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Union Carbide Corp. v. Newboles

United States Court of Appeals, Seventh Circuit
Aug 16, 1982
686 F.2d 593 (7th Cir. 1982)

Summary

holding under previous version of bankruptcy code that such releases are improper

Summary of this case from Airadigm v. Federal

Opinion

No. 81-2851.

Submitted May 3, 1982.

On April 28, 1982, we granted appellants' motion to consider the case on the basis of the briefs and record alone.

Decided August 16, 1982.

F. Wesley Bowers, Evansville, Ind., for defendants-appellants.

Stephen W. Terry Jr., Baker Daniels, Indianapolis, Ind., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Indiana.

Before CUMMINGS, Chief Judge, COFFEY, Circuit Judge, and TEMPLAR, Senior District Judge.

The Honorable George Templar, Senior District Judge of the United States District Court for the District of Kansas, is sitting by designation.



Union Carbide Corporation loaned some $225,000 to New-Kro Oil Company. New-Kro gave Union Carbide a promissory note in return for the loan, and the President of New-Kro and his wife, F. Allen and Mary v. Newboles, personally guaranteed New-Kro's repayment of the loan. When New-Kro defaulted on its repayment of the loan, Union Carbide brought this diversity action against Mr. and Mrs. Newboles and New-Kro on October 31, 1978 in an attempt to recover the approximately $70,000 still owing on the note. On November 8, 1978, New-Kro petitioned for relief under Chapter XI of the Bankruptcy Act of 1898. New-Kro filed an amended proposed plan of arrangement for settlement of its unsecured debt on September 14, 1979. The plan allowed a twenty percent return on unsecured claims, and contained the following provision:

Impact of Arrangement on Guaranty Holders

Acceptance and confirmation of this Arrangement shall constitute a full settlement, satisfaction and discharge of all claims, demands, actions, causes of action or otherwise against not only the Debtor, but also against any other persons or entities who have entered into guaranty or indemnity agreements with unsecured creditors or who have endorsed commercial paper for the benefit of the Debtor, It is the intent of this Arrangement that upon its acceptance and confirmation, any creditors asserting claims arising out of agreements against persons or entities other than the Debtor by reason of indebtedness of the Debtor shall be required to look solely to the Debtor for payment of such indebtedness under the terms of this Arrangement.

The plan was approved by a majority of the creditors, including Union Carbide, and was confirmed by the Bankruptcy court. Pursuant to the plan New-Kro paid Union Carbide $14,337.01, leaving $55,715.90 unpaid principal on the note. The district court then granted summary judgment for Union Carbide against Mr. and Mrs. Newboles in the amount of the unpaid principal plus interest of $3,734.98, and Mr. and Mrs. Newboles appeal.

On appeal, Mr. and Mrs. Newboles argue that their liability as guarantors on the note was erased by Union Carbide's approval of the bankruptcy plan. In particular, Mr. and Mrs. Newboles argue that Union Carbide's approval of the above-quoted provision in the plan and acceptance of New-Kro's discharge payment worked an accord and satisfaction under Indiana law, which the district court must respect when sitting in diversity. But Section 16 of the Bankruptcy Act of 1898, 11 U.S.C. § 34 (repealed effective October 1, 1979), is to the contrary. Section 16 provides that "[t]he 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." Section 16 makes clear that the discharge of New-Kro itself had no effect upon the liability of Mr. and Mrs. Newboles on the note, and indeed we have held that the bankruptcy court has no power to discharge the liabilities of a bankrupt's guarantor. In re Diversely Building Corp., 86 F.2d 456, 458 (7th Cir. 1936), certiorari denied, 300 U.S. 662, 57 S.Ct. 492, 81 L.Ed. 870. We hold that a creditor's approval of the bankruptcy plan does not discharge the bankrupt's guarantors either.

Section 16 was rewritten and reenacted in the Bankruptcy Reform Act of 1978 at 11 U.S.C. § 524(e).

