In re Snead
| Decision Date | 20 November 1979 |
| Docket Number | Bankruptcy No. 79-00780. |
| Citation | 1 BR 551 |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re Earl H. SNEAD, Debtor. GREY LINE AUTO PARTS, INC., Complainant, v. Earl H. SNEAD and Muriel C. Snead, Defendants. |
Daniel M. McCormack, Hirschler, Fleischer, Weinberg, Cox & Allen, Richmond, Va., for bankrupts/defendants.
E. Brodnax Haskins, Richmond, Va., for plaintiff.
The Complainant, Grey Line Auto Parts, Inc. (Grey Line), filed herein on July 17, 1979 a complaint for relief from automatic stay of Bankruptcy Rule 13-401, in order to proceed in the state court to continue its suit against Earl H. Snead and Muriel C. Snead (Sneads) on an alleged promissory note (the Note) due from the Sneads to Grey Line. In the alternative, it has asked that the matter be heard here. Grey Line also seeks to recover attorney's fees in the collection of the Note. Grey Line further argues in its complaint that the Note signed by the Sneads is an individual obligation to pay Grey Line and not a corporate obligation, and that therefore, any judgments in favor of the Earl H. Snead, Inc. (the Corporation) against Grey Line are not assignable, and therefore, not allowable as an offset by the Sneads against claims by Grey Line. Grey Line also filed a proof of claim without stating the amount of the claim.
The Sneads on August 20, 1979 filed an answer to the complaint and an objection to Grey Line's proof of claim. They, by answer and brief, counter Grey Line's argument with the contention that an antitrust judgment was procured by Earl H. Snead, Inc. against Grey Line, that said judgment could be and was assigned to the Sneads individually and that said judgment can be used in an offset against Grey Line's claim against the Sneads. The Sneads also claim that Grey Line tortiously interfered with the Corporation's right to do business, resulting in monetary damage which is likewise assignable; that Grey Line is obligated by law to apply the credit from a return of inventory by the Corporation to the Note and then to the Corporation's open account; and since the offset from the antitrust judgment and the return of inventory is greater than the amount due on the Note, attorney's fees should not be allowed. In the alternative, the Sneads claim that they signed the Note only as guarantors of the Corporation's obligation and thus they were released from liability by the unexcused failure of Grey Line to continue to accept the return of auto parts which were security for the Corporation's Note guaranteed by the Sneads.
On August 28, 1979, pursuant to the request of the parties, this Court issued a pretrial order consolidating the complaint for relief from stay and the objection to the proof of claim for the purpose of determining the amount of the debt that may exist between the parties. On September 10, 1979, this Court heard evidence ore tenus and oral arguments of counsel. Upon consideration whereof and after hearing said evidence and argument of counsel and reviewing briefs filed in support of argument, the Court renders the following opinion.
On or about January 1, 1977, the Corporation and Grey Line entered into a franchise contract under which the Corporation became a franchisee of Grey Line and operated an automobile parts store at 3062 Hull Street, Richmond, Virginia (the Store). The Franchise Contract consisted of four parts: (a) a franchise agreement which detailed the franchisor/franchisee relationship between Grey Line and the Corporation; (b) a $65,000.00 note (the Note) which was signed by Mr. and Mrs. Snead; (c) a security agreement which granted Grey Line a lien against the Corporation's inventory of parts to secure the Note; and (d) a lease by which Grey Line leased the Store to the Corporation. (Stipulation No. 4).
Mr. Snead is the sole stockholder of Earl H. Snead, Inc., (the Corporation) and in connection with the liquidation and dissolution of the Corporation is the assignee of assets of the Corporation, including any and all claims and judgments of the Corporation against Grey Line. (Stipulation No. 3).
The Corporation recovered a judgment against Grey Line in the United States District Court for the Eastern District of Virginia on June 6, 1978 in the principal amount of $30,000.00 plus interest, costs and attorney's fees and it recovered a second judgment against Grey Line in the United States District Court on January 11, 1979 in the principal amount of $5,684.43 for its costs and attorney's fees through the conclusion of the trial. As of June 1, 1979, the amount that Grey Line owed the Corporation on the judgments including principal and accrued interest was $38,221.65. (Stipulation No. 16).
