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March 13, 1980

DEPOSITORS TRUST COMPANY, a Maine corporation, Plaintiff, against HUDSON GENERAL CORPORATION, a Delaware corporation, Defendant.

The opinion of the court was delivered by: NEAHER


Depositors Trust Company of Augusta, Maine ("DTC"), a Maine banking corporation, sues to recover $ 123,169.90 allegedly due pursuant to a guaranty agreement from Hudson General Corporation ("HGC"), a Delaware corporation with a principal office in Great Neck, New York. Since the undisputed facts involved are rather complex, an understanding of the issues presented requires a detailed narration of certain business transactions which gave rise to the parties' controversy.

Background Facts

 On January 25, 1972, HGC gave DTC a guaranty of payment for $ 123,169.90, the remaining sum then owing on account of a promissory note of Trans-East Air, Inc. ("Trans-East"), also dated January 25, 1972, which evidenced a loan in the original principal amount of $ 500,000 made pursuant to a loan agreement between Trans-East and DTC. Subsequent to execution of the guaranty, Trans-East defaulted and DTC sought to recover the final sum of $ 123,169.90 from HGC pursuant to the guaranty. Relying on a number of transactions occurring after the execution of the guaranty and DTC's failure to give notice, HGC refused to honor the guaranty claiming that its obligation was thereby discharged. This action followed.

 DTC had originally extended credit to Trans-East to provide it with capital to continue as operator of the fixed base operation ("FBO") at Bangor International Airport under and pursuant to a franchise and lease agreement dated June 20, 1968, between Trans-East and the City of Bangor. Trans-East agreed to provide ground and routine maintenance service to aircraft landing at Bangor Airport as well as to refuel such aircraft. The Humble Oil and Refining Company, now Exxon Corporation ("Exxon"), supplied the fuel pursuant to supply contracts with Trans-East and stored it in a tank farm at Bangor Airport owned by the City and leased by Trans-East. Trans-East derived the largest part of its revenues as operator of the FBO from its fuel pumping services to airlines, which were contract customers of Exxon. In consideration for performing the fuel pumping services for Exxon, Trans-East was entitled to receive fees ("Exxon fees") from these airlines equal to a maximum of three cents per gallon of fuel pumped. Exxon collected all fees from the airlines and then remitted Trans-East's fees on a monthly basis, one month after collection.

 The DTC loan to Trans-East of January 25, 1972, was secured by a security agreement of even date creating security interests in, among other things, (1) all accounts receivable from the FBO operations; (2) a conditional assignment of Trans-East's rights under the City lease; (3) an assignment of Exxon fees; and (4) a conditional assignment of the Exxon fuel agreement. The accompanying note provided, among other things, that principal and interest (at 10% per annum) would be payable by Trans-East in monthly installments of the greater of $ 5,000 or an amount equal to one-half cent per gallon of the Exxon fees earned by Trans-East for the preceding calendar month.

 HGC's guaranty was obtained as a result of Trans-East's request, shortly before closing, that the amount of the loan be increased from the amount originally sought, $ 370,000, to $ 500,000. Trans-East informed DTC that the reason for the increase was to enable it to satisfy a claim made against it by HGC. The parties stipulate that HGC did receive $ 123,169.90 from Trans-East out of the loan's proceeds, and HGC does not contest that it received valid consideration for the guaranty.

 In May 1972, DTC provided Trans-East with additional working capital by advancing $ 200,000 in cash pursuant to a supplemental loan agreement with Trans-East dated May 23, 1972. That new loan was evidenced by a second promissory note in the principal amount of $ 200,000 and secured by the same collateral provided by the January 25, 1972 security agreement. The second note provided, among other things, that principal and interest (at 12% per annum) would be payable in five monthly installments of $ 5,000 or a sum equal to an additional 4/10ths cent per gallon of the Exxon fees earned during the preceding calendar month, with a final payment due on November 23, 1972. HGC did not guarantee the May 1972 loan, nor did DTC give HGC notice of the supplemental loan agreement at the time of its execution or seek HGC's consent in connection therewith.

 In late July 1972, DTC learned that the City had declared Trans-East in default under its lease and had given it notice that the lease would be terminated on August 17, 1972, unless the default was cured. Shortly thereafter, on July 28, 1972, DTC gave notice to Trans-East that its default under the lease also constituted a default under the loan agreement.

 Trans-East having failed to cure its default to the City, DTC sent written notification of its notice of default under the loan agreement to all guarantors, including HGC. On August 11, 1972, DTC gave oral notice to Trans-East that DTC was taking possession of the FBO at Bangor Airport pursuant to the terms of the loan and security agreements and as creditor-in-possession under Article 9 of the Maine Uniform Commercial Code. Trans-East executed a consent to peaceable entry of possession by DTC and on August 11, 1972, DTC took joint possession of the FBO, with the City acting as DTC's agent.

 DTC entered into a management agreement with the City dated August 11, 1972, pursuant to which the City undertook to manage the FBO as DTC's agent and on the condition that the City remit monthly to DTC an amount equal to 9/10ths of one cent per gallon of fuel pumped for Exxon's contract customers at Bangor Airport, i. e., a sum equal to the combined amount of fuel fees Trans-East was obligated to pay DTC as principal and interest on the two loans. The management agreement also provided for direct payment of the Exxon fees to the City.

