Citizens Bank v. Fine Capital ( 2014 )

J-A19019-14
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
CITIZENS BANK OF PENNSYLVANIA, IN THE SUPERIOR COURT OF
PENNSYLVANIA
Appellant
v.
FINE CAPITAL ASSOCIATES, L.P., AND
FFC PARTNERSHIP, L.P.,
Appellees No. 1367 WDA 2013
Appeal from the Order Entered August 5, 2013
In the Court of Common Pleas of Allegheny County
Civil Division at No(s): GD-10-018621
BEFORE: BENDER, P.J.E., OLSON and FITZGERALD,* JJ.
MEMORANDUM BY OLSON, J.: FILED NOVEMBER 25, 2014
Appellant, Citizens Bank of Pennsylvania, appeals from the order
entered on August 5, 2013, which granted the motion for summary
judgment filed on behalf of Appellees, Fine Capital Associates, L.P. and FFC
Partnership, L.P. (hereinafter “the Guarantors”), implicitly denied Appellant’s
cross-motion for summary judgment, and dismissed Appellant’s complaint
against the Guarantors with prejudice. After careful review, we are
constrained to vacate the learned trial court’s order in part and remand.
Introduction
By way of overview, this case arose from a lending relationship
between Appellant, the Guarantors, and the following entities: BPP Illinois,
LLC, BPP Iowa, LLC, BPP Michigan, LLC, BPP Minnesota, LLC, BPP Texas, LLC,
and BPP Wisconsin, LLC (hereinafter “the Debtors”). Briefly stated,
* Former Justice specially assigned to the Superior Court.
J-A19019-14
Appellant loaned the Debtors a substantial sum of money, so that the
Debtors could develop certain hotel properties, and the Guarantors promised
to be the Debtors’ surety on the loan obligations. The promises and
obligations of the parties were memorialized in a credit facility (between
Appellant and the Debtors) and in a Guaranty and Suretyship Agreement
(between Appellant and the Guarantors).
Appellant claimed that the Debtors and the Guarantors defaulted
under the respective agreements; and, as a result of the default, Appellant
accelerated the loan. When neither the Debtors nor the Guarantors paid
Appellant’s demand, Appellant filed suit against the Debtors and Guarantors
in the Court of Common Pleas of Allegheny County, claiming breach of
contract.
While the lawsuit was pending in the trial court, the Debtors filed for
bankruptcy protection under Chapter 11 of the Bankruptcy Code. The trial
court then stayed the entire underlying lawsuit pending the bankruptcy
proceedings.
In the Bankruptcy Court, the Debtors’ Confirmed Plan declared that,
“in full and final satisfaction” of Appellant’s claim, the Debtors were required
to sell all of their hotel properties and provide Appellant with the proceeds
from the sales. The Confirmed Plan also required that the Debtors execute
and provide Appellant with amended loan documents, which restructured the
loan. The Confirmed Plan then incorporated, into the Plan, the obligations
contained in the restructured loan documents.
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Following the discharge of the Debtors, Appellant’s litigation against
the Guarantors continued in the trial court. There, the Guarantors promptly
filed a motion for summary judgment, claiming that the restructured loan
documents – that Appellant and the Debtors had executed in the Bankruptcy
Court and in accordance with the Confirmed Plan – had “cured” the
Guarantors’ earlier default under the Guaranty and Suretyship Agreement.
The Guarantors also claimed that the restructured loan documents had
materially modified their obligations as a surety, and that the Guarantors
were thus relieved of any liability under the Guaranty and Suretyship
Agreement.
The trial court granted the Guarantors’ summary judgment motion and
dismissed Appellant’s complaint against the Guarantors. Appellant filed a
notice of appeal.
Facts
On October 4, 2010, Appellant commenced the instant suit by filing a
complaint against the Guarantors and the Debtors.1, 2
As Appellant averred,
on February 8, 2008, Appellant agreed to loan the Debtors $66,000,000.00
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1
The complaint declared that each of the Debtors is a single-purpose,
limited liability company, whose sole material asset is the ownership of one
or more hotel. Appellant’s Complaint, 10/4/10, at ¶¶ 2-7.
2
Appellant claimed that the Guarantors and the Debtors “are all owned and
controlled, through a number of corporate intermediaries, [by an individual
named] Milton Fine.” Appellant’s Complaint, 10/4/10, at 3-4.
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(hereinafter “the Loan”), so that the Debtors could renovate, reflag,
purchase real property for, and operate the 22 hotels that the Debtors
owned.3 Appellant’s Complaint, 10/4/10, at ¶ 13. The Loan was secured by
mortgages on the 22 hotels and by a February 8, 2008 Security Agreement
between Appellant and the Debtors. Id. at ¶ 19.
The terms of the Loan were governed by a Credit Agreement, which
Appellant and the Debtors executed on February 8, 2008. The Credit
Agreement defined an “Event of Default” as including the failure of the
Debtors to pay the principal or interest on the Loan within 15 days of the
amounts becoming due. Credit Agreement, 2/8/08, at ¶ 8.1.1. Under the
Credit Agreement, if such an Event of Default occurred:
[Appellant] shall be under no further obligation to make
Loans and [Appellant] may by written notice to [the
Debtors], declare the unpaid principal amount of the Notes
then outstanding and all interest accrued thereon, any fees
and all other Indebtedness of [the Debtors] to [Appellant]
hereunder and thereunder to be forthwith due and payable,
and the same thereon become and be immediately due and
payable to [Appellant] without presentment, demand,
protest or any other notice of any kind, all of which are
hereby expressly waived.
Id. at ¶ 8.2.1.
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3
Appellant averred that “[a]ll of the [hotels] are owned by a [Debtor] in fee
simple, with the exception of the Super 8 [Hotel] located in Wauwatosa,
Wisconsin, which BPP Wisconsin holds as a leasehold.” Appellant’s
Complaint, 10/4/10, at ¶ 14. Yet, for ease and clarity of explanation, we will
simply refer to the Debtors as the “owners” of the hotels.
