McCartney v. Integra Natl Bank N

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Precedential or Non-Precedential: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.
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