Title: State Bank of Burleigh County v. Porter

State: north-dakota

Issuer: North Dakota Supreme Court

Document:

167 N.W.2d 527 (1969) STATE BANK OF BURLEIGH COUNTY, Plaintiff and Respondent, v. Lyle W. PORTER and Phillip W. Nelson, Defendants and Appellants, and Vernon Peterson, Evan Shark, Albert A. Wolf, Jerry Knudsen, and Robert Verson, Defendants. Civil No. 8512. Supreme Court of North Dakota. April 18, 1969. *529 Rausch & Chapman, Bismarck, for plaintiff and respondent. Vogel, Bair & Graff, Mandan, for defendant and appellant Phillip W. Nelson. Floyd B. Sperry, Bismarck, for defendant and appellant Lyle W. Porter. ADAM GEFREH, District Judge. This is an appeal from a judgment entered in the District Court of Burleigh County in favor of the Plaintiff, State Bank of Burleigh County, against seven persons sued as guarantors on notes delivered by Dakota Winter Sports, Inc. to the Plaintiff bank. Two of the seven defendants, Lyle W. Porter and Phillip W. Nelson, have appealed from this judgment. The record indicates that in 1963 several of the officers of Dakota Winter Sports, Inc., d/b/a Twilight Hills Ski Shop, desired to establish a line of credit with the State Bank of Burleigh County, located in Bismarck, North Dakota. The bank *530 agreed to extend a line of credit to Dakota Sports, Inc. on condition that a certain guaranty covering the obligations be delivered to the bank. An instrument, marked Plaintiff's Exhibit 1, dated September 17, 1963, was executed by seven persons including Lyle W. Porter and Phillip W. Nelson, the appellants. The instrument delivered reads as follows: The bank made loans to Dakota Sports, Inc., to the extent of $15,000.00, evidenced by promissory notes executed by Dakota Sports, Inc., as follows: One note dated September 4, 1963, in the amount of $5,000.00, due December 4, 1963; one note dated October 22, 1963, in the amount of $5,000.00, due January 22, 1964; and one note dated December 16, 1963, in the amount of $5,000.00, due January 16, 1964. Each of the notes included a clause stating, "The several makers, signers, guarantors and endorsers hereof hereby waive presentment, demand, notice of dishonor and protest, and consent that the time of payment may be extended or this note renewed without affecting their liability thereon." Interest payments and some payments on the principal were made, and the notes renewed from time to time until May 23, 1966, when the principal sum of $12,577.34 was renewed by a demand note. The record also shows that negotiations for a Small Business Administration loan were carried on by Dakota Sports, Inc. from about September 15, 1965, for a $100,000.00 loan until February 1, 1966, when the loan authorization was cancelled by the SBA. The bank was informed of this decision by letter from the SBA dated May 25, 1966. The record further shows that the bank at various times had made demand upon Dakota Winter Sports, Inc. and the guarantors for payment of the notes. In so far as the appellants are concerned, the record shows that on August 31, 1965, demand was made by letter upon Mr. Phillip Nelson, Defense Exhibit "F", for payment of the past due notes. Defense Exhibit "J" contains copies of two letters directed to the President of Dakota Winter Sports, Inc., one by Mr. Phillip W. Nelson, dated September 2, 1965, and the other by Mr. Lyle W. Porter, dated September 3, 1965, each letter stating in part "Demand has been made upon me as guarantor, that arrangement be made, forthwith, for payment of a note dated April 21, 1965, the amount of $13,000.00. I am informed by the State Bank of Burleigh County that said note has been in default since July 1, *531 1965, with an unpaid principal balance of $12,000.00 plus interest. * * *" The record shows that on September 3, 1965, the bank was served with an instrument in which demand was made, on behalf of Phillip W. Nelson, upon the bank to take legal action against Dakota Winter Sports, Inc. for the collection of the past due notes. A similar demand was made upon the bank by Mr. Lyle W. Porter on the same date. The Plaintiff commenced action against the guarantors on April 13, 1967. In order to simplify references to the different parties, the State Bank of Burleigh County will hereafter be referred to as the "creditor", The Dakota Winter Sports, Inc., as the "principal debtor" or "principal", and Lyle W. Porter and Phillip W. Nelson, as the "guarantors". The issues on this appeal are: Whether the guaranty extended to the $5,000.00 note dated September 4, 1963; whether refusal by the bank to sue