Opinion
Case No. 95-12010-AM
September 6, 1996
Stephen J. O'Brien, Esquire, Odin, Feldman Pittleman, P.C., Fairfax, Virginia, for Sequoia National Bank
Joseph S. Luchini, Esquire, Hazel Thomas, P.C., Falls Church, Virginia, for the debtor in possession
MEMORANDUM OPINION
This matter is before the court on the objection of the debtor in possession to the claim of Sequoia National Bank ("Sequoia" or "the Bank"). An evidentiary hearing was held on July 15, 1996, at which time the court took the matter under advisement. The issue is whether the debtor is liable to Sequoia, based on a written guarantee, for a loan the Bank made to Robert and Marilyn DeLuca. The debtor in possession asserts the guarantee was either unauthorized or cancelled or both. Although the court cannot find that the guarantee was cancelled, it does find that Robert DeLuca, who signed the guarantee in the debtor's name, had neither actual nor apparent authority to do so. Accordingly, Sequoia's claim must be disallowed. This memorandum opinion constitutes the court's findings of fact and conclusions of law under F.R.Bankr.P. 7052.
The proof of claim was filed on October 26, 1995, in the amount of $830,154.00. On July 12, 1995, Sequoia filed an amendment to its proof of claim reducing the amount of the claim to $763,304.03. The debtor in possession does not dispute the dollar amount of the claim, but rather the debtor's liability for any amount.
Findings of Fact
The debtor, Kiln Creek Golf and Country Club, L.P. ("Kiln Creek Golf L.P.") is one of thirteen real estate partnerships, limited partnerships, and limited liability companies (collectively, "the DeLuca entities") owned, controlled, or managed by real estate developers Robert and Marilyn DeLuca ("the DeLucas"). The DeLucas filed a voluntary chapter 11 petition for themselves on May 5, 1995, and shortly before and after that date caused petitions to be filed on behalf of the various DeLuca entities. Kiln Creek Golf, L.P.'s petition was filed on May 11, 1995.
Kiln Creek Golf, L.P., operated briefly under the DeLucas' control as a debtor in possession before a chapter 11 trustee was appointed in response to vocal creditor concern over the DeLucas' management of the various entities. Thereafter, Joel T. Broyhill, an investor in several of the DeLuca entities, including Kiln Creek Golf, L.P, reached a global settlement with the DeLucas of their disputes over ownership and management control. As part of that settlement, management control of Kiln Creek Golf, L.P. was transferred to JTB Enterprises, L.C. The appointment of the chapter 11 trustee was then terminated, and Kiln Creek Golf, L.P. is once again operating as a debtor in possession.
Kiln Creek Golf, L.P., is a Virginia limited partnership that was formed in 1991 to develop the golf course adjacent to a larger project called the Villages of Kiln Creek located in York County and Newport News, Virginia. Originally, the DeLucas owned a controlling interest in the limited partnership. In 1994, however, JTB Enterprises, L.C. ("JTB Enterprises"), which in turn was controlled by Joel T. Broyhill, was admitted as a 50% limited partner. Following the admission of JTB Enterprises, the Delucas directly and indirectly (through their ownership of Kiln Creek Golf and Country Club, Inc.) owned a 45.5% interest in the debtor, and the remaining 4.5% interest in the debtor was owned by various relatives and business associates of the DeLucas. Kiln Creek Golf and Country Club,Inc. was the general partner.
Prior to the filing of the debtor's petition, the golf course and the club house had been sold, and the debtor had taken back from the purchaser four promissory notes totalling $1,075,000. After the sale was completed, the debtor's remaining assets, aside from the notes receivable, consisted of four parcels of real estate totalling approximately four acres on these parcels, the debtor was building condominiums that were approximately 90% complete at the time the chapter 11 petition was filed. A separate development entity, D B Venture, L.C., owned and was developing the larger portion of the Kiln Creek project, called the Villages of Kiln Creek. A brief history of that project, and of the DeLuca-Broyhill dispute, is set forth in JTB Enterprises, L.C. v. D B Venture, L.C. (In re Deluca), 194 B.R. 79 (Bankr. E.D. Va. 1996).
