UNITED STATES BANKRUPTCY COURT

MEMORANDUM DECISION

      In this adversary proceeding, plaintiff Phylene Gaffney seeks recoupment of funds she contends the defendant bank has misapplied to loans other than her own. Trial of this matter was held on February 12, 2002. This court has jurisdiction over the controversy in accordance with 28 U.S.C. § 1334 and the district court’s order of reference. It is a core proceeding under 28 U.S.C. § 157(b)(2)(B) and (C). I find that the plaintiff’s complaint should be dismissed with prejudice and that the defendant is entitled to attorney’s fees and costs.

     Factual Background

      Phylene Gaffney is a long-time resident of Fairbanks. She was briefly married to Sam Jeffcoat, but divorced him in 1971. Jeffcoat was a Fairbanks        7 ABR 285  entrepreneur active in the liquor and gambling industries and a convicted felon. Phylene had a business relationship with Sam after their divorce. Because of his criminal record, Phylene sometimes took title to business property as a convenience for him. Sam died in 1995 or 1996.

     In August of 1985, under authority of a power of attorney Phylene had given him, Sam executed a promissory note (hereinafter, “the loan”) on behalf of himself and Phylene for a loan in the principal amount of $295,385.51. ¹ Sam had negotiated the loan with defendant First National Bank of Anchorage (FNBA). The loan was secured by a deed of trust encumbering two distinct parcels of real property: the Gaffney Hotel and the Jeffcoat Building. ² It had a fifteen year term and matured on August 15, 2000. Title to the Gaffney Hotel realty was in Phylene only. Title to the Jeffcoat Building realty was transferred by Phylene to both Sam and her before the loan was taken out. ³ After the loan transaction occurred, Phylene quitclaimed her interest in the Jeffcoat Building to Sam. ⁴

     Phylene testified that she helped Sam acquire the Jeffcoat Building and obtain the financing for it because, at the time, Sam didn’t have a job. While the loan also included the Gaffney Hotel, Sam was to make all the payments on the loan. In exchange for her assistance, Phylene said she got her house on Pedro Street in        7 ABR 286  Fairbanks. Phylene further stated that she didn’t have any real involvement with the loan until 1994.

      The loan was modified three times before 1993. ⁵ All three of the modification agreements were reached between FNBA and Sam. Phylene was not consulted, and the written modifications were not signed by her. William Renfrew, a senior vice-president for FNBA, signed the modifications on behalf of the bank.

      Renfrew stated that it was his belief that, until Phylene actually took control of the business in 1994, Sam was the sole owner of the Gaffney Hotel. This belief is supported by bank records, including a signature authorization for a bank account Sam maintained at FNBA and a note Phylene wrote to the Bank in July of 1993. A “Sole Ownership Authority for Signing and Endorsing Checks” form dated January 22, 1993, indicates that Sam was the sole owner of an account set up under the name of the Gaffney Motel. ⁶ The form reflects that Phylene was authorized to sign checks as an agent on this account. The signature page contains Sam’s signature as owner, and Phylene’s as agent. Phylene wrote a note to FNBA on July 14, 1993, in which she requested that her name be immediately taken off of this bank account. ⁷ Mr. Renfrew also testified that Phylene had told him several times that she had nothing to do with any of Sam’s loans. Sam had additional loans with FNBA, but whenever Renfrew contacted Phylene about any of these loans, she told him they were solely Sam’s responsibility.

