In re Hood
| Decision Date | 31 January 1989 |
| Docket Number | Bankruptcy No. 88-02350-C. |
| Citation | 95 BR 696 |
| Parties | In re Barbara Ann HOOD, Debtor. |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
Carrie Francke, Columbia, Mo., for debtor.
Duane Schreimann, Jefferson City, Mo., for Herington Bancshares.
Jack E. Brown, Columbia, Mo., Trustee.
FACTS
The debtor in this adversary proceeding, Barbara Ann Hood (hereinafter "Debtor"), initially filed for relief under Chapter 13 on May 23, 1988. Upon Debtor's motion, the case was later converted to a Chapter 7 bankruptcy pursuant to this Court's Order filed on September 30, 1988. Before the Court is a motion filed by Plaintiff, First Finance, Inc., requesting relief from the automatic stay in order that Plaintiff might enforce its asserted rights against certain collateral securing two separate promissory notes.
The first promissory note at issue involves a 1981 Lincoln Continental Town Car that Debtor purchased on February 18, 1983. Debtor financed this purchase through a promissory note in the principal amount of $10,726.56 (hereinafter the "Car Note"), executed in favor of Lake National Bank (hereinafter "LNB"). LNB secured its loan with a first lien against the car. At the December 14, 1988 hearing in which the Court considered Plaintiff's motion to lift the stay, Plaintiff stated that the balance due on the car as of June 9, 1988 was $2,407.17 and that its estimated value was between $1,850.00 and $2,200.00. Debtor's Amended Schedule of Assets, filed on December 1, 1988, and Response to Plaintiff's motion disputes Plaintiff's value estimate, declaring the car's market value to be $700.00. Both Plaintiff's and Debtor's estimates are predicated on the car's mileage of approximately 140,000 miles.
Unlike the promissory note on the car, the second promissory note carries a somewhat more lurid heritage. From about 1979 to 1986, Debtor owned and operated a business known as the Crazy Horse (Dilly's) Lounge, Inc. (hereinafter the "Corporation"). Debtor was the sole stockholder and director of the Corporation. Debtor also served as the Corporation's President. To manage the day to day operations of the business, Debtor employed an individual by the name of Robert Schnur. In addition to his role as General Manager, Schnur also served as the Corporation's Secretary. Under Debtor's ownership, the Corporation conducted all of its banking business at LNB. Pursuant to a Resolution of the Board of Directors dated August 16, 1983 (hereinafter the "Resolution"), fund withdrawals and transfers from the Corporation's general checking and payroll accounts up to $1,200.00 were authorized under the signature of either Debtor or Schnur. Any withdrawals or transfers exceeding this amount required both of their signatures. With respect to borrowing authority under the Resolution, both Debtor's and Schnur's signatures were required to borrow money in the name of the Corporation. Schnur signed the Resolution in his capacity as the Corporation's Secretary and delivered a certified copy of the same to LNB.
Unbeknownst to Debtor, LNB permitted Schnur on several occasions to borrow money on behalf of the Corporation without Debtor's requisite approval. The first such borrowing was for $10,000.00. Debtor claims that she first became aware of this loan in July of 1983 when LNB asked her to sign the underlying note merely as a recordkeeping formality since the loan had already been paid in full. According to Debtor, she made several demands upon LNB before it finally released the Corporation's bank records to her. Before taking these records to her accountant, Debtor personally reviewed them. Her examination revealed two other notes executed by Schnur in violation of the aforementioned Resolution. The total amount of the two loans was approximately $30,000.00. One of the notes pledged the entire inventory of the business, while the other was unsecured. Both notes were dated prior to Debtor being apprised of the above $10,000.00 note. All the while these revelations were surfacing, the business was experiencing various financial difficulties to the extent that Debtor claims its failure was imminent. About this same time, Debtor claims that the LNB loan officer who had approved the unauthorized loans to Schnur offered to bend the rules and consolidate all of her existing indebtedness to LNB into a single new loan for the ostensible purpose of staving off failure of the business and to somehow eradicate Schnur's interest. Additional statements by Debtor suggest, however, that the real inspiration for this loan officer's otherwise unexplainable benevolence was his fear of losing his job for having loaned money in contravention of the Resolution. Debtor agreed to the proposed consolidation and executed a promissory note, dated March 15, 1984, in the principal amount of $130,000.00, bearing interest at a rate of 13.5% per annum (hereinafter the "Consolidated Note").
