Opinion ID: 1578166
Heading Depth: 1
Heading Rank: 3

Heading: Enforceability of Fort's Guaranty.

Text: A. Issues. Beal Bank argues that it should be able to recover under Fort's guaranty for two reasons. First, it claims, contrary to the district court's view of the evidence, that there is insufficient proof that the guaranty was discharged. This argument has two components. Beal Bank asserts that any discharge of Fort had to be in writing and signed by Hartford pursuant to the statute of frauds for credit agreements set forth in Iowa Code section 535.17(2). Even if that statute does not apply, contends the plaintiff, the evidence falls short of proving Hartford abandoned Fort's guaranty. In addition to this challenge to the sufficiency of the evidence, Beal Bank claims it is not bound by the allegedly undocumented release of Fort because it is a holder in due course. We consider each argument separately. B. Scope of review. We review the trial court's decision that Fort was not liable under his guaranty for the September 1998 loan to DASL for correction of errors at law. Wellman Sav. Bank v. Adams, 454 N.W.2d 852, 855 (Iowa 1990). Although the trial court's legal conclusions are not binding under this standard of review, we are bound by its findings of fact, provided they are supported by substantial evidence. Land O'Lakes, Inc. v. Hanig, 610 N.W.2d 518, 522 (Iowa 2000). Evidence is substantial for purposes of sustaining a finding of fact when a reasonable mind would accept it as adequate to reach a conclusion. Falczynski v. Amoco Oil Co., 533 N.W.2d 226, 230 (Iowa 1995). In assessing the evidence, we view the record in the light most favorable to the prevailing party, indulging in all legitimate inferences that may fairly and reasonably be deduced from the evidence. Pollmann v. Belle Plaine Livestock Auction, Inc., 567 N.W.2d 405, 409 (Iowa 1997). C. Applicability of statute of frauds for credit agreements. Iowa Code section 535.17(2) provides in pertinent part: Unless otherwise expressly agreed in writing, a modification of a credit agreement which occurs after the person asserting the modification has been notified in writing that the oral or implied modifications to the credit agreement are unenforceable and should not be relied upon, is not enforceable in contract law by way of action or defense by any party unless a writing exists containing the material terms of the modification and is signed by the party against whom enforcement is sought.... Iowa Code § 535.17(2) (emphasis added). A `[c]redit agreement' means any contract made or acquired by a lender to loan money, finance any transaction, or otherwise extend credit for any purpose, and includes all of the terms of the contract. Id. § 535.17(5)( c ). A modification of a credit agreement includes change, addition, waiver, rescission, and any other variation of any kind whether expressly made or implied by, or inferred from, conduct of any kind. Id. § 535.17(5)( f ). In arguing the applicability of these provisions, Beal Bank contends Fort is attempting to modify the terms of his guaranty. Fort's guaranty was expressly made continuous and expressly covered all DASL indebtedness to Hartford existing at the time the guaranty was executed as well as debts hereinafter incurred or created. The plaintiff claims any modification of these terms that would relieve Fort from liability for the September 1998 loan to DASL is unenforceable because it was not in writing and signed by Hartford as required by section 535.17(2). The trial court rejected Beal Bank's argument on several grounds, but we limit our discussion to one. We agree with the trial court's conclusion Fort was not given the notification mandated by this statute so as to trigger application of the in-writing requirement. Section 535.17(2) makes an oral modification of a credit agreement unenforceable only if the person asserting the modification [here Fort] has been notified in writing that oral or implied modifications to the credit agreement are unenforceable. Iowa Code § 535.17(2). Although [t]his notification can be included among the terms of a credit agreement, [t]o be effective, the notification and its language must be conspicuous. Id. The statute provides explicit guidance on compliance with this requirement: A notification referred to in subsection 2 in the following form in boldface, ten-point type, complies with the requirements of this section: IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT. Id. § 535.17(3). In addition, we find the dictionary definition of the term conspicuous to be helpful in ascertaining compliance with the statutory notification requirement. See Midwest Automotive III, LLC v. Iowa Dep't of Transp., 646 N.W.2d 417, 426 (Iowa 2002) (looking to dictionary definition to determine meaning of statutory terms). Two common meanings of conspicuous are: (1) obvious to the eye or mind: plainly visible; and (2) attracting or tending to attract attention by reason of size, brilliance, contrast, station. Webster's Third New International Dictionary 485 (unabr. ed.2002). Turning to the guaranty at issue here, we find the following miscellaneous provision: This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Guaranty. No alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. This language was not in boldface type, nor was the type larger than the type size of the surrounding paragraphs. There was nothing noticeable about this provision and it had no attributes that would have attracted the reader's attention to it. In short, the notification given to Fort in the guaranty was not conspicuous. Compare Clinton Nat'l Bank v. Saucier, 580 N.W.2d 717, 722 & n. 3 (Iowa 1998) (impliedly finding notification was adequate where notice was set off in boldface type and letters were all capital). Under these circumstances, the restriction set forth in section 535.17(2) requiring that any modification to a credit agreement be in writing in order to be enforceable does not apply. D. Abandonment of guaranty. Having determined that any release of Fort from his guaranty need not be in a writing signed by Hartford, we now examine the record to decide whether there is substantial evidence to support the trial court's factual finding that Hartford abandoned Fort's agreement to guarantee future loans made to DASL. A guaranty contract may be abandoned by the creditor so far as it relates to future transactions, so that the guarantor is not liable for future advances to the principal debtor. 