In re Gene
| Decision Date | 17 April 1997 |
| Docket Number | Bankruptcy No. SL-96-84260. |
| Citation | 207 BR 861 |
| Parties | In re Wilbur GENE and Barbara Lee Campbell, Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Michigan |
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D. Dennis Dudley, Lansing, MI, for Debtors.
John L. Bolenbaugh, Lansing, MI, Trustee.
This matter came before the Court upon the motion of Debtor Barbara Lee Campbell. She argues that the claim of Joseph and Nadeem Ajlouny should be disallowed in its entirety. The Court disagrees and will allow the claim as filed.
Ms. Campbell was president and sole shareholder of Five-Star Attractions, Inc. ("5-Star"), the video rental store which she operated. On June 15, 1991, 5-Star entered into a three-year lease with landlord Joseph S. Ajlouny, who was doing business as Midway Plaza Shopping Center ("Midway Plaza").2 The original lease, scheduled to run from July 1, 1991 to June 30, 1994, included the following surety provision:
In consideration of the letting of space at Midway Plaza, and for the sum of one dollar to Midway paid I do hereby become surety for the punctual payment of the rent and performance of the covenants in the lease to be paid and performed by 5-Star and if any default shall at any time be made therein do hereby promise and agree to pay unto Midway Plaza, the said rent and arrears thereof that may be due, and fully satisfy the condition of the lease, and all damages that may occur by reason of the non-fulfillment thereof, without requiring notice or proof of the demand being made. Midway Plaza shall not be held to strict construction adopted in cases of principal and surety. The surety shall not have the right to claim discharge, or plead by way of defense any extension of time given by Midway Plaza, failure of Midway Plaza to give notice of default, receipt by Midway Plaza of securities from 5-Star, failure of Midway Plaza to pursue 5-Star and its property with due diligence or to apply other remedies and other securities which may possibly be available to Midway Plaza and any direct release, unless it be in writing duly authorized and executed.
The surety provision was signed by Barbara Campbell. Although a form affidavit was appended to the agreement, the affidavit was not completed by Ms. Campbell, nor was it notarized.3
The original lease, printed on a standardized form, covered insurance, fire, indemnity, and the like, and further provided for a month-to-month tenancy during any period of holdover. In addition, 5-Star was given the right to extend the original lease for another three-year term upon notice to Midway Plaza within 90 days before the expiration of the original term. Under that provision, if 5-Star chose to extend, the rent was to escalate annually but all other provisions of the original lease were to have remained in force unless amended in writing.
The leasing arrangement did not proceed well. Instead, 5-Star quickly accumulated a significant rent arrearage. On December 1, 1993, six months prior to the termination date of the original lease, a Lease Addendum was executed ("the Addendum"). Under the Addendum, the leased square footage was reduced from 3000 to 2000; concomitantly, the monthly rent was reduced from $2,000 to $1,133. The Addendum also included 5-Star's agreement to execute a note for back rent under a "separate agreement." The surety provision from the original lease was nowhere mentioned in the Addendum.
A promissory note for $40,959.97 plus eight percent interest was executed on November 4, 1993. "Five-Star Attractions, Inc. by Barbara Campbell, its President" was the maker, and Midway Plaza was the payee. The note was signed by Ms. Campbell as 5-Star's president, and was secured by 5-Star's assets under a separate Security Agreement. The Security Agreement was signed the same day by Ms. Campbell as 5-Star's president. 5-Star remained in possession of the premises long after the original lease term had expired, but fell further behind in rent. On June 14, 1996, Midway Plaza filed an eviction action in Michigan's 55th Judicial District Court. The Debtor and her husband thereupon filed Chapter 13 on June 24, 1996.
Midway Plaza filed a proof of claim for $54,195.37. The Debtor objected, claiming that the only personal obligation she undertook was as 5-Star's surety under the original lease. She argues that the Addendum, promissory note, and security agreement superseded the surety clause of the original lease in that new terms were included in the latter-executed documents. She contends further that the parties intended the surety agreement to remain in force only under the terms of the original lease. Thus, she was released from the surety obligation. And even if the surety agreement were found to apply outside the original lease, she contends that because Midway Plaza failed to perfect its security interest in 5-Star's collateral, she has no obligation to satisfy the note. Finally, at the March 13, 1997 hearing, the Debtor represented that she entered into the original lease and surety agreement without the advice of counsel.