In addition to the two notes signed by Schnur, the Consolidated Note subsumed the mortgage on Debtor's personal residence which consists of a lakefront home and 19 adjacent acres (hereinafter the "Residence"). At the time of the consolidation, this mortgage carried a loan balance of approximately $67,000.00. The Consolidated Note is secured exclusively by a Deed of Trust on Debtor's Residence. The balance due on the Consolidated Note as of June 9, 1988 was $191,013.23. Plaintiff maintains that the market value of the Residence is $156,500.00. Debtor insists that the property's market value is substantially less than this amount, indicating in her most recent Statement of Liabilities that its market value is $75,000.00. Although both the Car Note and the Consolidated Note are in default, Debtor claims to have made payments on each for which she did not receive credit.
As a result of an examination by the Office of the Comptroller of the Currency (hereinafter "OCC") in which it was determined that LNB's financial condition had substantially deteriorated, LNB was declared insolvent on or about December 13, 1985. The OCC subsequently appointed the Federal Deposit and Insurance Corporation (hereinafter the "FDIC") as receiver of LNB, whereupon the FDIC took possession and control of LNB's assets, including the two Notes in dispute. Pursuant to its powers as a receiver for LNB under the Federal Banking Laws, specifically 12 U.S.C. § 1823(c), the FDIC entered into a "purchase and assumption" agreement with Central Lake State Bank (hereinafter "CLSB") on December 13, 1985 under which CLSB purchased certain assets and assumed certain liabilities of LNB. Among the assets not so purchased from the FDIC were the Car Note and the Consolidated Note. Instead these Notes were purchased by the FDIC acting in its corporate insurer capacity from the receiver FDIC. Under an Assignment of Mortgage/Deed of Trust dated February 10, 1988, the corporate FDIC later sold these notes to the Bank of White City (hereinafter "BWC"), a corporation wholly owned by Herington Bancshares (hereinafter "HBC"). HBC later assigned its claim to Plaintiff with the Court's approval on October 19, 1988. Plaintiff now seeks relief from the automatic stay in order to enforce its asserted rights against the collateral.
While in possession of Debtor's two promissory notes, BWC filed a proof of claim on August 4, 1988 for a total claim of $195,620.40. Debtor filed an Objection to BWC's proof of claim and argued then, as she does now, the following with respect to each of the two Notes:
1. Car Note
a. Although Plaintiff is a holder of this Note, Plaintiff is not a holder in due course.
b. Debtor should be allowed to redeem the car for $700.00 which represents its fair market value and a sum sufficient to satisfy Plaintiff's security interest in the vehicle.
2. Consolidated Note
a. Plaintiff is not a holder in due course of this Note, in part, for the following reasons:
1. Debtor's signature was obtained while Debtor was under duress.
2. The Note was given for past consideration and improperly consolidated certain promissory notes that Debtor had never signed.
b. The value of the property is substantially less than $156,500.00.
c. Debtor has at all times made her defenses to the Notes known to each of the Note's transferees.
1. Whether Plaintiff qualifies as a holder in due course with respect to the two Notes.
2. Depending on Plaintiff's status as determined above, which of Debtor's defenses, if any, may be asserted against Plaintiff.
To determine the status of Plaintiff's rights as assignee of the claim encompassing the promissory notes at issue in this case, the Court must evaluate the rights held and passed by each transferor prior to Plaintiff. While not always true, hornbook law tells us that an assignee cannot have any greater title to or interest in an instrument than was held by the person from whom the instrument was acquired. § 431.160 V.A.M.S. (1939). A corollary to this rule is that an assignee of an instrument takes it subject to all defenses which the maker may have against the instrument prior to notice of the assignment. Kaw Valley State Bank and Trust v. Commercial Bank of Liberty, N.A., 567 S.W.2d 710, 713 (Mo.App.1978). Thus, Plaintiff acquired whatever title and interest in the Notes that its transferor, HBC, had held, and such title and interest are subject to any defenses Debtor, as maker of the Notes, may have had against the Notes while held by HBC. Because HBC similarly took whatever rights its transferor, the FDIC, had in the Notes, Plaintiff, in effect, now stands in the FDIC's shoes which were previously worn by HBC. Determining the status of Plaintiff's rights in the Notes is, therefore, a question of establishing what rights the FDIC held by virtue of its Purchase and Assumption transaction with CLSB and Assignment to HBC. Because failed banks many...
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