UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
MARION GAYLE MILLER
EVELYN L. MILLER CASE NO. 93-30209
ENGLISH PAVING COMPANY PLAINTIFF
VS. ADV. NO. 95-3016
MARION GAYLE MILLER,
EVELYN L. MILLER, REPUBLIC
BANK & TRUST COMPANY and
GEORGETOWN BANK & TRUST
This matter came before the Court for trial on February 29, 1996, at which time the parties tendered Supplemental Stipulations of Fact in lieu of presentation of testimony. The Court agreed to take the matter under submission, and by Order entered on March 1, 1996, this matter was submitted for decision. This Court has jurisdiction of this matter pursuant to 28 U.S.C.'1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(K).
The plaintiff initiated this matter by the filing of its Complaint on August 15, 1995. The debtors filed their Answer on August 28, 1995, and defendants Georgetown Bank & Trust Company ("GBT") and Republic Bank & Trust Company ("RBT") filed their Answers on September 15, 1995, and September 18, 1995, respectively. An Order for Trial entered on October 17, 1995, set the matter for trial on February 29, 1996.
The plaintiff filed a Motion for Summary Judgment on Counts 1 and 2 of the Complaint on November 6, 1995. RBT filed a Response on December 15, 1995. The Motion was heard on December 18, 1995, and by Order entered on December 21, 1995, was taken under submission. On February 5, 1996, the plaintiff filed a Motion for Summary Judgment on Count 3 of the Complaint. On February 21, 1996, this Court entered an Opinion and Order overruling the plaintiff's Motion for Summary Judgment on Counts 1 and 2 of the Complaint.
Count 1 of the Complaint alleges that in January 1994 the Chapter 13 trustee distributed the sum of $17,056.72 to RBT, and that this distribution represents the proceeds from the sale of collateral of Farmers Bank & Capital Trust Company which had assigned its interest to the plaintiff. Count 1 further alleges that the plaintiff holds a continuing perfected, first priority security interest on these proceeds. Count 2 makes similar allegations in regard to $2,355.71 distributed by the Chapter 13 trustee to GBT on February 28, 1994.
Count 3 of the Complaint alleges that pursuant to the terms of the Addendum to the Third Amended Plan, the debtors are obligated to pay the plaintiff all interest on its secured claim of $50,000.00 at 9% for five years. Count 3 further alleges that the plaintiff has demanded payment of the interest and that the debtors are in default on the obligation. The Complaint asks for judgment against RBT in the amount set out above, plus pre- and post-judgment interest, and costs and expenses, including attorneys' fees; for judgment against GBT for the amount set out above, plus pre- and post-judgment interest; and for judgment against the debtors for $22,500.00, representing interest for which the debtors waived discharge under 11 U.S.C.'727.
The parties have filed Joint Stipulations of Fact which provide in pertinent part:
"4. The Debtors Marion Gayle Miller and Evelyn L. Miller filed a petition under Chapter 13 on April 21, 1992 and a petition under Chapter 7 of Title 11 on January 10, 1995.
5. The plaintiff, English Paving, is a creditor and party-in-interest as the assignee of Farmers Bank & Capital Trust Company.
6. Republic Bank & Trust Company is a Kentucky banking corporation which was properly served pursuant to Bankruptcy Rule 7004.
7. Georgetown Bank & Trust Company is a Kentucky banking company which was properly served pursuant to Bankruptcy Rule 7004.
15. Attached as Exhibit 8 is a true and accurate copy of Farmers Bank's proof of claim in the amount of $54,447.16 and the Amendment thereto filed on November 23, 1993 claiming a perfected first priority security interest in all of the Debtors' inventory, equipment and accounts receivable of whatever kind of nature, wherever located, now owned or hereafter acquired, and all returns, repossessions, exchanges, substitutions, replacements, attachments, parts accessories and accessions thereto and thereof, and all other goods used or intended to be used in conjunction therewith, and all proceeds thereof (whether in the form of cash, instruments, chattel paper, general intangibles, accounts, or otherwise) including but not limited to 550 Case backhoe, Gomaco GT-6000 Curb Machine and accessories, Caterpillar grader, International endloader, and Case track endloader (1975).
22. The claim now held by English Paving is secured by a first priority perfected and unavoidable security interest in all of the property set forth above in paragraph 15.
23. The Debtors' plan classified Farmers Bank as a Class 4 secured creditor.
24. Attached as Exhibit 14 is a true and accurate copy of a Memo of Understanding between Gayle ("Butch") Miller and H.G. Mays Corporation dated January 3, 1994.
