FIRST SECURITY BANK OF UTAH, National Association, a national banking association, Plaintiff and Appellant, v. Orville L. CREECH, Ruby E. Creech, Larry O. Creech, Joann Creech, and Walter Herbert Creech, Defendants and Appellees.
No. 910149
Supreme Court of Utah
March 3, 1993
Rehearing Denied Sept. 23, 1993
852 P.2d 958
In short, there is well-established precedent for following comity principles in cases such as this.
As a final matter, I register my objection to the majority‘s treatment of the merits of the boundary issue. Were I to reach the issue, I would follow the exhaustive and thoroughly researched opinions of the federal courts, both trial and appellate. See Ute Indian Tribe, 773 F.2d 1087; Utah Indian Tribe v. State of Utah, 521 F.Supp. 1072 (D.Utah 1981). They constitute an adequate remonstrance to the majority‘s disposition of the issue. Specifically, those decisions followed the approach dictated by the Supreme Court in determining whether the various enactments at issue demonstrated a congressional intent to diminish reservation boundaries. That Court has said that, in the absence of “substantial and compelling evidence of a congressional intention to diminish Indian lands,” the courts’ “traditional solicitude for the Indian tribes” must compel a finding that “the old reservation boundaries survived the opening.” Solem v. Bartlett, 465 U.S. 463, 472, 104 S.Ct. 1161, 1167, 79 L.Ed.2d 443 (1984) (emphasis added) (quoted in Ute Indian Tribe, 773 F.2d at 1089); accord Rosebud, 430 U.S. at 586, 97 S.Ct. at 1363 (“Doubtful expressions are to be resolved in favor of the weak and defenseless people who are the wards of the nation, dependent upon its protection and good faith.” (Citation omitted)). The Tenth Circuit and the district court viewed the relevant statutes with this perspective, see 773 F.2d at 1089; 521 F.Supp. at 1110 n. 118; a close reading of the majority decision here demonstrates that it does not.
There are times when I, as a state court judge, lament what might be fairly characterized as the second-guessing of our decisions by federal courts simply because they do not like a result we may have reached. See, e.g., Lafferty v. Cook, 949 F.2d 1546 (10th Cir.1991) (disagreeing with State v. Lafferty, 749 P.2d 1239 (Utah 1988)) cert. denied sub nom. Cook v. Lafferty, 504 U.S. 911, 112 S.Ct. 1942, 118 L.Ed.2d 548 (1992). The present case puts that shoe on the other foot, an exercise that may be ironic, but is even less defensible. The federal government is, after all, supreme on questions that fall within its purview. In this situation, federal statutory law is at issue, the federal trust responsibility to the Indian tribe is at issue, and it was the federal courts that adjudicated the boundary question years ago. As of today, federal supremacy and Supreme Court review of this court‘s decision provides the only remaining hope for the Ute Tribe, one of those “weak and defenseless people who are the wards of the nation, [and who are] dependent upon its protection and good faith,” Rosebud, 430 U.S. at 586, 97 S.Ct. at 1363, for what little is left of the patrimony they held before the whites came to this continent.
Steven W. Dougherty, Linda M. Jones, Salt Lake, for Orville and Ruby Creech.
Lyle W. Hillyard, Logan, for Joann, Larry & Walter Creech.
ZIMMERMAN, Justice:
First Security Bank appeals an interlocutory order denying its motion for partial
The facts are not in dispute. In February of 1986, the elder Creeches entered into a series of loan agreements with First Security to fund the continued operation of their dairy farm. Larry and Joann Creech provided some of the collateral and served as guarantors on one of the loans, a commercial note. Walter Creech served as a guarantor on another loan, a promissory note pursuant to an agricultural credit and security agreement. All the loan agreements included a provision, referred to as an “ipso facto clause,” which specified that the bank could hold the Creeches in default, accelerate their monthly payments, and take immediate possession of the collateral if they filed for bankruptcy. The loan agreements also specified that the Creeches could be held in default if they failed to make the payments.