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Moreover, pursuant to the terms of the Credit Agreement and in
consideration of the credit that was to be granted the Debtors, Appellant and
the Guarantors entered into a separate Guaranty and Suretyship Agreement.
See Credit Agreement, 2/8/08, at ¶ 6.1.3 (“conditions of lending”);
Guaranty and Suretyship Agreement, 2/8/08, at 1. Under the Guaranty and
Suretyship Agreement, the Guarantors agreed to become the “absolute and
unconditional guarantors and sureties as though they were primary obligors
to [Appellant]” of, among other things: 1) “the prompt payment and
performance when due” of a stated portion of the Debtors’ principal payment
obligations; and 2) the payment of all interest under the Loan and the
payment of all expenses Appellant might incur in enforcing its rights or
collecting under either the Guaranty and Suretyship Agreement or the Loan
Documents.4 Guaranty and Suretyship Agreement, 2/8/08, at ¶ 1.
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4
The Credit Agreement defined the term “Loan Documents” in the following
manner:
Loan Documents shall mean [the Credit Agreement], the
Guaranty Agreement, the Environmental Indemnity, the
Lease Assignments, the Mortgages, the Notes, the Security
Agreement, the Collateral Assignments, agreements related
to Bank-Provided Hedges and any other instruments,
certificates or documents delivered or contemplated to be
delivered hereunder or thereunder or in connection herewith
or therewith, as the same may be supplemented or
amended from time to time in accordance herewith or
therewith, and Loan Document shall mean any of the Loan
Documents.
Credit Agreement, 2/8/08, at ¶ 1.1.
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The Guaranty and Suretyship Agreement between Appellant and the
Guarantors further provided: that Appellant may, at its sole option,
exchange or release any collateral security held by Appellant for any of the
“Debtor Liabilities;”5 that Appellant may, at its sole option, “renew, extend,
modify, supplement, amend, release, alter or compromise the terms of any
or all of the Debtor Liabilities;” that the Guaranty and Suretyship Agreement
was a continuing agreement and remained in force until “all Debtor Liabilities
and all other amounts payable under the Loan Documents have been paid
and performed in full;” that the Guarantors’ liability under the Guaranty and
Suretyship Agreement “is absolute and unconditional for the aggregate of
the Debtor Liabilities;” that the Guarantors waived all notice with respect to
the present existence or future incurrence of any Debtor Liabilities, including
“the amount, terms[,] and conditions thereof;” and, that the Guarantors
waived “any defense arising by reason of any disability or other defense
whatsoever to the liability of any Debtor.” See id. at ¶¶ 2, 4, 11, 12, 13,
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5
Under the Guaranty and Suretyship Agreement, the term “Debtor
Liabilities” included the “Principal Payment Liabilities” and the “Cost Payment
Liabilities.” In short, the “Principal Payment Liabilities” are the Debtors’
existing and future liabilities and obligations with respect to the payment of
the Loan principal (including “any extensions, modifications, . . . and
substitutions therefor . . . of any nature whatsoever”); the “Cost Payment
Liabilities” are the Debtors’ existing and future liabilities and obligations with
respect to the payment of the Loan interest and the cost of enforcing the
agreements or collecting on the obligations (including “any extensions,
modifications, . . . and substitutions therefor . . . of any nature
whatsoever”). Guaranty and Suretyship Agreement, 2/8/08, at ¶ 1.
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15, and 18. With respect to the Debtors’ possible bankruptcy, the Guaranty
and Suretyship Agreement specifically declared:
16. BANKRUPTCY OF THE DEBTOR. Neither the
Guarantors’ obligations to make payment in accordance
with the terms of [the Guaranty and Suretyship] Agreement
nor any remedy for the enforcement hereof shall be
impaired, modified, changed, released or limited in any
manner whatsoever by any Debtor’s bankruptcy or by any
impairment, modification, change, release or limitation of (i)
the liability of any Debtor, any Person assuming the
obligations of any Debtor under any of the Loan Documents
or such Debtor’s estate in bankruptcy. . . .
Id. at ¶ 16.
Further, the Guaranty and Suretyship Agreement declared:
20. ACCELERATION OF THE GUARANTORS’ LIABILITIES.
Upon the occurrence of an Event of Default,[6] all of the
Debtor Liabilities shall, at [Appellant’s] sole option, be
deemed to be forthwith due and payable for the purposes of
this Agreement and for determining the liability of the
Guarantors hereunder, whether or not [Appellant] has any
such rights against any other Obligor, and whether or not
[Appellant] elects to exercise any rights or remedies against
any other Person or property including, without limitation,
any other Obligor.
____________________________________________
6
The Guaranty and Suretyship Agreement defined an “Event of Default” as
including the following occurrences: 1) “[t]he Guarantors shall fail to pay
any principal of any Loan (including scheduled installments, mandatory
prepayments or the payment due at maturity) or shall fail to pay any
interest on any Loan or any other amount owing hereunder or under the
other Loan Documents within ten (10) days after such principal, interest or
other amount becomes due in accordance with the terms hereof or thereof
(whether at stated maturity, by acceleration or otherwise)” and 2) “[a]n
‘Event of Default’ shall occur under any other Loan Document.” Guaranty
and Suretyship Agreement, 2/8/08, at ¶¶ 19.1 and 19.4.
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Id. at ¶ 20.
As Appellant averred, the Debtors borrowed a total principal amount of
$65,815,728.44 from Appellant, in accordance with the above agreements.
Appellant’s Complaint, 10/4/10, at ¶ 42.
Appellant further averred that, on March 22, 2010, it provided the
Debtors and the Guarantors with written notice that Events of Default under
the Credit Agreement had occurred. These Events of Default included the
failure of the Debtors and the Guarantors to make scheduled interest
payments on the Loan. Id. at ¶ 26; Letter, 3/22/10, at 1-3. As a result of
the default, Appellant informed the Debtors and the Guarantors that it was
declaring the entire principal amount of the Loan and all interest, unpaid
fees, and indebtedness to be “forthwith due and payable.” Letter, 3/22/10,
at 2; Appellant’s Complaint, 10/4/10, at ¶ 26.
