Title: McDonald v. National Enterprises Inc.

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
ROGER J. MCDONALD 
 
v. Record No. 001773   OPINION BY JUSTICE CYNTHIA D. KINSER 
 
 
 
 
 
 
 
    June 8, 2001 
NATIONAL ENTERPRISES, INC. 
 
FROM THE CIRCUIT COURT OF HENRICO COUNTY 
George F. Tidey, Judge 
 
 
National Enterprises, Incorporated (NEI), filed an 
action against Roger J. McDonald on a Guaranty Agreement 
that McDonald had executed in 1988 to secure a loan to 
Lafayette Associates, a Virginia general partnership.  
McDonald was one of two partners in Lafayette.1  After the 
close of the evidence during a jury trial, the circuit 
court granted NEI’s motion to strike McDonald’s evidence 
and its motion for summary judgment.  After considering 
McDonald’s post-trial motions, the court entered judgment 
in favor of NEI in the amount of $462,839.60, together with 
interest at the judgment rate.  Based on an affidavit from 
NEI’s counsel, the court also awarded NEI attorney’s fees 
and costs in the amount of $14,834.  McDonald appeals. 
 
On appeal, McDonald contends that the circuit court 
erred in entering judgment for NEI on the Guaranty 
Agreement because NEI was not in possession of the original 
note evidencing the primary obligation, and because 
                     
1 Lawrence T. Phillips was the other partner. 
liability on that note had been adjudicated in favor of the 
maker of the note in a prior action filed by NEI.  McDonald 
further claims that the circuit court erred by ruling, as a 
matter of law, that the statute of limitations did not bar 
the present action on the Guaranty Agreement.  Finally, in 
his last two assignments of error, McDonald challenges the 
admissibility of certain documents and the award of 
attorney’s fees to NEI.  Because we find no error in the 
judgment of the circuit court on these issues, we will 
affirm that judgment. 
FACTS 
On October 3, 1988, Lafayette obtained a loan from 
Seasons Mortgage Corporation.2  That indebtedness was 
evidenced by a Deed of Trust Note (the Note) executed by 
McDonald and Phillips as the general partners of Lafayette.3  
McDonald and Phillips, in their individual capacities, also 
signed a Guaranty Agreement bearing the same date.  In that 
agreement, they unconditionally guaranteed “full and prompt 
                                                             
 
2 Seasons Mortgage Corporation is a wholly owned 
subsidiary of Seasons Federal Savings Bank, formerly 
Seasons Savings Bank. 
 
3 Lafayette, through its general partners, also 
executed a Deed of Trust and Security Agreement to secure 
payment of the Note. 
 
2
payment . . . of all obligations payable by” Lafayette 
pursuant to the Note. 
In October 1989, the Resolution Trust Company (RTC) 
was appointed as the receiver for Seasons Savings Bank.4  
Subsequently, RTC sold a package of loans and collateral to 
NEI.  As evidenced by a Bill of Sale and Assignment of 
Loans dated December 15, 1992, the loan and Guaranty 
Agreement at issue in this case were included in that 
package.5
After that purchase, NEI filed an action against 
Lafayette, the maker of the Note, and against McDonald and 
Phillips, as the guarantors.  The circuit court denied 
Lafayette’s motion to dismiss that action, but in an order 
dated August 25, 1998, the court granted NEI’s motion to 
nonsuit the case.  However, in that order, the court stated 
that, “[i]n the event of any refiling[,] . . . the 
                     
4 As receiver for Seasons Savings Bank, RTC received 
authorization to incorporate and issue a federal charter as 
Seasons Federal Savings Bank.  RTC was then appointed as 
the conservator for Seasons Federal Savings Bank. 
 
5 In January 1992, prior to NEI’s purchase of the loan 
package, RTC foreclosed on the property secured by the Deed 
of Trust.  RTC then sold the outstanding balance on the 
loan to NEI. 
 
3
plaintiff shall be allowed to proceed on the guarantee, but 
not on the note.”6
NEI filed the present action on September 21, 1998, 
naming only McDonald as a defendant.  NEI alleged that RTC 
had conveyed its interest in the loan evidenced by the Note 
and Guaranty Agreement to NEI, and that McDonald was 
indebted to NEI under the Guaranty Agreement.  McDonald 
defended the action primarily on the grounds that the 
statute of limitations had expired, and that NEI cannot 
proceed on the Guaranty Agreement since NEI is not in 
possession of the original Note.  Finally, McDonald argued 
that the first action was resolved on the merits in favor 
of Lafayette and that, therefore, NEI is precluded from 
pursuing this cause of action on the Guaranty Agreement.  
The circuit court denied McDonald’s motions based on these 
defenses.  In entering judgment for NEI, the court accepted 
the testimony of McDonald’s sole witness regarding the 
amount due and owing on the primary obligation guaranteed 
by McDonald. 
ANALYSIS 
I. POSSESSION OF NOTE AND DISPOSITION OF PRIOR ACTION 
                     
