RIDC Industrial Development Fund v. Snyder, 72-45-Civ-Oc.

• Decision Date: 09 January 1975
• Docket Number: No. 72-45-Civ-Oc.,72-45-Civ-Oc.
• Citation: RIDC Industrial Development Fund v. Snyder, 387 F. Supp. 466 (M.D. Fla. 1975)
• Parties: R.I.D.C. INDUSTRIAL DEVELOPMENT FUND, Plaintiff, v. P. L. SNYDER, Defendant.
• Court: U.S. District Court — Middle District of Florida

387 F. Supp. 466

R.I.D.C. INDUSTRIAL DEVELOPMENT FUND, Plaintiff, v. P. L. SNYDER, Defendant.

No. 72-45-Civ-Oc.

United States District Court, M. D. Florida, Ocala Division.

January 9, 1975.

COPYRIGHT MATERIAL OMITTED

Frank D. Newman, DeLand, Fla., for plaintiff.

Robert E. Austin, Jr., Leesburg, Fla., for defendant.

ORDER AND OPINION

CHARLES R. SCOTT, District Judge.

This is a suit based on certain promissory notes executed by the primary obligor, Sunnyhill Research & Manufacturing Company (hereinafter referred to as SMAC or Sunnyhill, its successor in interest and now a bankrupt), in favor of the plaintiff and guaranteed by the defendant P. L. Snyder, a principal in SMAC. Involved in this case is the question of the effect of a plan of arrangement under Chapter XI of the Bankruptcy Act on a secured creditor which attempted to voluntarily submit itself to the jurisdiction of the bankruptcy court. This Court concludes that the plaintiff is barred as a matter of law from proceeding against the defendant on the notes in question.

I. FACTUAL BACKGROUND

Plaintiff R.I.D.C. Industrial Development Fund and SMAC's predecessor in interest, Sunnyhill Research & Manufacturing Company, entered into two credit agreements, one dated August 24, 1964, and the other dated April 11, 1966, pursuant to which the two subject promissory notes of $335,000.00 and $100,000.00, respectively, were executed by Sunnyhill in favor of the plaintiff. These credit agreements provided:

4. To induce the lenders to enter into this agreement and as a condition precedent to its rights to borrow hereunder, Company has:

(a) executed and delivered a chattel mortgage to R.I.D.C. Fund covering all its present equipment with an after acquired property clause to cover any equipment which it may acquire in the future and constituting, or to constitute, as the case may be, a first lien thereon for the purpose of securing the R.I.D.C. Fund loan;

By virtue thereof, plaintiff became a secured creditor of SMAC. In addition, the defendant P. L. Snyder, along with his now deceased brother C. H. Snyder, in accordance with the provisions of the credit agreements, executed two guaranty agreements, dated, respectively, August 24, 1964, and November 9, 1966. These guaranty agreements provided in pertinent part as follows:

Guarantors, their heirs and assigns, jointly and severally, do hereby absolutely and unconditionally promise and guarantee to R.I.D.C. Fund the prompt and punctual payment of all amounts required to be paid under said Credit Agreement; and that the obligations assumed and guaranteed by Guarantors shall continue with the same force and effect until the debt is paid in full; and further that recourse may be made to Guarantors upon this Guaranty without requiring any proceedings to be taken against Borrower, and that any change or alteration in the Credit Agreement shall not discharge the obligation of Guarantors hereunder, which shall be absolute until all claims of R.I.D.C. Fund against Borrower arising out of said Credit Agreement shall have been settled and discharged in full; however, Guarantors shall not be bound hereunder by any alteration or modification of said Credit Agreement which extends the term of repayment or increases the amount due thereunder without their written approval of any such alteration or modification. (emphasis added)

On January 22, 1968, with the defendant's written consent, SRM Company entered into an acquisition agreement with Sunnyhill, the principal obligor, and purchased all of its assets. That agreement listed R.I.D.C. as a secured creditor under its schedule of "Permitted Liens." On the same date, SRM Company and Sunnyhill, also with the defendant's consent, entered into a modification of security agreement whereby the parties thereto agreed that R.I.D.C.'s security interest would continue in the machinery, equipment and tools but not as to the inventory. Sunnyhill and SRM Company also agreed that SRM Company would not assume the obligations underlying the security interest.

