Rock Hill Nat. Bank v. Honeycutt

• Citation: 344 S.E.2d 875,289 S.C. 98
• Decision Date: 26 March 1986
• Docket Number: No. 0719,0719
• Court: South Carolina Court of Appeals
• Parties: ROCK HILL NATIONAL BANK, Respondent, v. James L. HONEYCUTT, James L. Honeycutt as Executor for the Estate of Sue D. Honeycutt, deceased, and Home Federal Savings & Loan Association, Defendants, of whom James L. Honeycutt, James L. Honeycutt as Executor for the Estate of Sue D. Honeycutt, deceased are Appellants. . Heard

Page 875

344 S.E.2d 875

289 S.C. 98

ROCK HILL NATIONAL BANK, Respondent, v. James L. HONEYCUTT, James L. Honeycutt as Executor for the

Estate of Sue D. Honeycutt, deceased, and Home

Federal Savings & Loan Association, Defendants,

of whom James L. Honeycutt, James L. Honeycutt as Executor

for the Estate of Sue D. Honeycutt, deceased are Appellants.

No. 0719.

Court of Appeals of South Carolina.

Heard March 26, 1986.

Decided May 19, 1986.

Bean & Bean, Spartanburg, for appellants.

Spencer & Spencer, Rock Hill, for respondent.

CURETON, Judge:

James L. Honeycutt, individually and as executor of his wife's, Sue D. Honeycutt, estate (Honeycutts), is the surviving guarantor of a note executed by the Honeycutts' wholly owned corporation and secured by real estate personally owned by the Honeycutts. The trial judge rendered a foreclosure decree against the Honeycutts' property after the corporation's debts had been discharged in bankruptcy. The Honeycutts appeal. We affirm.

The Honeycutts were sole shareholders of Mac-Fab, Inc. In 1976 Mac-Fab borrowed Seventy-eight Thousand, Four Hundred Thirty-three Dollars and Seventy-five Cents ($78,433.75) from Rock Hill National Bank. The Honeycutts personally guaranteed the note and secured it with a second mortgage on their personal properties, including their home. The note was renewed in 1977 for Sixty-three Thousand, Four Hundred Eighty-three Dollars and Nine Cents ($63,483.09) with the guarantee from the first note being extended to the renewed note. Mac-Fab also owed the bank a substantial additional indebtedness that was partially secured.

In October 1977 Mac-Fab filed for bankruptcy under provisions of Chapter Eleven of the Bankruptcy Act. ¹ At that time the sums owed by Mac-Fab to the bank exceeded the collateral pledged by Mac-Fab for the debt and thus the bank filed its claim in bankruptcy partly as a secured claim and partly as an unsecured claim. The Bankruptcy Court ruled that the portion of the indebtedness not satisfied by collateral owned by the corporation was unsecured although the amount was also secured by the guarantee and mortgage executed by the Honeycutts to the bank.

In the bankruptcy proceeding, Honeycutt presented a "plan of arrangement" for Mac-Fab. He proposed to sell the corporation to a buyer he had located. According to Honeycutt, a majority of the corporation's unsecured ² creditors approved the plan until the bank cast its vote against the plan. The bank's negative vote forced Mac-Fab into involuntary liquidation under Chapter Seven of the Bankruptcy Act. Upon liquidation, the bank received only Twenty-two Thousand, Two Hundred Thirty-two Dollars ($22,232.00) leaving Forty- one Thousand, Two Hundred Fifty Dollars ($41,250.00) of the renewal note unsatisfied. This foreclosure action is aimed at collecting the unsatisfied balance. After a reference, the trial court ordered foreclosure. Honeycutt appeals individually and as executor of his wife's estate.

In this appeal Honeycutt claims: (1) that by participating in the corporation's bankruptcy proceedings as an unsecured creditor, the bank waived its right to subject the security pledged by the Honeycutts to payment of its debt; (2) that the bank does not come into court with clean hands; and (3) that the bank created the situation it now finds itself in because if it had voted for the plan of reorganization all debts of the corporation would have been paid in full. We deal with these contentions seriatim.

