Opinion
CASE NO.: 01-08736-FJO-11, CASE NO.: 01-08735-FJO-11
February 28, 2003
ORDER
This matter came before the Court on the Objections to Claims of U.S. Bank, National Association filed by the Debtors on January 8, 2002. The matter was set for a hearing on October 8, 2002, at which time the parties appeared and U.S. Bank, by counsel, presented its case-in-chief. The Court then continued the matter to December 3, 2002, when the Debtors presented their case and rebuttal. At that point, the Court took the matter under advisement and allowed each party to submit briefs in support of their arguments.
Having reviewed the evidence and testimony presented at the hearing, as well as the briefs submitted by both parties, the Court hereby OVERRULES IN PART and SUSTAINS IN PART the Objections to Claims of U.S. Bank, National Association, in accordance with the attached Memorandum.
IT IS SO ORDERED
MEMORANDUM
Jim and Lenora Sapp were the principals of Sapp Bros. D/B/R Leasing, Inc. ["Sapp Bros"], and made a living by leasing trucks to truck drivers. Sapp Bros obtained financing for the trucks from U.S. Bank, National Association ["USB"], who, in turn, took the Sapp Bros' lease portfolios as collateral. In addition to that security interest, USB obtained the personal guarantee of Jim and Lenora Sapp to pay the Sapp Bros' debt. The second page of said guaranty states:
Guarantor also waives any and all rights or defenses arising by reason of . . .
(d) any right to claim discharge of the indebtedness on the basis of unjustified impairment of any collateral for the indebtedness.
Although the majority of the relationship between USB and the Sapp Bros was beneficial to both, in 2000 Sapp Bros began to default on its loans. As a result, USB transferred the Sapp Bros account to its "Special Asset Workout Department" which manages distressed accounts. Suzanne Rausch ["Rausch"] was the officer in charge of this account and began efforts to collect on the default. Rausch and the Sapp Bros attempted negotiations to cure the default, but in the end, USB, thinking the relationship had gone sour, assumed control of the leases and told all of the lessees to deal exclusively with USB, not the Sapp Bros.
For example, USB offered to forbear their rates in exchange for the collateral — but Sapp Bros refused. Also, after Sapp Bros was sold to Chancellor, Chancellor offered to purchase the lease portfolios from USB for $560,000, and USB refused, stating in court that it could collect more on the leases itself and, furthermore, doubted that Chancellor could pay the $560,000.
After USB assumed control of the leases, it endeavored to cure the Sapp Bros' default by administering or otherwise disposing of the lease portfolios. The administration or other disposition of the collateral did not cover the Sapp Bros' debt to USB and, therefore, USB made demand on Jim and Lenora Sapp to cover the default in accordance with their personal guarantee to secure the Sapp Bros' debt. However, as is the subject of this Order, Jim and Lenora Sapp allege that USB did not dispose of the lease portfolios in a commercially reasonable manner. They therefore object to USB's claim for the amount owing on the loan. USB argues, on the other hand, that:
1) To the extent the evidence and testimony presented at the hearing suggest that USB impaired the collateral prior to its disposition, Jim and Lenora Sapp, as a condition contained in the guaranty agreement, waived all rights to that defense; and
2) USB did, in fact, dispose of the collateral in a commercially reasonable manner.
Analysis
USB seeks recourse under two legal theories when only one exists. The first involves the defense of pre-default impairment of collateral; the second involves the right of a debtor to a post-default commercially reasonable disposition of collateral. In determining what, if anything, either theory bears on this case, the facts presented here are novel.
As held by the Indiana Court of Appeals, an "unconditional guarantor of liabilities arising from . . . a security agreement is a `debtor,' and thus entitled to notice under IC § 26-1-9-504(3). . . ." Walker v. McTague, 737 N.E.2d 404, 409 (Ind.App. 2000).
As stated in USB's brief, "[USB] made demand upon the lessees of trucks owned by [Sapp Bros] to remit continuing monthly lease payments directly to [USB] in mid-February, 2000." By implication, this occurred because the Sapp Bros defaulted on its loan from USB. Thus, after this default, USB "[f]rom the time of its initial demand to the lessees . . . administered the portfolios of loans. . . ." This "administration" involved two methods: 1) collecting payments and contacting lessees who failed to make payments; 2) the repossession and sale of the collateral pledged to USB when the lessees were severely in default.
