Opinion ID: 3064802
Heading Depth: 4
Heading Rank: 2

Heading: Centre’s Return of $110 Million to the Commis-

Text: sioner in Settlement of a Preference Claim Revived Its Guaranty Claim Against SNIG Article X of the PCSA, entitled “Voidable Transfers,” governs the rights of Centre in the event payments made pursuant to the PCSA constituted preferential transfers. Upon entry of the requisite court order or finding, Centre may exercise “any other remedy provided by law, equity, statute or contract[.]” PCSA, Article X (emphasis added). In other words, because the state court’s order was the type of court order contemplated by Article X, it triggered whatever remedies Centre had at law as a result of the return of the PCSA payment. Centre argues that under applicable law, SNIG’s guaranty obligation was revived upon and to the extent of the return of the PCSA Payment. While we located no Ninth Circuit or California case precisely on point, we agree that the return of a preferential payment by a creditor generally revives the liability of a guarantor. As the Tenth Circuit has observed (in dicta), courts “have recognized, without regard to any special guaranty language, that guarantors must make good on their guaranties following avoidance of payments previously made by their principal debtors.” Lowrey v. Mfrs. Hanover Leasing Corp. (In re Robinson Drilling, Inc.), 6 F.3d 701, 704 (10th Cir. 1993). “Alguarantor. This omission is irrelevant. The Release applies to all parents and affiliates of the primary obligors, for all liabilities or debts whatsoever. PCSA, Article III. Recital 3 of the PCSA states that the “Guarantor” [SNIG], the primary obligors (the reinsurers) and Centre wish “to fully and finally to [sic] settle and determine their respective obligations and liabilities.” PCSA, Recital 3. IN THE MATTER OF SNTL 7453 though a surety usually is discharged by payment of the debt, he continues to be liable if the payment constitutes a preference under bankruptcy law. A preferential payment is deemed by law to be no payment at all.” Herman Cantor Corp. v. Cent. Fidelity Bank (In re Herman Cantor Corp.), 15 B.R. 747, 750 (Bankr. E.D. Va. 1981). The Restatement (Third) of Suretyship and Guaranty and the Corpus Juris Secundum on Principal and Surety echo these general principles. When a secondary obligation is discharged in whole or part by performance by the principal obligor or another secondary obligor, or by realization upon collateral securing such performance, the secondary obligation revives to the extent that the obligee, under a legal duty to do so, later surrenders that performance or collateral, or the value thereof, as a preference or otherwise. Restatement (Third) of Suretyship & Guaranty § 70 (1996). Similarly, the Corpus Juris Secundum provides that if a creditor is forced to refund a payment to a primary obligor, the guarantor’s liability is revived: [T]o discharge the surety, the payment of the principal debt or obligation must be valid and binding, and, if the creditor is forced to refund the payment, the surety’s liability is restored. Thus, a surety is not, as a general rule, released by a payment that is a preference under the bankruptcy laws, which the creditor is obliged to refund. 72 C.J.S. Principal and Surety § 129 (Updated 2007). Trustee disputes the applicability of the cases that follow or recognize the general principle, but cites no case law holding the contrary: that the liability of a surety or guarantor is not 7454 IN THE MATTER OF SNTL revived by a return of a preferential transfer to a primary obligor (or its assigns). Rather, Trustee contends that the general principle is inapplicable because, inter alia, the repayment of the preference must be involuntary for the principle to apply. Trustee’s contention is based on the assumption that a return of a payment is “voluntary” if it was made pursuant to a settlement. We disagree.10 While Corpus Juris Secundum and the Restatement do indicate that the repayment must be “forced” or made “under a legal duty to do so,” the Sixth Circuit in Wallace Hardware Co., Inc. v. Abrams, 223 F.3d 382, 408-09 (6th Cir. 2000), held that when the obligee returns a payment as part of a settlement of a preference avoidance action, the guarantor is not discharged of his obligation to pay the debt. We find Wallace Hardware persuasive. In that case, the creditor repossessed inventory of a primary obligor in satisfaction of the obligor’s debt. Thereafter, the obligor filed for bankruptcy relief and the trustee filed an action to have the 10 A state appellate court recently tackled the issue of whether a return of a payment pursuant to a settlement constituted a “voluntary” payment outside the scope of the Restatement’s revival rule set forth in section 70. Because the case is not published and the local rules of the court prohibit citation to its unpublished decisions, we will not cite it. We nonetheless agree with its reasoned holding. In that case, like Trustee here, the guarantor argued that its liability on the guaranty was not revived when the creditor “voluntarily” returned the payment to the primary obligor in settlement of a preference action. Like us, the appellate court rejected this argument, stating (emphasis added): [T]his argument misconstrues the nature of voluntariness. [The creditor/obligee] did not spontaneously return the money to [the primary obligor]. It responded to a lawsuit, and entered lengthy negotiations with [the primary obligor] before ultimately reaching a settlement. We do not regard the settlement as uncoerced. A lawsuit necessarily implies a degree of compulsion. A payment made in settlement of contested litigation is not truly voluntary. We agree with this analysis of why a return of a payment made in settlement of a lawsuit is not “voluntary” and of why the general principles of section 70 of the Restatement (Third) of Surety & Guaranty apply here. IN THE MATTER OF SNTL 7455 repossession avoided as a preference. The creditor settled with the trustee and sued the guarantors for the amount of the debt that remained outstanding upon the creditor’s partial return of the proceeds of its inventory repossession.11 In holding that the guarantors were obligated to repay the amounts returned by the creditor to the trustee under the preference action settlement, the Sixth Circuit stated that “courts have uniformly held that a payment of a debt that is later set aside as an avoidable preference does not discharge a guarantor of his obligation to repay that debt.” Id. at 408 (citing cases). The Sixth Circuit also observed that the repossession operated as an accord and satisfaction, and that “an accord and satisfaction, like any contract, can be set aside, in whole or in part, for such reasons as mutual mistake, supervening illegality, or frustration of purpose.” Id. Trustee contends that we should disregard Wallace Hardware because there the obligations of the guarantors, unlike those of SNIG, had not been contractually released by the creditor. This distinction is not significant because while Article III of the PCSA did release SNIG, Article X provided Centre with whatever remedies were available in law upon entry of the requisite court order or finding. As we have already held, the triggering event of Article X’s remedies occurred when the state court entered the order approving the settlement agreement. As one of the remedies available at law permits revival of otherwise released guaranty obligations upon return of a preferential payment of the primary obligor, the remedies available under Article X and under law supersede the release provisions of Article III. 11 In Wallace Hardware, the payment made by the primary obligor was attacked under the Bankruptcy Code’s preference provisions, while the Payment here was alleged to be preferential under California’s Insurance Code. Nonetheless, the general principle — that the return of a preferential payment of a primary obligor by the obligee revives a guarantor’s obligation otherwise released by that payment — should operate with equal force whatever preference law applies. 7456 IN THE MATTER OF SNTL Thus, Trustee’s reliance on Article III’s Release in an effort to distinguish Wallace Hardware and the other cases is not convincing, particularly because Trustee’s position (unlike that of Wallace Hardware) would discourage settlement of preference litigation.12 It would be a strange result, indeed, if we were to require Centre to litigate with the Commissioner to the bitter end, lose, then satisfy a judgment of at least $163.4 million before it could revive SNIG’s guaranty obligation, particularly where Article X itself requires merely a finding that the Payment was subject to a preference claim. Instead, we find Wallace Hardware’s position more persuasive because it does not require full and costly litigation but instead acknowledges that the general principle should also apply when the creditor returns at least a portion of a primary obligor’s payment in settlement of a preference action.