Opinion
CASE NO. 03-35869-SAF-7, ADVERSARY NO. 03-3763
April 16, 2004
Michael J. Scott, Dallas, TX, of Counsel for Plaintiff or Petitioner
Terry K. Ray, DeSoto, TX, of Counsel for Defendant or Respondent
MEMORANDUM OPINION AND ORDER
On November 19, 2003, Ebenezer K. Ekuban, the defendant, filed a motion for summary judgment to dismiss the above-styled adversary proceeding, contending that certain guaranty agreements cannot be enforced under applicable non-bankruptcy law. On January 26, 2004, First Union National Bank, the plaintiff, filed its response, opposing the motion. The court held a hearing on the motion on February 13, 2004. On March 23, 2004, the bank filed a motion for summary judgment, contending that it has a claim against Ekuban arising from a fraudulent real estate transaction. The bank premises its motion on an amended proof of claim filed in the underlying bankruptcy case. On March 24, 2004, Ekuban filed his response to the bank's motion.
Summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, and other matters presented to the court show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby Inc., 477 U.S. 242, 250 (1986);Washington v. Armstrong World Indus., Inc., 839 F.2d 1121, 1122 (5th Cir. 1988). On a summary judgment motion the inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Anderson, 477 U.S. at 255. A factual dispute bars summary judgment only when the disputed fact is determinative under governing law. Id. at 250.
The movant bears the initial burden of articulating the basis for its motion and identifying evidence which shows that there is no genuine issue of material fact. Celotex, 477 U.S. at 322. The respondent may not rest on the mere allegations or denials in its pleadings but must set forth specific facts showing that there is a genuine issue for trial. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986).
The bank objects to the discharge of a debt of $1,641,000. The bank alleges that Ekuban obtained credit in that amount by false pretenses, a false representation or actual fraud barring the discharge of the debt under 11 U.S.C. § 523(a)(2)(A). Section 523(a)(2)(A) provides that a discharge does not discharge an individual debtor from "any debt" for money, property, services or an extension of credit to the extent obtained by false pretenses, a false representation or actual fraud.
The following are not subject to genuine issues of fact: On August 14, 2000, EBCO Partners, L.L.C., a Delaware corporation, purchased thirty-six units in a condominium project known as Bryn Mawr Condominiums, located in Pasadena, Texas, from J.M.K. 6, Inc., for $1,641,600. The seller financed the transaction. EBCO by Ekuban, its president, executed thirty-six promissory notes, payable to J.M.K. 6, secured by the real property. Ekuban did not attend the closing. Documents had been mailed to Ekuban. Ekuban returned the documents in pre-addressed envelopes. Ekuban personally signed thirty-six guaranty agreements. The agreements were separate documents. Ekuban forwarded the thirty-six guaranty agreements separately from any of the other documents involved in the transaction.
On September 22, 2003, the bank filed a proof of claim in the underlying Ekuban bankruptcy case for $1,744,904.88, based on the guaranty agreements. On October 14, 2003, the bank filed the instant adversary proceeding alleging that the debt premised on those guaranty agreements should be excluded from Ekuban's discharge under § 523(a) (2)(A).
On January 22, 2004, the bank filed an amended proof of claim in the underlying Ekuban bankruptcy case, asserting an additional claim based on an allegedly fraudulent real estate transaction. In its motion for summary judgment, the bank seeks a declaration that it has such a claim separate from its claim based on the guaranty agreements. The bank asserts that its amended proof of claim relates back to its original proof of claim. The amendment of the proof of claim filed under 11 U.S.C. § 501 and 502 does not affect what is before the court on a dischargeability complaint under § 523(a)(2)(A). In other words, the issue is not the claim submitted to the trustee in the underlying bankruptcy case. Rather, the issue is the debt alleged to be excluded from discharge in the complaint.
The instant complaint alleges that Ekuban personally executed thirty-six guaranty agreements. Compl. ¶ 6. The complaint alleges that Ekuban participated in a fraud or false representations regarding the financing of the transaction. Compl. ¶ 9. The seller, however, financed the transaction. The bank acquired the notes and guaranty agreements. Compl. ¶ 10. The bank alleges it relied on Ekuban's representations when it acquired the notes and guaranty agreements. Compl. ¶ 11. The bank "now sues herein objecting to the dischargeability of its debt because of the conduct of [Ekuban]." Compl. ¶ 11.
The bank did not provide money, property or services, or extend or renew credit to Ekuban. The bank acquired notes and guaranty agreements executed to and for J.M.K. 6. Consequently, when the bank objects to the discharge of its debt, it objects to the discharge of Ekuban's obligations under the guaranty agreements. Regardless of what the bank asserts in an amended proof of claim filed in the underlying bankruptcy case, in the instant complaint, it objects to the discharge of the debt it acquired from J.M.K. 6. As to Ekuban individually, the debt is premised on the guaranty agreements. The bank contends that Ekuban executed those agreements and J.M.K. 6 thereby extended credit through those agreements, based on false pretenses, a false representation or actual fraud.
