In re XYZ Options, Inc.
| Citation | 217 BR 912 |
| Decision Date | 29 January 1998 |
| Docket Number | Adversary No. 96-00314.,Bankruptcy No. 94-70883-TBB-7 |
| Parties | In re XYZ OPTIONS, INC., Debtor. Donald L. DIONNE, Plaintiff, v. FIRST ALABAMA BANK and XYZ Trading Co., Inc., Defendants. |
| Court | United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Alabama |
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Jerry W. Schoel, Birmingham, AL, for Plaintiff.
Robert P. Reynolds, Tuscaloosa, AL, for Regions Bank.
William R. Murray, Northport, AL, for XYZ Trading Co., Inc.
Convolution envelops that which is basic in the fog of complexity. It also delays, sometimes prevents, travel to one's desired destination. Lifting of the fog and resumption of a journey is the focus of this opinion.
Donald L. Dionne, the trustee of the chapter 7 bankruptcy estate of XYZ Options, Inc. ("Trustee"), seeks partial summary judgment against First Alabama Bank, now known as Regions Bank ("Regions Bank"), and XYZ Trading, Co., Inc. ("Trading") to control by marshaling the disposition of collateral securing repayment of certain debts. Some were owed to Regions Bank and one is allegedly owed to the Trustee.
The Trustee's marshaling demand is predicated on Alabama's codification of this equitable doctrine. It is set forth in Ala.Code § 35-11-4 (1991).1 The Trustee's demand involves sundry transactions associated with (i) two parcels of real property, (a) lots 5 and 5A located on the Ono Island Harbor Peninsula in Baldwin County, Alabama ("Ono Island Property") and (b) 5201 Reichhold Road, Tuscaloosa, Alabama ("Reichhold Road Property"), and (ii) a certificate of deposit. What the Trustee wants is the certificate of deposit applied to reduce debts of Trading in a fashion which increases the amount of proceeds from sale of the Ono Island Property available to pay monies claimed to be owed to the Trustee. Intertwined with the order of liquidation of properties sought by the Trustee are credit transactions involving Trading and William H. Muscarella.
Multiplicity of the pre-bankruptcy transactions of parties other than the debtor joined with the debtor's post-petition acquisition of an interest in the real properties which form a basis for the Trustee's demand causes marshaling on superficial examination to appear to be warranted. It is not. To comprehend the inapplicability of marshaling necessitates an analysis and understanding of the credit transactions upon which the Trustee grounds his marshaling theories. Once this occurs, just why the Trustee's argument navigates onto a shoal in the passage selected surfaces: the unavailability of one of the funds mandated for marshaling.
Although marshaling is not a proper basis by which the Trustee recovers monies for the bankruptcy estate of XYZ Options Inc. ("Options"), its denial is not the end of the voyage to recovery. Another principle—that of a foreclosing mortgagee holding surplus sale funds for inferior lienholders—allows the Trustee's transport to be salvaged and the resumption of his journey to recover the surplus from the foreclosure sale of the Ono Island Property. Despite the continuation of the Trustee's voyage, the award of monies to him may not yet be made. This is due to the Trustee's craft having to moor at the dock of want of evidentiary fact: how much, if any, monies of the asserted common debtor are owed to the Trustee.
Time is of the essence when marshaling is sought. To be timely, the Trustee must have made a written demand before one of the properties for which marshaling is sought—here the Ono Island Property—was sold. See Ala.Code § 35-11-4 (1991); Vines v. Wilcutt, 212 Ala. 150, 102 So. 29 (1924); Turner v. Flinn, 67 Ala. 529 (1880); see also Cent. Lumber Co. v. Jacks, 222 Ala. 475, 132 So. 721 (1931). Why a timely demand is required is rudimentary. One seeking to have a secured creditor sell or liquidate one property or fund against which the secured creditor holds a lien before the disposition of another property or fund against which the secured creditor and other creditors have liens, that is to marshal, cannot obtain the desired result once this other property or fund has been sold or otherwise liquidated.
In this case, a serious issue exists over the Trustee's compliance with the timely, written demand requirement. The Trustee asserts in a pleading the existence of a letter dated after the sale of one of the properties sought to be used as one of the funds necessary for marshaling — the Ono Island Property. The complaint filed to initiate this adversary proceeding may also be a written demand. It, too, is dated after the sale of the Ono Island Property.
