Winters By and Through McMahon v. George Mason Bank

Decision Date23 August 1996
Docket NumberNo. 95-2635,95-2635
PartiesCatherine Norwood WINTERS, acting By and Through her attorney-in-fact, Toni Louise McMAHON, Plaintiff-Appellant, v. GEORGE MASON BANK; Robert O. Tyler, Trustee, Defendants-Appellees.
CourtU.S. Court of Appeals — Fourth Circuit

ARGUED: John Minh Tran, Greenberg, Bracken & Tran, Alexandria, Virginia, for Appellant. Michael Lee Zupan, Hazel & Thomas, P.C., Alexandria, Virginia, for Appellees. ON BRIEF: H. Bradley Evans, Jr., Hazel & Thomas, P.C., Alexandria, Virginia, for Appellees.

Before RUSSELL and MICHAEL, Circuit Judges, and NORTON, United States District Judge for the District of South Carolina, sitting by designation.

Affirmed by published opinion. Judge NORTON wrote the opinion, in which Judge RUSSELL and Judge MICHAEL joined.


NORTON, District Judge:

This case involves the validity of a bank's security interest in stocks held jointly by the Plaintiff Mrs. Winters and her daughter Mrs. McMahon, which were pledged to the bank by Mrs. McMahon and her husband for a series of loans upon which they have defaulted. Because this court finds that the bank has a valid security interest in the stocks pursuant to the 1992 pledge agreement signed by Mrs. Winters, we affirm the decision of the district court.


On March 30, 1990, Defendant George Mason Bank ("the Bank") approved a loan to Mr. and Mrs. McMahon in the form of a $200,000 secured line of credit to be used as working capital for Mr. McMahon's real estate development business. The McMahons signed a business loan agreement on April 4, 1990. (J.A. 367). As collateral, the parties executed a commercial pledge agreement in which Mrs. Winters and Mrs. McMahon granted the Bank a security interest in stocks they held as joint tenants with rights of survivorship ("the Winters stocks"), which had an aggregate market value of at least $300,000. 1 (J.A. 372).

On April 20, 1990, the Bank approved a $25,000 extension to the McMahons' line of credit. The McMahons pledged additional collateral to the Bank in the form of $70,000 worth of securities ("the McMahon stocks"), 2 as reflected in the collateral pledge agreement signed by the McMahons on May 4, 1990. Additionally, Mrs. Winters signed a second commercial pledge agreement dated May 4, 1990, which is identical to the April pledge agreement except that it secures loan # 7027168 in the amount of $225,150.00. (J.A. 467).

On October 26, 1990 the Bank and the McMahons signed a change in terms agreement in which additional McMahon stock was pledged to extend the maturity of loan # 7027168. (J.A. 395). On May 31, 1991, the Bank approved an extension of the McMahons' credit line to $295,000. This third loan was designed to combine the balance of the existing line of credit with new funds advanced to pay a $67,819.99 note due to Independent Bank of Manassas, Virginia. (J.A. 405-6). Unlike the first two notes which were for revolving lines of credit, this note was a variable rate, one-year loan, with the full principal due within 12 months and interest payable monthly. The June 5, 1991 business loan agreement for loan # 7035764 was not signed by Mrs. Winters. 3

On September 16, 1991, the McMahons signed a promissory note in the amount of $56,500. This note stated that it was secured by the Winters and McMahon stocks in accordance with the commercial pledge agreements of May 4, 1990 and October 26, 1990, and was designed to refinance the interest and fees on a previous loan which was sold to Independent Bank. (J.A. 411-12).

On January 31, 1992, the McMahons filed a joint Chapter 11 Bankruptcy Petition. (J.A. 566-67). The McMahons and the Bank entered into a stipulation on June 1, 1992 that the McMahons were indebted to the Bank for the June 1991 note in the sum of $295,000, and for the September 1991 note in the sum of $56,000. (J.A. 694-697). The stipulation further provided that both notes were secured by the Winters and McMahon stocks as reflected in the collateral pledge agreements of April 1990 and October 1990. Finally, the stipulation provided that the McMahon stocks would be sold, the proceeds reducing the indebtedness and creating an insurance reserve, and the Winters stocks would "remain pledged to the Bank as security for the repayment of the Indebtedness." (J.A. 697). The bankruptcy court entered an order approving the stipulation regarding relief from the stay and postpetition financing, and incorporating it into the order. (J.A. 692-93).

