In re Barthelmes

• Court: U.S. Bankruptcy Court — District of South Carolina
• Writing for the Court: John E. Waites
• Citation: In re Barthelmes, 318 B.R. 364 (Bankr. S.C. 2004)
• Decision Date: 07 May 2004
• Docket Number: Civil Action No. 03-10696-W.,Adversary No. 04-80007.
• Parties: In re Lana M. BARTHELMES, Debtor. Automotive Finance Corp., Plaintiff, v. Lana M. Barthelmes, Defendant.

Page 364

318 B.R. 364

In re Lana M. BARTHELMES, Debtor Automotive Finance Corp., Plaintiff, v. Lana M. Barthelmes, Defendant.

Civil Action No. 03-10696-W.

Adversary No. 04-80007.

United States Bankruptcy Court, D. South Carolina.

May 7, 2004.

Toni T. Pennington, Lead Attorney, Pawleys Island, SC, for Debtor.

Joseph F. Buzhardt, III, Office of the United States Trustee, Columbia, SC, for trustee.

Robert E. Culver, Lead Attorney, Finkel & Altman, LLC, Charleston, SC, for Plaintiff.

ORDER

JOHN E. WAITES, Bankruptcy Judge.

This matter comes before the Court upon Automotive Finance Corp.'s ("AFC") complaint (the "Complaint") against Lana Barthelmes' ("Debtor") seeking a determination of nondischargeability of a portion of the indebtedness owed it by Debtor due to the sale out-of-trust of certain automobiles. Debtor and Plaintiff have agreed at the pretrial conference and/or by their Joint Pretrial Order that the indebtedness owed Plaintiff on those certain automobiles in the amount of $47,103.64 is nondischargeable pursuant to 11 U.S.C. § 523.¹ The parties also stipulate that the only remaining issue the Court must determine under the Complaint is whether Debtor may direct that proceeds collected through a disposition of other collateral be allocated first to the nondischargeable portion of the indebtedness, thereby reducing the amount agreed to be nondischargeable.² The parties also agree that there is no need for a further trial or further evidence, and that the Court may render a final decision based on the record developed in this adversary, Debtor's main bankruptcy case, and briefs submitted to the Court. After reviewing the record and the parties' briefs, the Court makes the following Findings of Fact and Conclusions of Law pursuant to pursuant to Fed.R.Civ.P. 52, made applicable to these proceedings through Fed. R. Bank. P. 7052.³

FINDINGS OF FACT

1. AFC is a creditor in Debtor's Chapter 7 proceeding and brings this adversary proceeding to determine the dischargeability of certain indebtedness.

2. The parties agree that the Court has jurisdiction over the matters alleged herein and over this proceeding and also agree that this action is a core proceeding.

3. Debtor was in the business of selling used automobiles in Myrtle Beach, South Carolina under the name of Auto Corral, an unincorporated business.

4. In connection with Auto Corral, on or about December 28, 1999 and again on June 20, 2002, Debtor made, executed and delivered to AFC a Promissory Note ("Note") and Security Agreement ("Security Agreement"). The terms of the Note and Security Agreement provided for AFC to make loans to Debtor for the purchase of automobiles for resale.

5. Section 2.3 of the Note and Security Agreement is entitled "Repayment of Obligations" and provides in relevant part, "The order and method of application of such payments of the Obligations shall be in the discretion of AFC."

6. Contemporaneously with the execution of the Note and Security Agreement, Debtor executed a personal guaranty of performance.

7. To secure obligations due under the terms of the Note, Debtor placed physical possession of the title to the automobiles with AFC and granted AFC a lien and security interest in all equipment of any kind or nature and all vehicles, vehicle parts and other inventory then owned or thereafter acquired by Debtor ("Encumbered Inventory").⁴

8. AFC filed a UCC-1 Financing Statement with the Secretary of State of South Carolina to perfect its security interest. Debtor does not dispute AFC's perfected security interest in her inventory of automobiles.

9. Pursuant to the Security Agreement, Debtor was required to hold the proceeds from the sale of certain vehicles in trust in a segregated account for the benefit of AFC. After the automobiles were sold and the proceeds paid to AFC, AFC would deliver title to the purchasers.

10. Prior to the bankruptcy filing, Debtor sold the following six automobiles "out-of-trust" by failing to remit the proceeds from the sales to AFC:

Vehicle            Sales Price
                1998 Mazda 626        $ 6,905.71
                2000 Durango          $13,295.00
                1999 F-150            $12,995.00
                2000 Ranger           $ 8,999.00
                1999 Yukon            $14,185.00
                1999 Mustang          $12,999.00
                

11. Debtor sold these six automobiles (the "Out-of-Trust Vehicles") for a total of $69,378.71.

12. At the time of the sale, Debtor owed $47,103.64 for the Out-of-Trust Vehicles.

13. Debtor agrees that the $47,103.64 debt for the Out-of-Trust Vehicles is non-dischargeable.

14. Apparently following the sale of the Out-of-Trust Vehicles, and acting pursuant to its Note and Security Agreement, AFC took possession of several other vehicles on the Auto Corral lot (the "Seized Vehicles").

