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MP Associates v. Liberty
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MAINE SUPREME JUDICIAL COURT Reporter of Decisions
Decision: 2001 ME 22
Docket: Cum-00-472
Argued: January 10, 2001
Decided: January 30, 2001
Panel:WATHEN, C.J., and RUDMAN, DANA, ALEXANDER, and CALKINS, JJ.
MP ASSOCIATES et al.
v.
MICHAEL LIBERTY et al.
RUDMAN, J.
[¶1] Michael Liberty and David Cope (collectively referred to as
"Liberty") appeal from a judgment entered in the Superior Court
(Cumberland County, Cole, J.), finding them liable-in their capacities as
general partners of Middle Pearl Associates-to Henry S. Payson, Daniel G.
Hall, and James Kilbride for the $250,000 payment made by each to U.S.
Trust Company and to Morse Payson & Noyes Insurance for its payment of
$439,512.99 to Casco Northern Bank. Plaintiffs MP Associates, Henry S.
Payson, James J. Kilbride, Daniel G. Hall, and Morse Payson & Noyes
Insurance (collectively referred to as "Plaintiffs") appeal from that portion of
the court's judgment denying MP Associates' reimbursement for the
$439,512.99 it alleges it paid to Casco Northern Bank. We affirm the
judgment in part and vacate in part.
I. CASE HISTORY
[¶2] This matter arises out of a failed business venture. The parties
stipulated to a set of facts in conjunction with their cross motions for a
summary judgment in the Superior Court. The following facts are derived,
in large part, from that factual stipulation.
[¶3] On September 9, 1986, MP Associates, a Maine general
partnership, was formed to pursue a commercial real estate venture. Its
general partners were Henry S. Payson, James J. Kilbride, William Webster,
and Daniel G. Hall. The MP Associates partnership agreement was later
amended to include Morse Payson & Noyes Insurance ("Morse Insurance")
as a partner.
[¶4] On the same date, Middle Pearl Associates, a Maine limited
partnership, was formed. Its general partners were David Cope, Michael
Liberty, Webster, and David and Richard Cook.{1} The limited partners were
Liberty, Cope, the Cooks, and MP Associates.
A. U.S. Trust Loan.
[¶5] On March 30, 1987, U.S. Trust Company, a Massachusetts
banking institution, lent $5,500,000 to Middle Pearl Associates to purchase
a commercial office building located at 130 Middle Street in Portland,
Maine. The U.S. Trust loan was secured by a mortgage and guarantied by
Liberty, Cope, the Cooks, Webster, Payson, Hall, and Kilbride.
[¶6] In 1990, after falling behind on its U.S. Trust mortgage
obligation, Middle Pearl Associates was forced to liquidate its only asset, the
130 Middle Street property, and to cease to operate. After the sale of the
property, U.S. Trust made a demand upon Middle Pearl Associates and each
of the guarantors of its loan for the deficiency in the amount of
$1,790,838.54. Hall, Kilbride, and Payson negotiated with U.S. Trust on
their guaranty liability on the deficiency, reaching a settlement in June
1991. In satisfaction of their obligation as guarantors, Hall, Kilbride, and
Payson each made a $250,000 payment ($750,000 in total), and Morse
Insurance issued a note in the amount of $250,000 to be satisfied from a
rent deduction if obtained. The debt evidenced by the note that was due on
December 31, 1992, has not been paid.
[¶7] In June 1991, Liberty and Cope settled their obligation as
guarantors of the U.S. Trust debt by paying a total of $200,000 in cash and
providing notes totalling $350,000. As part of the settlement, Liberty
provided U.S. Trust with new security for the debt, including a collateral
assignment of 30% of the capital stock of Liberty Group; an assignment of
Liberty's limited partnership interest in Westbrook Associates; a second
mortgage on the David Cope House (when and if the Cope real estate is
transferred to Liberty or to an entity controlled by Liberty); and an
assignment of Liberty's limited partnership interest in Stillwater Avenue
Land Associates. The notes are currently outstanding, unpaid obligations,
continuing to accrue interest. U.S. Trust continues to demand payment
under these notes; there is no evidence that U.S. Trust has sought to
recover on the collateral.
