McFeeley Maryland Opinions et al v. Rubenstein et al

93-5558-SD 	JAMES T. FRESE,
HOWARD A. RUBENSTEIN,Defendant and CIT GROUP/EQUIPMENT
FINANCING, INC.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
IN RE: 	*
INDUSTRIAL MACHINE, INC., 	* 	Case No. 92-5-2084-SD
Chapter 11
*
Debtor. *
* * * * * * * * * * * * * * * * * * * * *
JAMES T. FRESE, 	*
*
Plaintiff/
Counter Defendant, 	*
v. 	Adversary No. 93-5558-SD
*
HOWARD A. RUBENSTEIN, *
Defendant 	*
and 	*
CIT GROUP/EQUIPMENT 	*
FINANCING, INC., *
Defendant/
Counter Plaintiff. 	*
* * * * * * * * * * * * * * * * * * * * *
MEMORANDUM OPINION
THIS MATTER came before the Court upon the motion of CIT
Group/Equipment Financing, Inc. for partial summary judgment
declaring that Count II of the complaint, which seeks equitable
subordination of CIT's claim in the bankruptcy case, is barred by
Maryland law. 	Having heard the arguments of counsel, examined
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the pleadings, considered the briefs and being otherwise fully
advised, the Court denies the motion.
Factual Background
In the fall of 1989, Industrial Machine entered into
negotiations with CIT to refinance certain loan obligations. 	In
connection with these negotiations, James T. Frese, a stockholder
and officer of Industrial Machine, was requested by CIT to
guarantee the debt personally. Concurrently Frese, as part of a
retirement package, was entering into a stock redemption
agreement with Industrial. 	According to Frese, his agreement to
guarantee the CIT loan to Industrial was conditional upon his
release from the guaranty at the time the stock redemption sale
was completed and he retired. 	The loan documents on which Frese
signed as guarantor, however, do not contain any provision for
his release. 	Frese insists that CIT agreed to this condition and
induced him to sign the unconditional guaranty by promising to
execute a separate letter agreement setting forth the details of
Frese's release from the guaranty. 	Such a letter agreement was
never provided. 	Frese has offered, as exhibit 1 to his
memorandum in opposition to the motion for partial summary
judgment, a copy of an internal memo written by Stan Cochran of
CIT on January 18, 1990. 	The memo contains a reference to the
agreement Frese describes.
Industrial Machine filed a petition for Chapter 11 relief on
March 19, 1993. 	Pursuant to the terms of Industrial's Chapter 11
plan, which was confirmed on May 20, 1993, certain collateral was
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to be liquidated and sold at public auction. 	The proceeds were
to be divided among participating secured creditors according to
their respective priorities. 	Both CIT (based on the 1990 loan)
and Frese (based on the stock redemption agreement) were
participating creditors. 	Because Frese and CIT disagree about
the extent of Frese's personal guaranty and for numerous other
reasons not pertinent here, a dispute exists concerning the
allocation of the proceeds of the auction sale. On December 1,
1993, Frese filed a complaint in the Industrial Machine
bankruptcy for a determination of his security interest, for
disgorgement of funds and equitable subordination, and for
negligence and breach of fiduciary duty.
Discussion
CIT takes the position that the absence of any written
memorialization of the alleged agreement to release Frese from
his guaranty is conclusive. 	CIT relies primarily on the Maryland
Credit Agreement Statute of Frauds (Md.Code Ann., Cts.& Jud.
Proc. §5-317(b)), which contains the following language:
A credit agreement is not enforceable by way
of action or defense unless it:
1. 	Is in writing;
2. 	Expresses consideration;
3. 	Sets forth the relevant terms and
conditions of the agreement; and
4. 	Is signed by the person against
whom its enforcement is sought.
According to CIT, the effect of §5-317 is to require any person
"who seeks to enforce a credit agreement, such as Mr. Frese is
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attempting to do in his Complaint," to obtain documentation of
the agreement. 	CIT backs up its position with citation to Howard
Oaks, Inc. v. Maryland National Bank, 810 F.Supp. 674 (D. Md.
1993) in which the United States District Court confirmed that
§5-317 bars the enforcement of claims based upon "side
agreements" with lenders.
The difficulty with the position taken by CIT is that Frese
is not asking in Count II for the relief which CIT insists is
unavailable. 	Frese is not seeking to enforce the alleged
agreement to release the guaranty; Frese instead asks the Court
to subordinate CIT's claim to the auction proceeds on the grounds
that equity requires such subordination. 	Frese asserts claims of
conspiracy, misrepresentation, unfair advantage, and malicious
and unlawful conduct, among others, in support of his plea for
equitable relief.
Section 510(c) of the Bankruptcy Code provides for the
equitable subordination of claims:
(c) 	Notwithstanding subsections (a) and (b) of this
section, after notice and hearing, the court may ---
(1) under principles of equitable subordination,
subordinate for purposes of distribution all or
part of an allowed claim to all or part of
another allowed claim or all or part of an
allowed interest to all or part of another
allowed interest; or
(2) order than any lien securing such a subord-
inated claim be transferred to the estate.
Pursuant to that section, the bankruptcy court has the power to
subordinate claims against the debtor's estate to claims it finds
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"ethically superior under the circumstances." 	In the Matter of
Greensboro Lumber Company, 183 B.R. 316, 321 (Bankr. M. D.
Georgia 1995). 	The body of law which establishes the doctrine of
equitable subordination is separate and distinct from the
statutory citations and contract theories upon which CIT relies
in arguing for summary judgment.
It is also clear that material facts about the personal
guaranty, the alleged agreement to release Frese, and the alleged
promise to provide written confirmation of the agreement are
disputed. 	Frese, in response to CIT's motion for partial summary
judgment, has submitted his own affidavit and a copy of the
internal memo written by Stan Cochran. 	CIT, in support of its
position, has offered the Frank Gallagher letter and certain
excerpts from Frese's deposition. 	These various documents are
intended by the parties to substantiate conflicting versions of
the circumstances underlying their dispute. 	The existence of
these conflicting fact recitals prohibits resolution of Count II
by summary judgment.
Conclusion
For the foregoing reasons, the motion by CIT for summary
judgment with respect to Count II of the complaint is denied.
This opinion constitutes the Court's findings of fact and
conclusions of law pursuant to Rule 7052 of the Federal Rules of
Bankruptcy Procedure. 	An appropriate order will be entered.
____________________________________
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MARK B. McFEELEY
United States Bankruptcy Judge
Sitting by designation
I certify that on the above stamped date I mailed a copy of the
above to:
Steven N. Leitess
Wendell Finner
Lawrence J. Merwin
Leitess & Associates, P.A.
201 Pomona Square
1700 Reisterstown Road
Baltimore, Maryland 	21208
Troy C. Swanson
Kincaid, McGrath & O'Keefe
800 N. Charles Street - Suite 400
Baltimore, Maryland 	21201
William Marlow
Attorney at Law
404 Alleghany Avenue
Towson, MD 	21204
Jeffrey Orenstein
Adelberg, Rudow, Dorf, Hendler
& Sameth
600 Mercantile Bank & Trust Bldg.
2 Hopkins Plaza
Baltimore, MD 	21201
John Strange
Attorney at Law
124 West Street - 4th floor
Annapolis, MD 	21401
U.S. Trustee
Marsh & McLennan Bldg. - Suite 350
300 West Pratt Street
Baltimore, MD 	21201
______________________________
Dinah N. Martinez
Secretary to Judge McFeeley
(505) 248-6526
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