IN RE: GRAYSON LOAN COMPANY CASE NO. 87-00022

UNITED STATES BANKRUPTCY COURT 

FOR THE EASTERN DISTRICT OF KENTUCKY

ASHLAND DIVISION

IN RE:

GRAYSON LOAN COMPANY CASE NO. 87-00022

DEBTOR CHAPTER 11

MEMORANDUM OPINION

This matter is before the court on the motion of Citizens Fidelity Bank & Trust Company, administrator de bonis non of the estate of E. R. McGuire ("the movant"), for relief from the automatic stay.

Grayson Loan Company was incorporated on May 17, 1962, by L. R. McGuire, E. E. McGuire, and E. R. McGuire. On or about July 25, 1981, E. R. McGuire and Grayson Loan Company executed a note evidencing an indebtedness in the amount of $2,100,000 to First Bank and Trust Company (now First American Bank). It appears E. R. McGuire owned no interest in Grayson Loan Company at the time the note was executed. Subsequent to the execution of the note, First Bank and Trust Company sold participations in the loan to Citizens Deposit Bank and Bank Josephine.

Grayson Loan Company filed a petition for relief under chapter 11, Title 11 United States Code on January 30, 1987. In April 1987, the movant initiated a civil action in Boyd Circuit Court against First American Bank, Bank Josephine and Citizens Deposit Bank, alleging that the decedent, E. R. McGuire, signed the July 1981 note as an accommodation to Grayson Loan Company and that the movant, as administrator of the decedent's estate, is entitled to indemnification from Grayson Loan Company for any amount for which the movant may be found liable on the note. On April 10, 1987, the movant filed a proof of claim in the bankruptcy case for indemnification in the amount of $749,044.75.

On June 30, 1989, the movant requested a modification of the automatic stay pursuant to 11 U.S.C. § 362(d)(1) in order to amend its complaint in Boyd Circuit Court to name Grayson Loan Company as a defendant and to proceed to judgment against Grayson Loan Company. The motion asserts that the requested modification of the stay would conserve judicial resources. The movant states if it obtains a judgment against Grayson Loan Company in the state court action it will not attempt to execute on the judgment but will return to the bankruptcy court for any distribution and for a determination of dischargeability.

Section 362(a)(1) operates as a stay of "the commencement or continuation . . . 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." Section 362(d)(1) permits termination or modification of the stay "for cause."

Although the court is without the benefit of having a copy of the complaint that has been filed in Boyd Circuit Court, it appears the movant seeks a determination from the Boyd Circuit Court that it is not liable to the lending institutions because the decedent E. R. McGuire executed the note as an accommodation maker, or that to the extent the movant is liable it is entitled to reimbursement from Grayson Loan Company. The movant desires to have the issues of its liability to the banks and its right to indemnification from Grayson Loan Company determined at the same time in the state court action.

This court is of the opinion that the claims are severable and that the state court action can proceed without Grayson Loan Company.

The state court may determine that the movant owes no debt on the July 1981 note to the lending banks, in which case an adjudication that Grayson Loan Company must indemnify the movant would not be required.

The state court may determine that the movant is liable for the balance due on the note. Such a determination may be made without the joinder of Grayson Loan Company in the Boyd Circuit Court action. Under Kentucky law, a creditor may proceed against a principal and surety jointly or severally. Dorman v. Carnes, 96 S.W.2d 869, 876 (Ky. 1936). A principal debtor is not an indispensable party to an action to adjudicate the liability of a surety or an accommodation maker on a note. 3A Moore's Federal Practice ¶ 19.10 at 19-200 to -201 (1990); see Matter of Safeguard Manufacturing Co., 25 B.R. 415 (Bankr. Conn. 1982). But see 2A Bender's Uniform Commercial Code Service § 13.31[1] at 13-131 (1990).

The entry of judgment against the movant in the state court action may give rise to a claim by the movant against Grayson Loan Company for reimbursement. The movant filed a proof of claim on April 10, 1987. A claim for reimbursement of a surety who is liable with a debtor on the claim of a creditor is disallowed to the extent the claim is contingent. 11 U.S.C. § 502(e)(1)(B). When the claim is fixed, i.e., when the surety makes payment to the creditor, section 502(e)(2) provides the claim is allowed as a prepetition claim under 11 U.S.C. § 502(a). Section 502(a) in turn provides a claim is allowed unless a party in interest objects. Sections 502(e)(1)(B) and 502(e)(2) read together articulate a policy that the surety will be permitted a claim for reimbursement only to the extent the surety has paid the creditor. 3 Collier on Bankruptcy ¶ 502.05, at 502-88 to -89 n.13 (15th ed. 1990). Only if an objection to the claim is filed would a hearing be necessary to address the movant's right to indemnification from Grayson Loan Company.

A claim for reimbursement of a surety who is liable with the debtor on a claim of a creditor may be disallowed to the extent the creditor's claim against the estate is disallowed. 11 U.S.C. § 502(e)(1)(A). The claim of First Bank and Trust Company (First American Bank) is listed on Schedule A of the Statement of Financial Affairs for Debtor Engaged in Business filed March 30, 1987. A proof of claim is deemed filed for any claim that appears in the debtor's statement of affairs. 11 U.S.C. § 1111. The loan participants, Citizens Deposit Bank and Bank Josephine, have filed proofs of claims. Claims are allowed unless a party in interest objects. To the extent any claim of First Bank and Trust Company, Citizens Deposit Bank, or Bank Josephine against Grayson Loan Company is disallowed, the claim of the movant seeking reimbursement as surety would be disallowed. 11 U.S.C. § 502(e)(1)(A).

The process of allowance or disallowance of claims is a matter reserved for determination by the bankruptcy court. Cause to modify the automatic stay to permit the commencement or continuation of an action in state court by this creditor against the debtor has not been shown. The motion for relief from the automatic stay shall be overruled.

Dated:

By the court -

Joe Lee

Copies to:

John P. Reisz

Jerry D. Truitt

James I. Murray

Gillard B. Johnson

John P. Brice

Wendell S. Roberts