In re Harstad, Bankruptcy No. 4-90-869.
| Decision Date | 07 February 1992 |
| Docket Number | Bankruptcy No. 4-90-869. |
| Citation | 136 BR 806 |
| Parties | In re Keith T. HARSTAD and Diane N. Harstad, d/b/a Harstad Companies, Debtors. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
James L. Baillie, Fredrikson & Byron, Minneapolis, Minn., for debtors.
Brian F. Kidwell, O'Neill, Burke, St. Paul, Minn., for ITT Commercial Finance Corp.
MEMORANDUM ORDER DISALLOWING CLAIM NO. 242
This case came on for hearing on the debtors' objection to claim no. 242 filed by ITT Commercial Finance Corporation. James L. Baillie appeared on behalf of the debtors and Brian F. Kidwell appeared on behalf of ITT. This court has jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334 and Local Rule 201. This is a core proceeding under § 157(b)(2)(B). Based on the memoranda, arguments of counsel and the file in this case, I make the following memorandum order.
ITT Industrial Credit Company1 loaned $3,600,000.00 to Keith and Diane Harstad and John and Catherine McCulloch on August 31, 1983. The debtors and the McCullochs executed and delivered to ITT a mortgage note and a mortgage deed secured by commercial real estate in St. Paul known as the 333 Sibley Building. At the time the debtors and McCullochs executed the mortgage note and deed, they also executed guaranties guarantying the debt evidenced in the mortgage note.
The executed guaranties contain the following language:
The debtors and the McCullochs created a partnership, Griggs-Midway Management Company, to manage the Sibley Building property and other property.3 The debtors, the McCullochs, and the Griggs-Midway Management Company were also parties to an Assignment of Leases, Rents and Profits executed on or about August 31, 1983, with respect to the Sibley Building property.
The mortgage note matured on September 10, 1989. The debtors and the McCullochs defaulted under the terms of the mortgage note by failing to pay the note in full at maturity. They also defaulted on their obligation to pay real estate taxes on the property securing the mortgage. The debtors filed this Chapter 11 case on February 16, 1990.
ITT sought relief from the automatic stay to foreclose by advertisement on the mortgaged property. ITT asserted that the value of the property was less than the principal amount due which exceeded $2,592,234.90 exclusive of interest, penalties and costs. I granted ITT relief from the automatic stay on May 14, 1990. ITT purchased the property at the foreclosure sale on June 28, 1991, subject to a six month redemption period.4
Based on the debtors' guaranties, ITT filed an unsecured claim, claim no. 242, in the amount of $1,156,821.40, for the deficiency resulting from the foreclosure sale.
The debtors objected to ITT's claim. The debtors argue that under Minnesota's anti-deficiency statute, Minn.Stat. § 582.30, subd. 2, the mortgagee is prohibited from collecting a deficiency from the debtors since the debtors were the mortgagors.
The issue is whether ITT's unsecured claim against the debtors as guarantors for a deficiency resulting from a foreclosure sale should be allowed.
A claim, which is filed, "is deemed allowed, unless a party in interest, . . . objects." 11 U.S.C. § 502(a). Upon objection to a claim by a party in interest, and after notice and a hearing, the court shall determine the amount of the claim and allow the claim unless the claim "is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured." 11 U.S.C. § 502(b)(1).
ITT argues that their claim should be allowed in the amount of $1,156,821.40 as an unsecured claim against the debtors as guarantors for the deficiency resulting from the foreclosure of the Sibley Building property.
The debtors argue that although they signed guaranties of the debt, they are also the mortgagors and since Minn.Stat. § 582.30, subd. 2, prohibits mortgagees from collecting deficiency amounts from the mortgagors, ITT's unsecured claim would not be enforceable under Minnesota law and, therefore, it should not be allowed.
Prior to 1986, when a mortgagee foreclosed by advertisement with a six month redemption period, the mortgagee "or any other purchaser so purchasing at the sheriff's sale shall by purchasing the property at the sheriff's sale thereby waive his right to a deficiency judgment against the mortgagor." Minn.Stat. § 580.23, subd. 1 (1984).
