Opinion ID: 1353789
Heading Depth: 1
Heading Rank: 4

Heading: National Bank of Washington Vis-a-vis Evelyn Stepnitz and Stepnitz Estate Guaranty

Text: This particular cause involves a written guarantee of the loan which the court found unenforceable against the Minnesota estate of one of the guarantors  whose death occurred after his appearance in the case  and the decedent's widow, also a guarantor. In May, 1969, when the National Bank of Washington and General Mortgage Investments entered into a construction loan agreement with Equity Investors to lend $1,750,000, the borrowers gave the lenders a promissory note in the sum of $1,850,000, secured by a first deed of trust on the real property. Performance of the loan agreement and payment of the promissory note was guaranteed in writing by Richard L. Brama and Eileen D. Brama, M. Richard Walsh, Gloria L. Walsh and Brama Construction Company, a Minnesota corporation. The bank, as we have noted, made periodic disbursements on the loan through February 9, 1970, on requests by Brama Construction Company, the contractor, and Equity Investors, owner. From time to time the bank inspected and obtained written reports of the project to ascertain if the work had progressed so as to warrant the requested advances. In October, 1969, however, the bank's inspectors found that, although the project was about 63 percent complete, the requested advance would exhaust about 65.6 percent of the loan fund. Accordingly, the bank indicated it would require what the record describes as additional equity funds before making further advances. Walter Stepnitz at that point contributed $75,000. In October, General Mortgage Investments audited the project and calculated that construction costs would run to $1,988,475, instead of the earlier estimated $1,750,000. It agreed to advance an additional $100,000, and helped institute a procedure for waiver of liens in September or October, 1969, for all lien claimants receiving payment from the National Bank of Washington. Then, on or about December 16, 1969, after the bank and General Mortgage Investments had disbursed a total of $1,386,659.21 in performance of the construction loan agreement, the defendants directly involved in this phase of the action executed the guaranty agreement upon which this particular action was brought. The guaranty agreement, by its terms, provided that the signatories, or new guarantors, as the instrument called them, jointly and severally guaranteed the collection of the note upon which the advances contemplated by the construction loan agreement would thereafter be made for completing the project. In pertinent part, the guaranty stated: [T]he New Guarantors hereby jointly and severally and unconditionally guarantee to the Interim Lender [Bank] and Participant [General Mortgage Investments] that: (a) The Note (in the full amount advanced up to $1,850,000 plus interest) will be fully paid by May 31, 1970 unless by that date it is purchased by the permanent lender for the floor amount, namely $1,480,000; ... (c) By May 31, 1970 the following things will have happened (i) the Project will be completed in accordance with the plans and specifications therefor approved by the Permanent Lender and in accordance with the Construction Contract and (ii) all the conditions of the Permanent Lender for the purchase by it of the Note will be met; and (d) The New Guarantors will hold Interim Lender and the Participant harmless from any and all loss due to advances made under the Note or on account of the Participant's purchase of an interest therein. Each of the New Guarantors hereby expressly (i) waives presentment, demand, notice of non-payment, protest and notice of protest with respect to the Note and (ii) agrees that as to him or it this guaranty shall continue in full force and effect notwithstanding the death of any of the guarantors or the release of, or any extension of time granted with respect to, any of the guarantors or the Borrower or the security for the Note. So long as any portion of the Note is unpaid, none of the New Guarantors will collect from Borrower the claim, if any, by subrogation or otherwise, acquired through payment by any of the New Guarantors of any part of the Note. The liability of each of the New Guarantors hereunder shall not be affected or impaired by any failure, neglect or omission to realize upon the Note or the security therefor. (Italics ours.) Signing this guaranty agreement as new guarantors were Walter F. Stepnitz, Evelyn Stepnitz, M. Richard Walsh, Gloria Walsh and Brama Construction, Inc. When construction activities ended with the project still uncompleted, estimated costs of completion ran from $135,000 to $150,000 with only $107,000 remaining in the loan account still undisbursed. National Bank of Washington and General Mortgage Investments brought this action against Equity Investors and the guarantors of the loan to recover upon the guaranty agreement and also to foreclose the deed of trust given by Equity Investors as security for the loan. Concluding that the bank and General Mortgage Investments had negligently administered