In re Bahara
| Decision Date | 13 March 1998 |
| Docket Number | 3:CV-96-102.,No. 3:CV-96-104,3:CV-96-104 |
| Citation | 219 BR 77 |
| Parties | In re Robert BAHARA and Elaine Bahara, Debtors. In re Eugene BRIZER and Roberta Brizer, Debtors. |
| Court | U.S. District Court — Middle District of Pennsylvania |
Stephen G. Bresset, Stroudsburg, PA, for Debtors.
George E. Clark, Jr., Scranton, PA, for First Nat'l Bank of Jermyn.
The above-captioned matters are before this Court on appeals taken on behalf of Eugene and Roberta Brizer (the Brizers) and Robert and Elaine Bahara (the Baharas) from an Order of the Bankruptcy Court for this District entered on October 12, 1995. In this Order, Bankruptcy Judge Thomas sustained the objection of the First National Bank of Jermyn (Bank) to the reorganization plans submitted on behalf of the Brizers and Baharas (referred to herein collectively as the "debtors"); overruled the debtors' contention that their indebtedness to the Bank had been discharged by the Bank's modification of the obligations of the debtors' co-obligors; granted the Bank's motion to convert the proceeding to Chapter 7, subject, however, to the right of the debtors to submit amended reorganization plans; and granted the Bank relief from the automatic stay provision of the Bankruptcy Code as to certain commercial property that secured part of the debtors' obligations to the Bank. The focus of the debtors' argument on appeal is Judge Thomas' determination that the debtors' obligation to the Bank had not been discharged by virtue of a Loan Modification Agreement pursuant to which the Bank released the debtors' co-obligors. Because the October 12, 1995 Opinion left unresolved substantial questions as to the effect of the Loan Modification Agreement on the debtors' obligations to the Bank in connection with the 1979 loan, the bankruptcy court Order of October 12, 1995 will be affirmed in part, reversed in part, and this matter will be remanded to the bankruptcy court for further proceedings consistent with this Memorandum and Order.
This litigation arises out of the failure of a meat processing business known as M. Brizer & Co., which was owned as a partnership by Eugene Brizer, Robert Bahara, and Edward Kubecki. In November of 1979, the Bank effectively extended a $650,000 loan to M. Brizer & Co.1 The Bank also required that the partners of M. Brizer & Co., along with their spouses, execute a mortgage for certain commercial property (Exhibit 3), a "Bond Accompanying a Mortgage" (Exhibit 2), and an "Industrial Revenue Bond Guaranty" (the "Guaranty") (Exhibit 1). The Guaranty has three provisions particularly pertinent to the matters and issues raised here. First, the liability of the guarantors was "unconditional" and was not to be impaired by "any renewal or extension which may be made (with or without the guarantors' knowledge or consent) of the time of payment of the Industrial Revenue Bond, or of the time for performance by any party obligated thereto of any of the terms and provisions of the Bond." (Id. ¶ 3(a).) Second, the guarantors agreed that the Bank could pursue them without exhausting any remedy or claim against M. Brizer & Co. Finally, the guarantors were "jointly and severally liable under this Guaranty." (Id. ¶ 8.)
In May of 1987, the Bank made a second loan in connection with the business of M. Brizer & Co. This loan was in the amount of $200,000. The promissory Note was signed by not only the debtors and the Kubeckis' but also the Kubeckis' children.2 This indebtedness was secured by mortgages on each of the personal residences of the Brizers, Baharas, the Kubeckis, and the Kubeckis' children.
M. Brizer & Co. last made payment on the $650,000 loan, listed by the Bank as No. 65250, on September 4, 1987. At that time, the principal balance due was $403,962.63.
Payments on the $200,000 loan, listed by the Bank as No. 82114, were also discontinued in September of 1987. At that time, the principal balance due was $184,958.12.
In November of 1988, the Bank confessed judgment in the amount of $650,000 against the debtors and the Kubeckis on the confession of judgment clauses in the 1979 Guaranty and the Bond Accompanying the Mortgage. In December of 1988, the Bank confessed judgment for $200,000 against the debtors, the Kubeckis and the Kubeckis' children pursuant to the warrant of attorney contained in the 1987 Note. Efforts to strike the judgments were unsuccessful. See First Nat'l Bank of Jermyn v. Bahara, 539 Pa. 153, 650 A.2d 1060 (1994) (per curiam) (Cappy, J., dissenting).3
While the litigation over the confessed judgments was pending, the Bank sought to negotiate loan modification agreements with the debtors and the Kubeckis. Although the Bank reached an agreement with the Kubeckis, it was unable to do so with the debtors. In order to avoid foreclosure on their personal residences, the debtors filed Chapter 11 proceedings on June 12, 1992.