The limited partnership agreement gave Kiln Creek Golf and Country Club, Inc., as "Managing General Partner," broad and exclusive powers to manage and control the business of the partnership, including the power "without the consent or approval of the Limited Partners . . . to make all decisions affecting the business of the partnership." § 8.1, Limited Partnership Agreement of Kiln Creek Golf and Country Club Limited Partnership dated Jan. 15, 1991 (Pltf. Ex. 1). Among the specific powers granted was the power "to borrow money and, if security is required therefor, to mortgage, enter into land contracts or deeds of trust or otherwise subject to any other security device any portion of the property of the Partnership." § 8.1(iii). The limited partnership agreement further provided that the limited partners "shall not participate in the management or control of the Partnership's business . . . said powers being vested solely and exclusively in the Managing General Partner." § 9.
Sometime in March or April 1994, the DeLucas approached Sequoia, with whom they did not have an existing borrowing relationship, about the possibility of making a loan to them. After a period of negotiation, Sequoia agreed to make a $350,000 line of credit loan to the DeLucas, with the loan to be guaranteed by Kiln Creek Golf, L.P. and secured by the pledge of $500,000 in first deed of trust notes payable to the debtor by the partnership that had purchased the golf course. The loan officer testified that the reason he wanted the guarantee was because he felt it was "an important part of getting access" to the note being pledged. The loan was actually made on May 25, 1994. The Bank's records related to the internal approval of the loan by its loan committee reflect that the stated purpose of the loan was to "Provide working capital for various needs, i.e., appraisal fees, points for refinancing, interim loans to partnerships." Pltf. Ex. 5. The only project specifically mentioned by name was "a new theatre complex being built in Countryside (a major living/shopping complex in eastern Loudoun County, Virginia)." Id. Among the conditions set forth in the internal loan approval was that "No proceeds are to be disbursed until we are presented with an attorney's opinion letter stating that Kiln Creek Golf And Country Club Limited Partnership is empowered to pledge assets and guarantee notes on behalf of the DeLucas. . . ." Id.
Samuel Skinner, who functioned essentially as chief financial officer for the DeLucas, had written the Bank on May 9, 1994, and represented that the intended use of the funds included "some short term payables relating to the Villages of Kiln Creek that are to be repaid from land sales already under contract." Def. Ex. J. The "Villages of Kiln Creek" was, as noted above, being developed by a separate entity, D B Venture, L.C. While the Bank attempted at the hearing to suggest that it was confused by the similarity of names, the loan workup plainly reflects that Kiln Creek Golf Country Club "sold asset (golf course) on April of 1994. Current assets are dues and notes receivables." Pltf. Ex. 5. It seems clear, therefore, that the Bank understood that the Villages of Kiln Creek was separate from Kiln Creek Golf, L.P.
The note evidencing the $350,000 indebtedness was signed by the DeLucas as "Borrower" on May 25, 1994. On the same day, Robert Deluca, in his capacity as president of Kiln Creek Golf and Country Club,Inc., signed a document entitled "Partnership Agreement to Guarantee/Grant Collateral" that in effect amounted to a power of attorney giving Robert R. DeLuca the power on behalf of the debtor to guarantee loans made by the Bank to the DeLucas and to pledge as collateral for such loans "any property belonging to the Partnership." Pltf. Ex. 7. The document represented that Kiln Creek Golf and Country Club, Inc., as general partner, constituted "all partners" of the partnership and contained a certification that "All partners of the Partnership have met" to consider the grant of the power of attorney. No other signatures appear on the document other than that of Robert R. DeLuca. Finally, Robert DeLuca signed, in the debtor's name, a "Commercial Guaranty" dated the same date, under which the debtor guaranteed "all of [the DeLucas'] present and future liabilities and obligations to Lender . . ., including without limitation all such liabilities and obligations arising from . . . the Note. . . ." Pltf. Ex. 9. The "Note" in turn was defined as: "the promissory note . . . dated May 25, 1994, in the original principal amount of $350,000.00 from Borrower to Lender, together with all modifications of and renewals, replacements, and substitutions. . . ." The guarantee is expressly stated to be "unlimited" as to amount. Furthermore, the guarantee states that it
will continue in full force until all indebtedness incurred or contracted before receipt by Lender of any notice of revocation shall have been fully and finally paid and satisfied. . . . If Guarantor elects to revoke this Guaranty, Guarantor may only do so in writing. This Guaranty may be revoked only with respect to indebtedness incurred or contracted by Borrower . . . thirty (30) days or more after the date on which written notice of revocation is actually received by Lender.
