DocketNumber： 96-2009
Filed Date： 5/5/1997
Status： Precedential
Modified Date： 9/21/2015
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 96-2009
IN RE HELEN D. GENS, d/b/a
HELEN GENS AND ASSOCIATES,
Appellant,
v.
RESOLUTION TRUST CORPORATION
(FEDERAL DEPOSIT INSURANCE CORPORATION),
Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Reginald C. Lindsay, U.S. District Judge] ___________________
____________________
Before
Selya, Circuit Judge, _____________
Cyr, Senior Circuit Judge, ____________________
and Stahl, Circuit Judge. _____________
____________________
Richard H. Gens for appellant. _______________
Barbara R. Sarshik, Counsel, FDIC, with whom Ann S. DuRoss, ____________________ ______________
Assistant General Counsel, FDIC, Thomas L. Hindes, Senior Counsel, _________________
FDIC, Joseph G. Butler, and Barron & Stadfeld were on brief for __________________ __________________
appellee.
____________________
May 5, 1997
____________________
CYR, Senior Circuit Judge. Chapter 11 debtor-in- CYR, Senior Circuit Judge. ______________________
possession Helen D. Gens ("Gens") challenges a bankruptcy court
order which allowed the Federal Deposit Insurance Corporation
("FDIC") to amend its proof of claim following the bar date for
filing claims. We affirm.
I I
BACKGROUND BACKGROUND __________
In July 1988, Gens executed a promissory note ("the
Gens Note") payable to U.S. Funding Inc. of America ("U.S.
Funding") in the principal amount of $70,000, by signing it both
in her "individual" capacity and in her representative capacity
as trustee for the Old Jail Trust ("Trust"). The Gens Note was
secured by a third mortgage on real property in Barnstable,
Massachusetts, owned by the Trust ("the Barnstable Property").
Although the Barnstable Property was subject to two prior
mortgages, U.S. Funding and Gens allegedly arranged for $36,000
of the $70,000 in loan proceeds to be used to satisfy the
preexisting second mortgage. U.S. Funding promptly assigned the
Gens Note to Key Financial Services ("Key"), which assigned it to
Home Owners Savings Bank ("Home Owners").
In October 1989, Home Owners commenced suit against Key
in federal district court, alleging that the purchase-sale
agreement, whereby Home Owners acquired the Gens Note from Key,
had been induced by fraud or that Key had breached its title- __
insurance provisions. Home Owners demanded either rescission or
damages for breach of contract.
2
The Trust defaulted on the Gens Note in or about
January 1990 and the first mortgagee foreclosed on the Barnstable
Property. The foreclosure sale resulted in no surplus for
application to any junior lien, including the third mortgage
securing the Gens Note. In September 1990, Home Owners was
declared insolvent and the Resolution Trust Corporation ("RTC")
was appointed receiver. RTC designated Knutson Mortgage
Corporation ("Knutson") as its servicing agent on the Gens Note,
and gave Knutson a limited power of attorney.
Meanwhile, in the ongoing federal action brought by
Home Owners against Key, the district court entered partial
summary judgment for RTC and Home Owners, finding that Key had
breached the purchase-sale agreement. The attendant district
court order directing Key to repurchase the Gens Note never
became final, however, apparently because RTC and Key were unable
to agree upon a repurchase price.
Gens commenced a voluntary chapter 11 proceeding in
September 1993, but failed to schedule the Gens Note as a
liability. Knutson, as RTC's agent, filed a proof of claim
("POC") in relation to the Gens Note in December 1993 ("original
POC"), well before the May 16, 1994 bar date for filing claims.
The original POC incorrectly listed Knutson itself as the
creditor, failed to disclose that Knutson was the authorized RTC
servicing agent, mischaracterized the claim as secured, and
mistakenly identified February 24, 1989 (rather than July 1988)
as the date Gens incurred the Gens Note obligation.
3
Almost seven months after the bar date, Knutson filed
an amended POC in relation to the Gens Note, correctly listing
RTC as the creditor, but still (i) failing to disclose that
Knutson was RTC's agent, and (ii) incorrectly characterizing the
claim as "secured." Knutson eventually submitted additional
amended POCs correcting these deficiencies.
Gens objected to the original and amended POCs,
asserting inter alia judicial estoppel and discharge of the note, _____ ____
see Mass. Gen. Laws Ann. ch. 106, 3-606. While these ___
objections were pending, FDIC, successor to RTC, was substituted
as the creditor on all POCs filed by Knutson. Ultimately, the
objections to the original and amended POCs were rejected by the
bankruptcy court and the district court affirmed.