6 NEI obtained a default judgment against Phillips in 
that first action. 
 
4
McDonald’s first two assignments of error, concerning 
the fact that NEI does not have possession of the original 
Note and the disposition of the first action filed by NEI, 
involve the relationship between a guaranty contract and 
the primary obligation.  This Court has defined a guaranty 
as “an independent contract, by which the guarantor 
undertakes, in writing, upon a sufficient undertaking, to 
be answerable for the debt, or for the performance of some 
duty, in case of the failure of some other person who is 
primarily liable to pay or perform.”  B.F. Goodrich Rubber 
Co., Inc. v. Fisch, 141 Va. 261, 266, 127 S.E. 187, 188 
(1925); accord American Indus. Corp. v. First & Merchants 
Nat’l Bank, 216 Va. 396, 398, 219 S.E.2d 673, 675 (1975); 
Bourne v. Board of Supervisors, 161 Va. 678, 683-84, 172 
S.E. 245, 247 (1934).  In an action to enforce an 
independent contract of guaranty, the obligee is proceeding 
on the guaranty, not on the underlying note.  Thus, to 
recover on a guaranty, the obligee must establish, among 
other things, the existence and ownership of the guaranty 
contract, the terms of the primary obligation and default 
on that obligation by the debtor, and nonpayment of the 
amount due from the guarantor under the terms of the 
guaranty contract.  Delro Indus., Inc. v. Evans, 514 So.2d 
976, 979 (Ala. 1987); Torrey Pines Bank v. Superior Court, 
 
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216 Cal. App. 3d 813, 819 (Cal. Ct. App. 1989); Stewart 
Title Guar. Co. v. WKC Restaurants Venture Co., 961 S.W.2d 
874, 880 (Mo. Ct. App. 1998); Wiman v. Tomaszewicz, 877 
S.W.2d 1, 8 (Tex. App. 1994); cf. Bowman v. First Nat’l 
Bank, 115 Va. 463, 466, 80 S.E. 95, 96 (1913) (averments 
that defendant, for consideration, guaranteed payment of 
notes were sufficient to imply that plaintiff was owner and 
legal holder of notes). 
Accordingly, in the present case, the circuit court 
did not err in failing to dismiss this action because NEI 
did not have possession of the original Note.  In arguing 
otherwise, McDonald confuses the difference between the 
enforceability of the Note against Lafayette, the maker of 
that Note, and the question whether the debt has been 
extinguished, i.e., whether there is an obligation on the 
part of Lafayette.  The non-enforceability of a note as to 
the maker does not necessarily extinguish the obligation.  
See Fidelity & Cas. Co. v. Lackland, 175 Va. 178, 187, 8 
S.E.2d 306, 309 (1940) (running of statute of limitations 
against primary obligor does not extinguish debt of 
guarantor).  However, if there is no obligation on the part 
of the principal obligor, then there is also none on the 
guarantor.  Bourne, 161 Va. at 684, 172 S.E. at 247. 
 
6
In the present case, NEI established the existence of 
the Guaranty Agreement executed by McDonald, the terms of 
the primary obligation, Lafayette’s default on that 
obligation, and McDonald’s failure to pay the amount due 
under the Guaranty Agreement.  Notably, McDonald has never 
asserted that the primary indebtedness has been paid.  His 
only witness at trial, an attorney who practices in the 
area of real estate foreclosures and related fields, 
testified that the original Note evidencing the loan from 
Seasons Mortgage to Lafayette, if it were available, would 
reflect on its face a credit of $283,654.55 resulting from 
the foreclosure by RTC.  Consequently, he opined that the 
copy of the Note introduced into evidence did not bear the 
same information that the original Note would contain.  In 
calculating the amount of the judgment rendered against 
McDonald, the circuit court accepted this witness’s 
testimony regarding the amount that had been paid on the 
primary indebtedness. 
As to the effect of the disposition of the first 
action on the present one, McDonald took inconsistent 
positions before the circuit court in this case with regard 
to the outcome of that first action.  In a pre-trial 
memorandum, McDonald stated that, in the first case, “NEI 
. . . non-suited its claim against Lafayette Associates, 
 
