McCartney v. Integra National Bank North , 106 F.3d 506 ( 1997 )


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  •                                                                                                                            Opinions of the United
    1997 Decisions                                                                                                             States Court of Appeals
    for the Third Circuit
    2-11-1997
    McCartney v. Integra Natl Bank N
    Precedential or Non-Precedential:
    Docket 96-3023
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    THE UNITED STATES COURT OF APPEALS
    FOR THE THIRD CIRCUIT
    __________
    No. 96-3023
    __________
    LAMAR A. MCCARTNEY,
    Appellant
    v.
    INTEGRA NATIONAL BANK NORTH,
    Successor to McDOWELL NATIONAL BANK;
    GARY J. GAERTNER, U.S. TRUSTEE
    Appellee
    __________
    ON APPEAL FROM THE UNITED STATES DISTRICT COURT
    FOR THE WESTERN DISTRICT OF PENNSYLVANIA
    (D.C. No. 94-cv-00984)
    __________
    Argued October 24, 1996
    BEFORE: STAPLETON and NYGAARD, CIRCUIT JUDGES AND
    MAZZONE, District Judge*
    (Opinion Filed February 11, 1997)
    Donald R. Calaiaro (Argued)
    Calaiaro, Corbett and Bower
    1105 Grant Building
    Pittsburgh, Pa. 15219
    Counsel for Appellant
    P. Raymond Bartholomew (Argued)
    701 North Hermitage Road
    Hermitage, Pa. 16148
    Counsel for Appellee Integra
    National Bank, Sucessor to McDowell
    National Bank
    William F. Pineo
    764 Park Drive
    1
    P.O. Box 598
    Meadville, Pa.    16335
    Counsel for Chapter 7 Trustee
    For McCartney
    *    The Honorable A. David Mazzone, Senior District Judge for
    the District of Massachusetts sitting by designation.
    Nygaard, Circuit Judge:
    The district court affirmed a bankruptcy court's order
    denying a motion for summary judgment on an objection debtor-
    appellant Lamar McCartney filed to Integra National Bank's proof
    of claim.   McCartney argues on appeal that the bankruptcy court
    erred by not discharging the debt he owes to Integra.       We will
    affirm.
    I.
    The facts are undisputed.    On September 26, 1989, Integra
    loaned $80,000 to Lamar’s Restaurant & Lounge, Inc., which was
    guaranteed by the Small Business Administration.       As security for
    the loan, Lamar’s granted Integra a first mortgage on Lamar’s
    corporate property.   McCartney guaranteed the loan to Lamar’s by
    granting Integra a second mortgage lien on land owned by him
    individually.
    In May 1992, McCartney filed a voluntary petition under
    Chapter 13 of the Bankruptcy Code.       He then filed a motion to
    sell Lamar’s corporate property.       At the conclusion of the sale
    hearing, McCartney's Amended Plan for Reorganization was adopted
    as an Interim Plan, pending a status report.       The parties and the
    court agreed at the sale hearing that Integra, acting with the
    2
    SBA, would put Lamar’s corporate property through a sheriff's
    sale to determine what deficiency, if any, McCartney, as
    guarantor of Lamar’s loan, owed to Integra.
    Fearing that the sheriff’s sale would not occur until after
    the bar date in McCartney’s bankruptcy proceeding, Integra filed
    Proof of Claim No. 6 in the amount of $38,564.66 against
    McCartney’s individual property pledged as collateral for Lamar’s
    loan.    The state court subsequently sold Lamar’s corporate
    property.    Integra purchased Lamar’s corporate property at the
    sale for costs and taxes.    Integra then resold the property and
    agreed to modify its proof of claim to show a deficiency of
    $29,638.14 plus interest and attorney’s fees.
    Almost ten months later, McCartney filed an objection to
    Integra’s proof of claim, asserting that Integra’s claim on
    Lamar’s underlying debt was satisfied as a matter of law because
    Integra failed to file a petition to fix the fair market value of
    the property within six months of the sheriff’s sale as required
    under the Pennsylvania Deficiency Judgment Act, 42 Pa.C.S.A. §
    8103.    Both parties filed cross-motions for summary judgment,
    which the bankruptcy court denied.1
    1
    On April 12, 1994, the bankruptcy court heard argument on
    the valuation of Lamar’s property sold at the sheriff’s sale. On
    May 3, 1994, the court determined that the value of the Lamar’s
    property was $20,000 and directed Integra to recalculate its
    deficiency claim based on this value. On July 20, 1994, the
    bankruptcy court converted the Debtor’s Chapter 13 case to a
    Chapter 7 case. Since then, the Chapter 7 Trustee has sold some
    of McCartney’s other property and applied the net proceeds to the
    debt owed to Integra. As a result, it appears that the balance
    due Integra has been reduced to $4,379.88 plus interest and
    additional attorney’s fees.
