LaRoche, In re

• Decision Date: 17 July 1992
• Docket Number: No. 91-1989,91-1989
• Citation: 969 F.2d 1299
• Parties: , Bankr. L. Rep. P 74,772, 18 UCC Rep.Serv.2d 329 In re David F. LaROCHE. David F. LaROCHE, Appellant, v. AMOSKEAG BANK, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 1299

969 F.2d 1299

23 Bankr.Ct.Dec. 334, Bankr. L. Rep. P 74,772,

18 UCC Rep.Serv.2d 329

In re David F. LaROCHE.

David F. LaROCHE, Appellant, v. AMOSKEAG BANK, Appellee.

No. 91-1989.

United States Court of Appeals, First Circuit.

Argued Feb. 3, 1992.

Decided July 17, 1992.

Mal A. Salvadore with whom Sondler, Salvadore & Dicristofaro, Providence, R.I., was on brief, for appellant.

Gordon P. Cleary with whom Vetter & White, Providence, R.I., was on brief, for appellee.

Before CYR, Circuit Judge, and COFFIN and CAMPBELL, Senior Circuit Judges.

CYR, Circuit Judge.

David F. LaRoche appeals the order for relief entered against him in an involuntary chapter 11 case commenced by the filing of a creditors' petition by Dartmouth Bank ("Dartmouth"), Amoskeag Bank ("Amoskeag"), and Connecticut National Bank d/b/a Shawmut Bank ("Shawmut"). See Bankruptcy Code § 303(b)(1), 11 U.S.C. § 303(b)(1). At the bankruptcy court hearing on the merits of the contested petition, Suffield Bank ("Suffield") was permitted to join the creditors' petition, and the order for relief was granted. The district court affirmed. ¹

DISCUSSION

LaRoche advances three claims. First, he asserts that the creditors' petition was defective because one of the three petitioning creditors, Amoskeag, acted in "bad faith," thereby tainting the petition beyond cure by Suffield's subsequent joinder pursuant to Bankruptcy Code § 303(c), 11 U.S.C. § 303(c). See infra note 2. Second, LaRoche challenges Shawmut's status as a petitioning creditor under Bankruptcy Code § 303(b)(1), on the grounds that the creditors' petition was not signed by its attorney and Shawmut did not appear at the hearing on the contested petition. Third, LaRoche claims that Suffield's joinder in the contested creditors' petition on the day of the hearing resulted in unfair surprise and prejudice.

On intermediate appeal to a district court, a final order of the bankruptcy court is subject to the same familiar standards of review normally employed in direct appeals to the courts of appeals in civil cases generally. The district court accepts all bankruptcy court findings of fact unless "clearly erroneous," Fed.R.Bankr.P. 8013, but reviews rulings of law de novo. Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1543 (10th Cir.1988). The court of appeals then undertakes an independent review of the bankruptcy court order, utilizing the same appellate standards governing the district court review. In re G.S.F. Corp., 938 F.2d 1467, 1474 (1st Cir.1991) (in an appeal from the decision of a district court on intermediate appeal from the bankruptcy court, the court of appeals "independently reviews the bankruptcy court's decision, applying the clearly erroneous standard to findings of fact and de novo review to conclusions of law"). Where the district court findings conflict with those of the bankruptcy court, "it is the bankruptcy court's findings of fact that receive clearly erroneous review, not the contrary findings of the district court."). Id.

A. Code Section 303(b)(1) and the Existence of a Bona Fide Dispute

LaRoche contends that Amoskeag either knew or should have known when it joined the creditors' petition that its claim against LaRoche was the subject of a bona fide dispute under New Hampshire law; and, therefore, "bad faith" tainted the creditors' petition, precluding effective joinder by Suffield pursuant to 11 U.S.C. § 303(c). See, e.g., Myron M. Navison Shoe Co. v. Lane Shoe Co., 36 F.2d 454, 459 (1st Cir.1929) (creditor's knowing and fraudulent attempt to confer jurisdiction on bankruptcy court where none exists merits dismissal of involuntary petition) (Bankruptcy Act case). ²

On December 7, 1989, Laroche borrowed approximately $3 million from Amoskeag, secured by a pledge of 208,250 shares of common stock and by his promise to pledge an additional 5,000 shares by March 8, 1990. The pledge provided, in pertinent part:

The Bank [Amoskeag] may, at its option without notice (i) transfer into its name or the name of its nominees all or any part of the collateral, including stock, bonds, and other securities, (ii) demand sue for, collect and receive all interest, dividends, including liquidated dividends, and other proceeds thereof, and hold the same as security for payment of the obligations or, if cash proceeds, apply the same in payment thereof, (iii) notify any person obligated on any of the collateral of the Bank's security interest therein and request that such person make payment directly to the Bank or (iv) demand, sue for, collect or make any settlement or compromise the Bank deems desirable with respect to any of the collateral.

