Texas Water Sup. Corp. v. Reconstruction Finance Corp., 14187.

Citation204 F.2d 190
Decision Date21 April 1953
Docket NumberNo. 14187.,14187.
PartiesTEXAS WATER SUPPLY CORP. et al. v. RECONSTRUCTION FINANCE CORP.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

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Joseph W. Cash and Orin H. Bonney, Houston, Tex., for appellants.

Raymond A. Cook, Houston, Tex., Andrews, Kurth, Campbell & Bradley, Houston, Tex., of counsel, for appellee.

Before HUTCHESON, Chief Judge, and HOLMES and RIVES, Circuit Judges.

RIVES, Circuit Judge.

This was an action on a promissory note by the Reconstruction Finance Corporation against the Texas Water Supply Corporation and on a guaranty contract against A. E. Fawcett, Jr., and L. M. Fawcett. The issues on this appeal relate first to the personal liability of the guarantors, and second to the Texas Corporation's counterclaim.

The note was executed September 30, 1942, in the principal amount of $30,950.00 payable ninety days after date and signed for the maker, the Texas Corporation, by its President, A. E. Fawcett, Jr., and its Secretary, L. M. Fawcett. On the same date as the note, the guaranty contract was executed by A. E. Fawcett, Jr., and L. M. Fawcett individually. On the back of the note are several entries of partial payments of principal and interest and the following notation:

"12-29-42 `The time of payment of the balance of the principal and Interest on this Note is hereby extended so that it shall become due and payable on or before March 30, 1943\'."

By the terms of the note, the maker bound itself also to pay "any and all other indebtedness of the undersigned to Payee, * * * now due or hereafter to become due and whether heretofore or contemporaneously herewith or hereafter contracted, and whether arising by operation of law, or out of the same or different transactions between the parties hereto, or between others."

On February 4, 1943, a formal "extension agreement" was executed between the Texas Corporation acting by the two Fawcetts as its officers and the Reconstruction Finance Corporation extending the maturity of the note to March 30, 1943. That agreement recited: "Whereas, Texas Water Supply Corporation has asked for an extension of the time of payment of said note, which has been granted by the payee". The guarantors, the Fawcetts as individuals, did not join in this "extension agreement". No demand was made upon the guarantors before this action was commenced on March 28, 1947.

Appellants insist with much force that, according to the terms of the guaranty, the guarantors promised to pay "immediately upon the written demand of Reconstruction Finance Corporation", and that demand against the guarantors before suit was required. They rely principally upon First National Bank of Waterloo v. Story, 200 N.Y. 346, 93 N.E. 940, 943, 34 L.R.A., N.S., 154, 21 Ann.Cas. 542, in which case it was stated that:

"upon principle as well as authority the following propositions should be announced as the law:
"(1) When the promise is to pay one\'s own debt for a specified amount on demand, no demand need be alleged or proved.
"(2) When the promise to pay on demand is not to pay one\'s own debt, but is a collateral promise to pay the debt of another, a demand is necessary, for it is part of the cause of action."

See also cases collected in the annotations in each of the two annotated reports of that decision, and see Nelson v. Bostwick, 5 Hill 37, 40 Am.Dec. 310.

The rule generally as to the necessity of demand before suit has been well stated both by the Court of Civil Appeals of Texas and by this Court. "When an obligation to pay is complete, a cause of action at once arises, and no formal demand is necessary. Ballew v. Casey, 60 Tex. 573." Green v. Scales, Tex.Civ.App., 219 S.W. 274, 275. "A demand before suit usually is necessary only when the debtor must be put in default before the cause of action accrues. Where there is a present liability the suit is itself a sufficient demand." Stephens v. Pittsburgh Plate Glass Co., 5 Cir., 36 F.2d 953.