the loan funds so as to impair what the record describes as the guarantors' security, the trial court exonerated the new guarantors from liability under the new guaranty agreement. On another issue, the court also held that it was without jurisdiction to enter judgment against the estate of Walter F. Stepnitz, one of the new guarantors, whose estate was in probate in Minnesota  an issue which we will subsequently consider. The first question, then, is whether the bank so negligently administered the loan funds and disbursements as to release the new guarantors from liability on their written guaranty. In other words, did the bank and General Mortgage Investments breach any duty owed to the new guarantors upon which negligence could be found? If they did not, then there can be no demonstrable negligence upon which the new guarantors could be discharged. Arguing the merits, defendant Stepnitz contended and the court ruled that affirmative detrimental action in handling loan proceeds operated to release the new guarantors from their guaranty. Cited as leading authority on this point is Fidelity Sav. Bank v. Wormhoudt Lumber Co., 251 Iowa 1121, 104 N.W.2d 462 (1960), along with Nolan v. Colorado Mortgage Co., 137 Colo. 103, 322 P.2d 98 (1958), and Black Masonry & Contracting Co. v. National Sur. Co., 61 Wash. 471, 112 P. 517 (1911). In essence, the new guarantors contend that the lenders advanced to the builder and lien claimants more than that to which they were entitled under the construction loan agreement, that this tended to deprive the guarantors of part of their security and, as a matter of law, operated to release them from liability as guarantors. But we are unable to find in this record evidence of such dereliction or breach of duty. That other banks may have followed different procedures in advancing construction loan funds does not establish that this bank, in administering this loan, failed to act with reasonable prudence. Whatever may be the general rules of guaranty and suretyship, we think in the absence of fraud, deceit and overreaching that the principles of law upon which the new guarantors rely have no application to the present contract. There are several reasons those principles do not apply here, not the least of which is that the parties to the new guaranty explicitly contracted against the contentions here made. [5] First, the guaranty agreement itself militates against defendant's contentions. It provides that, in consideration of releasing Richard L. Brama and Eileen Brama individually from the earlier guaranty, the new guarantors hereby jointly and severally and unconditionally guarantee that The Note (in the full amount advanced up to $1,850,000 plus interest) will be fully paid by May 31, 1970, and that the Project will be completed. Being unconditional by its terms, this guaranty amounts in law to an absolute guaranty and constitutes an unconditional promise to pay on default of the principal obligor. Sherman, Clay & Co. v. Turner, 164 Wash. 257, 2 P.2d 688 (1931); Amick v. Baugh, 66 Wn.2d 298, 402 P.2d 342 (1965). In the absence of fraud, if a guarantor unconditionally promises payment or performance of the principal contract, the guaranty is deemed absolute, unless by its terms a condition precedent to liability of the guarantor is created. Sherman, Clay & Co. v. Turner, supra . We stated the distinction between an absolute and conditional guaranty in Robey v. Walton Lumber Co., 17 Wn.2d 242, 255, 135 P.2d 95, 145 A.L.R. 924 (1943), as follows: The contract of guaranty may be absolute or it may be conditional. An absolute guaranty is an unconditional undertaking on the part of the guarantor that the debtor will pay the debt or perform the obligation. A conditional guaranty contemplates, as a condition to liability on the part of the guarantor, the happening of some contingent event other than the default of the principal debtor or the performance of some act on the part of the obligee. Where the guaranty is conditional, the obligation of the guarantor may not be enforced unless the event has occurred or the act has been performed.... (Italics ours.) A guaranty of the payment of an obligation, without words of limitation or condition, is construed as an absolute or unconditional guaranty. 24 Am. Jur. 885, § 16. The written guaranty contained no conditions either subsequent or precedent to its taking effect nor did it place any qualifications upon the imposition of liability. It contained no conditions operating to relieve the new guarantors of liability except that the borrowers pay the note according to its terms and conditions. Upon the default of Equity Investors as the principal debtor or obligor, the duty of the guarantor to pay became absolute. [6] An additional reason those principles do not apply here is that, although we do not find in this record evidence supporting the court's conclusion of negligence in administering the loan, we think that the contract of guaranty here anticipated the possibility that such a claim might be made, and the parties by contract laid to rest the possibility of such a defense. The guaranty