Opinion
Case Nos. A95-00011-HAR, A95-00012-HAR, A95-00013-HAR, A95-00242-HAR, Jointly Administered, Chapter 7 Cases.
Dated: December 1, 1999.
MEMORANDUM DECISION REGARDING DISALLOWANCE OF STENGAS' CLAIMS
Contents
INTRODUCTION
FACTS
ISSUES
ANALYSIS
4.1. The McLane Women Did Not Intend to Assume Nonrecourse Debt as Personal Liabilities
4.2. Parol Evidence is Admissible to Show the Intent of the McLane Men and Women
CONCLUSION
1. INTRODUCTION
Four couples were in a partnership which leased land from the Stengas. The Stengas had no recourse against the partnership or its partners for defaults, but could only recover the land.
For unrelated financial reasons, the four husbands withdrew from the partnership, but the four wives continued and agreed to pay the partnership debts.
The Stengas filed claims against the women's bankruptcy estates as third-party beneficiaries of their agreement to pay the partnership debts. The chapter 7 trustee objects on the ground the debts are nonrecourse.
The claims will be disallowed. Parol evidence, which is admissible, shows that the four couples did not intend to gratuitously turn nonrecourse claims into large liabilities against the women.
2. FACTS
4M 2B Investors was a partnership formed to build and operate the Peninsula Shopping Center in Soldotna, Alaska. The partnership initially included all members of the McLane Men's and Women's cases (as well as other parties), except for Maria Victoria McLane who was added later.
The four men in the jointly administered cases of M. Scott, Michael, Stan A., and Stanley S. McLane (Case Nos. A95-00014-HAR through A95-00017-HAR) are called the "McLane Men" in this Memorandum .
The four women shown in the joint caption are called the "McLane Women" in this Memorandum .
4M 2B entered into a long-term ground lease with Herman and Janet Stenga for the site on which to build the shopping center. The Stengas agreed that they would not seek personal recourse against 4M 2B or its partners.
The shopping center was built and operated by 4M 2B. The McLane Men got into financial difficulty as a result of a subdivision development project by another partnership in which they (but, not their wives) were partners, to develop other property in Kenai, Alaska. The project was not financially successful and the City of Kenai sued the McLane Men for some of the subdivision development costs advanced by the City of Kenai.
While the City was litigating with the McLane Men, the four couples rearranged their marital property holdings with the assistance of an attorney and CPA. Basically, each couple shuffled their respective holdings around so that each of the couples wound up with each of the McLane Men holding about 45% of the couple's estate and each of the McLane Women about 55%. All this was done in preparation to the McLane Men making a settlement offer to the City.
The McLanes insist that this was done in a manner specifically to avoid an allegation that the transfers of property to the Women in four marital settlements were a fraudulent conveyance under Alaska law.
As 34.40.010, et seq.
One of the transfers by each of the McLane Men to their wives concerned 4M 2B. The three McLane Women who were already partners in 4M 2B acquired their husbands' shares of the partnership, and M. Scott McLane transferred his share in 4M 2B to Maria Victoria (she became a new partner). The four McLane Women continued as the partners in 4M 2B, and the McLane Men withdrew. The transfer closed on November 17, 1992, documented by a short Agreement Amending Partnership Agreement which contained the following clause:
3. Assumption of Debts . The Continuing Partners and the New Partner hereby assume and shall satisfy all debts and liabilities of the old partnership and hold the Retiring Partners harmless from all such debts and liabilities.
The body of this agreement is only two pages long, and contains no integration clause. It was one of numerous documents executed by the four couples on November 17, 1992, to rearrange the property interests in each family to better withstand an adverse judgment by the City of Kenai. The marital property adjustments were made in formal agreements, referencing the CPA's evaluation, which analyzed, among other things, the 4M 2B partnership.
The CPA attempted to identify all known liabilities, current and contingent, in all the business relationships of the McLane Men and Women, and he did not find a personal liability for the Stenga lease. The Agreement Amending Partnership Agreement was not meant to be an isolated agreement among the McLane Men and Women, but was an integral part of each couples' marital property settlement.
There was no marital animosity in the sense one might encounter in a hostile divorce situation, and to my knowledge, each couple is together today as a married family unit. The marital transfers were solely in anticipation of a possible financial crisis due to the City of Kenai suit.
On November 17, 1992, or very shortly after, the McLane Men made a settlement offer to the City and, also, told the City about the four marital property settlement agreements, hoping to preempt a claim of clandestine, self-serving behavior. The modification of ownership of the various properties in each of the martial estates was done with the assistance of an attorney (to draft the agreements) and an independent CPA (to arrive at fair valuations) to counter, as much as possible, the appearance of having engaged in fraudulent conveyances.
The City refused the settlement offer. Unfortunately for the McLanes, a large judgment in favor of the City against the McLane Men was ultimately entered, after a favorable ruling on the key legal issue was decided in the City's favor by the Alaska Supreme Court. As a result, the McLane Men and Women all filed individual chapter 11 cases, which were later converted to chapter 7.
City of Kenai v. McLane , 821 P.2d 717 (Alaska 1991).
The Stengas have filed a claim in each of the eight McLane cases exceeding $1,000,000. The McLanes themselves have previously objected to the Stengas' claims on the basis that they were nonrecourse, and the trustee has recently renewed those objections. The Stengas claim that they are third-party beneficiaries of the Agreement Amending Partnership Agreement between the McLane Men and Women containing the provision that the Women would continue as 4M 2B partners, pay the partnership debts and indemnify the McLane Men in the event of a claim for nonpayment.