    3
    II.
    On appeal, McCartney asserts that the bankruptcy court erred
    by concluding that the automatic stay provision of the Bankruptcy
    Code, 11 U.S.C. § 362, precluded Integra from complying with the
    requirements of the DJA.    More specifically, McCartney maintains
    that the automatic stay applies only to actions commenced against
    McCartney himself, and therefore, the stay imposed in his
    bankruptcy did not prevent Integra from seeking a deficiency
    judgment against Lamar’s within the time permitted under the DJA.
    Since Integra failed to file a petition in state court to fix
    the fair market value of Lamar’s corporate property within six
    months of the sheriff’s sale, McCartney argues, Integra’s claim
    against Lamar’s is deemed released and satisfied as a matter of
    law.    As a consequence, McCartney contends that he, as guarantor,
    is also discharged from any deficiency remaining on Integra’s
    loan to Lamar’s.    Thus, McCartney concludes, Proof of Claim No. 6
    filed by Integra in his bankruptcy should be stricken.
    III.
    Under Pennsylvania law, every judgment creditor who forces
    real estate to be sold in an execution sale must comply with the
    DJA to protect its claim to any unpaid balance remaining after
    the sale.    42 Pa.C.S.A. § 8103.       Under the DJA, the judgment
    creditor has six months after the debtor’s collateral is sold in
    which to petition the court to fix the fair market value of the
    real property.    42 Pa.C.S.A. § 5522(b).       Failure to file a
    petition within this time period “creates an irrebuttable
    presumption that the creditor was paid in full in kind.”            Valley
    4
    Trust Co. of Palmyra v. Lapitsky, 
    488 A.2d 608
    , 611 (Pa. Super.
    Ct. 1985).   This presumption serves to discharge all parties
    either directly or indirectly liable to the judgment creditor for
    payment of the debt, including guarantors.   42 Pa.C.S.A. §
    8103(d); see also Commonwealth Bank and Trust Co. v. Hemsley, 
    577 A.2d 627
    , 631 (Pa. Super. Ct.), alloc. denied, 
    583 A.2d 793
    (Pa.
    1990).
    Significantly, to comply with the requirements of the DJA,
    the judgment creditor must either (1) name in the petition, or
    (2) give notice to, any “debtor, obligor, guarantor, mortgagor,
    and any other person directly or indirectly liable to the
    judgment creditor for the payment of the debt.”    42 Pa.C.S.A.
    §8103(b).    Default on this notice requirement discharges all
    personal liability to the judgment creditor for parties neither
    served with notice nor named in the petition.   
    Id. It is
    undisputed that Integra has never filed a petition in
    state court to fix the fair market value of Lamar’s property sold
    at the sheriff’s sale.    Under normal circumstances, failing to
    file a petition would discharge whatever remaining debt Lamar’s
    owed to Integra.    Moreover, Integra’s failure to meet the
    statutory requirements of the DJA would also normally discharge
    McCartney’s guarantee of Lamar’s debt because, as a matter of
    law, there is no underlying debt owing to Integra.
    This case, however, does not present a normal situation
    where the DJA can be applied by its literal terms.    As the
    bankruptcy court rightly noted, when McCartney filed for
    bankruptcy, the automatic stay provision of 11 U.S.C. § 362(a)
    5
    was triggered and effectively precluded Integra from state court
    actions of any type against McCartney.    Consequently, McCartney
    cannot use Integra’s failure to comply with the DJA to avoid the
    proof of claim Integra filed against him.
    Section 362(a) of the Code operates to stay
    ... (1) the commencement or continuation, including the issuance
    or employment of process, of a judicial, administrative, or
    other action or proceeding against the debtor that was or
    could have been commenced before the commencement of the
    case under this title, or to recover a claim against the
    debtor that arose before the commencement of the case under
    this title . . . .
