White v. Phillips, 80-7689
| Decision Date | 16 June 1982 |
| Docket Number | No. 80-7689,80-7689 |
| Citation | 679 F.2d 373 |
| Parties | William H. WHITE, d/b/a Southern Investment Company, Plaintiff-Appellee, v. Lofton A. PHILLIPS, Defendant-Appellant. . Unit B |
| Court | U.S. Court of Appeals — Fifth Circuit |
Fletcher Thompson & Associates, Mark C. Ellison, Fletcher Thompson, Atlanta, Ga., for defendant-appellant.
Arnall, Golden & Gregory, Charles L. Gregory, Jeffrey C. Baxter, Atlanta, Ga., for plaintiff-appellee.
Appeal from the United States District Court for the Northern District of Georgia.
Before GODBOLD, Chief Judge, TJOFLAT, and THOMAS A. CLARK, Circuit Judges.
After a bench trial below, the district court entered judgment on behalf of William White for $39,090.92 plus attorney's fees and interest. The court held Lofton Phillips liable for that amount as a compensated surety. Because White's claims are within the scope of Phillips' "guaranty," 1 we affirm.
Mr. and Mrs. Phillips became acquainted with R. C. Shumpert as a member of their church. Mr. Shumpert had spent "all of his adult life" in the van lines business. He approached the Phillipses and asked for their assistance in putting together a "real good working company." On the basis of their friendship (and apparently Mr. Shumpert's experience in the field), Mr. Phillips invested $50,000 in the enterprise in exchange for 48% ownership. Mr. Shumpert held the remaining, controlling interest and managed R. C. Van Lines. Although Mr. Phillips was vice president, he only "dropped in occasionally."
In the summer of 1977, R. C. Van Lines was doing poorly. Like many similar companies, most of its business came from government contracts. Unlike private parties who have to pay before a shipment is delivered, the United States pays its obligations with all the speed one might expect of a cumbersome bureaucracy. In order to improve cash flow, R. C. Van Lines, like many other carriers, factored its accounts receivable. Under this business procedure, the factor pays the carrier the face value of the account less a discount. A factor's key to profit-making is his correct estimation of the delay between his purchase of the account and its payment. If the period is short, the cost of money (which the factor borrows in part to buy the accounts) will be less than the amount of the discount and a profit will result. In 1977, R. C. Van Lines had a factoring arrangement with a 5% discount.
In the summer of 1977, White (Southern Investment) and Shumpert discussed a prospective factoring arrangement at a more favorable discount rate. At a meeting held in August, White agreed to factor "Government receivables" of R. C. Van Lines at 2 1/2% discount. Under the agreement, R. C. Van Lines assigned its accounts to White and promised to reimburse him for any amounts not paid by the government. The principals (Mr. Shumpert and Mr. Phillips) and their spouses were to sign an "Unconditional Guaranty and Indemnification Agreement." Mr. Phillips signed an agreement which provided in pertinent part:
... in consideration of SOUTHERN INVESTMENT COMPANY purchasing by assignment certain receivables of R. C. VAN LINES, INC. in an amount not to exceed five hundred thousand dollars ($500,000.00) at any given time, the undersigned hereby guarantee absolutely and unconditionally the payment by R. C. VAN LINES, INC. to SOUTHERN INVESTMENT COMPANY of any and all sums which may become due to SOUTHERN INVESTMENT COMPANY by reason of its purchase of such receivables and to further indemnify SOUTHERN INVESTMENT COMPANY against any and all claims, losses, or damages it may incur or suffer by reason of the failure of R. C. VAN LINES, INC. to perform its obligations to SOUTHERN INVESTMENT COMPANY.
The essence of the August meeting was recorded in a letter from Mr. White to the company, a copy of which Mr. Phillips received.
With reference to our meeting last Saturday, August 13, with your attorney, Mr. Fletcher Thompson, and your partner, Mr. L. A. Phillips, this is to confirm to you that Southern Investment Company would be willing to finance your U. S. Government receivables for the discount rate of 2 1/2%. In lieu of a reserve account which is customary in this type of financing, we would accept the unconditional guaranty of you and your wife, and Mr. L. A. Phillips and his wife.
All parties concede that this is the last information provided by the principals to Mr. Phillips regarding the factoring arrangement. Within six weeks of the execution of the "guaranty," Mr. White, no longer satisfied with the bargain he had struck, advised Shumpert that the accounts were not as readily collectible as he had believed and that new terms were necessary. The new agreement is set forth in a follow-up letter from White to Shumpert.