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the alleged maker of the note, and Roger J. McDonald, the 
alleged guarantor of the note.”  Later, in a post-trial 
memorandum, McDonald asserted that “Lafayette Associates, 
which was sued on the alleged note[,] won on its defenses 
and was dismissed with prejudice by the final order.”  “A 
litigant cannot assume positions which are inconsistent 
with each other and mutually contradictory.”  McLaughlin v. 
Gholson, 210 Va. 498, 501, 171 S.E.2d 816, 818 (1970). 
Irrespective of McDonald’s inconsistency, we do not 
believe that there was an adjudication in the first action 
with regard to the question whether the primary obligation, 
through payment or otherwise, has been extinguished.  The 
circuit court’s order dated August 25, 1998, clearly 
nonsuited NEI’s cause of action.  Although the court also 
stated that, in any future case, NEI could proceed only on 
the Guaranty Agreement, that statement was not an 
adjudication that the primary obligation had been 
satisfied.  Thus, we conclude that the court’s disposition 
of NEI’s first case does not preclude this action to 
enforce the Guaranty Agreement against McDonald. 
II. STATUTE OF LIMITATIONS 
With regard to his plea of the statute of limitations, 
McDonald presents two theories in support of that defense.  
Relying on the Restatement (Third) of Suretyship and 
 
8
Guaranty § 43 (1996), he states that “where the statute of 
limitations is a bar to the note, it is a bar to the 
enforcement of the guaranty.”  However, in Whitehurst v. 
Duffy, 181 Va. 637, 648, 26 S.E.2d 101, 106 (1943), this 
Court stated “that the running of the statute of 
limitations against the primary obligation did not bar a 
cause of action on the contract of guaranty or suretyship.”  
See also Lackland, 175 Va. at 187, 8 S.E.2d at 309 (running 
of the statute of limitations against principal obligor 
merely bars creditor’s remedy, but does not extinguish debt 
or obligation of guarantor).  Thus, this argument has no 
merit. 
 
McDonald also asserts that the statute of limitations 
applicable to the Guaranty Agreement itself bars this 
action.  In response, NEI claims that McDonald never 
presented this argument to the circuit court and that the 
argument is, therefore, waived under Rule 5:25.  We do not 
agree with NEI. 
McDonald affirmatively pled the statute of limitations 
in his grounds of defense to NEI’s motion for judgment.  In 
a memorandum in support of his affirmative defenses, 
McDonald addressed the applicability of the five-year 
statute of limitations set forth in Code § 8.01-246(2) and 
the six-year statute of limitations provided in 12 U.S.C. 
 
9
§ 1821(d) 14 (A) and (B).  He also discussed the 
availability of the tolling provision in Code § 8.01-
229(E)(3) if NEI relied on the federal statute of 
limitations.  Finally, during his motion to strike NEI’S 
evidence after both parties rested, McDonald stated, “the 
statute of limitations began to run on the guarantee when 
it began to run on the maker.”  Thus, we conclude that 
McDonald did present this argument regarding the statute of 
limitations to the circuit court.  Accordingly, we will 
address the merits of that issue. 
In denying McDonald’s motion to dismiss based on his 
plea of the statute of limitations, the circuit court did 
not articulate the rationale for its decision.  The court 
did, however, state in its letter opinion dated May 25, 
1999, that “[u]nless the plaintiff states to the contrary, 
I am assuming that [it is] relying on the Virginia Statute 
of limitations of five years rather than the federal 
statute.”  NEI never advised the circuit court that it was 
not relying on the five-year statute of limitations 
contained in Code § 8.01-246(2), nor did it indicate that 
it was relying on the federal six-year statute of 
limitations.  Thus, in accordance with the circuit court’s 
direction to NEI, we resolve this issue by applying the 
five-year statute of limitations. 
 
10
In Guth v. Hamlet Assoc., Inc., 230 Va. 64, 75, 334 
S.E.2d 558, 565 (1985), this Court concluded that a cause 
of action on the guaranty at issue there accrued at the 
same time as the statute of limitations began to run on the 
underlying obligation.  Thus, relying on that decision, 
McDonald argues that the statute of limitations commenced 
to run on the Guaranty Agreement and the Note at the same 
time, specifically no later than September 18, 1990.  On 
that date, Seasons Federal sent a letter to Lafayette, 
advising Lafayette that it was in default and demanding 
payment in full from Lafayette of all amounts due under the 
Note.  Based on that letter, McDonald argues that the five-
year statute of limitations expired before NEI filed the 
first action in July 1996, thus barring the present action 
because NEI would not be entitled to the tolling provision 
in Code § 8.01-229(E)(3) after it nonsuited the first case.  
However, we do not accept McDonald’s premise that NEI’s 
cause of action on the Guaranty Agreement accrued in 
September 1990. 
This Court has recognized that the statute of 
limitations on a guaranty may or may not start to run at 
the same time as that on the underlying obligation.  
Compare Guth, 230 Va. at 75, 334 S.E.2d at 565 (cause of 
action on guaranty accrued at same time as statute of 
 
