## Facts

- Walter Kilimnik founded American Alloy Metals (AAM) and, by 1982, was its president and sole shareholder.
- In 1982, Kilimnik sold AAM’s operating assets to a new corporation formed by AAM’s general manager, Peter Suriano, through a leveraged buyout in which the buyer used the AAM name.
- The purchase price included a down payment, assumption of trade payables, and a multi-million-dollar promissory note to Kilimnik secured by transaction documents with an unclear, scattered collateral description.
- After the sale, Kilimnik remained deeply involved in the buyer’s operations, served as its president, and later obtained voting control through an irrevocable proxy over Suriano’s stock.
- The buyer later defaulted; Kilimnik foreclosed on assets he claimed were subject to his security interest and transferred them to a newly formed corporation, AAM Aerospace & Corrosion International, Inc., which continued substantially the same business.
- The buyer filed for bankruptcy, and the bankruptcy trustee brought an adversary proceeding seeking recovery of post-sale inventory and equipment, avoidance relief, equitable subordination of Kilimnik’s claims, and successor liability against Aerospace.

## Issues

1. Whether the security documents granted Kilimnik a security interest in after-acquired inventory and equipment or only in collateral existing at the time of the 1982 sale.
2. Whether Kilimnik’s foreclosure and related transfers could be challenged in bankruptcy once the scope of his secured interest was properly defined.
3. Whether Kilimnik’s insider status and conduct justified equitable subordination of his claims.
4. Whether Aerospace could be held liable as a successor corporation under a fraud-to-creditors theory based on the asset transfer and continuity of operations.

## Decision

- The Ninth Circuit reversed the judgment in most respects and remanded.
- It held the security interest did not extend to after-acquired inventory and equipment; the agreement was construed as covering only collateral in existence at the time of the sale.
- It declined to infer an after-acquired property clause from ambiguous drafting and rejected any automatic extension of the lien to later-acquired equipment.
- It held Kilimnik’s conduct as a controlling insider warranted equitable subordination and directed the lower court to subordinate his claims consistent with the opinion.
- It remanded for further findings on whether Aerospace bore successor liability under a fraud-to-creditors theory, given the transfer of assets and continuity of the business.

## Legal Principles

- A security agreement covering after-acquired collateral requires clear contractual language; courts generally will not supply an after-acquired term by implication when the collateral description is ambiguous.
- Purchase-money concepts support limiting a secured creditor’s interest to the assets actually sold in the underlying transaction absent an express agreement extending the lien to later-acquired property.
- Insider creditors are subject to heightened scrutiny in bankruptcy; inequitable conduct that advantages the insider and harms other creditors can justify equitable subordination.
- A transferee corporation that continues the transferor’s business after an asset transfer may face successor liability under state-law exceptions, including fraud-to-creditors, when the transaction is structured to hinder, delay, or defraud creditors.

## Conclusion

The Ninth Circuit limited Kilimnik’s lien to assets existing at the time of the sale because the documents did not clearly grant an after-acquired security interest, ordered equitable subordination based on insider control and inequitable conduct, and remanded for further proceedings on successor liability and related bankruptcy remedies.


Stoumbos v. Kilimnik, 988 F.2d 949 (9th Cir. 1993)