Opinion ID: 1357622
Heading Depth: 1
Heading Rank: 1

Heading: defaulted payments reimbursement and contribution

Text: The Roscoe, Jrs. were the principal obligors for performance of the buyers' obligations of the contract. Western was a guarantor of their performance. Western's suit against the Roscoe, Jrs. for reimbursement of payments made under the retail installment contract was based on the theory that a guarantor who has paid his principal's debt is entitled to reimbursement from the principal. This is a correct statement of the law. See Dykes v. Clem Lumber Co., 58 Ariz. 176, 180, 118 P.2d 454, 455 (1941); Western Coach Corp. v. Rexrode, 130 Ariz. 93, 96, 634 P.2d 20, 23 (App. 1981). See generally 38 Am.Jur.2d Guaranty § 127 (1968). The trial judge apparently believed that in order to recover under this theory Western had to prove that the Roscoe, Jrs. had agreed that Western would act as guarantor. This element, however, is not necessary in order to establish a right to subrogation. The principal is liable to the guarantor even though the contract of guaranty was executed at the request of the creditor and without the knowledge of the debtor. See Western Coach Corp. v. Rexrode, 130 Ariz. at 97, 634 P.2d at 24; 38 Am.Jur.2d Guaranty § 127 at 1136-37 (1968). Therefore, when Western Introduced evidence at trial to prove that it was a guarantor and had paid its principals' obligation, it was entitled to have its reimbursement claim submitted to the jury for decision. Accordingly, it was error for the trial judge to direct a verdict in appellants' favor on this issue. The subsequent grant of a new trial was legally correct.
Western's suit against the Roscoe, Srs. was based upon the theory that as co-guarantors [2] under the retail installment contract, the Roscoe, Srs. were liable to contribute a pro rata share of the amount that Western was required to pay under the installment contract. This is a correct theory of law. Where two or more persons [e.g., Western and Roscoe, Srs.] have bound themselves as coguarantors, each of them, as between themselves, is required to bear a ratable proportion of the amount for which they are liable under the contract of guaranty. In the event one has paid more than his share of the sum, he is entitled to demand contribution from the other or others and may maintain suit to enforce the right. 38 Am.Jur.2d Guaranty § 128 at 1137 (1968) (footnotes omitted). See also Restatement of Security § 149 (1941). To establish its right to contribution under this theory, Western produced evidence to show its status as guarantor, Roscoe, Srs.' status as guarantors, and that Western had made payments under the installment contract in an amount greater than its pro rata share. Thus, there was sufficient evidence in the record to establish a prima facie right to contribution from Roscoe, Sr. to Western. Again, therefore, the trial judge erred when he originally directed a verdict in favor of Roscoe, Sr., and the subsequent grant of a new trial was correct.
Appellants contend that the evidence presented at trial establishes that a novation occurred when the mobile home was sold to the Loves, thus releasing both the Roscoe, Jrs. and their guarantors from liability under the installment contract. Therefore, appellants argue, when Western made the default payments to the bank it acted gratuitously and is not entitled to reimbursement. We recognize that if a novation had in fact occurred, both the Roscoe, Jrs. and their guarantors would have been released from liability under the retail installment contract: Novation may be defined as `the substitution by mutual agreement of one debtor or of one creditor for another, whereby the old debt is extinguished, or the substitution of a new debt or obligation for an existing one which is thereby extinguished.' Steele v. Vanderslice, 90 Ariz. 277, 284, 367 P.2d 636, 640 (1961). However, to constitute a valid novation, there must be an extinguishment of a previously valid obligation and an agreement of all parties to a new, valid contract. Dunbar v. Steiert, 31 Ariz. 403, 404, 253 P. 1113, 1114 (1927); United Security Corp. v. Anderson Aviation Sales Co., 23 Ariz. App. 273, 275, 532 P.2d 545, 547 (1975). The novation agreement may be express or implied. Dunbar v. Steiert, 31 Ariz. at 405, 253 P. at 1114. In this case, there was clearly a factual question whether the Roscoe, Jrs. had been released from their obligations under the retail installment contract when they sold the mobile home to the Loves. Mrs. Roscoe, Jr. testified at trial that it was her understanding that their obligation was extinguished when the Loves agreed to assume the payments under the contract. On the other hand, Max Morgan, President of Western, testified that he had explained to the Roscoes that even though they sold the mobile home to the Loves, they remained liable. In addition, Western introduced into evidence the consignment agreement whereby the Roscoe, Jrs. gave Western the power to sell the mobile home on their behalf, and the assumption agreement pursuant to which the Roscoes sold the mobile home to the Loves. Both of these documents contain clauses which state that nothing in the agreement alters the original purchasers' liability under the original installment contract. Since there was a factual question whether a novation had occurred, the Roscoes were not entitled to a directed verdict on that basis.
In the alternative, the Roscoes seem to contend that, as a result of the sale from Roscoe, Jr. to Love, the Loves became the principal obligors on the debt by implication of law, so that, as between the parties to that sale, the Loves were principal obligors and Roscoe, Jrs. were sureties. See A. Stearns & J. Elder, The Law of Suretyship § 2.3, at 10 (5th ed. 1951); Restatement of Security § 83(c) (1941). Arguably, then, when the holder of the seller's interest learned of the transaction and of Roscoe, Jrs.' implied suretyship relation with Love, it was legally required to refrain from doing anything which would adversely affect Roscoe, Jr.'s rights as surety by either impairing security for payment of the debt or the ability of the principal obligor to pay that debt. [3] See Westinghouse Credit Corp. v. Wolfer, 10 Cal. App.3d 63, 88 Cal. Rptr. 654, 657 (1970); Restatement of Security, supra, § 83, comment c. The Roscoes urge that when the holder of the seller's interest consented, without the Roscoes' knowledge, to the transfer of ownership from Love to Chambers, it committed an act which adversely affected the surety and thus released the Roscoes from their suretyship obligations. Even assuming that despite the contractual provision that they remained liable as primary obligors, the Roscoes were converted to sureties by reason of the sale to Love and Love's assumption of the payments, and even assuming further that the holder of the seller's interest was required by force of law to recognize this status, [4] we disagree with the Roscoes' position. By consenting to the sale from Love to Chambers, the holder of the seller's security interest did nothing that would release Roscoe, Jr. from a suretyship obligation. The obligee's consent to the principal's transfer of property which is security for the debt does not ordinarily release the surety, unless the effect of the transaction is to alter the obligation, as, for example, by releasing the original obligor. See Hartford Accident & Indemnity Co. v. Federal Bond & Mortgage Co., 59 F.2d 950, 954 (8th Cir.1932); Guide Realty Co. v. Lucas, 151 Misc. 775, 272 N.Y.S. 416, 417-18 (1934). Here, Western maintained that despite the transfer of the right of ownership in the trailer, the Loves remained primarily liable on the debt. This was established by the admission in evidence of the assumption agreement between Love and Chambers; it provided that the ORIGINAL PURCHASER [Roscoe, Jr.] or SUBSEQUENT TRANSFEREE [Love] agrees that he/she would not be relieved from any of his/her responsibilities under the agreement. Thus, there was evidence which permitted the finder of fact to conclude that the Roscoes' rights against Love were unaffected by Love's sale to Chambers, with the result that the Roscoes were not released from their obligations whether they were principal debtors or sureties for Love's assumed performance. [5] Cf. Restatement of Security § 122 (1941). The Roscoes were not, therefore, entitled to a directed verdict on this issue.