By a change in terms agreement signed by the McMahons on June 5, 1992, the McMahons' loan of $293,633.58 was extended one year and assigned the number 7035764. At that time, Mrs. Winters signed a new commercial pledge agreement in which she repledged the same Winters stocks previously covered by the April and May 1990 commercial pledge agreements as collateral for loan # 7035764.

In summary, Mrs. Winters signed a total of three commercial pledge agreements pledging as collateral her interest in the Winters stocks. On April 4, 1990, she pledged those stocks as collateral for loan # 7026706 in the amount of $200,150. (J.A. 464). On May 4, 1990, she pledged those stocks as collateral for loan # 7027168, which increased the McMahons' loan to $225,150. (J.A. 467). And on June 5, 1992, she pledged those stocks as collateral for loan # 7035764, with principal of $293,633.58. (J.A. 470).

On November 1, 1994, Mrs. Winters brought this action against the Bank, claiming that the Bank converted the stocks, that the stocks were wrongfully transferred to the Bank under Virginia law, and that her pledges of the stocks were invalid and unenforceable. After a non-jury trial on July 10, 1995, Judge Leonie M. Brinkema issued an order on July 17, 1995, finding that Mrs. Winters' signatures on the pledge agreements were genuine, and that the Bank had a valid, perfected and enforceable security interest in the Winters stocks.


Mrs. Winters' basis for challenging the district court's decision is that (1) the 1992 collateral pledge represented an unapproved postpetition transfer and was thus void ab initio; and (2) the documents signed prior to 1992 were insufficient to create a security interest in the Winters stocks. Mrs. Winters concedes that if the court disagrees with her former contention, it need not reach the latter.

The filing of a bankruptcy petition "operates as a stay, applicable to all entities, of ... (4) any act to create, perfect, or enforce any lien against property of the estate." 11 U.S.C. § 362(a)(4) (1993 & Supp.1996). The purpose of the automatic stay, in addition to protecting the relative position of creditors, is to shield the debtor from financial pressure during the pendency of the bankruptcy proceeding. In re Stringer, 847 F.2d 549 (9th Cir.1988). In Williford v. Armstrong World Indus., 715 F.2d 124 (4th Cir.1983), this court considered the comments of the Committee on the Judiciary:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from its creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

Williford, at 127 (quoting S.Rep. No. 95-989, 95th Cong., 2d Sess. 54-55 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5840-41).

Mrs. Winters argues that because she and Mrs. McMahon jointly owned the Winters stocks, those stocks were part of the bankruptcy estate. Mrs. Winters also argues that the 1992 pledge agreement was an act to create or perfect a lien against that property, and thus violated the automatic stay provision. Finally, Mrs. Winters argues that because the pledge agreement was in violation of the automatic stay, the agreement is void rather than merely voidable, and cannot provide the basis for the Bank's interest in the Winters stocks.

There are several problems with the Appellant's argument. First, as a non-bankrupt co-owner of property, Mrs. Winters lacks standing to challenge the purported violation of the automatic stay. Second, Mrs. Winters' interest in the stocks was not part of the bankruptcy estate. Third, the 1992 pledge agreement, voluntarily entered into by the debtors and by Mrs. Winters, benefited the bankruptcy estate and is thus not within the purpose of the automatic stay.


It is well settled that the automatic stay does not apply to non-bankrupt codebtors, Williford v. Armstrong World Indus., 715 F.2d 124, 126 (4th Cir.1983), nor does the automatic stay prevent actions against guarantors of loans. Credit Alliance Corp. v. Williams, 851 F.2d 119, 121 (4th Cir.1988). In A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir.), cert. denied, 479 U.S. 876, 107 S.Ct. 251, 93 L.Ed.2d 177 (1986), this court noted a narrow exception to the general rule that the automatic stay is not available to third parties [I]n order for relief for such non-bankrupt defendants to be available under (a)(1), there must be "unusual circumstances".... This "unusual situation," it would seem, arises when there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.

Id. at 999 (citations omitted). This case does not present such an unusual situation. On the contrary, the debtors in this case, Mr. and Mrs. McMahon, voluntarily entered into and benefited from the transaction of which Mrs. Winters complains.

This court's decision in Credit Alliance Corp. is instructive. In that case, Penn Hook Coal Company had signed a conditional sales contract note with Croushorn Equipment Company, who assigned the note to Credit Alliance. Gary and Malcolm Williams ("the guarantors") executed a guaranty of Penn Hook's obligation in...

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