The "debt" alleged in this adversary proceeding is premised on thirty-six guaranty agreements signed by Ekuban. A "debt" is a "liability on a claim." 11 U.S.C. § 101(12). A claim is a "right to payment." § 101(5)(A). Ekuban contends, in his motion for summary judgment, that the guaranty agreements are not enforceable under the Texas Statute of Frauds. As a result, he argues Ekuban has no liability on the claim based on the guaranty agreements. Without liability on a claim, there is no debt. Without a debt, the bank's complaint must be dismissed. The bank counters that the guaranty agreements are enforceable under Texas law.
To be enforceable, the guaranty agreements must comply with the Texas Statute of Frauds. Section 26.01 of the Texas Business and Commerce Code provides:
(a) A promise or agreement described in Subsection (b) of this section is not enforceable unless the promise or agreement, or a memorandum of it, is (1) in writing; and (2) signed by the person to be charged with the promise or agreement or by someone lawfully authorized to sign for him.
Tex. Bus. Com. Code Ann. § 26.01(a).
The section applies to "a promise by one person to answer for the debt, default, or miscarriage of another person." Tex. Bus. Com. Code Ann. § 26.01(b)(2). The section applies to the guaranty agreements.
Under § 26.01(a), the writing must be complete within itself in every material detail and must contain the essential elements of the agreement, so that the agreement can be ascertained from the writings without resort to oral testimony. Cohen v. McCutchin, 565 S.W.2d 230, 232 (Tex. 1978). The material details or essential terms of a guaranty include the parties involved, a manifestation of intent to guaranty the obligation and a description of the obligation being guaranteed.Material Partnerships, Inc. v. Ventura, 102 S.W.3d 252, 261 (Tex.App.-Houston [14th Dist.] 2003).
The guaranty agreements executed by Ekuban read:
FOR VALUE RECEIVED, I, EBENEZER EKUBAN, individually, do hereby guarantee payment of the hereinabove described note, according to the terms thereof, both as to interest and as to principal, and I do hereby waive demand, all notices including notice of intention to accelerate the maturity, notice of non-payment, presentment for payment, protest, notice of protest, suit, diligence and any notice of or defense on account of the extension of the time of payments or change in methods of payments and consent to any and all renewals and extensions in the time of payment hereof.
The guaranty agreements do not contain a "hereinabove described note." The agreements do not contain "the terms thereof." The guaranty agreements reflect a manifestation of Ekuban's intent to guarantee an obligation. But the court cannot determine from the writing the terms of the notes being guaranteed. The writings do not identify the maker of the note nor the payee on the note. Thus, the writings do not identify the parties involved. The writings do not describe the obligations being guaranteed. The court cannot determine from the writings the essential elements of the agreements. The guaranty agreements do not comply with the Texas Statute of Frauds.
The writing requirement of the statute of frauds may be satisfied by two or more documents in combination. Central Power Light Co. v. Del Mar Conservation, 594 S.W.2d 782, 789-90 (Tex.Civ.App.-San Antonio 1980, writ ref'd n.r.e.). One document must refer to another existing document, Morrow v. Shotwell, 477 S.W.2d 538, 539 (Tex. 1972), or must be exchanged between the parties in a series of documents. Central Power, 594 S.W.2d at 789-90.
EBCO Partners, L.L.C., by Ekuban, its president, executed thirty-six promissory notes. Ekuban separately executed thirty-six guaranty agreements. None of the notes refers to a guaranty agreement, let alone an agreement executed by Ekuban. A note, for example, says "PROMISSORY NOTE: $45,600 Houston, TX August 14, 2000" with a promise to pay J.M.K. 6, Inc., at Friendswood, TX. The note does not proceed to refer to an identifiable guaranty.
The guaranty agreements refer to the "hereinabove described note" but there is no above described note included. The guaranty agreements do not refer to an identifiable note, whether by date, amount, property, payee, maker, or any other reference.
The summary judgment evidence establishes that a title company in Wichita Falls faxed guaranty agreements to Chicago Title, as separate documents. Notes were not attached to or faxed by the title company with the guaranty agreements. There is no summary judgment evidence that the notes and guaranty agreements were ever contained in a joint document, either when executed or through closing, to thereby give meaning to the words "here in above described note."
Consequently, no one note refers to a specific guaranty agreement or vice versa to allow the court to consider two documents to satisfy the statute of frauds.
Assuming one document does not need to refer to another existing document, at a minimum the documents must be "sufficient as to contents and signatures," signed by the party to be charged and addressed to his agent or the other party to the contract or even to a third party.Central Power, 594 S.W.2d at 789-90. The guaranty is insufficient as to its contents. No other document supplies the contents for the guaranty. The guaranty is not addressed to any one person.
The bank argues that the court may draw inferences from all the summary judgment evidence to determine the terms of the parties' transactions and thereby derive the intent of the parties. The court does not engage in that process unless it first determines that the guaranty agreements comply with the statute of frauds. The guaranty agreements do not comply with the statute of frauds.