    11 U.S.C. § 362(a)(1) (1996).    The automatic stay serves several
    purposes.    The stay gives a debtor a breathing spell from
    creditors by stopping all collection efforts and all foreclosure
    actions.    Maritime Elec. Co., Inc. v. United Jersey Bank, 
    959 F.2d 1194
    , 1204 (3d Cir. 1991) (citation omitted).    In this
    respect, the stay permits the debtor to attempt a repayment or
    reorganization plan; or it simply relieves the debtor of the
    financial pressures that drove him into bankruptcy.     
    Id. at 1204.
    The stay also protects creditors by preventing particular
    creditors from acting unilaterally to obtain payment from a
    debtor to the detriment of other creditors.    
    Id. (citation omitted).
    Although the scope of the automatic stay is broad, the clear
    language of section 362(a) stays actions only against a “debtor.”
    
    Id. (citing Association
    Of St. Croix Condominium Owners v. St.
    Croix Hotel Corp., 
    682 F.2d 446
    , 448 (3d Cir. 1982)).    As a
    consequence, “[i]t is universally acknowledged that an automatic
    stay of proceedings accorded by § 362 may not be invoked by
    6
    entities such as sureties, guarantors, co-obligors, or others
    with a similar legal or factual nexus to the . . . debtor.”     
    Id. at 1205
    (quoting Lynch v. Johns-Manville Sales Corp., 
    710 F.2d 1194
    , 1196-97 (6th Cir. 1983)); see also United States v. Dos
    Cabezas Corp., 
    995 F.2d 1486
    , 1491-93 (9th Cir. 1993) (holding
    that stay does not preclude government from pursuing deficiency
    judgment against nondebtor cosignors of promissory note); Croyden
    Associates v. Alleco, Inc., 
    969 F.2d 675
    , 677 (8th Cir. 1992)
    (refusing to extend stay to claims against solvent codefendants),
    cert. denied sub nom, Harry and Jeanette Weinberg Foundation,
    Inc. v. Croyden Associates, 
    507 U.S. 908
    (1993); Credit Alliance
    Corp. v. Williams, 
    851 F.2d 119
    , 121-22 (4th Cir. 1988)
    (enforcing a default judgment entered against a nondebtor
    guarantor of a note during the pendency of the corporate
    obligor’s bankruptcy).   As one court has reasoned, a primary
    rationale for refusing to extend the automatic stay to
    nonbankrupt third parties is to insure that creditors obtain “the
    protection they sought and received when they required a third
    party to guaranty the debt.”    Credit 
    Alliance, 851 F.2d at 121
    ;
    accord In re F.T.L., Inc., 
    152 B.R. 61
    , 63 (Bankr. E. D. Va.
    1993).
    This prohibition, however, has been liberalized in a number
    of cases where courts have applied the automatic stay protection
    to nondebtor third parties.    Relying on A.H. Robins Co., Inc. v.
    Piccinin, 
    788 F.2d 994
    , 999 (4th Cir.), cert. denied, 
    479 U.S. 876
    (1986), these courts have extended the automatic stay to
    nonbankrupt codefendants in “unusual circumstances.”   As the case
    7
    law demonstrates, courts have found “unusual circumstances” where
    “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
    (relying on both the automatic stay provision and the
    bankruptcy court’s equitable powers under 11 U.S.C. § 105 to
    enjoin actions against nondebtor codefendants in the Dalkon
    Shield products liability litigation because of the potential
    impact on the estate and the availability of insurance proceeds
    to satisfy the claims); see also, In re American Film
    Technologies, Inc., 
    175 B.R. 847
    , 855 (Bankr. D. Del. 1994)
    (staying prosecution of wrongful discharge claims against former
    and present directors of debtor corporation because of debtor’s
    indemnification obligations and its possible exposure to
    collateral estoppel prejudice); In re Family Health Services,
    Inc., 
    105 B.R. 937
    , 942-43 (Bankr. C. D. Cal. 1989) (staying
    collection actions against nondebtor members of debtor HMO
    because judgments against nondebtors would trigger claims for
    indemnification from the debtor HMO).
