IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
DANIEL JOSEPH CATES, JUHREE ROCKHILL CATES,
ROBERT L. BAER, Trustee,
THE WYANDOTTE BANK,
ADV. NO. 93-7134
ORDER DENYING MOTION TO DISMISS
This proceeding is before the Court on defendant Wyandotte Bank's motion to dismiss. The Bank appears by counsel Scott E. Wasserman. The trustee appears by Susan L. Mauch. The Court has reviewed the relevant pleadings and is now ready to rule.
For purposes of this motion, the following facts must be taken as true. Debtor Daniel Cates was a general partner in a partnership that borrowed money from the Bank, and both he and his wife personally guaranteed the debt. All the partners and Mrs. Cates(1) are "insiders" of Mr. Cates. 11 U.S.C.A. §101(31)(A)(i) and (iii). When the partnership defaulted on the loan, the Bank sued Mr. Cates. Apparently the Bank obtained a judgment, because it had garnishments issued against Mr. Cates and collected a total of $3,213.75 of his money within one year before he filed for bankruptcy. It collected $401.72 of this amount within ninety days before he filed. The trustee has sued to recover the garnished amounts as preferences under 11 U.S.C.A. §547(b), contending that they benefitted Mr. Cates' insiders.
The complaint is based on the ruling in In re Robinson Brothers Drilling, Inc., 97 B.R. 77 (W.D. Okla. 1988), aff'd 897 F.2d 850 (10th Cir. 1989), which extends the preference period for transfers made to non-insiders to one year when an insider-creditor benefitted from the transfer. As a sort of preliminary argument, the Bank notes that this case is different from Robinson Brothers because the plaintiff is the trustee for one of the general partners rather than for the business entity itself, but fails to explain why this makes any difference in the theory of recovery accepted in that case. The Court believes the theory that the extended insider-preference period may apply to payments made to non-insiders can be applicable--so long as the other prerequisites to recovery are met--when the trustee represents the estate of a general partner of the primary obligor on a debt as well as when he represents the primary obligor itself. However, while a guarantor normally has a claim against the primary obligor for every dollar the guarantor pays on the debt, secondary obligors like partners and guarantors probably have claims against one another for some portion of the amounts they pay but not to recover every dollar. This distinction may make some difference in this case, and seems to be an underlying basis for the Bank's other arguments.
Without citing any authority other than Federal Rule of Bankruptcy Procedure 7012(b) and Federal Rule of Civil Procedure 12(b)(6) concerning the failure to state a claim upon which relief can be granted, the Bank presses several arguments under two general headings: (1) the transfers conferred no economic benefit on the co-guarantors; and (2) the complaint does not allege the co-guarantors are creditors of Mr. Cates. The Court believes the motion must be denied.
Under its first heading, the Bank argues: "If the transfers were less than [Mr.] Cates' pro-rata share of the indebtedness, then the payments did not reduce the pro-rata liability of the other partners. . . . On the other hand, if the transfers were greater than [his] pro-rata share, then [he] acquired a claim for contribution against the other partners. Once again, the indebtedness of the other partners would not be reduced, although in this scenario they might owe [Mr.] Cates instead of the Wyandotte Bank."(2) Two assumptions seem to be implicit in this argument: first, that partners and guarantors are liable only for their respective shares of a debt rather than the full amount; and second, that under §547(b), the "benefit" to the partners or guarantors must be directly related to their status as contingent creditors of the debtor rather than their status as debtors of the Bank. The Court's understanding of the law is contrary to the first assumption. General partners are ordinarily, if not always, jointly and severally liable for a partnership's debts, and so any one of them can be forced to pay such debts in full. In the absence of some contrary provision in the guarantee, guarantors are also jointly and severally liable for the debts they have guaranteed. Therefore, at least with respect to the Bank, the garnished money reduced the other partners' or guarantors' obligations by the full amount of the payments. The Court is inclined to agree with the second assumption, but would like the parties to brief the question before finally deciding it. Although any partner or guarantor is liable for the full debt, one who actually paid it would not likely have a claim against Mr. Cates for the full amount paid but only for some portion of it, and would be his creditor only to that extent. The extent of the claim against him becomes even more complicated if one assumes less than the full amount of the debt is paid. Consequently, the Court would also like the parties to brief the rights of contribution that partners and guarantors have against one another.
Still under the first heading, the Bank asserts the other general partners have, at some unspecified time, been discharged in their own individual bankruptcy cases. Assuming without deciding that this fact would defeat the trustee's claim, the Court believes it has not been properly presented. The trustee's complaint does not allege that anyone has received a discharge, nor has the Bank presented any evidence to establish this has occurred. Furthermore, to the extent such discharges would be relevant at all, whether they occurred before or after the garnishments would probably be significant as well. If the Bank wishes to pursue this argument, it will need to produce evidence showing when any of the other partners or guarantors were discharged. If this can be shown, the Court will need briefs addressing the effect such discharges would have on any solvent partners' or guarantors' status as creditors of Mr. Cates.
Under its second heading, the Bank argues that the trustee has failed to allege that the co-guarantors are creditors of Mr. Cates. While the complaint does not expressly allege this fact, the Court believes, based on its understanding of partnership and guarantee law, that their potential claims against Mr. Cates can be inferred from their status as partners or guarantors. Partners are liable to a partnership's creditor, and guarantors to the beneficiary of their guarantees, for the full amount of a debt; however, among the partners or the guarantors, one who pays more of the debt than his or her pro-rata share, or perhaps simply more than the others pay, has a claim against the others for some sort of contribution. So, the Court believes the partners and co-guarantors would be at least contingent creditors of Mr. Cates. As indicated above, the Court is uncertain the precise extent to which they would be creditors.
The Bank's additional assertion that, even if they once were, the partners and co-guarantors are no longer creditors of Mr. Cates because he has received a discharge in his main bankruptcy case is clearly mistaken. While Congress might conceivably have intended the partners' or co-guarantors' status as creditors to be determined at some time after the transfers, it certainly did not intend their status to be determined as of any time after the debtor filed for banruptcy. Otherwise, either the recipient of a transfer could escape the trustee by delaying the resolution of the trustee's claim or the debtor's discharge would have to be delayed until the trustee has completed all attempts to recover any transfers. Instead, the Court believes, the parties' status is fixed no later than the date of the bankruptcy petition, and probably at the time of the transfer.
For these reasons, the Court concludes the Bank's motion to dismiss must be denied. The Bank shall have until June 20, 1994, to file its answer to the trustee's complaint. At a pretrial conference in December, the parties had indicated they could complete discovery by January 31, 1994. Any additional discovery they may need regarding possible bankruptcy discharges of other partners or guarantors should be completed by July 8. They should then submit any dispositive motions by August 10, including briefs on any issues identified in this order as requiring further briefing, to the extent they intend to rely on them. If no dispositive motions are filed by August 10, the Clerk is directed to set this matter for a final pretrial conference during August court week.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this _____ day of June, 1994.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE
1.1The materials submitted have not made clear whether Mrs. Cates is a partner in the partnership. Nevertheless, as a "relative," she is an "insider" of the debtor.
2.2The Bank speaks of liability as a partner as though it were identical to liability as a guarantor. It is unclear whether Mrs. Cates is liable on the debt only as a guarantor or as a partner as well. Otherwise, the Court is not aware of any difference in the two types of liability that is relevant in this case. However, since they will be filing briefs, the parties should address any relevant differences between the two.