Despite the fact that the letter and the complaint are dated after the sale of one of the properties for which marshaling is requested, another occurrence prevents a ruling that the Trustee's demand was untimely. It is an asserted agreement between Regions Bank and the Trustee on what Regions Bank was to do with the Ono Island Property foreclosure sale surplus. It was made before Regions Bank exercised its foreclosure rights against the Ono Island Property.
Due to the manner of disposition of this matter, this Court need not resolve whether the claimed agreement on the handling of the surplus met the statutory requirement of a timely, written demand. For the same reason, no determination is required that its existence overcomes a contention of waiver or other similar defense to marshaling premised on the absence of a timely, written demand necessitated by Ala.Code § 35-11-4 (1991). To resolve this dispute, it is enough that the existence of a timely demand is assumed.
a. Regions Bank
The Trustee asserts he holds a mortgage against Trading's Ono Island Property second in priority only to that held by Regions Bank. The bank obtained its first mortgage position to secure repayment of a promissory note executed by Trading on September, 19, 1991, payable in the original principal amount of one hundred sixteen thousand one hundred twelve dollars and eighteen cents ($ 116,112.18) ("Trading-Ono Note"). At the same time, a mortgage was executed by Trading transferring to Regions Bank legal title in and to the Ono Island Property (First Ono Mortgage). William H. Muscarella ("Muscarella") and Richard W. Kendricks ("Kendricks"), each of whom at the time of this transaction were officers of Trading, were guarantors of the Trading-Ono Note.
The Trading-Ono Note contains a provision which sets forth that the Reichhold Road Property is additional collateral securing its repayment. However, in September, 1991, the Reichhold Road Property was owned by Muscarella and Kendricks — not Trading. Muscarella and Kendricks signed the portion of the Trading-Ono Note describing and granting the lien and security interest solely in each's respective capacity as an officer of Trading, the borrower, and not as the owners of the Reichhold Road Property. Also, the First Ono Mortgage does not transfer any interest in or to, nor create any lien against or security interest in the Reichhold Road Property. There has been no evidence tendered of any properly executed and recorded mortgage, deed of trust, or other security granting device giving Regions Bank either legal title to or a valid, perfected lien or security interest in the Reichhold Road Property to directly secure repayment of the Trading-Ono Note.
b. The Trustee
Just how the Trustee acquired his asserted lien position against the Ono Island Property has a serpentine origin. A second mortgage against the Ono Island Property was granted by Trading to First Phoenix Capital, Inc., now known as First Alabama Capital, Inc. (hereinafter FAC), on December 13, 1993, (Second Ono Mortgage) to secure repayment of a promissory note payable to FAC in the original principal sum of seventy-five thousand dollars ($75,000) ("Trading-Trustee-Ono Note").2 On or about October, 1995, as a part of a settlement entered into in the civil action captioned Dionne v. Muscarella et. al., CV-95-AR-0329-W, then pending in the United States District Court for the Northern District of Alabama ("District Court Settlement"), FAC assigned to the Trustee its interest in the Trading-Trustee-Ono Note along with the Second Ono Mortgage.
On June 14, 1996, following Trading's default under the Trading-Ono Note, Regions Bank held a nonjudicial foreclosure sale on the Ono Island Property. This property sold for approximately two hundred ten thousand dollars ($210,000). The sale proceeds were sufficient to pay in full the Trading-Ono Note which satisfied this Regions Bank obligation and left excess proceeds of fifty-five thousand seven hundred sixty-eight dollars and seventy-six cents ($55,768.76). Unfortunately, the excess proceeds are not enough to pay in full what the Trustee claims is due under the Trading-Trustee-Ono Note. As of May 29, 1997, the Trustee contends it had an unpaid balance including interest of eighty-seven thousand four hundred ninety-three dollars and forty-two cents. ($87,493.42).
Sometime after conclusion of the sale of the Ono Island Property, the Trustee made what may be characterized as some sort of a written demand for marshaling. This occurred no earlier than thirteen days after the foreclosure sale of the Ono Island Property, June 27, 1996. Before the sale of the Ono Island Property, the Trustee alleges that a marshaling related arrangement had been made between the Trustee and Regions Bank to place any residual proceeds above those necessary for payment of foreclosure expenses and the Trading-Ono Note in a certificate of deposit or other account pending the sale of the Reichhold Road Property. Apparently, there is no...
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