Universal Guaranty Life Insurance Company v. William N. Coughlin

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-1805
U NIVERSAL G UARANTY L IFE I NSURANCE C OMPANY ,
Plaintiff-Appellee,
v.
W ILLIAM N. C OUGHLIN ,
Defendant-Appellant.
____________
Appeal from the United States District Court
for the Central District of Illinois.
No. 3:05-CV-3130—Richard Mills, Judge.
____________
A RGUED J ANUARY 17, 2007—D ECIDED M ARCH 14, 2007
____________
Before F LAUM , K ANNE , and E VANS , Circuit Judges.
F LAUM , Circuit Judge. Health Management Limited
Partnership (“Health Management”) owned a hospital in
Springfield, Illinois when it filed for bankruptcy on April
2, 2003. At the time, Health Management owed debts to
Marine Bank and National City Bank. This case concerns
a March 7, 2003 loan from Marine Bank to Health Man-
agement that Dr. William Coughlin secured with $250,000
of his own cash. Coughlin claims that the loan was se-
cured by both his cash and Marine Bank’s first priority
interest in Health Management’s accounts receivable. The
bankruptcy court disagreed and held, after a bench trial,

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2 No. 06-1805
that the loan was not secured by Health Management’s
accounts receivable. Coughlin appealed, and the district
court affirmed. For the following reasons, we reverse.
I. Background
During the 1990s, Health Management operated Doctors
Hospital in Springfield, Illinois. To cover its operating
costs, Health Management borrowed money from National
City Bank (“National City”) in exchange for a first mort-
gage on Health Management’s hospital facility and a first
priority lien on its other business assets, including its
accounts receivable. Eventually, National City assigned
its security interest to Universal Guarantee Life Insur-
ance Company (“Universal”), which assumed National
City’s position in this litigation.
In 1999, Marine Bank of Springfield (“Marine Bank”)
extended Health Management a $4 million line of credit.
As security, Marine Bank received a second mortgage on
the hospital and other Health Management assets, includ-
ing its accounts receivable. Marine Bank then negotiated
with National City to acquire the first priority lien on the
accounts receivable.
The most recent version of Marine Bank’s security
agreement with Health Management became effective on
April 30, 2002 and stated that a first priority security
interest in Health Management’s accounts receivable
secured all of Health Management’s “obligations.” The
term “obligations” was defined as follows:
any and all of the Borrower’s Indebtedness and/or
liabilities to the Bank of any kind, nature and descrip-
tion, direct or indirect, secured or unsecured, joint,
several, joint and several, absolute or contingent, due
or to become due, now existing or hereafter arising,
regardless of how such indebtedness or liabilities arise

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No. 06-1805 3
or by what agreement or instrument they may be
evidenced or whether evidenced by any agreement or
instrument . . . .
This type of contract provision is known as a dragnet
clause because it secures current as well as future debt.
The April 30, 2002 security agreement also provided
that it could not be modified, amended, or terminated
“orally or by any course of dealing, or in any manner
other than by an agreement in writing, signed by the
Borrower to be charged.” The parties signed security
agreements that were consistent with the language of the
April 30 security agreement.
Between 1999 and February 2003, Health Management
executed a number of promissory notes (the parties do not
specify how many) payable to Marine Bank. Each loan
agreement stated that Health Management’s accounts
receivable secured the loan. Additionally, when Health
Management submitted each loan to its loan committee,
the loan presentation documents recited that its ac-
counts receivable secured the loan.
On January 10, 2003, Health Management was $150,000
overdrawn on its Marine Bank account and had maxed
out its revolving line of credit. It convinced Marine Bank
to lend it an additional $250,000, but Marine Bank
insisted that the loan be secured by the personal guaran-
tees of a number of Health Management’s partners and by
Health Management’s accounts receivable. Marine Bank
promised that it would satisfy the debt using Health
Management’s accounts receivable ahead of the personal
guarantees. Eventually, the January 10 note became
overdue, and, as promised, Marine Bank used Health
Management’s accounts receivable to pay the loan.
On March 7, 2003, Health Management sought a sec-
ond $250,000 note to cover the hospital’s payroll. Marine
Bank said that it would make the loan if it was collateral-

