Bankr. L. Rep. P 71,737browning Seed, Inc., Plaintiff-appellant, v. Johnnie Bayles, Defendant-appellee, 812 F.2d 999 (5th Cir. 1985)

Plaintiff-appellant Browning Seed, Inc. (Browning Seed) brought this Louisiana law diversity action against defendant-appellee Johnnie Bayles to recover on a personal guaranty undertaken by Johnnie Bayles on behalf of Bayles Supply Company, Inc. (Bayles Supply). In a trial on facts stipulated to by the parties, the district court held that the applicable Louisiana statute of limitations barred Browning Seed's action. Accordingly, the district court entered judgment in favor of Johnnie Bayles. We affirm.

Facts and Proceedings Below

Bayles Supply is a distributor of garden products for use in residential and commercial gardening. In December 1979, Bayles Supply entered into a credit arrangement with Browning Seed, allowing it to purchase trade supplies from Browning Seed on open account. In connection with its extension of credit, Browning Seed required the personal guaranty of Johnnie Bayles, the president and sole shareholder of Bayles Supply. The terms of the guaranty extended by Mr. Bayles were set forth in a single paragraph on Bayles Supply's application for credit. That paragraph, entitled "Guarantee," provided:

"In consideration of credit being extended to the above named person or firm, I personally guarantee all indebtedness hereunder. I further agree that this guarantee is an absolute, completed and continuing one and no notice of the indebtedness or any extension of credit already or hereafter contracted by or extended need be given. The terms may be rearranged. Upon notice that the account is past due, I will pay the amount due."

Pursuant to this credit arrangement, Bayles Supply purchased merchandise on open account from Browning Seed. In February 1980, Bayles Supply received an invoice from Browning Seed for $27,650. Payment was due within thirty days. More than forty-five days later, Bayles Supply paid the full amount by check dated April 20, 1980. Soon thereafter, on July 9, 1980, Bayles Supply filed a voluntary petition for Chapter 11 bankruptcy. See 11 U.S.C. § 301. In an adversary action ancillary to the bankruptcy proceedings, Bayles Supply, as debtor-in-possession, sued Browning Seed for return of the amount paid. The bankruptcy court on February 23, 1982, held that the invoice payment was a preferential transfer voidable under 11 U.S.C. § 547(b)¹  and, pursuant to that section, ordered Browning Seed to repay the sum to Bayles Supply. Johnnie Bayles Supply Co. v. Browning Seed, Inc., No. 581-0102 (Bankr.W.D. La. Feb. 23, 1982). Nearly three years later, on December 26, 1984, Browning Seed finally satisfied the judgment by check to Bayles Supply.² 

Subsequently, on November 1, 1985, Browning Seed brought the present action against Johnnie Bayles. Browning Seed alleged that under the terms of the "Guarantee," Johnnie Bayles was indebted to Browning Seed for the amount it had remitted to Bayles Supply, plus legal interest. Johnnie Bayles asserted in defense that Browning Seed's suit was barred by the three-year limitations period provided for by article 3494 of the Louisiana Civil Code.³  The parties agreed that no facts were known to be disputed and that the district court could decide the case on the basis of the record, including facts to which they had stipulated and briefs filed in support of their respective positions. Based on the facts as stipulated, the district court held that Louisiana's three-year statute of limitations for debts on open accounts applied to Browning Seed's suit on the guaranty; that the limitations period had commenced on February 23, 1982, the date the bankruptcy court ordered Browning Seed to return the sum paid by Bayles Supply; and, therefore, that Browning Seed's suit was time barred. Browning Seed appeals that decision.

Discussion

Louisiana substantive law concededly governs this diversity action. The sole issue we address on this appeal is whether the district court correctly entered judgment in favor of Johnnie Bayles on the ground that the applicable Louisiana limitations period barred Browning Seed's suit against him on the "Guarantee."

What other states call a contract of guaranty is roughly equivalent to a suretyship agreement in Louisiana civil-law parlance. See, e.g., Bonura v. Christiana Bros. Poultry Co., 336 So. 2d 881, 884 (La.App. 4th Cir. 1976); R. Slovenko, Treatise on Creditors' Rights under Louisiana Civil Law, at 6-7 (1968). Article 3035 of the Louisiana Civil Code defines suretyship as "an accessory promise by which a person binds himself for another already bound and agrees with the creditor to satisfy the obligation, if the debtor does not." La.Civ.Code art. 3035. As such, rights and obligations of suretyship are secondary, or accessorial, to those arising from the principal debt. Bonura, 336 So. 2d at 885.

