90 B.R. 29 | Bankr. D. Conn. | 1988
MEMORANDUM OF DECISION ON TRUSTEE’S OBJECTION TO CLAIM
The trustee objects to the claim of Chase Manhattan Bank, N.A. (Chase), asserting that the underlying debt was released by novation.
BACKGROUND
On February 7, 1980, the debtor (Stader) filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code and listed in Schedule A-3 an unsecured, undisputed debt to Chase in the amount of $537,-524.07. On May 12, 1980, a discharge was granted. On December 19, 1980, Chase instituted an adversary proceeding to revoke Stader’s discharge, see 11 U.S.C. § 727(d), and thereafter established at trial that Stader had fraudulently concealed valuable real estate from his schedule of assets. As a consequence, Stader’s discharge was revoked. In re Stader, Adv. No. 5-81-0001 (Bankr.D.Conn. July 21, 1982). On July 25, 1983, Stader amended Schedule A-3 to designate his debt to Chase as “disputed”. The disputed debt relates to the following personal guaranties of loans made by Chase to two corporations in which Stader was president and sole shareholder.
On September 5, 1972, Stader executed a guaranty of debts incurred by Stader Asso-
Chase maintains that the personal guaranties were in effect when, on June 3,1974, Stader, as president of Redats, executed a note for $68,800.00
DISCUSSION
I
Choice of Law
The trustee argues that a federal court sitting in Connecticut should apply Connecticut law when resolving matters of contract interpretation. In addressing a choice of laws question, this court previously recognized that “federal courts must apply the substantive conflict of law rules of the forum state in which it sits.” In re U.S. Repeating Arms Co., 67 B.R. 990, 994 (Bankr.D.Conn.1986), citing, Klaxon Co. v. Stentor Electric Manufacturing Co., Inc., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). Connecticut courts give effect to agreements between parties regarding the substantive law to govern the interpretation and enforcement of their contract. Gannett Co., Inc. v. Register Publishing Company, 428 F.Supp. 818, 824 (D.Conn.1977), citing, Poliak v. Danbury Mfg. Co., 103 Conn. 553, 131 A. 426 (1925); Fairfield Lease Corp. v. Pratt, 6 Conn.Cir. 537, 278 A.2d 154 (1971); Vending Credit Corp. v. Trudy Toys Co., 5 Conn.Cir. 629, 260 A.2d 135 (1969). Paragraph 5 of each guaranty provides, inter alia, that “obligations and liabilities arising hereunder shall be construed according to the laws of the State of New York.”
II
Novation
Under New York law, in order to establish a novation, each of the following four elements must be present: (1) a valid prior obligation; (2) the agreement of all parties to a new contract; (3) the extinguishment of the old obligation; and (4) a valid new contract supported by consideration. Callanan Industries v. Micheli Contracting, 124 A.D.2d 960, 508 N.Y.S.2d 711, 712, (3d Dept.1986); Wasserstrom v. Interstate Litho Corp., 114 A.D.2d 952, 495 N.Y.S.2d 217, 219 (2d Dept.1985); Town & Country Linoleum & Carpet Co. v. Welch, 56 A.D.2d 708, 392 N.Y.S.2d 517, 518 (4th Dept.1977); see also, French American Banking Corp. v. Flota Mercante, 609 F.Supp. 1352, 1357 (S.D.N.Y.1985); VJK Productions v. Friedman/Meyer Productions, 565 F.Supp. 916, 921 (S.D.N.Y.1983). As to the fourth element, the discharge of the original contract ordinarily constitutes sufficient consideration for the substituted contract. Wasserstrom, supra, 495 N.Y. S.2d at 219.
Under non-bankruptcy law, the party asserting a claim of novation has the burden of establishing the “clear and definite intention on the part of all concerned that such is the purpose of the agreement.” Beck v. Manufacturers Hanover Trust Co., 125 Misc.2d 771, 481 N.Y.S.2d 211, 218 (Sup.Ct.1984) (quoting 22 N.Y.Jur.2d, Contracts, § 406, pp. 321-322); see also 58
a.
The Redats Note
The trustee contends that Chase orally agreed to release Stader from his guaranty of the Redats note if Stader found someone acceptable to Chase to replace him as operator of the restaurant. The trustee bases his contention on Stader’s uncontroverted
Redats initially borrowed money from Chase in 1972.
It is my understanding since the restaurant is closed, Redats, Inc. is no longer functioning, the Hypothecation agreements have been returned and lium in [sic] assuming the control and responsibilities [sic] of Redats that I am neither corporately or psersonally [sic] responsible for any existing debts.
An April 15, 1976 letter is to the same effect.
I find that Stader’s testimony is credible and convincing. Moreover, Chase’s own records support Stader’s account of the novation. In an April 29, 1974 file memo, Schroeder wrote that “the Redats loan ... has since been assumed by the Hungry Lion Restaurant, who [sic] leased the restaurant space from Stader.”
b.