In November of 1986, the elder Creeches filed for chapter 12 bankruptcy protection and stopped making payments. During the bankruptcy proceedings, the elder Creeches and the bank entered into a stipulation that required the elder Creeches, among other things, to maintain their dairy herd at a minimum size, to maintain a certain average level of milk production, and to provide the herd with regular veterinary inspection and treatment. The stipulation provided that if the elder Creeches failed to meet these requirements, First Security would be given relief from the automatic stay imposed by the Bankruptcy Code, see
The stipulation was incorporated into the elder Creeches’ reorganization plan, which was confirmed by an amended order of the bankruptcy court on July 8, 1987. On July 20, 1987, the bankruptcy court issued another order, modifying the confirmed plan and stipulation for reasons not relevant here. Thereafter, the elder Creeches commenced making monthly payments to First Security in the amounts specified by the stipulation.
In May of 1988, while the elder Creeches’ bankruptcy action was still pending, First Security brought a foreclosure action in state district court, alleging that both the elder and the younger Creeches were in default under the stipulation because they failed to maintain the size of their herd, to maintain milk production at the specified level, and to provide necessary veterinary care. Because of this default, the bank claimed that it could proceed against the Creeches under the original loan agreements. The Creeches filed an application to remove the state court action to the bankruptcy court, but the bankruptcy court denied the application, reasoning that the issue of whether the Creeches had defaulted under the terms of the stipulation was appropriately before the state court.
In November of 1989, before the state district court took any action in the foreclosure case, the bankruptcy court dismissed the elder Creeches’ chapter 12 case without prejudice. It found that the elder Creeches had not adhered to their confirmed bankruptcy plan in that they had failed to make required payments to another creditor.
In March of 1990, First Security moved for partial summary judgment in the foreclosure action. It contended that the stipulation, bankruptcy plan, and order confirming the plan controlled the rights and duties of the parties and that under one or
The trial court ruled in favor of the Creeches, finding that the stipulation and “resulting order” from the bankruptcy court were unenforceable because they “were not freely negotiated at arms length, and did not result in an [o]rder which otherwise could be enforceable outside the framework of bankruptcy.” The court found further that the original loan agreements “were in force and effect and the period of the bankruptcy shall not be considered to be a breach of the original terms and provisions.” The court stated that the payments made during the bankruptcy period “should be applied against the whole obligation” and that the Creeches “under this formula, will be obliged to eventually make up the difference.” The court reasoned that the parties should be returned to the same positions they had occupied prior to the bankruptcy filing, but cited no legal authority for this conclusion. The court only stated that it was relying on “principles of equity and law” with “perhaps the former overriding the latter.”
After the trial court issued its memorandum decision, First Security made a “motion for clarification.” It argued that the trial court incorrectly “assumed that, under the provisions of the Bankruptcy Code, the filing of a bankruptcy or any other default that may have occurred as a result of or during the course of a bankruptcy could not, as a matter of law, constitute a breach.” First Security also contended that if it was the trial court‘s intent to apply equity, at a minimum the bank should be awarded attorney fees and costs. After a hearing, the trial court reaffirmed its previous decision and said that it was explicitly reserving the issue of attorney fees and costs for a later hearing. First Security then petitioned this court for interlocutory review, which we granted.
On appeal, the bank does not challenge the trial court‘s conclusion that the stipulation and “resulting order” are void. Although the trial court‘s ruling is unclear as to which “order” it was referring, it is apparent from the court‘s findings and the parties’ contentions in their cross-motions for summary judgment that the court believed that any bankruptcy court orders recognizing the stipulation were unenforceable. Because First Security does not dispute the trial court‘s determination on this point, we do not review the correctness of this view of the law. Consequently, we treat the stipulation, confirmed plan, and associated bankruptcy court orders, to the extent they control the relationship between the elder Creeches and the bank, as having no effect.
First Security initially argues that the trial court erred in ruling on the parties’ rights and duties under the loan agreements because neither party had requested that the court reach that issue. In making this claim, the bank presents no analysis or reasoning and cites no authority.
First Security‘s principal argument is that the trial court erred in finding that both the elder and younger Creeches were not in default under the loan agreements. Specifically, the bank challenges the court‘s determination that no default oc-
We first state the standard of review. We review a summary judgment for correctness, affording no deference to the trial court‘s legal conclusions. Allen v. Prudential Property & Casualty Ins. Co., 839 P.2d 798, 800 (Utah 1992); Bonham v. Morgan, 788 P.2d 497, 499 (Utah 1989) (per curiam). On the other hand, we can rely on any basis having support in the record to affirm. Allen, 839 P.2d at 800; College Irr. Co. v. Logan River & Blacksmith Fork Irr. Co., 780 P.2d 1241, 1244 (Utah 1989).