B. Casco Northern Bank Loan.
[¶8] On September 9, 1986, Casco Northern Bank also lent Middle
Pearl Associates $2,500,000 in connection with the 130 Middle Street
Property. The Casco loan was secured by a second mortgage on the property
and guarantied by Liberty, Cope, Morse Insurance, and MP Associates. After
the 1990 liquidation of Middle Pearl Associates's commercial property,
Casco demanded full payment of its loan, having a principal balance of
$1,300,000. Casco applied a setoff of $426,828.99 from a Morse Insurance
escrow account and a setoff of $339,763.04 from a Cook escrow account.
After applying the setoffs, Casco made a demand upon each of the Casco-loan
guarantors for the $533,387.97 deficiency.
[¶9] On January 1, 1991, Morse Insurance and MP Associates
settled with Casco. Under the settlement, Morse Insurance and MP
Associates agreed to pay an additional $452,177 in satisfaction of the Middle
Pearl Associates deficiency.
[¶10] Casco then commenced negotiations with Liberty and Cope
regarding their guaranty obligations. After several workout agreements and
amendments, Liberty and Cope, as guarantors, collectively paid at least
$171,984.75 toward the Middle Pearl Associates deficiency to Casco in
satisfaction of their obligations as guarantors on the Casco debt. The parties
dispute the precise amount of the payments that were made by Liberty and
Cope.
[¶11] After the January 8, 1998, trial management conference, the
court entered a pre-trial scheduling order, which was later modified to
extend, by one week, the due dates for filing the parties' motions for a
summary judgment and reply memoranda. Pursuant to the order, the
parties entered in the stipulation of facts and filed cross summary judgment
motions. After some adjustments between Morse Insurance and MP
Associates, the original factual stipulation indicated that each paid
$439,512.99 to fulfill their guaranty obligations. On July 17, 1998, Liberty
filed a motion to strike the provision of the stipulation stating that MP
Associates had made a payment to Casco in satisfaction of its obligations as a
guarantor. Liberty contended that while preparing the defendants'
statement of material fact, it was discovered the stipulated fact of MP
Associates' payment was not consistent with the express terms of the
settlement agreement with Casco. The trial court agreed and that portion of
the stipulation was stricken. The plaintiffs contend that the trial court
abused its discretion when it struck the stipulation. The trial court
concluded that Liberty and Cope were liable-in their capacities as general
partners of Middle Pearl Associates-to Payson, Hall, and Kilbride for their
payments each of $250,000 to U.S. Trust and liable to Morse Insurance for
its payment of $439,512.99 to Casco. Liberty contends, that, (1) the
plaintiffs agreed to defer their claims for reimbursement until Middle Pearl
Associates's debts to both U.S. Trust and Casco were paid in full and that has
not occurred; (2) Morse Insurance's claim is time barred; and (3) MP
Associates did not make any payments and is not, therefore, entitled to
reimbursement. This appeal and cross-appeal followed.
II. DISCUSSION
[¶12] In reviewing a grant of a summary judgment, we view the
evidence in the light most favorable to the party against whom the judgment
has been granted, and review the trial court's decision for errors of law.
Kandlis v. Huotari, 678 A.2d 41, 42 (Me. 1996) (citation omitted). We
independently determine whether the record supports the conclusion that
there is no genuine issue of material fact and that the prevailing party is
entitled to judgment as a matter of law. Id. A material fact is one having the
potential to affect the outcome of the suit. Burdzel v. Sobus, 2000 ME 84,
¶ 6, 750 A.2d 573, 575 (citation omitted). A genuine issue exists when
sufficient evidence requires a factfinder to choose between competing
versions of the truth at trial. Id.
A. U.S. Trust Loan
[¶13] Section 295-A of the Maine Partnership Act provides that all
partners are jointly liable for all debts and obligations of the partnership. 31
M.R.S.A. § 295-A (1)(B) (Supp. 2000).{2} This general principle of
partnership law extends to general partners in a limited partnership. See
31 M.R.S.A. § 443(2) (1996).{3} Hence, Liberty and Cope, as general partners
in Middle Pearl Associates, are jointly liable for all debts and obligations of
that limited partnership.