The bank further contends that the statute of frauds should not be applied because of the so-called main purpose doctrine. A promise to pay an enforceable obligation, when the benefit of that obligation accrues directly to the promisor, need not satisfy the statute of frauds.Butler Aviation Int'l v. Whyte (In re Fairchild Aircraft Corp.), 6 F.3d 1119, 1128 (5th Cir. 1993). Under that doctrine, a promise to pay is enforceable, even if not satisfying the statute of frauds, if:
(1) [t]he promisor intended to become primarily liable for the debt, in effect making it his original obligation, rather than to become a surety for another; (2) [t]here was consideration for the promise; and (3) [r]eceipt of the consideration was the promisor's main purpose or leading object in making the promise; that is, the consideration given for the promise was primarily for the promisor's own use and benefit.
Id. (citing Haas Drilling Co. v. First Nat'l Bank, 456 S.W.2d 886, 890 (Tex. 1970)).
The cases cited by the parties apply the main purpose doctrine to oral promises to pay. Nevertheless, the court considers the doctrine as applicable to documents, as well.
Ekuban executed the guaranty agreements, but EBCO Partners, L.L.C., executed the notes and the related security agreements. EBCO is a separate legal entity from Ekuban. On June 10, 2003, EBCO filed a petition for relief under Chapter 7 of the Bankruptcy Code, case no. 03-35871-HDH-7. EBCO scheduled the thirty-six notes as its liability, listing the thirty-six properties as its assets, with the property secured with Interbay Funding, the bank's servicing agent, listed as the secured creditor. Ekuban did not obtain the property; EBCO did. As a result, the property became part of the EBCO bankruptcy estate, not Ekuban's bankruptcy estate. According to EBCO's statement of financial affairs, Ekuban was the sole equity holder in EBCO at the time of the filing of its bankruptcy petition. Nevertheless, Ekuban's interest in the obligation being guaranteed derives from his equity position in EBCO. As demonstrated by the EBCO bankruptcy case, that equity interest has value only after EBCO pays its creditors. As evidenced by the loan to value considerations for the loans to EBCO, the real estate acquired appeared to have value to satisfy the notes. Ekuban did not become primarily liable for the debt; EBCO did. The notes cannot be construed as making Ekuban the original obligor. Ekuban was the surety for EBCO. Ekuban's interest indirectly derives through his interest in EBCO. Accordingly, the main purpose doctrine does not apply. Cooper Petroleum Co. v. LaGloria Oil Gas Co., 436 S.W.2d 889, 896 (Tex. 1969) (when benefit received by guarantor was as a shareholder, benefit was too remote and indirect to be enforceable as an original undertaking, causing the guaranty to be within the statute of frauds).
The bank concedes that it became the holder of the notes and guaranty agreements at the closing of the transaction when EBCO purchased the condominiums. The bank knew or should have known from the face of the guaranty agreements that the writings did not comply with the statute of frauds. The bank knew or should have known that the notes do not reference the guaranty agreements and vice versa.
Based on the foregoing, there is no genuine issue of material fact that the guaranty agreements do not comply with the Texas statute of frauds and that the main purpose doctrine does not apply. The debt based on the guaranty agreements is not enforceable. Consequently, regardless of the bank's allegations concerning the circumstances surrounding the guaranty agreements, there is no debt.
The complaint does not allege a debt owed by Ekuban to the bank other than through the guaranty agreements. As there must be a "debt" to maintain a § 523(a) complaint, Ekuban's motion for summary judgment will be granted.
Because of this conclusion, the court does not consider the allegations that Ekuban executed the guaranty as part of a fraud or conspiracy to defraud since, without a debt, there is no dischargeability issue. The court rejects any contention by the bank that the debt is based on fraud, and not on the guaranty, as the bank has argued that the guaranty is enforceable. The guaranty per se would not be of concern to the bank if it alleged a tort cause of action for damages for fraud.
The parties have engaged in an exchange of motions challenging the summary judgment evidence. The court has focused on the proper summary judgment evidence addressing the debt alleged in the complaint, the statute of frauds documentation and the main purpose doctrine.
On March 31, 2004, the bank filed a motion for leave to file an amended complaint. Ekuban filed his response opposing the motion on April 1, 2004.
The court, having considered the motion and response, concludes that its analysis and reasoning in South Trust Bank v. Ekuban (In re Ekuban), adversary proceeding no. 03-3718, order entered March 19, 2004, applies. The court recognizes that it continued the trial docket call in this adversary proceeding from March 8, 2004, to May 10, 2004. Nevertheless, the parties were to be prepared for trial on March 8, 2004. The court only continued the trial docket call because it determined to conduct the trial of related adversary proceedings first, and because it had Ekuban's motion for summary judgment under advisement. Conducting separate trials does not alter the analysis.
Accordingly,
IT IS ORDERED that the motion for leave to file an amended complaint is DENIED.
IT IS FURTHER ORDERED that the motion for summary judgment filed by Ebenezer Ekuban is GRANTED.
IT IS FURTHER ORDERED that the motion for summary judgment filed by First Union National Bank is DENIED.
Counsel for Ekuban shall submit a proposed final order dismissing the complaint.