    Courts have also extended the stay to nondebtor third
    parties where stay protection is essential to the debtor’s
    efforts of reorganization.   See, e.g., In re Lazarus Burman
    Associates, 
    161 B.R. 891
    , 899-900 (Bankr. E. D. N.Y. 1993)
    (enjoining guaranty actions against nondebtor principals of
    debtor partnerships because principals were the only persons who
    could effectively formulate, fund, and carry out debtors’ plans
    8
    of reorganization); In re Steven P. Nelson, 
    140 B.R. 814
    , 816-17
    (Bankr. M. D. Fla. 1992) (enjoining actions against nondebtor
    guarantor of debtor corporation’s obligations where guarantor was
    president of debtor and president's services, expertise and
    attention were essential to the reorganization of the debtor);
    see also, Paul H. Deutch, Expanding The Automatic Stay:
    Protecting Nondebtors In Single Asset Bankruptcies, 2 Am. Bankr.
    Inst. L. Rev. 453 (1994).
    Here, McCartney argues that the automatic stay only applied
    to him in his individual capacity, not to Lamar’s.   As such, he
    maintains that Integra was not stayed from pursuing a deficiency
    judgment in state court against Lamar’s, as required under the
    DJA.    In response, Integra concedes that under normal
    circumstances the automatic stay does not preclude creditors from
    pursuing their right to payment from nondebtor third parties.
    Indeed, Integra notes that, acting in compliance with this
    general rule, it pursued Lamar’s to foreclosure and sheriff’s
    sale.    However, Integra asserts that it could not have proceeded
    any further against Lamar’s to obtain a deficiency judgment
    because it would have been required under the terms of the DJA to
    name McCartney as a respondent in the petition and thereby
    violate the automatic stay protecting him.   The bankruptcy court
    found Integra’s argument to be persuasive and reasoned that
    permitting Integra to name McCartney in a deficiency judgment
    action in state court at the same time that his bankruptcy case
    was pending would defeat the purpose of § 362 to centralize all
    prebankruptcy civil claims against a debtor in the bankruptcy
    9
    court.   In re McCartney, 
    165 B.R. 18
    , 21 (Bankr. W. D. Pa. 1994).
    We agree.   It is undisputed that, had Integra sought a
    deficiency judgment against Lamar’s, it would have been required
    under the DJA to name McCartney as a respondent in its petition
    or risk discharging him as loan guarantor.    It is also undisputed
    that, had Integra named McCartney as a respondent in a deficiency
    action against Lamar’s, it would have clearly violated the
    automatic stay in place in his bankruptcy.    Moreover, it is clear
    that following the sheriff’s sale, Lamar’s, as a corporate
    entity, no longer had any assets.    Consequently, McCartney, as
    guarantor, would have been liable for satisfying any deficiency
    judgment claim asserted by Integra.    Simply stated, there was no
    way for Integra to pursue a deficiency judgment action against
    Lamar’s and to protect its right to satisfaction of Lamar’s debt
    without involving McCartney in the process.
    Given McCartney’s necessary participation in any deficiency
    judgment action initiated by Integra against Lamar’s in state
    court, we find that the bankruptcy court properly concluded that
    the automatic stay extended to enjoin Integra from complying with
    the requirements of the DJA.   This case falls squarely under the
    “unusual circumstances” exception as developed in A.H. Robins and
    its progeny: any deficiency judgment recovery from Lamar’s would
    have necessarily impacted upon McCartney’s estate.    Indeed,
    because McCartney, as guarantor, was secondarily liable for any
    deficiency entered against Lamar’s, and Lamar’s, following the
    foreclosure and sheriff’s sale, had no assets, McCartney would
    have been the real party defendant in a deficiency judgment
    10
    action by Integra against Lamar’s.        Any deficiency judgment
    entered against Lamar’s would have operated as a judgment or
    finding against him; an outcome clearly in tension with the
    purposes of the automatic stay.       Accordingly, Integra was stayed
    from pursuing a deficiency judgment action against the nondebtor
    third party Lamar’s because McCartney was, in essence, the real
    party in interest.
    IV.
    Assuming, arguendo, that the automatic stay precluded
    Integra from pursuing a deficiency judgment action in state
    court, McCartney asserts that Integra should have sought relief
    from the automatic stay to allow it to name both Lamar’s and
    McCartney in a deficiency judgment petition.        This same argument
    was considered and rejected in In re Wilkins, 
    150 B.R. 127
    (Bankr. M. D. Pa. 1992), an opinion we find instructive.