When neither the Debtors nor the Guarantors paid what was
demanded, Appellant filed its two-count complaint, wherein Appellant
claimed breach of contract against the Debtors and breach of guaranty
against the Guarantors. Appellant’s Complaint, 10/4/10, at ¶¶ 41-48.
The Debtors and the Guarantors filed responsive pleadings to
Appellant’s complaint and both sets of defendants denied liability. Within
the Guarantors’ answer and new matter, the Guarantors essentially claimed
that they were not liable under the Guaranty and Suretyship Agreement
because Appellant “orally modified the obligation underlying the Guaranty by
consenting to the non-payment of interest” and, in the alternative, that their
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obligations under the guaranty were discharged because Appellant impaired
the value of the collateral. See, e.g., The Guarantors’ Answer and New
Matter, 11/1/10, at ¶ 20.
On December 21, 2010, the Debtors each filed voluntary petitions for
relief under Chapter 11 of the Bankruptcy Code. The trial court thus stayed
Appellant’s action against the Debtors, in accordance with Section 362(a) of
the Bankruptcy Code. See 11 U.S.C. § 362 (“Automatic stay”). However,
given that “it is universally acknowledged that an automatic stay of
proceedings accorded by § 362 may not [normally] be invoked by entities
such as sureties, guarantors, co-obligors, or others with a similar legal or
factual nexus to the debtor,” Appellant filed a motion in the trial court,
requesting that the trial court sever its claims against the non-debtor
Guarantors and allow the litigation on those claims to proceed. McCartney
v. Integra Nat’l Bank N., 106 F.3d 506, 509-510 (3rd Cir. 1997) (internal
quotations, citations, and corrections omitted); Appellant’s Motion to Sever,
1/24/11, at 1-8 (declaring that, although it might be legally unnecessary, “it
has become conventional practice in many jurisdictions, including
Pennsylvania, to sever claims against non-debtor defendants to promote
efficiency and procedural clarity going forward”).
The Guarantors filed a response to Appellant’s motion and argued that
the trial court must deny the severance request because the Debtors “are []
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indispensable parties to the instant litigation” and because Appellant’s
contract action could not proceed without the Debtors’ participation.7 The
Guarantors’ Response, 2/14/11, at 3. Further, the Guarantors filed a motion
to stay the state court proceedings, again arguing that the Debtors were
indispensable parties to the litigation.8 The Guarantors’ Motion to Stay,
2/14/11, at 5.
On July 13, 2011, over Appellant’s objection, the trial court entered an
order granting the Guarantors’ motion to stay; the trial court ordered that
the action was stayed in its entirety, pending a final resolution of the
bankruptcy proceeding. Trial Court Order, 7/13/11, at 1.
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7
But see Read v. Pa. Co. for Ins. on Lives and Granting Annuities, 12
A.2d 925, 927 (Pa. 1940) (“it is the law that a creditor may enforce his claim
against the surety without first having proceeded against the principal”).
8
But see McCartney, 106 F.3d at 509-511 (courts may extend an
automatic stay to non-debtor third parties only in “unusual circumstances,”
such as where “there is such identity between the debtor and the third-party
defendant that the debtor may be said to be the real party defendant and
that a judgment against the third-party defendant will in effect be a
judgment or finding against the debtor” and where the stay protection “is
essential to the debtor[’s] efforts [at] reorganization”); see also Credit
Alliance Corp. v. Williams, 851 F.2d 119, 122 (4th Cir. 1988) (“[t]he very
purpose of a guaranty is to assure the creditor that in the event the debtor
defaults, the creditor will have someone to look to for reimbursement. The
purpose of the guaranty would be frustrated by interpreting [11 U.S.C.
§ 362] so as to stay [the creditor’s] action against the non-bankrupt
guarantor when the defaulting debtor petitioned for bankruptcy”) (internal
quotations, citations, and corrections omitted).
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On September 27, 2011, the Debtors executed their Second Amended
Modified Joint Consolidated Plan of Reorganization (hereinafter “the Plan”) in
the United States Bankruptcy Court for the Eastern District of Texas. The
Plan declared that Appellant was allowed a secured claim in the amount of
$67,400,835.06.9 The Plan, 9/27/11, at ¶ 4.3.1. According to the Plan,
“[i]n full and final satisfaction, discharge, and release” of Appellant’s
$67,400,835.06 secured claim, the Debtors would sell all of their hotels and
then pay Appellant the proceeds from the sales. Id. at ¶ 4.3.3(i). Further,
and as a condition of the discharge, the Plan required that the Debtors
execute and then deliver to Appellant a number of documents, including: an
amended and restated credit agreement (hereinafter “Amended Credit
Agreement”), an amended and restated non-revolving credit note
(hereinafter “Amended Note”), and an omnibus amendment and ratification
agreement. Id. at ¶ 4.3.3(vii) and “Schedule A.” As the Plan declared, the
execution and delivery of the above documents was “a condition precedent
to the occurrence of the Effective Date” and the Plan incorporated the
obligations that were stated in the documents. Id. at ¶ 4.3.3(vii) and
“Schedule A.” Specifically, the Plan declared:
The Reorganized Debtors shall execute, and shall deliver to
[Appellant] no later than five [] Business Days following the
____________________________________________
9
The Plan refers to Appellant’s $67,400,835.06 secured claim as the “Lender
Secured Claim.” The Plan, 9/27/11, at 14.
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entry of the Confirmation Order, the documents listed at
Schedule A[10] attached hereto duly executed as
appropriate. The execution and delivery of the same is a
condition precedent to the occurrence of the Effective Date.
Upon such delivery, the Reorganized Debtors shall comply
with all obligations stated therein, including any reporting
requirements, even if any such obligation is not specifically
referenced in this Plan, in which case such obligation shall
be deemed to be an obligation under this Plan. . . .
Id. at ¶ 4.3.3(vii) and “Schedule A.”
