Memorandum of Decision Re: Contract Dispute

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re ROBERT FORTUNE,                                                                              No. 1-86-00176      Debtor. ____________________/
Memorandum of Decision re Allowance of Claim
     Claimant Diana Lowers and debtor Robert Fortune were co-owners of a corporation known as Homeowners Partnership, Inc. (HPI). This corporation owned several parcels of heavily encumbered real property, some outright and some under equity sharing agreements with co-owners who resided on the property.      In early 1982, as part of a general separation of their business affairs, Fortune and Lowers entered into an oral agreement whereby Lowers agreed to surrender her interest in HPI to Fortune in return for his promise to pay the HPI's debts. Lowers' primary concern at that time was her exposure to personal liability if some of the debts of HPI were not paid.      Shortly after Fortune took over sole ownership of HPI, he stopped making payments on most of the obligations secured by the corporation's real property, and these properties were lost to foreclosure. Ordinarily, this would have been of no consequence to HPI, Lowers or Fortune as the senior lienholders were fully secured and barred from seeking deficiency judgments pursuant to California Code of Civil Procedure section 580d and the junior lienholders all held purchase money notes and were barred from deficiency judgments pursuant to section 580b. However, one of the sold-out junior deed of trust holders sued both Lowers and Fortune for fraud and another sold-out junior on property which Lowers had originally purchased herself and then deeded to the corporation threatened to sue Lowers for fraud.      In order to settle the fraud suit against them, Lowers and Fortune agreed to pay the plaintiff $26,500.00 each. Because Lowers did not have the cash, she gave the plaintiff her note and entered into an "Indemnity Agreement" with Fortune which provided that if she defaulted on her note and Fortune thereby had to pay more than his agreed share of the settlement then her note was assigned to him. The Indemnity Agreement further provided that Lowers would indemnify Fortune and hold him harmless "from any responsibility, obligation or liability to plaintiff" if he had to pay any part of her portion of the settlement.      Lowers settled the other claim against her alone for $3,750.00. She seeks allowance of an unsecured claim for this amount, plus the $26,500.00 she paid to settle the lawsuit, plus $2825.00 in attorney's fees incurred in defending the lawsuit. Fortune disputes the claim on three grounds:
     1. The oral agreement between him and Lowers is unenforceable pursuant to the Statute of Frauds;
     2. The obligations which resulted in the claims against Lowers were never formally assumed by the corporation, so that they were not covered by his promise to pay the corporation's debts; and
     3. The Indemnity Agreement precludes Lowers from making a claim.
     The court is unmoved by the Statute of Frauds argument. Section 1624(b) of the California Civil Code makes an unwritten agreement to pay another's debts unenforceable by the creditor; it in no way bars enforcement by the debtor. 1 Witkin, Summary of California Law (9th ed.), Contracts section 293, p.281; 20th Century Cigarette Vendors v. Shaheen (1966) 241 Cal.App.2d 391, 395.      While interpretation of an oral agreement is never easy, the uncontradicted testimony of Lowers is that she specifically discussed payment of the obligations which eventually caused the problems with Fortune, and that he at first balked and then agreed to make these payments. Fortune does not dispute this conversation, but claims that only the corporation, and not himself personally, agreed to make the payments. The court finds this interpretation unconvincing, as the agreement was between Lowers and Fortune, not Lowers and the corporation, and would be illusory as to Lowers if Fortunes's interpretation is used. Fortune's subsequent comingling of personal and corporate funds and lack of observation of corporate formalities also make his claim unconvincing.      There are no grounds for interpreting the Indemnity Agreement as a waiver of Lower's breach of contract claim against Fortune. The Indemnity Agreement only provided that Lowers held Fortune harmless from any liability to the plaintiff resulting from Lowers' default on her note to the plaintiff. Both Lowers and Fortune were then represented by counsel, so the court can see absolutely no reason to imply a provision in the Indemnity Agreement neither contained in it nor necessary to its implementation, especially if such an implied provision would constitute a waiver by Lowers of a valuable right. The court finds that the purpose of the Indemnity Agreement was to protect Fortune from further liability to the plaintiff, and nothing more. It was not intended to protect him from liability to Lowers.      For the above reasons, the court finds that Lowers has an allowable general unsecured claim against Fortune to be calculated as follows:
     a. $26,500.00 together with interest at the legal rate from August 31, 1983, to the date of the filing of the debtor's petition; plus
     b. $3,750.00 together with interest at the legal rate from April 12, 1984, to the date of the petition; plus
     c. $2,825.00.
     Counsel for Lowers shall prepare a form of order consistent with this decision and submit it together with proof of service upon counsel for Fortune.
Dated: September 21, 1987                                                                              _____________________                                                                                                                      ALAN JAROSLOVSKY                                                                                                                      U.S. BANKRUPTCY