    In Wilkins, the creditor sought relief from an automatic
    stay to commence a deficiency judgment action under the DJA
    against both the debtor and nondebtor obligors.        The court denied
    the creditor’s motion for two primary reasons.        First, the court
    held that 11 U.S.C. § 108(c) specifically extends the six-month
    limitation period for deficiency judgment actions under 42
    Pa.C.S.A. § 5522(b).2      
    Id. at 128.
       Thus, contrary to the
    2
    Section 108(c) of the Bankruptcy Code reads, in pertinent
    part:
    [I]f applicable nonbankruptcy law . . . fixes a period
    for commencing or continuing a civil action in a court other than
    a bankruptcy court on a claim against the debtor, . . . and such
    period has not expired before the date of the filing of the
    petition, then such period does not expire until the later of--
    11
    creditor’s argument, the Wilkins court found no urgency that the
    debtor’s obligation to the creditor would be discharged unless
    the creditor received relief from stay and filed a deficiency
    petition within the six month limitation period.      Second, the
    court noted that the deficiency issues were likely to be settled
    in the bankruptcy court and consequently, there was no reason for
    the debtor to defend litigation in state court that could be
    settled in the bankruptcy forum.     
    Id. at 128-29.
      In this
    respect, the court expressed its concern that the debtor not be
    “burdened by litigation and resulting legal fees if unnecessary
    at this time.”   
    Id. at 129.3
    We agree with the Wilkins court that debtors should not be
    burdened by state court litigation when deficiency judgment
    actions impacting upon the debtor’s estate can be settled in the
    bankruptcy forum.   Indeed, to permit state court deficiency
    judgment actions involving the debtor to proceed when they can be
    (1) the end of such period, including any suspension of such
    period occurring on or after the commencement of the
    case; or
    (2) 30 days after notice of the termination or expiration of the
    stay under section 362 . . . with respect to such
    claim.
    3
    The court also held that the creditor must commence a
    deficiency judgment action against the nondebtor obligors within
    the six-month limitation period permitted by state law. 
    Wilkins, 150 B.R. at 128
    . Significantly, however, the court expressly
    noted that permitting the creditor to proceed against the
    nondebtor obligors would have no impact upon the debtor’s
    deficiency liability, and that the assets of the nondebtors could
    be collected without risk of discharging the debtor pursuant to
    the DJA. 
    Id. Thus, unlike
    the present case, the Wilkins court
    found no “unusual circumstances” that would warrant extending the
    automatic stay to the nondebtor obligors.
    12
    adjudicated in the bankruptcy court is to do violence to the
    purposes of the automatic stay.    As discussed earlier, by
    centralizing all prebankruptcy civil claims against a debtor in
    the bankruptcy court, the debtor is granted a “breathing spell”
    during which he is relieved of the financial pressures that drove
    him to bankruptcy.   
    Maritime, 959 F.2d at 1204
    .    The
    centralization of all claims in the bankruptcy court also permits
    the assets of the debtor’s estate to be marshaled for
    distribution to creditors in an orderly and equitable fashion.
    
    Id. (citation omitted).
        These benefits of the automatic stay
    could not be achieved if creditors are permitted relief from stay
    to pursue state court deficiency judgment actions impacting on
    the estate of the debtor.    Debtors would be forced to expend
    valuable time, energy and resources defending against state court
    litigation that could be settled directly in the bankruptcy
    court.4
    Moreover, we fail to see how McCartney was harmed by
    Integra’s failure to seek relief from the automatic stay.     As the
    record clearly demonstrates, the bankruptcy court held a
    valuation hearing and heard argument concerning the fair market
    value of Lamar’s property sold at the sheriff’s sale.     The court
    subsequently entered an order finding the value of Lamar’s
    4
    We note also that considerations of judicial economy weigh
    against granting creditors relief from stay to pursue state court
    deficiency judgment actions that impact upon the estate of the
    debtor and could be settled in the bankruptcy court. Indeed, the
    time, energy and resources of the courts are no less valuable
    commodities to preserve when it is possible to litigate a claim
    in one forum instead of two.
    13
    property to be $20,000 and directing Integra to recalculate its
    deficiency claim based on that value.   Thus, the bankruptcy court
    afforded McCartney an opportunity to present evidence and
    testimony at a hearing specifically convened to determine the
    fair market value of the property sold at the sheriff’s sale.
    This is precisely the same opportunity to be heard that McCartney
    would have been granted in a state court deficiency judgment
    action commenced under the DJA.    See 42 Pa.C.S.A. § 8103(c)(4).
