AMA Management Corp. v. Strasburger

• Decision Date: 17 February 1992
• Docket Number: No. 1864,1864
• Court: South Carolina Court of Appeals
• Parties: AMA MANAGEMENT CORP., Appellant, v. Alvin STRASBURGER, Individually and as general partner for Associated Distributing Co., a South Carolina Limited Partnership, Roy Strasburger, Individually and as general partner for Associated Distributing Co., a South Carolina Limited Partnership, Associated Distributing Co., a South Carolina Limited Partnership, and TransAmerica Commercial Finance Corporation, Respondents. . Heard

Page 868

420 S.E.2d 868

309 S.C. 213

AMA MANAGEMENT CORP., Appellant, v. Alvin STRASBURGER, Individually and as general partner for Associated Distributing Co., a South Carolina Limited Partnership, Roy Strasburger, Individually and as general partner for Associated Distributing Co., a South Carolina Limited Partnership, Associated Distributing Co., a South Carolina Limited Partnership, and TransAmerica Commercial Finance Corporation, Respondents.

No. 1864.

Court of Appeals of South Carolina.

Heard Feb. 17, 1992.

Decided Aug. 10, 1992.

Rehearing Denied Sept. 16, 1992.

Robert W. Foster, and Howard A. VanDine, III, both of Nelson, Mullins, Riley & Scarborough, Columbia, for appellant.

Evans T. Barnette and Thomas E. McCutchen, both of Whaley, McCutchen, Blanton & Rhodes; James M. Brailsford, III, and John S. Taylor, both of Robinson, McFadden & Moore, Columbia, for respondents.

BELL, Judge:

This is an action in contract to enforce two agreements guaranteeing payment of a loan made by TransAmerica Commercial Finance Corporation, a commercial lender, to Top Brass Enterprises, Inc., a bankrupt corporation. AMA Management Corp., the holder of the guaranty agreements by virtue of an assignment for value from TransAmerica, sued Alvin Strasburger and Associated Distributing Co., the respective guarantors. Roy and Alvin Strasburger were also sued individually and as partners of Associated. In addition, AMA sued TransAmerica on a separate claim for misrepresentation in connection with the assignment and for breach of the assignment agreement. The case was brought on for trial by jury. At the close of AMA's evidence, the court granted motions by the Strasburgers and Associated for a directed verdict, holding that the assignment to AMA operated to extinguish the debt and release the guarantors. In response to TransAmerica's motion for a directed verdict, the court dismissed the cause of action for misrepresentation on the ground that the claim was moot because the debt and guaranty agreements were extinguished. The court also granted a directed verdict on AMA's claim for breach of the assignment agreement, although no motion was before it regarding that claim. AMA appeals. We affirm on other grounds as to the cause of action for misrepresentation, but reverse and remand as to the causes of action on the guaranty agreements and for breach of the assignment agreement.

The facts relevant to the appeal are largely undisputed. Associated is a wholesale distributor of household appliances owned and operated by Alvin and Roy Strasburger as partners. Among its customers was Top Brass, a nationwide retail dealer of household appliances.

Top Brass encountered difficulty financing its purchases from Associated. To resolve this difficulty, the parties entered negotiations with Borg-Warner Acceptance Corporation, the predecessor in interest of TransAmerica, to arrange floor plan financing for Top Brass. ¹ Under a proposed floor plan agreement, Associated would ship goods to Top Brass and send the bills to TransAmerica. TransAmerica would advance money directly to Associated to pay the bills, then look to Top Brass for repayment of the advances. In return for this extension of credit, Top Brass would give TransAmerica a first lien security interest in all of its inventory, receivables, and other specified collateral to secure repayment of the sums advanced.

A problem arose with this proposed financing plan, because Security Pacific Bank had a prior perfected security interest in the inventory of Top Brass. To induce TransAmerica to provide floor plan financing, TransAmerica, Security Pacific, and Top Brass agreed to execute an Inventory Security Agreement in which Security Pacific subordinated its security interest to TransAmerica. In reliance upon the anticipated execution of the Inventory Security Agreement by Security Pacific, Associated sold about $500,000 worth of goods to Top Brass.

As part of this negotiated arrangement, Alvin Strasburger and Associated also executed the written guaranty agreements at issue in this suit. There is a dispute concerning the validity and terms of the guaranty agreements which is not relevant to the issues raised by this appeal. ² For purposes of analysis, therefore, we assume, without deciding, that the guaranty agreements are valid.

On August 25, 1986, Top Brass filed for protection from its creditors under Chapter 11 of the United States Bankruptcy Code. On that date, it had an unpaid debt to TransAmerica of $472,368. TransAmerica timely filed a Proof of Claim for that amount as a secured creditor under the Inventory Security Agreement.