The Amended Credit Agreement, Amended Note, and omnibus
amendment and ratification agreement were amended loan documents
concerning Appellant’s Loan to the Debtors; the documents, in essence,
restructured the Loan in order to effectuate the terms of the Plan. As the
trial court succinctly explained, the documents provided for an amended
“note in an amount greater than the amount of the original note, . . .
included numerous material modifications to the financial terms and
[covenants] governing the creditor-debtor relationship[,] . . . forced [the
Debtors] to liquidate their assets in a relatively short time frame, and
[declared that] the Debtors agreed to waive all defenses such as the right to
seek bankruptcy relief.” Trial Court Opinion, 11/15/13, at 6.
With respect to Appellant’s claims against the Guarantors, the Plan
explicitly declared:
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10
“Schedule A” is attached to the Plan and lists the Amended Credit
Agreement, the Amended Note, and the omnibus amendment and
ratification agreement. The Plan, 9/27/11, at “Schedule A.”
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9.8 No Discharge of Guarantors. For the avoidance of
doubt, nothing in this Plan and nothing in the Confirmation
Order serves or will serve to discharge any claim, cause of
action, or right that any creditor or person has against any
third person or guarantor for or on account of a claim
against one or more of the Debtors, including, without
limitation, any claim that [Appellant] may have against the
Guarantors. . . .
The Plan, 9/27/11, at ¶ 9.8.
On October 4, 2011, the Bankruptcy Court entered an order of
confirmation (hereinafter “Confirmation Order”), which confirmed the Plan
and declared that, except as otherwise provided in the Plan, the Debtors
were discharged pursuant to section 1141(d)(1)(A) of the Bankruptcy Code.
Confirmation Order, 10/4/11, at 6-7. The Confirmation Order declared that,
henceforth, “all [p]roperty of the Debtors and their Estates vest[s] in the
Reorganized Debtors.” Id. at 7. Moreover, the Confirmation Order declared
that the Debtors’ discharge did not affect the liability of the Guarantors. The
order declared:
the Plan and [the Confirmation] Order are wholly without
prejudice to all claims, causes of action, defenses, and
rights of [Appellant] as against the Guarantors . . .
including, without limitation . . . all matters asserted or
assertable in Case Number GD 10-18621 pending in the
Civil Division, Court of Common Pleas of Allegheny County,
Pennsylvania.
Id. at 9.
Finally, the Confirmation Order declared that the restructuring of the
Loan was simply a “modification and amendment” of the Lender Secured
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Claim and was not a “new extension of credit.” With respect to this issue,
the Confirmation Order declared:
that the credit facility described in the Credit Agreement is a
modification and amendment of the Lender Secured Claim
pursuant to and as defined in the Plan and is not in any way
a new extension of credit, an accord and satisfaction, or
other arrangement that would impair in any way
[Appellant’s] right to assert claims against any non-Debtor
party as to the Lender Secured Claim, nor would it or this
Order impair in any way any non-Debtor’s right to assert
any defense thereto, including, without limitation, any
defense relating to or arising from the modification and
amendment of the Lender Secured Claim[.]
Id. at 8.
On February 13, 2012, the trial court issued an order dissolving the
stay with respect to Appellant’s case against the Guarantors; the trial court
order also declared that the parties were permitted to file dispositive
motions on the issue of the Guarantors’ liability.11 Trial Court Order,
2/10/12, at 1.
In response to the trial court’s order, Appellant and the Guarantors
filed cross-motions for summary judgment. Within Appellant’s summary
judgment motion, Appellant claimed that it was entitled to summary
judgment, in its favor, with respect to the Guarantors’ liability. According to
Appellant, the principals of the Guarantors had admitted that, as of March
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11
On October 20, 2011, Appellant filed a praecipe with the Allegheny County
Department of Court Records (hereinafter “ACDCR”), requesting that the
ACDCR discontinue the action against the Debtors with prejudice.
Appellant’s Praecipe to Discontinue, 10/20/11, at 1.
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23, 2010, the Guarantors “had not made their most recently required
interest payments and swap payments.” Appellant’s Brief in Support,
3/30/12, at 11. Since this constituted a default under the Guaranty and
Suretyship Agreement and since this default caused Appellant to accelerate
the Loan and demand that the Guarantors pay their obligation in full,
Appellant claimed that it was entitled to a judgment as a matter of law with
respect to the Guarantors’ liability. Id.
Further, Appellant claimed that the Guarantors had no defense to the
breach of guaranty claim. Appellant noted that, within the Guarantors’
answer and new matter, the Guarantors had claimed that Appellant “orally
modified the obligation underlying the Guaranty by consenting to the non-
payment of interest” and that Appellant impaired the value of the collateral.
See, e.g., The Guarantors’ Answer and New Matter, 11/1/10, at ¶ 20.
Appellant, however, claimed that these two defenses failed as a matter of
law. With respect to the alleged forbearance agreement, Appellant claimed
that this defense failed because the alleged oral forbearance: is barred by
the statute of frauds; is unenforceable because it was not supported by any
consideration; is unenforceable because the Credit Agreement contains a “no
oral modification” clause; is not a valid agreement; does not discharge the
Guarantors because the alleged oral forbearance occurred after the
Guarantors’ default; does not discharge the Guarantors because the alleged
modification was not a material change that substantially increased the
Guarantors’ risk; and, was consented to by the Guarantors. Appellant’s Brief
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in Support of Motion for Summary Judgment, 3/30/12, at 12-23. Further,
with respect to the “impairment of collateral” defense, Appellant claimed
that this defense failed because the Guarantors signed an unconditional
guaranty and thus “waived the right to participate in [Appellant’s]
collateral.” Id. at 23-25.
Therefore, Appellant claimed that since the Guarantors admitted to
being in default and since the Guarantors’ defenses failed as a matter of law,
Appellant was entitled to summary judgment in its favor. Id.
