Opinion
No. CV 03-0522575S
August 16, 2005
MEMORANDUM OF DECISION
I
On April 20, 1994, Enterprise Yacht Sales, Inc. (Enterprise) executed a promissory note to the North American Bank Trust (NABT) in the amount of $350,000 together with a written guarantee signed by the defendant Kenneth W. Biebel, his father, Kenneth R. Biebel, and his brother, William B. Biebel, the president of Enterprise. On December 28, 1994, NABT extended a $400,000 commercial line of credit to Enterprise. On May 2, 2002, Kenneth R. Biebel paid the outstanding balance due on the line of credit in the sum of $370,227.43 to NABT. Upon said payment, the line of credit and the note were marked paid and surrendered to Enterprise along with a termination of a UCC filing statement and a release of a security interest in the assets of Enterprise. On June 12, 2002, Kenneth R. Biebel filed a Chapter 7 bankruptcy petition and on July 1, 2002, Enterprise filed a Chapter 7 petition. On August 13, 2002, the Bankruptcy Trustee asserted a preference claim in the amount of $154,392.32 against NABT claiming that a portion of the May 2, 2002 payoff constituted a voidable preference under the Bankruptcy code, 11 U.S.C. § 547(b)(4)(A). That claim, subsequently reduced to $50,000, was approved by the Bankruptcy Court on June 25, 2003, and paid by NABT on June 26, 2003. On July 8, 2003, NABT, having paid the preference claim, made demand on the defendant for said sum. The substitute plaintiff, Webster Bank, National Association (Webster) is the successor by merger to NABT. CT Page 11952-s
11 U.S.C. § 547(b)(4)(A) states, in part: "(b) Except as provided in subsection (c) and (i) of this sector, the trustee may avoid any transfer of an CT Page 11952-v interest of the debtor in property — 4) made —
(A) on or within 90 days before the date of the filing of the petition;"
II
"To establish a prima facie case of entitlement to recover on [a] [g]uaranty . . . plaintiff must show (1) that it is owed a debt from a third party; (2) that defendant made a guaranty of payment of the debt; and (3) that the debt has not been paid by either the third party or defendant." Chase Manhattan Bank, N.A. v. Harris, 899 F.Sup. 64, 67 (Conn. 1995). Webster's argument is straightforward: Biebel must pay the $50,000 amount Webster was forced to disgorge; that is, the portion of the debt that has not been paid. The defendant's position is as well: the debt was paid and released and the plaintiff had no right under the guaranty to reinstate the claim. This court agrees with the plaintiff; the Trustee's preference of the defendant's father's payment, made within ninety days of his filing, voided that portion of the payment and made it a nullity.
In In Re Hackney, 93 B.R. 213 (Bkrtcy. C.D.Cal. 1988), the court held that the creditor, the County of Sacramento, which had to surrender, under the preference provisions of 11 U.S.C § 502(h), a pre-petition payment of its non-dischargeable claim (court ordered restitution for welfare conviction), had its claim reinstated. The court in Hackney rejected the argument, similar to that made herein, that reinstating the claim required the debtor to make the payment twice. The court held, "[t]he recovery of preferences serves the fundamental bankruptcy policy of equality of distribution . . . It requires a finding that the debtor was insolvent when the payment was made and essentially treats the estate as if it were already created during the preference period. Since an insolvent debtor has no equity in that estate, the pre-petition payment was in fact made by the other creditors of the estate, not by the debtor. It is this inequity that the preference law serves to redress." (Citation omitted.) Id., 218.
11 U.S.C. § 502(h) provides: "[a] claim arising from the recovery of property under section 522, 550, or 553 of this title shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition."
