Court Opinion

ID: 9569813
Source: CourtListenerOpinion
Date Created: 2023-08-21 20:17:43.479631+00
Date Added: 2024-06-11T12:04:04.651610
License: Public Domain

WYNN, Judge,
dissenting.
The issue on appeal is whether the SBA’s assignment of the Note conferred on Plaintiff the right to enforce an unassigned guaranty to *751the Note. Because the SBA did not assign the guaranty to the Note back to the Plaintiffs, I would hold that the Plaintiffs may not enforce that guaranty. Accordingly, I dissent.
From the outset, I observe that no North Carolina appellate court has previously had occasion to consider the issue presented in the somewhat more complex context of the federal 504 loan program.1 To better understand the nature of the transactions in this matter, additional background is useful.
Plaintiff Self-Help Ventures Fund, a Certified Development Company or CDC, provided a twenty-year loan to Custom Finish, LLC through the Small Business Administration’s (SBA) 504 loan program. See generally 13 C.F.R. § 120.800 (2009). Generally, financing of a 504 project involves the contribution by a small business in an amount of at least ten percent of the project costs; a loan made with the proceeds of a CDC debenture for up to forty percent of the project costs2; and a third party loan comprising the balance of the financing.3 13 C.F.R. §120.801 (2009). The CDC debenture is guaranteed one-hundred percent by the SBA with the full faith and credit of the United States, and it is sold to underwriters who form debenture pools. Id. Investors purchase interests in these debenture pools and receive certificates representing ownership of all or part of a debenture pool. Id. The proceeds of the CDC debenture are then used to fund the 504 loan. 13 C.F.R. § 120.802.
*752On 14 August 2002, Plaintiff/GDC made a SBA 504 loan to Custom Finish in the amount of $223,000.00. Plaintiff obtained a promissory note (“the Note”) on SBA letterhead executed on behalf of Custom Finish by Defendant Clarence W. Adams and other members of the LLC. Mr. Adams and the other members did not sign the Note in their individual capacities, and co-defendant Gladys L. Adams did not sign the Note at all. The Note states under the section “CDC’s RIGHTS IF THERE IS A DEFAULT” that without notice or demand and without giving up any of its rights, the CDC may collect all amounts owing from any borrower or guarantor and that it may file suit and obtain judgment. Under the section “SUCCESSORS AND ASSIGNS,” “the CDC” includes its successors and assigns under the Note. Under “GENERAL PROVISIONS” of the Note, the “[b]orrower also waives any defenses based upon any claim that CDC did not obtain any guarantee . . Although these conditions appear in the Note, it also contains a clause purporting to assign the Note to the SBA, and is signed by Margaretta L. Belin, Plaintiffs authorized officer and President. This assignment to the SBA was made in consideration of the SBA’s guaranty of a debenture in the principal amount of $223,000.00. See 15 U.S.C. § 697a(2008); 13 C.F.R. § 120.801. An allonge4 was attached to the Note to provide for the acknowledgment of a future advances deed of trust and for the signature of an SBA officer to be added to the Note; however, the allonge was not signed until March 3, 2008, after Custom Finish had already defaulted on its loan.
On the same day the Note was signed, “Unconditional Guarantee” forms on SBA letterhead in the Note’s principal amount were signed and delivered to Plaintiff by defendants, Clarence W. and Gladys L. Adams, and two prior defendants to this case. In an attachment to each guarantor’s “Unconditional Guarantee” form, Plaintiff, under corporate seal, assigned and transferred all of its interest in the guaranties to the SBA. This assignment possibly provided backing for the SBA’s guaranty of the debenture funding the 504 loan.5 See 13 C.F.R. § 120.801. On 26 September 2002, in a separate document *753signed under corporate seal, Plaintiff again assigned to the SBA all of its right, title and interest in the Note and a future advances deed of trust.
In mid-2007, Custom Finish defaulted on its 504 loan. On 3 March 2008, the SBA, under signature of R. Wayne Reid, assigned all of its right, title, and interest in the Note dated 14 August 2002 in the original principal amount and the future advances deed of trust back to Plaintiff. A signed affidavit by Plaintiffs 504 Loan Servicing Officer states that “Defendants defaulted on their March, April and May 2007 payments under the Note, and on May 31, 2007 the SBA repurchased its debenture . . . the Note was reassigned by the SBA to the Plaintiff to pursue collection efforts against the Defendants, who remain liable for the loan pursuant to their Guarantees.”
The Plaintiffs Complaint filed 2 April 2008 declared that the subject Note was in default because of Defendant Custom Finish, LLC’s failure to pay despite Plaintiffs demand for payment. All other Defendants’ obligations under their respective unconditional guaranties became due as a result. The default accelerated the balance due, and as of 18 March 2008, the owed amount was $174,620.78, with interest continuing to accrue at the rate of 5.173% per annum.
Like a note, a guaranty contract is a principal obligation. Although the two are related contractual agreements, they are nonetheless separate obligations. See Credit Corp. v. Wilson, 12 N.C. App. 481, 485, 183 S.E.2d 859, 862 (1971) (“North Carolina also recognizes that the obligation of the guarantor and that of the maker, while often coextensive are, nonetheless, separate and distinct.”), aff’d, 281 N.C. 140, 187 S.E.2d 752 (1972). Furthermore, “[a]n assignment operates as a valid transfer of the title of a chose in action.” Gillespie v. DeWitt, 53 N.C. App. 252, 262, 280 S.E.2d 736, 743 (1981) (citing Lipe v. Bank, 236 N.C. 328, 72 S.E.2d 759 (1952)). Thus, the assignee of a guaranty acquires the rights, title and interest to the guaranty that the assignor had and may take action upon it. Id. (citing Holloway v. Bank, 211 N.C. 227, 189 S.E. 789 (1937)) (citation omitted).
Here, Custom Finish, LLC, executed and delivered a Note to Plaintiff on 14 August 2002. Through the original Note and using a separate document on 26 September 2002 under corporate seal, Plaintiff assigned the Note to the SBA. Also on 14 August 2002, Clarence W. Adams, Gladys L. Adams, Curthue Louis Johnson, and Ivesta Johnson, executed and delivered separate guaranty contracts to Plaintiff. These guaranties were also assigned to the SBA by attach*754ments to the guaranty contracts on 14 August 2002. Thus,' the SBA acquired the rights to enforce the Note and the individual guaranties when Plaintiff assigned each of those obligations to it in 2002.1 do not agree, however, that Plaintiff reacquired the right to enforce the guaranties in 2008 when the SBA assigned the Note back to Plaintiff, but not the “separate and distinct” guaranty agreements.6 See Credit Corp., 12 N.C. App. At 485, 183 S.E.2d At 862.
I also observe a distinction between the relatively unique circumstances involved in' the federal 504 loan program setting and North Carolina’s leading cases bearing on this issue. In Kraft Foodservice, Inc. v. Hardee, 340 N.C. 344, 345-46, 457 S.E.2d 596, 597 (1995), for example, the plaintiff seeking to collect on the principal obligation and enforce its guaranty was the successor-entity of the original obligee. See also Trust Co. v. Trust Co., 188 N.C. 766, 768, 125 S.E. 536, 536-37 (1924) (assignee bank, which “took over the assets of the [assignor bank], and continued its business” had the right to enforce guaranties in favor of the assignor bank). Here, Plaintiff and the SBA undoubtedly shared the same interest in repayment of the 504 loan; but, there can also be no doubt that Plaintiff and the SBA are separate entities. Accordingly, I would not rely on Kraft Foodservice and instead hold that the guaranties must have been separately reassigned to give Plaintiff the right to enforce them.7

