Woods-Tucker Leasing Corp. of Georgia v. Kellum, WOODS-TUCKER

• Citation: 641 F.2d 210
• Decision Date: 30 March 1981
• Docket Number: WOODS-TUCKER,No. 79-3400,79-3400
• Parties: 31 UCC Rep.Serv. 188 LEASING CORPORATION OF GEORGIA, Plaintiff-Appellee, v. Thomas Boyd KELLUM, Sr., Defendant-Appellant. . Unit A
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 210

641 F.2d 210

31 UCC Rep.Serv. 188

WOODS-TUCKER LEASING CORPORATION OF GEORGIA, Plaintiff-Appellee, v. Thomas Boyd KELLUM, Sr., Defendant-Appellant.

No. 79-3400.

United States Court of Appeals, Fifth Circuit.

Unit A

March 30, 1981.

Glen W. Hall, Jackson, Miss., for defendant-appellant.

Richard T. Bennett, Jackson, Miss., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Mississippi.

Before WISDOM, RUBIN and SAM D. JOHNSON, Circuit Judges.

SAM D. JOHNSON, Circuit Judge:

In this diversity action, governed by Mississippi substantive law, Thomas Boyd Kellum, Sr., a guarantor, appeals from a district court decision holding him presently liable on his Continuing Guaranty Agreement. Since we find that the district court failed to apply the proper Mississippi U.C.C. provision to this action, we reverse and remand for further proceedings consistent with this opinion.

Durfold, Inc., a Mississippi corporation that was one of the original defendants in this action, is a manufacturer of convertible lounge furniture, primarily for hospital use. Durfold is also engaged in the business of leasing its lounge furniture and television sets to hospitals for use by patients. Between 1972 and 1974, Durfold entered into financing arrangements with Woods-Tucker Leasing Corporation, whereby Woods-Tucker would purchase certain merchandise normally either Durfold lounge beds or television sets from Durfold or its subsidiary Duo Services, Inc. Durfold would lease this merchandise back from Woods-Tucker and then furnish it to various hospitals by lease. Woods-Tucker required Durfold as lessee to execute an equipment lease setting up monthly installment payments to be made to Woods-Tucker as rent of the equipment sold to Woods-Tucker for subsequent lease back to Durfold. Upon the execution of each equipment lease between Woods-Tucker and Durfold, a security deposit or retained deposit of approximately ten percent of the total cost of that equipment was generally taken by Woods-Tucker. The security deposit or retained deposit was forfeited to Woods-Tucker upon the expiration of the lease term in return for the execution of a bill of sale of the equipment leased.

On May 23, 1974, Durfold executed nineteen leases for the rental of certain lounge-a-bed equipment from Woods-Tucker. The leases were payable monthly over a period of thirty-six months. A ten percent security deposit was taken by Woods-Tucker upon the execution of each of the leases. The first payment was due July 1, 1974, and the final payment on each of the nineteen leases was due June 1, 1977. (At trial these leases were designated Exhibits A through S.) On June 21, 1974, Durfold executed a lease for the rental of one used forklift from Woods-Tucker, payable over a period of thirty-six months. The first payment was taken upon the execution of the lease and no security deposit was taken. The final payment was due on May 20, 1977. (At trial this lease was designated Exhibit T.) Finally, on August 14, 1974, Durfold executed two leases for the rental of certain Zenith Color TV sets from Woods-Tucker, payable over a period of forty-eight months, with three rental payments taken on each of the leases upon their execution and no deposit taken. The final rental payment was due July 1, 1978. (At trial these leases were designated Exhibits U and V.) ¹

On or about May 23, 1974, former defendant William H. Barbour, Sr. (previously President of Durfold and a member of the Board of Directors of Durfold since March 1970) executed a Continuing Guaranty of Lease to Woods-Tucker, its transferees or assignees, of the leases marked A through T executed by Durfold. Later, on August 14, 1974, Barbour executed a Continuing Guaranty of Lease to Woods-Tucker, its transferees or assignees, of the leases executed by Durfold marked U and V. Also on August 14, 1974, defendant Thomas Boyd Kellum, Sr. executed a Continuing Guaranty of Lease to Woods-Tucker, its transferees or assignees, of the leases executed by Durfold marked U and V. ² Thus, Barbour guaranteed all twenty-two of the leases executed by Durfold, while Kellum guaranteed only two of the leases. Woods-Tucker Leasing Corporation subsequently assigned for value all twenty-two of the leases to Woods-Tucker Leasing Corporation of Georgia. (Woods-Tucker Leasing Corporation of Georgia will hereinafter be referred to in this opinion simply as Woods-Tucker.)