15. Two of Debtor's automobile suppliers, Rivertowne Autoworld, Inc. ("Rivertowne") and Bobby Allen ("Allen") d/b/a Allen's Used Cars, contacted AFC and claimed ownership of several of the automobiles that AFC seized. There appears to be no dispute that five of the Seized Vehicles were not subject to the claims of Rivertowne and Allen. These five vehicles were not subject to a floor plan agreement Debtor had with AFC but instead served as security for the Note pursuant to AFC's security interest in Encumbered Inventory (hereinafter, the five vehicles will be referred to as the "Non-Floor Plan Vehicles").⁵

16. Rivertowne's and Allen's claims are the subject of an action in Horry County, South Carolina.

17. Debtor filed for bankruptcy protection under Chapter 7 on or about August 28, 2003 and filed the Complaint on January 13, 2004.

18. On February 10, 2004, AFC obtained relief from the automatic stay to sell the Seized Vehicles.

19. On February 24, 2004, AFC sold all of the Seized Vehicles for a total of $150,971.00.

20. AFC sold the Non-Floor Plan Vehicles for a net amount of $23,097.50.

21. AFC applied the proceeds of the sale of the Non-Floor Plan Vehicles to Debtor's account.

22. When allocating the distribution of the sale proceeds to Debtor's account, AFC applied the proceeds to interest, fees, and payment of debts secured by automobiles other than the Out-of-Trust Vehicles.

23. As of February 27, 2004, the balance on Debtor's account with AFC after application of those proceeds was $143,784.32.

24. With respect to amounts collected for the sale of the Seized Vehicles (for which Rivertowne and Allen claim an interest), excluding the Non-Floor Plan Vehicles, AFC placed the proceeds ($127,873.50) in escrow. Application of the full amount held in escrow to Debtor's account with AFC would still leave AFC with a balance due pursuant to the Security Agreement.

25. The parties have requested that the Court resolve the Complaint by addressing the allocation of payment issue set forth herein.

CONCLUSIONS OF LAW

Although Debtor agrees that $47,103.64 is nondischargeable, Debtor seeks to have the amount obtained from the sale of the Non-Floor Plan Vehicles, $23,097.50, applied to the nondischargeable amount due. AFC contends that it should not have to credit the $23,097.50 toward the nondischargeable amount, primarily because the Note and Security Agreement provide AFC has the discretion to apply payments of obligations.

No evidence has been presented by Debtor that the elements of a contract are not met, thus serving to negate the application of the allocation language in the Note and Security Agreement. See Wright v. Trask, 329 S.C. 170, 176, 495 S.E.2d 222, 225 (S.C.Ct.App.1997) (elements of contract are contractual intent, meeting of the minds, and valid mutual consideration). Further, there was no argument that there was any ambiguity with respect to the allocation clause, and the Court sees no reason to deviate from the clear intent of the parties in executing the Note and Security Agreement. Schulmeyer v. State Farm Fire and Cas. Co., 353 S.C. 491, 495, 579 S.E.2d 132, 134 (S.C.2003) (intent of parties to be primarily considered which can be ascertained from language of contract); Ellis v. Taylor, 316 S.C. 245, 449 S.E.2d 487, 488 (1994) (court is to enforce unambiguous contract according to its terms regardless of unreasonabless or a parties' failure to guard their rights). Therefore, according to the express agreement of the parties, AFC may direct the application of the proceeds to debt other than the nondischargeable debt.

Even if the Court were to look beyond the language of the Note and Security Agreement, determining whether the proceeds from the sale of the Non-Floor Plan Vehicles should be allocated toward the nondischargeable amount turns on whether the repossession and sale of those vehicles are the equivalent of a "voluntary payment."

The general rule governing allocation of payments is that the party paying may direct to what the application is to be made. Nat'l Bank v. Mechanics' Nat'l Bank, 94 U.S. 437, 439, 24 L.Ed. 176 (1876). If no direction is given, the creditor may apply the payment as it wishes. The general rule regarding allocation of payments is a matter of common law and is consistent with South Carolina authority. Restatement (Second) of Contracts § 258 (2003); Frost & Co. v. Weathersbee, 23 S.C. 354, 1885 WL 3667 (Aug. 12, 1885) (debtor, when owing two debts to same creditor, has the right on making payment to direct its application). See also Maryland Cas. Co. v. South Norfolk, 54 F.2d 1032, 1038 (4th Cir.1932) (reciting general rule that right to direct application belongs in the first instance to the debtor). The United States District Court for the District of South Carolina further described the general rule as follows:

[T]he general rule for the application of payment when there are a number of accounts due the creditor by the debtor [is that,] [o]rdinarily, a creditor must apply the payments as instructed by the debtor; absent instructions from the debtor, the creditor may apply them as he chooses, between secured and unsecured matured debts, including past-due account; and, if neither...