USB desires to frame the first manner of "administration" as an "impairment of collateral" issue and the second manner as a "commercial reasonableness" issue. The reason being, no doubt, that Jim and Lenora Sapp signed a guaranty agreement which contained a valid waiver of their "impairment of collateral" defense. While the Court agrees with USB that Jim and Lenora Sapp waived their right to plead pre-default impairment of collateral, the distinction that USB attempts to draw between the first manner of administration and the second is one without a difference.
The Indiana Supreme Court recognized in Farmers Loan Trust Company v. Letsinger, 652 N.E.2d 63 (Ind. 1995), that, although a guaranty agreement is not a negotiable instrument and therefore not governed by the U.C.C., signatories to a guaranty agreement retain the panoply of rights granted to accommodation parties to a negotiable instrument. Among these rights is the defense of pre-default impairment of collateral. However, as stated by the Supreme Court in footnote three of that opinion, such rights, recognized by Indiana common law, may be prospectively waived by the guarantor or surety in the guaranty agreement.
All of the facts at issue in this case occurred after Sapp Bros defaulted on its loan from USB. And as the Indiana Court of Appeals held in McEntire v. Indiana Nat'l Bank, 471 N.E.2d 1216, 1226 (Ind.Ct.App. 1984), post-default disposition of collateral is protected by the terms of Article 9 of the U.C.C. and may not be waived. As the court stated in McEntire, "a distinction must be made between the waiver of pre-default disposition of collateral when the guarantor is still only secondarily liable and post-default treatment of collateral when the guarantor is actually facing primary liability and is entitled to fair treatment in reduction of that liability." Id. Therefore, because both manners of "administration" occurredpost-default, and because neither Jim nor Lenora Sapp waived the protection afforded by Article 9 of the U.C.C. to a post-default commercially reasonable disposition of their collateral, the U.C.C. requires the commercial reasonableness of both methods USB utilized to "administer" the collateral. It is to that determination that the Court now turns.
Indiana Code section 26-1-9.1-610(a) provides that "[a]fter default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing." The statute further provides that "[e]very aspect of a disposition of collateral . . . must be commercially reasonable." Ind. Code § 26-1-9.1-610(b). In any action in which the secured party's failure to sell in a commercially reasonable manner is placed in issue, the secured party has the burden of establishing that the collection, enforcement, disposition or acceptance was commercially reasonable. Ind. Code § 26-1-9.1-626(2).
Section 26-1-9.1-627 provides guidance as to what constitutes a commercially reasonable sale:
(a) The fact that a greater amount could have been obtained by a collection, enforcement, disposition, or acceptance at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the collection, enforcement, disposition, or acceptance was made in a commercially reasonable manner.
(b) A disposition of collateral is made in a commercially reasonable manner if the disposition is made:
(1) in the usual manner on any recognized market;
(2) at the price current in any recognized market at the time of the disposition; or
(3) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.
Although subsection (a) allows a secured party some wiggle room, the Uniform Commercial Code Comment states, in subsection (2), that "a low price suggests that a court should scrutinize carefully all aspects of a disposition to ensure that each aspect was commercially reasonable."
The Indiana Court of Appeals fleshed these principles out even further in Hall v. Owen State Bank, 370 N.E.2d 918, 930 (Ind.App. 1977), wherein it stated: "[t]herefore, a sale to a dealer on the wholesale market will probably be the more reasonable approach in most cases." That case goes on to provide other variables relevant to commercial reasonableness, which include "the number of bids received or solicited . . .[, and] the time and place of the sale [which] must be such that they are reasonably calculated to bring a satisfactory turnout of bidders." Id. Finally, the Hall decision adopts the holding of another court which stated, "[i]t is the aggregate of circumstances in each case rather than specific details of the sale taken in isolation that should be emphasized in a review of the sale." Id. (quoting In re Zsa Zsa Limited, 352 F. Supp. 665, 670 (S.D.N.Y. 1972)).
Jim and Lenora Sapp called William Powers, a veteran in the industry, as a witness to testify as to what was required to succeed in this business. Powers stated that the job was time intensive in that a manager of a portfolio must be very diligent, work weekends, and follow clients with a series of phone calls when they became delinquent. Powers's testimony implied that a bank, such as USB, would not be prepared nor savvy enough to administer the leases as profitably as someone who knew the business. Jim Sapp also testified to that effect, saying that proper management of the leases was crucial to collecting money from the lessees and that USB did not contact him for advice on how to do the job properly.