The Guarantors responded to Appellant’s motion for summary
judgment and primarily argued that the Debtors’ bankruptcy – and the
resulting Plan, amended loan agreements, and Confirmation Order – had
“cured” the Guarantors’ original default. The Guarantors argued:
the Debtors filed bankruptcy petitions[,] a Confirmation
Order confirming a “consensual” Plan was entered[,] and
the Debtors and [Appellant] entered into [an Amended
Credit] Agreement and executed the New Loan Documents
to memorialize their agreement. As a matter of law, the
Original Loan has been replaced and no longer exists. The
Guaranty provides that the [Guarantors] originally were
liable “as though they were primary obligors to [Appellant].”
Since [the Guarantors] . . . stand in the shoes of the
Debtors, when the Debtors’ primary liability went away, so
did the alleged liability of the [Guarantors].
The Guarantors’ Response, 5/7/12, at 7.
Moreover, the Guarantors argued that: they never admitted that they
were in default of the Guaranty and Suretyship Agreement; the Bankruptcy
Court already determined that there was a valid forbearance agreement and
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Appellant is collaterally estopped from claiming otherwise; the forbearance
agreement is otherwise enforceable; and, the Guaranty and Suretyship
Agreement does not permit the impairment of collateral. Id. at 8-11 and
18-23.
The Guarantors also filed a cross-motion for summary judgment and
claimed that they were entitled to a judgment as a matter of law because
“the Plan, the [Amended] Credit Agreement[,] and the New Note modify and
restate the Original Credit Agreement and Original Note in their entirety,
such that nothing of the Original Loan Documents remain[].” The
Guarantors’ Motion for Summary Judgment, 3/30/12, at 7. According to the
Guarantors, since the Debtors were no longer liable under the Original Loan
Documents, the Guarantors also could not be liable. Id. Further, the
Guarantors claimed that they could not be liable under the Amended Credit
Agreement, as the new contractual terms “materially increased [the
Guarantors’] risk” – thus discharging their obligations as surety. Id. at 8;
see McIntyre Square Assoc.’s v. Evans, 827 A.2d 446, 452 (Pa. Super.
2003) (“Where, without the surety's consent, there has been a material
modification in the creditor-debtor relationship, a . . . compensated surety is
discharged [] if, without the surety’s consent, there has been a material
modification in the creditor-debtor relationship and said modification has
substantially increased the surety’s risk”).
On August 5, 2013, following extensive briefing and oral argument,
the esteemed trial court judge entered an order that granted the Guarantors’
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motion for summary judgment, implicitly denied Appellant’s cross-motion for
summary judgment, and dismissed Appellant’s complaint against the
Guarantors with prejudice. The trial court reasoned:
The Bankruptcy agreement essentially restructured and
reorganized the creditor-debtor relationship, and effectively
discharged the Debtors as they stood under the Original
Credit Agreement[. T]he consent agreement in the
bankruptcy action [thus] renders the Original Credit
Agreement null and void. As [the Guarantors’ were] not []
part[ies] to the [Amended] Credit Agreement, and since the
Original Credit Agreement no longer exists, any liability to
the [G]uarantors for default events under the Original Credit
Agreement [is] extinguished.
Trial Court Opinion, 11/15/13, at 9.
Appellant filed a timely notice of appeal and now raises the following
claims to this Court:
1. Whether modifications to the loan entered into under a
confirmed plan of reorganization in federal bankruptcy
proceeding discharged the [Guarantors’] obligations under
the guaranty?
2. Whether the [Guarantors] consented to modifications to
the loan relationship contained in the plan and amended
and restated credit agreement pursuant to the clear and
unambiguous advance consents and waivers of suretyship
defenses in the guaranty?
3. Whether the bankruptcy plan and amended and restated
credit agreement constituted (1) material modifications to
the debtor-creditor relationship, (2) which substantially
increased the risk to the [Guarantors], and (3) to which the
[Guarantors] did not consent (or were not deemed to have
consented) such that the [Guarantors’] guaranty was
discharged?
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4. Whether the amended and restated credit agreement is a
single integrated document that precludes enforcement of
the [Guarantors’] guaranty?
5. Whether the [Guarantors’] guaranty was discharged as to
the existing obligations of the [Debtors] under the plan and
amended and restated credit agreement where the guaranty
expressly guarantees all present and future liabilities of [the
Debtors] to Appellant?
Appellant’s Brief at 4-5.
Analysis
Initially, we conclude that Appellant waived any potential claim that
the trial court erred when it implicitly denied Appellant’s cross-motion for
summary judgment. Within Appellant’s brief to this Court, Appellant has
focused its attention on the specific portion of the trial court’s order that
granted the Guarantors’ summary judgment motion. Moreover, even though
Appellant declares that we should direct that summary judgment be entered
in its favor, Appellant has done so in conclusory fashion and has failed to
establish that there are no genuine issues of material fact with respect to the
claims raised in its own summary judgment motion. In particular, Appellant
has not made any argument that the Guarantors’ actual default has been
established as a matter of law or that the Guarantors’ stated defenses to the
alleged default fail as a matter of law. See, e.g., Appellant’s Brief in
Support of Motion for Summary Judgment, 3/30/12, at 11-25. Therefore,
Appellant has waived any such claim on appeal. Wirth v. Commonwealth,
95 A.3d 822, 837 (Pa. 2014) (“[w]here an appellate brief fails to provide any
discussion of a claim with citation to relevant authority or fails to develop the
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issue in any other meaningful fashion capable of review, that claim is
waived. It is not the obligation of an appellate court to formulate appellant’s
arguments”) (internal quotations, citations, and corrections omitted).
Nevertheless, we conclude that Appellant’s first claim on appeal
entitles Appellant to relief. Specifically, we hold that the loan modifications
entered into by the Debtors pursuant to the confirmed reorganization plan in
the federal bankruptcy proceedings (and Appellant’s consent thereto) do not
relieve the Guarantors of their obligations under the Guaranty and
Suretyship Agreement. We thus vacate the trial court’s order in part and
remand.12
In the case at bar, the trial court granted the Guarantors’ motion for
summary judgment and dismissed Appellant’s complaint. We note:
Our scope of review of a trial court’s order granting or
denying summary judgment is plenary, and our standard of
review is clear: the trial court’s order will be reversed only
where it is established that the court committed an error of
law or abused its discretion.