Turning to the merits, we first review the bankruptcy law framework within which this case is necessarily considered. By filing a petition under chapter 12 of the Bankruptcy Code, the elder Creeches placed all their legal and equitable interests in the bankruptcy estate, referred to as “property of the estate” under the Bankruptcy Code.
The Bankruptcy Code provides that confirmation of a reorganization plan under chapter 12 revests the property of the estate in the debtor except as provided by the plan.
What happened to the elder Creeches’ bankruptcy estate hinges on the effect of section 349(b)(3) of the Bankruptcy Code. This section provides that a dismissal of the bankruptcy case automatically “revests property of the estate in the entity in which such property was vested immediately before the commencement of the case.”
We are of the view that any contract rights held by the elder Creeches under the original loan agreements became property of the estate when they filed for bankruptcy and were then revested in the elder Creeches when their bankruptcy case was dismissed. This view is supported by section 541(a) of the Bankruptcy Code, which defines “property of the estate” as all legal and equitable interests of the party filing for bankruptcy. Furthermore, the legislative history of this statute indicates that the scope of this definition is broad: “It includes all kinds of property, including tangible or intangible property.” S.Rep. No. 989, 95th Cong., 2d Sess. 82 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5868; see also Whiting Pools, 462 U.S. at 204-05 & n. 9, 103 S.Ct. at 2313-14 & n. 9. This provision has been interpreted as “all-inclusive,” In re Minoco Group of Cos., 799 F.2d 517, 518 (9th Cir.1986), and “sweeping,” In re Goff, 706 F.2d 574, 578 (5th Cir.1983). One court has noted that “an interest is not outside its reach because it is novel or contingent or enjoyment must be postponed.” In re Minoco Group, 799
The contract rights held by the elder Creeches under the original loan agreements at the time of the bankruptcy filing included the right to continue to own and enjoy the collateral securing the loans so long as the terms of the loan agreements were fulfilled. When the elder Creeches filed for bankruptcy, this right and others held by the elder Creeches under the loan agreements became property of the estate. See
It may be argued that when the Creeches filed for bankruptcy, a default automatically occurred by reason of the ipso facto clauses in the loan agreements and that the default divested the elder Creeches of the right to continue to own and enjoy the collateral before the bankruptcy estate came into being. Under this theory, this and other rights contingent on the elder Creeches’ performance under the loan agreements could not have vested in the bankruptcy estate because the elder Creeches no longer were entitled to them. This argument is untenable. Section 541(c)(1)(B) of the Bankruptcy Code provides, inter alia, that “an interest of the debtor in property becomes property of the estate . . . notwithstanding any provision in an agreement . . . that is conditioned on the insolvency or financial condition of the debtor [or] on the commencement of a case under [title 11 of the United States Code].”
Having found that the elder Creeches’ contract rights under the loan agreements vested in the bankruptcy estate upon filing, it follows that those rights were revested in the elder Creeches when their bankruptcy case was dismissed under section 349(b)(3) of the Bankruptcy Code. Thus, even if the elder Creeches defaulted under the original agreements by filing for bankruptcy or failing to make payments during the bankruptcy—thereby losing their rights under the loan agreements and giving First Security the opportunity to foreclose—section 349(b)(3) returned the elder Creeches to the same position they occupied prior to filing the petition. Cf. In re Nash, 765 F.2d 1410, 1414 (9th Cir.1985) (“[Section] 349 ‘obviously contemplates that on dismissal a bankrupt is reinvested with the estate, subject to all encumbrances which existed prior to the bankruptcy.‘” (quoting In re Income Property Builders, Inc., 699 F.2d 963, 965 (9th Cir.1982) (per curiam))).