Prior to the closing, Robert DeLuca had faxed to the Bank a copy of the Certificate of Limited Partnership that set forth the names and percentage ownership interests of the general and limited partners. It is undisputed that no meeting of the partners was ever actually held to discuss the guarantee, and that JTB Enterprises, the 50% limited partner, knew nothing of the guarantee and never consented to the partnership's guarantee of the loan to the DeLucas. Although the Bank did receive a carefully-worded opinion letter from the law firm that had represented Kiln Creek Golf, L.P. when the golf course was sold, the letter did not address whether the partnership was authorized to guarantee, or to pledge its assets as collateral for, a loan by the Bank to the DeLucas.
The sum and substance of the opinion is set forth in a single sentence: "The attached Note, which is Note #1 in a series of four (4) notes, may be pledged without restriction by the holder thereof, as well as assigned, transferred and otherwise conveyed in accordance with the applicable provisions of the Uniform Commercial Code." Pltf. Ex. 26.
The line of credit was twice modified to increase the available amount of credit. The first modification occurred on October 20, 1994, when the loan amount was increased from $350,000 to $550,000. The stated purpose of the first modification was to "Provide additional working capital for extraordinary expenses associated with pending sale of major assets." Pltf. Ex. 11. The primary source of repayment was to be "scheduled real estate closings at Kiln Creek yielding $1.2 million," and the secondary source was the proceeds from the projected sale of the DeLucas' real estate portfolio to the Donohoe group. Id. In connection with the first modification, a new guarantee — essentially identical to the prior guarantee — was executed by Robert DeLuca in the debtor's name. Additionally, the Bank received as additional collateral, a second note out of the four that the debtor had taken back when it sold the golf course and club house. The DeLucas signed a new promissory note for $550,000, and the original $350,000 promissory note was marked "PAID BY SUBSTITUTION NOTE" and returned to the DeLucas.
The second modification occurred on November 23, 1994, when the loan amount was increased to $1,050,000. The stated purpose of the second modification was "Short term working capital to fund buildout for new tenants at Gunston Plaza and completion of hospital center at Countryside Loudoun County, Virginia." A significant change was effected with respect to the collateral for the loan. The original notes from the purchaser of the golf course to Kiln Creek Golf, L.P. were subject to a subordination agreement. Additionally the DeLucas were anxious to get the pledged notes back in order to use them to reacquire an interest in the golf course. Def. Ex. H. Accordingly, the Bank accepted as a substitute for those notes the pledge of a $250,000 certificate of deposit owned by the DeLucas, an assignment of proceeds from the expected sale of real estate at Kiln Creek, and an assignment of proceeds from the pending sale of the DeLuca partnership interests to Donohoe. More significantly, as concerns the dispute currently before the court, a new guarantee form was neither requested nor signed. The Bank's internal loan approval workup for the second modification — unlike those for the original loan and the first modification — makes absolutely no reference to any guarantee. Similarly, the loan agreement signed by the DeLucas in connection with the second modification — unlike those for the original loan and the first modification — is silent with respect to the requirement of a guarantee. Although the Bank treated the October 20, 1994 note has having been paid by the new note, the Bank did not return it to the DeLucas and apparently still retains the original in its loan file.
These were not parcels owned by the debtor, but parcels owned by D B Venture, L.C.
Robert Miller, the bank officer responsible for the loan, had brought the new note and loan agreement to the debtor's offices in Sterling, Virginia, where the DeLucas signed them. Miller had agreed to bring with him the two pledged notes, but had left them behind at the bank. He promised to send them over the next day and that the "other" loan documents would be returned "in due course," marked "paid." The pledged golf course notes were in fact sent over the next day. The DeLucas never made any follow-up request for the $550,000 note or related documents. Skinner, when asked at the trial whether he had ever specifically asked Miller for the return of the guarantee, replied that the guarantee "was not on our mind."