Summary judgment is appropriate only when the record
clearly shows that there is no genuine issue of material fact
and that the moving party is entitled to judgment as a
matter of law. The reviewing court must view the record in
the light most favorable to the nonmoving party and resolve
all doubts as to the existence of a genuine issue of material
fact against the moving party. Only when the facts are so
clear that reasonable minds could not differ can a trial court
properly enter summary judgment.
____________________________________________
12
Given our disposition, we need not address Appellant’s remaining issues.
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Englert v. Fazio Mech. Serv.’s, Inc., 932 A.2d 122, 124 (Pa. Super. 2007)
(internal citations omitted).
In granting the Guarantors’ summary judgment motion, the trial court
essentially ruled that the Debtors’ bankruptcy – and the resulting Plan,
amended loan agreements, and Confirmation Order – cured the Guarantors’
original, alleged default under the Guaranty and Suretyship Agreement.
According to the trial court, since Appellant and the Debtors executed
amended loan documents during the bankruptcy proceeding, the “Original
Credit Agreement no longer exists [and] any liability to the [G]uarantors for
default events under the Original Credit Agreement are extinguished.” Trial
Court Opinion, 11/15/13, at 9.
We respectfully disagree with the trial court’s conclusion. While we
acknowledge the hard work and thoughtful consideration invested by the
trial court in this case, our own review of the issues raised on appeal begins
with, and focuses upon, the independent obligations of the Guarantors under
their agreement with Appellant. As we develop in greater detail below,
although Pennsylvania law is silent on the issue, we conclude that the
restructuring of the Debtors’ loan in bankruptcy – and the Debtors’ resulting
discharge – neither cured the Guarantors’ earlier default nor defeated the
Guarantors’ promises on their own underlying obligations.
Section 524(e) of the Bankruptcy Code generally provides that the
“discharge of the debtor does not affect the liability of any other entity on,
or the property of any other entity for, such debt.” 11 U.S.C. § 524(e).
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Hence, ordinarily, the “discharge of the principal debtor in bankruptcy will
not discharge the liabilities of co-debtors[, sureties,] or guarantors.”13 In re
American Hardwoods, Inc., 885 F.2d 621, 625 (9th Cir. 1989) (internal
____________________________________________
13
We note that the Restatement (Third) of Suretyship and Guaranty defines
a “guarantor” and a “surety” in the following manner:
if the parties to a contract identify one party as a
“guarantor” or the contract as a “guaranty,” the party so
identified is a secondary obligor and the secondary
obligation is, upon default of the principal obligor on the
underlying obligation, to satisfy the obligee's claim with
respect to the underlying obligation
...
if the parties to a contract to which the principal obligor and
secondary obligor are both parties identify one party as a
“surety,” or the contract as a “suretyship” contract, the
party so identified is a secondary obligor who is subject to a
secondary obligation pursuant to which the secondary
obligor is jointly and severally liable with the principal
obligor to perform the obligation set forth in that contract
Restatement (Third) of Suretyship and Guaranty § 15(a) (1996).
Pennsylvania has, however, largely eliminated the distinction between a
guaranty and a suretyship agreement; it has done so by mandating that,
unless otherwise specified, every such contract is a contract of suretyship.
See 8 P.S. § 1 (“Every written agreement hereafter made by one person to
answer for the default of another shall subject such person to the liabilities
of suretyship, and shall confer upon him the rights incident thereto, unless
such agreement shall contain in substance the words: ‘This is not intended
to be a contract of suretyship,’ or unless each portion of such agreement
intended to modify the rights and liabilities of suretyship shall contain in
substance the words: ‘This portion of the agreement is not intended to
impose the liability of suretyship’”).
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quotations and citations omitted). Rather, the “discharge in bankruptcy
does not extinguish the debt itself, but merely releases the debtor from
personal liability for the debt[; thus,] . . . the debt still exists and can be
collected from any other entity that might be liable.” Matter of
Edgeworth, 993 F.2d 51, 53 (5th Cir. 1993).
Moreover, the vast majority of courts who have confronted the issue
have also held that, when a debtor’s loan is restructured in bankruptcy, the
restructuring of the loan neither releases the non-debtor surety nor “cures”
the surety’s own default.14 For example, in United States v. Stribling
Flying Service, Inc., the Small Business Administration extended a loan to
____________________________________________
14
Within the Guarantors’ brief to this Court, the Guarantors continuously
refer to the restructured Loan as a “new” loan. The Guarantors’
characterization of the restructured Loan as a “new” loan is, however,
contrary to the explicit terms of the Bankruptcy Court’s Confirmation Order.
Indeed, the Confirmation Order declares:
ORDERED that the credit facility described in the Credit
Agreement is a modification and amendment of the
Lender Secured Claim pursuant to and as defined in the
Plan and is not in any way a new extension of credit,
an accord and satisfaction, or other arrangement that would
impair in any way [Appellant’s] right to assert claims
against any non-Debtor party as to the Lender Secured
Claim, nor would it or this Order impair in any way any non-
Debtor’s right to assert any defense thereto, including,
without limitation, any defense relating to or arising from
the modification and amendment of the Lender Secured
Claim[.]
Confirmation Order, 10/4/11, at 8 (emphasis added).
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a corporation, with payment for the loan secured by the unconditional
personal guaranties of Donald and Frances Kimball. After the corporation
defaulted on the note and the Kimballs defaulted on the guaranty, the
United States agency accelerated the debt and then filed suit against the
corporation and the Kimballs for breach of contract. United States v.
Stribling Flying Serv., Inc., 734 F.2d 221, 222-223 (5th Cir. 1984). The
corporation filed a bankruptcy petition under Chapter 11 of the Bankruptcy
Code and the bankruptcy court confirmed the corporation’s plan of
reorganization, wherein the corporation’s loan was restructured and the
corporate debt owed on the note was reduced. Id.