II II
DISCUSSION DISCUSSION __________
A. Judicial Estoppel A. Judicial Estoppel _________________
The companion doctrines of judicial estoppel and
election of remedies1 essentially preclude a party from asserting
a legal or factual position "inconsistent" with its position in a
prior proceeding. See Patriot Cinemas, Inc. v. General Cinema ___ ______________________ ______________
Corp., 834 F.2d 208, 212 (1st Cir. 1987). The estoppel defense _____
advanced by Gens is predicated entirely on the contract-
rescission claim Home Owners asserted in the federal court action
____________________
1The "election of remedies" defense likewise derives from
the equitable doctrine of estoppel. See Butcher v. Cessna ___ _______ ______
Aircraft Co., 850 F.2d 247, 248 (5th Cir. 1988), cert. denied, _____________ _____ ______
489 U.S. 1067 (1989); In re Leonardi's Int'l, Inc., 123 B.R. 668, ____________________________
669 (Bankr. S.D. Fla. 1991).
4
against Key, alleging inter alia that Key had made material _____ ____
misrepresentations in negotiating the purchase-sale agreement.
Implicit in Home Owners' demand for rescission of the purchase-
sale agreement was its averment that Key's fraud rendered the
purchase-sale agreement voidable ab initio, and therefore that __ ______
Home Owners never became a "holder" of the Gens Note. See, e.g., ___ ____
In re Southern Indus. Banking Corp., 46 B.R. 306, 313 (Bankr. _____________________________________
E.D. Tenn. 1985) ("A party to a transaction induced by fraud may
elect between two remedies he may treat the contract as
voidable and sue for the equitable remedy of rescission or he may
sue for damages at law under the tort theory of 'deceit.'").
In January 1992, the district court awarded summary
judgment to RTC on its contract claim. Gens now contends,
therefore, that FDIC is estopped from asserting a claim under the
Gens Note in her bankruptcy proceeding, since its POC is legally
and factually inconsistent with the litigation position adopted
by Home Owners in the district court action, namely, that Home
Owners never became a holder of the Gens Note because the
purchase-saleagreementwasrescindablefromitsinception.Wedisagree.2
____________________
2Although Gens argues that the bankruptcy court decision
must be reviewed de novo, we have yet to determine the exact __ ____
standard for reviewing applications of the doctrine of judicial
estoppel. See Desjardins v. Van Buren Community Hosp., 37 F.3d ___ __________ _________________________
21, 23 (1st Cir. 1994) (expressly reserving question); cf. ___
McNemar v. Disney Store, Inc., 91 F.3d 610, 613 (3d Cir. 1996) _______ ___________________
(adopting "abuse of discretion" standard), cert. denied, 117 S. _____ ______
Ct. 958 (1997); Data Gen. Corp. v. Johnson, 78 F.3d 1556, 1565 ________________ _______
(Fed. Cir. 1996) (same); Yanez v. United States, 989 F.2d 323 _____ _____________
(9th Cir. 1993) (same). "In reality, judicial estoppel is not
extrinsically a matter of fact or law; the issues that arise may
turn out to be ones of raw fact, abstract law, or something in
between, e.g., the application of a general standard to a known
5
Judicial estoppel is not implicated unless the first
forum accepted the legal or factual assertion alleged to be at ________
odds with the position advanced in the current forum:
[W]here a party assumes a certain position in
a legal proceeding, and succeeds in ________
maintaining that position, he may not
thereafter, simply because his interests have
changed, assume a contrary position,
especially if it be to the prejudice of the
party who has acquiesced in the position
formerly taken by him. . . . Judicial
estoppel should be employed when a litigant
is "playing fast and loose with the courts,"
and when "intentional self-contradiction is
being used as a means of obtaining unfair _________
advantage in a forum provided for suitors
seeking justice."