. As do the parties and the majority, I analyze the issue presented under North Carolina’s common law of contracts. However, I note that this Court has held that a promissory note may qualify as a negotiable instrument governed by the UCC. See N.C. Gen. Stat. § 25-3-104 (2008); First Commerce Bank v. Dockery, 171 N.C. App. 297, 300, 615 S.E.2d 314, 316 (2005). But see Barclays Bank v. Johnson, 129 N.C. App. 370, 373, 499 S.E.2d 768, 770 (1998) (A promissory note was not a negotiable instrument where it did not state that it was payable on demand or at definite time). I note also that this guaranty would not be considered a negotiable instrument subject to the UCC’s rules, since it is not payable on demand or at a definite time, but rather is conditioned on a default of the Note. See § 25-3-104; see also Branch Banking & Trust Co. v. Creasy, 301 N.C. 44, 51-52, 269 S.E.2d 117, 121-22 (1980). Moreover, there appears to be a lack of authority on whether a guaranty automatically follows a promissory note under the UCC. Nonetheless, this case presents no occasion to answer these questions because the issue has been presented and argued only in the context of common contract law.

. This portion of the 504 project’s financing is at issue in this case.

. In late 2006, Custom Finish, LLC defaulted on the third party loan from First National Bank, which resulted in the foreclosure of the real estate and the loss of Plaintiffs second deed of trust as collateral. Around this time, Custom Finish, LLC also ceased operations.

. “A slip of paper sometimes attached to a negotiable instrument for the purpose of receiving further indorsements when the original paper is filled with indorsements.” Black’s Law Dictionary 88 (9th ed. 2009).

. However, assignment of loan instruments is required only upon the SBA’s desire to litigate a 504 loan. 13 C.F.R. § 120.535(d)(2009) (“If SBA elects to service, liquidate and/or litigate a loan, it will notify the relevant Lender or CDC in writing, and, upon receiving such notice, the Lender or CDC must assign the Loan Instruments to SBA and provide any needed assistance to allow SBA to service, liquidate and/or litigate the loan. SBA will notify the Borrower of the change in servicing. SBA may use contractors to perform these actions.”)

. The weight of authority on this issue in this context appears to hold that the guaranty automatically follows the note. See Sinclair Marketing, Inc. v. Siepert, 695 P.2d 385 (Idaho 1985); Hazel v. Tharpe & Brooks, 283 S.E.2d 653 (Ga. Ct. App. 1981); see also Sidney Indus. Corp. v. Lafler, 1993 WL 302276 (Neb. Ct. App. 1993) (unpublished) (finding that a transfer of a principal obligation is held to operate as an assignment of the guaranty). However, as a matter of North Carolina contract law, which holds that the note and guaranty are “separate and distinct” obligations, of which the assignment of one does not necessarily confer on the assignee rights to enforce the other, I am compelled to conclude that the SBA must also have assigned the guaranties for Plaintiff to have a right to enforce them.

. Considering that defense counsel argued the issue of the guaranties not having been assigned to Plaintiff during the hearing before the Superior Court, it is uncertain why prior to this appeal the guaranties were not assigned by the SBA to Plaintiff.