In re McMullan

Decision Date18 April 1996
Docket NumberBankruptcy No. 94-11228M. Adv. No. 94-1516.
Citation196 BR 818
PartiesIn re L.D. McMULLAN and Nila McMullan, Debtors. NATIONAL BANK OF COMMERCE OF EL DORADO, Plaintiff, v. L.D. McMULLAN and Nila Owens McMullan, Defendants.
CourtU.S. Bankruptcy Court — Western District of Arkansas

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Stephen L. Gershner, Little Rock, AR, for Defendants.

Charles R. Camp, Michael Massey and Herman Ivester, Little Rock, AR, for Plaintiff.

MEMORANDUM OPINION

JAMES G. MIXON, Chief Judge.

On December 20, 1994, L.D. McMullan and Nila McMullan filed a voluntary petition for relief under the provisions of Chapter 11 of the United States Bankruptcy Code. On the same day the McMullans removed this foreclosure action pending in state court to this Court pursuant to 28 U.S.C. § 1452 (1994). A trial on the merits of the foreclosure action was held on May 15, 1995, after which the matter was taken under advisement.

The proceeding before the Court is a core proceeding in accordance with 28 U.S.C. § 157(b)(2)(B) (1994), and the Court has jurisdiction to enter a final judgment in the case. The following shall constitute the Court's findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.

BACKGROUND

From February 1, 1982, through December 14, 1988, L.D. and Nila McMullan and National Bank of Commerce (NBC) engaged in a series of complex business loan transactions. NBC made several loans to the McMullans that were secured by real estate located in Union County, Arkansas; oil leases located in Louisiana; and various types of oil field equipment also located in Louisiana.

In connection with the loans to the McMullans, NBC currently holds four promissory notes consisting of the following:

(1) Note numbered 87761 dated May 7, 1986, in the original principal sum of $233,400.00, executed by L.D. and Nila McMullan,

(2) Note numbered 87762 dated May 7, 1986, in the original principal sum of $206,550.00, executed by L.D. and Nila McMullan,

(3) Note numbered 89334 dated December 17, 1986, in the original principal sum of $27,484.64, executed by L.D. and Nila McMullan, and

(4) Note numbered 95049 dated December 14, 1988, in the original principal sum of $150,000.00, executed by L.D. and Nila McMullan and Ed and Ailene Cook.

The McMullans' liability on these four notes evolved from transactions with the bank that began in early 1982 when NBC loaned the McMullans $200,000.00 to purchase a one-thirteenth working interest in the "Manorado oil properties" located in Sabine, Winn, and Red River Parishes, Louisiana. In early 1986 the price of oil had decreased and operating expenses of the oil fields had increased. The McMullans were unable to make the payments due on the notes, and NBC became concerned. The bank agreed to extend the due dates of the note payments if the McMullans would convey additional collateral to the bank. The McMullans agreed and conveyed a mortgage on the their interest in oil production in Sabine and Union Parishes and a mortgage in the McMullans' one-half interest in an El Dorado office building.

On May 7, 1986, NBC loaned the McMullans an additional $206,550.00 to pay off an indebtedness related to leases in a different oil field serviced by the McBead Drilling Company. The May 7, 1986, note described the collateral securing the $206,550.00 note as including, "Real Estate Mortgage * Oil Prod. Mtg. dated 9-12-84 & 5-7-86." Pl.'s Ex. 29. The referenced mortgages refer to the McMullans' interest in oil and gas leases, leasehold equipment, and oil production in Webster Parish, Louisiana, known as the Bobby Slack properties, and in an office building located in El Dorado, Arkansas.

On May 7, 1986, the McMullans executed a note in favor of NBC in the principal sum of $233,400.00. This note was secured by a mortgage on the McMullans' interest in oil production in Sabine and Union Parishes and in the McMullans' one-half interest in the El Dorado office building. The May 7, 1986, mortgages were recorded on May 12, 1986. In December 1986, NBC loaned the McMullans an additional $27,484.64 evidenced by note numbered 89334 to make the payments due on the two existing oil field-related notes.

L.D. McMullan testified that in June 1987 he informed James Cook, president of NBC, that the McMullans were reluctantly contemplating bankruptcy. L.D. McMullan recalled that Cook stated, "Well, Nila McMullan does not need to file bankruptcy. The bank would never take any action against her." Record at 244. Following that discussion, on June 17, 1987, L.D. McMullan filed an individual voluntary petition for relief under the provisions of Chapter 7 of the United States Bankruptcy Code.