When the DeLucas filed their chapter 11 petition on May 5, 1995, the Bank's internal memoranda do not evidence awareness of any guarantee and reflect that the Bank believed it was totally unsecured aside from $250,000 certificate of deposit. Pltf. Ex. 23. Eventually, however, the loan file was examined more closely, and the Bank discovered the two guarantees dated May 25, 1994, and October 20, 1994. It is those guarantees that form the basis of Sequoia's claim against the debtor. It is undisputed that (1) Sequoia never required that any portion of the loan proceeds be used for the benefit of Kiln Creek Golf, L.P. and (2) the debtor never mailed or delivered to the Bank a written notice revoking the guarantees.
Sequoia, although listed as a creditor in the DeLucas' case, was not listed as a creditor in the Kiln Creek, L.P., case and did not file a proof of claim prior to the expiration of the original bar date, which had been set forth in the notice of the meeting of creditors. After an evidentiary hearing, the court found that Sequoia's failure to file the proof of claim within the bar date was the result of "excusable neglect" and allowed the proof of claim to be filed late. See, Pioneer Investment Svcs. Co. v. Brunswick Assocs. L.P., 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993).
Conclusions of Law and Discussion I.
This court has jurisdiction over this controversy under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
II.
The debtor asserts two defenses to the Bank's claim. The first is that Robert DeLuca had no authority, actual or apparent, to sign a guarantee that would make the debtor liable for Sequoia's loan to the DeLucas individually. The second is that the guarantee, even if valid, was intended to be, and was in fact, cancelled when the October 20, 1994 loan was "paid" by the November 23, 1994 note. Each of these contentions will be discussed in turn.
A. Did Robert DeLuca have actual or apparent authority to execute the guarantees?
It is clear that Robert DeLuca had no actual authority to sign the two guarantees. The loan was for his own and his wife's personal benefit, notwithstanding that they intended to use the proceeds to keep their various partnerships and limited liability companies afloat while they sold assets and restructured indebtedness. The limited partnership agreement did not give the general partner the power to pledge the partnership's credit or assets for loans to the general partner or other entities, and the limited partners, who had no knowledge of the proposed guarantee, never assented to it. Since the DeLucas were in the habit, particularly in the months leading up to their chapter 11 filing, of shuffling large sums among their various entities to meet various short term cash needs, the court cannot entirely rule out the possibility that some of the borrowed funds were in turn loaned to the debtor. It is equally clear, however, and the Bank concedes, that there is no evidence that any of the Sequoia loan proceeds were ever paid to the debtor or used for its benefit. Based on the specific references to "Gunston Plaza" and "Countryside" in the workup for the second modification, however, it seems likely that most, if not all, of the loan proceeds went to prop up Deluca entities other than Kiln Creek Golf, L.P.
The debtor and the Bank, not surprisingly, disagree on the choice of law applicable to this dispute. The debtor is a Virginia limited partnership. Its business office and all its assets are located in Virginia. The Bank has its offices in Maryland, but all negotiations between the DeLucas and the loan officer took place in Virginia, and all the loan documents — including the guarantee — were signed in Virginia. The guarantee itself states that it is to be governed by Maryland law, and on that basis Sequoia asserts that Maryland law governs on the threshold question of whether Robert DeLuca had actual or apparent authority to pledge the debtor's credit or assets. Of course, that argument puts the cart before the horse: the choice of law provision in a contract cannot control unless there is a valid contract to begin with. In any event, the thorny issue of which state's law applies does not, in the court's view, affect the outcome, since the relevant statutory provisions of both states are the same. Under Va. Code Ann. § 50-73.29(A), "Except as provided in this chapter or in the partnership agreement, a general partner of a limited partnership has the rights and powers of a partner in a partnership without limited partners." The Maryland counterpart, Md. Corps. Assns. Code Ann. § 10-403, is identical, except that it adds the words, "and is subject to the restrictions and liabilities" after the words "rights and powers." The authority of a general partner to bind a partnership is addressed in Va. Code Ann. § 50-9, which provides in pertinent part:
§ 50-9. Partner as agent; limitation of authority.