Grey Line appealed the District Court judgments to the United States Court of Appeals for the Fourth Circuit and the judgments were affirmed per curiam by the Fourth Circuit in April of 1979. Thereafter Grey Line petitioned the United States Supreme Court for a writ of certiorari and that petition was pending as of the evidentiary hearing in this matter on September 10, 1979, and as of the filing of the memoranda of authorities by the parties. On October 1, 1979, the Supreme Court of the United States entered an order denying Grey Line's petition for writ of certiorari whereby Grey Line had challenged the June 6, 1978 and the January 11, 1979 judgments of the Corporation against Grey Line.
Meanwhile pursuant to an agreement in its Chapter XI proceedings1 the Corporation, during the approximate period of March 1, 1979 to April 5, 1979, returned to Grey Line and Grey Line accepted without protest auto parts from inventory having a value of $53,991.91. Grey Line refused to accept the return of auto parts after April 5, 1979. Prior to the commencement of the return of the inventory, the Corporation in a letter by its counsel to Grey Line, specifically elected to have the value of the returned inventory credited first against the Note and then against its open account. Grey Line, however, applied the credit to the open account first and then to the Note.
As stipulated by the parties, the total obligation of the Corporation to Grey Line pursuant to the Note and open account is $82,972.78. (Stipulation No. 8).
On or about May 18, 1978, Grey Line opened a competing automobile parts store at 3060 Hull Street, immediately adjacent to the store which was operated by the Corporation pursuant to the franchise contract with Grey Line. A sign was posted in the competing store at 3060 Hull Street which read simply "GREY LINE" and a banner was placed on the store which stated "THE MILLS ARE BACK" and "PRICES ARE RIGHT." For some years prior to the commencement of the Corporation's franchise operation at its store, Grey Line and Mr. William L. Mills had operated an automobile parts jobber store at the same location and Mr. William L. Mills knew many of the store's regular customers. Further Grey Line hired away the Corporation's store manager, who had worked in the store when Grey Line operated it, and its sales clerk to operate the competing store for Grey Line. Mr. Snead testified that he observed many instances in which William L. Mills would either call out to or physically intercept customers approaching the store operated by the Corporation and encourage those customers to purchase parts from the competing store. Mr. Snead also testified that on other occasions he observed instances in which the Corporation sold automobile parts to its customers only to have those customers leave the store and be intercepted by Mr. William L. Mills. Thereafter, the same customers would return the parts purchased from the store of the Corporation and go next door to purchase the same parts from the competing store operated by Grey Line. The total reduction in gross sales for the three months of May, June and July in 1978 as compared with the same months in 1977 is $56,139.15.
In an effort to enforce collection of the Note against Earl H. Snead and Muriel C. Snead, the attorney for Grey Line expended 24½ hours of attorney time in negotiations for return of merchandise and the institution of a suit in the Circuit Court of the City of Richmond (Division II) up to the time that action was stayed by filing of the Chapter XIII petition.
Counsel for both parties have agreed and the Court perceives the issues in this case to be:
(1) Did Grey Line have the right to credit the inventory returned by the Corporation first against the open account then against the Note despite the Corporation's election to have the returned inventory credited first against the Note and then the excess, if any, against the open account?
(2) Are Mr. and Mrs. Snead in their individual capacity allowed to set off assets of the Corporation, specifically an antitrust judgment and a tortious cause of action, against their individual debt to Grey Line?
(3) Did Grey Line tortiously interfere with the Corporation's right to do business, and if so, are the damages ascertainable by this Court?
(4) Finally, is Grey Line entitled to attorney's fees for its actions in attempting to collect on the Note from the Sneads?
The first issue is whether the Corporation had the right to direct that the value of the returned inventory be credited first against the Note and then its open account. It is well accepted that a debtor, such as the Corporation "at or before the time of making payments has the absolute right to direct to which of his debts payments shall be applied." 14B M.J., Payment § 24; Accord, Northern Va. Sav. & Loan Ass'n v. J.B. Kendall Co., 205 Va. 136, 135 S.E.2d 178 (1964).
To continue reading
Request your trial