Borg-Warner Acceptance Corp. v. Johnston

• Decision Date: 20 March 1990
• Docket Number: No. 8926SC830,BORG-WARNER,8926SC830
• Court: North Carolina Court of Appeals
• Parties: , 12 UCC Rep.Serv.2d 297 ACCEPTANCE CORPORATION, Plaintiff, v. Hugh W. JOHNSTON and wife, Audrey S. Johnston, Defendants.

Page 429

389 S.E.2d 429

97 N.C.App. 575, 12 UCC Rep.Serv.2d 297

BORG-WARNER ACCEPTANCE CORPORATION, Plaintiff, v. Hugh W. JOHNSTON and wife, Audrey S. Johnston, Defendants.

No. 8926SC830.

Court of Appeals of North Carolina.

March 20, 1990.

DeLaney and Sellers, P.A. by Timothy G. Sellers and Charles E. Lyons, Charlotte, for plaintiff-appellee.

Stott, Hollowell, Palmer & Windham by E. Gregory Stott and Grady B. Stott, Gastonia, for defendants-appellants.

LEWIS, Judge.

On 29 June 1983 and 28 December 1983, defendants signed guaranty agreements with the plaintiff under the terms of which they agreed to unconditionally guarantee the indebtedness of Royal Villa, Inc. to the plaintiff under two Equipment Lease Agreements between the plaintiff and Royal Villa, Inc. dated 29 June 1983 and 28 December 1983.

Royal Villa, Inc. was the owner of the real property upon which the Royal Villa Hotel was located and where the equipment, furniture and furnishings leased by the plaintiff to Royal Villa, Inc. were to be delivered. As additional security for its performance under the terms of the Equipment Leases, Royal Villa, Inc. executed a deed of trust in favor of the plaintiff encumbering the real estate. After executing these documents, Royal Villa, Inc. changed its name to The Raleigh Inn, Inc.

In May of 1986, the Inn filed a petition under Chapter Eleven of the Bankruptcy Code. The Inn subsequently defaulted in making timely payments to Borg-Warner. Pursuant to the terms of the Equipment Leases, the entire unpaid balances due were declared immediately due and payable on 30 November 1986.

An Order was entered by the Bankruptcy Court granting Raleigh Federal Savings & Loan Association, holder of a first deed of trust on the Wake County real property, and the plaintiff relief from the Automatic Stay of the Bankruptcy Code and permission to foreclose their deeds of trust.

During the course of the bankruptcy proceeding, a potential buyer of the Inn deposited $50,000.00 which was later forfeited to the plaintiff and applied to the indebtedness owed to them by the Inn.

The plaintiff instituted foreclosure proceedings in Wake County and a foreclosure sale was held on 23 September 1987. The plaintiff was the only bidder present at the scheduled sale and entered a bid of $100,000.00. No other bids were made. A Trustee's Deed was delivered to Borg-Warner. The net proceeds from the foreclosure sale, totaling $94,353.00 were disbursed to Borg-Warner and applied to reduce the indebtedness of the Inn. At the time of the sale, the Promissory Note secured by the first deed of trust in favor of Raleigh Federal Savings & Loan Association was also in default with a balance due and owing in excess of $3,500,000.00. Proceedings had been instituted in Wake County to foreclose the Raleigh Federal Savings & Loan Association deed of trust.

In January 1988, the real property formerly owned by the Inn and acquired by the plaintiff through foreclosure was sold to P.S. Investment Company, Inc. for the sum of $5,024,419.89. The personal property located at the Inn was also sold to P.S. Investment Company, Inc. for $10.00. Neither the Inn nor the defendants received any notice from Borg-Warner of the sale of the property.

Borg-Warner claims and defendants deny that there is a total balance due and owing on the Inn leases of $1,222,298.23. Defendants claim that through its sale of the real and personal property of the Inn, plaintiff received a return on its loan of $1,694,318.00 and that this amount should be used to extinguish their indebtedness.