A bankruptcy discharge arises by operation of federal bankruptcy law, not by contractual consent of the creditors. In re Kornbluth, 65 F.2d 400, 402 (2d Cir. 1933). A creditor's approval of the plan cannot be deemed an act of assent having significance beyond the confines of the bankruptcy proceedings, simply because the gamesmanship imported from state contract law into the bankruptcy proceedings would be intolerable. Since a majority of the creditors must approve the debtor's plan for the debtor to be discharged, in many instances one creditor's approval or disapproval will have no effect even in the bankruptcy proceeding. In the case that a single creditor's vote is determinative, imputing extra-bankruptcy significance to it for that reason violates the specific command of Section 16 that "[t]he liability of a * * * guarantor * * * shall not be altered by the discharge of [the] bankrupt." This case is no different because the plan expressly purports to discharge guarantors of the bankrupt. The import of Section 16 is that the mechanics of administering the federal bankruptcy laws, no matter how suggestive, do not operate as a private contract to relieve co-debtors of the bankrupt of their liabilities. See R. I. D.C. Industrial Development Fund v. Snyder, 539 F.2d 487, 490 n. 3 (5th Cir. 1976) (creditor's approval of Chapter XI bankruptcy arrangement that purported to eliminate the underlying debt did not prevent the creditor from having recourse against the guarantor), certiorari denied, 429 U.S. 1095, 97 S.Ct. 1112, 51 L.Ed.2d 542; United States v. George A. Fuller Co., 250 F. Supp. 649, 656, 658 (D.Mont. 1966).

Similarly, the payment which effects a discharge is not consideration for any promise by the creditors, much less for one to release non-party obligors. In re Kornbluth, 65 F.2d 400, 402-403 (2d Cir. 1933); Post v. Losey, 111 Ind. 74, 12 N.E. 121 (1887). Thus Union Carbide's receipt of the discharge payment of $14,337.01 does not estop it to collect the rest of the debt from Mr. and Mrs. Newboles.

Therefore we affirm the order of the district court granting summary judgment for Union Carbide.


Summaries of

Union Carbide Corp. v. Newboles

United States Court of Appeals, Seventh Circuit
Aug 16, 1982
686 F.2d 593 (7th Cir. 1982)

holding under previous version of bankruptcy code that such releases are improper

Summary of this case from Airadigm v. Federal

rejecting defense by guarantors of bankrupt debtor that creditor's approval of plan constituted accord and satisfaction

Summary of this case from Fifth Third Bank of Southeastern Indiana v. Bentonville Farm Supply, Inc.

In Union Carbide the reorganization plan provided for the "settlement, satisfaction and discharge" against individual third-party guarantors in exchange for distributions of proceeds from the property of the debtor.

Summary of this case from Matter of Specialty Equipment Companies, Inc.

reaching the same result under section 16 of the Bankruptcy Act

Summary of this case from Matter of Edgeworth

In Union Carbide Corp. v. Newbowles, 686 F.2d 593 (7th Cir. 1982) the court, interpreting the predecessor to Section 524(e) under the Bankruptcy Act, held that a creditor may collect the full amount of its loan from the guarantors of the loan despite the bankruptcy discharge.

Summary of this case from First Fidelity Bank v. McAteer

In Union Carbide Corp. v. Newboles, 686 F.2d 593 (7th Cir. 1982), the court concluded that, when the creditor did not receive the full amount of the original debt in the bankruptcy proceeding, the guarantors were liable for the unpaid portion of the original debt.

Summary of this case from Federal Deposit Insurance v. Municipality of Ponce

In Newboles, the Seventh Circuit held that although Union Carbide, the creditor, had approved a reorganization plan that provided for release of its guarantor, Union Carbide could nevertheless enforce the guaranty since the bankruptcy court's discharge was outside its powers to act and hence had no effect.

Summary of this case from Republic Supply Co. v. Shoaf

In Union Carbide, for example, the Seventh Circuit held ineffective a release of a guarantor despite its acceptance by the creditors and its confirmation by the bankruptcy court.