Following confirmation of the corporation’s plan, the Kimballs claimed
in court that the confirmed bankruptcy plan had affected their own
obligations as guarantors of the debt. Of relevance to the case at bar, the
Kimballs claimed that “the confirmation of the plan cured the default on the
previously accelerated corporate debt, so that their guaranties [now only]
guarant[eed] the restructured and reduced debt” and that “the confirmation
order act[ed] as collateral estoppel or res judicata as to any claim that might
be brought . . . against the individual guarantors of the corporate debt.” Id.
The Fifth Circuit rejected both claims and held that the “the obligation[s] of
. . . unconditional guarantors of [a] corporate obligation [are] not affected
by confirmation of [a] reorganization plan by which the corporate debt was
restructured and reduced.” Id. at 223-224. Rather, the court held, a
restructuring under the Bankruptcy Code “does not affect the responsibility
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of the [corporation’s] guarantors to make good on the unpaid portion of the
guaranteed debts that remain after the arrangement is completed.” Id. at
223 (internal quotations, citations, and corrections omitted). Thus, the court
held that the Kimballs were liable for “the entire original corporate debt that
was guaranteed by” them. Id. at 224.
Results similar to that reached by the Stribling Flying Service Court
are found throughout the courts of the United States. See J & B Inv.’s,
LLC v. Surti, 258 S.W.3d 127, 130 (Tenn. Ct. App. 2007) (the confirmed
plan declared that, if the debtor were to pay off its reduced and restructured
debt, the debtor’s default would be cured and the payment would be “in full
satisfaction of the obligation owed to [the creditor]”; nevertheless, the court
held that “the discharge of [the debtors] in bankruptcy did not alter the
liability of the [g]uarantors”); Austin Hardwoods, Inc. v. Vanden
Berghe, 917 S.W.2d 320, 326 (Tex.App. 1995) (“modification of a corporate
debt through a confirmed reorganization in bankruptcy does not constitute a
material alteration of the underlying obligation so as to release a
guarantor”); F.D.I.C. v. Lapierre, 144 B.R. 581, 584 (D.Me. 1992) (“the
fact that under the reorganization plan the debtor may have been relieved
from the consequences of its default does not mean that a default does not
exist”); R.I.D.C. Indus. Dev. Fund v. Snyder, 539 F.2d 487, 492 (5th Cir.
1976) (“bankruptcy courts may have jurisdiction over secured creditors in
Chapter XI proceedings and, if the debt owed the secured creditor is altered
by a Chapter XI arrangement, the secured creditor's guarantee is insulated
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by § 16 of the Bankruptcy Act [(which has been rewritten and codified at 11
U.S.C. § 524(e))]”); In re Nine N. Church St., 82 F.2d 186 (9th Cir. 1936)
(“By its guaranty, [the guarantor] promised to meet certain obligations and
these are not affected by reorganization of this debtor. Any modification of
[the debtor’s contract with the creditor] can only be justified by the
bankruptcy power which extends only to the relief of insolvent or hard
pressed debtors. If [the guarantor] is in that class, it must come into court
and establish the fact. It [cannot] modify its obligations by the
reorganization of other insolvents”).
We conclude that, if confronted with the issue, our Supreme Court
would hold consistent with the above cases and declare that, when a debt or
loan has been restructured in bankruptcy, the restructuring does not affect
the liability of a non-debtor surety or guarantor. One reason for our
conclusion is because, as a bankruptcy court has explained, “a discharge is
an involuntary release by operation of law of asserted and non-asserted
claims by a creditor against any entity who has filed a petition under the
Bankruptcy Code and who has abided by its rules.” In re Yellowstone
Mountain Club, LLC, 460 B.R. 254, 268 n.4 (Bkrtcy.D.Mont. 2011)
(emphasis added). Thus, since “[a] bankruptcy discharge arises by
operation of federal bankruptcy law, not by contractual consent of the
creditors[, a] creditor’s approval of the plan cannot be deemed an act of
assent having significance beyond the confines of the bankruptcy
proceedings.” In re Arrowmill Dev. Corp., 211 B.R. 497, 506
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(Bkrtcy.D.N.J. 1997) (internal quotations, citations, and corrections
omitted).
Further, any other result would cause our state courts to intrude upon
federal bankruptcy law. Initially, if we were to hold that the restructuring of
a loan under a bankruptcy plan implicitly released a non-debtor surety of
its liability under a separate guaranty and suretyship agreement, our holding
would very likely directly contravene 11 U.S.C. § 524(e). 11 U.S.C.
§ 524(e) (the “discharge of the debtor does not affect the liability of any
other entity on, or the property of any other entity for, such debt”).15
Additionally, and as Appellant has rightly explained, if we were to hold
that the loan restructuring in the case at bar released the Guarantors:
No lender or creditor, whether they are the largest or
smallest in a bankruptcy case, [would] negotiate with a
bankruptcy debtor, let alone vote in favor of a plan, unless
their guarantor participates in the bankruptcy and
affirmatively “consents” to the deal. Imagine the leverage a
guarantor and borrower could obtain in bankruptcy
negotiations by having the guarantor threaten not to
consent to plan modifications negotiated by the borrower
and lender? A lender would be faced with a no-win situation
of risking loss of its guaranty or ceding to the demands of
its guarantor in exchange for consent.
____________________________________________
15
Certainly, some courts and federal circuits hold that 11 U.S.C. § 524(e)
prohibits a bankruptcy court from approving a reorganization plan that
explicitly and knowingly releases claims against a non-debtor. See In re
W. Real Estate Fund, Inc., 922 F.2d 592 (10th Cir. 1990); Matter of Zale
Corp., 62 F.3d 746 (5th Cir. 1995); In re Lowenschuss, 67 F.3d 1394 (9th
Cir. 1995).
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Appellant’s Brief at 3.
