Court Opinion

ID: 9688192
Source: CourtListenerOpinion
Date Created: 2023-08-24 17:38:07.986718+00
Date Added: 2024-06-11T18:18:35.981075
License: Public Domain

BIEGELMEIER, Chief Justice
(dissenting).
This appeal concerns the validity and effect of subordination agreements which contain, among other clauses, the following:
“SUBORDINATION AGREEMENT
WHEREAS INDUSTRIAL FINANCE COMPANY (hereinafter called the ‘Borrower’) is now or hereafter may be indebted to ANY AND ALL BANK OR BANK ASSOCIATIONS (hereinafter called the ‘Bank’) on account of loans or other extensions of credit or financial accommodations from the Bank to the Borrower (such indebtedness being hereinafter called the ‘Bank Indebtedness’); and
*476WHEREAS Borrower is also indebted to the undersigned in the sum appearing below opposite the signature of the undersigned (hereinafter called the ‘Subordinated Indebtedness’), and
WHEREAS the Bank is unwilling to continue the presently existing Bank Indebtedness or to make future loans or to continue to extend financial accommodations to the Borrower except and unless the Subordinated Indebtedness is made subordinate to the Bank Indebtedness as hereinafter set forth; and
WHEREAS the undersigned is of the opinion that it would be for his (her or its) best interests to assist the Borrower in obtaining credit accommodations from the Bank, and therefore is willing to make and enter into this Subordination Agreement.
NOW, THEREFORE, in consideration of the premises and other valuable consideration, the receipt and sufficiency whereof is hereby acknowledged, the undersigned does hereby agree with the Bank as follows:
1. Undersigned hereby agrees that the Subordinated Indebtedness shall be and it is hereby made fully subordinate to the Bank Indebtedness for all purposes.
2. Until this agreement be terminated, as hereinafter provided, undersigned will not ask for or demand, receive or accept payment of the Subordinated Indebtedness, or any part thereof, except the current interest thereon, and the undersigned will bring no action or proceeding to collect or enforce the payment of said Subordinated Indebtedness, or any part thereof, and if payments are made contrary to the terms of this agreement to apply upon the principal of said Subordinated Indebtedness, the undersigned will forthwith pay over the same to the Bank.
*4773. In the event of the insolvency, bankruptcy or other liquidation of the Borrower, or in the event of proceedings to reorganize the Borrower under any appropriate bankruptcy or reorganization statute, the undersigned will file a claim against the Borrower on account of the Subordinated Indebtedness, and will order and direct by appropriate instruments in writing that all dividends or payments made on said claim shall be paid over to the Bank, and will further order and direct that in case of reorganization of the Borrower, any new obligations or securities which the undersigned would be entitled to receive shall be delivered to the Bank, or, the Bank may itself file a claim for or on account of the Subordinated Indebtedness, and for such purpose the undersigned hereby nominates, constitutes and appoints the Bank its true and lawful attorney either in the name of the undersigned or in the Bank’s own name to file such claim and to take any and all other actions or proceedings in respect thereto which it deems necessary or desirable. The undersigned agrees that the power of attorney herein given to said bank is coupled with an interest and is not subject to revocation by the undersigned and that it shall not become terminated by reason of the death or disability of the undersigned. The undersigned agrees, upon request of the Bank, to give the Bank such further instruments of assignment or assurance as are necessary to more fully enable the Bank to file said claim and to carry out the provisions of this paragraph.
4. All moneys or other properties received by the Bank from or on account of the Subordinated Indebtedness pursuant to the provisions of either paragraph 2 or 3 of this agreement, may be held by it either as additional security for payment of the Bank Indebtedness, or, at its election, may be applied in payment thereof.
5. Undersigned hereby further agrees that it will not, without first obtaining the written consent of *478the Bank, sell, pledge or otherwise dispose of any of the Subordinated Indebtedness.”
The court found that all the notes of plaintiff, except the one note for $1,000 (Ex. 3), “were subordinated by Mr. Richter to indebtedness owed by Industrial Finance Company to several banking corporations;” that the “subordination agreements apply to the principal indebtedness of all of the promissory notes signed by Industrial Finance Company, except Exhibit 3, but said subordination agreements do not apply to any of the promissory notes as signed by Carl W. Pfeifer individually.” (emphasis supplied)
The court concluded that plaintiffs’ complaint against the Company on all the notes (except Ex. 3) “be. dismissed without prejudice.” The trial court then entered judgment against defendant Pfeifer for all these notes ($25,550) but dismissed plaintiffs’ complaint on those same notes against the defendant Company. Therefore, by these rules the court upheld the validity of the subordination agreements and yet did not give effect to or enforce them against plaintiffs.
It is undisputed that the Company executed these notes on October 21, 1966 through April 15, 1969, and that on August 22, 1969, after the proceedings mentioned in the opinion, Pfeifer affixed his signature on the bottom of the notes. It was alleged in the answer and is undisputed that the obligations to the banks were unpaid.
The law is, and it is correctly stated in the opinion, that a guarantor on a note cannot be held liable unless the principal is liable nor to a greater extent than the principal. For instance, the opinion states, quoting from 38 Am.Jur.2d, Guaranty, § 46:
“ ‘Thus, the promise of the guarantor has generally been held not to be supported by consideration where the creditor did not have any enforceable demand or cause of action against the purported debtor.’ ”
Thereafter, some of the clauses barring action by the Richters are set forth in the opinion. The opinion assumes the agreements valid between the banks and Richters. There can be no question of that. The majority opinion states: “Regardless of the legality or illegality, the agreements” did not “discharge Industrial Finance from its obligation on the notes.” While this is true, nevertheless, the agreements not only prevented the Company from paying the *479notes, they also barred this action; the trial court so concluded and so decreed by entering a judgment for the Company.
The majority opinion then continues:
“In other words, the agreements, if valid, could be asserted by the banks but not by Industrial Finance or defendant Pfeifer. They cannot assert as a defense a contractual obligation made for the benefit of someone else.”
The words therein “if valid” repeat the illegality theory without applying it. I have come to the conclusion that the agreements were made also for the benefit of the Company because they required that the Company deal with, and pay the obligations to, the banks, during which time the Company would not be harassed by other creditors. The agreements prohibited any action by Richters against the banks, the Company and Pfeifer. If the Company could not be sued in this action while the banks’ debts remained unpaid, neither could Pfeifer be sued. The agreements completely barred Richters from taking any action, including any steps to “throw the corporation into bankruptcy;” Richter cannot even “ask for or demand, receive or accept payment” of the notes. If any part of the principal is collected, Richter must “forthwith pay over the same to the Bank.”
Under the facts here, SDCL 56-1-18, quoted in the majority opinion, prevents plaintiffs’ action until the debts of the Company to the banks are paid, as does the following statement in that opinion:
“Generally, the liability of a guarantor cannot exceed the liability of the principal debtor, and all guaranty contracts are conditioned upon the underlying obligation between the creditor and the principal debtor. * * * The rule is that a guarantor is liable only in the event and to the extent that his principal is liable.”
Under the principles of law set forth in the majority opinion the action against Pfeifer was prematurely commenced and the judgment against him should be reversed.
I am authorized to state that Justice WOLLMAN joins in this dissent.