As to contracts, we think the full rule is best set forth in Restatement, Contracts, Sec. 264, as follows:

"264. Promises Conditional on Demand.
"Where a contractual promise to pay money is in terms performable on demand by the promisee, but the duty of performance is otherwise unconditional, and neither more specific words nor usage requires a different result, a right of action by the promisee is not conditional on a demand being made.
"Comment:
"A. Generally there can be no right of action on a contractual promise in terms conditional until all the facts stated as conditions have happened or been performed. But a peculiar rule prevails in regard to promises to pay money debts on demand. Such a promise to pay one\'s own money debt is regarded as unconditional unless the parties by some more express language indicate a contrary intention, or unless usage as in the case of bank deposits prescribes a different rule. In other promises in terms conditional on demand, no duty of immediate performance arises without a demand, and even in such promises to pay one\'s own money debt, interest is allowed as damages only from the making of a demand (See Sec. 337)."

See also, I Am.Jur., Actions, Sec. 36; 1 C.J.S., Actions § 27.

The note and the guaranty contract were executed simultaneously. The guarantors were the corporate officers who signed the note, and, except for one qualifying share, were all of the stockholders of the corporation. The note was for a definite amount payable ninety days after date. The guarantors "unconditionally guaranteed" payment of the debt. Most significant is the entire sentence in which the requirement for demand relied on is included: "In case the Debtor shall fail to pay all or any part of the Liabilities when due, whether by acceleration or otherwise, according to the terms of said note, the undersigned, immediately upon the written demand of Reconstruction Finance Corp., will pay to Reconstruction Finance Corp. the amount due and unpaid by the Debtor as aforesaid, in like manner as if such amount constituted the direct and primary obligation of the undersigned." Considering the contract, and all of the surrounding circumstances, we think that the rule to be applied should be the same as if the note were the direct and primary obligation of the guarantors and, hence, that no demand before suit was necessary. The suit itself was sufficient demand.

The guarantors, the Fawcetts individually, contend that, since they signed the extension agreement as officers of the Corporation and did not join individually, they as individuals are not bound by the extension of the due date of the note. When the note and the guaranty are read together, it is clear that the guarantors undertook to pay not only the principal sum of the note at its maturity, but any indebtedness theretofore or thereafter contracted, whether arising out of the same or different transactions. Under the terms of the note and guaranty, the guarantors were bound by any extension or modification of the note. It follows that this action was filed within the statutory period of limitation after the accrual of the cause of action against the guarantors.

L. M. Fawcett was the wife of A. E. Fawcett, Jr., and claims that she was prohibited by the laws of the State of Texas from binding herself on the contract of guaranty. She concedes that a married woman is authorized by statute to become a joint maker of a note or a surety on the bond or obligation of another, provided that her husband joins her in making the contract of suretyship; but argues that the word "surety" as employed in the statute, Article 4623, Texas Revised Civil Statutes, excludes the kind of contract labeled in this case a "guaranty". The distinction between "surety" as used in this statute and "indemnity" was carefully pointed out by the Supreme Court of Texas in Tolbert v. Standard Accident Insurance Co., 148 Tex. 235, 223 S.W.2d 617, 620. Among other things, it was said that suretyship presupposes a contract or transaction to which it is collateral; that the surety undertakes to pay if the principal does not; and that the surety becomes liable as soon as the debt of the principal matures and is unpaid.

"A surety makes a direct promise to perform the principal\'s obligation if he fails to perform it as he agreed to do; an indemnitor obligates himself to reimburse the indemnitee for loss suffered or to save him harmless from liability, but he never agrees directly to perform the obligation indemnified. Suretyship requires three parties, while indemnity requires only two." Tolbert v. Standard Accident Insurance Co., 148 Tex. 235, 223 S.W.2d 617, 620.

We find in 24 Am.Jur., Guaranty, Sec. 10, the following statement: "The contract of suretyship is in some situations not distinguishable from the contract of guaranty. This is generally, if not invariably, true where the contract of guaranty is absolute or unconditional, binding the guarantor to pay a definite sum at a specified time."

Considering this note and guaranty and all of the surrounding circumstances, we are of the clear opinion that L. M. Fawcett was bound certainly as a surety, if indeed not as virtually a joint maker of the note.

The amount borrowed from the Reconstruction Finance Corporation was to assist the Texas Corporation in financing the completion of a number of well drilling contracts, and those contracts...

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