Court Opinion

ID: 8976446
Source: CourtListenerOpinion
Date Created: 2022-11-27 10:58:17.281857+00
Date Added: 2024-06-11T17:10:33.483355
License: Public Domain

GARWOOD, Circuit Judge,
dissenting:
I respectfully dissent.
The issues are certainly not free from doubt and Judge Thornberry fairly states the best case for affirmance. Nevertheless, I would construe the Collateral Assignment of the construction contract and the Contractor’s Consent as being in substance a security assignment and consent thereto, so that neither document imposed any obligation on the lender, Carteret, to see to it that the general contractor, Blair, was paid for its work under the construction contract, unless and until Carteret in effect foreclosed on its security interest in the construction contract by terminating the license of the owner-borrower, Three Lakeway.
The majority notes: “[i]f Carteret had exercised its option to terminate the license granted to Three Lakeway, under the first sentence of section 3(d) [of the Contractor’s Consent] it could have elected to assume Three Lakeway’s right to enforce the construction contract and therefore also to assume Three Lakeway’s payment obligations under that contract,” and “Carteret had the power to terminate the [construction] contract only if it stepped into Three Lakeway’s shoes by terminating the license it granted to Three Lakeway ...” (emphasis added). Since the second sentence of section 3(d) of the Contractor’s Consent, on which Blair relies, expressly postulates “termination of the Construction Contract by Lender ” (emphasis added), it therefore also necessarily presupposes that the lender, Carteret, had “stepped into Three Lake-way’s shoes [under the construction contract] by terminating the license it granted to Three Lakeway,” for that is the “only” way the lender could terminate the construction contract. Here the majority holds that Carteret never terminated Three Lakeway’s license and hence never either stepped into Three Lakeway’s shoes under *437the construction contract or had the power (or purported) to terminate the construction contract. It follows from this that neither the first nor the second sentence of section 3(d) — on which Blair’s recovery is predicated — is applicable.
If, however, the Contractor’s Consent is construed to require Carteret to pay Blair whatever Blair is due under the construction contract, regardless of whether Car-teret has ever revoked Three Lakeway’s license or cancelled the construction contract, then it seems to me that the Contractor’s Consent was in this respect a contract of suretyship or guaranty.1
As the majority correctly recognizes, Carteret was never a principal in the construction contract, and it had no interest in the project being built, or in Three Lake-way or the construction contract, other than a creditor’s security interest to secure its loan to Three Lakeway. It is plain that if the Contractor’s Consent imposes on Carteret any liability to Blair for sums owing under the construction contract, where Carteret has not revoked Three Lakeway’s license, or stepped in its shoes under or cancelled the construction contract, then such liability must necessarily be secondary to that of Three Lakeway and must be the liability of one who is not a principal. That species of liability is guarantor or suretyship liability.
The character of the liability as that of guarantor or surety is clearly not changed by reason of the fact that the guarantor or surety receives consideration for acting as such or some incidental benefit from the transaction being guaranteed. Of course, all species of customer guarantees are not prohibited to federally controlled financial institutions. Letters of credit are an example. But in such instances, the transaction is usually treated, for purposes of documentation, reflection on the books, and other regulatory limitations, similarly to a loan to the principal whose obligation the financial institution is guaranteeing. See 12 U.S.C. § 1464(b)(2); 12 C.F.R. § 545.103.
And, where the transaction is one primarily for the financial institution’s direct benefit, it may not be viewed as unauthorized even though it is in form the guaranty of another’s obligation. The authorities in this regard are reviewed in Norton Grocery Co. v. Peoples National Bank, 151 Va. 195, 144 S.E. 501 (1928). But these are typically situations where the financial institution’s previously made loan has been put in jeopardy and it therefore has, in effect, taken over the security or the borrower’s business, and then guarantees third party advances to or for the benefit of that security or business. When the guaranty is entered into, the financial institution has already in substance become a principal in the business or property for the benefit of which the guaranteed funds are thereafter advanced.2 This case would be analogous to those if Carteret, due to Three Lakeway’s default, had terminated its license and stepped into its shoes. But that is not what happened here. Rather, the majority holds Carteret liable on the theory that from the very beginning it agreed to stand good for the construction contract payments that might become due to Blair. Such an agreement, even though supported by consideration and incidentally beneficial to Carteret, is clearly a guaranty, since Carteret was not a principal in the construction contract and, at that point, had and intended to have no more than a *438creditor’s security interest in the building to be erected and in Three Lakeway. In those circumstances, the undertaking that the majority says Carteret made in favor of Blair would, in my opinion, constitute Car-teret a “surety” for Three Lakeway within the meaning of 12 U.S.C. § 1464(b)(2), thus requiring compliance with 12 C.F.R. § 545.103 (1984), which was apparently not achieved, or even attempted, here. Because the majority does not reach the question of the effect on Blair’s rights as against Carteret if this obligation is one of suretyship, no useful purpose would be served by this dissent addressing that issue. As previously indicated, the relevant documents reasonably can, and in my view should, be construed not to impose such an improper suretyship obligation on Carteret.

. Under Louisiana law "[a] contract of guaranty is equivalent to a contract of suretyship and the two terms may be used interchangeably.” Guaranty Bank & Trust Company v. Jones, 489 So.2d 368, 370 (La.App.1986).

. As the Norton Grocery Co. opinion states (144 S.E. at 505):
“The underlying principle in the cases relied upon is this: A bank may not lend its credit to another, even though such a transaction turns out to have been of benefit to the bank, and in support of this a list of cases might be cited, which would look like a catalogue of ships; but there is no reason in principle why a bank may not pledge its credit for its sole benefit in an effort to save itself from loss imminent under some lawful contract, and the fact that it may rebound incidentally to the benefit of another does not invalidate the transaction, and this notwithstanding the fact that the transaction is termed one of guaranty. Ellis v. Citizens’ Nat. Bank, 25 N.M. 319, 183 P. 34, G.A.L.R. 166. There is no black magic in a name.”