In 1986, the statutes were amended and the above language in § 580.23, subd. 1, which prohibited the mortgagee from collecting a deficiency judgment against the mortgagor, was deleted. The legislature inserted a new provision, § 582.30, subd. 2, which is a general prohibition against deficiency judgments if a mortgage is foreclosed by advertisement with only a six month redemption period. Minn.Stat. § 582.30, subd. 2 (1986). The 1986 amendments also included § 580.225 which provides that "the amount received from foreclosure sale under this chapter is full satisfaction of the mortgage debt, except as provided in section 582.30." Minn.Stat. § 580.225 (1986).
The debtors initially argue that the 1986 amendment, Minn.Stat. § 580.225, proscribes collection of a deficiency from anyone including the mortgagors or the guarantors. Although the statute could fairly be read to relieve everyone of liability after foreclosure by advertisement, the Minnesota Court of Appeals expressly rejected this argument in National City Bank v. Lundgren 435 N.W.2d 588, 592 (Minn.Ct.App. 1989).
In National City Bank, Lundgren individually guarantied loans made to a corporation and a partnership. Lundgren argued that the 1986 amendments to the Minnesota Statutes were intended to protect the guarantors as well as the mortgagors from any deficiency judgment liability. The court of appeals, rejected Lundgren's argument and found no "significant distinction between the prior law's waiver of deficiency `against the mortgagor' and the current law's `satisfaction of the mortgage debt.'" National City Bank, at 592. The court found that the bank's foreclosure by advertisement did not discharge Lundgren from his obligations as guarantor of the loans.
ITT relies on National City Bank, and argues that, like Lundgren, the debtors were acting as individual guarantors for a partnership. Minnesota law defines a partnership as "an association of two or more persons to carry on as coowners a business for profit." Minn.Stat. § 323.02, subd. 8 (1990). ITT presented no evidence that the loan was made to the debtors and the McCullochs as a partnership but argues that a partnership can exist without strict compliance with the Minnesota Uniform Partnership Act.5 ITT cites several cases to support its assertion that courts have found partnerships to exist even where there is an expressed intention not to create a partnership. See Lund v. Norwest Bank (In re Flight Transp. Corp. Sec.), 825 F.2d 1249 (8th Cir.1987), Schaefer v. Bork, 413 N.W.2d 873 (Minn.Ct.App.1987), Sit v. T & M Properties, 408 N.W.2d 182 (Minn.Ct.App.1987), Hansen v. Adent, 238 Minn. 540, 57 N.W.2d 681 (1953). Yet, ITT presented no evidence from which to find the debtors and McCullochs acted as a partnership. Although intent to form a partnership is not dispositive, there is no evidence to indicate that the debtors were executing guaranties to secure a loan made to a partnership.
In fact, the debtors previously formed a partnership, Griggs-Midway Management Company, to manage certain properties. The debtors and the McCullochs executed the Assignment of Leases, Rents and Profits both individually and as partners of Griggs-Midway Management Company. This indicates that the debtors knew about partnerships, knew how to form a partnership and they specifically chose to form a partnership to manage property. There is no evidence that the debtors and the McCullochs were acting as a partnership when they purchased the property and ITT loaned them $3,600,000.00.6
ITT also argues that National City Bank expressly found that the Minnesota anti-deficiency statute does not apply to guarantors, therefore, the debtors are liable for the deficiency amount as guarantors of the mortgage note. The court in National City Bank relied on Victory Highway Village, Inc. v. Weaver, 634 F.2d 1099 (8th Cir.1980), to conclude that a guarantor's liability is not discharged through Minn.Stat. § 580.23, subd. 1 (1980). The court in Victory Highway found that the mortgagee, in the pre-1986 statute, waived any deficiency claim against only the mortgagor since the statute did not expressly include the term guarantors. Victory Highway, at 1102. The court of appeals in National City Bank expanded on this analysis and concluded "if the legislature had intended to overrule Victory Highway, therefore, it presumably would have included clear language to protect guarantors." National City Bank, at 592.
The debtors also rely on National City Bank as indirect support for their position...
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