Republic Supply Co. v. Shoaf

• Decision Date: 04 May 1987
• Docket Number: No. 86-1541,86-1541
• Citation: 815 F.2d 1046
• Parties: 16 Collier Bankr.Cas.2d 1305, Bankr. L. Rep. P 71,802 REPUBLIC SUPPLY CO., Plaintiff-Appellee, v. Joseph SHOAF, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1046

815 F.2d 1046

16 Collier Bankr.Cas.2d 1305, Bankr. L. Rep. P 71,802

REPUBLIC SUPPLY CO., Plaintiff-Appellee, v. Joseph SHOAF, Defendant-Appellant.

No. 86-1541.

United States Court of Appeals Fifth Circuit.

May 4, 1987.

Thomas J. Armstrong, Henry W. Simon, Jr., Simon, Anisman, Doby, Wilson & Skillern, Fort Worth, Tex., for defendant-appellant.

Wesley N. Harris, Kelly, Appleman, Hart & Hallman, Fort Worth, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GARWOOD, JOLLY and HILL, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

In this appeal we address the question whether a bankruptcy court's confirmation order which, beyond the statutory grant of the Code, expressly released a third-party guarantor, is to be given res judicata effect. In a previous bankruptcy action, the bankruptcy court confirmed a reorganization plan (the Plan) that released a guaranty executed by the appellant, Dr. Joseph Shoaf, in favor of the creditor, now plaintiff-appellee, Republic Supply Company (Republic). In the bankruptcy court, Republic neither objected to that provision of the Plan nor appealed its confirmation. Prior to confirmation, however, Republic had initiated this action on the guaranty against Shoaf, and after the Plan was confirmed, Shoaf raised the defense of res judicata in this suit that seeks to collect on the guaranty. The district court rejected the defense and ruled in favor of Republic, holding that the provision of the Plan that released the guaranty was without effect because the bankruptcy court expressly lacked statutory authority to release a third-party guarantor from his obligation on a bankrupt's note. Shoaf appeals the judgment of the district court.

I

In February 1980, Dr. Joseph Shoaf and Mr. Fred Mergner were principals in Command Energy Company (Command), ¹ a company engaged in the business of drilling oil wells. In that connection, Command purchased supplies from Republic Supply Company (Republic), and to secure payment for the goods, Republic required Shoaf to sign a guaranty. According to its terms, Shoaf could revoke the guaranty by written notice sent to Republic at Oklahoma City by registered mail, or by personal service on an officer of Republic.

In February 1981, Shoaf left Command following a disagreement with Mergner, and sold his interest. According to Shoaf, he and Command sent separate letters to creditors and other interested parties, announcing that Shoaf was no longer associated with Command. Shoaf testified that Dick Evans of Republic told him that Command was then current in its account, and that Shoaf should talk with Brian Bonnell, an employee, about cancelling the guaranty. Evans, however, denied that this conversation took place. Shoaf further testified corroborated by Bonnell, that he gave Bonnell a letter revoking the guaranty. Bonnell stated that he received the letter from Shoaf and forwarded it to Republic's office in Oklahoma City. Neither Republic's nor Shoaf's records reveal a copy of this letter, and its existence was implicitly discredited by the district court. After Shoaf left Command, Republic secured a guaranty from Mergner, and thus, when the case was pending before the bankruptcy court, Republic claimed two guaranties as security for Command's debt.

Soon after Shoaf's departure, the company became delinquent in its account with Republic and Republic sued Shoaf in district court on the guaranty for Command's debts which then exceeded $900,000. Shoaf answered that the guaranty had been cancelled according to its terms and that he was therefore no longer liable. In the meantime, Shoaf filed a separate suit against Command, seeking $2.5 million in damages resulting from the purchase of his interest in Command.

While those suits were pending, Command filed a petition in bankruptcy under Chapter 11 of the Bankruptcy Code. The primary concern of the creditors during negotiations in the bankruptcy proceeding was, of course, amassing funds with which to pay their claims. Apparently Command's only source of a substantial amount of money lay in its claim to proceeds of an insurance policy covering the life of Fred Mergner, the co-guarantor, who had recently died. Entitlement to the insurance proceeds, approximately $1 million, was disputed because Command had paid the premiums for the policy, but Mrs. Mergner, rather than Command, was the named beneficiary. Mrs. Mergner agreed to release to Command $850,000 of the proceeds, but in return, she insisted on a release of all liabilities resulting from Mr. Mergner's operation of Command. Because she sought release, not only from any direct liability, but also from any liability of the estate as a co-guarantor, release of all guarantors, which included Shoaf, was a condition to Mrs. Mergner's contribution of the insurance proceeds. Additionally, in further consideration for his release, Shoaf agreed to dismiss with prejudice his action against Command.