the principal debtor after demand had been served upon it exonerated the guarantors; whether the renewal of the notes after demand was made upon the creditor to commence action against the principal debtor operated to exonerate the guarantors; and whether any lack of due diligence by the creditor to proceed against the principal debtor should operate to estop the creditor from enforcing the guaranty against the guarantors. On the first issue the guarantors contend that the note for $5,000.00 dated September 4, 1963, was given prior to the date of the guaranty, therefore there was no consideration to effect a binding guaranty as to this $5,000.00 note. This contention cannot be sustained. A guaranty, although executed subsequently to the creation of the principal obligation, if given in fulfillment of an agreement on the faith of which the principal obligation was created, is deemed contemporaneous in effect and requires no other consideration. The record shows that the $5,000.00 note of September 4, 1963, was intended to cover a portion of the $15,000.00 credit that principal debtor had sought from the creditor and to which the creditor had agreed on condition that the guaranty would be delivered. The record further indicates that, although the note was dated September 4, 1963, and several checks were written upon the creditor prior to September 17, 1963, the proceeds of the note were not deposited in the bank until September 17, 1963 and none of the checks was paid by the creditor until September 17, 1963, the date of the guaranty. The record supports the conclusion that the guaranty executed by the guarantor was in consideration for the agreement by the creditor to establish a line of credit to the principal debtor to the extent of $15,000.00 over a period of several months, and the note dated September 4, 1963 was given to cover the first portion of this credit. This is clearly in conformity with Sec. 22-01-03 NDCC and the general rule of law found in 38 Am.Jur.2d, Guaranty, Sec. 45: See also First National Bank of Hopkins v. International Machines Corp., 279 Minn. 188, 156 N.W.2d 86. On the second issue the guarantors contend that they were exonerated when the creditor refused to proceed against the principal debtor. In support of this contention they cite Sec. 22-03-08 NDCC. The guarantors contend that the guaranty agreement they signed can be construed as a surety contract and therefore Sec. 22-03-08 NDCC would be applicable. Section 22-03-08 reads as follows: Although it may be difficult to distinguish a contract of guaranty from that of surety in some cases, our statutes and case law define these undertakings in separate and distinct terms. Section 22-01-01 NDCC defines a guaranty as follows: A guaranty may be further classified as "absolute", "conditional", "guaranty of solvency", "guaranty of collection", and "guaranty of payment." A guaranty is deemed unconditional unless its terms import some condition precedent to the liability of the guarantor. (Section 22-01-09) An absolute guaranty is defined as The distinction between a "guaranty of collection" and "guaranty of payment" is defined as follows: See also Smith v. Bradley, 16 N.D. 306, 112 N.W. 1062 in which this court discussed the distinction between a "guaranty of collection" and "guaranty of payment" in substantially the same language. In Smith v. Bradley the court quoted with approval from McMurray v. Noyes, 72 N.Y. 523,28 Am.Rep. 180, as follows: Section 22-01-10 NDCC defines a guaranty of payment in terms of liability as follows: Section 22-03-01 NDCC defines a surety as follows: In Northern State Bank of Grand Forks v. Bellamy, 19 N.D. 509, 125 N.W. 888, 31 L.R.A.,N.S., 149, this court stated: The present action is based on the separate contract executed by the guarantors. This contract meets the distinguishing characteristics of that of a contract of guaranty as described in State Bank of Grand Forks v. Bellamy, supra. Chapter 22-04 NDCC relates to "Letters of Credit." This chapter was repealed effective July 1, 1966. Sec. 22-04-01 defined a letter of credit as follows: Section 22-04-07 provided: The contract signed by the appellants could be viewed as a "letter of credit" and under Section 22-04-07 would be a continuing guaranty, and the liability of the appellants would be that of guarantors. In *534 Aluminum Cooking Utensil Co. v. Rohe, 43 N.D. 433, 175 N.W. 620, this court held that a letter of credit "constitutes a contract of guaranty." When we view the contract executed by the guarantors in the light of the definitions and