38 Am.Jur.2d Guaranty § 80, at 939 (1999). We think there is substantial evidence that such an abandonment occurred here. The testimony and exhibits introduced at trial provide substantial support for the following facts. The parties to the initial transaction anticipated that Fort's involvement in the storage facility business would be limited to the construction phase and the initial operation of the facility. Consistent with this understanding, Titus undertook to buy out Fort's small ownership interest in DASL after construction was completed in the summer of 1998. One condition of the buyout was that Fort would be released from his $100,000 guaranty. Fort discussed the transaction with the president of Hartford and it was agreed that Fort would write a letter to Hartford setting forth the terms of the buyout. Fort did so, enclosing an assignment to Titus of Fort's interest in DASL. Fort instructed Hartford not to forward the assignment until Fort had been paid the purchase price, Fort's bill for services rendered to DASL had been paid, and Fort had been released from the guaranty. Hartford issued the checks, but did not prepare a formal, written release or cancellation of Fort's guaranty. Nonetheless, Hartford's subsequent actions support the trial court's finding that Hartford thereafter abandoned Fort's guaranty. When permanent financing was put into place, Fort's guaranty was not listed as collateral. Fort was not notified of the terms of this financing, as would be the normal banking practice if Fort had been considered a guarantor of the debt. In contrast, when the guaranty was initially executed in 1996, Fort was provided a notice of final agreement informing him of the terms of the original construction loan he had agreed to guarantee. We think these well-supported facts support the trial court's determination that Hartford abandoned Fort's guaranty when Fort sold his interest in DASL to Titus. E. Holder in due course. Beal Bank argues that any abandonment of the Fort guaranty by Hartford is not binding on the plaintiff because it is a holder in due course of the guaranty. In response, Fort contends Beal Bank had notice of Hartford's abandonment of Fort's guaranty and therefore holds the guaranty subject to Fort's defense of discharge. The trial court agreed with Fort on this issue, concluding any reasonable banker should have known of Fort's discharge from [Hartford's] records. Both parties cite to article 3 of Iowa's Uniform Commercial Code in support of their respective arguments. See Iowa Code ch. 554, art. 3 (1999). Accordingly, we accept the parties' apparent agreement as to the applicability of this statute and rely on its provisions in determining the correctness of the trial court's ruling. Iowa Code section 554.3302(2) states that a defense of discharge is effective against a person who became a holder in due course with notice of the discharge. Id. § 554.3302(2). A person has `notice' of a fact when ... from all the facts and circumstances known to the person at the time in question the person has reason to know that it exists. Id. § 554.1201(25)( c ). A person `knows' or has `knowledge' of a fact when that person has actual knowledge of it. Id. Given the applicable standard of review, our role is simply to ascertain whether there is substantial evidence to support the trial court's factual finding that Beal Bank had notice, as that term is defined in chapter 554, of Fort's discharge. Beal Bank makes much of the fact that the DASL loan file it obtained upon purchase of Hartford's assets did not contain Fort's letter to Hartford making his assignment conditional on Hartford's release of Fort's guaranty. Notwithstanding Beal Bank's ignorance of this communication, we think the record provides substantial evidentiary support for the trial court's factual finding that Beal Bank had notice of Hartford's 1998 abandonment of the Fort guaranty. Fort's expert witness, who had considerable experience in the banking industry, testified that it was the custom and practice in that industry to list all guarantors in the promissory note. Yet, Beal Bank knew that the loan documents representing DASL's indebtedness to Hartford did not list Fort's guaranty as collateral. Beal Bank also knew that Fort had not been given a notice of final agreement, as debtors and guarantors customarily are. Based on the information actually known by the plaintiff, it had reason to know that Fort had been discharged from his obligation. In conclusion, there is no basis to overturn the trial court's factual finding that Beal Bank had notice of Fort's discharge, as this finding is supported by substantial evidence. Similarly, we find no error in the trial court's conclusion that in view of Beal Bank's knowledge, its status as a holder in due course did not prevent Fort's assertion of his discharge defense against the plaintiff in this action.