Meadow Brook National Bank v. Recile

• Decision Date: 28 April 1969
• Docket Number: Civ. A. No. 67-341.
• Citation: 302 F. Supp. 62
• Parties: The MEADOW BROOK NATIONAL BANK v. Sam J. RECILE and Wilson P. Abraham.
• Court: U.S. District Court — Eastern District of Louisiana

302 F. Supp. 62

The MEADOW BROOK NATIONAL BANK v. Sam J. RECILE and Wilson P. Abraham.

Civ. A. No. 67-341.

United States District Court E. D. Louisiana, New Orleans Division.

April 28, 1969.

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COPYRIGHT MATERIAL OMITTED

Jerry A. Brown, D. D. Howard, Monroe & Lemann, New Orleans, La., for The Meadow Brook Nat. Bank.

James J. Morrison, New Orleans, La., for Sam J. Recile.

Moise S. Steeg, Jr., Steeg & Shushan, New Orleans, La., for Wilson P. Abraham.

HEEBE, District Judge:

This diversity suit, while appearing to be a run-of-the-mine suit on a promissory note, is steeped with intriguing and unique questions of vast importance to the lending institutions of this state. The real problem is usury, an ancient one, and the solution is unexpectedly difficult under Louisiana law. The tale, though, is a remarkably familiar one.

On April 6, 1966, Sam J. Recile and Wilson P. Abraham endorsed a negotiable promissory note in the face amount of $4,200,000, which was executed that same day by Bourbon Kings Hotel Corporation, as maker, payable to the order of The Meadow Brook National Bank (now The National Bank of North America) in 180 monthly installments of $35,154 on the first day of each month commencing on June 1, 1966, except that the final payment of the entire indebtedness, if not sooner paid, was due and payable on May 1, 1981. The face amount of the note included a 5% discount, the Bank advancing only $3,990,-000. The note provided for 8% interest on the face amount of the note from date until maturity, and 8% interest on all matured but unpaid sums. The note contained a typical acceleration clause and fixed attorneys' fees at 10% in the event resort to attorneys for collection was necessary. A first mortgage on the Bourbon Orleans Hotel in New Orleans secured the note.

The maker was surprisingly quick to default, failing to make the second payment on July 1, 1966. Motivated by its own selfish interests, the second mortgagee intervened and made certain payments on the first mortgage to stave off the Bank's threatened foreclosure. This burden, obviously onerous, soon broke the second mortgagee's spirit, and the monthly installment due on December 1, 1966, was never paid nor were any monthly installments paid thereafter. The plaintiff Bank, payee and holder of the note, then exercised its option under the acceleration clause and demanded payment of the entire indebtedness. Meadow Brook National Bank then instituted this suit seeking to recover against the endorsers on the note, Recile and Abraham.¹ Subsequently, Recile was adjudicated a bankrupt by a judgment of January 12, 1968, in proceedings before this Court under Chapter XII of the Bankruptcy Act entitled "In the Matter of Sam James Recile, Debtor, In Proceedings for a Real Property Arrangement," and numbered Bankruptcy No. 67-702. A myriad of legal issues emerged from these simple facts.

A. Stay of Suit as to Recile

On the morning of the trial, a motion was filed on behalf of defendant Recile suggesting that he was an improper party defendant and requesting that the suit be stayed as to him because he had been adjudged a bankrupt and the bankruptcy proceedings were still pending. We took the motion under advisement and proceeded with the trial. We now deny the motion.

Section 11(b) of the Bankruptcy Act, 11 U.S.C. § 29(b), provides:

"The court may order the receiver or trustee to enter his appearance and defend any pending suit against the bankrupt."

The defendant Recile requests us to substitute the bankruptcy trustee as defendant in this suit. We have no power to do so. The "court" referred to in § 11(b) is the bankruptcy court which has the exclusive power to order the trustee to defend a suit such as this. Rhodes v. Elliston, 29 F.2d 737 (5th Cir. 1928). This is implicit in the whole tenor of Collier's discussion of this provision. 1 Collier on Bankruptcy ¶ 11.09 (14th ed.). We are simply without authority to order the trustee to defend this suit. He is subject only to the authority of the bankruptcy court. This aspect of the motion, therefore, should have been directed to the bankruptcy court. If the trustee himself had filed a motion to intervene in this suit, we, of course, would then have power to grant the motion, provided he had approval of the bankruptcy court. But the trustee did not file such a motion, and Recile is the proper defendant.