[¶14] The general principle of suretyship law further requires that a
secondary obligor is entitled to reimbursement from a primary obligor for
performance of the secondary obligation. See Godfrey v. Rice, 59 Me. 308,
314 (1871) (holding an indorser of a note may recover of the maker for any
payment made upon the note after its dishonor); Matthews v. Matthews, 128
Me. 495, 499 (1930) (finding one who furnishes collateral as an
accommodation to secure a loan of another is a surety to the one
accommodated; surety who is called upon to pay debt of principal debtor is
entitled to compel debtor to exonerate him from liability); Restatement
(Third) of Suretyship and Guaranty § 22 (1996) (stating principal obligor has
duty to reimburse secondary obligor).
[¶15] The determination of whether the general reimbursement
rule is applicable in the present case requires an analysis of the U.S. Trust
guaranties, which provide, in relevant part, that:
The undersigned [Liberty, Cope, the Cooks, Webster, Payson,
Hall, and Kilbride] shall not exercise any right of subrogation,
reimbursement, indemnity, contribution, or the like
(including any right to proceed against any collateral granted
by the Borrower to the undersigned) against the Borrower or
any person liable or obligated for or on the Liabilities unless
and until all of the Liabilities have been satisfied in full.
The trial court concluded that Plaintiffs were secondary obligors entitled to
reimbursement for the payments they made on the Middle Pearl Associates
debt. Liberty first argues that the court erred in so finding because,
pursuant to the guaranty, Plaintiffs Hall, Kilbride, and Payson expressly
deferred their right to reimbursement until the U.S. Trust obligation has
been fully satisfied.
[¶16] Liberty argues that, under Kandlis v. Huotari, 678 A.2d 41
(Me. 1996), the deferral language of the guaranties, which were all signed at
the same time and must be read together as a single contract, inures to
Liberty's benefit as well. See Kandlis v. Huotari, 678 A.2d 41, 43 (Me.
1996). Liberty claims, therefore, that he is entitled to enforce the
"deferral" provision against the plaintiffs, as co-sureties, thereby precluding
plaintiffs from bringing this action. Liberty's assertions are flawed.
[¶17] Liberty's deferral argument fails because the guaranties at
issue here have been superseded by separate settlement agreements and are
no longer effective. By paying $250,000 each in cash and obtaining releases
under the terms of the settlement agreement, the obligations of plaintiffs
Hall, Kilbride, and Payson under the original guaranties have terminated.
Similarly, having settled with U.S. Trust on the original debt by paying
$200,000 in cash and executing notes-secured by certain Liberty
collateral-totalling $350,000, Liberty's liability as a U.S. Trust loan
guarantor has also terminated.{4}
[¶18] Because the promissory notes executed by Morse Insurance
and by Liberty remain unpaid, however, Liberty contends the U.S. Trust debt
has not been fully satisfied. He contends that Plaintiffs cannot, therefore,
yet seek reimbursement. As we noted above, Liberty's argument fails,
because under the facts of this case, the notes represent a new obligation
with new remedies. At oral argument, Liberty's attorney also argued,
pursuant to 11 M.R.S.A. § 1310(2),{5} that the underlying obligations were
still active because the U.S. Trust notes have not been paid. See 11 M.R.S.A.
§ 1310(2) (1995). Because Liberty is making this latter argument for the
first time on appeal, the issue has not been preserved. See Sanders v.
Sanders, 1998 ME 100, ¶ 11, 711 A.2d 124, 127 (holding when there is no
indication in the record that an issue was either raised, discussed, or ruled
upon below, the point is not preserved).
[¶19] Even if the issue were preserved, Liberty's contentions lack
merit because the relevant commercial code provision does not apply when
the parties agree to a different result, which is the case here. See 11
M.R.S.A. § 1310. As noted above, the plaintiffs and Liberty each entered into
settlement agreements, obtaining releases and/or providing additional
collateral, which had the effect of terminating the original obligation. The
trial court, therefore, did not err in concluding that plaintiffs Hall, Kilbride,
and Payson were entitled to reimbursement.