Similarly, counsel for the Sapps cross-examined Rausch, the USB officer in charge of this account, at great length as to her efforts to remain in control of the business. Counsel questioned the reasonableness of USB's liquidation methods, indicating that 1) the bank disregarded proximity when it chose its auction venues, 2) the bank resold trucks with "poor" tires, 3) at times the bank towed, rather than drove, trucks to auction at added expense, and 4) the bank incurred unnecessary miscellaneous expenses including new batteries, fees to pull a truck out of the snow, and general wear and tear on the trucks. Most importantly, however, counsel questioned USB's decision to rewrite some delinquent lease agreements rather than immediately repossess and liquidate the trucks. Both parties agreed that, when the lessees were paying, it was more profitable to rewrite a delinquent lease rather than repossess the vehicle. However, the Sapps contend that USB should have immediately repossessed and liquidated many of the vehicles precisely because the lessees were not paying. USB, on the other hand, argued that rewriting the leases made the most business sense, given that a lease, if paid out, would produce the most profit. Due to this difference of opinion, the Court asked the parties to go through a large list of accounts and examine Rausch as to the decisions she made on any given account.
On some accounts, Jim Sapp testified that he would have managed the account differently. What was clear, however, was Rausch's commitment to and knowledge of each and every account at issue. She responded to questions about her actions regarding many accounts with exacting detail and fortified her decisions by filling in the gaps as to the verbal relationship she had with many of the lessees. Although much was made of Rausch's unorthodox record-keeping, and while the Court agrees that her notes initially appear scant, they must be viewed in conjunction with her ability to testify from them. In doing that, it cannot be said that Rausch was anything less than a credible witness or that her efforts were at all short of commercially reasonable.
Rebutting the Sapps' allegations of other mismanagement, Rausch also testified that, when choosing an auction venue, she used the internet service "MapQuest" in order to determine the closest place and shortest route. The Court also notes that the methods USB utilized in liquidating its collateral were all comparable to their relative alternative. Had USB put new tires on the trucks, it would have realized more profit only after the added expense of purchasing the new tires; driving the trucks instead of towing them is not without cost; and batteries, hazard, and miscellaneous wear and tear are unavoidable. Moreover, as suggested to be commercially reasonable in Hall, the trucks were liquidated, in each instance, in an active and recognized wholesale market, with many bidders, after proper notice to the Sapps.
Lastly, and as Powers testified, the trucking industry was severely affected by the economy's downturn at the time period relevant to the disposition of this collateral. To this end, it is important to note that the same economic factors which lead to the decline of Sapp Bros, Inc., contributed to the poor market conditions undoubtedly affecting the sale of the collateral at issue. With this in mind, it must be said that USB realized the current market price for the time period at issue. Therefore, in light of the foregoing, although USB did not manage the accounts in precisely the same manner as the Sapp Bros, the Court finds that, in the aggregate, USB's efforts to administer the collateral were commercially reasonable and hereby OVERRULES IN PART Jim and Lenora Sapp's objection to USB's claim.
Interest and Costs
The Sapps also raise an objection to the interest rate USB applied to their claim, as well as various charges USB has attributed to the administration of this case. The Sapps agree that interest is attributable to USB's claim pursuant to § 765(a)(5), but contend the rate should be the applicable federal judgment rate rather than the rate specified in the loan document.
The Ninth Circuit recently addressed this issue in In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002). In that opinion, the court contrasted the federal versus the contractual interest rates and concluded that the interests of "fairness, equality, and predictability in the distribution of interest on creditors' claims as well as the interest in applying federal law to federal bankruptcy cases, require[s] application of the federal judgment rate. . . ." Id. at 1234 (quoting In re Beguelin, 220 B.R. 94, 100-101 (9th Cir. BAP 1998). The court further grounded its decision on principles of statutory construction, stating that the definite article "the" in front of "legal rate" in § 765(a)(5)
indicates that Congress meant for a single source to be used to calculate post-petition interest. . . . The use of `legal rate' indicates that Congress intended the single source to be statutory because the commonly understood meaning of `at the legal rate' at the time the Bankruptcy Code was enacted was a rate fixed by statute. . . . Congress' choice of the phrase `interest at the legal rate' suggests that it intended for bankruptcy courts to apply one uniform rate defined by federal statute.