Patriot Cinemas, 834 F.2d at 212 (emphasis added) (citations ________________
omitted).3 Similarly, the primary purpose served by the
____________________
set of facts." Desjardins, 37 F.3d at 23. It is not necessary __________
to determine the precise standard of review at this juncture,
however, since the bankruptcy court ruling would be affirmed even
on plenary review. See id. ___ ___
3See United States v. Levasseur, 846 F.2d 786, 793 (1st ___ _____________ _________
Cir.) (estoppel applies where party previously "obtained a
litigation benefit"), cert. denied, 488 U.S. 894 (1988); see also _____ ______ ___ ____
Continental Ill. Corp. v. Commissioner, 998 F.2d 513, 518 (7th ______________________ ____________
Cir. 1993), cert. denied, 510 U.S. 1041 (1994) (party must have _____ ______
"sold" its position to prior tribunal); Wang Lab., Inc. v. ________________
Applied Computer Sciences, Inc., 958 F.2d 355, 358 (Fed. Cir. _________________________________
1992); In re A. Barletta & Sons, Inc., 185 B.R. 976, 980 (Bankr. _______________________________
M.D. Pa. 1995); In re Pierce Packing Co., 169 B.R. 421, 429-30 _________________________
(Bankr. D. Mont. 1994); In re UNR Indus., Inc., 143 B.R. 506, 526 ______________________
(Bankr. N.D. Ill. 1992), vacated on other grounds, 173 B.R. 149 _______ __ _____ _______
(N.D. Ill. 1994); Phillips v. FDIC (In re Phillips), 124 B.R. ________ ____ _______________
712, 719 (Bankr. W.D. Tex. 1991); In re Merritt Logan, Inc., 109 __________________________
B.R. 140, 147-48 (Bankr. E.D. Pa. 1990); cf. also Crown Life Ins. ___ ____ _______________
Co. v. American Nat'l Bank and Trust Co. of Chicago, 35 F.3d 296, ___ ____________________________________________
299 (7th Cir. 1994) ("An election of remedy occurs only when a
party accepts the benefit of pursuing the initial remedy.");
Leonardi's Int'l, Inc., 123 B.R. at 669 ("An election . . . _______________________
between legally inconsistent remedies can be made at any time
prior to the entry of [final] judgment."); Collumb v. Wyatt (In _______ _____ __
re Wyatt), 6 B.R. 947, 951-52 (Bankr. E.D.N.Y. 1980) ("'The _________
6
"election of remedies" doctrine is "to prevent double [viz., ____
sequential] recoveries for the same wrong." Tavormina v. Fir, _________ ____
Inc. (In re Alchar Hardware Co.), 764 F.2d 1530, 1534 (11th Cir. ____ _________________________
1985).
Contrary to Gens' contention, RTC permissibly displaced
its contract-rescission claim by moving for partial summary
judgment on its alternative claim that Key had breached the
purchase-sale agreement. See Fed. R. Civ. P. 8(e)(2) ("A party ___
may also state as many separate claims [in its complaint] . . .
as the party has[,] regardless of consistency . . . .").4 Under
an express provision in the purchase-sale agreement, the
exclusive remedy for its breach was the repurchase of the Gens
Note by Key upon demand by Home Owners. Thus, unlike a
rescindment, which necessarily presumes a disaffirmance of the
purchase-sale agreement by Home Owners ab ovo, the RTC breach-of- __ ___
contract claim implicitly acknowledged a valid contract whereby
Home Owners became the holder of the Gens Note until Key
repurchased the Note. Accordingly, the current FDIC litigation
____________________
purpose of [the] doctrine [of election of remedies] is not to
prevent recourse to any remedy, but to prevent double redress
for a single wrong.'") (citation omitted).
4See, e.g., Desjardins, 37 F.3d at 23 ("There are many ___ ____ __________
situations, especially at the outset of litigation, where a party
is free to assert a position from which it later withdraws or
even to assert, in the alternative, two inconsistent positions of
its potential claims and defenses."); Fort Vancouver Plywood Co. __________________________
v. United States, 860 F.2d 409, 415 (Fed. Cir. 1988) ("With the _____________
enactment of the Federal Rules of Civil Procedure, the
traditional election doctrine was relaxed."); Grogan v. Garner, ______ ______
806 F.2d 829, 838 (8th Cir. 1986) ("[T]he doctrine [of election]
is remedial, and neither it nor the federal rules of pleading
require an election of substantive theories.").
7
position is not inconsistent with that advanced by its
predecessor, RTC, since Home Owners and RTC failed to persuade
the district court that the purchase-sale agreement was voidable,
hence invalid from its inception.5
B. Validity of Knutson Authorization B. Validity of Knutson Authorization _________________________________
Next, Gens contends that the original and amended POCs
submitted by RTC are invalid because Knutson was not authorized
to act as agent for RTC. See Fed. R. Bankr. P. 3001(b) ("A proof ___
of claim shall be executed by the creditor or the creditor's
authorized agent . . . ."); see also Fed. R. Bankr. P. ___ ____
9010(a)(2). Gens asserts that it would have demonstrated, at an
evidentiary hearing, that RTC regulations, see 12 C.F.R. ___
1606.4; see also 12 U.S.C. 1441a(n)(6), presumptively ___ ____
disqualified Knutson from serving as an RTC agent because, as an
affiliate of Home Owners, presumably it was complicit in whatever
financial misfeasance or malfeasance led to the Home Owners
insolvency. As the bankruptcy court aptly noted, however, Gens
lacked standing to challenge Knutson's agency status.
The RTC regulation pursuant to which Knutson was
____________________
5Furthermore, RTC had a legal obligation to file a POC
against the Gens estate in order to preserve the position of Home
Owners, which then held an unsecured claim against Gens.
Finally, should Key repurchase the Gens Note, FDIC would realize
no double recovery, since Key would become the claim holder of
record. See Fed. R. Bankr. P. 3001(e)(2). ___
The "election of remedies" argument fails for yet another
reason. Since the Trust and Gens did not default on the Gens
Note until January 1990, Home Owners had no available remedy
against Gens in 1989 when it filed its complaint against Key.