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4 No. 06-1805
ized fully by cash. Health Management convinced Dr.
William Coughlin, a staff physician and a former limited
partner of Doctors Hospital, to provide the requested
collateral. Coughlin thought the loan involved little risk
because the hospital’s accounts receivable amounted to
approximately $8 million—two times the value of the
hospital’s revolving line of credit. The loan documents
were signed in a hurry, and Coughlin did not read them.
Coughlin signed “an assignment agreement” that allowed
Marine Bank to keep Coughlin’s $250,000 until Health
Management repaid the loan. He also signed a “hypotheca-
tion agreement,” in which the parties agreed to make a
loan secured by the $250,000. None of the documents
discussed a security interest in Health Management’s
accounts receivable.
On April 2 or 3, 2003, Marine Bank discovered that
Health Management was depositing receipts in an ac-
count at another bank. Marine Bank became concerned
about Health Management’s continuing viability, so it
took possession of Coughlin’s $250,000 collateral. On
April 2, 2003, Health Management filed for bankruptcy.
Within one or two days of the bankruptcy filing, the
bankruptcy court entered an “Order Authorizing Use of
Certain Cash Collateral,” to which National City, Marine
Bank, and Universal stipulated in open court. The order
stated that Health Management owed Marine Bank
approximately $3,600,000 and that any party had until
July 1, 2003 to challenge the amount of this debt. Coughlin
maintains that the March 7, 2003 loan was part of the
$3.6 million debt discussed in the order. He also notes
that Universal did not challenge the amount of debt be-
fore July 1.
Doctors Hospital closed within a month of the bank-
ruptcy filing, and Marine Bank collected the hospital’s
accounts receivable until its debt was paid in full. At that

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No. 06-1805 5
1 The bankruptcy court also implied that Coughlin’s March 7
assignment agreement with Marine Bank modified the April 30,
2002 security agreement between Marine Bank and Health
Management. See App. 26. The parties did not brief this issue,
but we note that no such modification occurred. The March 7
assignment agreement provided that it “constitute[d] the
entire understanding and agreement of the parties,” but only as
“to matters set forth in the Agreement.” The assignment agree-
ment concerned Marine Bank’s security interest in Coughlin’s
deposit account. It did not concern the terms of the underlying
loan or any additional security for that loan. Consequently, it
did not modify the April 30 security agreement.
point, Universal began collecting the remaining accounts,
though it recovered only a fraction of the $9 million it
was owed. When, in the fall of 2003, Coughlin maintained
that he was entitled to $250,000 of the accounts re-
ceivable, Universal filed the current adversary proceed-
ing, alleging that Health Management’s accounts receiv-
able did not secure Marine Bank’s March 7 loan. Coughlin,
as the subrogee of Marine Bank under 11 U.S.C. § 509,
responded that the bankruptcy court had already ruled
that Health Management’s accounts receivable secured
the loan and that the April 30, 2002 dragnet clause
secured all of Health Management’s future debts to
Marine Bank.
On August 18, 2004, the bankruptcy court presided over
a short bench trial. On May 5, 2005, the court ruled in
Universal’s favor, concluding that the court’s Cash Collat-
eral order did not preclude it from considering how the
March 7 loan was secured. On the merits, the court held
that Health Management’s accounts receivable did not
secure the March 7 loan. 1 The court said that Marine Bank
knew how to create a security interest in accounts receiv-
able and that the March 7 loan did not create such an
interest.

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6 No. 06-1805
The district court affirmed the bankruptcy court. It
observed that the March 7 loan, unlike the previous loans
between Marine Bank and Health Management did not
mention a security interest in accounts receivable. The
district court did not address whether the dragnet clause
in the April 30, 2002 security agreement covered the
March 7 loan.
II. Analysis
A. Cash Collateral Order
Coughlin first argues that the bankruptcy court’s Cash
Collateral order barred it from reconsidering whether
Health Management’s accounts receivable secured the
March 7 loan. Coughlin maintains that the ruling has
collateral estoppel effect and is the law of the case. The
Court reviews the question de novo. See Adair v. Sherman,
230 F.3d 890, 893 (7th Cir. 2000) (collateral estoppel);
Moore v. Anderson, 222 F.3d 280, 283 (7th Cir. 2000) (law
of the case).
For a ruling to have collateral estoppel effect, “four
elements must be met: ‘(1) the issue sought to be precluded
must be the same as that involved in the prior litigation,
(2) the issue must have been actually litigated, (3) the
determination of the issue must have been essential to the
final judgment, and (4) the party against whom estoppel
is invoked must be fully represented in the prior action.’ ”
Meyer v. Rigdon, 36 F.3d 1375, 1379 (7th Cir. 1994)
(quoting La Preferida Inc. v. Cerveceria Modelo, S.A.
de C.V., 914 F.2d 900, 906 (7th Cir. 1990)). Like the
collateral estoppel doctrine, law of the case only applies
where a court actually decided the issue in question. See
Wright & Miller, Federal Practice & Procedure § 4478. In
this case, neither doctrine applies because the Cash
Collateral order did not resolve whether Health Manage-