(1) Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.
(2) An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners.
(emphasis added). Again, the Maryland counterpart, Md. Corps. Assns. Code Ann. § 9-301, is identical:
§ 9-301. Partner agent of partnership.
(a) Acts of partners bind partnership. — Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.
(b) Nonbinding acts. — An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners.
(emphasis added). See, Klein v. Weiss, 284 Md.36, 60, 395 A.2d 126, 140 (1978) ("authority not specifically delegated in the limited partnership agreement to general partners is presumed to be withheld"; hence, general partners did not have implied authority to revise the partnership agreement to admit additional partners); Allen v. Steinberg, 244 Md. 119, 223 A.2d 240 (1966) (managing general partners of limited partnership had no authority to mortgage partnership lands without receiving proceeds of mortgage); Fox Hill Office Investors, Ltd. v. Mercanfile Bank, N.A. (In re Fox Hill Office Investors, Ltd.), 101 B.R. 1007 (Bankr. W.D. Mo. 1989) (general partner of limited partnership did not have actual or apparent authority to execute recourse note and mortgage where loan proceeds were not used to maintain or operate the partnership's property but to provide cash flow to general partner's parent corporation).
Whether Robert DeLuca, despite his lack of actual authority, had apparent authority to sign the debtor's name to the guarantee is a closer issue. As explained by the Supreme Court of Virginia:
The general rule is that as between the principal and agent and third persons, the mutual rights and liabilities are governed by the apparent scope of the agent's authority, which is that authority which the principal has held the agent out as possessing, or which he has permitted the agent to represent that he possesses, in which event the principal is estopped to deny that the agent possessed the authority which he exercised. In such cases the apparent authority, so far as third persons are concerned, is the real authority; and when the third person has ascertained the apparent authority with which the principal has clothed the agent, he has a right to rely thereon. . . . An act is within the apparent scope of an agent's authority if, in view of the character of his actual and known duties, an ordinarily prudent person, having a reasonable knowledge of the usages of the business in which the agent is engaged, would be justified in believing that he is authorized to perform the act in question.
Neff Trailer Sales, Inc. v. Dellinger, 221 Va. 367, 370, 269 S.E.2d 386, 388 (1980), citing Wright v. Shortridge, 194 Va. 346, 352-53, 73 S.E.2d 360, 364-65 (1952). See, also, Klein v. Weiss, supra, 284 Md. at 61, 395 A.2d at 140 ("Apparent authority results from certain acts or manifestations by the alleged principal to a third party leading the third party to believe that an agent had authority to act.") (holding that general partners had no apparent authority to revise the limited partnership agreement). A similar formulation was recently articulated by the Fourth Circuit:
Apparent authority results from a principal's manifestation of an agent's authority to a third party, regardless of the actual understanding between the principal and agent. See Crothers v. Commodity Futures Trading Comm'n, 33 F.3d 405, 410 (4th Cir. 1994); Restatement (Second) of Agency § 8 (1957); see also General Elec. Credit Corp. v. Fields, 148 W. Va. 176, 133 S.E.2d 780, 783-84 (1963). Indeed, apparent authority is "entirely distinct" from-and sometimes conflicts with-both express and implied authority. Restatement (Second) of Agency § 8 cmt. a. When a principal, through his acts or omissions, causes a third party, in good faith and in the exercise of reasonable prudence, to rely on the agent's authority to act on the principal's behalf, the agent can bind the principal. See Crothers, 33 F.3d at 410; General Elec. Credit Corp., 133 S.E.2d at 783-84.
Auvil v. Grafton Homes, Inc., — F.3d —, 1996 WL 439242 (4th Cir. 1996).