The 1990 default by the Trust and Gens thus constituted a legal
wrong distinct and severable from the breach of contract by Key.
8
designated is designed (i) to "ensure that contractors [hired by
RTC] meet minimum standards of competence, integrity, fitness,
and experience and are held to the highest standards of ethical
conduct in performing services for RTC," (ii) to prevent "the
direct or indirect use of information gained through performance
of a contract . . . for personal gain not contemplated by the
contract," and (iii) to preclude "the use of personal
relationships or improper influence to gain unfair competitive
advantage in obtaining contracts with the RTC." 12 C.F.R.
1606.1. The RTC regulation thus identifies two conceivable
classes of intended beneficiaries: (1) competing contractors _________ ___________
which are unfairly denied RTC contract bids; and (2) the ___
taxpaying public, which may be harmed by RTC revenue losses _________ ______
resulting from "insider" conflicts of interest.
Gens plainly cannot qualify under the first
classification, as she is not a competing contractor. See, e.g., ___ ____
New Hampshire Right to Life Political Action Comm. v. Gardner, 99 __________________________________________________ _______
F.3d 8, 15 (1st Cir. 1996) ("[U]nder the principle of jus tertii, ___ ______
the plaintiff ordinarily 'must assert [her] own legal rights and
interests, and cannot rest [her] claim to relief on the legal
rights or interests of third parties.'") (citation omitted).
Moreover, no standing is conferred upon Gens, individually, by
the generalized taxpayer benefit theme which actuates the second
classification. See Libertad v. Welch, 53 F.3d 428, 436 (1st ___ ________ _____
Cir. 1995) (noting that claimant normally may not adjudicate
"abstract questions of wide public significance which amount to
9
generalized grievances more appropriately addressed by the
legislature"). Nothing in the statute, the RTC regulation or the
attendant case law remotely suggests that Congress or the agency
itself intended to confer standing on chapter 11 debtors to
enforce the RTC regulation.6 See, e.g., Dubois v. United States ___ ____ ______ _____________
Dep't of Agric., 102 F.3d 1273, 1281 (1st Cir. 1996) (to ________________
demonstrate "standing," complainant must establish, inter alia, _____ ____
that her claim does not fall "outside the zone of interests
protected by the specific law invoked") (quoting Allen v. Wright, _____ ______
468 U.S. 737, 751 (1984)); Benjamin v. Aroostook Med. Ctr., Inc., ________ _________________________
57 F.3d 101, 104 (1st Cir. 1995).7
C. Amendments to Original POC C. Amendments to Original POC __________________________
Gens next contends that the bankruptcy court erred in
permitting RTC to amend its original POC (i.e., December 1993), ____
which incorrectly stated that Knutson was the claim holder,
without disclosing that it was acting as RTC's agent. Gens
represents that she reasonably believed Knutson held no valid
____________________
6Furthermore, even assuming she had standing, Gens has
alleged no facts suggesting that Knutson contributed either to
Home Owners' insolvency or to any "substantial loss" occasioned
RTC.
7Gens argues that the POCs filed by Knutson were invalid
because they were not signed by RTC's attorney. See Fed. R. ___
Bankr. P. 9010(a); 9011(a). But see Fed. R. Bankr. P. 3001(b) ___ ___
(POC may be signed by creditor or its authorized agent); compare, _______
e.g., Official Bankruptcy Form 1 (providing space for attorney ____
signature) with Official Bankruptcy Form 10 (POC form providing ____
no attorney-signature line). We need not resolve the present
claim, however, since Gens concededly failed to raise it in the
bankruptcy court. See Juniper Dev. Group v. Kahn (In re ___ ___________________ ____ ______
Hemingway Transp., Inc.), 993 F.2d 915, 935 (1st Cir.), cert. ________________________ _____
denied, 510 U.S. 914 (1993). ______
10
claim in its own right. Further, she argues, since RTC failed to
file a POC in its own name prior to the bar date, there was no
timely POC to be amended.
A bankruptcy court ruling allowing an amendment to a
POC is reviewed for abuse of discretion, under three criteria:
First, the proposed amendment must not be a _____
veiled attempt to assert a distinctly new
right to payment as to which the debtor
estate was not fairly alerted by the original
proof of claim. Second, the amendment must ______
not result in unfair prejudice to other
holders of unsecured claims against the
estate. Third, the need to amend must not be _____
the product of bad faith or dilatory tactics
on the part of the claimant.
Juniper Dev. Group v. Kahn (In re Hemingway Transp., Inc.), 954 __________________ ____ ______________________________
F.2d 1, 10 (1st Cir. 1992) (citations omitted) (emphasis added).
Leave to amend a POC should be "freely given when justice so
requires." See Fed. R. Bankr. P. 7015.8 The bankruptcy court ___
did not abuse its discretion.