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No. 06-1805 7
ment’s accounts receivable secured the March 7 loan.
Though the order said that Health Management owed
approximately $3.6 million to Marine Bank and that
Health Management’s accounts receivable secured that
debt, the order did not state whether the $3.6 million
included the $250,000 March 7 loan.
B. Security for the March 7 Loan
Coughlin next argues that the dragnet clause in the
April 30, 2002 security agreement covered all of Health
Management’s future debt to Marine Bank, including
the March 7 loan. Universal responds that the March 7
loan did not mention a security interest in accounts
receivable and, therefore, was secured only by Coughlin’s
$250,000. The parties agree that Illinois law applies. The
issue is one of contract interpretation, which we review
de novo. Avery v. State Farm Mut. Auto Ins. Co., 835
N.E.2d 801, 821 (Ill. 2005).
A dragnet clause “saves the parties the trouble of
executing a new security agreement every time there is a
further extension of credit. It also backstops the lender
against the possibility of an inadvertent failure by
the borrower to execute the new agreement.” In re
Kazmierczak, 24 F.3d 1020, 1021 (7th Cir. 1994) (applying
Wisconsin law). Dragnet clauses are not favored in Illi-
nois, but they are enforceable if they are clear and unam-
biguous. See 810 ILCS 5/9-204; Metro. Life Ins. Co. v. Am.
Nat’l Bank & Trust Co., 682 N.E.2d 72, 77 (Ill. App. Ct.
1997); Nat’l. Acceptance Co. of Am. v. Exchange Nat’l Bank
of Chi., 243 N.E.2d 264, 268 (Ill. App. Ct. 1968).
In National Acceptance, the defendant borrowed money
from the plaintiff in 1961 and 1962 and secured the debt
with, among other things, two trust deeds on its real
property. The deeds contained broadly worded dragnet

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8 No. 06-1805
clauses securing all of the defendant’s future debts to the
plaintiff up to $200,000. In 1963, the defendant guaran-
teed a third-party’s debt to the plaintiff. The guaranty
stated that it was secured by a trust deed executed on
the same date, but the parties never actually executed
that deed because the defendant believed the guaranty
was secured by sufficient collateral. The guaranty did not
state, however, that it was secured by the 1961 and 1962
trust deeds. When the third-party filed for bankruptcy, the
plaintiff sued the defendant, alleging that the deeds’
dragnet clauses secured the guaranty. The court agreed
with the plaintiff. It recognized that dragnet clauses
are ordinarily construed narrowly, but nevertheless held
that the unambiguous language of the trust deeds covered
the guaranty. National Acceptance, 243 N.E.2d at 268.
In Metropolitan Life, Bank One loaned money in 1990
to Woodfield Hotel, which executed a security agree-
ment giving Bank One a security interest in Woodfield’s
furniture and equipment. The 1990 security agreement
contained a dragnet clause. In 1992, Bank One extended
Woodfield a new loan agreement that referred to a security
agreement in accounts receivable, but the parties never
executed that agreement. The loan documents also con-
tained a space to check the type of collateral that secured
the loan. Though furniture and equipment was one of
the spaces that the parties could have checked, the par-
ties left the space blank. Instead, they checked only
accounts receivable. The court held that there was an
ambiguity between the 1990 and 1992 agreements and
construed the ambiguity against the drafter, Bank One.
Alternatively, the court held that the 1992 loan explicitly
terminated the 1990 security agreement. The court
observed that the 1992 loan said, “[T]his agreement
contains the entire agreement of the parties and super-
sedes all prior agreements and understandings, oral or