Summary of this case from Underhill v. Royal

In Union Carbide Corp. v. Newboles, 686 F.2d 593 (7th Cir. 1982), the court held that although the creditor had approved a reorganization plan that provided for the release of a guarantor, it could nevertheless enforce the guaranty because the bankruptcy court was without power to release a guarantor and that an order confirming the plan was, to that extent, of no effect. Shoaf disavows a conflict in these holdings since res judicata was the sole basis for the Shoaf holding. Shoaf, 815 F.2d at 1051, n. 6.

Summary of this case from In re North Alabama Anesthesiology Group, P.C.

In Newboles, two personal guarantors of a promissory note executed by the debtor sought to avoid their own liability on the note to promisee Union Carbide. The guarantors argued that their liability was erased by Union Carbide's approval of the plan which provided that acceptance of a discharge payment would constitute a full settlement not only against the debtor but also "against any other persons or entities who have entered into guaranty or indemnity agreements with unsecured creditors or who have endorsed commercial paper for the benefit of the Debtor."

Summary of this case from UNARCO Bloomington Factory Workers v. UNR Industries, Inc.

In Union Carbide, the Seventh Circuit Court of Appeals disapproved a plan provision purporting to discharge the debtor's guarantors and held that Section 16 of the Bankruptcy Act of 1898 made “clear that the discharge of [the debtor] itself had no effect upon the liability of [the guarantors] on the note....” Id. at 595.

Summary of this case from In re Linda Vista Cinemas, L.L.C.

construing 1898 Bankruptcy Act; subsequently limited by Specialty Equipment, infra

Summary of this case from In re Original IFPC Shareholders, Inc.

In Union Carbide v. Newboles, 686 F.2d 593 (7th Cir. 1982), the confirmed plan provided for a release of the non-debtor guarantor.

Summary of this case from In re Sybaris Clubs Intern., Inc.

construing Section 16 of the 1898 Bankruptcy Act, the predecessor to Section 524(e)

Summary of this case from In re Keene Corp.

In Union Carbide, the plan of reorganization provided for the "settlement, satisfaction and discharge" against third party guarantors in exchange solely for distribution of proceeds from property of the debtor.

Summary of this case from In re Resorts Intern., Inc.

discussing the effect of discharge upon guarantors under 11 U.S.C. § 524(e) and concluding "[t]he import of the [the section] is that the mechanics of administering the federal bankruptcy laws, no matter how suggestive, do not operate as a private contract to relieve co-debtors of the bankrupt of their liabilities."

Summary of this case from In re Stoller's, Inc. (Bankr.N.D.Ind. 1988)

In Union Carbide, the plan of reorganization provided for the "settlement, satisfaction and discharge" against third party guarantors in exchange solely for distribution of proceeds from property of the debtor.

Summary of this case from In re Elsinore Shore Associates

In Union Carbide Corp. v. Newboles, 686 F.2d 593 (7th Cir. 1982) the court was presented with the issue of whether a creditor's approval of a chapter 11 plan of arrangement under the Bankruptcy Act of 1898 discharges the obligation owed to that creditor by the debtor's guarantors where plan language purports to do so.

Summary of this case from In re Scranes, Inc.

In Newboles, under section 524(e), the Seventh Circuit rejected the argument of guarantors of a bankrupt company that the creditor's approval of a bankruptcy plan constituted accord and satisfaction under Indiana law. 686 F.2d at 594-95.

Summary of this case from Dyrdal v. Lindfors Agency, Inc.

In Union Carbide Corp. v. Newboles, 686 F.2d 593 (7th Cir. 1982), Union Carbide attempted to collect the balance owed on a corporate note of a bankrupt debtor corporation from the guarantors of that note.

Summary of this case from Rock Hill National Bank v. Honeycutt
Case details for

Union Carbide Corp. v. Newboles

Case Details

Full title:UNION CARBIDE CORPORATION, PLAINTIFF-APPELLEE, v. F. ALLEN NEWBOLES AND…

Court:United States Court of Appeals, Seventh Circuit

Date published: Aug 16, 1982

Citations

686 F.2d 593 (7th Cir. 1982)

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