First, in order to "fairly alert" the debtor estate, a
POC need only "provide[] adequate notice of the existence,
nature, and amount of the claim as well as the creditor's intent
to hold the estate liable." Unioil, Inc. v. H.E. Elledge (In re ____________ ____________ _____
Unioil, Inc.), 962 F.2d 988, 992 (10th Cir. 1992). The original _____________
POC, accompanied by a copy of the Gens Note, see Fed. R. Bankr. ___
P. 3001(c), met the general notice requirement. As Knutson was
____________________
8Bankruptcy Rule 7015 makes Fed. R. Civ. P. 15 (governing
amendments to complaints) applicable in adversary proceedings.
Although this case arose as a contested matter, rather than an
adversary proceeding, Fed. R. Bankr. P. 9014 permits Bankruptcy
Rule 7015 to be applied in contested matters. In re Stavriotis, ________________
977 F.2d 1202, 1204 (7th Cir. 1992).
11
duly authorized to file the original POC for RTC, see supra ___ _____
Section II.B, the mere failure to disclose Knutson's agency
status in no sense affected the validity of the claim itself. As
the Tenth Circuit correctly recognized in Unioil, a simple ______
substitution of the real party in interest (viz., RTC) for a ____
related party mistakenly listed in the original POC (viz., ____
Knutson qua agent) represents a proper ground for amendment. See ___ ___
Unioil, 962 F.2d at 992 (permitting amendment where a trustee ______
(rather than the trust) was incorrectly listed as creditor).9
Second, Gens points to no unfair prejudice from any
deficiency in the original POC. See Hemingway Transp., 954 F.2d ___ _________________
at 10; see also Unioil, 962 F.2d at 993 (noting that party ___ ____ ______
opposing amendment must show actual prejudice). Instead, she
suggests simply that allowing the RTC amendment prejudices
unsecured creditors, who may receive less under any
reorganization plan than would have been received were the FDIC
claim not allowed. But the standard Gens proposes would preclude
virtually any amendment, since it dispenses with the requirement
that the debtor or trustee show "unfair" prejudice. Thus,
something more than mere creditor disappointment is required to
preclude amendment. See In re Stoecker, 5 F.3d 1022, 1028 (7th ___ _______________
____________________
9Nor would the two remaining defects in the original POC bar
amendment. First, as trustee for the Old Jail Trust, Gens had
every reason to know that the original characterization of the
POC, as "secured," was mistaken, since the first mortgagee
already had foreclosed on the Barnstable Property securing the
Gens Note. Second, the mistaken date assigned to the underlying
debt instrument was a minor defect, given that the Gens Note
itself was attached to the POC.
12
Cir. 1993); In re Outdoor Sports Headquarters, Inc., 161 B.R. _________________________________________
414, 422 (Bankr. S.D. Ohio 1993); In re Brown, 159 B.R. 710, 716 ___________
n.5 (Bankr. D.N.J. 1993); In re Dietz, 136 B.R. 459, 468-69 ____________
(Bankr. E.D. Mich. 1992).
Gens neither alleged nor demonstrated that any creditor
acted in detrimental reliance on any representation or omission
in the original POC. See, e.g., Brown, 159 B.R. at 716 ___ ____ _____
(permitting POC amendment from unsecured to secured, given that
"no evidence has been offered that anyone relied to their
detriment upon the claims as originally filed"). Nor did Gens
allege either bad faith or dilatory motive. Moreover, these RTC
amendments occurred long before the formulation of a chapter 11
plan. See Holstein v. Brill, 987 F.2d 1268, 1270 (7th Cir. 1993) ___ ________ _____
(characterizing confirmation of debtor plan as "passing
milestone" that makes it more likely POC amendment may be
prejudicial).
To be sure, Knutson demonstrated considerable laxity in
executing its agency responsibilities, especially its seven-month
delay in submitting amended proofs of claim. Were there some
showing in these circumstances that RTC gained a strategic
advantage or that other parties in interest were unfairly
prejudiced, the case for disallowance of the amended POCs would
have been much stronger. Absent any such showing, however, the
court did not abuse its discretion in permitting RTC to amend its
original POC. "It is well accepted that the bankruptcy court is
guided by the principles of equity, and that the court will act
13
to assure that ' . . . substance will not give way to form, [and]
that technical considerations will not prevent substantial
justice from being done.'" Pepper v. Litton, 308 U.S. 295, 305 ______ ______
(1939) (citation omitted).
D. Impairment of Collateral D. Impairment of Collateral ________________________
Lastly, Gens challenges the bankruptcy court ruling
dismissing her "impairment of collateral" defense without first
affording her an evidentiary hearing. She claimed that a prior
holder of the Gens Note presumably U.S. Funding used
$36,000 of the loan proceeds to pay off the preexisting second
mortgage on the Barnstable Property, but failed to obtain and
record the mortgage discharge. Thus, the mortgage securing the
Gens Note remained third in priority, rather than climbing to
second priority.