One of the consequences of the accessorial nature of a surety's obligation under Louisiana law is that the limitations period that applies in a suit against a surety is normally the same as that which applies to suits against the principal debtor for payment of the underlying debt. Id.⁴  Here the principal debt owed by Bayles Supply was a debt on an open account. Louisiana Civil Code article 3494 provides that suits on open accounts are subject to a three-year statute of limitations period (a three-year "liberative prescription" in civil-law terminology). As both parties acknowledge, Browning Seed's suit against Johnnie Bayles, as guarantor of the debt owed it by Bayles Supply, was therefore governed by a three-year limitations period.

The issue disputed on appeal is when this three-year period commenced. Browning Seed contends that the district court erred in holding that prescription began to run on the date of the bankruptcy court's judgment. According to Browning Seed, until it satisfied the bankruptcy court's order by paying the requisite sum back to Bayles Supply on December 26, 1984, it had no claim against either Bayles Supply or Johnnie Bayles for the amount of the debt. Browning Seed argues that its conclusion is mandated by the provision of the Bankruptcy Code that requires disallowance of a claim against the bankrupt debtor until the creditor has returned to the estate the amount voided as a preferential transfer. See 11 U.S.C. § 502(d).⁵  Browning Seed's position is that this Bankruptcy Code provision should be interpreted to mean that the debt itself was reinstated only upon Browning Seed's December 1984 payment. Under this theory, the "principal indebtedness" sued upon by Browning Seed in its present suit against Johnnie Bayles would not have arisen until December 1984, so that the November 1985 suit would be timely.

Johnnie Bayles counters, in essence, that section 502(d) of the Bankruptcy Code is merely procedural. According to Mr. Bayles, section 502(d) dictates only that as a matter of bankruptcy law the creditor's claim will be disallowed where acted on prior to repayment of a preferential transfer, even though as a matter of state law the debt is viable and could be sued upon were it not for the procedural bar imposed by the Bankruptcy Code. Under this approach, the debt owed by Bayles Supply would have been resurrected when the bankruptcy court voided Bayles Supply's attempt to pay it, and Browning Seed's suit against Johnnie Bayles nearly four years later would be time barred.

Since no reported Louisiana case has addressed when prescription commences in such a situation, we must predict what the Louisiana Supreme Court would hold if presented with this issue. See Erie R.R. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938); Louisiana AFL-CIO v. Lanier Business Products, 797 F.2d 1364, 1366 (5th Cir. 1986). In the absence of specific guidance from the Louisiana Supreme Court, our prediction of state law normally looks to: (1) the state's general rule on the question; (2) lower state court decisions, state supreme court dicta, and state court decisions in analogous situations; (3) the district court ruling in this case; (4) the rule in other states; and (5) other available legal sources, such as restatements, law review articles, and treatises.⁶  See Jackson v. Johns-Manville Sales Corp., 781 F.2d 394, 397-98 (5th Cir. 1986); Seafirst Commercial Corp. v. United States Fidelity & Guar. Co., 780 F.2d 1290, 1295 (5th Cir. 1986).

The general rule under Louisiana law is that prescription in an action on an open account begins to run "from the day payment is exigible." La.Civ.Code art. 3495. The Civil Code "Comments" explain that this rule is based on the principle that prescription commences to run "from the day a cause of action arises and its judicial enforcement is possible." Id. Comment (b) (citing 2 M. Planiol, Traite elementaire de droit civil 3 Pt. 2, at 358 (Louisiana State Law Institute trans. 1959)). Additionally, in the context of a suit against a surety, Louisiana courts have said that prescription does not begin to run "until the principle indebtedness sued on arises." Bonura, 336 So. 2d at 885.

As mentioned above, we were unable to find a Louisiana case that applied these principles to a situation, such as the one here, where a creditor sues a surety after the principal debtor's attempted payment has been invalidated by a court judgment in a separate case. Of the kinds of cases to which Louisiana courts have applied these general prescription rules, however, we think suits for indemnification present the closest analogy. In indemnity cases, the well-settled rule applied by Louisiana courts is that prescription begins to run on a claim for indemnification when "the party seeking same is itself cast in judgment." Guidry v. Hoogvliets, 411 So. 2d 629, 631 (La.App. 4th Cir. 1982); see also Brenham v. Southern Pacific Co., 328 F. Supp. 119 (W.D. La. 1971), aff'd, 469 F.2d 1095 (5th Cir. 1972); Minyard v. Curtis Products, Inc., 251 La. 624, 205 So. 2d 422 (1967); Edward Levy Metals, Inc. v. New Orleans Public Belt R.R., 243 La. 860, 148 So. 2d 580 (1963); Blue Streak Enters., Inc. v. Gulf Coast Marine, Inc., 370 So. 2d 633, 635 (La.App. 4th Cir. 1979); Leblanc v. Big Jim's, Inc., 252 So. 2d 181, 183 (La.App. 3d Cir. 1971).⁷  Under this rule, the would-be indemnitee's cause of action for indemnification is deemed to accrue as of the date judgment is entered against him making him liable to another. Prescription therefore starts running on the indemnification suit on that date, whether or not the party seeking indemnification has made payment in satisfaction of the judgment entered against him.