             7 ABR 287  Documentary evidence submitted at trial indicates that Sam owned the Gaffney Motel through 1993. Sam applied for an Alaska business license for the Gaffney Motel on September 15, 1990, as a new owner. The physical address for the business, as listed on the application, was 741 Gaffney Road. This license was effective through December 31, 1995. ⁸ Phylene submitted an application for a business license for the Gaffney Hotel in February of 1994. The application indicates that the license was for a new business, with the effective date for the new ownership or start of the business listed as being February 4, 1994. ⁹ The 1994 date is also consistent with information reflected in an attachment to Schedule C of Phylene’s 1997 Federal Income Tax Return, which states that she acquired the Gaffney Hotel building on February 1, 1994. ¹⁰

      Sam ran a bar known as the “Lonely Lady” in Fairbanks. Phylene had initially held title to the real property and the liquor license for the premises. The bar’s liquor license was lost and Sam’s financial condition deteriorated in 1992 and 1993. Because of continuing problems with loan defaults, including default on a working capital loan FNBA had extended to Sam, Renfrew testified that in early 1993 Sam agreed to an arrangement in which the revenues from the Gaffney Hotel and Sam’s other businesses would be voluntarily turned over to FNBA. FNBA could apply the funds as it saw fit to bring all of Sam’s loans current as quickly as possible. Under this arrangement,        7 ABR 288  FNBA collected the revenues from the Gaffney Hotel and the Jeffcoat Building from May of 1993 through January of 1994. This arrangement was reached with Sam through a series of phone conversations Renfrew had with him. Renfrew did not contact Phylene about, nor seek her consent for, the arrangement.

      FNBA collected more than $103,000.00 from the Gaffney Hotel under this arrangement. ¹¹ Phylene testified that she learned the bank was taking hotel revenues in May of 1993. Employees at the hotel contacted her to let her know it was happening. She called Renfrew to find out why, but was informed by him that the loan had been transferred to FNBA’s special credits office in Anchorage. Renfrew told her she would need to contact David Stringer in the Anchorage office to discuss her loan. Phylene said she called Stringer and asked him why the bank was taking money from her hotel. She says Stringer told her the bank had the right to do this under the terms of her deed of trust. After reviewing the deed of trust, Phylene said she concluded Sam wasn’t making payments on the loan, the loan was delinquent, and the bank could take money from the hotel. She believed that the bank would be applying all the money taken from the hotel against the loan. In early 1994, when she learned that this was not the case, she took control of the Gaffney Hotel and stopped making payments to FNBA.

      Renfrew and Stringer had different recollections of the conversations they had with Phylene during 1993 and early 1994. Renfrew did not remember Phylene ever complaining to him, in 1993, about the arrangement the bank had reached with Sam. Instead, he recalled Phylene telling him the loans were Sam’s responsibility. He said        7 ABR 289  Phylene never mentioned the arrangement, not even when she sent the bank her note, in July of 1993, asking that she be taken off Sam’s bank account for the Gaffney Motel. ¹² Renfrew also testified that on several occasions he was the bank officer who went to the Gaffney Hotel to pick up its revenues in accordance with the arrangement he had reached with Sam. Renfrew said that when he spoke to the hotel employees at these times, they never indicated to him that they would need to discuss the arrangement with Phylene before they could turn the money over to FNBA. Finally, Renfrew said he had no recollection of referring Phylene to Stringer in 1993. He would not have done this until after the loan was transferred to FNBA’s special credits department in Anchorage.

      Stringer also said he would not have spoken to Phylene about the loan until after it had been transferred from Fairbanks to the special credits department. He said this didn’t occur until early 1994. He didn’t recall having any conversations with Phylene in 1993 about the bank collecting rents from the hotel in accordance with the terms of the deed of trust. Stringer testified that he has never had any phone conversations with Sam, and had no involvement with the arrangement Renfrew reached with him.

     After Phylene took control of the Gaffney Hotel, Stringer sent her written correspondence regarding delinquencies on various loans. The first letter, dated April 7, 1994, is addressed to both Sam and Phylene at her Pedro Street residence. ¹³ In this letter, Stringer advised that three loans had been transferred to him for further        7 ABR 290  handling. None of the three delinquent loans referenced in this letter is the loan against the Gaffney Hotel. Stringer’s letter stated that, “Henceforth, you may communicate only with me in regard to the debts.” ¹⁴ Phylene recalled receiving this letter.