The bankruptcy court eventually appointed a trustee to take possession of the bankrupt estate and to operate Top Brass's business. The trustee, with the approval of the bankruptcy court, entered into a management agreement with AMA. Under the management agreement, AMA was to manage Top Brass's day to day operations, lend new money to the business, and otherwise conduct the affairs of the business subject to the approval and direction of the trustee and the bankruptcy court. In return, the bankrupt estate was to pay AMA a $40,000 management fee each month and to repay any sums AMA advanced to rehabilitate the business. Repayment to AMA was secured by a so called "super priority" lien on all assets of the bankrupt estate. This lien had priority over all prepetition debt. In addition, if the bankruptcy court approved the reorganization plan submitted by AMA and the Chapter 11 reorganization was successful, AMA would emerge as a majority shareholder in the reorganized business.

During the course of the Chapter 11 reorganization, AMA loaned approximately $3.8 million to the bankrupt estate in an attempt to return the business to profitable operation. After many months of conducting the business, AMA decided a greater infusion of money was needed to make the reorganization succeed. Because it wanted to decrease rather than to increase its own exposure as a lender, AMA decided to look for an outside lender to supply the additional money. To that end, it entered negotiations with TransAmerica to extend a $3 million line of credit to the business. Roy Strasburger was instrumental in arranging these negotiations and also participated directly in some of the negotiating sessions.

AMA and TransAmerica eventually concluded a set of interrelated agreements to provide Top Brass with additional credit. TransAmerica, on its part, agreed to furnish the bankrupt estate with a $3 million line of credit under which it would immediately advance $1.25 million in cash to allow Top Brass to pay down half of its then outstanding $2.5 million debt to AMA. The remaining $1.75 million on the line of credit would be used to infuse working capital into the business as needed. AMA, on its part, agreed that TransAmerica would be secured as to the $3 million by a lien on the bankrupt estate's assets senior to AMA's super priority lien. AMA also paid TransAmerica $325,000 in cash for a written assignment of TransAmerica's $472,368 Proof of Claim in the bankruptcy court together with the Inventory Security Agreement and the two guaranty agreements securing that claim. AMA's purchase of the Proof of Claim was part of the inducement for TransAmerica to extend postpetition credit to the bankrupt estate. The bankruptcy court approved these agreements.

As it happened, AMA was unable to rehabilitate the business, the bankruptcy court never approved a reorganization plan, and the Chapter 11 reorganization failed. AMA then filed this suit seeking to enforce the assigned guaranty agreements.

I.

AMA contends the circuit court erred in holding TransAmerica's assignment of its bankruptcy claim to AMA released the guarantors from their obligations under the guaranty agreements.

A guaranty of payment is an absolute or unconditional promise to pay a particular debt if it is not paid by the debtor at maturity. Greene County v. National Bank of Snow Hill, 193 N.C. 524, 137 S.E. 593 (1927). It is a personal obligation running directly from the guarantor to the creditor which is immediately enforceable against the guarantor upon default of the debtor. See, Peoples Federal Savings and Loan Assoc. v. Myrtle Beach Retirement Group, Inc., 300 S.C. 277, 387 S.E.2d 672 (1989). If the principal obligation is assignable, assignment of the debt operates as an assignment of the guaranty of the debt. Bachmann v. Glazer, 316 Md. 405, 559 A.2d 365 (1989); Silver v. Friedman, 18 N.J.Super. 367, 87 A.2d 336 (1952); Weinsklar Realty Co. v. Dooley, 200 Wis. 412, 228 N.W. 515 (1930). Unless the debt instrument or the instrument of guaranty prohibits assignment, an assignment does not release the guarantor, who is discharged only when the underlying debt has been paid or otherwise satisfied in full. Id. The guarantor is not discharged if the debtor files a petition for bankruptcy. The automatic stay under 11 U.S.C. § 362(a) does not extend to actions against guarantors of the debtor. See, e.g., Otoe County National Bank v. W & P Trucking Co., 754 F.2d 881 (10th Cir.1985); In re Advanced Ribbons and Office Products, Inc., 125 B.R. 259 (Bankr. 9th Cir.1991); In re Murall, Inc., 118 B.R. 400 (Bankr.D.S.C.1989); In re Philadelphia Gold Corporation, 56 B.R. 87 (Bankr.E.D.Pa.1985). Thus, the creditor may bring a separate state court action to enforce the guaranty despite the bankruptcy petition. In re Murall, supra.

By their express terms, the guaranty agreements here in issue were: (1) assignable; (2) enforceable without prior demand on the debtor for payment; and (3) enforceable without any recourse to other security for payment and despite the creditor's release of any other security. Therefore, the assignment from TransAmerica to AMA did not discharge the guarantors. We reverse the circuit court's judgment to the contrary.

The Strasburgers argue that our decision in Jeffcoat v. Morris, 300 S.C. 526, 389...