25. On or about January 3, 1994, the Debtors remitted a portion of the proceeds of such transaction (the "Harold Mays Transaction") in the amount of $22,973.14 to the Chapter 13 Trustee.
27. In January 1994, the Chapter 13 Trustee distributed the sum of $17,056.72 to Republic from the funds derived from the Harold Mays transaction.
28. On or about February 28, 1994, the Chapter 13 Trustee distributed the sum of $2,355.71 to Georgetown Bank from the proceeds submitted to the Chapter 13 Trustee derived from the Harold Mays transaction.
29. Attached as Exhibit 16 is a true and accurate copy of a draft loan document prepared by Harold Mays which was not executed.
30. Attached as Exhibit 17 is a true and accurate copy of a memo to file executed by Harold Mays concerning "permission to extend option on equipment purchase of $26,000 for an additional six months to December 31, 1994."
33. The Property described in the Memo of Understanding (Exhibit 15) are listed by the Debtors as property of the estate in the Chapter 13 Schedules, but are not listed as property of the estate in the Debtor's Chapter 7 Schedules.
34. The Debtor did not obtain court approval to incur secured debt under'364 at any time during the pendency of the Main Case.
35. Pursuant to the Addendum to Third Amended Plan, the Debtor agreed as follows:
All secured creditors of Class 4 shall receive no interest payments during the Chapter 13 payment term so as to afford a dividend to the Class 5 unsecured creditors but shall receive Chapter 13 payments on to the extent of their principal balances, provided, however, that:
(a) The Debtors hereby waive discharge of any and all interest owed by them to the Class 4 secured creditors and, pursuant to Code
(b) All accrued interest due the Class 4 secured creditors shall be due and payable thirty days after the end of the Chapter 13 payment term.
36. Republic Bank holds a first and second mortgage lien on the Debtors' residence located in Franklin County, Kentucky to secure its loan, which, as of February 14, 1996, has an outstanding balance of $63,141.75.
39. The Debtor is current on all obligations to the Republic Bank and has continued since conversion of the case to Chapter 7 to make monthly payments of principal and interest on both the first and second mortgage loans.
40. Republic's loan to the Debtor is oversecured by an amount in excess of $20,000.
41. On or about December 28, 1994 the Debtor sold a GT-6000 curb machine and accessories, which was Farmer's collateral to R.E. Huber for the sum of $6,500 and paid to (sic) proceeds of such sale to the Chapter 13 Trustee.
46. The Debtor's plan provided for the payment of regular payments by the Debtors outside of the plan on Republic Bank's first and second mortgages on Debtor's residence located in Franklin County, Kentucky.
47. The Debtors' plan provided for the complete payment of arrearage to secured creditors and classified the same as a Class 2 creditor.
48. The payment of arrearage to Republic Bank was paid inside the plan and classified and paid as a Class 2 creditor.
49. Pursuant to'363(b), the Debtors did not obtain prior court approval, provide notice or opportunity for a hearing in order to sell, outside the ordinary course of business, any of the assets which were listed in the Harold Mays - Gayle (Butch) Miller, Memo of Understanding."
In addition to these Stipulations of Fact, the parties have filed the following Supplemental Joint Stipulations of Fact, which provide:
"1. The parties stipulate that Marion Gayle Miller, Debtor, would testify at the trial of this matter, pursuant to his 2004 Examination dated March 20, 1995, as follows:
A. The subject transaction between Debtor and Harold Mays was a sale of equipment, and debtor intended such transaction to be a sale.
2. Without English Paving Company waiving its objection to the use of extrinsic evidence and the applicability of the Parol Evidence Rule to this adversary proceeding, this Court having previously overruled English Pavings's Motion for Summary Judgment seeking to exclude the introduction and the applicability of the same, the parties stipulate that Harold Mays, President of H.G. Mays Corporation, would testify at a trial of this matter, pursuant to his deposition dated January 16, 1996, as follows:
A. On January 3, 1994, it was Harold Mays intent to loan $26,000.00 to Debtor Marion Gayle Miller, with the equipment as collateral or security.
B. Harold Mays initially drew up a promissory note and security agreement on a yellow legal pad of paper.
C. The promissory note was not executed, because Debtor Marion Gayle Miller suggested that they should show the subject transaction as a sale or as a form of collateral even though the transaction was a loan.