Here, there is no question that the debtor's limited partnership agreement expressly appointed Kiln Creek Golf and Country Club, Inc. as its sole managing general partner. There is also no question that Robert DeLuca was the president of Kiln Creek Golf and Country Club, Inc. Accordingly, Robert DeLuca, acting in his capacity as president of Kiln Creek Golf and Country Club, Inc., clearly had apparent authority to transact business in the debtor's name. The problem here is that the transaction in question was not a loan to the limited partnership but rather a loan to the president of its corporate general partner. As the debtor correctly points out, Virginia law does not recognize any apparent authority on the part of an agent to pledge the credit of his principal for his own (the agent's) debts:
The statute of frauds, Code § 11-2(4), bars enforcement of a promise to answer for the default of another, unless evidenced by a writing signed by the party to be charged or his agent. A prudent lender must be cognizant of this state of the law. He must also be aware that agency cannot ordinarily be proved solely by the utterances of the purported agent. If he wishes to rely on an agency, he must look further.
Here, the circumstances would show the lender only that the purported agent had agreed to . . .[pledge] his principal's assets as security for the agent's debt. It has been well settled in Virginia for over a century that an agent has no such power, and that all who deal with him are charged with notice of that fact. "Such a transaction furnishes inherent evidence of obliquity and necessarily carries notice to one knowingly dealing with an agent. Thus, if the bank wished to bind Mrs. Elliott to a pledge of her funds to answer for the debt or default of her agent, more was required than the signature of her purported agent.
Fleming v. Bank of Va., 231 Va. 299, 343 S.E.2d 341 (1986) (emphasis added; internal citations omitted). See, also, Auvil v. Grafton Homes, Inc., supra:
From the well-established tenet that an agent cannot create his own authority to represent a principal, see NLRB v. Local Union 1058, UMW, 957 F.2d 149, 153 (4th Cir. 1992), it follows that an agent's statements that he has such authority cannot, without more, entitle a third party to rely on his agency, see Fennell v. TLB Kent Co., 865 F.2d 498, 502 (2d Cir. 1989); D G Equip. Co. v. First Nat'l Bank of Greencastle, 764 F.2d 950, 954 (3d Cir. 1985); see also Restatement (Second) of Agency §§ 7, 285 (1957). An agent's authority must be conferred by some manifestation by the principal that the agent is authorized to act on the principal's behalf. Id. §§ 7-8.
(emphasis in original).
To this, the Bank replies that there is nothing inherently suspect or unauthorized in a limited partnership guaranteeing debts of its affiliates. Pavetti and Freeman v. Autoworld Enterprises (In the matter of Autoworld Enterprises), 131 B.R. 1 (Bankr. D. Conn. 1991). In Autoworld, the debtor was a limited partnership controlled by one Joseph Caldrello, the sole general partner. Caldrello also controlled, and had ownership interests, direct or indirect, in five other automobile dealerships (two of which were actually subsidiaries of the debtor). The debtor owned the land on which all the dealerships were located, and the dealerships in turn paid rent to the debtor. Each of the dealerships owed a law firm substantial amounts of unpaid fees. In exchange for the attorney's promise to forebear for a reasonable period of time, the debtor agreed to guarantee each dealership's obligations to the law firm and to secure the guarantee by a mortgage on the debtor's interest in two pieces of real property. The parties decided on this procedure in order not to further encumber assets of the dealerships then being considered for debt restructuring. Additionally, in the past the companies had frequently cross-guaranteed each other's obligations to creditors. It was in this context that the chapter 7 trustee argued that Caldrello, as the debtor's general partner, had no authority to cause the debtor to guarantee debts of other companies. The court rejected this argument:
The trustee's witnesses did not dispute that it was customary for the various Caldrello entities to guarantee debts of each other. . . . Not only did the debtor have ownership interests in many of the automobile dealerships, they were rent-paying tenants of the debtor's property and the debtor's source of monies to pay its mortgage and other obligations. The authorities are generally in accord that it is not outside the scope of a partnership business to guarantee debts of another when "the nature of the partnership business and the circumstances of the guarantee may be such that . . . the partnership has a business interest in the person guaranteed or may otherwise benefit from the guarantee."
