S-Tek 1, LLC v. Surv-Tek, Inc. (In re S-Tek 1, LLC)

• Decision Date: 31 August 2022
• Docket Number: 20-12241-j11,Adv. Proc. 20-01074-j
• Parties: In re: S-Tek 1, LLC, Debtor. v. SURV-TEK, INC. et al., Defendants and Counterclaimants, S-Tek 1, LLC Plaintiff and Counter-Defendant, and SURV-TEK, INC. et al., Third Party Plaintiffs, v. CHRISTOPHER CASTILLO et al., Third Party Defendants.
• Court: U.S. Bankruptcy Court — District of New Mexico

In re: S-Tek 1, LLC, Debtor.

S-Tek 1, LLC Plaintiff and Counter-Defendant,
v.
SURV-TEK, INC. et al., Defendants and Counterclaimants,

and

SURV-TEK, INC. et al., Third Party Plaintiffs,
v.
CHRISTOPHER CASTILLO et al., Third Party Defendants.

No. 20-12241-j11

Adv. Proc. No. 20-01074-j

United States Bankruptcy Court, D. New Mexico

August 31, 2022

Counsel for the Guarantors Nephi Hardman Nephi D. Hardman Attorney at Law, LLC

Counsel for Surv-Tek, Inc. Christopher M. Gatton Giddens & Gatton Law, P.C.

MEMORANDUM OPINION REGARDING CLAIMS AGAINST GUARANTORS AND EMERGENCY MOTION FOR JUDGMENT AGAINST GUARANTORS

ROBERT II. JACOBVITZ UNITED STATES BANKRUPTCY JUDGE

THIS MATTER is before the Court on Surv-Tek, Inc.'s ("Surv-Tek") third-party claims against Randy Asselin, Christopher Castillo, and Kymberlee Castillo (collectively, the "Guarantors") in adversary proceeding number 20-01074-j (the "Adversary Proceeding") and Surv-Tek's Emergency Motion for Entry of Judgment Against Guarantors (the "Emergency Motion" - Doc. 147).

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FACTUAL AND PROCEDURAL HISTORY

The Court held a trial in the Adversary Proceeding on January 25 through February 7, 2022,^[1] and issued a memorandum opinion on June 13, 2022, with extensive findings of fact and conclusions of law (the "Prior Memorandum Opinion" - Doc. 132). The Court incorporates all findings of fact and conclusions of law in the Prior Memorandum Opinion into this memorandum opinion.

In connection with the Prior Memorandum Opinion, the Court entered an order, disposing of a majority of claims in the case (the "Prior Order" - Doc. 133, as corrected by Doc. 135). However, the Court reserved ruling on claims against the Guarantors for breach of the Commercial Guaranty (with respect to the Note) and Personal Guaranty (with respect to the Lease). See Doc. 133.

The Court fixed a briefing schedule for the parties to file briefs on the issue of whether the claims of Surv-Tek and STIF, LLC against the Guarantors are determined based on the allowed amounts of their claims in S-Tek 1, LLC's ("S-Tek") bankruptcy case or are determined under applicable state law without regard to any limitations on the amount of the allowed claims in the bankruptcy case. Briefing was completed on August 8, 2022. In their brief, the Guarantors argue that the language of the Commercial Guaranty, which states that the Guarantors guarantee the "Indebtedness of S-Tek 1, LLC," limits the Guarantors' liability to the portion of the Indebtedness (as defined in the Commercial Guaranty) for which S-Tek is responsible. See Doc. 138 at ¶¶ 13-16. The Guarantors argue further that since S-Tek's liability on the Indebtedness is limited by

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applicable bankruptcy law, the Guarantors' liability under the Guaranties is similarly limited.^[2] In their reply brief, the Guarantors make the additional argument that, at a minimum, the limitation of the guaranteed obligation in the Commercial Guaranty to the "Indebtedness of S-Tek 1, LLC" creates ambiguity with respect to the extent of the Guarantors' liability. See Doc. 143 at ¶¶ 12-16. The Guarantors ask the Court to admit parol evidence relevant to that issue.

Based on the Guarantors' request to present parol evidence, the Court fixed a deadline of August 29, 2022 for the Guarantors to file an offer of proof regarding what the evidence would show if the Court permitted parol evidence on the alleged ambiguity. See Doc. 146. The Guarantors timely filed their offer of proof on August 29, 2022 (the "Offer of Proof" - Doc. 148). The Offer of Proof states,

10. In signing the Commercial Guaranty, the Guarantors did not believe or understand that their liability under the Note would ever exceed S-Tek's liability under the Note

11. In signing the Commercial Guaranty, the Guarantors believed that their liability under the Note was wholly dependent on S-Tek's liability and responsibility to pay thereunder

12. If anyone had asked the Guarantors, at the time of signing the Commercial Guaranty, whether, under the Commercial Guaranty, they could ever be responsible for a charge under the Note that S-Tek itself was not responsible for, they all would have answered no.

13. Part of the reason for these understandings and beliefs was the Commercial Guaranty's statement that "each . . . Guarantor, absolutely and unconditionally guarantees full and punctual payment and satisfaction of the Indebtedness of S-TEK 1, LLC . . . ." The Guarantors viewed this as a straightforward application of the principle that their liability under the Commercial Guaranty wholly derived from S-Tek's responsibility to pay under the Note.

Offer of Proof at ¶¶ 10-13.

Meanwhile, earlier on August 29, 2022, Surv-Tek filed its Emergency Motion, asking the Court to enter final judgment against the Guarantors with a reservation by Surv-Tek of the right to

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present evidence at a later date of the amount of attorney's fees and costs to be awarded in the judgment. Surv-Tek alleged that Mr. and Mrs. Castillo had listed their home for sale and raised concerns regarding potential fraudulent transfers. See Emergency Motion at ¶¶ 7-10.

The Court held a status conference on the Emergency Motion on August 30, 2022. Counsel and parties who appeared at the status conference were noted on the record. The Court stated that it had reviewed the Offer of Proof and denied the request for parol evidence regarding the extent to the Guarantors' liability under the Commercial Guaranty. The Court further stated that, therefore, a final judgment could be rendered on the claims against the Guarantors without additional evidence, except for evidence needed prior to entry of a final judgment to determine the amount of attorney's fees and costs to be awarded. Based on the Court's statement, Surv-Tek agreed to waive its claim for attorney's fees and costs against the Guarantors.^[3] The Court therefore will enter a final judgment on Surv-Tek's claims against the Guarantors as requested in the Emergency Motion.

CONCLUSIONS OF LAW

In determining whether the Guarantors' liability under the Commercial Guaranty is limited to the amount of S-Tek's liability, there are two separate issues at play. First, the Court must determine whether bankruptcy law limits not only the Debtor's (S-Tek's) liability but also the Guarantors' liability. Second, the Court must determine whether the language of the Commercial Guaranty limits the Guarantors' liability. Both of those questions are answered

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dispositively by Tenth Circuit precedent in FB Acquisition Prop. I, LLC v. Gentry (In re Gentry), 807 F.3d 1222 (10th Cir. 2015).

(1) The Guarantors' Liability Is Not Limited by Bankruptcy Law

There are bankruptcy limitations on the amount of an allowed claim of a creditor against the debtor in a bankruptcy case. For example, in a chapter 11 case, a secured creditor is entitled to post-petition, preconfirmation interest and attorney's fees and costs provided for in a contract or under state law, as part of its allowed claim, only to the extent the value of the collateral securing the claim exceeds the...