In re Russell
| Decision Date | 14 June 1989 |
| Docket Number | Bankruptcy No. ED 84-58M. |
| Citation | 101 BR 62 |
| Parties | In re Herbert E. RUSSELL, Debtor. |
| Court | U.S. Bankruptcy Court — Western District of Arkansas |
William R. Gibson, Fayetteville, Ark., Trustee.
Jill R. Jacoway, Fayetteville, Ark., for Snider & Gibson.
Charles W. Baker, Little Rock, Ark., for Creditor's Committee.
Susan Gunter, Little Rock, Ark., for debtor.
On July 18, 1984, Herbert E. Russell filed a voluntary petition for relief under the provisions of chapter 11 of the United States Bankruptcy Code. On March 19, 1985, Hon. William R. Gibson was appointed trustee. The trustee objected to Claim No. 84, filed by R. Edward Snider, Jr., (Snider) in the sum of $13,220.24, and Claim No. 50, filed by Richard H. Gibson (Gibson) in the sum of $56,626.33, and a hearing was held on September 13, 1988. This proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B), and the Court has jurisdiction to enter a final judgment.
On January 2, 1978, Snider and Gibson borrowed $988,000.00 from National Bank of Commerce of Pine Bluff (NBC) to purchase 5,261 shares of stock in Citizens First National Bank of Arkadelphia. Snider and Gibson jointly executed a promissory note for $988,000.00 and delivered it to NBC. Snider and Gibson granted a lien in the stock to NBC to secure repayment of the debt, and NBC perfected its lien by taking physical possession of the stock certificates. Title to the stock purchased with the loan proceeds was divided between Snider and Gibson in some proportion not shown by the record. For reasons not fully explained by the record, this stock became "around" 16,000 shares of stock in an entity known as First Arkadelphia Bancshares, Inc., (FAB). According to the testimony, the stock was worth approximately $54.00 a share on the day of the hearing. According to the claim filed by NBC in the case, the principal balance of the indebtedness owed to NBC by Snider and Gibson as of January 2, 1985, was $679,498.32.
On November 3, 1981, Gibson sold 2,000 shares of his stock to the debtor. The sale was evidenced by a written contract between Gibson and the debtor. According to the contract, the purchase price for the stock was $171,220.000, or $85.61 a share, and was payable by the debtor as follows: (1) payment of $210.03 in cash to Gibson; (2) assumption of $49,015.75 of Gibson's portion of the $988,000.00 debt to NBC; and (3) execution of a promissory note in favor of Gibson for $121,994.25. The note was to be paid in quarterly payments of $10,166.18, plus interest. The debtor's obligation to Gibson pursuant to the contract was secured by a second lien on the 2,000 shares of stock sold to the debtor.
FAB's stockholder ledger was revised to reflect the debtor as record owner of 2,000 shares, and new stock certificates in the debtor's name were prepared and exchanged for Gibson's cancelled certificates. NBC retained possession of the 2,000 shares as collateral for Snider and Gibson's note, and all parties agree that NBC's first lien in the 2,000 shares was perfected on the date the petition was filed. Gibson testified that he sent a copy of the promissory note and the contract to NBC soon after they were executed.
The debtor made payments to Gibson on the promissory note and made payments to NBC on the portion of NBC's debt he assumed until he filed his bankruptcy petition. When the debtor ceased making payments to NBC, Snider and Gibson made the payments to prevent the note to NBC from becoming delinquent. Snider made payments on the debtor's obligation to NBC totaling $13,115.70 and Gibson made payments totaling $34,144.51.
In October 1987, Snider and Gibson paid the NBC debt in full with proceeds from a loan from Arkansas Bank & Trust Company of Hot Springs (ABT), and NBC withdrew its claim against the estate. According to the testimony, all of the stock certificates were physically transferred to ABT to be used as collateral for the new loan, but the debtor's 2,000 shares were not formally pledged because the trustee would not execute the pledge documents.
Snider claims to be equitably subrogated to NBC's secured claim to the extent of the $13,115.70 he paid NBC on the debtor's behalf. Gibson claims to be equitably subrogated to NBC's secured claim to the extent of the $34,144.51 he paid NBC on the debtor's behalf. The parties stipulated that the unpaid principal balance of the promissory note in favor of Gibson on the day the bankruptcy petition was filed was $56,626.33 and that interest had accrued postpetition in the sum of $24,437.10 through the date of the hearing. Gibson's combined claim is therefore $115,207.94.
