In re Stader
| Decision Date | 01 September 1988 |
| Docket Number | Adv. No. 5-85-0033.,Bankruptcy No. 5-80-00134 |
| Citation | 90 BR 29 |
| Court | U.S. Bankruptcy Court — District of Connecticut |
| Parties | In re Martin A. STADER, Debtor. Daniel MEISTER, Trustee, Plaintiff, v. CHASE MANHATTAN BANK, N.A., Defendant. |
Ira B. Charmoy, Charmoy & Kanasky, Bridgeport, Conn., for Chapter 7 Trustee.
Max F. Brunswick, Sherman A. Zitomer, New Haven, Conn., for Chase Manhattan Bank, N.A.
ALAN H.W. SHIFF, Bankruptcy Judge.
The trustee objects to the claim of Chase Manhattan Bank, N.A. (Chase), asserting that the underlying debt was released by novation.1
On February 7, 1980, the debtor (Stader) filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code and listed in Schedule A-3 an unsecured, undisputed debt to Chase in the amount of $537,524.07. On May 12, 1980, a discharge was granted. On December 19, 1980, Chase instituted an adversary proceeding to revoke Stader's discharge, see 11 U.S.C. § 727(d), and thereafter established at trial that Stader had fraudulently concealed valuable real estate from his schedule of assets. As a consequence, Stader's discharge was revoked. In re Stader, Adv. No. 5-81-0001 (Bankr.D.Conn. July 21, 1982). On July 25, 1983, Stader amended Schedule A-3 to designate his debt to Chase as "disputed". The disputed debt relates to the following personal guaranties of loans made by Chase to two corporations in which Stader was president and sole shareholder.
On September 5, 1972, Stader executed a guaranty of debts incurred by Stader Associates, Inc. (Stader Associates),2 the builder and owner of Cross River Plaza, a shopping center in Cross River, New York (Center). On October 16, 1972, Stader executed an identical guaranty of the obligations of Redats, Inc. (Redats),3 the owner and operator of a restaurant in the Center.
Chase maintains that the personal guaranties were in effect when, on June 3, 1974, Stader, as president of Redats, executed a note for $68,800.004 and when, on December 9, 1974, Stader, as president of Stader Associates, executed a note for $396,156.04.5 The trustee concedes the validity of the notes, but asserts that the personal guaranties were released by novation.6
The trustee argues that a federal court sitting in Connecticut should apply Connecticut law when resolving matters of contract interpretation. In addressing a choice of laws question, this court previously recognized that "federal courts must apply the substantive conflict of law rules of the forum state in which it sits." In re U.S. Repeating Arms Co., 67 B.R. 990, 994 (Bankr.D.Conn.1986), citing, Klaxon Co. v. Stentor Electric Manufacturing Co., Inc., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). Connecticut courts give effect to agreements between parties regarding the substantive law to govern the interpretation and enforcement of their contract. Gannett Co., Inc. v. Register Publishing Company, 428 F.Supp. 818, 824 (D.Conn.1977), citing, Pollak v. Danbury Mfg. Co., 103 Conn. 553, 131 A. 426 (1925); Fairfield Lease Corp. v. Pratt, 6 Conn.Cir. 537, 278 A.2d 154 (1971); Vending Credit Corp. v. Trudy Toys Co., 5 Conn.Cir. 629, 260 A.2d 135 (1969). Paragraph 5 of each guaranty provides, inter alia, that "obligations and liabilities arising hereunder shall be construed according to the laws of the State of New York."7 I therefore conclude that New York law controls Stader's liability under those guaranties.
Under New York law, in order to establish a novation, each of the following four elements must be present: (1) a valid prior obligation; (2) the agreement of all parties to a new contract; (3) the extinguishment of the old obligation; and (4) a valid new contract supported by consideration. Callanan Industries v. Micheli Contracting, 124 A.D.2d 960, 508 N.Y.S.2d 711, 712, (3d Dept.1986); Wasserstrom v. Interstate Litho Corp., 114 A.D.2d 952, 495 N.Y.S.2d 217, 219 (2d Dept.1985); Town & Country Linoleum & Carpet Co. v. Welch, 56 A.D. 2d 708, 392 N.Y.S.2d 517, 518 (4th Dept. 1977); see also, French American Banking Corp. v. Flota Mercante, 609 F.Supp. 1352, 1357 (S.D.N.Y.1985); VJK Productions v. Friedman/Meyer Productions, 565 F.Supp. 916, 921 (S.D.N.Y.1983). As to the fourth element, the discharge of the original contract ordinarily constitutes sufficient consideration for the substituted contract. Wasserstrom, supra, 495 N.Y.S.2d at 219.