This Court is inclined to agree with the reasoning of the Ninth Circuit in Cardelucci and, therefore, adopts the rule handed down by it. The fundamental purpose behind the creation of a bankruptcy estate is to treat all creditors in like fashion. This rule, giving all § 765(a)(5) creditors the same federal judgment interest rate, rather than the disparate rates negotiated by individual creditors prior to the bankruptcy, serves that end. Furthermore, the principles of statutory interpretation utilized in Cardelucci are sound and lead to the same conclusion. Id. at 1234-1236. Therefore, the Court hereby SUSTAINS IN PART Jim and Lenora Sapp's objection to the interest rate employed by USB and does fix the interest at the applicable federal judgment rate.
The Sapps also objected to USB's various "Other Charges" including "External Legal" and "Internal Legal" charges because USB did not verify that suchfees accrued pre-petition. The Sapps' "Maximum Liability" as defined by the guaranties includes the principal amount plus "Lenders' costs, expenses, and attorneys' fees incurred in connection with or relating to (a) the collection of the Indebtedness, (b) the collection and sale of any collateral for the Indebtedness or this Guaranty, or (c) the enforcement of this Guaranty." This section further states, "[a]ttorneys' fees include, without limitation, attorneys' fees whether or not there is a lawsuit, and if there is a lawsuit, any fees and costs for trial and appeals." However, as the court noted in In re Loewen Group Int'l Inc., 274 B.R. 427, 444 (Bankr.D.Del. 2002), "[a]lthough a contractual provision providing for the recovery of attorneys' fees and costs may enable an unsecured creditor to pursue recovery of such fees and costs in an action in state court, in the context of bankruptcy, the creditor's right to assert such claims is limited by the provisions of the Bankruptcy Code."
A creditor's pre-petition attorneys' fees are a claim on the estate just like any other. They are governed by § 502(a) and deemed allowed unless there is an objection. Section 506(b) allows for a creditor's post-petition attorneys' fees, costs or other charges provided they are reasonable, and "[t]o the extent that an allowed secured claim is secured by property the value of which . . . is greater than the amount of such claim." As the majority view of the case law surrounding this provision suggests, "Congress, by permitting the recovery of attorney's fees in the case of an oversecured creditor, necessarily denied the recovery of attorney's fees in the case of an undersecured or unsecured creditor." In re Pride Companies, L.P., 285 B.R. 366, 372 (Bankr.N.D.Tex. 2002); accord In re Waterman, 248 B.R. 567, 573 (8th Cir. BAP 2000); Adams v. Zimmerman, 73 F.3d 1164, 1177 (1st Cir. 1996); In re Smith, 206B.R. 133, 115 (Bankr.D.Md. 1997). This common view stems from the legal maxim of statutory construction known as "expressio unius est exclusio alterius, meaning the expression of one is the exclusion of another. . . ." In re Pride, 285 B.R. at 372; see also United Savings Ass'n of Tex. v. Timbers of Inwood Forest Assocs. Ltd., 484 U.S. 365, 372-73 (1988) (holding that "the undersecured creditor, who has no [equity] cushion, falls within the general rule disallowing postpetition interest"); In re Waterman, 248 B.R. 567, 573 (8th Cir. BAP 2000) (holding that because an unsecured creditor's claim is calculated as of the date of the bankruptcy filing, see § 502(b), attorneys' fees incurred after the filing cannot become part of the claim). Therefore, because USB is an undersecured creditor in the Sapp Bros case, and an unsecured creditor in this case, its claim for attorneys' fees is limited to those fees which accrued prepetition and must be calculated as of the date of the Sapp Bros' bankruptcy filing.
Because USB did not provide the Court with an accounting of its legal fees and other charges, those fees cannot be determined by this Order. Therefore, USB is hereby ORDERED to submit to the Court and opposing counsel an accounting of its prepetition attorneys' fees and other charges within thirty (30) days of this Order. It should be noted, though, that USB's claim for their "Internal Legal" fees will not be allowed. The costs of in-house counsel are assumed within the note as the overhead costs of doing the business of any bank. Moreover, the guaranties at issue here provide only for the payment of the attorneys' fees associated with the collection of USB's collateral or any unpaid debt; not "Internal Legal" fees. IT IS SO ORDERED.