Wetzler v. Cantor, Civil No. B-96-411
| Citation | 202 BR 573 |
| Decision Date | 15 November 1996 |
| Docket Number | Bankruptcy No. 94-5-5595.,Civil No. B-96-411 |
| Parties | Robert Arthur WETZLER v. Eddie CANTOR. |
| Court | U.S. District Court — District of Maine |
Ronald Jay Drescher, Gebhardt and Smith, Towson, MD, for appellant Robert Arthur Wetzler.
Ann Ramsey Bergan, Michael L. Jennings, Baltimore, MD, Robert L. Hodges, McGuire, Woods, Battle & Boothe, LLP, Richmond, VA, for appellee Eddie Cantor.
Presently pending before the Court is an Appeal from the United States Bankruptcy Court for the District of Maryland. Appellant Robert Arthur Wetzler ("Wetzler"), the Debtor, appeals from an order of the bankruptcy court dated January 11, 1996, which allowed a joint claim against him and his wife Joyce T. Wetzler ("Ms. Wetzler") for contribution in the amount of $125,000, and sustained an objection to his separate classification of this claim as several only. On January 19, 1996, Wetzler timely filed a Notice of Appeal. This Court has appellate jurisdiction pursuant to 28 U.S.C. § 158(a) and Rule 8001 of the Federal Rules of Bankruptcy Procedure.
This appeal arises from a dispute as to whether an equitable subrogation claim brought by appellee Eddie Cantor ("Cantor") against Wetzler and his wife, as guarantors, may reach property held by the Wetzlers as tenants by the entirety. In 1986, the Wetzlers obtained an eleven percent interest in First Stafford Development Corporation ("First Stafford"), a Virginia corporation that was in the business of owning and developing a parcel of real property in Stafford County, Virginia (the "Virginia Property"). First Stafford had several other shareholders, among whom was Cantor, who held the largest percentage interest in the company.
First Stafford eventually sold the Virginia Property to Balbir Brar Associates for $1,650,000. The purchase price was paid partially in cash and partially through Balbir Brar's promissory notes to First Stafford in the aggregate amount of $1,000,000 (collectively, the "Note"). The Note was secured by a purchase money deed of trust on the Virginia Property.
Subsequently, First Stafford borrowed $975,000 from Heritage Federal Savings bank ("Heritage"). This loan was secured by the Note and the deed of trust on the Virginia Property. The proceeds of this loan were distributed to the shareholders of First Stafford. Heritage also obtained the guarantees of the shareholders of First Stafford and of each spouse who was not a shareholder, pursuant to an unconditional written guaranty ("the Guaranty"). The Guaranty provides, in part, as follows:
(emphasis added).
Eventually, the Resolution Trust Corporation ("RTC") took control of the assets of Heritage, including all of Heritage's rights against the guarantors. When Balbir Brar defaulted on the Note, the RTC sought recovery from the guarantors. In the course of that litigation, Cantor negotiated a settlement with the RTC which required that he pay $500,000 to the RTC in exchange for the RTC's grant of a full release to all guarantors. The settlement agreement was signed by all guarantors.
Cantor next sought contribution from the other guarantors for the RTC payment. Wetzler and his wife refused to contribute, prompting Cantor to bring suit against them in the United States District Court for the Eastern District of Virginia. In that suit, Cantor demanded that each Wetzler separately reimburse him for a pro rata, one eighth share of the RTC payment.1 On August 30, 1994, before the District Court could resolve this dispute, Wetzler and his spouse filed individual bankruptcy petitions. Wetzler filed this case under Chapter 11, while Ms. Wetzler filed a petition under Chapter 7.
On October 14, 1994, Cantor filed a proof of claim for $154,250 in Wetzler's bankruptcy proceeding. Following a September 12, 1995, hearing, the bankruptcy court issued a Memorandum Opinion and Order in which it allowed Cantor's joint claim against the Wetzlers in the amount of $125,000. The court also sustained Cantor's objection to Wetzler's separate classification of the joint claim.