The aspect of the motion requesting a stay is governed by § 11 (a) of the Bankruptcy Act, 11 U.S.C. § 29 (a), which provides in pertinent part:

"A suit which is founded upon a claim from which a discharge would be a release, and which is pending against a person at the time of the filing of a petition by or against him, shall be stayed until an adjudication or the dismissal of the petition; if such person is adjudged a bankrupt, such action may be further stayed until the question of his discharge is determined by the court after a hearing * * *."

Collier states the purpose of this section is primarily for the benefit of the bankrupt to avoid being harassed in two courts at the same time with regard to the same debt. 1 Collier on Bankruptcy ¶ 11.02 (14th ed.). Once a person is adjudged a bankrupt as Recile was, a motion for a stay is directed to the discretion of the court. 1 Collier on Bankruptcy ¶ 11.06 (14th ed.). The exercise of this discretion is governed by a consideration of the equities involved. The very lateness of the motion, coming on the day of the trial, cast the equities against the defendant Recile. The harassment, if any, certainly could not have been very great if it did not prompt Recile to file the motion sooner. The trial itself took only an hour and certainly could not have constituted harassment in itself. Moreover, since this suit was filed against Recile and Abraham, the trial had to proceed even if it were stayed against Recile. A stay would thus only necessitate a duplication of effort, time, and expense by the plaintiff and the courts when the claim against Recile was presented in the bankruptcy proceedings. By denying the stay, we avoid this needless waste under circumstances where no real harassment of which the defendant can complain exists. We are fully aware that a judgment in personam against the bankrupt is not absolutely binding upon the trustee in bankruptcy as to the validity of the claim when, as here, the trustee is not a party to the suit and has not been directed by the bankruptcy court to defend the suit. Coleman v. Alcock, 272 F.2d 618 (5th Cir. 1959); Rhodes v. Elliston, 29 F.2d 737 (5th Cir. 1928); 1 Collier on Bankruptcy ¶ 11.09 (14th ed.). However, the probabilities are that the trustee in bankruptcy will accept this judgment as proof of the claim. Hence, our refusal to grant this "thirteenth hour" delaying tactic will most likely result in future economies to the plaintiff, the public, and the bankrupt's creditors.

B. Character of Defendants' Liability

The parties being unable to agree as to the character of the defendants' liability on the note, and this having a direct bearing on the other issues raised herein, we think it important to determine this question before journeying further. The defendants claim to be merely accommodation endorsers, whereas the plaintiff insists they are not accommodation endorsers but rather are liable in solido with the maker of the note. Relying on § 29 of the Negotiable Instruments Law, La.Stat.Ann. 7:29, and Gaspard v. Lachney, 92 So.2d 277 (La. App.1957), the plaintiff correctly claims that an accommodation endorser is one who merely lends his name to the instrument without receiving any consideration in return. Continuing, the plaintiff asserts that § 24 of the NIL, La. Stat.Ann. 7:24, establishes a presumption that every person whose signature appears on a note has become a party thereto for value. Therefore, the plaintiff argues, the burden is upon the defendants to establish that they did not receive any consideration and, therefore, were only accommodation endorsers. Concluding, the plaintiff argues that since the defendants produced no evidence on this issue, we must find that they are not accommodation endorsers and are therefore solidarily liable with the maker on the note. The defendants agree, as do we, that they carry the burden of establishing their status as accommodation endorsers. They request us, however, if their status as accommodation endorsers is important, to reopen the trial in order to permit them to adduce additional evidence establishing their status as accommodation endorsers.

As far as this case is concerned, it is immaterial whether the defendants are classified as accommodation endorsers or plain endorsers because, regardless of their classification, they are liable in solido² with the maker of the note. On its face, the note contains a promise to pay by the Bourbon Kings Hotel Corporation. The note does not contain a promise to pay by anyone else. The defendants signed the back of the note. By virtue of §§ 63 and 17(6) of the NIL, La.Stat.Ann. 7:63, 17(6), it is clear that the defendants are endorsers and not comakers of the note. The liability of endorsers, whether accommodation endorsers or not, is secondary; it is conditioned upon presentment for payment, dishonor, and notice of dishonor. The endorsers, however, may waive these conditions, and when they do so, they become primarily liable on the note insofar as the holder is concerned even though they are entitled to recourse against the maker if they are forced to pay the note. Atkins v. Dixie Fair, 135 La. 622, 65 So. 762 (La.1914); Central Sav. Bk. & Tr. Co. v. Oilfield Supply & S. Mat. Co., 202 La. 787, 12 So.2d 819 (La.1943); New Ulm State Bk. v. Moore, 185 So.2d 367 (La.App. 1966); Seelig v. Brusso, 121 So.2d 28 (La.App.1960). This only means that the holder of a negotiable instrument may proceed directly against an endorser who waives these conditions without first seeking recovery against the...