....

Upon any event of default hereunder ... without any demand or notice, except as may be required by applicable law, the Bank may sell or otherwise dispose of any and all of the Collateral and may exercise any and all rights and remedies accorded by law, all as the [sic] Article 9 of The New Hampshire Uniform Commercial Code ... may determine. (Emphasis added).

On or about March 29, 1990, Amoskeag provided LaRoche with written notice of default for failing to (1) make timely interest payments, (2) pledge the additional 5,000 shares by March 8, and (3) direct dividend payments to Amoskeag. The notice of default invoked the acceleration provisions in the loan agreements and concluded:

We further give notice to you that we intend to protect and to enforce our rights and remedies in respect of our collateral in which we were granted a security interest by you pursuant to the Security Documents. Such actions shall in no event constitute a waiver or other impairment of any of our other rights or remedies which we have under or in respect of the Notes, the Security Documents or in respect of our collateral, or arising by applicable law or otherwise, all of such rights and remedies being cumulative and not exclusive. (Emphasis added).

On May 3, 1990, Amoskeag caused the pledged shares to be transferred into its own name on the books of the issuing corporation. Shortly thereafter, Amoskeag informed LaRoche that it intended to sell the pledged shares. On June 22, 1990, LaRoche's attorney sent a letter to Amoskeag warning that the pledged shares, "owned by Mr. LaRoche, in his own name or beneficially," were "restricted" securities, and could not be resold absent strict compliance with the SEC rules and regulations prescribed pursuant to the Securities Act of 1933. See 17 C.F.R. § 230.144 (1991). ³ Trading in the shares of the issuing corporation was halted on July 6, 1990.

Unable to sell the pledged shares, Amoskeag commenced an action in the United States District Court for the District of New Hampshire to recover its loan indebtedness. LaRoche raised the defense of payment, arguing that Amoskeag's reregistration of the pledged shares, which allegedly "exceeded its rights under the Collateral Pledge Agreement," constituted a proposal to accept and retain the collateral in full satisfaction of the indebtedness pursuant to Article 9 of the New Hampshire Uniform Commercial Code. ⁴

Article 9 of the Uniform Commercial Code (U.C.C.) permits a secured creditor to elect among several alternative remedies in the event of a default by the debtor. Under the "disposition" option in U.C.C. § 9-504, the secured creditor "may sell, lease or otherwise dispose of any or all of the collateral," as long as it does so in a "commercially reasonable manner." If the proceeds from any such disposition of the collateral are less than the amount due on the secured indebtedness, the secured creditor may attempt to recover the deficiency. See, e.g., Lamp Fair, Inc. v. Perez-Ortiz, 888 F.2d 173, 176-78 (1st Cir.1989); see generally 2 James J. White & Robert S. Summers, Uniform Commercial Code § 27-8, at 588 (3d ed. 1988).

On the other hand, the "retention" or "strict foreclosure" option available under U.C.C. § 9-505(2), relied on by LaRoche, permits the secured creditor to notify the debtor that it intends to retain the collateral in complete satisfaction of the indebtedness. Unless the debtor objects, the secured creditor thereby "forecloses" on its collateral and "waives" any deficiency claim against the debtor. Thereafter, the secured creditor bears the risk of any diminution in the value of the collateral. See Lamp Fair, 888 F.2d at 176.

U.C.C. § 9-505(2) expressly applies only if the debtor is served with written notice of the secured creditor's proposal to pursue the "strict foreclosure" remedy. LaRoche concedes that Amoskeag provided no such notice. See, e.g., Warnaco, Inc. v. Farkas, 872 F.2d 539, 544-45 (2d Cir.1989) (no strict foreclosure absent written notice by creditor; burden rests on debtor to demand express election). LaRoche contends, nonetheless, that the New Hampshire courts may yet adopt an alternative interpretation of U.C.C. § 9-505(2), which might save the day. Under the "implied election" theory, the absence of written notice of election by the secured creditor would not bar the debtor's recourse to U.C.C. § 9-505(2) as a defense to payment of the debt if the secured creditor (1) failed to dispose of the collateral within a "reasonable" time after default (e.g., pursuant to an election under § 9-504), or (2) engaged in other conduct (e.g., interim use of collateral) that indicates an intent to retain the collateral and waive any deficiency. See, e.g., In re Boyd, 73 B.R. 122, 124-25 (N.D.Tex.1987) (bank's actual use of repossessed boat for three-month period constituted implied election under § 9-505). LaRoche argues that Amoskeag's reregistration of the pledged securities in its own name could constitute conduct indicating an intent to retain the securities and waive any deficiency--and so, an implied election under the New Hampshire Uniform Commercial Code. Amoskeag's actual or constructive knowledge of this bona fide defense to payment, LaRoche argues, was enough to have precluded any finding that Amoskeag joined the creditors'...