In re Kaplan, Bankruptcy No. 91-30719
| Decision Date | 05 September 1995 |
| Docket Number | Bankruptcy No. 91-30719,91-30720. |
| Citation | 186 BR 871 |
| Parties | In re Michael KAPLAN and Morris Kaplan, Debtors. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Ravin, Sarasohn, Cook, Baumgarten, Fisch & Baime, Robert A. Baime, Bruce Buechler, Roseland, NJ, for debtors.
Greenberg Dauber & Epstein, Paul J. Dillon, Newark, NJ, for creditor Commercial Bank of New York.
This matter comes before the court as a motion by debtors Michael Kaplan and Morris Kaplan ("debtors") to estimate the claims of creditors Commercial Bank of New York ("CBNY") and Midlantic National Bank ("Midlantic") at zero pursuant to 11 U.S.C. § 502(c). This court heard the motion on February 27, 1994. In May 1994, Midlantic's debt was satisfied when CBNY purchased the loan, and debtors were released from their Midlantic guaranties. Thus the motion was rendered moot as to Midlantic. A motion to supplement the record was heard on October 24, 1994 only with respect to CBNY's claim; and a further telephonic hearing was heard on January 17, 1995. This court has jurisdiction over the matter pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157(b)(2)(A), (B) and (O).
This case involves the estimation of the claim of CBNY based upon personal guaranties executed by each of the debtors ("Guaranties"). The Guaranties were signed by debtors on April 24, 1989 to induce CBNY to loan $1,200,000 to the Summerton Group, a New Jersey partnership. The Guaranties were absolute and guaranteed that a $1,200,000 note made by Summerton Group ("Summerton") in favor of CBNY dated April 26, 1989 (the "Note") would be paid. The Guaranties provided that CBNY could seek payment from debtors without first having attempted collection from the principal, Summerton. The Guaranties also stated that they were to be construed in accordance with New York law.
Pursuant to the Note, Summerton was required to make monthly interest payments with a final balloon payment due on April 30, 1992. Prior to February 11, 1991, the date that debtors filed their petition, Summerton was in default on its loan for failure to pay interest. Rather than commence a collection action on the Note, CBNY restructured its loan with Summerton on March 1, 1991 ("March 1991 Restructuring Agreement") and added the past-due interest to the principal amount of the loan. The March 1991 Restructuring Agreement also extended the due date of the final balloon payment to February 28, 1993 and lowered the interest rate.
As part of the March 1991 Restructuring Agreement, the debtors were required to execute reaffirmations of the guaranties, which reaffirmed and ratified the terms and conditions of the original Guaranties. ("Reaffirmations"). The Reaffirmations also contained an additional covenant that the liabilities under the original Guaranties shall include the obligations of Summerton under the Note as well as the March 1991 Restructuring Agreement. Since the consummation of the March 1991 Restructuring Agreement and the execution of the Reaffirmations, Summerton has not been in default on the loan and is presently current with all interest payments. Since execution of the original Note and Guaranties, no demand letter ever has been issued by CBNY and no default interest has been charged.
After the March 1991 Restructuring Agreement, the Note was modified again four more times by extending the repayment date and/or reducing the interest rate. Finally in May 1994, CBNY and Summerton entered into a major restructuring agreement. CBNY purchased a $4,900,000 loan from Midlantic. Midlantic accepted $2,100,000 for the loan in full satisfaction of its obligation from Summerton and the individual partners. CBNY also infused an additional $1,700,000 into Summerton and now holds first and second mortgages against Summerton's property. In restated loan documents executed by Summerton Group in connection with this restructuring, Summerton represented that it had sufficient financial ability to pay its debts as they mature and that its assets exceed its liabilities. It is uncontroverted that existing cash flow from Summerton's mortgaged property adequately covers the combined debt service, including significant principal amortization.
Debtors argue that CBNY's claim should be estimated at zero pursuant to 11 U.S.C. § 502(c) because the principal, Summerton, is not in default, and is not in any imminent danger of defaulting on CBNY's loan since there is sufficient cash flow to service all debt. CBNY counters that debtors are liable on their Guaranties for the full amount of the $1,200,000 loan notwithstanding that the loan is current. CBNY asserts that in February 1991, after the filing of the petition, the loan was in default and that debtors' liability under the Guaranties became fixed at that point in time. For the following reasons this court finds that the debtors are not liable under the Guaranties and that the claim of CBNY should be estimated at zero pursuant to 11 U.S.C. § 502(c)(1).