    In addition, the bankruptcy court’s determination of the fair
    market value of the Lamar’s property resulted in a decrease in
    the deficiency claim owing to Integra, further demonstrating that
    McCartney was not harmed by Integra’s failure to seek relief from
    the stay.   Insofar as McCartney would have us find that he was
    prejudiced by his inability fully to escape liability for his
    guaranty, as may have been possible under the DJA, we decline to
    do so.   We will not transmogrify the DJA into a means for
    guarantors to escape liability from their guaranties.5
    5
    See Fidelity Bank, N.A. v. Bourger, 
    663 A.2d 213
    , 214 (Pa.
    Super. Ct. 1995), alloc. denied, 
    670 A.2d 142
    (Pa. 1996), holding
    that the purpose of the Deficiency Judgment Act is
    to relieve a debtor of further personal liability to the
    creditor, if the real property taken by the creditor on
    an execution has a “fair market value”, [sic] as of the
    date of the execution sale, sufficient so that the
    creditor may dispose of the property to others (or
    even, sometimes, use it himself) without a net loss to
    the creditor[.]
    (citations and internal quotations omitted) (emphasis added).
    14
    Accordingly, we conclude that none of McCartney’s substantive
    rights were prejudiced by Integra’s failure to seek relief from
    the automatic stay.
    V.
    In his final argument, McCartney asserts that the bankruptcy
    court erred by holding that 11 U.S.C. § 108(c) operated to
    suspend the limitations period for initiating a deficiency
    judgment action in state court pursuant to the DJA.    Because we
    have already determined that Integra was stayed from pursuing a
    deficiency judgment action in state court against either Lamar’s
    or McCartney, we need not decide this issue.   Nonetheless, we
    note parenthetically that the Pennsylvania Superior Court has
    unequivocally held that, under 11 U.S.C. § 108(c)(2), the six
    month limitation period for the filing of a deficiency petition
    pursuant to the DJA does not expire until thirty days after
    notice of the termination of the automatic stay.    Citizens
    National Bank of Evans City v. Gold, 
    653 A.2d 1245
    , 1247-48 (Pa.
    Super. Ct. 1995) (citing Wilkins); accord In re C.K. Smith, 
    192 B.R. 397
    , 399-400 (Bankr. W. D. Pa. 1996).
    VI.
    In summary, we are satisfied that Integra took all the steps
    legally possible to protect its rights to a deficiency claim
    against McCartney as guarantor of Lamar’s debt.    Integra filed a
    proof of claim in McCartney’s bankruptcy proceeding and pursued
    Lamar’s to foreclosure and sheriff’s sale.   Since any other
    action to collect on the deficiency would have necessarily
    involved McCartney, Integra could not proceed further without
    15
    either violating the automatic stay or sacrificing its deficiency
    claim against McCartney as guarantor of Lamar’s debt.    We
    conclude that Integra was stayed from initiating a deficiency
    judgment action against Lamar’s and McCartney in state court.
    Accordingly, we will affirm the order of the district court.
    MCCARTNEY V. INTEGRA NATIONAL BANK NORTH, ETC. - NO. 96-3023
    STAPLETON, J., concurring.
    McCartney argues that the DJA released his guaranty
    obligation to Integra when the bank failed to institute a
    deficiency proceeding naming him as a guarantor within six months
    of its purchase of the property at the execution sale.    This is
    an untenable position.   The automatic stay provision of the
    Bankruptcy Code, 11 U.S.C. § 362, clearly would be undermined by
    the enforcement in this situation of that portion of the DJA
    releasing a guarantor who is not so named.   42 Pa. C.S.A.
    § 8103(b).   If the court were willing to rest its decision on
    this ground, I would join without comment.   The court says a
    great deal more, however, and I am, accordingly, unable to join
    in its opinion.
    It is unnecessary for the court to address the issue of
    whether the DJA in this situation has the effect of releasing
    Lamar's Restaurant & Lounge's obligation to Integra.
    Accordingly, I would not address that issue.   Were it necessary
    16
    for the court to address it, however, I would find no
    justification for concluding, as does the court, that the
    automatic stay provision deprives a primary obligor not in
    bankruptcy of the benefit that the DJA intended it to have. There
    are simply no "unusual circumstances" warranting an exception
    from the general rule that § 362 applies only to a debtor in
    bankruptcy.   The court's conclusion to the contrary, while it
    makes no difference here, is likely to lead to mischief in the
    context of other cases.