On June 16, 1992, Edward and Stella Kubecki executed the Loan Modification Agreement with the Bank. Essentially, this agreement released the Kubeckis and their children from all prior obligations to the Bank in exchange for a $6,000 down payment by the Kubeckis and a promissory note for $127,000 executed by the Kubeckis and secured by a mortgage on the Kubeckis' residence. In essence, the Kubeckis agreed to pay the Bank $133,000, re-mortgaged their residence, which had been security for the 1987 Note, and in return received a discharge of their obligations on the 1979 Guaranty and the 1987 Note as well as a release of their children's liability to the Bank. (Exhibit 9.) An amendment to the Loan Modification Agreement, in which the Bank, inter alia, purported to expressly reserve all claims against the debtors, was executed in September of 1992. (Exhibit 10.)
During the course of the bankruptcy proceedings, the Bank filed a proof of claim as to only the 1979 loan.4 Debtors argue that their obligations under both the 1979 Guaranty and the 1987 Note were discharged as a result of the Bank impermissibly releasing the Kubeckis, the Kubeckis' children, and their mortgages without the debtors' consent.
In reviewing bankruptcy court decisions, questions of law are subject to plenary review while questions of fact require application of the clearly erroneous standard. Fed.R.Bankr.8013 (); In re Lilley, 91 F.3d 491, 494 (3d Cir.1996). "A finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire record evidence is left with the definite and firm conclusion that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). Whether a plan has been proposed in good faith is a question of fact subject to the clearly erroneous standard, while the legal standard applicable to good faith determinations is a question of law subject to plenary review. See In re Goddard, 212 B.R. 233, 237 (D.N.J.1997).
In this case, any decision as to the debtors' proposed reorganization plan is largely dependent upon whether the debtors' indebtedness to the Bank has been discharged, in whole or in part, as a result of the Loan Modification Agreement between the Bank and the Kubeckis. The bankruptcy court separately considered the impact of that agreement on the 1979 Guaranty and the 1987 Note.5 As to the 1979 Guaranty, Judge Thomas held that the debtors had waived any defense of discharge by agreeing in the Guaranty that their liability would not be affected by any modification of the terms of the Bond. As to the 1987 Note, the bankruptcy court found that the debtors had failed to carry their burden of showing the extent to which the Loan Modification Agreement impaired their rights of contribution against those who were released by the Bank. The Bankruptcy Court's rulings as to the 1979 Guaranty and 1987 Note will be addressed seriatim.
Under the 1979 Guaranty, the debtors and the Kubeckis unconditionally guaranteed payment to the Bank of the principal and interest on the $650,000 indebtedness.6 The liability of the debtors and the Kubeckis was not dependent upon the Bank's exhaustion of remedies against M. Brizer & Co. Nor could their liability be impaired by any modification of the terms of the Industrial Revenue Bond that was the subject of the 1979 Guaranty. Further, liability under the 1979 Guaranty was joint and several, meaning, of course, that the Bank could proceed against one or more of the guarantors separately, or all of them together, at the Bank's option, for the entire amount due and owing.
These aspects of the 1979 Guaranty are undisputed. Nor is there any contention in this case that the Bank took action vis a vis the principal debtor that vitiated its right to proceed under the 1979 Guaranty. On the contrary, the entry of judgment against the Kubeckis and the debtors under the 1979 Guaranty has been sustained. See First Nat'l Bank of Jermyn v. Bahara, 539 Pa. 153, 650 A.2d 1060 (1994) (per curiam).
What this case does concern is the relationship between the debtors, on the one hand, and the Kubeckis, on the other, as co-sureties. In Keystone Bank v. Flooring Specialists, Inc., 513 Pa. 103, 518 A.2d 1179 (1987), the Pennsylvania Supreme Court explained: "Where . . . there are several sureties for the principal's unpaid debt, each surety owes to his co-sureties a duty to pay his proportional share of their common debt." Id. at 115, 518 A.2d 1179. Upon default by the principal in a suretyship, each surety becomes a principal for his or her pro rata share and remains a surety for the balance of the debt. Id. at 116, 518 A.2d 1179 (). Accordingly, in this case, the Baharas, Brizers and Kubeckis...
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