Claim For Contribution Against “Accommodation Party” Fails

In re Simpson, 2012 Bankr. LEXIS 3021 (S.D. Ind. 2012) (.pdf), decided by the United States Bankruptcy Court for the Southern District of Indiana, involved a Chapter 7 Trustee’s adversary proceeding seeking contribution from the debtor’s spouse.  The opinion is thorough and complicated.  My goal here merely is to touch upon the concepts of common law contribution  and accommodation parties, which are similar to guarantors but ultimately treated differently under the law. 

Loan basics.  In Simpson, the debtor, an individual, operated a farm on residential real estate that he and his spouse owned.  To help fund the business, the debtor borrowed money from a lender secured by a mortgage on the real estate.  Interestingly, the wife also signed the subject promissory note, but the opinion doesn’t specifically explain why.  The spouse was not a partner in the debtor’s business and did not directly benefit from the proceeds of the subject loan.  But, to make the loan, the lender needed the mortgage, which the debtor could not have granted without the signature of his spouse.

Contribution.  Within the Chapter 7 bankruptcy case, the Trustee sought a judgment against the debtor’s spouse to recover half the amount of the joint loan.  In cases like these, the Trustee stands in the shoes of the debtor.  The Trustee claimed that the spouse was liable to the bankruptcy estate pursuant to Indiana’s doctrine of contribution, about which I wrote on 2/1/12 and 10/10/08.   

Accommodation party defense.  Following a lengthy discussion, the Court concluded that Indiana law permits an action for contribution as between spouses.  The opinion next focused on the affirmative defense asserted by the spouse.  Specifically, Indiana’s UCC provides that an action for contribution may lie “except as provided in I.C. § 26-1-3.1-419(f) . . ..”  See, I.C. § 26-1-3.1-116(b).  Section 419(f) states that:

[a]n accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party . . . [but a]n accommodated party that pays the instrument has no right of recourse against, and is not entitled to contribution from, an accommodation party.

The legal question became whether the spouse was an “accommodation party” under I.C. § 26-1-3.1-419(a). 

Accommodation party defined.  Generally, an accommodation party “signs the instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument.”  I.C.§ 26-1-3.1-419(a).  The Court addressed various cases regarding who qualifies as an accommodation party.  This included the Keesling case, which was the subject of my 2/23/07 post.  The Court concluded that any benefit to the spouse was “indirect within in the meaning of I.C. § 26-1-3.1-419(a) and Keesling.”  Because the debtor’s spouse was an accommodation party, the Court held that the Trustee’s claim for contribution failed.
 
Simpson tells us that, in Indiana, there isn’t a viable claim for contribution against an accommodation party.