Court Opinion

ID: 9476071
Source: CourtListenerOpinion
Date Created: 2023-08-05 05:47:00.244076+00
Date Added: 2024-06-11T17:45:06.993306
License: Public Domain

KRUPANSKY, Circuit Judge,
dissenting.
Because the majority misconstrues the protections afforded to the defendants by *1115the state law joined in issue on this appeal, I am constrained to dissent.
An initial examination of the record is in order to furnish the factual context of the instant dispute. The defendant M.F. Crouch (Crouch) on July 19, 1978 executed a promissory note in the amount of $340,-000 to United American Bank in Knoxville, Tennessee (UAB-K). The defendants Clifford and Mary Hemingway, husband and wife (the Hemingways), simultaneously executed a guaranty agreement in favor of UAB-K whereby they guaranteed payment of the note. The note represented Crouch’s indebtedness for a loan from UAB-K for Crouch’s purchase of an interest in a North Carolina business. The note and accompanying guaranty were transferred to First Tennessee Bank (FTB) upon the failure of UAB-K. Upon Crouch’s default on the loan, FTB filed suit in Tennessee state court. The Federal Deposit Insurance Corporation (FDIC) subsequently acquired the note as part of a purchase and assumption agreement and was substituted as the plaintiff in the state action.
The FDIC thereafter removed the suit to federal court. Subsequent to the Hemingway’s service of notice upon the FDIC to proceed against the collateral pursuant to North Carolina law, N.C.Gen.Stat. § 26-7, the FDIC also initiated a state action in North Carolina to foreclose upon Crouch’s leasehold interest located in that state, which had served as security for the loan. While those proceedings were pending, the FDIC filed a motion in the federal district court for summary judgment against the three defendants regarding their respective liability on the obligation. The magistrate granted summary judgment in favor of the FDIC, rejecting the defendants’ contention that, under North Carolina law, the pendency of the state foreclosure proceedings with respect to the security rendered the FDIC’s claim premature and thus barred entry of judgment in its favor.
On appeal, the defendants did not dispute their liability as maker or guarantors, respectively, on the promissory note, but rather contended that two North Carolina statutory provisions precluded the district court’s entry of personal judgments against them while foreclosure proceedings were pending in North Carolina state court. See N.C.Gen.Stat. §§ 26-7, 45-21.36.1
Chapter 26 of North Carolina General Statutes incorporates the law of suretyship in that jurisdiction. Specifically, § 26-7 provides as follows:
26-7. Surety, indorser, or guarantor may notify creditor to take action.
(a) After any note, bill, bond, or other obligation becomes due and payable, any surety, indorser, or guarantor thereof may give written notice to the holder or owner of the obligation requiring him to use all reasonable diligence to recover against the principal and to proceed to realize upon any securities which he holds for the obligation.
N.C.Gen.Stat. § 26-7(a). A subsequent section of the statute elaborates upon the effect of a creditor’s failure to take appropriate action in the face of such notice:
§ 26-9. Effect of failure of creditor to take action.
(a) If the holder or owner of the obligation refuses or fails, within 30 days from the service or receipt of such notice, to take appropriate action pursuant thereto, the following persons shall be discharged on any such note, bond, bill or *1116other obligation to the extent that they are prejudiced thereby:
(1) The surety, indorser or guarantor giving such notice,
tfc * * * * *
(b) The fact that an instrument contains a provision waiving any defense of any surety, indorser or guarantor by reason of the extension of the time for payment does not prevent the operation of this section. Any such notice to the holder or owner of the obligation as is authorized by G.S. 26-7 may be given at or subsequent to the time such obligation is due or at or subsequent to the termination of a period of extension.
N.C.Gen.Stat. § 26-9(a)(l), (b).
The Hemingways correctly contended that the magistrate’s entry of judgment against them personally in favor of the FDIC prior to the conclusion of the FDIC’s foreclosure action and suit against defendant Crouch as the maker was violative of § 26-7. The manifest intent of the foregoing chapter considered in its totality as well as the specific cited provisions is to protect guarantors from such judgments prior to a determination of the extent of liability, if any, of the guarantor subsequent to the holder’s realization of the collateral and recovery from the principal. A contrary construction of the legislative enactment in question would render meaningless its obvious prophylactic purpose with respect to guarantors such as the Hemingways, inasmuch as the financial reputations of guarantors would be subject to premature and ruinous judgments which are a matter of public record in amounts far exceeding any liability which might eventually and properly attach after foreclosure and recovery from the principal. In the instant matter, the FDIC, after receiving proper written notice from the Hemingways, instituted foreclosure proceedings in North Carolina state court, which action was ongoing at the time of the magistrate’s grant of summary judgment and apparently also at the time of argument before this court. In light of such pending proceedings against both the security and the principal (Crouch) and the pertinent North Carolina law on the subject, it was improper to render judgment at that premature stage against the defendant guarantors and the district court’s entry of judgment should accordingly be reversed as to the defendants Clifford and Mary Hemingway.2 Accordingly, I dissent.

. In actions involving the FDIC, the court entertaining the suit should reference the appropriate state law to furnish a rale of decision when a uniform national rule is not a prerequisite to effectuate federal interests, application of the particular state law will not unduly frustrate specific objectives of the federal program, and imposition of a federal rale would disrupt commercial relationships predicated upon state law. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 727-28, 99 S.Ct. 1448, 1457-58, 59 L.Ed.2d 711 (1979); D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942); Warner v. Central Trust Co., 798 F.2d 167, 171-72 (6th Cir.1986); FDIC v. Armstrong, 784 F.2d 741, 744 (6th Cir.1986); FDIC v. Wood, 758 F.2d 156, 159 (6th Cir.), cert. denied, — U.S. -, 106 S.Ct. 308, 88 L.Ed.2d 286 (1985). This being such a case, the defendants properly invoked state law in this situation. The magistrate below did not reach this issue, however, given his contrary construction of the relevant provisions of state law.

. The defendant Crouch further contended that N.C.Gen.Stat. § 45-21.36, which governs the right of a mortgagor to prove in a deficiency suit the reasonable value of property by way of defense in the event that the mortgagee has assumed title of the property, protected him as a maker or principal on the note from entry of a personal judgment prior to conclusion of the FDIC’s foreclosure proceedings against the security. As a maker or principal, however, Crouch did not occupy a status similarly protected pursuant to North Carolina law as did the Hemingways as guarantors. The foregoing statutory provision would properly apply at a later stage in the event that the FDIC purchased the leasehold interest in question when the power of sale were executed and sued Crouch for the amount of the deficiency, in order to ensure that the FDIC paid a fair market price for that interest.