Midway Plaza counters that the Debtor was not released as surety. According to Midway Plaza, the Debtor was not harmed by the changes effected by the Addendum and attendant documents, and in fact, actively participated in their making. Thus she consented to the changes and cannot claim discharge.
This is a core proceeding under 28 U.S.C. § 157(b)(2)(B). Accordingly, the bankruptcy court is authorized to enter a final judgment or order subject to those appeal rights afforded by 28 U.S.C. § 158 in accord with Fed.R.Bankr.P. 8001 and 8002.
On November 18, 1996, Midway Plaza timely filed its proof of claim. See 11 U.S.C. § 501(a); Fed.R.Bankr.P. 3002(c). Under Code section 502(a), a properly filed claim is "deemed allowed, unless a party in interest . . . objects." 11 U.S.C. § 502(a). Further, such a claim is prima facie evidence of the validity of its amount. Fed. R.Bankr.P. 3001(f); see also In re Gantos Stores, Inc., 181 B.R. 903, 908 (Bkrtcy. W.D.Mich.1995). An objection, however, rebuts the presumption of validity. Gantos, supra, at 908. Once rebutted, the claimant has the burden of establishing the validity of its claim by a preponderance of the evidence. Id. The court, upon receiving an objection and after notice and a hearing, determines the amount of the claim as of the date of filing and allows the claim in that amount. 11 U.S.C. § 502(b).
At issue in this case is whether the Addendum, secured note, or other acts of the parties relieved the Debtor of her surety obligation under the original lease. Since 5-Star is not in bankruptcy, the Court is concerned only with the extent to which the Debtor's Chapter 13 bankruptcy estate is obligated to the claimants. Whether the Debtor was discharged as a surety is a question of Michigan law since the instruments at issue were executed in Michigan, and the performance due thereunder was to be carried out in Michigan. See Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 917, 59 L.Ed.2d 136 (1979) (); In re Mount Pleasant L.P., 144 B.R. 727, 731-32 (Bkrtcy.W.D.Mich.1992) (discusses Butner); see also 6 COLLIER ON BANKRUPTCY §§ 502.031c, 2bii (15th ed. rev. 1996) (validity of claims is determined under applicable state or federal law).
In general a surety agreement is to be construed like any other written contract: the intent of the parties, as expressed in the language of the instrument, controls. Jerry McCarthy Foundation v. Winshall, 372 Mich. 389, 392, 126 N.W.2d 805 (1964); First State Bank of Holland v. Landwehr (In re Landwehr's Estate), 286 Mich. 698, 702-03, 282 N.W. 873 (1938); see also Purlo Corp. v. 3925 Woodward Avenue, Inc., 341 Mich. 483, 487-89, 67 N.W.2d 684 (1954) (). A surety agreement, as a "promise to answer for the debt . . . of another" must be in writing and signed to be enforceable. See M.C.L.A. § 566.132(1)(b). In construing any written contract, the entire instrument and all its parts must be considered. Purlo Corp., supra, at 487, 67 N.W.2d 684. If possible the Court should harmonize all expressed language so as to make the entire instrument meaningful; it should not excise any language needlessly. Id. Parol evidence may be considered in order to aid the court in construing an ambiguous instrument, but such evidence should not be heard where the provisions are clear and plain. Id.; Miller Industries, Inc. v. Cadillac State Bank, 40 Mich.App. 52, 55, 198 N.W.2d 433 (1972); In re Lansing Clarion L.P., 132 B.R. 845, 849 (Bkrtcy.W.D.Mich.1991).
We begin by noting that the Debtor was a "surety" as opposed to a "guarantor." Often the terms are used interchangeably, even in the cases, but in Michigan sureties and guarantors are legally distinguishable. While both agree to satisfy a debt in the event of the principal obligor's default, only the surety is obligated with the principal under the primary agreement. First Nat'l Bank & Trust Co. of Ann Arbor v. Dolph, 287 Mich. 219, 225, 283 N.W. 35 (1938). Thus a surety is immediately and primarily liable upon the default of the principal. Preston v. Huntingdon, et al., 67 Mich. 139, 141, 34 N.W. 279 (1887);4 Hunters Pointe Partners L.P. v. United States Fidelity & Guaranty Co., 194 Mich.App. 294, 298 n. 2, 486 N.W.2d 136 (1992). A guarantor, on the other hand, enters into an "independent, collateral agreement" of guaranty, becoming only secondarily liable upon the principal obligor's default. First Nat'l Bank & Trust Co., supra, 287 Mich. at 225, 283 N.W. 35. In this case, the original lease and the surety agreement were...
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