The trustee alleges that neither Snider nor Gibson is entitled to be equitably subrogated to the claim of NBC, and that Gibson's claim is not secured because Gibson failed to perfect his lien in the 2,000 shares of stock on the day the petition was filed.
Subrogation arises where a party having a liability pays a debt of a party who is primarily liable on the debt and who, in equity, should pay. In re Bugos, 760 F.2d 731, 733 (7th Cir.1984); In re Glade Springs, Inc., 47 B.R. 780, 784 (Bankr.E.D. Tenn.1985), aff'd sub. nom. Chemical Bank v. Craig (In re Glade Springs, Inc.), 826 F.2d 440 (6th Cir.1987). Subrogation entitles the party paying the debt to exercise all rights and remedies, which the creditor possessed against the party who should have paid the debt. American Surety Co. v. Bethlehem Nat'l Bank, 314 U.S. 314, 317, 62 S.Ct. 226, 228, 86 L.Ed. 241 (1941); Capital Nat'l Bank of Tampa v. Hutchinson, 435 F.2d 46, 52 (5th Cir. 1970). The classic example of an entity possessing a right of subrogation would be a surety, a guarantor or an endorser. See Bank of America Nat'l Trust & Savings Ass'n v. Kaiser Steel Corp. (In re Kaiser Steel Corp.), 89 B.R. 150, 151 (Bankr.D. Colo.1988); In re Tygrett, 72 B.R. 129, 130 (Bankr.C.D.Ill.1987). Subrogation is an equitable remedy designed to prevent unjust enrichment. In re Glade Springs, Inc., 47 B.R. at 784; 83 C.J.S. Subrogation § 2 (1953). Subrogation is not a matter of absolute right which a party paying a debt of another may enforce at will. In re Bugos, 760 F.2d at 734; Moon Realty Co. v. Arkansas Real Estate Co., 262 Ark. 703, 705, 560 S.W.2d 800, 801 (1978); 73 Am.Jur.2d Subrogation § 16 (1974). For instance, subrogation will not be applied where its application would inequitably disturb the priority of liens. 83 C.J.S. Subrogation § 6(d); 73 Am.Jur.2d Subrogation § 15.
The Bankruptcy Code authorizes a "co-debtor" of the debtor to assert rights of subrogation in a bankruptcy case. 11 U.S.C. § 509 provides as follows:
Under 11 U.S.C. § 509, a party may be subrogated to the extent of any payment made and, in the event of a partial payment, the party asserting subrogation is automatically subordinated to the claim of the creditor. See 3 Collier on Bankruptcy ¶ 509.04 (15th ed. 1989). The Bankruptcy Code denies subrogation if "as between the debtor and such entity, such entity received the consideration for the claim held by such creditor." 11 U.S.C. § 509(b)(2). This exception is a statutory expression of the general principle of equitable subrogation that the right of subrogation is not available to a party who satisfies an indebtedness for which he is ultimately and primarily obligated. 124 Cong.Rec. H11095 (daily ed. Sept. 28, 1978); S17411-12 (daily ed. Oct. 6, 1978). Rubenstein v. Ball Bros., Inc. (In re New England Fish Co.), 749 F.2d 1277, 1282 (9th Cir.1984). See Cooper v. Cooper (In re Cooper), 83 B.R. 544, 547 (Bankr.C.D.Ill. 1988), In re Tygrett, 72 B.R. at 130; Ridge v. Smothers (In re Smothers), 60 B.R. 733, 735 (Bankr.W.D.Ky.1986); In re Glade Springs, Inc., 47 B.R. at 785; Whitley v. Irwin, 250 Ark. 543, 549, 465 S.W.2d 906, 910 (1971); Lindley v. Marriott, 196 Ark. 1178, 1178, 114 S.W.2d 453, 454 (1938).
Under the facts in this case, the consideration for the original debt was distributed partially to Snider and partially to Gibson although both were fully liable to NBC as makers on the note. As between themselves, Snider and Gibson were primarily liable only for the amount of debt proportionate to the amount of stock purchased by each of them. See 72 C.J.S. Principal and Surety § 34 (1987). If either Snider or Gibson had been compelled to pay more than his share of the indebtedness to NBC, a classic right of subrogation would exist in favor of the one who paid more.
When Gibson sold 2,000 shares of his stock to the debtor and the debtor assumed a portion of Gibson's primary debt to NBC, the debtor became the principal...
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