After reaching an agreement with Mrs. Mergner, Command proposed to use the $850,000 to pay forty cents on the dollar to its unsecured creditors, including Republic, with an additional ten percent to be paid at a later date. This proposal, along with the releases demanded by Mrs. Mergner, which included Shoaf's guaranty, were incorporated into paragraph 4.4 of Command's Second Amended Plan of Reorganization. At a hearing, George Dillon, Republic's representative who was also President of the Unsecured Creditors' Committee, questioned the authority of the bankruptcy court to release the guaranty of a nondebtor. He stated:

On behalf of my client, Republic Supply, we object to this language in that it attempts to abrogate rights which we have--we feel we have against former shareholders and/or officers of the company which are founded upon the writings which are not subject of this bankruptcy, but they are personal guarantees, and to that extent, we feel as though we have the opportunity and should not be precluded as a result of confirmation of this plan ... from attempting to collect the balance of our debt if any, as a result of this discharge from those individuals.

....

I really haven't seen any basis in the Code that would allow this to be done, and a disclosure statement does not attempt to show where any jurisdiction which this Court may have over our claims or the claims of others or how our claims, vis-a-vis claims of others, could be adjudicated. Simply put, we have claims against other claimants in this bankruptcy and we just don't see how those can be abrogated as a result of discharge, and to that extent, we object to all things that attempt to release those.

In response, the bankruptcy judge said:

At this point, you can put anything in your plan you want to, as long as you disclose it, if I understand Chapter 11 properly, and I think it's proper that they object to the disclosure statement in the current language because it seems to cast that language in concrete, but I want it clear that you're seeking that. It's not necessarily you're going to get that in your order of confirmation, and you can object to confirmation if you think appropriate for inclusion of such provision. I'm not commenting as to whether or not I would deny confirmation for that reason or not.

When the Plan came again before the bankruptcy judge for a hearing prior to final confirmation, neither Republic nor any other creditor filed an objection to any part of it. The bankruptcy judge then entered an order confirming the Plan expressly stating that the Plan "include[d] the release of any guarantees given to a creditor of the Debtor which guarantees arose out of the Debtor's business dealings with any creditor of the Debtor." Republic did not appeal.

When Command sent Republic its check covering the forty percent payment on its debt, the check contained an endorsement releasing, among other classes of debtors, all guarantors. Republic refused to endorse the check and moved for relief from the bankruptcy court on the grounds that the requirement that it execute a general release was not provided in the Plan. Such a provision requiring general releases in return for the payments had been included in paragraph 7 of an early plan proposed by the debtor; Republic, however, had objected to that provision and the final Plan confirmed by the bankruptcy court omitted paragraph 7 that provided for this general release. It is undisputed, however, that the approved final Plan specifically provided in a separate paragraph for the release of Shoaf's guaranty. The motion was heard by a bankruptcy judge who, basing his ruling on a subsequent agreement reached between Republic and Command, entered an order on October 17, 1983 (the October 17 order), that Command pay Republic without requiring execution of the general release as a condition to payment.

After confirmation of Command's Plan in bankruptcy, Shoaf amended his answer in this action to plead the defense of res judicata. The case was heard by the district judge who rejected Shoaf's defenses and entered judgment for Republic on the guaranty in the amount of $451,749.11, plus attorney's fees of $45,174.91. He reasoned first that the guaranty was still in effect because Shoaf had failed to revoke it in accordance with its specific notice terms. Second, he held that the Plan did not release Shoaf from his guaranty because the bankruptcy court was without authority under the Code to relieve a third party of his obligation. Thus he held finally that the Plan was not res judicata to Republic's suit on the guaranty. This appeal followed.

II

On appeal, Shoaf contends that the district court erred in the following respects: in refusing to give res judicata effect to the bankruptcy court order, in denying Shoaf's arguments that Republic is estopped to enforce the guaranty and in holding that Shoaf did not effectively cancel the guaranty. Because we hold that the...