In re Wetzler

Decision Date11 January 1996
Docket NumberBankruptcy No. 94-5-5595-SD.
Citation192 BR 109
PartiesIn re Robert Arthur WETZLER, Debtor.
CourtU.S. Bankruptcy Court — District of Maryland



Ronald J. Drescher, Towson, Maryland, for debtor.

E. Duncan Gretchell, Michael L. Jennings, Ann Ramsey Bergan, McGuire, Woods, Battle & Boothe, Baltimore, Maryland, for Eddie Cantor.


E. STEPHEN DERBY, Bankruptcy Judge.

The controlling question for decision is whether an equitable subrogation claim against two guarantors who are husband and wife may reach property held by the guarantors as tenants by the entirety. If the answer is affirmative, two dependent issues must be resolved. First, among the several co-guarantors, how is the share of joint liability determined that may be satisfied from entireties property. Second, are the co-guarantors accountable for attorney fees incurred by the holder of the subrogation claim. These questions were argued by counsel at a hearing on undisputed facts.

I. Facts.

Robert Arthur Wetzler, the Debtor, is an investor in nonresidential, commercial property. The Debtor's financial difficulties are primarily the result of an unsuccessful real estate venture in northern Virginia.

Debtor purportedly owned 11% of the shares of Stafford Development Corporation ("Stafford Corp."). There were several other shareholders of Stafford Corp., among whom was Mr. Eddie Cantor ("Cantor") who held the largest percentage interest. Stafford Corp. was in the business of owning and developing a parcel of real property in Stafford County, Virginia (the "Virginia Property"). Stafford Corp. eventually sold the Virginia Property to Balbir Brar Associates for $1,650,000. The purchase price was partially payable through Balbir Brar's promissory notes to Stafford Corp. in the aggregate amount of $1,000,000 (collectively, the "Note"). The Note was secured by a purchase money deed of trust on the Virginia Property.

After the sale, Stafford Corp. borrowed $975,000 from Heritage Saving Bank, F.S.B. ("Heritage"). This loan was secured by the Note and the deed of trust on the Virginia Property. The loan proceeds were used to make distributions to the shareholders of Stafford Corp.

Heritage also obtained the guarantees of each shareholder and of each spouse who was not a shareholder. The guarantors executed an unconditional written guaranty in Henrico County, Virginia (the "Guaranty"). There were nine guarantors. The Debtor and his wife signed the Guaranty as husband and wife, as did Cantor and his wife, and two other married couples. The only guarantor to sign the Guaranty without a spouse was Warren D. Smith, who was divorced. The Guaranty reads, in part:

THIS UNCONDITIONAL GUARANTY is made this 7th day of May, 1989, by Eddie Cantor and Mary Lee Cantor, husband and wife; Robert Cantor and Selma Cantor, husband and wife; Warren D. Smith, divorced; Earl F. Leitess and Judith Leitess, husband and wife; and Robert A. Wetzler and Joyce T. Wetzler, husband and wife; ("Guarantors") to HERITAGE SAVINGS BANK, FSB . . .

In addition, the terms of the Guaranty state,

The Guarantors, jointly and severally, unconditionally guarantee the payment of the Note, whether by acceleration or otherwise, together with all interest due thereon and all other obligations and liabilities, including reasonable attorney\'s fees, due pursuant to the Note, or which may be incurred in enforcing the payment of any amount due or the performance of any obligations owed by Maker Stafford or Guarantors pursuant to the Note, Security Agreement or any other document which secures the Note. . . .

(Emphasis supplied.).

Heritage was later taken over by the Resolution Trust Corporation ("RTC"), and the RTC acquired all of Heritage's rights against the guarantors. Balbir Brar defaulted on the Note, and the RTC sought recovery of its deficiency from the guarantors. Facing substantial litigation with the RTC, Cantor employed Wyatt Durrette, an attorney with the law firm of Durrette, Irvin, Lemons & Bradshaw, ("Durrette") to negotiate a settlement. With Durrette's assistance, the guarantors reached an agreement with the RTC pursuant to which (1) Eddie Cantor paid the RTC $500,000 (the "RTC Payment"), and (2) Cantor and the other guarantors were granted a full release (the "Settlement Agreement"). Durrette has billed legal fees for negotiating the Settlement Agreement of more than $120,000, which Cantor has paid in part.

Cantor sought contribution from the other guarantors for both the RTC Payment and Durrette's fee. One of the original nine guarantors, Warren Smith, filed a bankruptcy case, and he is not an available source for contribution. Debtor and his wife refused to contribute. Consequently, Cantor sued Debtor and his wife in the United States District Court for the Eastern District of Virginia, demanding that each separately reimburse him for an individual pro rata, one eighth share of the RTC Payment. On August 30, 1994, before the District Court entered a judgment, Debtor and his spouse filed separate bankruptcy petitions. Debtor filed this case under Chapter 11, and his spouse filed under Chapter 7.