distinctions we have cited and which we believe are the established principles of law in most jurisdictions, we must agree with the trial court that the instrument in question is an absolute, unconditional, continuing guaranty. It is a guaranty of payment as distinguished from a guaranty of collection. In some jurisdictions the distinctions between a surety and guarantor have been abolished by statute. Our statutes on surety and guaranty were derived from California. California in 1939 revised its statutes and abolished the distinctions between a guarantor and a surety. However, prior to 1939 California recognized the distinctions between a guaranty and surety. In Bank of America Nat. Trust & Savings Ass'n v. McRae, 81 Cal. App. 2d 1, 183 P.2d 385, the California court held: In Moffett v. Miller et al., 119 Cal. App. 2d 712, 260 P.2d 215, the California court referred to the principle stated in Bank of America Nat. Trust & Savings Ass'n v. McRae and also referred to Ingalls v. Bell, 43 Cal. App. 2d 356, 110 P.2d 1068, in which the court discussed the California law prior to 1939, stating: North Dakota has not abolished the distinction between a guarantor and a surety, and the California cases cited are consistent with our interpretation of the statutes on guaranty and surety in State Bank of Grand Forks v. Bellamy, supra. We therefore hold that Section 22-03-08 NDCC is not applicable to the facts in this case, since we have already held that the Defendants are guarantors under an absolute and continuing guaranty. However, even if we were to hold that the rights under Section 22-03-08 may be invoked by guarantors, this right is only available upon a showing that the same remedy is not available to the surety himself. Section 22-03-08 has been in effect in North Dakota since statehood, and this court has construed this section in a number of cases. In Bingham v. Mears, 4 N.D. 437, 61 N.W. 808, 27 L.R.A. 257, this court stated: In this same case on rehearing, the court went into a full discussion of the history and interpretation of the rule of law embodied in Section 22-03-08 and denied the rehearing. After reading the lengthy history concerning this rule of law, it becomes clear that the rule was adopted to grant relief in exceptional cases where the creditor has recourse to assets that would not be available to the surety upon paying the debt and becoming subrogated to the rights of the creditor. In Yerxa v. Ruthruff, 19 N.D. 13, 120 N.W. 758, 25 L.R.A., N.S., 139, this court again discussed the rights of a surety and again sustained the holding in Bingham v. Mears, supra, by quoting approvingly from Taylor v. Beck, 13 Ill. 376, as follows: In Narveson v. Schmid, 77 N.D. 814, 46 N.W.2d 288, this court cited Yerxa v. Ruthruff, supra, and approvingly quoted the last sentence of the above quotation. The guarantors have not shown by any evidence in this record that at the time they served their demand upon the creditor to sue the principal debtor, that the creditor had recourse to any property or assets that were not available to the guarantors upon payment of the note. They have not shown that they were prejudiced in any way by the creditor's failure to proceed against the principal, since they had the same privilege and opportunity to sue as the bank had. Consequently, even if the appellants would be considered sureties Section 22-03-08 would not exonerate them. Next the guarantors contend that they were exonerated when the bank renewed the note on September 16, 1965. Under the terms of the guaranty, the guarantors became obligated to pay the notes as soon as the notes became due. Liability of the guarantors became fixed upon default by the principal. Demand was made upon them by the creditor for payment of the notes. Instead of paying the notes as obligated under the guaranty, the guarantors sought to forestall any action against themselves by demanding that the creditor bring action against the principal. The guarantors had no such right under the guaranty to require the creditor to sue the principal first and now have no right to complain about the creditor's refusal or neglect to bring action against the principal. Guarantors cite Northern State Bank v. Bellamy, supra, as supporting their contention that a guarantor is only secondarily liable and as such, a guarantor is exonerated by the creditor extending time of payment without the guarantor's consent. We concur with the holding of Northern State Bank v. Bellamy. The holding in that case was based upon Section 41-09-02 of the NDCC, which was a part