131 B.R. at 3 (citations omitted).
In the present case, the Bank — unlike the law firm in Autoworld — did not have a history of dealing with the debtor that would have reasonably created a belief that the various DeLuca entities routinely guaranteed each other's debts or the debts of their principal. In fact, there was no evidence presented of any such routine practice. Nor did the DeLucas or any of the DeLuca entities pay rent to the debtor. Moreover, the Bank in this case had actual knowledge, prior to the loan closing, that the DeLucas owned less than a majority interest in the debtor. Indeed, the Bank recognized that there was a serious issue as to whether the limited partnership was authorized to guarantee the loan to the DeLucas because one of the conditions it placed on the loan was an opinion letter from the partnership's counsel vouching for the transaction. The opinion letter it received cagily skirted this central and crucial issue; yet the Bank nevertheless went through with the loan and accepted as evidence of Robert DeLuca's authority to pledge the limited partnership's credit nothing more than Robert DeLuca's own certification that he had such authority. The Bank, moreover, could not reasonably have relied on the certification since the certification contained a representation — that Kiln Creek Golf Country Club, Inc. constituted "all" of the partners of Kiln Creek Golf, L.P. — that the Bank knew not to be true.
The loan officer, Robert Miller, testified that, after receiving the letter, he had a discussion with the attorney who signed it, and expected to receive "another" letter, which, however, never materialized.
Mr. Miller testified he had been told that the DeLucas owned 91% of the partnership. By the time the loan was closed, however, he had actual knowledge that the DeLucas owned less than 50%.
The facts in this case, in short, are significantly different than those in Autoworld. It is true that a limited partnership, unlike an individual, can only act through its agent, rendering somewhat problematical the rule that an agent's apparent authority cannot be proven solely by the agent's own utterances. In this vein, the Bank argues that to require something more than the sole managing general partner's certification that he had authority to act — in effect, to require that the Bank to go behind the general partner's certification and poll the limited partners to determine their consent to the transaction — would render entirely nugatory the provisions of the Uniform Limited Partnership Act giving the general partner authority to act on behalf of the partnership.
The short answer to this argument is that no such poll or other assurance is required where, in the words of both the Virginia and Maryland statutes, the contract or instrument is one "for apparently carrying on in the usual way of the business of the partnership." Va. Code. Ann. § 50-9(1); Md. Corps. Assns. Code Ann. § 9-301(a); Holloway v. Smith, 197 Va. 334, 88 S.E.2d 909 (partnership bound by note executed by general partner without authority from other partners where lender intended to make loan to partnership, lender wrote loan proceeds check to partnership, and note was signed in partnership's name; such note was given for "apparently carrying on in the usual way the business of the partnership.") It is only when the transaction is on its face outside the "usual way of . . . business," that a partner's act "does not bind the partnership . . . unless authorized by the other partners." Va. Code. Ann. § 50-9(2); Md. Corps. Assns. Code Ann. § 9-301(b). When that is the case, the lender who relies solely on the assurance of a general partner that the other partners have assented does so at its peril. The guarantee of a personal loan to the general partner and his wife — particularly where the lender has actual notice that they hold less than a majority interest in the partnership — would not ordinarily be "usual" for a limited partnership, and there is nothing in the limited partnership agreement in this case (had the Bank asked to look at it) or any past practice of which the Bank was aware, that would have made such a transaction apparently "usual" for this debtor.
The Bank, of course, had ample means to protect itself when confronted with a transaction that was not apparently "usual." It could have refused to make the loan unless presented with an unequivocal opinion letter from the partnership's counsel as to the propriety of the guarantee. If it had done so in this case, it might well have had a remedy against the attorney if the guarantee were ultimately determined to have been unauthorized. Or it could also have required that the certification of the general partner to pledge the partnership's credit for his own debt be signed by the limited partners, since nothing in the limited partnership agreement otherwise apparently authorized such action by the general partner.
Here, Robert DeLuca's execution of the guarantee was unauthorized in fact and the partnership had not cloaked him with apparent authority to obligate it for the loan in question. Accordingly, the Bank has no enforceable claim against the debtor for the loan made to Robert and Marilyn DeLuca, and on that basis the debtor's objection to the Bank's claim must be sustained.
B. Were the guarantees cancelled when the third note was signed?
In light of the court's ruling that the guarantees were unauthorized and do not bind the debtor, the debtor's second argument — that the guarantees were cancelled when the first two notes were paid — is moot. Nevertheless, some brief discussion is appropriate for the guidance of the parties in the event an appeal is taken from the court's ruling.
