Colonial Am. Nat. Bank v. Kosnoski

• Decision Date: 05 May 1980
• Docket Number: No. 78-1602,78-1602
• Citation: 617 F.2d 1025
• Parties: COLONIAL AMERICAN NATIONAL BANK, Appellee, v. Robert L. KOSNOSKI, Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1025

617 F.2d 1025

COLONIAL AMERICAN NATIONAL BANK, Appellee, v. Robert L. KOSNOSKI, Appellant.

No. 78-1602.

United States Court of Appeals Fourth Circuit.

Argued Oct. 3, 1979.

Decided Feb. 11, 1980.

Rehearing Denied May 5, 1980.

Douglas D. Wilson, Roanoke, Va. (Gerald A. Dechow, Martin, Hopkins & Lemon, P. C., Roanoke, Va., on brief), for appellant.

William R. Rakes, Roanoke, Va. (Bruce C. Stockburger, Gentry, Locke, Rakes & Moore, Roanoke, Va., on brief), for appellee.

Before BRYAN, Senior Circuit Judge, and WINTER and MURNAGHAN, Circuit Judges.

ALBERT V. BRYAN, Senior Circuit Judge:

Adjudged liable as the guarantor of two dishonored loans of the Colonial American National Bank at Roanoke, Virginia, Robert L. Kosnoski of West Virginia, appeals the judgment passed in a diversity action June 19, 1978, after a bench trial, by the Federal Court for the Western District of Virginia. In defense, he had pleaded complete release from the guaranty because of the bank's failure, upon his demand, after default in the loans, to sue all solvent parties (including sureties, guarantors and endorsers) who reside in Virginia. His stand rests on the exactions imposed upon the bank by the Code of Virginia: ¹

Surety may require creditor to sue. The surety, guarantor or endorser, or his committee or personal representative, of any person bound by any contract may, if a right of action has accrued thereon, require the creditor or his committee or personal representative, by notice in writing, to institute suit thereon, and if he be bound in a bond with a condition, or for the performance of some collateral undertaking, he shall also specify in such requirement the breach of the condition or undertaking for which he requires suit to be brought.

Va.Code § 49-25 (1974).

Effect of failure of creditor to sue. If such creditor, or his committee or personal representative, shall not, within fifteen days after such requirement, institute suit against every party to such contract who is resident in this State and not insolvent and prosecute the same with due diligence to judgment and by execution, he shall forfeit his right to demand of such surety, guarantor or endorser or his estate, and of his cosureties and their estates, the money due by any such contract for the payment of money, or the damages sustained by any breach of the collateral condition or undertaking specified as aforesaid; but the conditions, rights and remedies against the principal debtor shall remain unimpaired thereby.

Va.Code § 49-26 (1974).

There are no material factual differences here; decision hinges upon the construction of the statutes. Disagreeing with the trial judge's interpretation, we hold that under State law, Colonial should have sued all the other solvent, resident sureties, guarantors and endorsers, and failing to do so, it is precluded from enforcing Kosnoski's guaranty.

By a written contract of June 5, 1975, the bank agreed to lend Edward G. Frye and John Barbour Frye the sum of $372,272 on their note (Term Note), and to extend a $200,000 line of credit to the Frye Building Company to be used as working capital. The loan agreement was subscribed by Frye Building Company, a Virginia corporation, Edward G. Frye, John Barbour Frye, Ruth Townes Frye and Ernestine C. Frye. The agreement demanded that advances made under the line of credit be "personally guaranteed" by the borrowers (Edward G. Frye and John Barbour Frye) and their wives. The joinder of the wives in the loan papers is of peculiar import. It is notable because Ruth Townes Frye, wife of John Barbour Frye, was the only party who remained both a resident of Virginia and not insolvent at the time of default.

However, before consummation of the loans, the bank declined to advance $150,000 thereof, having learned meanwhile that Frye Building Company did not have perfect title to one parcel of the property tendered as security. ² During the summer of 1976, Frye Building Company approached the bank for release of the additional $150,000. To this end, Kosnoski, an investor in the Company, on August 12, 1976, executed a Guaranty Agreement with the bank and the Edward G. Frye, III, Construction Company, assuring payment of the retained $150,000.

In disbursing the additional funds, the bank prepared a document, signed by John Barbour Frye ³ and Ernestine C. Frye, wife of Edward, consenting to the disbursement of the $150,000 by the bank in August 1976. Through the bank's error, the signature of Ruth Townes Frye, wife of John Barbour Frye, was never obtained. Nevertheless, the bank turned over the $150,000 upon receipt of the Guaranty Agreement.