agreement thus contained the following provision: The New Guarantors will hold Interim Lender and the Participant harmless from any and all loss due to advances made under the Note or on account of the Participant's purchase of an interest therein. ... The liability of each of the New Guarantors hereunder shall not be affected or impaired by any failure, neglect or omission to realize upon the Note or the security therefor. (Italics ours.) We do not assume the fact of negligence, but if there were negligence in administering the loan, a hold harmless clause such as the guaranty amounted to in these circumstances would not in public policy be void as a contract to immunize another against his own negligence. RCW 4.24.115. In the absence of fraud and deceit, the new guaranty, in our opinion, does constitute an enforceable contract which must be upheld. Griffiths v. Henry Broderick, Inc., 27 Wn.2d 901, 182 P.2d 18 (1947); Fleming v. Stoddard Wendle Motor Co., 70 Wn.2d 465, 423 P.2d 926 (1967); Tucci & Sons, Inc. v. Carl T. Madsen, Inc., 1 Wn. App. 1035, 467 P.2d 386 (1970). A guaranty agreement of this kind is in essence a contract of indemnity, an undertaking to hold harmless made for a valuable consideration and as an inducement to the entering into and performance of another contract. It does not belong to that class of agreements alluded to by defendant here involving disclaimers of negligence or landlord liability where one in advance seeks to exonerate himself from the consequences of his negligence or misconduct. These agreements were held unenforceable as a matter of public policy in Baker v. Seattle, 79 Wn.2d 198, 484 P.2d 405 (1971); and McCutcheon v. United Homes Corp., 79 Wn.2d 443, 486 P.2d 1093 (1971). An absolute and unconditional guaranty should be and is enforceable according to its terms. The courts are to enforce it as the parties meant it to be enforced, with full effect given to its contents, and without reading into it terms and conditions on which it is completely silent. Poggi v. Tool Research & Eng'r Corp., 75 Wn.2d 356, 451 P.2d 296 (1969); Dopps v. Alderman, 12 Wn.2d 268, 121 P.2d 388 (1942); Kanaskat Lumber & Shingle Co. v. Cascade Timber Co., 80 Wash. 561, 142 P. 15 (1914). Here, the new guaranty agreement provided that: The liability of each of the New Guarantors hereunder shall not be affected or impaired by any failure, neglect or omission to realize upon the Note or the security therefor. (Italics ours.) As a matter of law, the bank acted with reasonable dispatch to preserve its security. It neither neglected nor failed to sue upon the note or foreclose its interest in the property, and it did not otherwise impair the security supporting the debt. We do not believe, as the new guarantors now contend, that the bank's disbursement of substantially all the loan funds, rather than retaining 10 percent, impaired the security of the loan, for the loan funds were not the new guarantors' security but rather were authorized to protect the bank. Additionally, the expenditure of the funds into the project would necessarily operate to enhance the security by adding to its value or reducing the claims against it. We find unacceptable the new guarantors' argument that the bank's retention of an additional sum of about $70,000, or about 3 percent of the project's total cost, constituted a condition, either precedent or subsequent, to guarantors' obligation to make good on their guaranty. [7] There was no claim here of fraud, misrepresentation, deceit or overreaching. At the time when the new guarantors bound themselves to the guaranty agreement, the project was well along. $1,386,659.21 of the loan funds contracted to be disbursed had already been advanced and projections already showed cost overruns. Whatever duty the plaintiff bank may have owed to the defendant new guarantors with reference to the method, manner and time of disbursing the remainder, we cannot find in this record that it breached that duty and, thus, we must conclude as a matter of law that the bank was without negligence toward the guarantor in making the postguaranty advances. Outside the contract, the major duty which a construction lender owes to any other party is the duty of good faith; though a loan may be inefficiently managed and with adverse consequences, neither inferior lienors nor absolute guarantors have any recourse against the lender unless it is alleged and proved that the lender acted in bad faith. Brooklyn Trust Co. v. Fairfield Gardens, Inc., 260 N.Y. 16, 182 N.E. 231 (1932). The decisions of the trial court releasing the new guarantors from the agreement are reversed. Next, we must decide whether the court retained jurisdiction over the estate of Walter F. Stepnitz. Following his death, the estate was opened for probate in Minnesota and defendant Donald S. Julen was there appointed as administrator. Did the Superior Court for the State of Washington lose jurisdiction because of the death of new guarantor Walter Stepnitz? During his lifetime, Mr. Stepnitz had been served in this particular action with a summons and complaint naming him as one of the defendant