Under non-bankruptcy law, the party asserting a claim of novation has the burden of establishing the "clear and definite intention on the part of all concerned that such is the purpose of the agreement." Beck v. Manufacturers Hanover Trust Co., 125 Misc.2d 771, 481 N.Y.S.2d 211, 218 (Sup.Ct.1984) (quoting 22 N.Y.Jur.2d, Contracts, § 406, pp. 321-322); see also 58 Am.Jur.2d Novation § 32 (1971). However, that burden does not require proof of an express novation. A novation may be implied or inferred from all surrounding circumstances. National Equipment Rental, Ltd. v. Sebert Mfg. Corp., 42 Misc.2d 415, 248 N.Y.S.2d 374, 376 (Sup.Ct. 1964); French American Banking Corp., supra, 609 F.Supp. at 1358. That procedure will apply here because it comports with the assignment of burdens of proof in bankruptcy claims litigation. Generally, In re Central Rubber Products, Inc., 31 B.R. 865, 867 (Bankr.D. Conn.1983) (citations omitted); see also, Matter of Fidelity Holding Co., Ltd., 837 F.2d 696, 698 (5th Cir.1988). Here, the trustee's objection is based upon novation. If he succeeds, Chase will have no claim to prove; if he doesn't, the claim will be allowed.
The trustee contends that Chase orally agreed to release Stader from his guaranty of the Redats note if Stader found someone acceptable to Chase to replace him as operator of the restaurant. The trustee bases his contention on Stader's uncontroverted8 testimony that the following events led to the novation of the Redats guaranty.
Redats initially borrowed money from Chase in 1972.9 At that time, Chase required Stader to sign a hypothecation agreement, pledging certain personal savings passbooks as collateral.10 Following the closing of the restaurant in May, 1973, Stader was advised by Paul Dallak, a manager and assistant treasurer at Chase's Cross River branch,11 that his personal guaranty would be released if he produced "a viable tenant who would assume the operation of the restaurant or take it over in a form acceptable to the bank. . . ."12 In September or October 1973, Stader introduced John Lium to Dallak as a person interested in taking over the restaurant and the Center.13 Dallak referred the matter to Charles Schroeder, a Chase vice-president, who had the authority to enter into such negotiations.14 Lium and Stader met with Schroeder in late September or early October 1973.15 In March 1974, Dallak informed Stader that Lium had been approved by Schroeder to take over the restaurant and "if Lium is going to take over the notes, you will be relieved of your guarantee."16 In June or July 1974, Dallak told Stader that the passbooks would be returned, "and then the guarantee would be cancelled or released. . . ."17 Thereafter, Stader's passbooks and hypothecation agreements were returned, and Lium eventually assumed control of the restaurant.18
Stader's testimony was bolstered by his August 4, 1974 letter19 to Dallak:
It is my understanding since the restaurant is closed, Redats, Inc. is no longer functioning, the Hypothecation agreements have been returned and lium in sic assuming the control and responsibilities sic of Redats that I am neither corporately or psersonally sic responsible for any existing debts.
An April 15, 1976 letter is to the same effect.20 In that letter, Stader responded to a demand by Chase for the repayment of the Redats note by reminding Chase of the agreement reached by him, Lium and Schroeder, and questioning why the bank had waited almost two years to communicate with him if it "believed that I was personally responsible."21
I find that Stader's testimony is credible and convincing. Moreover, Chase's own records support Stader's account of the novation. In an April 29, 1974 file memo, Schroeder wrote that "the Redats loan . . . has since been assumed by the Hungry Lion Restaurant, who sic leased the restaurant space from Stader."22 I am accordingly persuaded that Chase and Stader entered into negotiations which culminated in Chase's approval of Lium to operate the restaurant and assume its obligations and resulted in a concomitant release of Stader from his personal guaranty.
The trustee contends that Chase orally agreed to relieve Stader from his guaranty of the Stader Associates note if Stader would turn over management of the Center to Chase. The trustee's contention is based upon Stader's testimony corroborated by Frederick Jambes, his friend and advisor.
Stader testified that after the Redats novation, he asked Dallak about the possibility of obtaining a release on the Stader Associates guaranty. Dallak stated that he would confer with Schroeder, who thereafter proposed that Chase lend Stader Associates $60,000.00 to pay certain liens on the Center in return for Stader Associates' execution of a new secured note in the amount of its total outstanding balance guaranteed by Stader. Stader testified that he did not accept that proposal because it did not relieve him of his personal liability, and that he telephoned Schroeder to request an arrangement similar to the Redats...
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