Title: Charmoll Fashions, Inc. v. Otto

State: minnesota

Issuer: Minnesota Supreme Court

Document:

248 N.W.2d 717 (1976) CHARMOLL FASHIONS, INC., Appellant, v. Lorraine OTTO, et al., Respondents, Edward Knelman, Respondent, Varsi-Jac, Inc., Defendant. No. 45876. Supreme Court of Minnesota. December 3, 1976. Altman, Geraghty, Mulally & Weiss and Robert M. Mahoney, St. Paul, for appellant. Rietz, Rietz & Rietz, and Larry J. Rietz, Owatonna, for Otto, and others. Perry Scheftel, Minneapolis, for Knelman. Heard before PETERSON, MacLAUGHLIN, and SCOTT, JJ., and considered and decided by the court en banc. KELLY, Justice. Appellant, Charmoll Fashions, Inc., commenced an action to recover on a promissory note against Lorraine Otto, Delos O. Otto, Edward Knelman, and Varsi-Jac, Inc. The case was tried on stipulated facts and the trial court concluded that the individual defendants were comakers, and not guarantors, *718 of the note. Therefore, because the note called for 10-percent interest, it was held usurious and hence unenforceable as to these defendants. Appellant appeals from the entry of judgment and from denial of its motion for a new trial. We reverse. Appellant and defendant Lorraine Otto were at one time business partners. Otto, apparently in association with appellant, established an incorporated business known as Varsi-Jac, Inc. Shortly thereafter the new corporation purchased certain equipment and stock from appellant, and the following promissory note was executed: On November 15, 1972, after making payments totaling $15,000, Varsi-Jac, Inc., defaulted on the note and appellant brought this action to enforce the note against Varsi-Jac, Inc., as maker and the individual defendants as guarantors. The trial court found that the individuals were comakers and not guarantors and that the note was usurious and hence unenforceable as to them. Minnesota's usury law prohibits lenders from charging more than 8-percent *719 simple interest on loans to individuals. Minn.St. 334.01. However, corporations may not interpose the defense of usury in any action. Minn.St. 334.021. Similarly, individuals who guarantee a corporate debt may not interpose the defense. Dahmes v. Industrial Credit Co., 261 Minn. 26, 110 N.W.2d 484 (1961); see, generally, Annotation, 63 A.L.R.2d 924, 950. The reason individual guarantors of corporate debt may not raise the defense of usury is simply that However, where the individuals' liability for the corporate debt is direct and primary, such as that of the comaker of a note, the defense of usury may be invoked by the individual. Dahmes v. Industrial Credit Co. supra. Thus, the dispositive issue in the instant case is whether respondents were guarantors or comakers of the note. In Schmidt v. McKenzie, 215 Minn. 1, 6, 9 N.W.2d 1, 3 (1943), we defined a guaranty as We reiterated the rule in Clark v. Otto B. Ashbach & Sons, Inc., 241 Minn. 267, 275, 64 N.W.2d 517, 522 (1954), when we described a contract of guaranty as Also, in Clark we quoted with approval from 24 Am.Jur., Guaranty, § 4: Under the terms of the agreement, the corporation, Varsi-Jac, Inc., "promises to pay to the order of" appellant a sum plus 10-percent interest. Upon the death or incapacity of Lorraine Otto, president of Varsi-Jac, Inc., the holder of the note may declare the obligation immediately due and payable. In a separate clause, which is preceded by the signatures of officers of Varsi-Jac, Inc., on the note itself, the agreement further provides that certain individuals "do hereby jointly and severally guarantee the payment of the within note according to all its terms and conditions." (Italics supplied.) Among the individuals subscribing separately to this separate clause were two officers of Varsi-Jac, Inc., who had signed for the corporation under the promise-to-pay clause. Ordinarily, the clear delineation of promise-to-pay and guaranty clauses would leave no doubt as to the capacity in which a particular individual signed a particular clause. Respondents, however, argue that other language in the note compels a conclusion that the alleged guarantors really signed as comakers. After careful consideration of the clauses in question, we must disagree. Respondents first point to language in the guaranty clause under which the subscribers "shall jointly and severally be bound upon this guarantee to the holder hereof as if the obligation of the maker hereof were the primary obligation of the undersigned * * *." However, the clause further states that "* * * the holder hereof shall not be required to proceed against the maker hereof prior to proceeding to collect under this guarantee, but may proceed directly against the undersigned or any of them." Respondents suggest that the word "primary" in this clause *720 should be given its strictest legal meaning, i. e., "primary" refers to an obligation not contingent on default by another party. If this meaning is used, it follows that the subscribers were actually agreeing to be bound on the note itself without the necessity of any default by Varsi-Jac, Inc. Under such circumstances, the subscribers would in fact be comakers regardless of the guaranty language in the clause. We