      A second letter from Stringer is dated April 25, 1994. ¹⁵ It is addressed to Phylene at the Gaffney Hotel. It references a facsimile letter Phylene had sent to Renfrew which asked that no additional amounts be added to any loans on which she was obligated, without her prior approval. In the letter, Stringer reminds Phylene that the bank’s files on Sam’s and her loans have been transferred to him for further handling.

      A third letter by Stringer, dated May 12, 1994, and addressed solely to Phylene, discusses Phylene’s rejection of a proposed loan commitment made by the bank. ¹⁶ The letter itemizes arrearages for three loans on which Phylene was obligated, including the Gaffney Hotel loan. It further states:

On 5-11-94 Mr. Oczkus contacted me and what follows is my understanding of that conversation:

1.	The bank will receive $3,000 as a payment on loan #3 [Gaffney Hotel] by the close of business on Friday 05-13-94. The remaining payment and tax arrearage will be paid by the end of May 1994.
2.	The bank will initiate a nonjudicial foreclosure immediately with respect to loan #1 [Pedro Street] and loan #2 [5th Ave. Building].
7 ABR 291
3.	Respecting Loan #1, the bank will make a protective tax advance for 1993 in the amount of approximately $2,834.75.

 

Should you fail to make your payment and tax arrearages respecting loan #3 as outlined above, the bank will be free to commence foreclosure on the motel.

 

Pursuant to your letter to Mr. Renfrew of 05-10-94 requesting certain records, I assume that the bank’s initiation of a nonjudicial foreclosure renders your request moot. However, if you desire certain records nonetheless, please contact me. Please be aware that other than simple reproductions of loan history statements, there will be research costs associated with any in-depth request and a retainer required. ¹⁷

      Phylene received Stringer’s May 12th letter. It crossed in the mail with a letter Phylene’s attorney had written to Stringer requesting an accounting on the Gaffney Hotel loan. ¹⁸ Stringer said that since his letter followed conversations he had had with Phylene’s attorney, he assumed this request for an accounting was moot. He thought his May 12th letter resolved things. He doesn’t recall any further communications from either Phylene or her attorney about an accounting.

       Phylene testified that both she and her attorney have made numerous requests for an accounting of how the funds received by the bank in 1993 were applied to the various loans. She said she made several telephone requests for an accounting. She sent a written request for an accounting to Renfrew on May 10, 1994. ¹⁹ In addition, her attorney sent the May 12, 1994, letter to Stringer and a subsequent facsimile in        7 ABR 292  1995. She said that, to this date, neither she nor her attorney has received an accounting from FNBA which shows how the funds it collected in 1993 were applied.

      Renfrew testified that he recalls receiving Phylene’s May 10, 1994, request. He said he forwarded it on to Anchorage, because special credits was at that point handling the loan. He remembers Phylene calling him about having an accounting done, either just before the time he got the letter or just after Phylene had taken over the Gaffney Hotel; he’s not sure exactly when. He also recalls one subsequent phone conversation with Phylene, after the loan had been transferred to Anchorage. He did not provide Phylene with an accounting because special credits in Anchorage was handling the loan at that point.

      In 1994, FNBA foreclosed on the Jeffcoat Building and other properties. ²⁰ The Gaffney Hotel loan was then transferred back to Renfrew in Fairbanks. Phylene made monthly payments on the loan. On December 14, 1998, she signed a modification agreement regarding the loan. ²¹ The payments had been $3,000.00 per month and the modification changed the payment amount to $2,100.00. Phylene said the balance due on the loan was not discussed at the time the modification was made. The second recital in the document states, however, that “[t]he undersigned agree    7 ABR 293  that on 12/4/98 the outstanding balance of the principal indebtedness is $190,372.24 and interest has been paid through 11/6/98.” ²²

      Phylene filed her chapter 13 petition on February 16, 2001. ²³ FNBA has filed an amended proof of claim for $201,103.20, secured by the Gaffney Hotel. Phylene is making “interest only” payments to FNBA pending resolution of this proceeding. ²⁴ She is to file a chapter 13 plan within 90 days of entry of a non-appealable order in this adversary proceeding. ²⁵

 

Analysis

      In her original complaint, Phylene sought an accounting, “reformation” of her payment history, damages for fraud and other relief. When she filed her cross-motion for summary judgment on September 28, 2001, she changed her approach to the litigation by alleging a theory of recoupment. Although Phylene did not amend her complaint to allege her change in theory, her 22 page summary judgment memorandum gave FNBA ample notice of her recoupment claim. Trial was held February 12, 2002. During the trial, Phylene alleged that she was entitled to an accounting and other relief on a recoupment theory.