In a more recent case, In Re Bankvest Capital Corp., 375 F.3d 51 (1st Cir. 2004), the court considered the impact the trustee's preference claim on a secured creditor's 11 U.S.C. § 502(h) claim. The court said, "[i]n In re Verco, [ 704 F.2d 1134 (9th Cir. 1983)] the CT Page 11952-t Ninth Circuit stated, '502(h) serves to reinstate existing claims where property is recovered by the trustee,' thereby suggesting that the 502(h) claim would have the same secured status as the transferee's prepetition claim." Id., 67. The court continued its analysis by noting that "[s]cholars likewise appear to support this interpretation. See Rafael I. Pardo, "On Proof of Preferential Effect," 55 Ala.L.Rev. 281, 281 (2004) ('[P]referred creditor is granted the same legal rights it had before the transfer . . .'); David Gray Carlson, "Security Interests in the Crucible of Voidable Preference Law," 1995 U. Ill.L.Rev. 211, 356 (1995) ('Payments received by a secured party are analytically different. Prior to bankruptcy, the "payment" extinguished the antecedent debt. Once the payment is returned, it ought to be the case that the old debt, once dead, is now revived. This is universally assumed to be true, and § 502(h) more or less supports this conclusion . . .'); Harry M. Flechtner, "Preferences, Post-petition Transfers, and Transactions Involving a Debtor's Downstream Affiliate," 5 Bankr. Dev. J. 1, 20 (1987) ('To the extent a transfer satisfied a claim against the debtor, recovery of the transfer as a preference or voidable post-petition transfer restores the claim.'); Michael F. Jones, "Structuring the Deed in Lieu of Foreclosure Transaction," 19 Real Prop. Prob. Tr. J. 58, 64-65 (1984) ('Should the deed-in-lieu transaction ultimately be avoided under sections 544, 547 or 548, then the [lender] will be returned substantially to the status quo ante with its status being that of a holder of a prepetition claim existing at the time of the filing of the debtor's petition')." In Re Bankvest Capital Corp., supra, 375 F.3d 68. This sound reasoning certainly applies to the payment made by the co-guarantor in the instant case who made his payment to the plaintiff shortly before he filed bankruptcy. As noted by the plaintiff, the defendant is, in fact, fortunate that the preference was reduced from $154,392.32 to $50,000. Simply put, the Trustee's preference resulting in the disgorgement by the plaintiff means that a portion of the payment was not made.
For this same reason, that is, the payment was nullified by operation of law and a portion of the debt was reinstated, the court rejects the defendant's argument concerning the lack of "clawback" language in the guarantee. Such language was not required; the defendant as a guarantor already "unconditionally guarantees to the bank the due and punctual payment when due . . ." The payment was not made.
Our case law long supports this concept. In Eagle Bank of New Haven v. Smith and Parmelee, 5 Conn. 71, 74 (1823), our Supreme Court held, "[a] forged note or CT Page 11952-u dishonored draft, if delivered in payment, is no satisfaction or extinguishment of an antecedent demand; and for the most just and obvious reasons. They are of no value; and not what they were; either expressly or impliedly, affirmed to be, by the person delivering them as payment, or believed to be, by him who accepted them as such. On this point, the law is to well-established to require the aid of argument." Similarly, the Appellate Court has held that cancellation of a note (which under General Statutes § 42a-3-604 may constitute discharge) by mistake has no effect. In Guaranty Bank and Trust Co. v. Dowling, 4 Conn.App. 376, 380, 494 A.2d 1216, cert. denied, 197 Conn. 808, 499 A.2d 58 (1985), the court stated that, "[w]hile the mistaken discharge may well have been attributable to the plaintiff's negligence, that fact does not permit the defendant to gain a benefit to which he is not entitled . . ." This court agrees with the defendant that the initial discharge here was not a mistake in the classic sense such as discharge as a result of payment with insufficient funds. Yet, that is exactly what occurred by operation of law. Surely the plaintiff would not have cancelled the note and returned the documents had it known that Mr. Biebel did not have sufficient funds. The defendant maintains that Dowling is distinguishable because there is no fact evidencing a mistake at the time of the payment and initial discharge. That argument misses the point; the bankruptcy laws nullified a portion of the payment and reinstated the remaining portion of the debt.
General Statutes § 42a-3-604 states:
"(a) A person entitled to enforce an instrument, with or without consideration, may discharge the obligation of a party to pay the instrument (i) by an intentional voluntary act, such as surrender of the instrument to the party, destruction, mutilation, or cancellation of the instrument, cancellation or striking out of the party's signature, or the addition of words to the instrument indicating discharge, or (ii) by agreeing not to sue or otherwise renouncing rights against the party by a signed writing.
(b) Cancellation or striking out of an endorsement pursuant to subsection (a) does not affect the status and rights of a party derived from the endorsement."
As noted by the defendant, no factual evidence was introduced at trial other than the stipulation of facts.
The defendant's other arguments concerning accord and satisfaction and waiver fail for the same reason.
III
In light of the above finding, and in accordance with the relevant instruments, the plaintiff is entitled to judgment in the principal sum of $50,000 together with interest through May 12, 2005 of $6,239.72, per diem interest from that date of $10.62, default interest of $3,698.60 and attorneys fees of $8,074 and costs.
Berger, J.