guarantors. He had entered an appearance and filed his answer to that complaint. Before the case came on for trial, however, he died in Minnesota. When the present cause came on for trial in King County, the trial court ultimately ruled that it was without jurisdiction over the estate or the administrator. Neither the estate nor the administrator entered an appearance in this case although they were afforded full opportunities to do so, and had been fully advised of this pending action. When plaintiffs by motion sought to substitute the administrator in the Minnesota estate for Walter Stepnitz as party defendant in this action, they were proceeding, we think, within the letter and spirit of the civil rules governing survival of actions and substitution of parties. Relying mainly upon In re Estate of Rowley, 178 Wash. 460, 466, 35 P.2d 34 (1934), the defendants contended, and the court held applicable, the language of that opinion that Foreign administrators and executors have no standing, as such, beyond the jurisdiction of the state in which they are appointed. We think, however, that the principle elsewhere stated in that same opinion declaring that an action shall not abate by reason of the death, mania, or other disability is the more pertinent statement of principles to the questions at hand. We there quoted Rem. Rev. Stat. § 193, as follows: No action shall abate by the death, marriage or other disability of the party, or by the transfer of any interest therein, if the cause of action survive or continue; but the court may at any time within one year thereafter, on motion, allow the action to be continued by or against his representatives or successors in interest. In the instant case, the court had acquired in personam jurisdiction over Walter F. Stepnitz during his lifetime when plaintiffs had served the summons and complaint upon him personally, and he had filed an answer thereto. When Donald O. Julen, administrator of Walter F. Stepnitz' estate, a resident of and acting as administrator in the state of Minnesota, made no appearance on behalf of the estate, plaintiffs moved to substitute the administrator as a party defendant under CR 25(a) (1), which provides: If a party dies and the claim is not thereby extinguished, the court may order substitution of the proper parties. The motion for substitution may be made by the successors or representatives of the deceased party or by any party and, together with the notice of hearing, shall be served on the parties as provided by Rule 5 for service of notices, and upon persons not parties in the manner provided by statute or by rule for the service of a summons. If substitution is not made within the time authorized by law, the action may be dismissed as to the deceased party. A motion for substitution, and a notice of hearing thereon, was served upon the administrator, Julen. The court initially ordered the substitution to be made and ruled that Donald A. Julen, as administrator of Walter Stepnitz' Minnesota estate, be made a party defendant. Error is now assigned to the court's subsequent ruling that it acquired no jurisdiction over the out-of-state administrator and that the substitution should not be held good. [8] We are of the opinion that, under the rules of civil procedure in general and CR 25(a) (1) in particular, the motion for substitution was well taken and that the court did acquire jurisdiction upon entry of the order of substitution. The record does not show either want of notice, or time or opportunity to appear, prepare and defend  and these points were not raised in opposition to the substitution. The court was not requested to enlarge the time for further answer or for preparing a defense and there is, thus, no question of procedural due process insofar as it involves these questions of notice, time and opportunity to prepare and defend. On the narrow question of jurisdiction, the rules of this court in general and CR 25(a) (1) in particular were, we think, intended to cover the situation now before us and to expedite the trial of cases on their merits where no basic rights to procedural due process will be lost to any party. Mr. Stepnitz, as noted, had appeared in the pending action by filing his answer. The superior court thereby acquired jurisdiction over him and the subject matter of the action as it concerned him. He was prepared to defend the action in this forum, whose process had been directed to him. His intervening death did not operate to cut off the jurisdiction obtained during his lifetime, and the action pending against him did not abate with his death. The general administrator of his estate, in being substituted, simply stood in the deceased party's place as a personal representative, in the very role that CR 25(a) (1) was meant to establish. Aside from perhaps the problem of providing security for costs, had Walter F. Stepnitz been the plaintiff rather than a defendant, his out-of-state administrator, we think, could have prosecuted the action on motion for substitution in the same way that we rule now he should defend it. Reversed and remanded for a determination of damages.