In re Frost
| Decision Date | 26 November 1979 |
| Docket Number | 79-10045.,Bankruptcy No. 79-10044 |
| Citation | 1 BR 313 |
| Parties | In re William Alvin FROST and Emily Jean Frost, Debtors. |
| Court | U.S. Bankruptcy Court — Middle District of Tennessee |
Richard Marshall, Nashville, Tenn., Robert F. Spann, Nashville, Tenn., for William and Emily Frost.
John W. Nelley, Jr., Nashville, Tenn., for Wm. B. Allen and wife Judith Allen.
The debtors-in-possession, William Alvin Frost and wife, Emily Jean Frost, have objected to one of two claims founded on the same promissory note (hereinafter the "Note") payment of which is secured by an installment deed on a valuable tract of real property. One claim was filed by Springfield (Tennessee) Production Credit Association (hereinafter "SPCA"). The other was filed by William B. Allen and wife, Judith E. Allen (hereinafter the "Allens"). SPCA is the holder of the Note. The Allens had pledged the Note to secure payment of their obligations to SPCA.
The Frosts do not contest their obligation as makers to pay the principal and interest due on the Note and have accepted the claim of SPCA. They have objected to the claim of the Allens. Both claims include the same amounts for principal and interest but while the claim of SPCA includes only the additional sum of $100 for attorneys' fees, the claim of the Allens includes additional sums of $69,333.70 for the fee of one attorney, $5,000 for the fee of a second attorney, $6,933.37 for the fee for the trustee under the installment deed and $531.32 for other miscellaneous expenses.
In the opinion of the court the objection to claim of the Allens is well-founded under applicable state law and must be sustained. The provision in a promissory note for payment of attorneys' fees and other collection expenses is deemed by Tennessee courts to be a constituent part of the obligation and the courts of this state have adhered strictly to the general rule that only the holder or a properly authorized agent of the holder has the right to receive payment on a negotiable promissory note. Pursuant to Rule 914 of the Bankruptcy Rules the court required the Allens to file a written response to the objection and neither in that response nor in their post-hearing brief have the Allens asserted that they were either the holder of the Note or agents of the holder authorized to receive payment for the holder. The Allens have never questioned the status of SPCA as the lawful holder of the Note. They have acknowledged the right of SPCA to receive payment of the principal and interest due on it (except to the extent that one of their attorneys might be entitled to 10% of the principal and interest as his fee.) The Allens and their attorneys have pursued a course of conduct consistent only with the proposition that as the pledgors of the Note they had the unqualified right to collect it and be reimbursed for attorneys' fees and other collection expenses incurred by them as provided in the Note.
Courts in other jurisdictions have permitted pledgors to collect pledged instruments in their own names usually when the amount due on the pledged instrument exceeded the amount of the debt secured by it and the pledgor was not in default and was proceeding with the consent of the pledgee who had returned the instrument to the pledgor. A few cases have accorded a pledgor the right to collect when he had an interest in surplus even though he apparently had not regained possession of the instrument. An even fewer number of cases have indicated that a non-holder pledgor with no interest in surplus may be entitled to collect by judicial proceeding which includes the pledgee as a party but only after the pledgee has refused to do so. In no reported case which this court has been able to uncover has this collection right of a pledgor been extended to provide a non-holder the right to collect by non-judicial means. Thus, the reported decisions from other jurisdictions are not supportive of the Allens' position. The Allens owed SPCA more than the amount due on the Note, they were in default on their obligations to SPCA, they had not obtained the consent of SPCA to collect the Note, SPCA had not refused to collect it, and the bulk of the attorneys' fees which are the major additional item included in their claim were incurred in connection with a non-judicial foreclosure. In any event, the collection of a negotiable instrument by a non-holder pledgor is such a significant exception to the general rule restricting collection rights to the holder and is so inconsistent with prior decisions by the Tennessee courts that, in the opinion of this court, it would be permitted in this state in only the most limited circumstances, if at all.