Pursuant to Mass. Gen. Laws. Ann. ch. 106, 3-
606(1)(b), "[t]he holder discharges any party to the [negotiable]
instrument to the extent that without such party's consent the
holder . . . unjustifiably impairs any collateral for the
instrument given by or on behalf of the party or any person
against whom he has a right of recourse." An impairment of
collateral may result if the conduct of the holder of a
collateralized negotiable instrument unjustifiably diminishes the
physical value of the collateral, releases the collateral to the
principal obligor before the loan is repaid, or fails to perfect
its security interest in the collateral. See Rose v. Homsey, 197 ___ ____ ______
N.E.2d 603, 605-06 (Mass. 1964); see also Hawaii Broad. Co. v. ___ ____ __________________
14
Hawaii Radio, Inc., 919 P.2d 1018, 1029 (Haw. Ct. App. 1996); __________________
White v. Household Fin. Corp., 302 N.E.2d 828, 835 (Ind. Ct. App. _____ ____________________
1973). Nevertheless, in most jurisdictions a party asserting an
"impairment of collateral" defense must prove she signed the
negotiable instrument (viz., promissory note) merely as an ____
accommodation party for the principal debtor, rather than as a
borrower. See James A. White & Robert S. Summers, Uniform ___ _______
Commercial Code 13-16 (3d ed. 1988).10 _______________
An accommodation maker is one "who signs the
[negotiable] instrument in any capacity for the purpose of
lending [her] name to another party to it," Mass. Gen. Laws.
Ann. ch. 106, 3-415(1). Frequently, accommodation parties sign
debt instruments to enable the principal obligor to obtain a loan
which would not have been granted absent the accommodation.
Although an accommodation party is liable to the lender under the
debt instrument, her liability is that of a surety only. Id. ___
cmt. 1. Thus, the accommodation maker reasonably expects that if
called upon for payment following the principal obligor's
default, she will be subrogated to the lender's rights against
the principal obligor, including the right of recourse against
____________________
10The latent confusion in this regard stems from the broad
language in U.C.C. 3-606, which refers to "any party to the ___ _____
[negotiable] instrument." See FDIC v. Blue Rock Shopping Ctr., ___ ____ _________________________
Inc., 766 F.2d 744, 749 (3d Cir. 1985) (outlining caselaw split). ____
We have found no Massachusetts case which determines whether a
nonaccommodation obligor on a promissory note may also invoke the
U.C.C. 3-606 defense. Since Gens and the bankruptcy court
implicitly accepted the majority rule that Gens must establish
accommodation status and because we affirm on an alternative
ground, we need not address the unresolved Massachusetts-law
question.
15
any collateral securing the underlying debt instrument. See id. ___ ___
cmt. 5; see also FDIC v. Blue Rock Shopping Ctr., Inc., 766 F.2d ___ ____ ____ _____________________________
744, 749 (3d Cir. 1985); accord Restatement of Security 104, ______
141 (1941). Therefore, to the extent the holder of the debt
instrument unjustifiably devalues or releases the collateral, or
fails to perfect its rights in the collateral against third
parties, the right of recourse may be diminished, thereby
entitling the accommodation maker to a commensurate discharge
from liability under the debt instrument. See Blue Rock Shopping ___ __________________
Ctr., 766 F.2d at 751. ____
The bankruptcy court considered Gens' second signature
conclusive evidence that she had signed the Gens Note in her
"individual" capacity, that is, as a principal coborrower rather
than an accommodation maker. It also concluded that the purport
of Gens' second signature on the Gens Note was not rendered
ambiguous, either by the anterior designation of the Trust as the
sole "Borrower" or the failure to designate a "Co-borrower."
Citing considerable case authority, Gens maintains that
all accommodation makers necessarily sign promissory notes either
in their "individual" or "representative" capacities.
Consequently, she argues, these designations cannot conclusively
resolve a signatory's accommodation status.11 Since the Gens
Note must therefore be considered facially ambiguous, Gens argues
____________________
11See, e.g., FDIC v. Trans Pacific Indus., Inc., 14 F.3d 10, ___ ____ ____ __________________________
12 (5th Cir. 1994) (rejecting FDIC's "attempts to nullify the
import" of the "borrower" identification block in promissory
note, which reflected corporation as sole borrower and did not
designate corporate officer as coborrower).