I. Defendants' Right To Assert Certain Statutory Defenses

Defendants contend that as guarantors they are entitled to the defense established by G.S. 45-21.36, which provides in pertinent part:

When any sale of real estate has been made by a mortgagee, trustee, or other person authorized to make the same, at which the mortgagee, payee or other holder of the obligation thereby secured becomes the purchaser and takes title either directly or indirectly, and thereafter such mortgagee, payee or other holder of the secured obligation, as aforesaid, shall sue for and undertake to recover a deficiency judgment against the mortgagor, trustor or other maker of any such obligation whose property has been so purchased, it shall be competent and lawful for the defendant against whom such deficiency judgment is sought to allege and show as matter of defense and offset, but not by way of counterclaim, that the property sold was fairly worth the amount of the debt secured by it at the time and place of sale or that the amount bid was substantially less than its true value, and, upon such showing, to defeat or offset any deficiency judgment against him, either in whole or in part....

G.S. § 45-21.36. (Emphasis added). This statute limits protection to those parties who hold a property interest in the mortgaged property and is not applicable to other parties liable on the underlying debt. First Citizens Bank & Trust Co. v. Martin, 44 N.C.App. 261, 264, 261 S.E.2d 145, 148 (1979), disc. rev. denied, 299 N.C. 741, 267 S.E.2d 661 (1980). Defendants contend that they do own a property interest in the property of the Inn since Mr. Johnston owns 77% of the capital stock of the corporation, pledged his own assets and extended his own personal credit in order to pay off creditors. Borg-Warner argues that defendants do not possess a property interest in the Inn since title to that property was held solely in the name of the corporation. In support of its argument, Borg-Warner cites American Foods, Inc. v. Goodson Farms, Inc., 50 N.C.App. 591, 275 S.E.2d 184, disc. rev. denied, 303 N.C. 180, 280 S.E.2d 451 (1981), aff'd, 304 N.C. 386, 283 S.E.2d 517 (per curiam) (1981) (affirming result of hearing). In that case J. Michael Goodson, one of the defendants, was the comaker of a note securing property in the name of Lewis Nursery, Inc. This Court refused to allow defendant Goodson to assert the defense contained in G.S. § 45-21.36, stating:

By contending they are comakers and as such are entitled to the defense established by G.S. 45-21.36, defendants are in effect asking this Court to pierce the corporate veil in a unique way. Defendant Goodson is asking us to wrap the corporate cloak of Lewis Nursery, Inc., around him, since he financed the corporation, and conclude that he and Goodson Farms had an equitable interest in the lands, title to which was recorded in the name of Lewis Nursery, Inc. This we cannot do. Defendants did not hold a property interest in Lewis Nursery, Inc.

Id. 50 N.C.App. at 597, 275 S.E.2d at 188. We see no difference between this case and the case at bar. Title to the real property was held solely in the name of the corporation. Defendants, as guarantors of the Inn, hold no property interest in the Inn and therefore may not assert the defense contained in G.S. § 45-21.36.

The defendants next contend that since the Inn, as mortgagor, could utilize the provisions of § 45-21.36, they should be allowed to do so pursuant to G.S. 26-12, which states:

(a) As used in this section, 'surety' includes guarantors....

(b) When any surety is sued by the holder of the obligation, the court, on motion of the surety may join the principal as an additional party defendant, provided the principal is found to be or can be made subject to the jurisdiction of the court. Upon such joinder the surety shall have all rights, defenses, counterclaims, and setoffs which would have been available to him if the principal and surety had been originally sued together.

G.S. 26-12. (Emphasis added). Because the Raleigh Inn, Inc. has filed bankruptcy pursuant to Chapter Eleven of the United States Bankruptcy Code, it is subject to the exclusive jurisdiction of the United States District Court for the Western District of North Carolina. See 28 U.S.C. 1334(d). The statute expressly states that the principal must be joined as a party and to do so requires the surety to show that our courts have jurisdiction over the principal. This the defendants are unable to do. Therefore, the defendants may not avail themselves of the rights and privileges...