In re Carter
| Citation | 220 BR 411 |
| Decision Date | 06 May 1998 |
| Docket Number | Bankruptcy No. 11-95-14093ML. |
| Parties | In re Anderson CARTER, Debtor. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of New Mexico |
Jennie Deden Behles, P. Diane Webb, Albuquerque, NM, for Debtor.
William Keleher, Kevin Riedel, Albuquerque, NM, for Western Commerce Bank of Carlsbad, Inc.
THIS MATTER is before the Court on Creditor Western Commerce Bank of Carlsbad's (WCB) Motion for Directed Verdict. The only issue before the Court is whether WCB is entitled to collect interest and attorney fees from the solvent Debtor on its unsecured claim. Having considered the briefs submitted by counsel, reviewed the pleadings and the applicable law, having had a hearing on the merits, and being otherwise fully informed and advised, the Court finds: 1) that the appropriate rate of interest to be applied to WCB's claim is the contract rate of interest consisting of the New York Prime rate plus one percent (1%) calculated through December 5, 1996, and 2) WCB is entitled to attorney fees for the reasonable fees incurred in establishing the validity and amount of the claim, to the extent there is a surplus remaining in the estate after payment of interest.
In 1989, a loan was made for a business line of credit to High Country Pecans, Inc., an Arizona Corporation, which filed its own bankruptcy in the District of Arizona. This loan was evidenced by a promissory note in the amount of $600,000. The Debtor signed a personal guarantee of the collateralized loan to High Country Pecans. The loan was a variable interest rate loan with the interest rate being the published New York Prime rate plus one percent (1%). The personal guarantee constituted an unsecured debt.
Subsequently, WCB sought to collect on the Debtor's personal guarantee and instituted a civil lawsuit in the Fifth Judicial District Court.1 On December 13, 1995, the New Mexico District Court entered a summary judgment against the Debtor in the amount of $630,967.75 bearing interest at the rate of the published New York Prime plus one percent (1%) until paid in full. After WCB attempted to collect on this judgment, the Debtor filed for relief under Chapter 11.
In 1994, the Debtor sought and obtained from WCB a second business line of credit. This loan was made to the Debtor personally and was evidenced by a promissory note in the amount of $225,000 with a variable rate of interest consisting of the published New York Prime plus one percent (1%). The actual amount advanced to the Debtor against this line of credit was approximately $120,000. This debt was also unsecured.
WCB's claim as of the date of the bankruptcy petition was $757,956.83, which included both the amount of the judgment received by WCB against the Debtor on the personal guarantee, and the $120,000 actually advanced to the Debtor against the second line of credit, with accrued interest.
WCB is owned by Western Commerce Bancshares of Carlsbad, Inc. (WCB, Inc). The Debtor owned approximately 3,855 shares of stock in WCB, Inc. On December 12, 1995, the Debtor filed a Chapter 11 Plan of Reorganization (Plan). In the Plan the Debtor proposed to satisfy WCB's claim with the stock the Debtor owned in WCB, Inc. First, the Plan called for a valuation of the stock held by the Debtor in WCB, Inc. by the Bankruptcy Court. Once the value was established by the Court, the Debtor would then pledge a sufficient amount of that stock as collateral against WCB's claim. WCB's claim would then be satisfied by either 1) the liquidation of the stock and the proceeds therefrom, 2) the transfer of a sufficient amount of the stock back to WCB or 3) the proceeds, if any, of the Debtor's pending lawsuit against WCB, Inc.2
In accordance with the terms of the Plan, on June 26, 1996, the Debtor filed a Motion for Valuation seeking to have the Court value the Debtor's stock in WCB, Inc. In that motion, the Debtor asked the Court to base the value of the stock either on the latest appraised value of the stock or on the valuation formula contained in Buy-Sell Agreements between the Debtor and WCB, Inc.3 According to the Amended Disclosure Statement, these values were $287.59 per share and $272.68 per share, respectively.
WCB objected to the Motion for Valuation on several grounds, including that banking regulations prohibited WCB from accepting the stock in satisfaction of the debt, that the "alleged" Buy-Sell Agreements were invalid, and that the proposed values or formulas to arrive at a value were inappropriate for various reasons.