Our conclusion is supported by the policy underlying section 349. The Senate Report that accompanied the bill later enacted and codified in section 349 states, “The basic purpose of [section 349(b)] is to undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case.” S.Rep. No. 989, 95th Cong., 2d Sess. 49 (1978) (emphasis added), reprinted in 1978 U.S.C.C.A.N. 5787, 5835. The accompanying House Report has similar language. See H.R.Rep. No. 595, 95th Cong.2d Sess. 338 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6294; see also 1 Collier Bankruptcy Manual ¶ 349.02 to .03, at 349-6 to -9 (1991) [hereinafter Collier].
First Security cites a number of decisions in which ipso facto clauses have been enforced against the debtor. However, none of those cases involved bankruptcy proceedings dismissed under section 349, which specifically provides for the automatic revesting of the property of the estate in those entities in which it was vested prior to the bankruptcy. For example, in In re Bell, 700 F.2d 1053, 1057-58 (6th Cir.1983), the court held that an ipso facto clause became effective after the trustee abandoned the property subject to the security interest under section 554 of the Bankrupt-
In sum, because the contract rights of the elder Creeches have returned to their prepetition positions, we hold that any default occurring when the elder Creeches filed for bankruptcy or failed to make payments between filing and confirmation has no effect on the elder Creeches’ rights under the original loan agreements and cannot be the basis for an assertion of default by First Security. We therefore affirm the trial court‘s ruling regarding the claim against the elder Creeches.
We acknowledge that our decision effectively excuses the elder Creeches from their obligation to make payments during the period after filing for bankruptcy and before confirmation of their reorganization plan.1 However, our interpretation of section 349(b)(3) does not give a debtor an automatic cost-free grace period by filing for bankruptcy and later obtaining its dismissal. During the bankruptcy, a secured creditor faced with a debtor‘s default may seek to lift the automatic stay and foreclose on the collateral. See, e.g., In re Edwards, 962 F.2d 641, 645 (7th Cir.1992).
Moreover, in dismissing a bankruptcy, the bankruptcy court has broad discretion under section 349(b) to tailor orders to protect the rights of parties who have acted in reliance on the bankruptcy case. See, e.g., In re Newton, 64 B.R. 790, 793 (Bankr.C.D.Ill.1986); cf.
The remaining question before us is the effect of section 349(b)(3) on the contractual relationship between the younger Creeches and First Security. The trial court exonerated the younger Creeches as guarantors on their parents’ obligations. First Security, however, claims that the younger Creeches are in default under two of the loan agreements, a commercial note and a promissory note, for failing to make payments during the pendency of their parents’ bankruptcy case. Larry and Joann Creech are the guarantors on the commercial note, and Walter Creech is the guarantor on the promissory note.
Section 349(b)(3) affects only the “property of the estate.” Because the younger Creeches did not join the bankruptcy petition, whatever rights they had under the loan agreements did not become property of the estate when the elder Creeches filed for bankruptcy. Moreover, the younger Creeches’ rights as guarantors are not so inextricably tied to the elder Creeches’ rights that the former must come within the ambit of section 349(b)(3) to protect the integrity of the latter. Under such circumstances, there is no reason why the bank could not have proceeded against Larry and Joann Creech on the commercial note and Walter Creech on the promissory note without regard to their parents’ bankruptcy.3 Cf. Surety Life Ins. Co. v. Rupp, 833 P.2d 366, 369 (Utah Ct.App.1992).
The younger Creeches make several other arguments in support of the trial court‘s ruling relieving them of any liability under the commercial note.4 First, they argue that under section 1201 of the Bankruptcy Code, they had no obligation to ensure that the monthly payments were being made after the elder Creeches filed for bankruptcy. Section 1201 places an automatic stay on any action to collect a “consumer debt”
The younger Creeches also argue that the stipulation between their parents and the bank materially modified the terms of the commercial debts they had accepted as guarantors and that this modification constitutes a discharge of their obligations to perform. See Carrier Brokers, Inc. v. Spanish Trail, 751 P.2d 258, 261 (Utah Ct.App.1988). We decline to address this contention. Because the trial court ruled that the stipulation was unenforceable and none of the parties appealed that ruling, the younger Creeches may not raise the issue here.