11
limitations began to run on underlying obligation), with 
Whitehurst, 181 Va. at 646-47, 26 S.E.2d at 105 (cause of 
action on note and guaranty did not accrue at the same 
time).  In the present case, the circuit court never 
specified the date upon which the five-year statute of 
limitations commenced to run.  However, in order to deny 
McDonald’s plea of the statute of limitations, the court 
necessarily had to decide that the statute did not commence 
to run in September 1990, as argued by McDonald.  And, we 
conclude that the court was correct. 
Under the terms of the Guaranty Agreement, McDonald 
agreed to pay all sums owed by Lafayette when in default 
“upon demand by the Lender, without notice other than such 
demand and without the necessity for additional action by 
the Lender.”  (Emphasis added).  Thus, under the terms of 
the Guaranty Agreement, McDonald was not required to pay 
until Lafayette defaulted and the obligee demanded payment 
from McDonald.  See Piedmont Guano & Mfg. Co. v. Morris, 86 
Va. 941, 945, 11 S.E. 883, 884 (1890) (“guarantor . . . is 
usually not responsible unless notified of the default of 
the principal”).  Accordingly, we hold that the five-year 
statute of limitations did not begin to run on the claim 
under the Guaranty Agreement until a demand was made to 
McDonald for payment.  See United States v. Vanornum, 912 
 
12
F.2d 1023, 1027 (8th Cir. 1990); Western Bank v. Franklin 
Dev. Corp., 804 P.2d 1078, 1080 (N.M. 1991); Ocean Transp., 
Inc. v. Greycas, Inc., 878 S.W.2d 256, 267 (Tex. App. 
1994). 
As the proponent of the bar of the statute of 
limitations, McDonald had the burden of proving the date on 
which the statute commenced to run.  Brown v. Harms, 251 
Va. 301, 306, 467 S.E.2d 805, 807 (1996).  Based on the 
record before us, a demand to McDonald was not made until 
September 11, 1991.  At that time, an asset manager for the 
loan at issue sent a letter to McDonald, advising that 
payments under the Note were in default and requesting 
payment from McDonald.  That letter, unlike the September 
1990 letter that was addressed only to Lafayette, was 
addressed and sent to McDonald.  Thus, we hold, as a matter 
of law, that the statute of limitations started to run on 
the claim under the Guaranty Agreement on September 11, 
1991.  That holding means that NEI filed the first action 
before the statute of limitations expired.  After the 
nonsuit of that action, NEI filed the present action on 
September 21, 1998, within the six months afforded under 
Code § 8.01-229(E)(3).  Therefore, the circuit court 
correctly denied McDonald’s plea of the statute of 
limitations. 
 
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III. EVIDENTIARY RULINGS 
McDonald next asserts that the circuit court erred by 
admitting into evidence NEI’s Bill of Sale and Assignment 
of Loans; a copy of the Note; a settlement statement dated 
October 3, 1988, reflecting the loan to Lafayette; a 
settlement statement dated July 30, 1992, accounting for 
the proceeds from the foreclosure by RTC; and an RTC sales 
transaction report; plaintiff’s exhibit numbers one, two, 
five, six, and seven, respectively.  McDonald contends that 
these documents were inadmissible hearsay evidence because 
they all contained information not generated by the 
employees of either NEI or RTC, and were not records kept 
in the regular course of business by either entity.  We 
find no merit to McDonald’s argument with regard to any of 
these documents. 
 
A senior asset manager for NEI testified that NEI 
received the Bill of Sale and Assignment of Loans in the 
consummation of the transaction in which it purchased the 
package of loans from RTC.  As such, that document is an 
operative legal document that embodies and evidences the 
conveyance.  It was not offered for the “truth” of its 
averments, but for its legal effect; hence, it was not 
hearsay.  Cf. Remington Investments v. Hamedani, 55 Cal. 
App. 4th 1033, 1042 (Cal. Ct. App. 1997) (“Promissory Note 
 