First, the guarantee, being in the nature of a contract between experienced and sophisticated parties, must be construed according to its plain language. The language of the guarantees at issue here are clear and unambiguous. The guarantees bind the guarantor to the payment, not only of the specific note identified in the instrument, but "all modifications of and renewals, replacements and substitutions." The amount of both guarantees is clearly stated to be "unlimited." And, finally, both guarantees clearly state that they will continue "in full force" until the lender receives written notice of revocation from the guarantor.
The note of November 23, 1994, was in no sense an independent extension of credit but was clearly a "modification" and "renewal" of the existing line of credit. See, F.D.I.C. v. Wald, 630 F.2d 239 (4th Cir. 1980) (liability of guarantors under written guarantee of first note not discharged when note was paid by renewal note guaranteed by only one of the original guarantors). It is true that each of the two increases in the line of credit were underwritten and approved by the Bank with the same formality as if they were new extensions of credit, but in neither case did the debtor actually pay off the prior note from its own funds. Instead, the prior note was simply credited on the books of the bank with the proceeds of the new loan. The first note, although surrendered to the DeLucas, was marked "PAID BY SUBSTITUTION NOTE." The second note is still in the Bank's possession, although presumably it is reflected on the Bank's books as having been paid. But even if the note had been surrendered to the DeLucas marked "PAID," such surrender would not have discharged the indebtedness evidenced by the prior note. Hubbard Realty Co., Inc. v. First Nat'l Bank of Pikeville, 704 F.2d 733 (4th Cir. 1983) (deed of trust securing earlier note that was paid by renewal and had been surrendered could be enforced even though the renewal note was invalid because it was executed after the bank received actual notice that former president who signed it had been removed from office).
It is a closer question, factually, whether the parties agreed or intended that the guarantee be cancelled at the time the third note was executed. Neither the Bank's internal workup nor the loan agreement make any mention of a guarantee, and it seems clear that the Bank's board of directors did not rely upon, or evidence any awareness of, the existing guarantee when it approved the increase in the line of credit from $550,000 to $1,050,000. Instead, the Bank was relying on the expected imminent sale of the DeLucas' partnership interests to another developer and on an assignment of proceeds from the sale of certain real estate that was expected to go to settlement shortly. Indeed, from the Bank's perspective, the need for the guarantee had arguably become moot. Robert Miller, the loan officer, testified that the Bank's original reason for requiring the guarantee was that he believed that unless the debtor was liable on the note, it could not pledge the two golf course notes as collateral. Since the Bank was now releasing the golf course notes, Miller may have thought there was no longer a legal need for the guarantee. When the sale of the DeLucas' partnership interests to Donohoe went sour and the DeLucas filed for chapter 11 protection, the Bank did not even realize for several months that it had the guarantees.
Although Mr. Miller testified at the hearing that the reason he did not include a reference to a guarantee in his loan workup was that the Bank "already had an unlimited continuing guarantee in the file," the court is unable to credit this explanation.
Quite possibly, had the DeLucas requested, at the time of the third note was signed, that the guarantees be returned, the Bank would have complied. But the point is, no one expressly asked that the guarantees be cancelled, and the only conclusion the court can draw from the evidence is not that the parties, at the time the third note was signed, had mutually intended or agreed that the guarantees be cancelled, but rather that the parties simply did not focus on the issue. Absent an express, mutual understanding that the guarantees were to be cancelled, the facts simply do not present any basis for this court to exercise its powers as a court of equity to reform the guarantees to reflect such cancellation. The plain language of the guarantees provides that they continue "in full force" until the Bank receives written notice of revocation. No such notice was ever given. Accordingly, had the guarantees been authorized in the first instance, the court would be constrained to find that they remained viable notwithstanding the Bank's acceptance of a new note in payment of the prior notes.
Conclusion
Since the court has determined that Robert DeLuca had neither express nor apparent authority to cause Kiln Creek Golf Country Club, L.P. to guarantee the loan Sequoia made to him and his wife, Sequoia's proof of claim, which is grounded solely on the existence and enforceability of that guarantee, must be disallowed in full. A separate order will be entered consistent with this opinion.