The questions for decision are raised by Debtor's objection to Cantor's claim for contribution and by Cantor's objection to Debtor's motion to classify Cantor's claim separately. Debtor's objection is that Cantor's claim is several against him and cannot reach property that Debtor holds by the entirety. Conversely, Cantor's objection to Debtor's separate classification of his claim is that Cantor's claim against Debtor and his wife is joint in nature and entitled to satisfaction from entireties property.

II. Choice of Law.

As a threshold matter, the court must determine what law applies. Maryland's choice of law rules will be utilized for this determination. In re Chateaugay Corp., 170 B.R. 551, 555 (S.D.N.Y.1994) ("Because federal courts must defer to state law . . . the applicable choice of law principles must determine which state's law applies."). To decide questions of validity and construction of contracts, Maryland adheres to the principle of lex loci contractus, under which the law of the jurisdiction where the contract was formed is applied, unless otherwise agreed by the parties. Kronovet v. Lipchin, 288 Md. 30, 43, 415 A.2d 1096, 1104 (1980); National Glass, Inc. v. J.C. Penney Properties, Inc., 336 Md. 606, 610-11, 650 A.2d 246, 248-49 (1994); American Motorists Insurance Company v. ARTRA Group, Inc., 338 Md. 560, 572, 659 A.2d 1295, 1301 (1995).

The Guaranty does not have a choice of law provision. Therefore, the court under Maryland choice of law principles must look to the law of the state in which the guaranty contract was consummated. Since the contract was entered into in Henrico County, Virginia, Virginia law applies. Additionally, the settlement agreement between the guarantors and the RTC specifies that it is governed by federal law and, in absence of controlling federal law, of which there is none, by Virginia law. In any event, Maryland substantive law that is applicable to the questions for decision is substantially similar to that of Virginia. Cf., In re Advance Insulation & Supply, Inc., 176 B.R. 390, 399 (Bankr.D.Md.1994), affirmed sub nom., Rinn v. First Union Nat. Bank, 176 B.R. 401 (D.Md.1995).

III. Liability Under Guaranty.

Once the nature of the parties' obligations under the Guaranty is defined, well established principles of property law dictate the treatment of Cantor's equitable subrogation claim. If Debtor and his wife are jointly liable to Cantor on his subrogation claim, then Cantor is entitled to proceed against their entirety property. Conversely, if each has only several liability to Cantor, then Cantor cannot proceed against their entirety property.

A. Equitable Subrogation

When a surety satisfies the debt of another, the surety acquires all rights that the original creditor had against the debtor. "There are few doctrines better established than that a surety who pays the debt of another is entitled to all rights of the person he paid to enforce his right to be reimbursed." Pearlman v. Reliance Ins. Co., 371 U.S. 132, 136-37, 83 S.Ct. 232, 235, 9 L.Ed.2d 190 (1962). See also Federal Land Bank of Baltimore v. Joynes, 179 Va. 394, 401, 18 S.E.2d 917, 920 (1942). Accord Lyon v. Campbell 324 Md. 178, 182, 596 A.2d 1012, 1013-14 (1991); Levenson v. Capital Mortgage, 101 Md.App. 122, 132, 643 A.2d 505, 510 (1994). This principle is known as the doctrine of equitable subrogation. There is both legal and equitable subrogation. While one is grounded in law and the other in equity, both types arise through contract and place a party satisfying the debt of another in the shoes of the original creditor. Rinn v. First Union National Bank of Maryland, 176 B.R. 401, 407-408 (D.Md.1995), affirming sub nom., In re Advance Insulation & Supply, Inc., 176 B.R. 390 (Bankr.D.Md.1994) and citing Security Ins. Co. v. Mangan, 250 Md. 241, 242 A.2d 482, 485 (1968). While the terms surety and guarantor are not identical, equitable subrogation applies to both. Davis v. Wells, Fargo & Co., 104 U.S. 159, 169, 26 L.Ed. 686 (1881); Colonial Am. Nat. Bank v. Kosnoski, 617 F.2d 1025, 1029-30 (4th Cir. 1980) (Murnaghan, J., dissenting opinion); Weitz v. Marram, 34 Md.App. 115, 121, 366 A.2d 86, 89 (1976) (citing Hooper v. Hooper, 81 Md. 155, 31 A. 508 (1895)).

Equitable subrogation is subject to limitation in cases where the relationship among the parties is one of co-guarantors. Gordon v. Rixey's Adm'r and al., 86 Va. 853, 857, 11 S.E. 562, 564 (1890); Atalla v. Abdul-Baki, 976 F.2d 189, 192 (4th Cir.1992). In these situations, liability is limited to the contributive share of each co-guarantor. This principle is summarized and set forth in the Restatement of Security, § 141, entitled Subrogation.

Where the duty of the principal to the creditor is fully

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