In re FA Potts & Co., Inc.
| Decision Date | 01 June 1990 |
| Docket Number | Civ. A. No. 90-0498. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
| Parties | In re F.A. POTTS & CO., INC. |
Duane, Morris & Heckscher, Teresa K. Deisinger, Philadelphia, Pa., for appellant.
Gary M. Schildhorn, Adelman, Lavine, Gold & Levin, Philadelphia, Pa., for Creditors Committee.
Earl T. Stamm, Blank, Rome, Comisky & McCauley, Philadelphia, Pa., for debtor.
This is an appeal from the December 14, 1989 order of the bankruptcy court. 108 B.R. 59. European American Bank (EAB) filed a proof of claim (claim) against the debtors' estate in the amount of $15,700,818. The bankruptcy court held that EAB had no claim. EAB timely appealed that finding. Jurisdiction to hear an appeal from a bankruptcy court's final judgment is found in 28 U.S.C. § 158.
Debtors, GMP Land Co. and F.A. Potts Co., Inc. (Potts), are corporations in the business of mining and selling coal. Debtors entered into a contract with a Belgian company, which required debtors to supply the Belgian entity with 120,000-180,000 tons of coal per year for ten years. Debtors valued the contract at $250,000,000.
To perform under the terms of the contract, debtors purchased from Ransome and Rapier (R & R) a "dragline", a large, expensive machine used in strip mining operations. Debtors needed the machine to increase rapidly production requirements demanded by its lucrative contract with the Belgian company. The dragline cost $11,039,647, which debtors could not pay without financing. Midland Bank (Midland) assisted R & R in making the sale by obtaining the financing the debtors required.
EAB agreed to lend debtors the money they required with Midland and R & R guaranteeing the obligation. The debtors defaulted on their first interest payment due March 31, 1981 and filed a voluntary chapter 11 bankruptcy action on September 11, 1981. On January 10, 1983 EAB filed a proof of claim in the amount of $15,700,818. When the bankruptcy petition was filed, the debtor owed $12,653,000, the principal of the underlying loan and interest accrued to the date of filing of the claim.
Until early 1987, Midland and R & R had not paid the amount due under the guarantees. However, in January of 1987 Midland, R & R and EAB entered into settlement agreements. At that time, the debt, including interest, totalled over $23,000,000, according to EAB. Midland agreed to pay $21,000,000 and assign its interest in the bankrupt estate to EAB. R & R paid EAB $515,585.77 in settlement of its guarantee obligations.
The bankruptcy court held that Midland and R & R were the primary obligors under the loan agreement with EAB and that the obligors fully satisfied their obligation to EAB. Therefore, EAB had no claim against the estate and Midland had no right of subrogation which it could assign to EAB. It based this finding on the following facts:
1. Midland and R & R, not debtors, requested that EAB finance the transaction.
2. EAB did not investigate debtors' financial background or the collateral that debtor proposed to post.
3. EAB demanded that Midland and R & R assume liability for the indebtedness.
4. The "guarantee" agreements between Midland, R & R and EAB, although so termed, created primary liability in R & R and stated that EAB did not rely on the financial undertaking of the debtors.
In effect the bankruptcy court found that the guarantee, as well as the conduct of the parties, created debtor status for Midland and R & R, as opposed to guarantor status. Alternatively, the bankruptcy court held that if EAB had a claim, subordination was required because EAB engaged in inequitable conduct when it hid the true nature of the loan.
On appeal EAB concedes that its settlement agreements with Midland and R & R extinguish its direct claims against debtors. However, it argues that it has a right to subrogation based on Midland's assignment. The value of this assignment allegedly would be $12,653,000. The Official Committee of Unsecured Creditors (the Committee), whose brief debtors join, argues that $2,407,444.28 of the $23,000,000 owed to EAB represent interest on interest, which debtors never agreed to pay. Because EAB has already received repayment of the principal amount of the debt, pre and post-petition interest at the default rate, fees, costs and expenses, and interest thereon, they argue that EAB would receive a double recovery if it recovered from the estate.
The questions presented on appeal are:
1. Whether the bankruptcy court erroneously found that EAB had no claim against the estate; and
2. Whether the bankruptcy court erroneously found that EAB's conduct had been inequitable and whether the court erred as a matter of law in finding that the claim would be subordinated, assuming that conduct existed.