Applying this rule by analogy to the present case leads us to predict that the Louisiana Supreme Court would hold that prescription commenced on Browning Seed's suit against Johnnie Bayles when the bankruptcy court entered judgment against Browning Seed. As of that date, Browning Seed had an obligation to pay the amount of the judgment to Bayles Supply. Hence, as of that date, Browning Seed's cause of action against Johnnie Bayles on the guaranty may be deemed to have accrued, even though Browning Seed had not yet paid Bayles Supply. If the analogy to indemnification claims is applied, the date that Browning Seed paid Bayles Supply is irrelevant for purposes of prescription on Browning Seed's claim against Johnnie Bayles as surety. Prescription would run from February 23, 1982, the date of the bankruptcy court's judgment against Browning Seed. Thus, under this approach, the three-year prescriptive period would have expired before Browning Seed filed its complaint (on November 1, 1985) in the present action. Hence, analogizing to the Louisiana rule for commencement of prescription on a claim for indemnification directs us to predict that the Louisiana Supreme Court would hold that Browning Seed's suit against Johnnie Bayles was time barred.

In this connection, we observe that there is no rule in Louisiana that the creditor must sue the principal debtor first, or that the surety cannot be sued unless the debtor is made a party. See Slovenko, Suretyship, 39 Tul.L.Rev. 427, 449 (1965). As a "simple" surety, Johnnie Bayles merely has the right, in the event of a judgment against him, to require that execution of the judgment be deferred until the creditor attempts to make the principal debtor pay the debt, and the right, if sued alone, to have the principle debtor joined if he is subject to the court's jurisdiction, see id. at 449-50; see also La.Civ.Code arts. 3045-3051; La.Code Civ.Proc. arts. 5151-5156; Nichols v. Pipes, 353 So. 2d 1086 (La.App. 2d Cir. 1977). Bankruptcy law likewise permits a guarantor to be sued in state court while pending bankruptcy proceedings against the principal debtor preclude suit in state court against the debtor. See, e.g., In re Magnus Harmonica Corp., 233 F.2d 803 (3d Cir. 1956); see also 2 Collier on Bankruptcy p 362.04, at 362-29 (1986). Therefore, although bankruptcy law may have precluded Browning Seed from procuring an allowance of its claim against Bayles Supply, neither Louisiana law nor bankruptcy law prevented Browning Seed from suing Johnnie Bayles under the guaranty agreement once the bankruptcy court's February 1982 judgment resurrected the principal debt.⁸ 

Further, our consideration is influenced by the district court's determination that Browning Seed's cause of action against Johnnie Bayles under Louisiana suretyship law, see La.Civ.Code arts. 3035-3063, accrued when Bayles Supply's debt to Browning Seed was revived on February 23, 1982, by virtue of the bankruptcy court judgment against Browning Seed, and that prescription therefore began running on Browning Seed's suit on that date. The well-settled rule in this Circuit is that on review we accord significant weight to a federal district court's determination of the law of the state in which it sits. Armstrong v. Farm Equip. Co., 742 F.2d 883, 886 (5th Cir. 1984); see also Lanier Business Prods., 797 F.2d at 1368; Acree v. Shell Oil Co., 721 F.2d 524, 525 (5th Cir. 1983); Smith v. Mobil Corp., 719 F.2d 1313, 1317 (5th Cir. 1983).

Finally, we think there are practical considerations favoring an interpretation of Louisiana prescription law that inures to the benefit of Johnnie Bayles, as surety, over that of Browning Seed. It seems unwise to allow a creditor unilaterally to prolong his right of action against a surety by failing to comply with a valid judgment entered against him.

Conclusion

The state law prescription issue presented in this case is not clearly resolved by Louisiana's Civil Code or case law. The parties' opposing constructions both have some persuasive force. Based on the somewhat analogous situation presented by Louisiana indemnity cases, and giving due consideration to the analysis of the district court well-versed in Louisiana law, however, our best judgment is that the Louisiana Supreme Court would conclude that Browning Seed's action was time barred. Accordingly, we affirm the judgment of the district court in favor of Johnnie Bayles.

AFFIRMED.