Durfold defaulted in its payments under the leases and Woods-Tucker originally filed suit on July 26, 1977, against Durfold and Barbour for $241,446.47 on twenty-two leases, and against Kellum for the outstanding balance of $145,348.84 on the two leases that he guaranteed. Woods-Tucker also claimed costs of collection, reasonable attorney's fees and expenses, and costs of court. The answers of all defendants denied the allegations in the complaint, denied that plaintiff was a holder in due course of the leases, and alleged a defense of usury, claiming that the leases were not true leases, but were in fact credit sales transactions charging a usurious rate of interest in violation of Miss. Code Ann. § 75-17-1 (1972 & Supp. 1980) (formerly codified at Miss. Code Ann. § 36 (1942)).

On March 23, 1978, defendants Durfold and Barbour filed an amended answer asserting a counterclaim against Woods-Tucker. The counterclaim again alleged that the leases designated as Exhibits A through V were in actuality credit sales transactions charging a usurious rate of interest. Defendants claimed the right to the recovery of all principal and interest paid on the "leases," in addition to the right to have all principal and interest that was currently due under any unpaid "leases" forfeited. They prayed for a judgment against Woods-Tucker in the amount of $926,000.00, plus costs of court.

A Settlement Agreement and Mutual Release dated January 30, 1979, was executed by Durfold, Barbour, and Woods-Tucker. Under the agreement, in exchange for dismissing its suit against Durfold and Barbour, Woods-Tucker received a note from Barbour in the amount of $201,500.00 plus interest of one percent per annum, secured by Barbour's stock in Durfold ³ and by a life insurance policy on Barbour's life in the amount of $202,000.00. The note was to be payable in monthly installments of $100.00 per month for thirty-six months commencing on February 1, 1979. Beginning on February 1, 1982, the remaining principal and interest due were to be payable in monthly installments of $1,000.00 each, less the amount of the monthly premium payment due on the life insurance policy on Barbour's life, but in no event to be less than $300.00. Woods-Tucker also received a note from Durfold for $36,000.00 plus interest of one percent per annum. This note was to be payable in monthly installments of $1,000.00 beginning on February 1, 1979. The last installment was to contain the principal sum of $1,000.00 plus all interest accrued during the term of the obligation. In addition, Durfold and Barbour dismissed their counterclaim against Woods-Tucker. The Settlement Agreement expressly reserved Woods-Tucker's rights against Kellum. On February 6, 1979, the district court entered an order of dismissal that dismissed with prejudice both Woods-Tucker's action against Durfold and Barbour, and Durfold and Barbour's counterclaim against Woods-Tucker. The instant suit, therefore, remains only against Kellum in the amount of $145,348.84. ⁴

On August 8, 1979, Kellum filed a motion requesting the district court to allow him to amend his answer to assert the defenses of (1) payment in full, (2) accord and satisfaction, (3) novation, and (4) relief afforded by Miss. Code Ann. §§ 85-5-1, -3 (1972). The district court, after hearing argument of counsel, granted Kellum leave to amend his answer to allege the defenses of payment in full, accord and satisfaction, and relief afforded by the above specified sections of the Mississippi Code. The district court stated, however, that "the pre-existing defenses involving the issues of holder in due course, usury and leases intended as security are not well taken nor the amended affirmative defense of novation." The trial court ordered "that both the Plaintiff and Defendant shall submit a stipulated memorandum of finding of fact unto this Court and that each side shall also file its own affidavits and memorandum of law no later than noon, Friday, August 17, 1979." This case was tried before the court upon stipulations of fact and memoranda of law. As required by the district court, the parties to this lawsuit have stipulated that the lease agreements are true leases and not credit sales transactions charging a usurious rate of interest and that Woods-Tucker is a holder in due course of the leases. The district court rejected Kellum's defenses and concluded that Woods-Tucker had not prejudiced its right to collect against Kellum on his Continuing Guaranty. Judgment was entered for Woods-Tucker in the amount of $145,348.84, plus $8,849.00 for attorney's fees and $252.40 for expenses and costs of court.

Kellum argued, both before the district court and before this Court, that the settlement between Woods-Tucker and the other defendants constituted an accord and satisfaction of the original debt to Woods-Tucker and a replacement of that lease obligation with an entirely new debt. This new debt, Kellum claims, is evidenced by the new promissory notes given to Woods-Tucker by Durfold and Barbour. Thus, Kellum contends that since the accord and satisfaction discharged Durfold's original obligation under the leases, Kellum is similarly discharged from his Continuing Guaranty Agreement since his guaranty is strictly collateral to and dependent upon Durfold's principal debt.

Kellum is correct in his contention that a guaranty contract is collateral to the principal contract between a creditor and the principal debtor. Powell v. Sowell, 245 Miss. 53, 61-62, 145 So.2d...