D. Subsequent to such suggestion, Mays, as President of H.G. Mays Corporation, and the Debtor executed the Memorandum of Understanding.
E. Subsequently, Mays initialed a memorandum to file which stated "Butch asked permission to extend option on equipment purchase of $26,000 for an additional six months to December 31, 1994."
F. On January 3, 1994, Harold Mays believed that Marion Gayle Miller, Debtor, had the intent to borrow $26,000.00.
G. Harold Mays did not individually, through an agent or by anyone under his direction search the U.C.C. records or the motor vehicle title records to determine whether or not Debtor Marion Gayle Miller had the authority or present ability to sell the items of equipment listed in the "Memo of Understanding."
H. Harold Mays took no action to transfer the titles of the subject vehicles and equipment into his or H.G. Mays Corporation's name.
I. Neither Harold Mays individually nor as President of H.G. Mays Corporation ever had any intention of owning the items of equipment which were listed in the "Memo of Understanding," and Harold Mays has never, to his knowledge, seen these items of equipment.
J. Neither Harold Mays individually nor as President of H.G. Mays Corporation has taken any action to collect the $26,000.00 transferred to Debtor Marion Gayle Miller, including, without limitation, filing a proof of claim in the Chapter 13 or Chapter 7 bankruptcy cases.
K. Harold Mays was aware, on January 3, 1994, that Debtor Marion Gayle Miller was in Bankruptcy."
The first issue to be considered by the Court is whether the Mays Transaction was a sale or a loan. This Court has already ruled in its Opinion and Order entered on February 21, 1996, that RBT and GBT, neither of which was a party to the agreement, may introduce extrinsic evidence with regard to the transaction, pursuant to KRS 355.2-202 which provides that an unambiguous agreement may be supplemented or explained by course of performance of the parties.
The extrinsic evidence offered by RBT and GBT consists of the Affidavit of Harold G. Mays, as well as the pertinent testimony offered by Mr. Mays at his deposition given on January 16, 1996, as set out in the Supplemental Joint Stipulation of Facts. The evidence offered by Mr. Mays is to the effect that the transaction between the debtor and himself was a loan, not a sale. The debtor's testimony in his 2004 examination, as well as his failure to schedule the subject equipment in his Chapter 7 case, support the contention that the transaction was intended to be a sale. In addition, Harold Mays never filed a claim as a creditor in the Chapter 7 case.
The Memo of Understanding is, on its own terms, an unambiguous document. It clearly identifies the transaction as a sale. The parole evidence concerning the transaction is contradictory, and does not provide sufficient evidence to justify characterizing this transaction as a loan. The Court therefore finds that it was a sale, that the undisputed first and prior lien of the plaintiff continued in the proceeds of that sale pursuant to KRS 355.9-306(1), and that the sums paid to RBT and GBT should be disgorged.
The next issue to be considered by the Court is the debtors' waiver of discharge on all interest accruing on secured claims for the term of the plan. The plaintiff alleges that the debtors owe 9% interest on Farmers Bank's secured claim of $50,551.00 compounded annually for the five year term of the plan, or $27,227.91. The plaintiff notes that without compounding, the interest accrued at 9% on $50,551.00 for five years is $22,747.95. The plaintiff does not present any argument concerning the compounding of interest, or cite any authority for the proposition that it should be compounded. In fact, the Complaint asks for judgment on Count 3 in the amount of $22,500.00, "representing interest for which the Debtors waived discharge ..." The debtors have admitted that the plaintiff should have judgment for the interest, but that it should be simple, not compound, interest.
Compound interest, or interest on interest, has been allowed on a creditor's oversecured claim, where interest charges on unpaid installments were provided for by the applicable loan documents and not otherwise prohibited by state law. See In re Sublett, 895 F.2d 1381, 1385 (11th Cir. 1990). See also 3 Collier on Bankruptcy ch. 506,&506.05, (Matthew Bender 15th ed.). Review of the loan documents of record in this matter in regard to the debt to Farmers Bank does not reveal any provision concerning the compounding of interest. In the absence of such a provision, the Court will not allow compound interest.
In consideration of all of the foregoing, it is the opinion of this Court that the plaintiff's Motion for Summary Judgment should be sustained. An order in conformity with this opinion will be entered separately.
By the Court -
William T. Shier, Esq.
William C. Ayer Jr., Esq.
Lucinda Masterton, Esq.
W. Thomas Bunch, Esq.