3. ISSUES
The issues which these facts suggest are: (a) did the McLane Men and Women intend to turn nonrecourse partnership debt into recourse debt for the Women; and, (b) even if they did not, does the parol evidence rule prevent the trustee from establishing that this was not their intent?
4. ANALYSIS
4.1. The McLane Women Did Not Intend to Assume Nonrecourse Debt as Personal Liabilities — Resolution of the first issue, whether the parties intended to make the Stengas' nonrecourse claims become personal, recourse claims against the McLane Women, is resolved by drawing common sense conclusions from the facts.
Unlike the normal situation under Alaska law, — the partners were not personally liable for the 4M 2B partnership debt by virtue of the terms of the Stenga lease.
AS 32.05.100(a)(2).
The McLanes are four couples who were faced with a financial crisis unrelated to the Stengas' long-term lease of the Peninsula Shopping Center. None were in a domestic dispute such as a divorce or separation.
They tried to structure their financial affairs in a way that would give them maximum protection from the possible judgment against the Men by the City of Kenai. As part of this structuring, the Men transferred their respective 4M 2B partnership interests to their wives. Although the Women indicated in the agreement which accomplished this that they would be responsible for the 4M 2B partnership debts, it is inconceivable that the Men and Women intended this to mean that the McLane Women would be personally responsible for debt which had been nonrecourse to both them (or at least three of them) and their husbands under the partnership agreement before the McLane Women took over completely.
The Alaska Supreme Court has held that, to bestow third-party beneficiary stature on an individual, the parties to a contract (the McLane Men and the Women in our situation) must have intended their contract to benefit the individual, and the motives of the parties, including that to the promisee (the McLane Men in our case), are determinative.
Howell v. Ketchikan Pulp Co. , 943 P.2d 1205, 1207 (Alaska 1997).
The McLane Men's and Women's individual cases have been before me in many proceedings. The facts and circumstances regarding the transfer of the McLane Men's
Peninsula Shopping Center to the McLane Women has been argued and explained in depth. There is no indication, other than a mechanical reading of paragraph 3 of the Agreement Amending Partnership Agreement in isolation, which would lead anyone to conclude that the McLane Men and Women intended to make the Women personally liable for the Stenga lease obligations.
Had the McLanes remained in chapter 11, there is a provision of the Bankruptcy Code which would have treated the Stengas' nonrecourse claims as if they had recourse. There is no comparable provision in chapter 7.
4.2. Parol Evidence is Admissible to Show the Intent of the McLane Men and Women — Nonetheless, the parol evidence rule must be considered to determine if the court is entitled, under Alaska law, to interpret the intent of the agreement by reference to those extrinsic facts which seem irrefutable. If the parol evidence rule bars reference to those facts, there is a possibility the Stengas might prevail.
The parol evidence rule is one of substantive law rather than of evidence. If the parties have made an agreement, written or oral, which is unambiguous and integrated, extrinsic evidence of prior or contemporaneous facts will not be received to contradict its terms. It applies "when there is a single and final memorial of the understanding of the parties." The parol evidence rule is, however, subject to a number of limitations and exceptions.
Alaska Diversified Contractors, Inc. v. Lower Kuskokwim School Dist. , 778 P.2d 581, 583 (Alaska 1989); 29A AmJur2d, Evidence , § 1093, Parol evidence rule as one of substantive law.
Neal Co., Inc. v. Assoc. of Village Council Presidents Regional Housing Authority , 895 P.2d 497, 502 (Alaska 1995); 29A AmJur2d, Evidence , § 1092, Generally
29A AmJur2d, Evidence , § 1092, Generally .
It generally applies to contracts between the parties themselves and those in privity, such as third-party beneficiaries.
29A AmJur2d, Evidence , § 1096, Parties affected by rule .
The Supreme Court of Alaska, in the Lower Kuskokwim School District case, explained the rule:
Alaska Diversified Contractors, Inc. v. Lower Kuskokwim School Dist. , 778 P.2d 581, 583-84 (Alaska 1989) (citations omitted).
The parol evidence rule is a rule of substantive law which holds that an integrated written contract may not be varied or contradicted by prior negotiations or agreements. Before the parol evidence rule can be applied, three preliminary determinations must be made: (1) whether the contract is integrated, (2) what the contract means, and (3) whether the prior agreement conflicts with the integrated agreement. Extrinsic evidence may always be received on the question of meaning. Once the meaning of the written contract is determined, however, the parol evidence rule precludes the enforcement of prior inconsistent agreements.
In the present cases, the short Agreement Amending Partnership Agreement was not an integrated agreement. It was just one cog in the four couples' marital settlement agreements entered into on November 17, 1992. The entire package of marital settlements is perhaps the integrated agreement of each couple, and those indicate the parties did not intend to make the McLanes personally liable to the Stengas.
Restatement of Contracts (2nd) § 209.
Extrinsic evidence shows clearly what the Agreement Amending Partnership Agreement meant in the context of the larger marital settlements. It was not an isolated deal. It was not that the McLane Women assume new liability where none existed. It was not that the three McLane Women who were initial members of 4M
2B intended to turn their nonrecourse position vis-a-vis the Stengas into one of liability merely by assuming the McLane Men's obligations or the payment of 4M 2B debts.
Rather, it was to make the McLane Women liable for those 4M 2B debts which the McLane Men could be held personally liable — a class to which the Stengas do not belong.
CONCLUSION
The claims filed by the Stengas in the estates of the McLane Women will be disallowed. Although this Memorandum deals with the Women's estates, there is a stronger case for disallowance in the estates of the McLane Men.
A separate order will be entered disallowing the Stengas' claims in all eight estates.
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