11 U.S.C. § 502(c)(1) provides in relevant part:
Neither the bankruptcy code nor the federal rules of bankruptcy procedure provide procedures or guidelines for estimation. However, the Third Circuit has ruled that bankruptcy judges may use "whatever method is best suited to the particular contingencies at issue," Bittner v. Borne Chemical Co., 691 F.2d 134, 135 (3d Cir.1982); provided that the procedure is consistent with the policy underlying Chapter 11, that a "reorganization must be accomplished quickly and efficiently." Id. at 137. The court is of course bound by "the legal rules which may govern the ultimate value of the claim" Id. at 136; and the court must determine the value of the claim according to its best estimate of the claimant's chances of ultimately succeeding in a state court action. Id. It is not inappropriate to value a party's claim at zero where the claim is contingent1 and where the bankruptcy court finds that the party probably would not succeed on the merits in a state court action. Id. As recognized by the Third Circuit in Bittner, the estimation process protects the interests of other creditors in not having their distributions diminished by allowing a claim whose contingency may never occur.2
The bankruptcy court first must determine whether the cause of action involves issues of state law. In most instances the bankruptcy court looks to state law in determining the validity or value of claims. In re Iommazzo, 149 B.R. 767, 771 (Bankr. D.N.J.1993) (citing In re Meyertech Corp., 831 F.2d 410, 417-418 (3d Cir.1987)). This case involves the interpretation and effect of a guaranty, which is controlled by state law.
In an action where state law governs, federal courts generally look to the law of the forum state to resolve choice of law issues. Fassett v. Delta Kappa Epsilon (New York), 807 F.2d 1150, 1157 (3d Cir. 1986), cert. denied, 481 U.S. 1070, 107 S.Ct. 2463, 95 L.Ed.2d 872 (1987). However, in this case, the Guaranties contained forum selection clauses which provided that the Guaranties were to be governed by and construed in accordance with the laws of the State of New York. As noted by the Third Circuit, "the law of the state or other jurisdictions whose law governs the construction of the contract generally applies to the enforceability of the forum selection clause determination unless `a significant conflict between some federal policy or interest and the use of state law exists.'" In re Diaz Contracting, Inc. (Diaz Contracting, Inc. v. Nanco Contracting Corp.), 817 F.2d 1047, 1050 (3d Cir.1987) (quoting General Eng'g Corp. v. Martin Marietta Alumina, Inc., 783 F.2d 352, 356 (3d Cir.1986)).
In re Diaz is similar to this case in that it involved the bankruptcy court's interpretation of a contract containing a forum selection clause. 817 F.2d at 1050. The panel found that the bankruptcy court erred by failing to apply New York law. The forum selection clause selected New York law to govern the agreement. Id. The Third Circuit held that under New York law, forum selection clauses are governed by the standard set forth in the United States Supreme Court case, The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972) () In re Diaz, 817 F.2d at 1050.3The Bremen standard is applicable in a bankruptcy proceeding. Id.
In applying The Bremen standard, this court finds that there has been no showing that enforcement of the forum selection clause would be unreasonable or unjust. In addition, there is no implication whatsoever that the clause is invalid for fraud or overreaching. Thus this court is required to give effect to the forum selection clause and interpret the Guaranties in accordance with New York law.
Under New York law, an absolute and unconditional guaranty or a "guaranty of payment" obligates the guarantor to pay upon default of the principal debtor. No steps need be taken to collect from the principal before demand is made of the guarantor. Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 495 N.Y.S.2d 309, 485 N.E.2d 974 (1985). An absolute and unconditional guaranty is established by language providing for payment by the guarantors immediately upon default. Tucker Leasing Capital Corp. v. Marin Medical Management, Inc., 833 F.Supp. 948, 957 (E.D.N.Y.1993).4 Absolute and unconditional guaranties are consistently upheld by New York courts. First New York Bank for Business...
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