U.S. v. Beardslee, 75-2466

• Decision Date: 14 September 1977
• Docket Number: No. 75-2466,75-2466
• Citation: 562 F.2d 1016
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Frank J. BEARDSLEE and Frances M. Beardslee, his wife, Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1016

562 F.2d 1016

UNITED STATES of America, Plaintiff-Appellee, v. Frank J. BEARDSLEE and Frances M. Beardslee, his wife Defendants-Appellants.

No. 75-2466.

United States Court of Appeals Sixth Circuit.

Argued April 5, 1977.

Decided Sept. 14, 1977.

Robert G. C. Heaney, Tucson, Ariz., for defendants-appellants.

Frank S. Spies, U. S. Atty., Grand Rapids, Mich., William Kanter, Edwin Huddleson, III, Morton Hollander, Harland F. Leathers, Civ. Div., App. Section, Dept. of Justice, Washington, D. C., for plaintiff-appellee.

Before PHILLIPS, Chief Judge, CELEBREZZE, Circuit Judge, and GUY, ^* District Judge.

GUY, District Judge.

This is an appeal from a judgment in favor of the Small Business Administration (SBA) against guarantors of two promissory notes. The notes were executed by Beardslee Lumber Company, the principal obligor, in favor of National Bank of Hastings and were guaranteed by defendants, Frank J. and Frances M. Beardslee. Subsequent to the notes being assigned to SBA, the principal obligor filed for a Chapter XI arrangement under the Bankruptcy Act, 11 U.S.C. § 701 et seq. Following a series of complicated transactions and negotiations leading to the discharge of the principal obligor, SBA commenced this action against the defendants as guarantors of the notes for the amount that had not been paid prior to the discharge of the principal obligor.

Beardslee Lumber executed two promissory notes on October 22, 1964 and May 3, 1967 for $140,000 and $120,000 respectively. In addition to the guaranties signed by defendants, the two promissory notes were secured by mortgages on the real estate and security agreements covering machinery and equipment of Beardslee Lumber situated in Freeport, Michigan. On January 30, 1968, the National Bank of Hastings assigned to SBA the aforementioned notes and related mortgages and security agreements, including the Guaranty Agreements signed by defendants.

After the notes were in default and maturity accelerated as provided by their terms, SBA submitted to the principal obligor demand letters on February 5, 1968, demanding payment of the full amount of the notes. Payment was not forthcoming. At approximately the same time, Beardslee Lumber filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 722. ¹ SBA filed proof of secured and priority claims based upon its two promissory notes and also listed the mortgages and security agreements as security for its claims. Beardslee Lumber filed a Plan of Arrangement pursuant to Chapter XI on April 26, 1968, which was accepted by order of the Bankruptcy Court on June 3, 1968.

Subsequently, on May 1, 1969, following negotiations between Freeport Hardwood Corporation, SBA, Beardslee Lumber, and Marshall B. Kindy, Receiver in Bankruptcy for Beardslee Lumber, Beardslee Lumber filed an amendment to its Plan of Arrangement. The amendment provided that Beardslee Lumber be permitted to convey by quit-claim deeds its real property and transfer its personal property covered by the SBA mortgages and security agreements, respectively, to Freeport Hardwood. The transfer of real and personal property, however, was made subject to the mortgages, security agreements and guaranties executed in favor of SBA. The transfer agreement also provided that Freeport Hardwood shall secure from SBA a release and discharge of Beardslee Lumber from all mortgages and security agreements executed in favor of SBA; however, such release and discharge was without prejudice to any priority or unsecured claims SBA might have against Beardslee Lumber.

As a result of the aforementioned transaction, Freeport Hardwood, on September 9, 1969, executed a promissory note for $126,921.96 to the SBA. This amount was credited to the account of Beardslee Lumber as partial satisfaction of the indebtedness owed SBA. The Freeport Hardwood promissory note was secured by a real estate mortgage, security agreement on personal property and guaranties signed by officers of Freeport Hardwood similar to those executed by defendants. As part of the agreement leading to the execution of the promissory note, SBA agreed that upon the payment of the note by Freeport Hardwood, the security agreements and mortgages against Beardslee Lumber would be discharged. The amendment to the Plan of Arrangement filed by Beardslee Lumber encompassing its agreement with Freeport Hardwood was approved by the Bankruptcy Court by order signed June 9, 1969.

