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Kham & Nate’s Shoes Number 2, Inc. v. First Bank of Whiting

United States Court of Appeals for the Seventh Circuit
908 F.2d 1351 (1990)


Facts

First Bank of Whiting (First Bank) (defendant) extended credit to Kham & Nate’s Shoes Number 2, Inc. (K&N) (plaintiff). Thereafter, K&N filed for Chapter 11 bankruptcy under the United States Bankruptcy Code. K&N requested additional credit from First Bank due to cash-flow problems. First Bank agreed to extend $300,000 in additional credit, as long as the loan was secured. K&N and First Bank executed a loan agreement according to these terms. The loan agreement also provided that it could be cancelled on five days’ notice, and explicitly stated that First Bank was not waiving its right to terminate the financing at any time. After executing the agreement, K&N borrowed $75,000 from the $300,000 line of credit. The following month, First Bank sent K&N a notice informing K&N that First Bank would not make any further advances after March 7. At a hearing on K&N’s proposed plan of reorganization, the bankruptcy court held that First Bank’s termination of the line of credit was inequitable conduct. As a result, the bankruptcy court ordered that First Bank’s security interest be subordinated to the interests of K&N’s other secured creditors. First Bank appealed.

Rule of Law

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Issue

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Holding and Reasoning (Easterbrook, J.)

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