In re Browning
| Decision Date | 18 July 1983 |
| Docket Number | Bankruptcy No. C-1-83-610,Adv. No. 1-82-0353,Related Case No. 1-82-01528. |
| Citation | 31 BR 995 |
| Parties | In re Michael Alan BROWNING, Debtor. Alan BROWNING, Plaintiff-Appellee, v. Michael Allen BROWNING, Defendant-Appellant. |
| Court | U.S. District Court — Southern District of Ohio |
Marc D. Mezibov, Cincinnati, Ohio, for plaintiff-appellee.
Sally A. Brock, Cincinnati, Ohio, for defendant-appellant.
This is an appeal by the debtor, Michael Alan Browning, from the judgment entry entered by the Bankruptcy Court for the Southern District of Ohio, Western Division, declaring Browning's debt to the First National Bank of Ludlow, Kentucky, non-dischargeable under 11 U.S.C. § 523(a)(2)(A).
Two issues are presented. The first, a legal issue, is the Bankruptcy Court's assumption that the co-signer of a loan has standing to seek an exception to discharge. The second focuses on the factual findings of the Bankruptcy Court. Having reviewed the arguments of counsel and the record below, we conclude both that the legal assumption is correct and that the lower court's Findings of Fact are not clearly erroneous. Accordingly, we affirm.
Appellant, Michael Alan Browning purchased a 1980 Datsun in January 1980. In later 1980 or early 1981, Michael Browning began having financial problems and, in April 1981, sought advice from his father, appellee Alan Browning. The son and father decided to ask the First National Bank of Ludlow, Kentucky for a consolidation loan for $14,000 to cover all of Michael Browning's debts, including the loan for the Datsun. The Bank agreed to a loan of only $7,701.50, consolidating all of Michael Browning's debts except the car loan. Alan Browning co-signed the loan. Implicit in the Bankruptcy Court's Findings of Facts are that Alan Browning co-signed the loan to accommodate his son and to make it possible for the son to pay off his debts and that the father received no consideration for co-signing the loan and none of the proceeds or benefits of the loan.
One year later, in May 1982, Michael Browning filed a voluntary Chapter 7 petition with the Bankruptcy Court. Alan Browning subsequently brought an adversary proceeding in that court, asserting that the debt arising out of the consolidation loan was not dischargeable. The Bankruptcy Court agreed, relying on 11 U.S.C. § 523(a)(2)(A). This appeal by debtor Michael Browning followed.
Debtor-appellant asserts that the Bankruptcy Court lacks the authority to hold non-dischargeable a debt owed to an entity not a party to the proceedings, in this case, the First National Bank of Ludlow. This issue was dealt with by the Bankruptcy Court in a footnote in which the Court recognized "the novel legal questions presented by this unusual dischargeability proceeding" but held:
As a court of equity, the bankruptcy court has both the power and responsibility to remedy the wrongful conduct of those who submit to its jurisdiction. Nothing short of a finding of nondischargeability would serve equity in this case. See Hartford Accident & Indemnity Co. v. Flanagan, 28 F.Supp. 415 419 (S.D.Ohio 1939); In re Covino, 12 Bankruptcy Reporter 876 (B.Ct., M.D.Fla., 1981); 11 U.S.C. § 105(a).
Appellant maintains that In re Covino is inapposite because the surety in that case had paid in full the obligation of the debtor, unlike the co-signer on the loan in question here. Appellant also relies on Northern Pipeline Construction Co. v. Marathon Pipeline Co., ___ U.S. ___, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), in which the Supreme Court found unconstitutional the grant of powers to Bankruptcy Courts by the Bankruptcy Reform Act of 1978 (Bankruptcy Code).
Although it is true that Marathon Pipeline cast some doubt upon the scope of the Bankruptcy Court's authority, that doubt is limited to the additional authority created by the Bankruptcy Code, ___ U.S. at ___, 102 S.Ct. at 2862-2864, 73 L.Ed.2d at 603-05, and does not fall upon powers traditionally exercised by the Bankruptcy Court under earlier bankruptcy legislation. The question, therefore, is whether the Bankruptcy Court's traditional equitable powers enable it to treat a co-signer of a loan as a creditor for purposes of finding a debt non-dischargeable.