Chronologically, the next event that occurred was a Stipulation for Settlement of Claims of the SBA filed May 20, 1970, which was approved by the Bankruptcy Court on June 22, 1970. This stipulation involved the disbursement of settlement proceeds resulting from certain litigation pending at the time Beardslee Lumber filed its petition for arrangement. Marshall B. Kindy, as receiver for Beardslee Lumber, became a participant in that litigation as a party defendant. Settlement proceeds amounted to $25,000. Of this amount $15,000 was paid for attorneys' fees; $5,000 was turned over to the receiver; and the remaining $5,000 was given to SBA: "to settle all its claims, priority or otherwise, against the above named debtor, which have not been previously settled." The lower court concluded that this stipulation, "together with a prior stipulation entered into December 8, 1969, had the effect, upon ratification by the referee, of discharging the lumber company of any and all further obligation upon the notes in question."

On February 5, 1971, Freeport Hardwood defaulted on its promissory note executed to SBA, and, as a result, suit was commenced for foreclosure of the mortgage and security agreements securing the note and for deficiency judgment on the remaining balance. Freeport Hardwood and the guarantors of the promissory note, Fred L. and Shirley Esslair, settled that lawsuit for $90,000. Furthermore, pursuant to that settlement, SBA discharged the mortgages and security agreements against Beardslee Lumber and Freeport Hardwood. The document discharging Freeport Hardwood states that the indenture of mortgage is "FULLY PAID, SATISFIED AND DISCHARGED," whereas, a similar document relating to Beardslee Lumber states that the indenture of mortgage is "DISCHARGED."

SBA then demanded from defendants payment under their Guaranty Agreements to satisfy amounts which had not been paid as a result of the principal obligor's discharge of the $120,000 and $140,000 promissory notes. Following defendants' refusal to pay, the SBA instituted this litigation. In answer to SBA's claim of liability, appellants argued that under general principles of guaranty law the release and discharge of the principal obligor served to release and discharge their guaranty agreements. The SBA on the other hand argued that this defense was not available to defendants because of Section 16 of the Bankruptcy Act, 11 U.S.C. § 34, which provides that "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." Upon the filing of a Motion for Summary Judgment by SBA, the parties stipulated that the case be submitted for decision on the merits under the motion on the basis of the briefs filed and arguments made by the parties and the other records and exhibits then before the court.

The trial court, in concluding that the defendants were liable under the Guaranty Agreements, rejected the arguments advanced by both parties and supported its decision on the following basis The more serious question is whether the language of the guaranty waives the defense of a complete release of the principal debtor by the creditor or holder. In the court's opinion it does.

Thus, the lower court held that the language of the Guaranty Agreement, irrespective of the general rules of guaranty law, precluded the appellants' defense of discharge of the principal debtor on an action on the Guaranty Agreement. The court left the issue of damages for further hearing or stipulation by the parties.

On the issue of damages, a stipulation was filed by the parties in which it was agreed that the SBA statement of account for the two promissory notes received from Beardslee Lumber accurately reflected as of a certain date the payments received on such notes. The stipulation further noted that no separate account had ever been carried by the SBA for the defendants. The defendants reserved their right to appeal from the lower court ruling.

After entry of judgment, defendants appealed the adverse ruling of the lower court claiming three points of error: 1) The Guaranty Agreements involved herein, SBA Form 148, do not waive the defense of the discharge of the principal debtor; 2) SBA did not sufficiently prove its damages against appellants, but only established proof of SBA accounts as to Beardslee Lumber, and 3) the lower court was precluded from resting its decision on waiver because neither party raised this issue before the court in their arguments or pleadings. Plaintiff responded by claiming that the lower court's decision was correct and that the Guaranty Agreement defendants had signed waived any defense otherwise available relative to the discharge of the principal obligor. In addition, plaintiff strenuously reiterates the argument raised in and rejected by the lower court that Section 16 of the Bankruptcy Act precludes defendants from raising the discharge of the principal obligor as a defense to this action.

The lower court relied heavily on paragraph two of the Guaranty Agreements in finding that the defendants had waived their defense of discharge of the principal obligor:

The undersigned waives any notice of the incurring by the Debtor at any time of any of the Liabilities, and waives any and all presentment, demand, protest or notice of dishonor, nonpayment, or other default with respect to any of the liabilities and any obligation of any party at any time...