On January 23, 1968, plaintiff R.I.D.C. Fund and certain other creditors of Sunnyhill, with the defendant's written consent, entered into an agreement regarding payment of amounts due both secured and unsecured creditors. Plaintiff requested and secured the written consent of the defendant for its entry into the acquisition agreement, the modification of security agreement and the creditors agreement because the terms thereof were such as to materially modify the guaranty agreements and thus the guarantors' consent was necessary to prevent their release from any obligation thereunder. 74 Am.Jur.2d, Suretyship, §§ 50-51. This Creditors' Agreement provided in paragraphs 7 and 8 as follows:

7. This agreement shall terminate upon the happening of any of the following events:

(a) the payment in full of all creditors of Sunnyhill disclosed on Exhibit "A";

(b) the unanimous agreement of the parties hereto; or

(c) the valid and effective foreclosure by R.I.D.C. Fund of its security interest (or acquisition of title of the assets pursuant to said security interest) with respect to assets or inventory covered by Section 2.01 and/or Articles V and VII of the SRM Agreement. (emphasis added)

8. In the event of bankruptcy or other cessation of business of SRM, all funds held by Sunnyhill for distribution to creditors shall be promptly distributed and thereafter this agreement shall terminate. (emphasis added)

In June 1968 Sunnyhill entered into an arrangement proceeding under Chapter XI of the Bankruptcy Act, 11 U.S.C. §§ 701-799. The record does not indicate that plaintiff R.I.D.C. ever sought the defendant's written approval of R.I. D.C.'s participation in the plan of arrangement. In addition, the record is clear that the defendant never actually agreed or consented in writing to plaintiff's participation in the Chapter XI proceeding. The plan of arrangement, which was subsequently approved by the bankruptcy court on July 2, 1968, provided in pertinent part as follows:

5. Any indebtedness of unsecured creditors and the secured creditors executing the attached Consent remaining unpaid after the last of the distributions provided for herein has been made shall be cancelled, discharged and extinguished. Debtor shall so notify such creditors. (emphasis added)

6. This Arrangement upon confirmation shall supersede the provisions of the Agreement dated January 23, 1968 between the debtor, Sun Capital, R.I.D.C. and the Creditors' Committee established pursuant to a Creditors' Agreement dated January 6, 1967.

. . . . . .

Consent of Certain Secured Creditors

In consideration of the above Arrangement and intending to be legally bound hereby, the undersigned hereby consent and agree to the terms of such Arrangement, including but not limited to Section II(5), which provides for the discharge of the debts of the undersigned, and the undersigned agree that during the term of the Arrangement they will not take any action to enforce their rights as secured creditors of the debtor. If such Arrangement is not confirmed, this Consent shall be cancelled, but the undersigned may not withdraw this Consent before the Court renders a decision regarding confirmation and, if the plan is confirmed, this Consent shall thereafter be irrevocable. (emphasis added)

This consent was signed by D. R. Clifford, as executive vice-president of R.I. D.C., and C. H. Snyder, as president of Sun Capital Corporation. The net effect of the arrangement was: (1) to assign priorities to R.I.D.C. and Sun Capital, the secured creditors, and the unsecured creditors as to any sums that would be available for distribution, and (2) to extend the time of payment of the bankrupt's debts.

The plaintiff, after rendering itself unable to collect the full amount of the debt from the principal obligor, Sunnyhill, brought this action against one of the guarantors, P. L. Snyder, for $312,869.03 on the 1964 note and for the full $100,000.00 on the 1966 note, for a total of $412,869.03.

The defendant contends, under the established principles of suretyship law, that the Plan of Arrangement, which provided that "any indebtedness of . . the secured creditors was . . . cancelled, discharged and extinguished" as to the principal obligor also extinguished any liability on his part as a guarantor or surety since he did not consent to it. 74 Am.Jur.2d, Suretyship, § 98. See Dabney v. Chase National Bank of City of New York, 201 F.2d 635, 641 (2d Cir. 1953), cert. den. 346 U.S. 863, 74 S.Ct. 102, 98 L.Ed. 374; Sarasota County, Florida v. American Surety Co. of New York, 68 F.2d 543, 544 (5th Cir. 1934). Restatement of Security § 122.

The plaintiff, on the other hand, contends that Section 16 of the Bankruptcy Act, 11 U.S.C. § 34, nevertheless preserves the right of recovery against a guarantor. That section provides as follows:

The liability of a person who is a co-debtor with, or guarantor or in any manner a surety for, a bankrupt shall not be altered by the discharge of such bankrupt.

Both parties agree that this section is applicable to Chapter XI proceedings. United States v. George A. Fuller Co., 250 F.Supp. 649 (D.Mont.1966); 1 Collier, Bankruptcy, § 16.02 at 1525 (14th ed. 1964). The bankruptcy court is simply without the power to affect the underlying obligation as to the surety. United States v. George A. Fuller Co., supra, at 658.

The defendant counters with the argument that the plan of arrangement could not affect the legal rights of the plaintiff by operation of law under the Bankruptcy Act since the plaintiff participated therein as a secured creditor. Therefore, the defendant argues, the plan of arrangement, which is thus a nullity under the bankruptcy law, becomes a contractual agreement between the creditor and the principal obligor so that the well-settled general principles of suretyship law apply so as to extinguish the liability of the defendant surety.

The defendant is certainly...