From the pleadings, testimony of witnesses at the hearing, exhibits, statement of counsel and the entire record the court makes the following findings of fact, although it would appear that there is no significant factual dispute, the principal issue to be resolved being one of law:
1. In the Fall of 1977 the Frosts purchased from the Allens for $1,000,000 one of the most celebrated privately-owned antebellum mansions in the South, "Rattle and Snap"1, which included approximately 400 acres of land in Maury County, near Columbia, Tennessee. The Frosts paid the Allens $400,000 in cash and executed the Note payable to the Allens' order for the balance of the purchase price. The principal of $600,000 together with interest at 8½% per annum was due on November 1, 1978. Payment was secured by an installment deed on "Rattle and Snap".
2. The Note contained the following pertinent provision:
"We, the makers and endorsers, jointly and severally waive demand, notice and protest, and in the event of default of payment we agree to pay expenses incurred in collecting this note, including attorney\'s fee."
3. In the installment deed the Frosts conveyed title to "Rattle and Snap" to one James Burt, as trustee who "at the option of the lawful owner and holder" of the Note was authorized to sell the property if the Note was not paid when due. The installment deed contained no undertaking by the Frosts to pay attorneys' fees or other expenses of collection independent of the Note. It did provide, however, that in the event of sale the trustee would apply the proceeds first "to pay all the costs and charges of executing this Trust including Attorneys' fees and all expenses of any litigation which may arise on account of the execution and enforcement of this Trust or the lien contained herein" and then to "the debt evidenced by" the Note.
4. Soon after receiving the Note from the Frosts the Allens indorsed it to SPCA and pledged it to secure their indebtedness to SPCA. During the entire time that SPCA held the Note the indebtedness of the Allens to SPCA has exceeded the amount due or to become due on the Note. At the time that the Note was pledged to SPCA a prior indebtedness exceeding $700,000 was renewed and they received additional advances exceeding $300,000. By March 1, 1979, their indebtedness had increased to an amount in excess of $1,300,000. SPCA held other collateral for the Allens' indebtedness. The total value of all such collateral, including the Note, was roughly equivalent to the amount of their indebtedness in March, 1979.
5. By letter dated November 16, 1977, SPCA advised the Frosts that the Note was being held by and all payments should be made to SPCA. A copy of this letter was sent to Mr. Allen.
6. In April, 1978 SPCA loaned the Frosts $65,280. Payment of this loan was secured by a second mortgage deed of trust on "Rattle and Snap".
7. Prior to the November 1, 1978, due date of the Note Mr. Frost requested that SPCA make a loan to be secured by "Rattle and Snap" and other property in Ohio, the proceeds of which would pay off the Note and SPCA's second mortgage loan. SPCA had been receptive to making such a loan but was deterred from doing so when in December, 1978 the Internal Revenue Service filed a tax lien against "Rattle and Snap" for approximately $75,000.
8. A substantial payment was due to SPCA on the Allens' indebtedness on December 1, 1978. Because SPCA was contemplating making the loan requested by Mr. Frost extensions were granted through January 31, 1979. Since February 1, 1979, the Allens have been in default on their obligations to SPCA.
9. Sometime in January, 1979, SPCA concluded that it would be unable to make the loan to pay off the Note because of the I.R.S. tax lien. The president of SPCA, Mr. Gary Haynes, advised Mr. Allen of this development and inquired as to what Mr. Allen was going to do relative to payment of the Note.
10. Mr. Allen conferred with Mr. Frost at "Rattle and Snap" on February 10, 1979, and, although he advised Mr. Frost that he would help as long as he could and would try to find a buyer for him, he concluded that a foreclosure sale under the installment deed was probably necessary.
11. Although Mr. Allen testified that he had not kept up with the interest rate changes on the Allens' indebtedness to SPCA he was conscious of the fact that the delay in payment of the Note was costing him money. Since the Note matured the rate of interest on the Allens' indebtedness had been greater than the Note rate. By January 1, 1979, it had increased to 10½% per annum, a rate differential which was costing the Allens approximately $1,000 per month.
12. Mr. Allen met with Mr. Haynes on February 19, 1979. He advised Mr. Haynes that Mr. Frost appeared to be working as hard as he could to sell or refinance "Rattle and Snap" but the prospects were not good and foreclosure would probably be necessary. Apparently both men thought the I.R.S. lien a complicating factor. The employment of attorneys was discussed. Mr. Allen mentioned that he was considering getting an attorney to represent him and was "going to talk to my attorney." Mr. Haynes indicated that he could get a local attorney to handle the...
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