Case Title: EAC Credit Corporation v. Wilson

Citation: 187 S.E.2d 752, 281 N.C. 140

Docket Number: 

State: north-carolina

Court: North Carolina Supreme Court

Date: 1972-04-12T00:00:00Z

Document:
187 S.E.2d 752 (1972) 281 N.C. 140 EAC CREDIT CORPORATION v. Frederick M. WILSON and Helen A. Wilson. No. 92. Supreme Court of North Carolina. April 12, 1972. *753 Thomas & Harrington, Monroe, for plaintiff appellant. Powe, Porter & Alphin, P. A., by Willis P. Whichard and James G. Billings, Durham, for defendant appellees. HUSKINS, Justice: Where a promissory note contains a provision requiring the debtor to pay *754 reasonable attorneys' fees of the creditor in collection of the note, but a guaranty of payment of the note contains no such provision, are the guarantors liable under G.S. § 6-21.2 for attorneys' fees incurred by the creditor in an action on the guaranty contract? This is the sole question presented on this appeal. Plaintiff contends that it is entitled to recover attorneys' fees in this action upon the guaranty contract by virtue of G.S. § 6-21.2 which provides in pertinent part as follows: Plaintiff argues that G.S. § 6-21.2 as quoted is sufficiently broad to include guarantors because the "evidence of indebtedness" is the note itself which provides for attorneys' fees and that the guaranty contract is simply a "security agreement" referred to in G.S. § 6-21.2(5) which secures the payment of the note. Defendants, on the other hand, contend that the guaranty agreement is the only "evidence of indebtedness" within the meaning of the statute and is not a security agreement "which evidences both a monetary obligation and a security interest in . . . specific goods." Since such evidence of indebtedness contains no provision for attorneys' fees, defendants contend the statute does not authorize collection of such fees in this action on the guaranty agreement. A guaranty contract is collateral to the primary obligation between the debtor and the creditor, and it may be absolute or it may be conditional dependent upon its terms. "A guaranty of the payment of a debt is distinguished by the authorities from a guaranty of the collection thereof, the former being absolute and the latter conditional." 38 Am.Jur.2d, Guaranty § 22; Garren v. Youngblood, 207 N.C. 86, 176 S.E. 252 (1934). *755 A guaranty of payment is an absolute promise by the guarantor to pay the debt at maturity if it is not paid by the principal debtor. The obligation of the guarantor is separate and independent of the obligation of the principal debtor, and the creditor's cause of action against the guarantor ripens immediately upon failure of the principal debtor to pay the debt at maturity. Arcady Farms Milling Co. v. Wallace, 242 N.C. 686, 89 S.E.2d 413 (1955). On the other hand, a guaranty of collection is a promise by the guarantor to pay the debt on condition that the creditor "shall diligently prosecute the principal debtor without success." Jenkins v. Wilkinson, 107 N.C. 707, 12 S.E. 630 (1890); Jones v. Ashford, 79 N.C. 172 (1878). Here, the language of the guaranty contract amounts to a guaranty of payment since the promise to pay when due is absolute and unconditional. Moreover, the guaranty instrument is not a "security agreement" analogous to a chattel mortgage or a conditional sales contract. Rather, it is a contract which guarantees payment of the note at maturity if not paid by the maker. There is no legal basis for plaintiff's argument that the guaranty contract is a security agreement within the language of G.S. § 6-21.2(5). "`Security agreement' means an agreement which creates or provides for a security interest," G.S. § 25-9-105(h); and "`security interest' means an interest in personal property or fixtures which secures payment or performance of an obligation. . . ." G.S. § 25-1-201(37). As used in the Commercial Code, the general term security agreement is ordinarily understood to embrace chattel mortgages, conditional sales contracts, assignments of accounts receivable, trust receipts, etc. Evans v. Everett, 279 N.C. 352, 183 S.E.2d 109 (1971). The term has a similar connotation here, and, for that reason, G.S. § 6-21.2(5) is entirely irrelevant to the question posed by this appeal. The rights of the plaintiff as against the guarantors, defendants herein, arise out of the guaranty contract and must be based on that contract. "Such an action is not a suit on the primary obligation which the guaranty contract secures, and the guarantor is not liable except under the terms of the guaranty contract." 38 Am.Jur.2d, Guaranty § 115; Arcady Farms Milling Co. v. Wallace, supra, 242 N.C. 686, 89 S.E.2d 413. Accord, Kushnick v. Lake Drive Building and Loan Assn., 153 Md. 638, 139 A. 446 (1927). Where the guaranty contract is silent concerning attorneys' fees but the note provides for their payment, and the action is brought against the maker and the guarantor jointly, there is authority in other jurisdictions that plaintiff may recover attorneys' fees, the rationale being that such fees are a valid indebtedness of the maker which the guarantor agreed to pay. See College National Bank v. Morrison, 100 Cal. App. 403, 280 P. 218 (1929); Franklin v. The Duncan, 133 Tenn. 472, 182 S.W. 230 (1916); Bank of California v. Union Packing Corp., 60 Wash. 456, 111 P. 573 (1910); California Standard Finance Co. v. Bessolo and Gualano, 118 Cal. App. 327, 5 P.2d 480 (1931). Other courts, in actions against the guarantor alone, have limited the liability of the guarantor of payment to payment of the primary debt, even though by the terms of the note the maker was obligated to pay the cost of collection including attorneys' fees. See Continental Supply Co. v. Tucker-Rose Oil Co., 146 La. 671, 83 So. 892 (1920); Krinsky v. Leventhal, 323 Mass. 160, 80 N.E.2d 477, 4 A.L.R.2d 136 (1948); Schauer v. Morgan, 67 Mont. 455, 216 P. 347 (1923). For a collection of cases involving suits against the maker and the guarantor jointly, suits against the guarantor after a fruitless suit against the maker, suits *756 where the guarantor expressly agrees to repay the creditor for expenses of attempted collection from the maker, and other factual situations, see Annotation, Guaranty of payment at maturity as covering expenses of collection, 4 A.L.R.2d 138; 38 Am.Jur.2d, Guaranty § 75, and cases cited. Decisions of this Court treat the obligation of a guarantor of payment separate and distinct from that of the maker. Coleman v. Fuller, 105 N.C. 328, 11 S.E. 175 (1890); Cowan v. Roberts, 134 N.C. 415, 46 S.E. 979 (1903); Rouse v. Wooten, 140 N.C. 557, 53 S.E. 430 (1905); Wachovia Bank & Trust Co. v. Clifton, 203 N.C. 483, 166 S.E. 334 (1932). "Their contract of guaranty is their own separate contract jointly and severally to pay the debts of the male defendants when due, if not paid by the male defendants . . .: they are not in any sense parties to the [note]." Arcady Farms Milling Co. v. Wallace, supra, 242 N.C. 686, 89 S.E.2d 413. Applying these principles to the facts before us, we hold that G.S. § 6-21.2 does not authorize collection of attorneys' fees in this action. The guaranty contract sued upon does not so provide. Guaranty of payment alone does not render the guarantors liable for attorneys' fees which the principal debtor, by the terms of the note, is bound to pay. Well-reasoned decisions from other jurisdictions supporting this view include Walker v. McNeal, 134 Okl. 111, 272 P. 443 (1928); Midway National Bank v. Gustafson, 282 Minn. 73, 165 N.W.2d 218 (1968); Estes v. Oilfield Salvage Co. (Tex.Civ.App.), 284 S.W.2d 201 (1955). For the reasons stated the decision of the Court of Appeals reversing that part of the judgment of the trial court which awarded plaintiff attorneys' fees in the sum of $5,877.42 is Affirmed.