In Re Southland Supply, Inc., Bankrupt. Sam Jonas, Trustee of Southland Supply, Inc. v. United States Small Business Administration

This case involves the validity of a compromise arrangement negotiated between a debtor and its major creditor prior to an adjudication of bankruptcy. Sam Jonas, trustee in bankruptcy for Southland Supply, Inc. (Southland), appeals summary judgment entered by the bankruptcy court in favor of the United States Small Business Administration (SBA). Jonas contends that it was improper for the court to enforce the SBA’s security interest against Southland’s lawsuit settlement proceeds. The district court affirmed the bankruptcy court judgment, and we also affirm. FACTS

Southland, the bankrupt in this proceeding, received a $300,000 loan from Santiago Bank on July 30, 1975. The SBA guaranteed 90% of the loan. Southland delivered a promissory note and granted Santiago a security interest in Southland’s inventory, accounts receivable, machinery, equipment, furniture and fixtures. In addition, South-land’s president Gerald Craig, and his wife, personally guaranteed the loan and secured this guarantee with a third deed of trust on their ranch property in San Diego, California.

On November 14, 1975, Southland filed a petition for an arrangement under Chapter XI of the Bankruptcy Act.…