Colonial Bank v. Pier Five, Inc.

• Decision Date: 30 April 1985
• Docket Number: No. CA-2011,CA-2011
• Citation: 469 So.2d 1029
• Parties: COLONIAL BANK v. PIER FIVE, INC., William P. Bosworth, III and Pascale Rodosta, Jr.
• Court: Court of Appeal of Louisiana — District of US

Page 1029

469 So.2d 1029

COLONIAL BANK v. PIER FIVE, INC., William P. Bosworth, III and Pascale Rodosta, Jr.

No. CA-2011.

Court of Appeal of Louisiana Fourth Circuit.

April 30, 1985.

Rehearing Denied June 5, 1985. ^*

Conrad Meyer, III, Monica T. Surprenant, New Orleans, for plaintiff-appellant, Colonial Bank.

Henry L. Klein, New Orleans, for defendant-appellee, William B. Bosworth, III.

Before GULOTTA, SCHOTT and WARD, JJ.

WARD, Judge.

Colonial Bank brought this suit seeking a deficiency judgment against several parties on a promissory mortgage note: Pier Five, Inc., the maker of the note, and William Bosworth, III and Pascale Radosta, Jr., endorsers of the note. The deficiency sought is the balance due on the note after Colonial Bank foreclosed by executory process, and the Trial Court ordered seizure of the mortgaged property, followed by an appraisal, judicial sale, and application of the proceeds to the note. Although the Trial Court held Pier Five, Inc. liable for the deficiency, it rendered judgment in favor of the endorsers, Bosworth, III and Radosta, Jr., releasing them from liability. Colonial Bank has appealed that part of the judgment in favor of Bosworth, III and Radosta, Jr; Pier Five, Inc., now without assets, has not appealed.

We reverse and hold Bosworth, III and Radosta, Jr. severally liable as endorsers of the note, and liable in solido for the deficiency under a separate Continuing Guaranty of Suretyship.

Colonial Bank's claims arise from financial transactions that provided funds for the construction of a building to be used as a restaurant known as "Mr. M's." Early in 1976, one of the defendants, Pascale Radosta, Jr., and William Bosworth, Jr., the father of the defendant, William Bosworth, III, agreed to open a restaurant in a building they would construct in the central business district of New Orleans. Bosworth, Jr. was experienced in construction and finance; Radosta, Jr. was experienced in restaurant management. They incorporated Pier Five, Inc., as a parent company for "Mr. M's", and Bosworth, Jr. and his son, Bosworth, III, acquired sixty-five percent of the stock, while Radosta, Jr. and his sons acquired the remaining thirty-five percent. After the incorporation, Bosworth, Jr. contacted Colonial Bank, with whom he had previously done business, to secure interim construction money. On February 27, 1976, a commitment letter was issued, and Colonial Bank, with Monroe Building and Loan Association participating, agreed to provide interim construction money to Pier Five if Bosworth, Jr., Bosworth, III, and Radosta, Jr. personally guaranteed the loan. Shortly thereafter Bosworth, III and Radosta, Jr. each entered into a "Continuing Guaranty", in which each accepted responsibility for $1,000,000.00 of the debts of Pier Five. Bosworth Jr., did not give a "Continuing Guaranty," although the commitment letter required it.

Nonetheless the loan was made, and construction began in May of 1976. The building was completed December 7th of that year. After completion, Colonial Bank agreed to provide the permanent financing, with Monroe Building and Loan again participating. To obtain the permanent financing, on February 1, 1977 Pier Five, Inc., through its president, Bosworth, III, executed a note for $1,060,000.00, secured by a first mortgage on the land and building. The note was personally endorsed by Bosworth, Jr., Bosworth, III and Radosta, Jr. In addition to the first mortgage, the entire stock of Pier Five, Inc. was pledged to the Bank to secure the note.

In the meantime, Radosta, Jr. had become ill and could not manage the restaurant. In spite of Radosta's illness, "Mr. M's" opened in December of 1976. For a brief period it fared well under the management of Bosworth Jr., Bosworth, III, and Radosta's sons, Jay and Scott. However, the relationship between the Bosworths and the Radostas soon became strained, and finally it ruptured. After some negotiations the Bosworths agreed to sell their interest to Scott Radosta's father-in-law, Whitney Porrier. The sale took place May 31, 1977, and thereafter the Bosworths had nothing to do with operation of "Mr. M's." Things went badly; Porrier and the Radostas argued; and finally, when they could not resolve their differences, Porrier bought out the Radosta interest in January of 1978. Business did not get any better, and in September of 1978, Porrier, who then owned all the stock, sold it to Charles Phillippi.