16
that a hearing should have been conducted to consider parol
evidence that the parties to the Gens Note (viz., U.S. Funding, ____
the Trust, and Gens) all understood that Gen's second signature
was intended only as an accommodation endorsement. See, e.g., ___ ____
Mass. Gen. Laws. Ann. ch. 106, 3-415(3) (expressly allowing
parol evidence of accommodation status except as to holders-in-
due-course); United Beef Co. v. Childs, 27 N.E.2d 962, 964 (Mass. _______________ ______
1940) (same); see also Butler v. Nationsbank, 58 F.3d 1022, 1027 ___ ____ ______ ___________
(4th Cir. 1995) (outlining multi-factored, intent-based "purpose"
and "proceeds" tests for determining accommodation status); First _____
Dakota Nat'l Bank v. Maxon, 534 N.W.2d 37, 41-42 (S.D. 1995) __________________ _____
(same).12
____________________
12FDIC counters that 12 U.S.C. 1823(e) (codification of
D'Oench Duhme doctrine) barred parol evidence of Gens' _______________
accommodation status, or that FDIC's status as a federal or state
holder in due course barred Gens from invoking the U.C.C. 3-606
defense. See Mass. Gen. Laws. Ann. ch. 106, 3-415(3) ("As ___
against a holder in due course and without notice of the
accommodation oral proof of the accommodation is not admissible
to give the accommodation party the benefit of discharges
dependent on his character as such."). Since FDIC's right to
invoke either doctrine in this case is open to serious question,
we express no opinion on its contentions. See, e.g., O'Melveny & ___ ____ ___________
Myers v. FDIC, 512 U.S. 79 (1994) (generally discouraging _____ ____
adoption of federal common-law rules especially protective of
FDIC); Varel v. Banc One Capital Partners, Inc., 55 F.3d 1016, _____ ________________________________
1021 (5th Cir. 1995) (D'Oench inapplicable where issue is not the _______
enforceability of a secret, unwritten side agreement, but whether
to allow parol evidence concerning the intendment of an ambiguous
written contract provision); Capitol Bank and Trust Co. v. 604 ___________________________ ___
Columbus Ave. Realty Trust (In re 604 Columbus Ave. Realty ____________________________ __________________________________
Trust), 968 F.2d 1332, 1350-51 (1st Cir. 1992) (holding that FDIC _____
is not entitled to federal holder-in-due-course status when
acting in its capacity as receiver); Calaska Partners Ltd. v. ______________________
Corson, 672 A.2d 1099, 1104 (Me. 1996) (FDIC as receiver of bulk ______
purchaser not a holder in due course under state law); Mass. Gen.
Laws. Ann. ch. 106, 3-302(3) (denying holder-in-due-course
status to party who acquired note "as part of a bulk
transaction").
17
Even were we to assume arguendo that Gens was entitled ________
to an evidentiary hearing to determine whether she signed the
Gens Note as an accommodation maker, she failed to set forth
allegations which would establish the second essential element in
her affirmative defense a cognizable "impairment" of the
collateral. See RTC v. Feldman, 3 F.3d 5, 9 (1st Cir. 1993) ___ ___ _______
(appellate court may affirm on any ground supported by record),
cert. denied, 510 U.S. 1163 (1994). As her section 3-606 defense _____ ______
is founded exclusively on the claim that her subrogation rights
were frustrated, supra, Gens was required to do more than prove _____
that U.S. Funding or another holder failed to obtain and record a
mortgage discharge.13
Section 3-606 plainly requires evidence that the
holder's dereliction actually resulted in a loss to the
accommodation party. See Mass. Gen. Laws. Ann. ch. 106, 3-606 ___
("The holder discharges any party to the instrument to the extent __ ___ ______
. . . the holder . . . unjustifiably impairs [the] collateral . .
____________________
13Citing Providence, Fall River & Newport Steamboat Co. v. ________________________________________________
Massachusetts Bay S.S. Corp., 38 F.2d 674 (D. Mass. 1930), Gens ____________________________
contends that the holder's mere failure to record a mortgage
discharge warrants her total release from liability because the
Barnstable Property obviously was of sufficient value to satisfy
the Gens Note in July 1988, and the holder's failure to perfect
its security interest unquestionably increased her risk of loss ____
without her consent, even if no actual loss occurred. Since the ______
cited case predates the adoption of the Massachusetts Uniform
Commercial Code in 1958, it is both legally and factually
inapposite. See id. at 675 (noting that the court was "dealing ___ ___
not with the question how far a surety who has guaranteed the
performance of a contract is released by subsequent alterations
in it by the contracting parties, but with a change made by the
creditor in the state of facts on which an independent contract
of guaranty rests"); cf. infra note 14. ___ _____
18
. .").14 Gens alleged no facts which would demonstrate any
actual diminution of her subrogation rights. See FDIC v. Blanton, ___ ____ _______
918 F.2d 524, 530 (5th Cir. 1990) (burden of proof is on party
alleging discharge).