The district court's review of questions of law is plenary in a bankruptcy appeal. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-03 (3d Cir.1981). However, when an appeal presents a mixed question of law and fact the factual determinations by the bankruptcy court are unassailable by the reviewing district court, unless the findings are clearly erroneous. Fed.R.Civ.P. 52(a). U.S. v. U.S. Gypsum Co., 333 U.S. 364 at 394, 68 S.Ct. 525 at 541, 92 L.Ed. 746 (1948). "A finding is `clearly erroneous' when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Id. at 394, 68 S.Ct. at 541.
If the trial court's factual determination is supported by the record, then the district court must analyze the legal aspects of the findings to determine whether the findings were legally sufficient. Universal Minerals, 669 F.2d at 102, citing Smith v. Harris, 644 F.2d 985 at 990 n. 1 (3d Cir.1981) (Aldisert, J., concurring).
Interpretation of an ambiguous contract is a question of fact. STV Engineers, Inc. v. Greiner Engineering, Inc., 861 F.2d 784, 787 (3d Cir.1988). However, the court must first determine whether the contract was ambiguous as a matter of law. STV Engineers, Inc., 861 F.2d at 787; Kroblin Refrigerated Xpress, Inc. v. Pitterich, 805 F.2d 96, 101 (3d Cir.1986); Mellon Bank v. Aetna Business Credit Corp., 619 F.2d 1001, 1011 (3d Cir.1980).
The bankruptcy court found that while the agreements executed by R & R and Midland were termed "guarantees", they were ambiguous and inconsistent. However, before evaluating the guarantee agreement, this court must address the obligations created by the loan instruments; the credit agreement and the promissory note.
Neither the credit agreement nor the promissory note is ambiguous and the bankruptcy court's ruling must be reversed. The credit agreement plainly states that EAB agrees to make loans to GMP and that GMP's obligation to repay the loan is evidenced in the promissory note. It also states that in the event of continuing default the principal and interest shall become immediately due and payable without declaration or notice to GMP. This agreement was executed by GMP and EAB.
Furthermore, the promissory note clearly states that, "for value received, GMP Land Company, Inc. . . . hereby promises to pay to the order of EAB . . . the sum of twelve million dollars." Together, the credit agreement and the promissory note create a debtor-creditor relationship between GMP and EAB. These two documents were both executed on April 15, 1980 and are contemporaneous documents. Therefore, this court must find, as a matter of law, that the liability of the debtor was unambiguously created by these loan instruments.
The bankruptcy court interpreted Midland's guarantee agreement, after determining that it was ambiguous. This court must first determine whether the guarantee was in fact ambiguous. Midland's guarantee states that Midland would pay the debt without contestation upon default of the borrower, debtors, and after EAB exercised its rights against any security it may hold.
A guarantee, by definition, is a debt payable by one party when another defaults and an attempt has been made to collect the debt of another. Atlanta Corp. v. Ohio Val. Provision Co., 489 Pa. 389, 394, 414 A.2d 123 (1980). The language of the guarantee is that Midland would pay EAB amounts due "in the event of default by the borrower . . . and following the realization by EAB of such security that may have been available to it." Midland's obligation is that of a guarantor. (Trial Exh R-1). Therefore, the agreement between Midland and EAB unambiguously creates Midland's secondary liability. Stated another way, it makes Midland a guarantor.
The Committee asks the court to read the Midland guarantee agreement with that of R & R. It argues that the R & R document is ambiguous because it states that R & R is primarily liable for the debt and then states that EAB cannot proceed against R & R unless Midland bank shall have no obligation to it and/or that EAB demanded that Midland pay the obligation.
Because Midland's agreement with EAB is unambiguous, this court need not evaluate R & R's agreement. Assuming that the Midland agreement is ambiguous, the Committee still cannot prevail. R & R's agreement seems ambiguous because while it states that R & R is a primary obligor it requires that EAB seek payment from Midland before R & R's obligation becomes due. Thus, R & R is not primarily liable for the debt. This guarantee agreement may use terms incorrectly, but the responsibilities and obligations of the parties unambiguously create a guarantee relationship.
The same reasoning applies to the Midland guarantee. Midland's agreement with EAB created secondary liability of Midland in the event of debtors' default. (Trial Exh M-3). A guaranty, according to Black's Law Dictionary, is "a collateral agreement for performance of another's undertaking." (5th ed. 1979). The document's scheme creates this...
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