Stader Associates Note
The trustee contends that Chase orally agreed to relieve Stader from his guaranty of the Stader Associates note if Stader would turn over management of the Center to Chase. The trustee’s contention is based upon Stader’s testimony corroborated by Frederick Jambes, his friend and advisor.
Stader testified that after the Redats no-vation, he asked Dallak about the possibility of obtaining a release on the Stader Associates guaranty. Dallak stated that he would confer with Schroeder, who thereafter proposed that Chase lend Stader Associates $60,000.00 to pay certain liens on the Center in return for Stader Associates’ execution of a new secured note in the amount of its total outstanding balance guaranteed by Stader. Stader testified that he did not accept that proposal because it did not relieve him of his personal liability, and that he telephoned Schroeder to request an arrangement similar to the Redats novation.
On November 19, 1974, Stader executed the confession of judgment.
Chase attempted to rebut Stader’s testimony by the introduction of various memo-randa from its files in which Chase officers referred to the guaranty as late as August 1975. Those references are, however, merely the mistaken impression by those officers of the consequence which followed from Stader’s execution of the note, mortgage, confession of judgment and irrevocable stock powers.
Jambes’ testimony corroborates Stader’s account of Chase’s offer of novation. Jambes testified that he accompanied Stader to a meeting with Chase.
Having reviewed the documents and assessed the credibility of the witnesses, I am convinced that Stader would not have executed a new note, mortgage, confession of judgment and irrevocable stock powers without a concomitant release of his guaranty. Accordingly, I conclude that Stader’s guaranty of the Stader Associates note was extinguished by novation.
CONCLUSION
For the foregoing reasons, the trustee’s objection to Chase’s claim is sustained and judgment shall accordingly enter in his favor.
. Generally, in order to be entitled to a distribution from a chapter 7 bankruptcy estate, see 11 U.S.C. § 726, a creditor is required to file a proof of claim, see 11 U.S.C. § 501(a); Official Form 19, which is deemed allowed unless a party in interest objects, see 11 U.S.C. § 502(a). The time within which to file a proof of claim is governed by Rule 3002, but when notice of insufficient assets to pay a dividend has been given to creditors pursuant to Rule 2002(e), creditors need not file their claims unless the clerk notifies them that the payment of a dividend appears possible, see Rule 3002(c)(5).
A search of the record reveals that Chase has not filed a proof of claim. This was initially reported as a no asset case. After Stader’s discharge was revoked in recognition, inter alia, that there were undisclosed assets, see text infra, a notice should have been but was not sent to Chase and other creditors under Rule 3002(c)(5).
Neither party has raised this issue. To the contrary, both have treated Chase’s claim as though a proof of claim had been filed. This decision recognizes the de facto status of Chase's claim.
. Claimant’s Exhibit 3.
. Claimant’s Exhibit 1.
. Claimant’s Exhibit 2.
. Claimant’s Exhibit 4.
. The trustee also claimed a recoupment which was denied by the July 28, 1985 partial summary judgment entered in favor of Chase. Thereafter, on July 22, 1987, during the course of the extended hearing held on this matter, the trustee filed an Amended Substituted Objection to Claim.
.Claimant's Exhibits 1 and 3.
. Chase contends that the trustee's failure to call John Lium (the party who assumed management of the restaurant) as a witness supports an inference that Lium’s testimony would have been unfavorable to the trustee’s theory of novation. Under federal law, in order to support such an inference, Chase was required to show that the trustee's control over Lium was such that he was able to assure Lium’s appearance at trial, or that Lium was available to testify and subject to subpoena. Matter of Unit, Inc., 45 B.R. 425, 431-32 (Bankr.S.D.Ohio 1984); Matter of Pal Transport, Inc., 13 B.R. 935, 939 (Bankr.M.D.Fla.1981). No such showing has been made here.
. Tr., September 23, 1986, Vol. I at 4.
. Id. at 4-5; Trustee’s Exhibit A and H.
. Tr., September 23, 1986, Vol. I at 4.
. Id. at 10-12.
. Id. at 13.
. Id. at 14.
. Id. at 15.
. Id. at 16-17.
. Id at 17-18.
. Id. at 13, 16 and 18.
. Trustee’s Exhibit D.
. Trustee’s Exhibit E.
. Id.
. Trustee’s Exhibit B. At this time, the novation of the Stader Associates guaranty had not yet occurred and Stader was still managing the Center.
. Tr, September 23, 1986, Vol. I at 26-29; Trustee’s Exhibit F.
. Tr., September 23, 1986, Vol. I at 30; Vol. II at 23.
. Tr., September 23, 1986, Vol. I at 30-32.
. Id. at 32-33.
. Trustee's Exhibit N.
. Claimant’s Exhibit 4.
. Trustee’s Exhibit M.
. Trustee’s Exhibit K; Tr., September 23, 1986, Vol. I at 37-38.
. Id. at 40.
. Id. at 42.
. Trustee’s Exhibit 25.
. Tr., September 23, 1986, Vol. I at 57.
. Id. at 42-43.
. Tr., September 24, 1986, Vol. III at 8.
. Id. at 10.
. Id. at 14.