      Phylene sought an accounting of how FNBA applied approximately $103,000.00 in hotel revenues it collected from May, 1993, through December of        7 ABR 294  1994. Her May 10, 1994, letter to Renfrew at FNBA requested an accounting. Stringer, in FNBA’s special credits department, replied to this request on May 12, 1994, as he was then in charge of the loan. He stated that he thought the issue of an accounting was moot. I view Stringer’s May 12, 1994, response as a denial of Phylene’s request for an accounting. Because Phylene’s claim for an accounting was based on her note and trust indenture obligations, she had a six year period in which to bring an action for an accounting, ²⁶ or until May of 2000. Phylene’s adversary complaint was filed well after this date, and her claim for an accounting is barred by the statute of limitations.  

      To avoid that defense, Phylene now alleges that she is entitled to an accounting under a theory of recoupment. Recoupment is generally not affected by the statute of limitations. ²⁷ Recoupment “is the setting up of a demand arising from the same transaction as the plaintiff’s claim or cause of action, strictly for the purpose of abatement or reduction of such claim.” ²⁸ To determine whether claims arise from the same transaction, the Ninth Circuit applies the “logical relationship” test outlined by the Supreme Court. The Court has noted that “‘[t]ransaction’ is a word of flexible        7 ABR 295  meaning. It may comprehend a series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship.” ²⁹

      Here, I find there is a logical relationship between the original note and the credits claimed by Phylene during 1993 and early 1994. The plaintiff’s claim arises out of the same act or transaction. Because Phylene seeks to lessen or eliminate FNBA’s claim against her through an accounting and other claims, her utilization of a recoupment theory circumvents the bank’s statute of limitations defense. ³⁰

      Recoupment does not, however, avoid application of other defenses raised by the bank. Phylene knew in early 1994 that the defendant had applied only $18,000.00 of the 1993 payments to the loan. Yet, on December 4, 1998, she executed a modification of the original promissory note. ³¹ The modification lowered Phylene’s monthly payments from $3,000.00 to $2,100.00 per month. The second recital to the “Modification of Promissory Note” stated that “[t]he undersigned agree that on 12/4/98 the outstanding balance of the principal indebtedness is $190,372.24 and interest has been paid through 11/6/98.” ³²

             7 ABR 296  FNBA argues that this recital was part of an integrated agreement that definitively established the amount of Phylene’s debt. ³³ Even if the agreement was integrated, however, a recital of fact may be shown to be untrue. ³⁴

A recital of fact in an integrated agreement is evidence of the fact, and its weight depends on the circumstances. Contrary facts may be proved. The result may be that the integrated agreement is not binding, or that it has a different effect from the effect if the recital had been true. . . . ³⁵

      Phylene contends that the $103,000.00 collected by the bank from May of 1993, through January of 1994 was impermissibly applied against other Sam Jeffcoat obligations. Thus, the indebtedness of $190,372.24 recited in the 1998 loan modification was untrue and should have been reduced to give full credit for all of FNBA’s collections from the hotel in 1993. Phylene bases her argument on language contained in the original August 14, 1985, deed of trust. It states, in part at B:

5.As additional security, Trustor hereby gives to and confers upon Beneficiary the right, power and authority, during the continuance of these Trusts, to collect the rents, issues and profits of said property, reserving unto Trustor the right, prior to any default by Trustor in payment of any indebtedness secured hereby or in performance of any agreement hereunder, to collect and retain such rents, issues and profits as they become due and payable. Upon any such default, Beneficiary may at any time without notice, either in person, by agent, or by a receiver to be appointed by a court, and without regard to the adequacy of any security for the indebtedness hereby secured, enter upon and take possession of said        7 ABR 297  property or any part thereof, in his own name sue for or otherwise collect such rents, issues and profits, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney’s fees, upon any indebtedness secured hereby, and in such order as Beneficiary may determine. The entering upon and taking possession of said property, the collection of such rents, issues and profits and the application thereof as aforesaid, shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. ³⁶

      The bank admits that only $18,000.00 of the proceeds it collected in 1993 were applied against the Gaffney Hotel loan. This was the amount needed to keep the Gaffney Hotel obligation current. The bank also admits making advances against the loan of $8,755.63 in 1993 for utilities and $8,108.16 in 1994 for real property taxes. The balance of the funds were applied against other Sam Jeffcoat obligations. The bank contends it was entitled to proceed in this fashion, notwithstanding the language of paragraph 5.B of the deed of trust.

      I agree with the bank. Paragraph B.5 of the deed of trust is inapplicable here for several reasons. First, FNBA never took possession of the Gaffney Hotel. Sam Jeffcoat and his agents remained in possession of the premises during all of 1993, when the bank was receiving proceeds from the hotel. While FNBA representatives would occasionally drop by the hotel to pick up its revenue, they did not actively manage the property. Sam ran the hotel as a sole proprietor and orally agreed to turn over receipts from the hotel to cure his arrearages on other obligations due the bank. The funds were not generated by FNBA as a beneficiary in possession, but rather by a business run by Sam Jeffcoat, the trustor on the deed of trust. Further, Phylene did        7 ABR 298  not own the hotel business in 1993. Sam, as sole owner of the hotel, had the ability to dispose of his cash receipts according to his own desires. ³⁷ Finally, the bank had the power, pursuant to the express terms of the deed of trust, to make advances to pay taxes and utilities to protect its security. ³⁸ Phylene’s reliance on paragraph 5.B of the deed of trust is misplaced. The provisions of paragraph 5.B were not implemented in the bank’s receipt of the hotel revenues in 1993.

      Phylene has also alleged that her indebtedness to FNBA should be discounted or eliminated because its employees, William Renfrew and David Stringer, engaged in fraudulent and deceitful conduct. There is no factual basis for these allegations. Phylene’s recollections of conversations she had with Renfrew and Stringer are flawed and not credible. Neither Renfrew nor Stringer made any misrepresentations to Phylene or engaged in any deceitful conduct. Any claim for recoupment based upon fraud or deceit must be denied.

      I conclude that the second recital contained in the December 4, 1998, loan modification agreement was true. Phylene Gaffney owed FNBA $190,372.24 as of November 6, 1998. She is not entitled to a credit against this sum on the theory of recoupment. The funds collected by the bank in 1993 were proceeds of Sam’s business, which the bank could apply in accordance with Sam’s wishes. FNBA’s amended proof of claim is allowed in the sum of $201,103.20 as a secured claim, together with accruing interest, costs and attorney’s fees.

             7 ABR 299  FNBA has asserted a counterclaim for attorney’s fees in this action. “[W]hen state law and not federal bankruptcy law provides the rule of decision in a contested matter, the bankruptcy court will award fees to the same extent allowed under the governing state law.” ³⁹ Alaska state law determines the amount of Phylene’s claim. Accordingly, the Bank is entitled to its reasonable attorney’s fees under the provisions of the deed of trust and Ak. R. Civ. P. 82(a).

Conclusion

      The plaintiff’s complaint will be dismissed, with prejudice. The defendant’s counterclaim will be allowed. FNBA will be awarded its costs and reasonable attorney’s fees. An interlocutory order will be issued in accordance with this decision. A final judgment will be entered after the amount of FNBA’s attorney’s fees has been established.

     

DATED: May 31, 2002.

