St. Petersburg Bank & Trust Company v. Boutin

• Citation: 445 F.2d 1028
• Decision Date: 24 June 1971
• Docket Number: No. 29135.,29135.
• Parties: ST. PETERSBURG BANK & TRUST COMPANY, Plaintiff-Appellee, v. Bernard L. BOUTIN, etc., et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

445 F.2d 1028 (1971)

ST. PETERSBURG BANK & TRUST COMPANY, Plaintiff-Appellee, v. Bernard L. BOUTIN, etc., et al., Defendants-Appellants.

No. 29135.

United States Court of Appeals, Fifth Circuit.

June 24, 1971.

Bernard H. Dempsey, Jr., Asst. U. S. Atty., Tampa, Fla., Robert V. Zener, Michael C. Farrar, Attys., Dept. of Justice, Washington, D. C., William D. Ruckelshaus, Asst. Atty. Gen., John L. Briggs, U. S. Atty., Washington, D. C., for defendants-appellants.

Edward I. Cutler, Tampa, Fla., Thomas M. Tucker, St. Petersburg, Fla., H. Diane Breithaupt, Tampa, Fla., Harrison, Greene, Mann, Davenport, Rowe & Stanton, St. Petersburg, Fla., and Carlton, Fields, Ward, Emmanuel, Smith, & Cutler, P.A., Tampa, Fla., for plaintiff-appellee.

Before JOHN R. BROWN, Chief Judge, and TUTTLE and GODBOLD, Circuit Judges.

GODBOLD, Circuit Judge:

The Bank sued SBA on that agency's guarantees of two separate $150,000 loans made by the Bank to the now-bankrupt Caladesic Capital Corporation.¹ After a nonjury trial the Bank secured judgment on both guaranties for the full amount of $300,000. We conclude that the court erred in holding SBA liable on the first guaranty issued, but correctly held it liable on the second, and, as modified, affirm.

Each of the two loan transactions was handled as follows. Caladesic and SBA entered into a loan agreement. Caladesic executed a promissory note payable to SBA, which stated that it was executed pursuant to the loan agreement. By a written assignment agreement, executed by SBA and the Bank, SBA assigned the note and loan agreement to the Bank. The Bank disbursed its funds to Caladesic. Under each loan agreement, the Bank could reassign the note at any time to SBA, and SBA would pay it the outstanding principal. Commencement of receivership or bankruptcy against Caladesic operated as an automatic reassignment, and the Bank was then obligated to pay the outstanding principal. Caladesic was put in receivership, then declared bankrupt. SBA declined to pay the Bank, claiming that it had been discharged as guarantor, and this suit ensued.

Federal common law controls the relationships and rights of the parties, First National Bank of Henrietta v. SBA, 429 F.2d 280 (5th Cir. 1970); W. T. Jones & Co. v. Foodco Realty, Inc., 318 F.2d 881 (4th Cir. 1963). Throughout the suit the parties have referred to SBA's status as that of guarantor and its obligation to repurchase the notes as one of guaranty, and have recognized that SBA is compensated. No particular form of words is required for a guaranty. We think the parties' characterization is correct.

There are four relevant loans made by the Bank to Caladesic:

June 11, 1964: first SBA-guaranteed loan of $150,000.

September 25, 1964: non-SBA loan of $150,000.

December 28 (or 31), 1964: non-SBA loan of $100,000.

February 12, 1965: second SBA-guaranteed loan of $150,000.

There was no collateral pledged or mortgaged for the first SBA-guaranteed loan. However, availability of collateral was provided by the loan agreement, which contained a "set aside" provision requiring Caladesic to segregate in its files and earmark with a distinguishing mark eleven securities with a face value of $610,000, and not to pledge or otherwise encumber them without prior written approval of SBA, and, on demand of SBA, to assign them as collateral for the loan. The securities were listed on a schedule attached to the loan agreement, and were described in detail.² The assignment agreement provided that neither the Bank nor SBA could change any provision of the note or the loan agreement without the consent of the other.

The assignment was executed on behalf of the Bank as assignee by its vice president-cashier, who "inspected" or "perused" or "scanned" it and the other loan documents and sent them to the Bank's attorney for his inspection. The same officer also handled all the subsequent loan transactions with Caladesic. The loan documents were placed in the Bank's files and have remained there.

Receivership proceedings were instituted against Caladesic in March, 1966, and it was adjudicated bankrupt in October, 1966. SBA made no recovery in bankruptcy.