Finally, the younger Creeches argue that First Security should be estopped from claiming a default because the bank agreed to accept reduced payments. However, on appeal, First Security claims only that filing for bankruptcy and failure to make payments prior to the stipulation constitute the events of default; First Security does not rely on any conduct or omission occurring after the stipulation.5 To establish estoppel, the proponent must show, inter alia, that he or she acted or refrained from acting in reliance on the opposing party‘s behavior. CECO Corp. v. Concrete Specialists, Inc., 772 P.2d 967, 969-70 (Utah 1989). The younger Creeches have not averred specifically how First Security‘s conduct in entering into the stipulation induced them into failing to make payments prior to the stipulation. Consequently, we reject the younger Creeches’ estoppel argument.
As a final matter, we address First Security‘s argument that the trial court improperly reserved ruling on the issue of attorney fees and costs. We hold that First Security is precluded from raising this issue because it is the party that petitioned for interlocutory appeal, thereby preventing the trial court from resolving the issue. First Security should have obtained a final judgment on this issue before raising it on appeal. In addition, because we have reversed the trial court‘s finding of default in regard to the younger Creeches, the facts pertinent to that claim likely have changed.
In sum, we affirm the trial court‘s order finding that Orville and Ruby Creech were not in default under the loan agreements. We reverse the trial court‘s finding that Larry and Joann Creech were not in default on the commercial note and that Walter Creech was not in default on the promissory note. The matter is remanded.
HALL, C.J., and DURHAM, J., concur.
HOWE, Associate Chief Justice (dissenting in part):
I concur with the majority that the elder Creeches’ failure to make loan payments to First Security Bank (FSB) for eight months after filing bankruptcy constitutes a default for which the younger Creeches, as guarantors, are liable. I cannot agree, however, that no default has occurred vis-à-vis the elder Creeches because of that same failure. This anomalous result is attributed to the effect of section 349 of the Bankruptcy Code.
The problem with the majority holding as to the elder Creeches is that it misconstrues the impact of the automatic stay.
It is as to the temporary nature of the automatic stay that the majority‘s analysis breaks down. The majority would have the automatic stay forgive the Creeches’ failure to make payments falling due while the stay was in effect. Were that the law, a motion for a lift of stay might be an exercise in futility. If a debtor in bankruptcy fails to make payments on a secured loan after filing bankruptcy, a creditor may move the bankruptcy court for a lift of the automatic stay so that it can proceed to foreclose against the property securing the loan. But under the majority‘s analysis, the debtor would not be in default because he has filed bankruptcy. Therefore, there would be no reason to lift the stay.
FSB moved for dismissal of the Creech bankruptcy after the Creeches defaulted post-petition. The motion was denied. However, a stipulation between the Creeches and FSB was subsequently entered into to permit the Creeches one last chance to perform. As part of the stipulation, FSB demanded that any default of the Creeches would entitle it to begin foreclosure proceedings in a state court without having to petition for the permission of the bankruptcy court. The bankruptcy court included the terms of the stipulation in the confirmation order.
When FSB claimed that the Creeches had defaulted under the stipulation, it began foreclosure proceedings in May of 1988 in the state court below, although the chapter 12 bankruptcy continued. It is undisputed that FSB was entitled to this remedy in the event of default under the terms of the confirmation order and bankruptcy law.
The majority‘s position that the subsequent dismissal of the bankruptcy halted the foreclosure proceeding already begun has no basis in bankruptcy law. Nor does the majority cite any cases in support of that interpretation of the effect of the dismissal.
It is true that the trial court held that the stipulation and confirmation order were void, but that does not aid the Creeches. The parties agree that with the stipulation and bankruptcy order out of the picture, their rights are to be determined under the 1986 loan agreements. There is no question but that the Creeches are in default under those agreements, having missed eight monthly payments that fell due after they filed bankruptcy. The Creeches seek to excuse those nonpayments because they assert that under the Bankruptcy Code, they could not make payments because such payments would have constituted “a post petition transfer of assets and use of such collateral without court authorization.” The Creeches’ statement evidences a misunderstanding of the Bankruptcy Code, and in any case, the majority does not rely on that assertion. Instead, the majority employs section 349 to excuse the failure to make the eight payments and to move those missed payments apparently to the end of the loan. Neither the Creeches nor FSB gives any such effect to section 349.