Such a result would greatly harm debtors and creditors alike and it
would greatly impair a bankruptcy court’s ability to restructure contracts as
part of the reorganization process, at least where a non-debtor surety or
guarantor exists. See 11 U.S.C. § 1123 (“a plan shall . . . provide adequate
means for the plan’s implementation, such as . . . curing or waiving of any
default [and] extension of a maturity date or a change in an interest rate or
other term of outstanding securities”); see also 11 U.S.C. § 1124 note
(“Curing of the default and the assumption of the debt in accordance with its
terms is an important reorganization technique for dealing with a particular
class of claims, especially secured claims.”)
Moreover, if we were to hold that a loan restructuring in bankruptcy
affects the liability of a non-debtor surety or guarantor, we would encourage
sharp practices in bankruptcy proceedings. Certainly, sureties and
guarantors are often closely related to the borrower under the primary
contract. Thus, if a borrower under the primary contract defaults and then
declares bankruptcy, the borrower would have an incentive to restructure a
loan under almost unachievable terms so that it could shield the guarantor
from liability. Stated another way, even if the debtor-borrower has a belief
that the terms of the loan will force it into liquidation, the debtor-borrower
might still restructure its loan in such a manner, simply because it knows
that the action will cure its individual surety or guarantor of liability under
the suretyship or guaranty agreement.
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Finally, any other result would destroy one of the primary purposes of
having a surety or guarantor. Indeed, with respect to a guarantor, the Ninth
Circuit has explained:
By its guaranty, [the guarantor] promised to meet certain
obligations and these are not affected by reorganization of
this debtor. . . . To allow a guaranty to be modified every
time the principal debtor found itself in financial difficulties
would be to make a guarantor’s obligation nominal only.
The very purpose of, and only value in, a guaranty is as a
protection against the principal’s inability to pay. Without a
reorganization of the guarantor and a showing that its
financial conditions justify relief from its obligations, the
contract between the obligees and the guarantor is
inviolate.
In re Nine N. Church St., 82 F.2d at 188.
In the case at bar, the Guarantors allegedly defaulted under the
Guaranty and Suretyship Agreement in March 2010 – well before the
underlying loan and credit facility were restructured, in bankruptcy, in
October 2011. Further, and as a result of the alleged default, Appellant
accelerated the Loan and declared the entire principal amount of the Loan
and all interest, unpaid fees, and indebtedness to be “forthwith due and
payable.” Letter, 3/22/10, at 2; Appellant’s Complaint, 10/4/10, at ¶ 26. It
was at this point that the Guarantors became liable, under the Guaranty and
Suretyship Agreement, for the entirety of their agreed upon indebtedness –
and the Debtors’ subsequent bankruptcy filing does not affect Appellant’s
ability to seek and obtain a judgment against the Guarantors for the alleged
default.
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Moreover, even though Appellant and the Debtors restructured their
Loan in the bankruptcy proceedings, the restructured loan documents
neither released the Guarantors from their already-established liability nor
cured the Guarantor’s default under the Guaranty and Suretyship
Agreement. Indeed, both the Plan and the Confirmation Order declared that
the Guarantors were not released as a result of the Debtors’ discharge. The
Plan, 9/27/11, at ¶ 9.8; Confirmation Order, 10/4/11, at 8-9.
Finally, our result is not changed by the mere fact that the Loan was
restructured in documents that exist outside of the four corners of the Plan.
To be sure, the Plan specifically declared that the execution and delivery of
the Loan restructuring documents were a “condition precedent to the
occurrence of the Effective Date” and that obligations under the restructured
Loan documents were incorporated into the Plan. The Plan, 9/27/11, at
¶ 4.3.3(vii) and “Schedule A.” Therefore, since the restructured Loan
documents are a part of the Plan, the restructuring did not affect Appellant’s
liability under the Guaranty and Suretyship Agreement or cure Appellant’s
alleged default of that agreement.16
____________________________________________
16
The Guarantors claim that Appellant entered into a voluntary settlement
agreement with the Debtors and, in doing so, voluntarily altered the terms
of the Loan documents. See the Guarantors’ Brief, at 24; see also In re
Arrowmill Dev. Corp., 211 B.R. at 503-507 (“When a release of liability of
a nondebtor is a consensual provision . . . , agreed to by the effected
creditor, it is no different from any other settlement or contract and does not
implicate 11 U.S.C. § 524(e). A voluntary, consensual release is not a
discharge in bankruptcy”). According to the Guarantors, since Appellant
(Footnote Continued Next Page)
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Hence, we vacate the trial court’s order in part and remand for further
proceedings.
Order vacated in part. Case remanded. Jurisdiction relinquished.
_______________________
(Footnote Continued)
“voluntarily agreed with the Debtors to extinguish the Debtor Liabilities
under the Original Loan Documents and replace and substitute them with
materially modified liabilities under the New Agreement,” the Debtors were
not “discharged” under the Bankruptcy Code. The Guarantors further claim
that, as a result of Appellant’s voluntary action, the Guarantors’ obligations
under the Guaranty and Suretyship Agreement have been extinguished. The
Guarantors’ Brief at 21; see also Food Lion, Inc. v. S.L. Nusbaum Ins.
Agency, Inc., 202 F.3d 223 (4th Cir. 2000) (“a release of the principal
debtor by the creditor, by an absolute release of the debt, or by an
obligatory extension of the time of payment, without the consent of the
surety, releases the surety in toto. . . . [Therefore, when the debtors
entered into a voluntary settlement with the creditor, releasing the debtors
from the creditor’s claims, the creditor’s] release of [the debtors] bar[red]
any claim against [the surety] . . . [b]ecause [the creditor] ha[d] no claim
against [the debtors]”).
The Guarantors’ claim is incorrect, as the Plan demanded the execution and
delivery of the Loan documents as a “condition precedent to the occurrence
of the Effective Date,” the Plan incorporated the obligations that were
contained in the Loan restructuring agreements, and the Bankruptcy Court
clearly discharged the Debtors pursuant to Section 1141(d)(1)(A) of the
Bankruptcy Code. Thus, the restructured Loan documents do not constitute
a “voluntary settlement” of Appellant’s underlying claims against the
Debtors. Rather, the restructured Loan documents are part and parcel of
the Plan itself.
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Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 11/25/2014
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