In re Miller

• Decision Date: 08 April 1987
• Docket Number: Motion No. 86-4175.,Bankruptcy No. 85-1000
• Citation: 72 BR 352
• Parties: In re Jack R. MILLER, Jr., Individually and t/a Wunder Bar, Debtor. Jack R. MILLER, Jr., Individually and t/a Wunder Bar, Movant, v. CONCORD-LIBERTY SAVINGS AND LOAN ASSOCIATION, Ann Silipigni, and Frank Suffoletta, Respondents.
• Court: U.S. Bankruptcy Court — Western District of Pennsylvania

72 B.R. 352 (1987)

In re Jack R. MILLER, Jr., Individually and t/a Wunder Bar, Debtor Jack R. MILLER, Jr., Individually and t/a Wunder Bar, Movant, v. CONCORD-LIBERTY SAVINGS AND LOAN ASSOCIATION, Ann Silipigni, and Frank Suffoletta, Respondents.

Bankruptcy No. 85-1000, Motion No. 86-4175.

United States Bankruptcy Court, W.D. Pennsylvania.

April 8, 1987.

David W. Lampl, Lampl, Sable, Makoroff & Libenson, Pittsburgh, Pa., for debtor.

Arnold M. Epstein, Brennan, Robins & Daley, Pittsburgh, Pa., for respondent Concord-Liberty.

Robert J. Masters, Hudacsek & Lewis, Beaver Falls, Pa., for respondents Silipigni and Suffoletta.

MEMORANDUM OPINION

BERNARD MARKOVITZ, Bankruptcy Judge.

Presently before the Court is the Debtor's Motion To Determine Balance Owed To Concord-Liberty Savings And Loan Association ("Concord"). The Court must determine whether co-Respondents, Ann Silipigni and Frank Suffoletta (hereinafter "Pledgors") are secured creditors, pursuant to both the doctrine of equitable subrogation, as codified in 11 U.S.C. § 509, and the Pennsylvania Uniform Commercial Code, 13 Pa.C.S.A. § 9101 et seq. Based upon the arguments offered at hearing, the briefs submitted thereon, and this Court's research, we find that Movant remains indebted to Concord for $33,000.00; further, we find that Pledgors possess a subordinated secured interest in the amount of $15,000.00, which the Debtor-in-Possession cannot avoid pursuant to 11 U.S.C. § 544(a).

FACTS

The Debtor and John R. Polyak were co-owners of property located in Midland, Pennsylvania, which was purchased from Pledgors. Said purchase was effectuated by a mortgage of $55,000.00 granted to the Debtor and Polyak by Concord. Further security to Concord included a pledge of $15,000.00 from Pledgors, as evidenced by an Agreement dated August 25, 1976, which stated that Concord would hold the pledge, in the form of a "certificate of value", until the mortgage indebtedness was reduced to $40,000.00. Until the mortgage balance was so reduced, if a default occurred, the Agreement authorized Concord,

. . . to appropriate all or any part of the said certificate of value of $15,000.00 for the payment of the principal debt, interest and other charges due . . .

The Agreement specified that foreclosure by Concord was not a condition precedent to its ability to appropriate the pledge.

In conjunction with the Pledge Agreement between Concord and Pledgors, a Consent Agreement dated August 25, 1976, was executed between Debtor and Pledgors. The Consent Agreement provided that:

. . . in case there should be a default on our part in the payment of said mortgage . . . and it is necessary to hold the same Pledgors responsible for said delinquency to the extent of said Pledge, that Concord shall have the right to sell, assign, transfer and set over to Pledgors the aforementioned mortgage . . . as may be expedient and necessary for the protection of Pledgors.

Prior to both the Debtor's bankruptcy filing and the necessary reduction of the mortgage debt, Debtor failed to make the required payments, and accordingly, default occurred. Consequently, Concord applied the $15,000.00 pledge to the outstanding balance, reducing same to approximately $33,000.00.

Thereafter, on May 6, 1985, Debtor filed its voluntary Chapter 11 petition. Pursuant to an Order of this Court dated August 7, 1986, the subject real estate, along with Debtor's bar equipment, furniture and fixtures, was sold for the sum of $60,000.00.

Debtor has requested a determination of the balance owed to Concord, and in particular, whether Pledgors are deemed unsecured creditors, giving the Debtor-in-Possession, as hypothetical lien creditor, priority under § 544(a).

ANALYSIS

The parties agree that § 509 of the Bankruptcy Code permits a co-debtor, guarantor, or surety who pays the debt, not as as volunteer, but because he is secondarily liable, to be subrogated to the creditor's rights to the extent of such payment.

The derivation of the equitable doctrine of subrogation has:

. . . its roots in the civil law, and applies to persons, such as sureties, who have paid a debt due to a third party for which another was primarily answerable, and who pays the debt not as a volunteer but because he is secondarily liable for the debt.

See, U.S. v. Commonwealth of Pennsylvania Department of Highways, 349 F.Supp. 1370 (E.D.Pa.1972); In re Co-Build Companies, Inc., 21 B.R. 635 (Bankr.E.D.Pa. 1982), quoting American Surety Company v. Bethlehem National Bank, 314 U.S. 314, 62 S.Ct. 226, 86 L.Ed. 241 (1941).

Although the majority of cases which discuss subrogation refer to guarantors rather than pledgors, the analysis regarding whether the Court should permit subrogation and the adjudication of the rights of the subrogee pursuant to the doctrine of subrogation remain constant. See, In re Bugos, 760 F.2d 731 (7th Cir.1985); In re Blair Contracting Company, Inc., 21 B.R. 353 (Bankr.M.D.Fla.1982).

Case law indicates that once the right to subrogation is established, the subrogee becomes subrogated to all rights of the creditor against the principal debtor, including the security given to secure the debt. Allen v. See, 196 F.2d 608 (10th Cir.1952); In re Blair, supra; In re Chasey, 16 B.R. 347 (Bankr.W.D.N.Y.1982); Sundheim v. Philadelphia School District, 311 Pa. 90, 166 A. 365 (1933); U.S. Steel Homes Credit Corporation v. South Shore Development Corporation, 277 Pa. Super. 308, 419 A.2d 785 (1980).

In the case at bar, Debtor argues that Pledgors are not secured because the Consent Agreement executed between Debtor and Pledgors was never publicly filed prior to Debtor's bankruptcy. Debtor views the Consent Agreement as, at best, a security agreement granting an interest in Debtor's real property, which was not perfected as mandated by the Pennsylvania Uniform Commercial Code, 13 Pa.C.S.A. §§ 9102(b) and 9302. Debtor argues therefore, that under § 544 of the Bankruptcy Code, the debtor-in-possession, as hypothetical lien creditor, takes priority over this...