do not think that the language of the note supports the meaning of primary suggested by respondents. First, the sentence quoted emphasized that the obligation of the undersigned is only upon and under the guaranty, and the second half of that sentence makes it clear in what sense liability is primary, i. e., in the sense that the holder may sue the guarantor on default without first suing the maker. The purpose of such a sentence is to render the guaranty absolute as opposed to conditional in order that the holder may proceed directly against the guarantor without complying with the difficult, costly, and cumbersome common-law requirements of notice, demand, and suit against the maker, etc. which apply to conditional guaranties. See, Plano Mfg. Co. v. Klatt, 87 Minn. 27, 91 N.W. 22 (1902); cases cited in 8A Dunnell, Dig. (3 ed.) § 4090 to 4092. The effect of the provision is to allow the holder to sue the guarantor upon default of the maker without the necessity of an often fruitless action against an insolvent corporate maker. It does not have the effect, as the respondents would seem to suggest, of allowing the holder to demand payment from the guarantor in the absence of default. Under the language of this note, respondents agreed only to "guarantee the payment of" the note under all its terms and conditions, until it had been paid; the corporation promised to "pay" the note. Therefore, the corporation remains primarily liable as a maker to pay the note and, on default, the guarantors become liable. This reading of the note is supported by the leading case of Dahmes v. Industrial Credit Co., 261 Minn. 26, 110 N.W.2d 484 (1961). In Dahmes, plaintiffs argued that their obligation was not a guaranty because the relevant document provided: "The undersigned agree: * * * that their liability hereunder is direct and unconditional and may be enforced without requiring LENDER first to resort to any other right, remedy or security; * * *." (Italics omitted.) 261 Minn. 30, 110 N.W.2d 487. This court rejected any suggestion that the "direct and unconditional" language rendered plaintiffs' obligation primary: In our view, respondents also confuse the term "primary" in the manner described by the last paragraph just quoted. In the context of this note, use of the term primary makes the guaranty absolute. It does not alter the fact that the corporation, which is primarily liable in that it must pay the note, must default before respondents, who are secondarily liable, become liable on the obligation. Respondents also rely on an acceleration clause in the note which provides that the note becomes payable upon Lorraine Otto's death, or in the event of her incapacity for more than 60 days. Such reliance is obviously misplaced. This clause reveals no more than that the holder may deem himself insecure if Lorraine Otto dies or if she is otherwise prevented from actively conducting her business and affairs. The logical inference to be drawn is that Lorraine Otto plays a key role in the business of Varsi-Jac, Inc., not that the loan represented by the note was made to her individually or that she was the comaker of the note. Furthermore, even if the respondents' inference were a logical one, it does not apply to Edward Knelman and Delos Otto, who were not the subject of the provision. Our reading of the entire note convinces us that the individual respondents were intended to be guarantors of a corporate loan. There is no evidence that plaintiff-holder was attempting to disguise an individual loan as a corporate transaction in order to avoid our usury law.[1] There is therefore no reason not to apply our law and policy forbidding the interposition of a usury defense. There is some suggestion in the record that appellant, Charmoll Fashions, Inc., engaged in activities that amounted to assertion *722 of rights not supported by the terms of the note; i. e., appellant insisted that it would hold Lorraine Otto liable on the full note if she were to sell Varsi-Jac, Inc., to a certain interested buyer. There is nothing in the language of the note that justifies such a position. We express no opinion as to any claim respondents may have for tortious interference with their business by the activities of appellant. We hold only that such activities do not change our usury law or the language in the note reflecting a corporate loan with individual, secondarily liable, guarantors. For the reasons stated above, the judgment of the district court is reversed and the case is remanded with instructions to enter judgment in accordance with the views expressed herein. Reversed and remanded. [1] There might be some ground to enforce the usury law against plaintiff if it were apparent from the record that the guaranty clause was a sham and that the loan was made for the individual purposes of the guarantors. Compare Raby v. Commercial Banking Corp., 208 Pa.Super. 52, 220 A.2d 659 (1966), with Walnut Discount Co. v. Weiss, 205 Pa.Super. 161, 208 A.2d 26 (1965). See, also, All Purpose Finance Corp. v. D'Andrea, 427 Pa. 341, 235 A.2d 808 (1967); Verson v. Hardt, 107 Ill.App.2d 480, 246 N.E.2d 461 (1969). See, generally, Annotation, 63 A.L. R.2d 924.