of the Negotiable Instruments Act, and which was repealed by adoption of the Uniform Commercial Code, effective July 1, 1966. This section prescribed how persons secondarily liable may be discharged, and subsection 6 of this section stated: In the Northern State Bank v. Bellamy case, this court held that a guarantor is only secondarily liable, and further held that the Plaintiff Bank had for valuable consideration entered into an agreement to extend the time of payment with the principal debtor without the knowledge or consent *536 of the guarantor. The facts in the present case differ from Northern State Bank v. Bellamy in that we have no binding agreement for an extension of time for payment between the Plaintiff and the principal debtor. The renewal notes were accepted by the bank in order to keep the debt current, and not to keep the guarantors from paying the notes and commencing actions themselves against the debtor since demands for payment had been made upon the guarantors before the guarantors served their demand upon the bank to sue the principal debtor, and prior to September 16, 1965, when the creditor renewed the note which the guarantors now claim extended the time of payment so as to exonerate them from any liability. The guaranty executed by the guarantors clearly contemplated a series of continuing transactions and as such, contemplated renewals of notes evidencing the loans or credit granted. The record shows that the notes were renewed as a regular course of business for a period of almost two years. The notes contained express provisions that the guarantors waive consent to renewals. The guarantors are bound by all the provisions of the original notes, as well as the provisions of their guaranty. In a case with facts rather similar to the present case, the South Dakota Supreme Court, in Hirning v. Jacobsen, 51 S.D. 270, 213 N.W. 505, stated: It is also a well established rule that consent need not be explicit, but may be implied from the nature of the guaranty and the transactions in connection with the guaranty. The rule is stated in 38 Am.Jur.Guaranty, Section 93, pp. 1099-1100: The evidence in this case is undisputed that the guarantors, as officers of the principal debtor, had knowledge of the course of business between the principal and creditor and had knowledge of the notes that were given by the principal, and the various renewal notes that were executed. The evidence tends to indicate that the renewals, although made without the express consent of the guarantors, were made for the benefit of the guarantors rather than for the benefit of the creditor, since the guarantors had become directly liable upon maturity of each of the notes. *537 We must also point out that the guaranty executed by the guarantors did not specify any particular debt or time when the debt would mature. It was a continuing guaranty. Under these circumstances, the general rule stated in 38 C.J.S. Guaranty § 75 also applies: Finally, the guarantors urge the court to invoke the doctrine of equitable estoppel. The creditor, upon default of the principal, had made demand upon the guarantors to perform under their guaranty. The guarantors, instead of performing as obligated, countered by demanding that the creditor institute action against the principal. There was no duty upon the creditor to institute any proceedings against the principal. There is nothing in the record to show that the actions of the creditor, of which the guarantors complain, materially changed the contract of the guarantors or in any way impaired their rights or remedies as guarantors. The guarantors cannot now urge that the creditor be estopped from bringing action against them simply because it didn't do so promptly when the notes became due. If the guarantors felt at any time that their position or rights were becoming impaired by any action of the principal, all they had to do was pay the past due debt which is no more than they had agreed to do, and immediately resort to the principal for reimbursement. The facts presented do not constitute a case for the application of the doctrine of equitable estoppel. The judgment appealed from is affirmed. TEIGEN, C. J., ERICKSTAD and KNUDSON, JJ., and HAMILTON E. ENGLERT, District Judge, concur. The Honorable ALVIN C. STRUTZ and the Honorable WM. L. PAULSON, Associate Justices, deeming themselves disqualified, did not participate; the Honorable ADAM GEFREH, Judge of the Third Judicial District, and the Honorable HAMILTON E. ENGLERT, Judge of the First Judicial District, sitting in their stead.