As a result of the objection to the Motion for Valuation, and the inability of the parties to reach a compromise as to the value of the stock, the motion was set for trial. Discovery in this matter was extensive, and as a result the final hearing on the matter was continued several times due to the extension of discovery deadlines. In March 1997, the Debtor filed a Motion for Partial Summary Judgment and asked the Court to find that the value of the stock was $280.00 as the Debtor had previously offered the bank, based on a letter and deposition testimony of a bank officer. That motion was denied. The matter was finally brought before the Court for a three day trial on the merits commencing on April 8, 1997. At the end of the three day trial the Debtor had not finished putting on his case. The trial was continued until June 30, 1997 for another week. The Debtor rested his case regarding valuation at the end of that week. The Court then strongly encouraged counsel to meet and attempt to reach some sort of compromise on the valuation issue, saying that he was sure counsel would not be happy with the Court "telling you which one of these buy-sell agreements you're bound by and what it says and how it operates."4
The trial was set to recommence for another week starting September 2, 1997. On August 29, WCB filed a Motion for Directed Verdict. The Debtor opposed the motion on a number of grounds. The day the trial was scheduled to commence, the parties were able to reach a compromise on several issues. The compromise provided that the objections of WCB to the valuation of the Debtor's stock in WCB, Inc. and to the Debtor's Plan would be withdrawn and WCB would agree to a value for the Debtor's shares of WCB, Inc., of $280.00 per share (value effective December 31, 1996).5 In addition, WCB also agreed to take an amount of Debtor's personally owned shares in WCB, Inc., sufficient to pay WCB's claim against Debtor including any interest ordered to be paid by the Court through the date of return of that stock and any attorney's fees which may be ordered by the Court to be paid to WCB.
The issues left for this Court to decide are: 1) the rate of interest that should be used to calculate the amount of interest, if any, which should be paid on WCB's unsecured claim, and 2) what amount, if any, of WCB's attorney fees can be recovered from the Debtor.
The parties agree and it has never been disputed that the Debtor's estate is and always has been solvent, and that a surplus will remain after all creditors are paid.
Generally, where a debtor is insolvent, unsecured creditors in a Chapter 11 proceeding are not entitled to payment of post-petition interest on their claims. See Nicholas v. United States, 384 U.S. 678, 684, 86 S.Ct. 1674, 1679-80, 16 L.Ed.2d 853 (1966) (). There are two notable exceptions to this general rule: 1) oversecured creditors receive post-petition interest on their claims; 2) post-petition interest on unsecured claims is payable in Chapter 7 cases where the bankruptcy estate is solvent. In re David Green Property Management, 164 B.R. 92, 96 (Bankr. W.D.Mo.1994).
Chapter 7 allows for the payment of post-petition interest on unsecured claims when the estate produces a surplus after all other claims are paid, but before the Debtor receives any property. As provided by Section 726(a)(5) of the Code:
11 U.S.C. § 726(a)(5)(6) (1998) (emphasis added).
While Chapter 7 expressly provides for payment of interest on unsecured claims in the event the bankruptcy estate produces a surplus, Chapter 11 does not provide for the same treatment of unsecured claims. See In re David Green Property Management, supra at 96. However, it seems that an underlying policy of the Code, as evidenced by Section 726, is that a debtor should not receive a windfall at the expense of creditors in the event that there is a surplus after payment of claims. See In re Gaines, 178 B.R. 101, 103 (Bankr.W.D.Va.1995); In re San Joaquin Estates, Inc., 64 B.R. 534 (9th Cir. BAP 1986). As one court has stated:
If solvent debtors are to be allowed to receive the Code\'s benefits, then they must pay all of their obligations before retaining any property. Otherwise, solvent debtors would have the option of filing a Chapter 11 petition and extinguishing a creditor\'s right to interest from the petition date through the date they are fully paid the allowed amount of the claim. In the meantime, the debtors would have the full use of their surplus property . . . at the expense of creditors. This outcome would clearly not obtain in Chapter 7 and, absent a specific provision in the confirmed plan denying post-petition interest, should not prevail in Chapter 11.
In re Gaines, 178 B.R. at 104(emphasis added).
Case law also provides that payment of post-petition interest on unsecured claims in a Chapter 11 setting is a matter within the Court's discretion and depends...
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