                                 BY THE COURT

                                 DONALD MacDONALD IV

                                 United States Bankruptcy Judge

N O T E S:

1.   See Pl.’s Ex. 6, 27.

2.   See Pl.’s Ex. 7.

3.   See Pl.’s Ex. 2.

4.   See Ex. 13 to Def.’s Ex. N.

5.   See Pl.’s Ex. 8, 9.

6.   See Pl.’s Ex. 26. This account card states the name of the business as being the “Gaffney Motel,” rather than the “Gaffney Hotel.”

7.   See Pl.’s Ex. 24.

8.   Def.’s Ex. F. Again, Sam used the name “Gaffney Motel,” rather than “Gaffney Hotel”, but the business location is that of the Gaffney Hotel.

9.   Def.’s Ex. I. Phylene’s explanation for this is that she just didn’t apply for a business license for several years. She said she didn’t know that Sam had obtained a business license for the Gaffney Motel.

10.   Def.’s Ex. J.

11.   Pl.’s Ex. 11.

12.   Pl.’s Ex. 24.

13.   See Pl.’s Ex. 40.

14.   Id.

15.   Pl.’s Ex. 41.

16.   See Pl.’s Ex. 43.

17.   Id. at p. 2.

18.   Def.’s Ex. L, Req. for Admis. No. 5(a).

19.   Pl.’s Ex. 16.

20.   The bank foreclosed a prior deed of trust on the Jeffcoat Building, on which Phylene was the only trustor. See Def.’s Ex. N, at Exs. 14, 15. The principal amount owing on this obligation at the time of foreclosure was $313,946.51.

21.   Def.’s Ex. B.

22.   Id.

23.   In re Phylene Gaffney, Main Case No. F01-00111-DMD, at Docket No. 1.

24.   Id., at Docket No. 38 [Order Modifying Automatic Stay].

25.   Id., at Docket No. 42.

26.   In 1994, the statute of limitations for actions upon a contract was six years under former A.S. 09.10.050(1) and (3).

27.   20 Am. Jur. 2d Counterclaim, Recoupment, and Setoff § 5 (1995).

28.   Newbery Corp. v. Firemens Fund Ins. Co., 95 F.3d 1392, 1399 (9th Cir. 1996), quoting 4 Collier on Bankruptcy ¶ 553.03 at 553-15 (15th ed. 1995) (emphasis in original).

29.   Newbery, 95 F.3d at 1402, quoting Moore v. New York Cotton Exchange, 270 U.S. 593, 610 (1926).

30.   Laches can be a valid defense to an accounting action. 1 Am. Jur. 2d Accounts and Accounting § 65 (1994). Laches is an affirmative defense which must be pled or it is considered waived. Todd v. United States, 155 Ct. Cl. 111 (1961). FNBA never raised the defense of laches (or waiver) in its answer, amended answer, summary judgment pleadings or at trial. It has therefore been waived as a defense. The defense of estoppel was raised by FNBA only in conjunction with the issue of ownership of the Gaffney Hotel.

31.   Def.’s Ex. B.

32.   Id.

33.   The Bank has cited §§ 209, 213 and 215 of the Restatement (Second) of Contracts as well as S & B Mining Co. v. N. Commercial Co., 813 P.2d 264, 269-270 (Alaska 1991), in support of its argument.

34.   Restatement (Second) of Contracts, § 218(1) (1981).

35.   Restatement (Second) of Contracts , § 218 cmt. b (1981).

36.   Pl.’s Ex. 7; Def.’s Ex. C.

37.   54A Am.Jur.2d Mortgages ¶¶ 203, 208 (1996).

38.   See Pl.’s Ex. 7; Def.’s Ex. C., at ¶ A6.

39.   Holiday Mobile Home Resorts v. Wood (In the Matter of Holiday Mobile Home Resorts), 803 F.2d 977, 979 (9th Cir 1986), citing Merced Prod. Credit Ass’n v. Sparkman (In re Sparkman), 703 F.2d 1097, 1099-100 (9th Cir. 1983).