Neither the parties nor the Bankruptcy Court addressed the admittedly "novel legal question" in any depth, focusing rather on the Bankruptcy Court's Findings of Facts. Nevertheless, the Bankruptcy Court's decision is premised on the assumption that a co-signer of a loan is a "creditor" for purposes of seeking an exception to dischargeability. The Bankruptcy Code provides that a debt "for obtaining money . . ., by- . . . a false representation," 11 U.S.C. § 523(a)(2)(A), will be discharged, "unless, on request of the creditor to whom such debt is owed," 11 U.S.C. § 523(c), the Bankruptcy Court determines that the debt is not dischargeable. The plain language of the statute thus casts in considerable doubt the correctness of the Bankruptcy Court's legal premise.
The legal premise upon which a Bankruptcy Court bases its decision—such as the assumption that a co-signer of a loan is a creditor for purposes of dischargeability— are freely reviewable on appeal. United States v. Mississippi Valley Generator Co., 364 U.S. 520, 81 S.Ct. 294, 5 L.Ed.2d 268 (1961); Matter of Multiponics, Inc., 622 F.2d 709, 713 (5th Cir.1980). If we conclude that the legal premises are correct, then we must examine the Court's Findings of Fact to determine whether they are clearly erroneous. Bankruptcy Rule 810; Multiponics, supra, at 709.
The Notes of the Committee on the Judiciary, S.R. No. 95-989, U.S.Code Cong. & Admin.News 1978, pp. 5787, 5866, state that "if the creditor does not act, the debt is discharged." (emphasis added) The Committee Notes point out that subsection (c) does not change prior bankruptcy law and that the rules on bankruptcy procedure will, as in the past, specify who may request determinations of dischargeability.
Bankruptcy Rule 409(a)(1) states that the bankrupt or a creditor may file a complaint with the bankruptcy court to determine the dischargeability of the debt. A "creditor" is an entity with a claim against the debtor that existed at the time the bankruptcy petition was filed. 11 U.S.C. § 101(9)(A). A "claim" is a right to payment whether or not the right is contingent. 11 U.S.C. § 101(4)(A).
A co-signer of a loan is thus clearly a creditor under the Bankruptcy Code for he has a claim against the debtor which remains contingent so long as the debtor has not defaulted on the loan. However, he is not "the creditor to whom the debt sought to be discharged is owed," 11 U.S.C. § 523(c) and it would seem therefore that he has no standing to seek an exception to the discharge of that debt.
Construing the Bankruptcy Code in In re Covino, 12 B.R. 876 (Bkrtcy.M.D.Fla.1981), the Bankruptcy Court held that a surety that had paid debtor's employer the amounts embezzled from the employer by the debtor had standing to seek an exception from discharge. Appellant insists that the case is distinguishable because the surety, unlike the co-signer in the instant case, had paid off the debt, thereby becoming subrogated to the rights of the creditor. See also In re Dynda, 19 B.R. 817, 818 (Bkrtcy., M.D.Fl.1982) (). The court in In re Covino relied upon Hartford Accident & Indemnity Co. v. Flanagan, 28 F.Supp. 415 (S.D.Ohio 1939), a case decided under the Bankruptcy Act and holding that a surety who had made payment pursuant to an indemnity agreement had standing to seek an exception to discharge where the debt was created by embezzlement. The Covino Court adopted the earlier decision's public policy argument that Bankruptcy law should be liberally construed to prevent discharge of "a liability which would not exist but for the fraudulent conduct of the bankrupt." 12 B.R. at 877, quoting 28 F.Supp. at 419.
We find this public policy argument persuasive. We further find the argument applicable to the co-signer of a loan who co-signs purely as an accommodation endorser and receives no consideration for his signature and no benefit or proceeds from the loan whether or not the co-signer has paid the obligation in full.
The creditor to whom the debt is owed has no reason to challenge the dischargeability of a debt arising out of a co-signed loan as he can always seek repayment from the co-signer. To hold that that co-signer does not have standing to challenge the dischargeability of the debt forces the co-signer to pay off the loan in order to challenge the discharge of that debt. Such a result is manifestly unjust where the debt to the creditor and the co-signer's liability arose out of the debtor's misrepresentations. The only person who benefits from such a holding is the fraudulent debtor.
Furthermore, although the general rule is that a voluntary petition for liquidation will result in the discharge of the petitioner's debts, 11 U.S.C. § 727, permitting a co-signer to object to the dischargeability of the debt, in no way limits the general rule. Unless the co-signer actively challenges the dischargeability, the debt will automatically be discharged. 11 U.S.C. § 523(c). Furthermore, the co-signer bears the...
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