On September 30, 1977, the bank wrote Edward and John Frye, their wives, the various corporate entities involved and Kosnoski, notifying them that the makers were in default on the Term Note and line of credit note, and demanding payment on or before October 12, 1977. Otherwise, the letter continued, "our attorneys will be instructed to proceed with collection of these obligations from the makers, guarantors or property securing said notes."

With the loans still in arrears, on December 8, 1977, suit was brought by the bank against Kosnoski alone. Through his attorneys, by letter of February 15, 1978, Kosnoski called upon the bank to sue each maker, guarantor and endorser of the two notes. ⁴ Although this demand was received by the bank February 16, no suit was ever begun against any of these parties other than Kosnoski.

Since this omission continued for more than 15 days, Kosnoski pleaded it as freeing him, by virtue of Va. Code § 49-26, from responsibility under his guaranty. Undisputed is the fact, it will be recalled, that the only other "party" to the loan "contract who is resident in this State and not insolvent," Va. Code § 49-26, and thus within the embrace of the Virginia statute, is Ruth Townes Frye, the wife of John Barbour Frye. As previously noticed, she bound herself by executing the loan agreement.

Admitting that no case has been decided in Virginia specifically addressing the issue of whether the statute applied to a situation in which a guarantor demands that the creditor sue another surety, guarantor or endorser, the bank adverts to the decision of the Supreme Court of West Virginia in State v. Citizens' National Bank of Philippi, 114 W.Va. 338, 171 S.E. 810 (1933). Its discussion traces the Virginia law from its first enactment to the present, but glosses over the point determinative here. The original 1794 statute, 1 Rev. Code of Va. c. 116, § 6, p. 461 (1819) was amended to substantially its present form in 1849 to impose penalties against a creditor who refused "(to) institute suit against every party to such contract who is resident in this State and not insolvent . . . ." Va.Code § 49-26. (Accent added.) The insertion of the phrase "every party" would have been entirely unnecessary if the legislature had intended that the guarantor could only demand suit against the principal. We, therefore, cannot accept the West Virginia view, and find Kosnoski's claim of discharge is unimpeachable.

The order on appeal will be reversed, and the action remanded to the District Court with directions to enter judgment for the appellant with costs.

Vacated with Directions.

MURNAGHAN, Circuit Judge, dissenting:

It concerns me to dissent, but my understanding of what the Virginia courts would do in this diversity action differs from that of my fellow panel members. The pertinent rules of suretyship and my perception of the proper reading of the applicable Virginia statutes lead me to a conclusion other than the one the majority has reached.

The case involved a term loan agreement, a loan guaranty agreement, and two notes thereunder, all executed on June 5, 1975. Those documents together provided for: (1) borrowings from Colonial American National Bank ("Bank") by Edward G. Frye, III ("Edward") and John Barbour Frye ("John") in the aggregate amount of $372,272, with $122,272 of the total amount to be relent by them to a partnership, Frye Building Company ("Partnership"), and $250,000 to be relent by them to a Virginia corporation also named Frye Building Company ("Virginia Corporation"); and (2) borrowings from the Bank by the Virginia Corporation in the amount of $200,000.

The term loan agreement covered in detail the terms of the first of the transactions, and also provided:

In addition to the above term loan, Bank will extend a $200,000 line of credit to the Company to be used as working capital at the best commercial rate then in effect plus 1%. . . . All advances made under this line of credit shall be personally guaranteed by Borrowers, Borrowers' wives, and the Partnership. Loans under this line of credit shall be secured by the deed of trust set forth in Exhibit B and governed by the terms of this Agreement.

The Borrowers were defined in the term loan agreement as Edward and John. The term loan agreement identified the parties thereto as Edward, John, the Partnership, the Virginia Corporation, and the Bank. The wives of Edward and John ¹ were not named as parties to the term loan agreement, the sole reference to them being found in the language quoted above requiring them to guarantee advances under the $200,000 line of credit to the Virginia Corporation. At the foot of the term loan agreement, following the signatures by or on behalf of the named parties, Ruth and Ernestine signed. No descriptive language appeared in the vicinity of their signatures. They signed in an order inverse to the order in which their respective husbands signed, thereby generating some subsequent confusion.

The term note covering the $372,272 advance identified John and Edward as the makers and borrowers and the Bank as the lender. Edward and John signed as makers. In its body the note provided for waiver of presentment, demand, notice of dishonor and all exemptions by the borrowers and "every endorser and guarantor." Appended at the foot...