[¶20] Liberty further contends-also relying on the Handlis
case-that plaintiffs' argument that they are entitled to reimbursement as
"secondary" obligors is misplaced because, in this case, all the parties were
equally liable to the banks under the guaranties as guarantors. Handlis,
however, is of no service to Liberty on this point. In Handlis, the parties'
relationship was uniform; they were all shareholders and guarantors of loans
of the defaulting entity. See Handlis, 678 A.2d at 42. In this case, Liberty
and Cope wear two hats; they serve as general partners of Middle Pearl
Associates and as guarantors of the Middle Pearl Associates' U.S. Trust loan.
Plaintiffs, on the other hand, serve only as guarantors of the U.S. Trust loan.
Handlis, therefore is distinguishable, and Liberty's assertion that all the
parties are equally responsible for the loans, irrespective of the various
levels of relationships at play here, is flawed.
[¶21] Because the plaintiffs only serve as guarantors of the Middle
Pearl Associates debt, they are, as to the Middle Pearl Associates general
partners, secondary obligors. Accordingly, Liberty and Cope, as general
partners of Middle Pearl Associates, are primarily liable for all debts and
obligations of the partnership, including the loans at issue. See 31 M.R.S.A.
§§ 295-A (1)(B), 443(2). Because plaintiffs are not suing Liberty and Cope in
their role as guarantors or co-sureties but in their role as general partners of
a failed limited partnership, the trial court did not err in finding that
plaintiffs are entitled to reimbursement.
B. Casco Loan
[¶22] With respect to the Casco loan, Liberty contends that Morse
Insurance's claim for reimbursement is barred by the statute of limitations
and that the trial court did not exceed the bounds of its discretion by
striking paragraph 15 of the factual stipulation.
1. Statute of Limitations.
[¶23] The trial court concluded that Morse Insurance's claim for
reimbursement was not barred by 14 M.R.S.A. § 752. Section 752 provides
that civil actions must be commenced "within 6 years after the cause of
action accrues" but does not specify when the cause of action accrues. See
M.R.S.A. § 752 (1980).{6} "When the Legislature does not give explicit
directions, the 'definition of the time of accrual . . . remains a judicial
function.'" Nevin v. Union Trust Co., 1999 ME 47, ¶ 24, 726 A.2d 694, 699
(quoting Anderson v. Neal, 428 A.2d 1189, 1191 (Me. 1981)).
[¶24] In this case, the trial court held that a secondary obligor's
action does not accrue until the date of the secondary obligor's performance
of the secondary obligation. Accordingly, the court held that Morse
Insurance did not perform its obligation until it was released by Casco in
January 1991.
[¶25] In considering this issue, we adopt the approach taken by
Restatement (Third) of Suretyship and Guaranty § 62 (1996). Section 62 of
the Restatement provides:
(1) A secondary obligor's cause of action against a principal
obligor to enforce the principal obligor's duty to reimburse
or the secondary obligor's right of restitution accrues at the
later of:
(a) the date for performance of the underlying obligation;
and
(b) the date of the secondary obligor's performance of
the secondary obligation.
Restatement (Third) of Suretyship and Guaranty § 62 (1996). The
Restatement did not define the term "performance." Black's Law Dictionary,
however, defines it as "[t]he successful completion of a contractual duty,
usu[ally] resulting in the performer's release from any past or future
liability." Black's Law Dictionary 1158 (7th ed. 1999). In the present case,
the successful completion of Morse Insurance's contractual duty occurred
on January 1, 1991, when it satisfied its guaranty obligations to, and
obtained a release from, Casco. Because the suit was brought on December
3, 1996, Morse Insurance's claim for reimbursement is not time barred.
This restatement rule allows a guarantor to work with the principal debtor
in its effort to put its financial affairs in order by discouraging precipitous
actions by the guarantor against the principal. The rule further relieves the
court of the burden of repetitious litigation.
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