The Honeycutts' primary contention is that because the bank participated in the Chapter XI arrangement, it is precluded from asserting its claim against them as guarantors for the unpaid balance due on the renewal note. Their argument is that by electing to participate as an unsecured creditor the bank effectively waived the security afforded by the Honeycutts' mortgage. They further argue that the bank was required to have exhausted its "security" before proceeding in bankruptcy as an unsecured creditor so as to make more funds available for all unsecured creditors. Because we think the trial judge's order correctly treated this argument, we print the pertinent portion of his order with our modifications as the opinion of this court.

As to the first contention, the cases reveal that a creditor does not lose his guaranty claim by filing a claim against the principal debtor or accepting a discharge payment from the bankrupt estate. Eads Hide & Wool Co. v. Merrill, 252 F.2d 80 (10th Cir.1958). In Union Carbide Corp. v. Newboles, 686 F.2d 593 (7th Cir.1982), Union Carbide attempted to collect the balance owed on a corporate note of a bankrupt debtor corporation from the guarantors of that note. The guarantors argued that Union Carbide's approval of the plan or arrangement and acceptance of a discharge payment from the bankrupt estate released them from any liability under the contract of guaranty. In response to this argument, the court stated:

Section 16 makes clear that the discharge of New-Kro (the debtor) had no effect on the liability of Mr. and Mrs. Newboles on the note, and indeed we have held that the bankruptcy court has no power to discharge the liabilities of a bankrupt's guarantor [citations omitted] We hold that a creditor's approval of the bankruptcy plan does not discharge the bankrupt's guarantors either. 686 F.2d at 595.

In R.I.D.C. Industrial Development Fund v. Snyder, 539 F.2d 487 (5th Cir.1976), it was held that a creditor's voluntary participation in a Chapter XI arrangement had no effect on the responsibility of the debtor's guarantors to pay the unsatisfied portion of the guaranteed debts that remain after the arrangement has been completed. Hence, mere submission of a proof of claim and voting against a plan of arrangement does not estop [the bank] from suing the Honeycutts on their guaranty.

Moreover, secured or unsecured status in a bankruptcy refers to whether or not the creditor has an interest in property of the bankrupt estate. A creditor's interest in the property of a third party does not make such creditor secured within the bankruptcy because the trustee has no right to sell or transfer property which does not belong to the bankrupt estate. As the court indicated in Matter of Bowers, 16 B.R. 298 (Bkrtcy.D.Conn.1981), the old Act defined the word "secured" in this manner:

Under the comparable provisions of the Bankruptcy Act of 1898 where the petitioning creditors had to have claims "amounting in the aggregate of $500.00 in excess of the value of any securities held by them", the courts uniformly held that a creditor holding a security that is not the property of the debtor is not a secured creditor. 16 B.R. at 303.

The proof of claim filed by [respondent] within the bankruptcy [proceeding] included loans other than the one at issue here. Some of the other loans were secured by property of the bankrupt estate. The Trustee disposed of that property in favor of [respondent]. Since the value of that property did not satisfy the entire claim of [Respondent] against Mac-Fab, Inc., the unsatisfied balance was treated as unsecured by the Bankruptcy Court. This treatment by the Court was in accordance with bankruptcy law, which classifies that portion of a claim in excess of the value of the collateral as unsecured. 11 U.S.C. Sec. 506 (1978); Bankruptcy Rule 306(d) (repealed effective October 1, 1979). There is no evidence that [respondent] ever represented to the Bankruptcy Court that it was foregoing its guaranty claim against the Honeycutts. The Order for Allowance of Claim signed by the Bankruptcy Court dealt only with [respondent's] claim to property of the bankrupt estate, and did not and could not determine the interest of [respondent] in the personal residence of the Honeycutts. For that reason, [we hold] that [respondent] did not waive its right to foreclose on the mortgage granted to it by [appellants] Honeycutt[s].

Since Mac-Fab, Inc. filed its petition in bankruptcy on October 18, 1977, the Bankruptcy Act governed that proceeding, not the Bankruptcy Code. 11 U.S.C. Sec. 101 et seq., (1978); R. Geoffrey Levy,...