Opinion ID: 587244
Heading Depth: 2
Heading Rank: 1

Heading: Code Section 303(b)(1) and the Existence of a Bona Fide Dispute

Text: 5 LaRoche contends that Amoskeag either knew or should have known when it joined the creditors' petition that its claim against LaRoche was the subject of a bona fide dispute under New Hampshire law; and, therefore, bad faith tainted the creditors' petition, precluding effective joinder by Suffield pursuant to 11 U.S.C. § 303(c). See, e.g., Myron M. Navison Shoe Co. v. Lane Shoe Co., 36 F.2d 454, 459 (1st Cir.1929) (creditor's knowing and fraudulent attempt to confer jurisdiction on bankruptcy court where none exists merits dismissal of involuntary petition) (Bankruptcy Act case). 2 6 On December 7, 1989, Laroche borrowed approximately $3 million from Amoskeag, secured by a pledge of 208,250 shares of common stock and by his promise to pledge an additional 5,000 shares by March 8, 1990. The pledge provided, in pertinent part: 7 The Bank [Amoskeag] may, at its option without notice (i) transfer into its name or the name of its nominees all or any part of the collateral, including stock, bonds, and other securities, (ii) demand, sue for, collect and receive all interest, dividends, including liquidated dividends, and other proceeds thereof, and hold the same as security for payment of the obligations or, if cash proceeds, apply the same in payment thereof, (iii) notify any person obligated on any of the collateral of the Bank's security interest therein and request that such person make payment directly to the Bank or (iv) demand, sue for, collect or make any settlement or compromise the Bank deems desirable with respect to any of the collateral. 8 .... 9 Upon any event of default hereunder ... without any demand or notice, except as may be required by applicable law, the Bank may sell or otherwise dispose of any and all of the Collateral and may exercise any and all rights and remedies accorded by law, all as the [sic] Article 9 of The New Hampshire Uniform Commercial Code ... may determine. (Emphasis added). 10 On or about March 29, 1990, Amoskeag provided LaRoche with written notice of default for failing to (1) make timely interest payments, (2) pledge the additional 5,000 shares by March 8, and (3) direct dividend payments to Amoskeag. The notice of default invoked the acceleration provisions in the loan agreements and concluded: 11 We further give notice to you that we intend to protect and to enforce our rights and remedies in respect of our collateral in which we were granted a security interest by you pursuant to the Security Documents. Such actions shall in no event constitute a waiver or other impairment of any of our other rights or remedies which we have under or in respect of the Notes, the Security Documents or in respect of our collateral, or arising by applicable law or otherwise, all of such rights and remedies being cumulative and not exclusive. (Emphasis added). 12 On May 3, 1990, Amoskeag caused the pledged shares to be transferred into its own name on the books of the issuing corporation. Shortly thereafter, Amoskeag informed LaRoche that it intended to sell the pledged shares. On June 22, 1990, LaRoche's attorney sent a letter to Amoskeag warning that the pledged shares, owned by Mr. LaRoche, in his own name or beneficially, were restricted securities, and could not be resold absent strict compliance with the SEC rules and regulations prescribed pursuant to the Securities Act of 1933. See 17 C.F.R. § 230.144 (1991). 3 Trading in the shares of the issuing corporation was halted on July 6, 1990. 13 Unable to sell the pledged shares, Amoskeag commenced an action in the United States District Court for the District of New Hampshire to recover its loan indebtedness. LaRoche raised the defense of payment, arguing that Amoskeag's reregistration of the pledged shares, which allegedly exceeded its rights under the Collateral Pledge Agreement, constituted a proposal to accept and retain the collateral in full satisfaction of the indebtedness pursuant to Article 9 of the New Hampshire Uniform Commercial Code. 4 14 Article 9 of the Uniform Commercial Code (U.C.C.) permits a secured creditor to elect among several alternative remedies in the event of a default by the debtor. Under the disposition option in U.C.C. § 9-504, the secured creditor may sell, lease, or otherwise dispose of any or all of the collateral, as long as it does so in a commercially reasonable manner. If the proceeds from any such disposition of the collateral are less than the amount due on the secured indebtedness, the secured creditor may attempt to recover the deficiency. See, e.g., Lamp Fair, Inc. v. Perez-Ortiz, 888 F.2d 173, 176-78 (1st Cir.1989); see generally 2 James J. White & Robert S. Summers, Uniform Commercial Code § 27-8, at 588 (3d ed. 1988). 15 On the other hand, the retention or strict foreclosure option available under U.C.C. § 9-505(2), relied on by LaRoche, permits the secured creditor to notify the debtor that it intends to retain the collateral in complete satisfaction of the indebtedness. Unless the debtor objects, the secured creditor thereby forecloses on its collateral and waives any deficiency claim against the debtor. Thereafter, the secured creditor bears the risk of any diminution in the value of the collateral. See Lamp Fair, 888 F.2d at 176. 