    As the court persuasively demonstrates, there can be no
    question that giving full effect to the DJA would undercut the
    objective of the automatic stay of § 362.    There is thus a
    conflict here between state law and bankruptcy law that must be
    resolved.   Under the Supremacy Clause, in cases of irreconcilable
    conflict, state law must give way.    This does not, however, give
    a court an unlimited license to decline enforcement of state
    rules of decision.   The court must look for the accommodation
    which will secure the objective of the bankruptcy law and, at the
    same time, intrude least on the objective or objectives
    underlying the state law rule.
    The accommodation that this approach counsels here requires
    the following conclusions:
    (a) The objective of § 362 can be secured by holding
    unenforceable that portion of the DJA which requires
    the creditor to join the bankrupt guarantor in the DJA
    proceeding upon pain of losing his claim against the
    bankrupt guarantor. It would necessarily follow that
    the bankrupt guarantor would not be bound by the
    deficiency determination unless he chose, with court
    approval, to participate. It also follows that the
    bankrupt guarantor can be pursued in bankruptcy court
    during the period specified in § 108(c) of the
    17
    Bankruptcy Code, even though the creditor may not be
    successful if the claim has been discharged for some
    reason other than this portion of the DJA.
    (b) There is nothing inconsistent between § 362 and
    that portion of the DJA that requires an executing
    creditor to file a deficiency proceeding against the
    primary debtor in order to preserve his claim against
    the primary debtor. Giving effect to this portion of
    the DJA would be consistent with the rationale of
    Maritime Electric Co. v. U.S. Jersey Bank, 
    959 F.2d 1194
    (3d Cir. 1991). Moreover, as I have noted, I find
    nothing in the Code that would justify depriving the
    primary debtor of the protection of the DJA.
    The difference between these conclusions and those reached
    by the court is not material here because McCartney argues only
    that he was released under the terms of the DJA.   He does not
    argue that he was released by the effect which Pennsylvania law
    accords an instrument having the terms of his note.6   The
    difference between my conclusions and those of the court would be
    important, however, if it appeared that Pennsylvania follows the
    generally accepted rules regarding the effect on a guarantor of
    releasing the primary debtor and if the plaintiff were relying on
    that law.
    We have no occasion here to comment on Pennsylvania's rule,
    but the generally accepted rule is that a "party who holds a
    contract of guaranty may by his act release the guarantor, even
    though he may not intend to do so.   A guarantor [, for example,]
    is discharged by operation of law from further liability by any
    act which extinguishes the principal obligation . . . ."     38A
    6 The appendix does not contain what McCartney refers to as his
    note of guaranty, and he cites no Pennsylvania case law on
    whether and under what circumstances release of the primary
    obligor releases a guarantor or surety, etc.
    18
    C.J.S. Guaranty § 83 at 642 (1996).    I perceive no inconsistency
    between the Bankruptcy Code and a state law rule which permits
    parties to bargain for an arrangement such that the guarantor
    will be liable only if the primary debtor is not released by the
    creditor.   It necessarily follows that there is nothing
    inconsistent between the bankruptcy law and enforcement of this
    generally accepted state law rule.    It would thus be permissible
    to hold in an appropriate case that a creditor in a state with
    such a rule releases his claim against a guarantor in bankruptcy
    if it allows its rights against the primary debtor to lapse by
    failing to pursue a DJA type proceeding within six months.
    I realize that such a holding would mean that a creditor in
    such a state would have to pursue the primary debtor in a
    deficiency proceeding even where it has little or no hope of
    being able to collect from the primary debtor.   But that is a
    policy choice made in statutes like the DJA, and we have no
    justification for rejecting that policy choice and no basis for
    drawing a line between cases where the primary debtor has no
    assets, a few assets, or many assets but perhaps not enough to
    cover the judgment.
    The statutory provisions relied on by McCartney are
    preempted by federal bankruptcy law.   I would affirm the judgment
    of the district court for that reason.
    19
    

Document Info

Docket Number: 96-3023

Citation Numbers: 106 F.3d 506, 37 Collier Bankr. Cas. 2d 713, 1997 U.S. App. LEXIS 2199

Judges: Stapleton, Nygaard, Mazzone

Filed Date: 2/11/1997

Precedential Status: Precedential

Modified Date: 11/4/2024

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