This is to confirm our conversation as of this date whereby Southern Investment Company will be charging R. C. VAN LINES, INC. a rate of 2 1/2% of the face amount of your Government receivables plus 2% over the prime rate charged by North Carolina National Bank, Charlotte, North Carolina, on the average outstanding balance of your account.
All parties concede that Mr. Phillips was never advised of this "new arrangement." During the remaining life of the company, interest charges amounted to $32,134.72.
In June 1978, White, anticipating the impending collapse of R. C. Van Lines, set up a reserve account in which 10% of the collected factored accounts were withheld. Over the remaining company life, $20,328.47 was withheld in the reserve account. No evidence was presented to show that Mr. Phillips was aware of this reserve account.
By White's accounting, $39,090.92 was owed by the van lines. It is important to consider how this was calculated. Initially, White would enter the value of the purchased accounts receivable in his books and disburse that amount, less 2 1/2 percent discount to the van lines. After setting up the reserve account and making the "prime plus 2%" arrangement, the accounts were handled differently. Ten percent of the account was "held back." Effectively, the van lines would be paid the face value of the accounts receivable less 12 1/2 percent. Ten percent of the account was then credited to the van lines in the reserve account. White charged the reserve account each month for interest due under the "prime plus 2%" agreement and for other fees related to collection. When the shipper paid on an account, that payment was credited against the accounts receivable. Because the original shipping charges were often greater than the "reasonable" charges which the government would pay, the amount was often less than originally billed. The payment which White claimed against Phillips ($39,090.92) was the sum of the unpaid accounts less the amount remaining in the reserve accounts. Thus, White's claim includes uncollected accounts, collection expenses, and interest due under the "prime plus 2" agreement.
In June 1978, White factored an account for Omni Products. Unlike the other accounts, for which the government was primarily liable, this was a "commercial" account. The parties dispute whether it was covered by Phillips' "guaranty."
Phillips wages a multipronged attack on the district court's judgment for plaintiff. He asserts that he was an uncompensated surety and that the "2% over prime" arrangement was a novation, and thus he is discharged under Ga.Code Ann. § 103-202. 2 He claims that the "increase in interest" increased his risk and thus discharged him under Ga.Code Ann. § 103-203. 3 He makes the same arguments with respect to the reserve account. He contends additionally that the parties agreed only to the financing of "Government receivables" and that the Omni accounts were not within the meaning of that term. Alternately, he asserts factoring the Omni accounts increased his risk and thus discharged him under Ga.Code Ann. § 103-203. If Phillips is a compensated surety, he must rely on the common law for his defenses. In essence, he must show a novation and then demonstrate a material change yielding actual harm.
Unlike the parties, we do not believe this case presents complex legal issues. Mr. Phillips agreed to act as surety in exchange for Mr. White's factoring of R. C. Van Lines' accounts. He did so in a writing under which he is liable for failure of the van lines to meet its obligations to White. That liability is not limited in the writing. The van lines failed to meet its obligations and now Phillips is liable. This case is no more complex than that; Phillips is liable for White's claims that are within the scope of the agreement whether he is guaranty, compensated surety, or uncompensated surety. All of the claims are within the scope of that broad agreement. Thus, no novation occurred, no risks were increased, and no harm incurred. The parties skipped this crucial initial step in the analysis and dove into the surety/guaranty quagmire.
Phillips' arguments concerning the "2% over prime" arrangement, reserve account and the Omni accounts are based on a theory of novation. Phillips argues that his liability is limited to "all sums which may become due to Southern Investment Company by reason of its purchase of such receivables." He then contends that the guaranty is limited by White's letter agreeing "to finance your U. S. Government receivables for the discount rate of 2 1/2%" and further stating that the guaranty agreement would substitute for a reserve account. If this were the entire agreement, Phillips' defenses would have considerable vitality. He overlooks the second part of the guaranty agreement which says:
... and to further indemnify SOUTHERN INVESTMENT COMPANY against any and all claims, losses, or damages it may incur or suffer by reason of the failure of R. C. VAN LINES, INC. to perform its obligations to SOUTHERN INVESTMENT COMPANY.
As can readily be seen, Mr. Phillips executed a general guaranty.
We are guided by the decision of White v. Chapman, 149 Ga.App. 409, 254...
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