16 U.C.C. § 9-505(2) expressly applies only if the debtor is served with written notice of the secured creditor's proposal to pursue the strict foreclosure remedy. LaRoche concedes that Amoskeag provided no such notice. See, e.g., Warnaco, Inc. v. Farkas, 872 F.2d 539, 544-45 (2d Cir.1989) (no strict foreclosure absent written notice by creditor; burden rests on debtor to demand express election). LaRoche contends, nonetheless, that the New Hampshire courts may yet adopt an alternative interpretation of U.C.C. § 9-505(2), which might save the day. Under the implied election theory, the absence of written notice of election by the secured creditor would not bar the debtor's recourse to U.C.C. § 9-505(2) as a defense to payment of the debt if the secured creditor (1) failed to dispose of the collateral within a reasonable time after default (e.g., pursuant to an election under § 9-504), or (2) engaged in other conduct (e.g., interim use of collateral) that indicates an intent to retain the collateral and waive any deficiency. See, e.g., In re Boyd, 73 B.R. 122, 124-25 (N.D.Tex.1987) (bank's actual use of repossessed boat for three-month period constituted implied election under § 9-505). LaRoche argues that Amoskeag's reregistration of the pledged securities in its own name could constitute conduct indicating an intent to retain the securities and waive any deficiency--and so, an implied election under the New Hampshire Uniform Commercial Code. Amoskeag's actual or constructive knowledge of this bona fide defense to payment, LaRoche argues, was enough to have precluded any finding that Amoskeag joined the creditors' petition in good faith. 5 Since the documentary evidence conclusively establishes that LaRoche's defense is unfounded, we are unable to agree. 17 LaRoche's payment defense was based entirely on the allegation that Amoskeag's reregistration of the pledged securities in its own name ... exceed[ed its] rights under the Collateral Pledge Agreement. But the allegation is patently incorrect. The pledge agreement explicitly authorized Amoskeag to transfer the pledged shares into its own name at its option and without notice. The language of the transfer provision is not conditioned on default; Amoskeag could cause the pledged shares to be transferred on the books of the issuing corporation at any time. Pledges of investment securities routinely empower the secured creditor to transfer the pledged securities on the books of the issuing corporation as a means of enabling the secured creditor to collect dividends and vote the shares during the term of the loan. Cf., e.g., Raible v. Puerto Rico Indus. Dev. Co., 392 F.2d 424, 426 (1st Cir.1968) (although secured creditor exceeded its voting authority under pledge agreement, provision permitting it to register pledged shares in its own name afforded creditor ordinary voting rights). 18 Furthermore, the intent of the transfer provision is evident from its context. It is one of four related provisions affording Amoskeag various options for protecting its collateral by transferring the securities into its own name, and for preserving its collateral by receiving dividends and voting the shares. See supra p. 1302. Thus, LaRoche's default, including the failure to deliver the additional 5000 shares required under the pledge agreement, as well as the failure to honor Amoskeag's request to remit dividends, jeopardized Amoskeag's security interest. 19 The March 29 notice of default and acceleration specifically informed LaRoche of Amoskeag's intent to protect its collateral by invoking the enumerated rights reserved in the pledge agreement, and emphasized that none of Amoskeag's protective measures was to be viewed as a waiver of any unexercised right. The subsequent transfer of the securities into its own name would entitle Amoskeag, as the record owner, to direct payment of dividends, which Amoskeag would then hold ... as security for payment of the obligations. See supra p. 1302; see also N.H.Rev.Stat.Ann. § 293-A:30 (closing of corporate transfer books and fixing of record date for voting and dividends). Prior to an explicit act of foreclosure, however, LaRoche remained their beneficial owner. 6 20 The March 29 notice expressly disavowed any implicit waiver of Amoskeag's rights or remedies (including its right to recover any deficiency) that might otherwise be inferred from the exercise of any option expressly reserved in the pledge agreement. See supra p. 1302. 7 Even if an act of post-default reregistration could be considered an implied election under U.C.C. § 9-505(2), the plain language of the pledge agreement precluded LaRoche's contention that Amoskeag knew or should have known that its reregistration of the pledged securities might constitute an implied waiver of its deficiency claim. On the contrary, given the clear import of the documentary evidence, 8 it is clear that LaRoche expressly foreclosed any bona fide implied election defense. 9 We conclude, accordingly, that Amoskeag's joinder in the creditors' petition was undertaken in good faith and, therefore, did not preclude the subsequent joinder by Suffield. See infra pt. C.