14
document itself is not a business record as that term is 
used in the law of hearsay, but rather is an operative 
contractual document admissible merely upon adequate 
evidence of authenticity”); Cohen v. Maine Sch. Admin. 
Dist., 393 A.2d 547, 549 (Me. 1978) (letter was legally 
operative document standing by itself as approval of 
Commissioner and thus not hearsay); Boyd v. Diversified 
Fin. Sys., 1 S.W.3d 888, 891 (Tex. App. 1999) (note and 
guaranty were admissible as operative facts regardless of 
hearsay status); 2 McCormick on Evidence § 249 at 100 & n.2 
(John W. Strong, ed., 5th ed. 1999); 6 John H. Wigmore, 
Evidence in Trials at Common Law § 1770 at 259-262 (James 
H. Chadbourn rev. 1976).  Therefore, the Bill of Sale and 
Assignment of Loans was properly admitted into evidence. 
As to the other documents, assuming without deciding 
that the circuit court erred in admitting them into 
evidence, we conclude that any such errors were harmless.  
The existence and amount of the loan to Lafayette, as 
evidenced by the Note and 1988 settlement statement, were 
also established by other evidence: (1) McDonald’s 
reference to the loan number in a letter dated December 3, 
1991;7 (2) Phillips’ signature on the 1988 settlement 
                     
7 That letter, plaintiff’s exhibit number 12, is not 
the subject of an assignment of error.  See Rule 5:17(c). 
 
15
statement as a partner of Lafayette; and (3) testimony from 
McDonald’s witness that the foreclosure on the property 
secured by the Deed of Trust (plaintiff’s exhibit number 
3), would not have taken place if the loan reflected in the 
1988 settlement statement had not been made, and that the 
loan was in the amount of $425,000.  Finally, the 1992 
settlement statement and the RTC sales transaction report 
related to the amount of proceeds received from the 
foreclosure that were applied to the indebtedness on the 
Note.  Those two documents were not used by the circuit 
court in calculating the amount owed to NEI.  Instead, the 
circuit court accepted the testimony of McDonald’s witness 
on that issue. 
IV. ATTORNEY’S FEES 
The final issue involves the award of attorney’s fees 
and costs to NEI.  At the conclusion of the trial, NEI 
reminded the court that the terms of the Guaranty Agreement 
provided for recovery of costs and attorney’s fees.  At 
that point, McDonald objected and noted that NEI had not 
presented evidence on that issue.  The court agreed and 
advised NEI that it could “submit something on that.”  NEI 
then submitted an affidavit to the court, requesting an 
award of attorney’s fees in the amount of $40,102.25.  
Based on that affidavit, the court determined the amount of 
 
16
attorney’s fees and costs without submitting the issue to 
the jury. 
McDonald now contends that the award was in error 
because NEI presented no evidence to the jury on its claim 
for attorney’s fees.  After NEI filed the affidavit 
regarding its request for attorney’s fees, McDonald 
objected to the procedure in a letter to the court dated 
April 11, 2000.  In that letter, McDonald reminded the 
court that he had requested a jury trial and that this 
issue should be heard and decided by the jury.  He also 
noted that the affidavit contained no detailed time records 
and that no evidence, expert or otherwise, had been offered 
during the course of the trial.  For those reasons, 
McDonald argued that attorney’s fees should not be awarded. 
On brief, NEI references a post-trial hearing during 
which NEI allegedly presented detailed time records.8  
However, a transcript of that hearing is not part of the 
record before this Court.  Without that transcript, we do 
not know what evidence and argument, if any, were presented 
to the circuit court.  Nor do we know what position 
                     
8 According to the circuit court’s order entered on May 
15, 2000, a hearing was held on April 28, 2000, which is 
the date of the court’s order setting the amount of 
attorney’s fees and costs awarded to NEI. 
 
17
McDonald took regarding his prior assertion that the matter 
of attorney’s fees should be decided by the jury. 
Under Rule 5:10, the record on appeal consists of, 
among other things, “the transcript of any proceeding or a 
written statement of facts, testimony, and other incidents 
of the case when made a part of the record as provided in 
Rule 5:11.”  As the appellant in this appeal, McDonald has 
the burden to present a sufficient record on which this 
Court can determine whether the circuit court erred as 
McDonald contends.  Wansley v. Commonwealth, 205 Va. 419, 
422, 137 S.E.2d 870, 873 (1964).  Because McDonald has 
furnished an insufficient record, the judgment of the 
circuit court regarding the award of attorney’s fees will 
be affirmed.  White v. Morano, 249 Va. 27, 30, 452 S.E.2d 
856, 858 (1995). 
CONCLUSION 
For the reasons stated, we find no error in the 
judgment of the circuit court and will affirm that 
judgment. 
Affirmed. 
 
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