First, she did not allege that any creditor obtained a
____________________
14Although we have found no Massachusetts case precisely in
point, the clear majority trend among U.C.C. jurisdictions is to
require the accommodation maker to prove actual loss from the
impairment. See, e.g., Alcock v. Small Bus. Admin., 50 F.3d ___ ____ ______ __________________
1456, 1462 (9th Cir. 1995) ("A clear majority of state courts
place the burden on the guarantor to prove actual prejudice and ______ _________
limit the discharge to the extent of the impairment
demonstrated.") (emphasis added); Myers v. First State Bank of _____ ____________________
Sherwood, 732 S.W.2d 459, 461 (Ark.) ("[T]he surety must prove ________
two elements in order to be entitled to a discharge 'that the
holder of the note was responsible for the loss or impairment of
the collateral, and the extent to which the impairment results in _______ __
loss.'") (emphasis added) (quoting Van Balen v. Peoples Bank & ____ _________ _______________
Trust Co., 626 S.W.2d 205, 209-10 (Ark. Ct. App. 1981)), modified _________ ________
on other grounds, 741 S.W.2d 624 (Ark. 1987); Bank South v. __ _____ _______ ___________
Jones, 364 S.E.2d 281, 285 (Ga. Ct. App. 1987) ("[A] failure to _____
perfect a lien on pledged corporate stock [does not] effect a
discharge where it was shown that the stock had no value at the
time the action [to collect on the debt] was commenced."); Hurt ____
v. Citizens Trust Co., 196 S.E.2d 349, 351 (Ga. Ct. App. 1973) ___________________
(noting that appellant has "not shown how the failure to record
the leases and assignments resulted in any damage")); Rempa v. _____
LaPorte Prod. Credit Ass'n, 444 N.E.2d 308, 313 (Ind. Ct. App. ___________________________
1983) (see infra); T.O. Stanley Boot Co. v. Bank of El Paso, 847 ___ _____ _____________________ _______________
S.W.2d 218, 223 (Tex. 1992) ("If the creditor breaches his duty,
the surety is discharged on the note to the extent of his
loss."); Century 21 Prods., Inc. v. Glacier Sales, 875 P.2d 1238, _______________________ _____________
1242 (Wash. Ct. App. 1994) ("Should a creditor impair the
collateral, the surety will be discharged to the extent he is
harmed by the impairment."), rev'd on other grounds, 918 P.2d 168 _____ __ _____ _______
(Wash. 1996); see generally Carolyn Edwards, Impairment of ___ _________ ______________
Collateral Under Section 3-606 of the Uniform Commercial Code, 12 _____________________________________________________________
U. Dayton L. Rev. 509, 522 n.81 (1987) ("A number of courts have
concluded that an unjustifiable impairment of collateral includes
a failure to perfect a security interest if such failure results
in a loss to the surety as subrogee."); cf. also Revised U.C.C. ___ ____
3-605(f) (discharge for impairment of collateral only "to the
extent the impairment causes the party asserting discharge to pay
more than that party would have been obliged to pay . . . if
impairment had not occurred.").
19
superior right of recourse against the Barnstable Property due to
the fact that the preexisting second mortgage was never
discharged of record. In addition, the auction sale of the
Barnstable Property conducted pursuant to the first-mortgage
foreclosure resulted in no surplus for application to any junior
lien, including the second mortgage. Accordingly, the record can
support no finding that any junior lien was impaired.
Consequently, Gens' liability would not have been affected even
if she had been able to establish that she signed the Gens Note
as an accommodation maker. See, e.g., Rempa v. LaPorte Prod. ___ ____ _____ ______________
Credit Ass'n, 444 N.E.2d 308, 313 (Ind. Ct. App. 1983) ("Thus, _____________
where the party asserting the impairment establishes that the
creditor did not perfect its lien but fails to establish the
extent to which that failure resulted in loss, the party has
failed to establish its affirmative defense of pro tanto ___ _____
release.").15
III III
CONCLUSION CONCLUSION __________
____________________
15Moreover, Gens merely alleged that no mortgage discharge
was recorded. She did not allege that the $36,000, see supra p. ___ ___ _____
2, was never applied to the preexisting second mortgage.
Therefore, assuming the underlying debt was in fact fully paid,
it would seem extremely unlikely that the mortgagee or any of its
assignees could have asserted a viable right to recourse against
the Barnstable Property. See, e.g., Beaton v. Land Court, 326 ___ ____ ______ __________
N.E.2d 302, 307 (Mass.) (noting that "a court acting under
general principles of equity jurisprudence has broad power to
reform, rescind, or cancel written instruments, including
mortgages," and that the discharging party could simply have
brought suit to compel the mortgagee to cancel the note and
"issue a discharge of mortgage in a form appropriate for
recording"), appeal dismissed, 423 U.S. 806 (1975). ______ _________
20
Accordingly, the district court judgment is affirmed
and costs are awarded to the appellee.
SO ORDERED. SO ORDERED. __ _______
21
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