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No. 06-1805 9
written, with respect to the subject matter hereof.” Metro-
politan Life, 682 N.E.2d at 78.
At first glance, it appears difficult to reconcile National
Acceptance with the first holding in Metropolitan Life. In
both cases, the parties entered a security agreement that
contained a dragnet clause, then entered a subsequent
loan agreement that did not mention the first security
agreement, yet only National Acceptance concluded that
the dragnet clause protected the creditor.
The key factual distinction between these cases—putting
aside the language in Metropolitan Life expressly termi-
nating prior agreements—is that the second loan agree-
ment in Metropolitan Life, unlike the guaranty in Na-
tional Acceptance, contained a space that allowed the
parties to indicate that the loan was secured by furni-
ture and equipment. The parties left that space blank
and checked a different space indicating that the loan
was secured by the debtor’s accounts receivable. Though
it did not say so explicitly, it appears that the court in
Metropolitan Life viewed the blank space as the equivalent
of an affirmative statement that the second loan was not
secured by furniture and equipment. This rendered the
contract language ambiguous because the two documents
gave conflicting answers about whether the debt was
secured by furniture and equipment. The 1990 dragnet
clause said that the debt was secured by furniture and
equipment, but the 1992 loan agreement said that it was
not. Contradictory language in a contract is classically
ambiguous. See, e.g., Yates v. Farmers Auto Ins. Ass’n, 724
N.E.2d 1042, 1045 (Ill. App. Ct. 2000) (holding that
contradictory language in a contract is ambiguous);
Chastain v. Chastain, 500 N.E.2d 998, 1000).
Had the 1992 loan agreement in Metropolitan Life said
nothing about security and not expressly terminated the
prior agreement, we believe the court would have enforced

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10 No. 06-1805
the dragnet clause. National Acceptance holds as much,
and to hold otherwise would be to ignore the dragnet
clause entirely. See Kazmierzak, 24 F.3d at 1024 (noting
that courts should avoid rendering a dragnet clause
meaningless) (applying Wisconsin law). We assume the
court also would have enforced the dragnet clause if the
second loan agreement said nothing about a security
interest in furniture and equipment (i.e., if it had no
blank space for checking furniture and equipment) and
only mentioned the security interest in accounts receiv-
able. There is nothing ambiguous or contradictory about
two documents, one that secures a loan with collateral A
and another that secures the same loan with collateral B.
Many loans are secured by multiple forms of collateral. On
the other hand, where, as in Metropolitan Life, a loan
agreement affirmatively states that a loan is secured by
collateral A and not secured by collateral A, it makes
sense to find the agreement ambiguous.
In this case, the March 7 loan agreement said that the
loan was secured by Coughlin’s $250,000, but made no
mention of a security interest in Health Management’s
accounts receivable. It also contained no language termi-
nating or modifying the April 30, 2002 security agree-
ment. As a result, there was no contradiction or incon-
sistency between the various loan and security documents,
and the plain and unambiguous language of the dragnet
clause controlled.
Universal attempts to avoid this outcome by noting that
previous Marine Bank/Health Management loan agree-
ments stated that they were secured by Health Manage-
ment’s accounts receivable, though this loan did not.
Therefore, Universal maintains, the parties must not have
intended to use that collateral as security. We reject
this argument for two reasons. First, the purpose of a
dragnet clause is to protect a creditor against the possibil-
ity that it might forget to execute a security agreement.

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No. 06-1805 11
2 Universal also points to parol evidence indicating that the
parties did not intend the March 7 loan to be secured by accounts
receivable (though there is also parol evidence to the contrary).
Because the dragnet clause is unambiguous, we cannot con-
sider parol evidence. See River’s Edge Homeowners’ Ass’n v. City
of Naperville, 819 N.E.2d 806, 809 (Ill. App. Ct. 2004) (“If the
language is unambiguous, then the trial court interprets the
agreement without resort to parol evidence.”).
USCA-02-C-0072—3-14-07
See Kazmierczak, 24 F.3d at 1021. Therefore, it makes
little sense to penalize a party that negotiated a dragnet
clause when that party fails to mention the security
interest in a subsequent loan agreement. Second, the
dragnet clause in this case stated that it could not be
modified “orally or by any course of dealing, or in any
manner other than by an agreement in writing, signed
by the Borrower to be charged.” This means that absent
an express modification, Marine Bank’s other loans
with Health Management could have no bearing on the
meaning or effect of the April 30, 2002 dragnet clause. 2
III. Conclusion
For the foregoing reasons, we R EVERSE the bankruptcy
court’s ruling.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit

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