The Chapter 7 schedules listed NBC as a creditor holding three claims of $232,270.00, $27,000.00, and $225,500.00. The claims were characterized as partially secured to the extent of $125,000.00. The security was identified on the schedules as "oil prod, Maney, LA," "oil prod. Sarepta, LA; also includes 50% interest from 1971 in office building." L.D. McMullan was granted a discharge in the Chapter 7 proceeding on September 8, 1988, and the case was closed on March 25, 1992.

In December 1988, L.D. McMullan approached James Cook to secure an additional loan from NBC to improve the office building jointly owned by L.D. and Nila McMullan and Ed and Ailene Cook. After negotiations, which will be discussed below in more detail, Cook, on behalf of NBC, agreed to make the loan. On December 14, 1988, L.D. and Nila McMullan and Ed and Ailene Cook executed note numbered 95049 in the principal sum of $150,000.00, which was secured by a mortgage on the office building. The mortgage was executed by L.D. and Nila McMullan and Ed and Ailene Cook and recorded on December 16, 1988.

On October 12, 1989, the Court entered an order in L.D. McMullan's Chapter 7 proceeding granting NBC's motion to abandon property from the estate. The order, which was prepared by counsel for NBC, stated:

The debtor, L.D. McMullan, is indebted to NBC in the amount of $453,877.54 as of September 13, 1989. The debt is secured by a Mortgage on oil properties in Sabine and Winn Parishes, Louisiana, which Mortgage was duly recorded on February 17, 1983, bearing Registration No. 265644 in Sabine Parish, Louisiana. Additionally, the debt to NBC is secured by a Mortgage dated May 7, 1986, recorded on May 12, 1986, in Book 1648 at Pages 598 and 604 in the records of Union County, Arkansas, which Mortgage covers Lots 43, 45, 47 and 49 of Block 5 in the North Washington Addition to the City of El Dorado, Union County, Arkansas, and by a Mortgage on certain oil and gas leases in Webster Parish, Louisiana, which was filed in Webster Parish on September 17, 1984, No. 318241.
The debtor has an undivided one-half interest in the real estate located in Union County, Arkansas, as described in Mortgage recorded in Book 1648, Page 598 and Page 604 and has an undivided working interest in the oil leases in Sabine Parish, Louisiana, and of .1833335 in the Webster Parish leases. The security for the loans made by NBC to the debtor is now of substantially less value than the balance owed to NBC. The debtor has no equity in the property. The property should be abandoned by the trustee in this case as having no value to the estate.

Pl.'s Ex. 47.

On November 13, 1992, thirty-six months after NBC obtained the order of abandonment in the bankruptcy proceeding, it filed a petition in the chancery court of Union County, Arkansas, to foreclose its security interests and mortgage liens allegedly existing in personal and real property located in Louisiana and Arkansas.1 NBC sought to foreclose L.D. McMullan's interest in the collateral, but did not seek a personal judgment against him because of the Chapter 7 discharge. NBC also sought to foreclose Nila McMullan's interest in the collateral and did seek a personal judgment against her in the amount of $565,411.75, plus attorney's fees. The foreclosure action was removed to this Court on December 20, 1994, and trial on the merits was held on May 15, 1995.

In order to be entitled to a judgment, NBC must prove that the debt has matured and is unpaid. Rawhide Farms, Inc. v. Darby, 267 Ark. 776, 780, 589 S.W.2d 210, 212 (Ct.App.1979). NBC has established the amounts due on the notes as follows:

                Note 87761
                     Nila McMullan            $298,853.36
                     In Rem                    232,270.00
                Note 87762
                     Nila McMullan            $264,663.01
                     In Rem                    205,550.00
                Note 89334
                     Nila McMullan            $ 46,277.27
                     In Rem                     27,484.64
                Note 95049
                     L.D. and Nila McMullan   $ 29,248.36
                

NBC has also established that all the notes are in default as to note payments and therefore matured under a standard acceleration clause, with the exception of note numbered 95049.

Although note numbered 95049 is not in default as to note payments, it may also be accelerated because all of the notes contain a clause that makes a default on any obligation to NBC a default of each note. This clause provides, in substance, that if the McMullans default on any obligation required by the notes or mortgages, NBC may accelerate the due date of all payments due under all notes and demand immediate payment in full. The validity of an acceleration clause has been upheld. Mitchell v. Federal Land Bank of St. Louis, 206 Ark. 253, 261, 174 S.W.2d 671, 676 (1943). The notes are to be read together with the mortgages, and NBC is entitled to accelerate the payments due under all the notes, including note numbered 95049. Rawhide Farms, Inc. v. Darby, 267 Ark. 776, 780, 589 S.W.2d 210, 212 (Ct.App.1979). Therefore, NBC has established a prima facie case for judgment for foreclosure on all the notes.

Defenses

The McMullans raise five defenses in opposition to NBC's allegations. First, the McMullans argue that the parties reached an accord and satisfaction in...

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