Section 349 is a narrow provision interpreted by the courts to apply only to unwind those unique bankruptcy protections specifically referred to: “[T]he courts have refused to extend the reinstatement effect of Section 349(b) beyond its expressly enumerated provisions.” 2 Lawrence P. King et al., Collier on Bankruptcy ¶ 349-11 (15th ed. 1993); see Norton v. Hoxie State Bank, 61 B.R. 258, 260 (Bankr.D.Kan.1989) (“Section 349(b)(2) affects only the specific actions delineated in that subsection.“). In his oral arguments in this case, the Creeches’ attorney conceded that in response to questions posed by Justice Zimmerman:
JUSTICE ZIMMERMAN: [Section] 349 says when you dismiss [a case] you unwrap the bankruptcy. My question
is aren‘t there any cases about that effect? THE CREECHES’ ATTORNEY: There isn‘t much law with respect to section 349. Primarily when you see a case concerning 349, it‘s a concern about some property that was transferred during bankruptcy or a lien that was avoided through the bankruptcy process and where that property should go afterwards. It deals primarily with property rights, but it also says that the bankruptcy should be undone.... I don‘t think you can take a literal interpretation of section 349 that would require that you ignore everything that happened in connection with the bankruptcy.... Section 349 does not instruct the court to ignore that the bankruptcy happened.
As was stated in oral arguments, section 349 generally refers to revesting property of the estate which was brought into the estate by one of the exotic and artificial bankruptcy provisions, such as section 547, “preferential transfers,” in the parties which held it prior to the bankruptcy. For example, it is not unknown for a debtor prior to filing bankruptcy to divest himself or herself of property so that it would be out of the reach of creditors, i.e., so that it would not become “property of the estate” upon filing bankruptcy. See In re Kaiser, 32 B.R. 701 (Bankr.D.C. 1983) (court held that property transferred to wife of debtor on eve of bankruptcy was nevertheless property of the estate). Another example of a preferential transfer is the preference of one creditor over the others by paying one debt in full before filing bankruptcy. Bankruptcy provides a remedy for this kind of bad faith behavior by empowering the trustee to recoup the property into the property of the estate. The rationale behind the Code‘s granting such powers to a trustee is that whether property which could potentially be property of the estate is used to pay a single creditor or simply hidden from the reach of creditors, such action results in a diminution of the property of the estate and thus an inequitable distribution to creditors during bankruptcy. Upon dismissal of a bankruptcy, which is essentially a failure of the bankruptcy, the trustee‘s actions are “unwound.” The property goes back to whomever the debtor transferred it to prior to bankruptcy, and the debtor is no longer protected against creditors pursuing their contractual remedies.
The majority cites no cases to support the use of section 349 in the manner it proposes. In re Nash, 765 F.2d 1410, 1413 (9th Cir.1985), the only case cited by the majority purportedly supporting its holding, is a chapter 13 case that deals with the issue of the disposition of funds held by a trustee upon dismissal of a bankruptcy. Neither party in this case argued on appeal that section 349 controls; in fact, both attorneys attempted to make clear in oral arguments that section 349 was not controlling:
JUSTICE ZIMMERMAN: It seems to me that 349 kinda governs here, doesn‘t it? Is that not the case?
FSB‘S ATTORNEY: I don‘t think 349 governs.
Justice Zimmerman posed a similar question to the attorney for the Creeches:
JUSTICE ZIMMERMAN: 349 says you unravel it.
THE CREECHES’ ATTORNEY: 349 deals with respect to property rights. It doesn‘t require again that you ignore what happened.... We submit that section 349 answered the question with respect to which agreements were enforceable.... [The issue of whether the original documents or the stipulation governs is not before us.] Section 349 really is not controlling law on the issues before the court today....
JUSTICE ZIMMERMAN: [Under section 349, the debtor‘s property is] just like it was the day before bankruptcy....
THE CREECHES’ ATTORNEY: But [the trial court] also recognized reality. We‘re not travelling in time here, going back to some date. Things happened.
I would reverse the trial court decision as to both the elder and younger Creeches
STEWART, J., concurs in the dissenting opinion of Associate Chief Justice HOWE.
MICHAEL D. ZIMMERMAN
JUSTICE
I. DANIEL STEWART
JUSTICE