When Radosta sold to Porrier, Bosworth, Jr. complained to the Bank about the operations and financial status of "Mr. M's." When Porrier sold to Phillippi, Bosworth, Jr. again complained to the Bank and asked that it foreclose on the mortgage. On September 1 and on October 1, 1978, Pier Five defaulted. In the meantime, Bosworth, Jr., fearing the worst, attempted to find a buyer to forestall foreclosure because both he and his son were endorsers on the note to the Bank.

On October 16th, Phillippi notified Colonial Bank that Pier Five could not make the payments on the note. On October 18th, Colonial Bank sent formal notice of default to Phillippi, and when payment was not made, Colonial Bank filed for foreclosure on November 21st. Although he neither possessed nor owned the stock of Pier Five, on December 13, 1978 Bosworth III notified Colonial Bank that he was "taking over" the restaurant. On January 11, 1979, the mortgaged property was offered for public sale after advertisement and appraisal, but no bid in excess of the minimum two-thirds was received. On February 22, 1979, the property was offered for sale with no minimum bid requirement, and the Colonial Bank purchased the property for $210,000.00. After applying the purchase price less judicial costs to the balance on the note and accumulated interest, the deficiency at the time this suit was filed was $1,030,966.77.

Colonial Bank claims Bosworth, III and Radosta, Jr. are liable as endorsers of the promissory note of Pier Five, Inc. and additionally, as guarantors under their prior continuing guarantees of $1,000,000.00 of Pier Five's debts.

As to their liability on the mortgage note, Bosworth, III and Radosta, Jr. contend they were released as endorsers because the Bank permitted the dissipation of the security for the loan. This was done, they argue, when the Bank allowed Phillippi to continue to operate the restaurant when it knew he was incompetent. They rely on Louisiana Civil Code Article 3061 and La.R.S. 10:3-606:

The surety is discharged when by the act of the creditor, the subrogation to his rights, mortgages and privileges can no longer be operated in favor of the surety.

La.C.C. art. 3061.

(1) The holder discharges any party to the instrument to the extent that without such party's consent the holder

* * *

* * *

(b) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse.

* * *

* * *

La.R.S. 10:3-606.

After finding that Colonial's actions both before and after foreclosure reduced the value of the restaurant, the Trial Court held the security for the note was impaired and Bosworth III and Radosta, Jr. were not liable for any deficiency.

We believe that the Trial Court erred. The defendants have misplaced their focus when they rely on La.C.C. art. 3061 and 10:3-606(1)(b). Both the Trial Court and the defendants have misconstrued the nature of the security for the mortgage note. The security described in the mortgage is the land and the improvements on it, not the restaurant, "Mr. M's." There is no evidence to show, nor is it even contended, that Colonial impaired the land or those improvements before filing its foreclosure petition. After foreclosure the Civil Sheriff, not the creditor, assumes custody and corresponding liability for preservation of the seized property. La.C.C.P. Art. 328. The creditor, in this instance Colonial Bank, has no duty to administer the seized property, nor does the Bank have a duty to go into the restaurant business to operate it for the debtor.

Bosworth III and Radosta Jr., in arguing that the Bank impaired the security for the note by not removing Phillippi as manager, apparently believe the Bank had this authority because it was pledgee of the stock of Pier Five. They cite no authority for this novel idea and we can find none, nor do we believe any exists. The Bosworths and the Radostas sold the stock to Phillippi, even though it remained pledged to the Bank. A pledge is nothing more than delivery of an asset to secure a loan. A pledge does not transfer rights of ownership, La.C.C. art. 3154, et seq., and in this instance, the pledge of Pier Five's stock did not transfer ownership to Colonial or give it the right to vote the stock to remove Phillippi as manager of the restaurant.

Secondly, Bosworth III and Radosta Jr. argue that the Bank agreed to suspend its right to enforce the note against Pier Five, and, as a consequence, they are released. They rely on R.S. 10:3-606(1)(a):

(1) The holder discharges any party to the instrument to the extent that without such party's consent the holder

(a) without express reservation of rights releases or agrees not to sue any person against whom the party has to the knowledge of the holder a right of recourse or agrees to suspend the right to enforce against such person the instrument or collateral....

* * *

* * *

We find nothing in the record to support this argument. There was a conversation between Mr. Herbert of Colonial Bank and Phillippi on December 1, 1978 in which Mr. Herbert assured Phillippi that the "foreclosure" would take at least thirty days; but this statement was an obvious reference to the judicial sale of the property, because the foreclosure petition had already been filed. The record shows that Pier Five defaulted September 1 and October 1, 1978. The Bank notified Pier Five of the default, "putting it in default" on October 16, and filed a petition for executory...