 As of August 11, 1972, the balance of principal and interest remaining unpaid on Trans-East's original note was $ 475,746.24 and the remaining unpaid balance of principal and interest on the supplemental note was $ 185,389.13. Application of the fuel fees payable for February-July 1972 reduced principal and payment of interest accrued on the original note, and similar application of fuel fees for June and July 1972 reduced principal and interest on the supplemental note.

 On August 29, 1972, an original creditors' petition was filed against Trans-East under Chapter X of the Bankruptcy Act in the United States District Court for the District of Maine, Northern Division.

 On October 13, 1972, the Bankruptcy Court issued an order continuing the management agreement in force indefinitely and directing that no change be made in its terms without that court's prior approval. The City remitted to DTC the fuel fees earned for the period August 12 through November 1972, and from these payments DTC applied $ 36,043.45 to interest and principal due on the original note, reducing principal remaining unpaid on the loan as of December 21, 1972 to $ 457,147.82. Also from City remittances, DTC applied $ 28,834.76 to payment of interest and principal due on the supplemental note. Moreover, on November 24, 1972, proceeds of $ 73,296.54 from DTC's collection of Trans-East accounts receivable were applied to interest and principal of the supplemental note. On January 11, 1973, an additional $ 8,828.88 in accounts receivable was applied as a principal payment to the supplemental loan, leaving a principal balance of $ 81,565.17. On February 2, 1973, however, an overdraft of $ 15,985.27 increased the principal balance to $ 97,557.44. During the remainder of 1973, $ 4,786.08 of Trans-East accounts receivable were collected by DTC and applied to the supplemental loan. Thus according to DTC's calculations, the amounts owed by Trans-East under that loan as of February 7, 1974, were principal of $ 92,771.36 and interest of $ 12,593.55, or a total of $ 105,364.91.

 In January 1973, shortly after its latest remittance, the City advised DTC that it was short of funds needed by the FBO for working capital and requested that DTC lend it additional funds. DTC rejected this request, whereupon the City informed DTC that it would postpone remittance of any further payments of fuel fees until the busier summer season. DTC objected to such withholding by the City and decided to terminate the management agreement. Upon advice of counsel that such termination was precluded by the Bankruptcy Court's order, however, DTC reached an informal understanding with the City under which the City continued to operate the FBO under the management agreement, and DTC would receive monthly statements of the FBO fuel fees owed DTC which were to be credited to DTC's account on the City's books. This arrangement continued until July 1, 1975, when the Bankruptcy Court ordered the fuel fees to be paid into a special escrow account.

 After several unsuccessful attempts to reach an agreement with the City with respect to the remittance of the fuel fees, DTC retained the accounting firm of Coopers & Lybrand to audit the FBO operation from August 11, 1972 through December 31, 1974. The draft audit disclosed that the City owed DTC $ 479,144 of accrued fuel fees for the period. After demand by DTC and refusal by the City to make payment, DTC filed a complaint in the bankruptcy proceedings on May 22, 1975, against the City, the Trustee and Exxon seeking a declaratory judgment and recovery against the City of the $ 479,144.

 According to DTC's records, as of May 22, 1975, the City's indebtedness was $ 550,225.40 attributable to principal and interest on the original note and $ 115,475.75 to principal and interest on the supplemental note, or a total of $ 665,701.15.

 On March 12, 1976, the Trustee agreed to accept a joint settlement offer from the City and Exxon of $ 1,300,000 to resolve all pending litigation and acquire for the City and Exxon jointly the FBO operating rights of Trans-East, subject to the concurrence in the settlement by DTC. Negotiations between DTC and the Trustee led to an agreement that would allow DTC to receive a minimum of $ 618,000 out of the $ 1,300,000 of settlement proceeds, if DTC would agree to the settlement proposed by the City and Exxon, with both DTC and the Trustee consenting to binding arbitration by the Bankruptcy Court as to all amounts claimed by DTC in excess of $ 618,000.

 By a memorandum opinion dated March 24, 1976, the Bankruptcy Court rendered its decision upon the arbitration and allowed DTC's claim as to $ 579,965.87 of unpaid principal and $ 38,034.13 of interest accrued on all of DTC's claims with respect to Trans-East indebtedness subsequent to the filing of the Chapter X petition, or a total of $ 618,000. The Bankruptcy Court also held that DTC retained its rights to proceed against guarantors.

 By order of March 30, 1976, the Bankruptcy Court set a hearing for April 20, 1976, on applications predicated on the agreement by DTC, the City, the Trustee and Exxon to settle the claims pursuant to a settlement agreement. The proposed agreement dated April 6, 1976 was executed by DTC, the City, the Trustee and Exxon, and on May 6, 1976, was filed with the Bankruptcy Court. The only parties who filed written objections to the settlement agreement were shareholders of Trans-East and the Securities and Exchange Commission. HGC did not appear before the Bankruptcy Court or make objection to it concerning the terms of the settlement agreement.

 DTC allocated the $ 618,000 received from the settlement first to principal and then, in arithmetic proportion, to interest on three ...

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