The standard of appellate review of a bankruptcy court's factual determinations is set forth in Rule 8013 of the Federal Rules of Bankruptcy Procedure. This Rule provides that the district court shall set aside only findings of fact that are clearly erroneous. See also Williamson v. Fireman's Fund Ins. Co., 828 F.2d 249, 251 (4th Cir.1987). The conclusions of law of the bankruptcy court are reviewed de novo. See, e.g., In re Bryson Properties, XVIII, 961 F.2d 496, 499 (4th Cir.), cert. denied, 506 U.S. 866, 113 S.Ct. 191, 121 L.Ed.2d 134 (1992); In re Patch, 24 B.R. 563, 565 (D.Md.1982).
"The right of subrogation is an equitable doctrine, designed to perform substantial justice." Western Cas. and Sur. Co. v. Brooks, 362 F.2d 486, 490 (4th Cir.1966). This doctrine establishes "the right of `a surety who pays the debt of another * * * to assert all the rights of the person he paid to enforce his right to be reimbursed.'" Id. (quoting Pearlman v. Reliance Ins. Co., 371 U.S. 132, 137, 83 S.Ct. 232, 235, 9 L.Ed.2d 190 (1962)).
Wetzler's chief contention is that the bankruptcy court erred when it allowed Cantor a joint claim against him and his wife. The parties do not dispute the right of Heritage to seek a joint judgment against the Wetzlers, as the Wetzlers signed the Guaranty as husband and wife and as the Guaranty explicitly provides for "joint and several" liability.
Under the doctrine of equitable subrogation, Cantor, upon settling with the RTC, became subrogated to all the rights the RTC acquired from Heritage. Such subrogation would appear to entitle Cantor to a joint judgment against the Wetzlers. Wetzler maintains, however, that Cantor is limited to several claims against him and his wife under the limitation on recovery provision of Restatement of Security, § 141(d) ("section 141(d)"). The Court does not find merit in this argument.
Section 141(d) provides as follows:
(emphasis added). Courts have held that, as between co-guarantors, this provision limits the liability of each co-guarantor to his or her pro rata share of the total obligation. Weitz v. Marram, 34 Md.App. 115, 121-22, 366 A.2d 86 (1976); Mansfield v. McReary, 263 Or. 41, 497 P.2d 654, 656 (1972) (). The purpose of this provision is to foster judicial economy by eliminating the potential for a multiplicity of suits. Mansfield, 497 P.2d at 656.
While these cases certainly establish that the Wetzlers should not be liable for more than their joint pro rata share as a couple, they do not suggest that the joint liability created by the Wetzlers when they guaranteed the contract as "husband and wife" must be converted to several liability by Cantor's settlement of the RTC's claim. Thus, in finding joint liability, the bankruptcy court did not, as Wetzler suggests, disregard "well-settled" principles of equitable subrogation.
Indeed, equitable subrogation compels the "ultimate payment of a debt by one who in justice, equity, and good conscience ought to pay it." Liberty Mutual Ins. Co. v. Borsari Tank Corp., 248 F.2d 277, 289 (2d Cir.1957) (quoting Pittsburgh-Westmoreland Coal Co. v. Kerr, 220 N.Y. 137, 115 N.E. 465, 467 (1917)). In the present case, equitable principles support a finding of joint liability. A finding of several liability could be interpreted as preventing Cantor from reaching property held by the Wetzlers as tenants by the entireties. This result would be inequitable because the entireties property was certainly within the grasp of the RTC, Cantor's predecessor. A finding of several liability would also frustrate the plain language of the Guaranty and would fail to put Cantor into the shoes of the RTC, as required by the doctrine of equitable subrogation. Further, a finding of several liability would constitute an unjustifiable windfall for Wetzler, who had already improved his position substantially by Cantor's settlement of the RTC's claims, because it eliminated Wetzler's liability for the entire obligation.
In addition, under the facts of this case, section 141(d) does not weigh in favor of several liability among the Wetzlers. Cantor will likely satisfy his claim from property held by the Wetzlers as tenants by the entirety. Thus, a determination that the Wetzlers are jointly liable would not lead to a multiplicity of suits, and consequently does not implicate the judicial economy concerns of section 141(d). Accordingly, the Court agrees with the bankruptcy court that section 141(d) does not prevent Cantor from pursuing a joint claim against the Wetzlers.
Wetzler next maintains that the Court committed reversible error by failing to decide certain issues raised by...
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