IN RE:
UNITED
STATES BANKRUPTCY COURT
EASTERN
DISTRICT OF KENTUCKY
PIKEVILLE
DIVISION
IN RE:
BETTY LOWE CASE
NO. 04-71159
MEMORANDUM OPINION AND ORDER
This Chapter 13 case is before the
court upon the Objection to Claim of Kentucky National Bank (“Kentucky
National”) filed by the debtor on February 28, 2005. That claim is in the amount of $57,705.28 and is based upon a
guaranty and mortgage executed by the debtor in favor of Kentucky National
guaranteeing the debt of Lowes Construction Group (“Lowes Construction”) which
is owned by the debtor’s son and daughter-in-law. The parties have now briefed their positions in the matter and it
was submitted to the court for decision on July 28, 2005.
Lowes Construction executed a note
in favor of Kentucky National on November 1, 2000 for a line of credit in the
amount of $40,200.00. The note bears
interest at the rate of 14% per annum and matured on January 2, 2001. In conjunction with the execution of this
note, the debtor executed, on November 1, 2000, a Guaranty agreement which is
attached to the claim of Kentucky National.
The debtor also executed a mortgage on that date giving Kentucky
National a lien against her home to secure the obligation.
The Guaranty executed by the debtor
provided that it would terminate on January 2, 2001. The instrument provided that the debtor guaranteed to the lender
the payment and performance of the debt and identified the note in
question. It provided that the
termination of the agreement would not affect debtor’s “...liability with
respect to obligations created or incurred prior to the termination date, or
extensions or renewals of, interest accruing on, or fees, costs, or expenses
incurred with respect to such obligations on or after the termination date.” It also contains the following language on
the reverse side:
“6. Whether or not
any existing relationship between the Undersigned and Borrower has been changed
or ended and whether or not this guaranty has been revoked, Lender may, but
shall not be obligated to, enter into transactions resulting in the creation or
continuance of indebtedness, without any consent or approval by the Undersigned
and without any notice to the Undersigned.
The liability of the Undersigned shall not be affected or impaired by
any of the following acts or things (which Lender is expressly authorized to
do, omit or suffer from time to time, both before and after revocation of this
guaranty, without notice to or approval by the Undersigned):”
...
“(ii) Any one or
more extensions or renewals of indebtedness (whether or not for longer than the
original period) or any modification of the interest rates, maturities or other
contractual terms applicable to any indebtedness;”
On January 2, 2001 an Amendment
Agreement was executed by Lowes Construction and Austin Lowe, debtor’s son, and
Joann Lowe, debtor’s daughter-in-law, as owners of Lowes Construction, amending
the note to provide the maturity date should be extended to February 15, 2001
and that Lowes Construction could continue to draw against the line of credit
up to the original amount. It further
provided that various security for the loan should remain as such during the
extended period of time. The debtor did
not execute the Amendment Agreement and there is no evidence in the record to
determine if she was aware of it.
Kentucky National has recited that, at the time of the extension, the
same date upon which her Guaranty expired, Lowes Construction had drawn
$30,312.80 against the note. Kentucky
National has recited that Lowes Construction made additional draws against the
note after the January 2, 2001 date for a total of $38,729.91 drawn against the
note.
The debtor contends that the
execution of the Amendment Agreement without debtor’s knowledge or permission
has relieved debtor of any obligation on her guaranty.
A question has arisen as to the
applicability of KRS 371.065 entitled “Requirement for valid, enforceable
guaranty” to the Guaranty executed by the debtor. That statute provides:
“(1) No
guaranty of an indebtedness which either is not written on, or does not
expressly refer to, the instrument or instruments being guaranteed shall be
valid or enforceable unless it is in writing signed by the guarantor and
contains provisions specifying the amount of the maximum aggregate liability of
the guarantor thereunder, and the date on which the guaranty terminates. Termination of the guaranty on that date
shall not affect the liability of the guarantor with respect to:
(a) Obligations
created or incurred prior to the date;
or
(b) Extensions
or renewals of, interest accruing on, or fees, costs or expenses incurred with
respect to, the obligations on or after the date.
(2) Notwithstanding
any other provision of this section, a guaranty may, in addition to the maximum
aggregate liability of the guarantor specified therein, guarantee payment of
interest accruing on the guaranteed indebtedness, and fees, charges and costs
of collecting the guaranteed indebtedness, including reasonable attorneys’ fees,
without specifying the amount of the interest, fees, charges and costs.”
This statute, enacted in 1986,
applied only to guaranties of commercial paper until it was amended in 1990 to,
apparently, apply to other instruments.
APL, Inc. V. Ohio Valley Aluminum, Inc., Ky. App., 839 S.W.2d 571
(1992) (1990 amendment broadening statute’s applicability to all guaranties was
irrelevant on appeal of a guaranty signed in 1989); Intercargo Ins. Co. v.
B. W. Farrell, Inc., Ky. App., 89 S.W.3d 422 (2002) (legislature intended
to expand statute to more than just guaranties of commercial paper but not
indemnity agreements). The court
concludes that the statute applies to the guaranty in question here.
The agreement clearly contemplates
extension or renewal of the indebtedness involved in the two portions of the
Guaranty above recited. By the terms of
the document, the liability of debtor continued after the termination date
under the terms of the Guaranty which she signed. The statute clearly permits these actions. The execution of an Extension Agreement by
other parties appears within the terms of the agreement which the debtor
executed in guaranteeing the debt. It does
not appear to amend any term of the original indebtedness except the maturity
date. As such, this court views the
Amendment Agreement as merely an extension of the maturity date of the original
loan.
With respect to the amount of
liability of the debtor, as of the date her guaranty expired, there was due and
owing on the note, for draws made, $30,312.80.
In addition to this sum, in accordance with the terms of the Guaranty
executed by the debtor, the debtor would owe interest, fees, charges and other
costs incurred in collecting the amount she owes. Those amounts are not itemized for the court and an Amended Proof
of Claim will be necessary to set out the amounts owed by the debtor. The additional draws made against the note
after January 2, 2001 are not liabilities of the debtor since she did not
consent to the Extension Agreement. Her
liability for the principal sum became fixed upon the date of expiration of her
Guaranty Agreement.
IT IS THEREFORE ORDERED AND ADJUDGED
AS FOLLOWS:
1) That
the Objection to Claim #1 herein filed by Kentucky National Bank of Pikeville
be, and the same hereby is, SUSTAINED as to all amounts exceeding the sum of
$30,312.80 plus interest, fees, costs and expenses accruing thereon as set out
in the Guaranty executed by the debtor;
2) That
the claimant, Kentucky National Bank of Pikeville, shall file an amended claim
consistent with the within Opinion within fifteen (15) days from the date of
this Order.
COPIES TO:
Franklen K.
Belhasen, II, Esq.
P. Frank
Heaberlin, Esq.
Beverly
Burden, Esq.