The controversy over whether SBA was relieved of its obligations as guarantor arises from the fact that after the first guaranteed loan was closed, and before the second, and without SBA's knowledge, the Bank, on September 25 and December 28, 1964 made the two nonguaranteed loans to Caladesic, and as collateral took pledges of a substantial portion of the set aside securities, which the Bank still retained at the time of trial.³ They were pledged and delivered in connection with the nonguaranteed loan of September 25. The District Court made no findings as to their number and amount, but an officer of the Bank testified to holding eight of the set aside securities, all secured by real estate mortgages. Since only nine were secured by mortgages, it would appear, by deducting the largest and the smallest of the real estate notes from the total of the nine, that the Bank held securities with face values between $470,000 and $550,000.

The nonguaranteed $100,000 loan made December 28 was secured by corporate stock owned by the president of Caladesic and (under cross-collateral agreements) by the set aside securities pledged for the September 25 loan. When the second SBA-guaranteed loan was closed, the September 25 loan was discharged out of the proceeds. At that time the president's corporate stock was released as collateral for the $100,000 loan, leaving the set aside securities still pledged for that loan.

At no time prior to the closing of the second guaranteed loan did the Bank notify SBA that set aside securities had been assigned to it.

The Bank's actions discharged SBA of liability on the first guaranty.

§ 128. Modification of principal\'s duty.

Where, without the surety\'s consent, the principal and the creditor modify their contract otherwise than by extension of time for payment

* * * * * *

(b) the compensated surety is

(i) discharged if the modification materially increases his risk, and

(ii) not discharged if the risk is not materially increased, but his obligation is reduced to the extent of loss due to the modification.

Restatement of Security § 128; Trinity Universal Ins. Co. v. Gould, 258 F.2d 883 (10th Cir. 1958); Logan v. Clark, 63 F.2d 973 (4th Cir. 1933). This is simply a more specific application of the general principle that, since a suretyship obligation is imposed only with the express consent of the promisor, he is entitled to stand upon the strict terms of his undertaking, and a new contract may not be substituted for the old one without his consent. Stearns, The Law of Suretyship, § 6.2. (Elder ed.) Modification need not be accomplished by changes in the language of the instrument but may be by material departures from its terms in its execution and enforcement. Reliance Ins. Co. of Phila. v. Colbert, 124 U.S.App.D.C. 339, 365 F.2d 530 (1966); 10 Williston on Contracts (3d ed.) § 1243; Restatement of Security § 128, Comment b; Stearns, The Law of Suretyship, § 6.6 (Elder ed.)

The material increase in risk to the surety is evident. The set aside agreement safeguarded the securities as a source of collateral for a loan otherwise unsecured, without the necessity of their being assigned to and held in the lender's files. The amount was substantial, $610,000 face value on a $150,000 loan. Had the Bank exercised its right to assign the note back to SBA, that agency would have found itself with no security available to it, and with the security agreed to be available in the hands of the Bank as a secured creditor of Caladesic on subsequently made loans, or else SBA would have found itself in a lawsuit with the Bank over release of the security (a lawsuit which, in fact, it is already in, in the form of a pending separate action to determine the rights of the parties to the securities, discussed infra). SBA would have been in a like posture had it exercised its right under the loan agreement to declare the note due at once because of the breach of the security arrangement.

The restriction also protected SBA against Caladesic's further extending its credit. While owing $150,000 on the first SBA-guaranteed loan, Caladesic, by use of the restricted securities (alone and with the temporary aid of its president's stock) obligated itself for an additional nonguaranteed $150,000, increased to $250,000, then reduced to $100,000. Whether these additional loans caused or contributed to Caladesic's bankruptcy we do not know, nor is SBA required to prove it — its right is to be protected against a substantially different risk of loss. Restatement of Security § 128, Comment f.

Payment of the nonguaranteed loan of September 25 did not eliminate the material increase in risk. The December 28 loan remained unpaid. Also the September 25 loan was the first step in the chain of dealings by which the restricted securities were placed with, and have remained with, the Bank as collateral.

The Bank states that at all times it has been ready to turn over the securities free of encumbrance or lien "if required to do so." In fact it has sought in a separate action a determination of the respective rights of the parties to the securities which it holds, and it sought unsuccessfully in the present action to amend so as to secure a judgment against SBA on the guaranties conditioned on the Bank's transferring to SBA such interest in the securities as the court might determine SBA is entitled. It is, to say the least, an unusual theory, and supported by no cited authority, that the creditor who has breached its obligations so as to relieve the guarantor before the events occur which otherwise would have made the guarantor liable, may, after the events occur, and if it wishes to do so, put Humpty Dumpty together again and restore the liability of the guarantor....