U.S. v. Vahlco Corp.

• Decision Date: 19 September 1986
• Docket Number: No. 85-2629,85-2629
• Citation: 800 F.2d 462
• Parties: 2 UCC Rep.Serv.2d 987 UNITED STATES of America, Plaintiff-Appellee, v. VAHLCO CORPORATION, et al., Defendants, and Frederick Henry Vahlsing, Jr., Defendant-Appellant. Fifth Circuit
• Court: U.S. Court of Appeals — Fifth Circuit

Page 462

800 F.2d 462

2 UCC Rep.Serv.2d 987

UNITED STATES of America, Plaintiff-Appellee, v. VAHLCO CORPORATION, et al., Defendants and Frederick Henry Vahlsing, Jr., Defendant-Appellant.

No. 85-2629.

United States Court of Appeals,Fifth Circuit.

Sept. 19, 1986.

Frederick H. Vahlsing, Jr. pro se.

Linda M. Samuel, Atty., Dept. of Justice, Commercial Litigation Branch, Civil Div., Washington, D.C., Helen M. Eversberg, U.S. Atty., San Antonio, Tex., Janice Alperin, Atty., Washington, D.C., for plaintiff-appellee.

Appeal from the United States District Court for the Western District of Texas.

Before WISDOM, DAVIS, and JONES, Circuit Judges.

WISDOM, Circuit Judge:

This appeal raises the question whether an "absolute and unconditional" guarantor of an indebtedness is discharged from his obligation to answer for the debt if the creditor and principal debtor alter its terms. The district court answered this question in the negative. We reverse and remand for further proceedings consistent with this opinion.

I.

Frederick H. Vahlsing, Jr., at all times relevant for purposes of this appeal, was president of Vahlco Corporation ("Vahlco"). Late in 1973, Vahlco negotiated a $350,000 loan from the First National Bank of Seguin, Texas (the "Bank"). To obtain the loan on favorable terms, Vahlco sought a guaranty of the $350,000 loan from the Small Business Administration (the "SBA"). The SBA agreed to guarantee a $350,000 line of credit for Vahlco subject to several conditions. The SBA required that 1) Vahlco assign to the Bank certain contracts, 2) Frederick H. Vahlsing, Jr. guarantee any loan under the line of credit, and 3) any loan under the line of credit be secured by a first lien on Vahlco's inventory and accounts receivable.

On November 16, 1973, Vahlsing executed the following letter:

November 16, 1973

TO WHOM IT MAY CONCERN:

I, Frederick H. Vahlsing, Jr., Route 130, Mercer County, Robbinsville, New Jersey, hereby guaranty any and all indebtedness of Vahlco Corporation of Seguin, Texas to the First National Bank of Seguin, Seguin, Texas and/or United Stated [sic], Small Business Administration relative to a $350,000 Line of Credit given to Vahlco Corporation of Seguin, Texas.

Sincerely,

/s/ Frederick H. Vahlsing, Jr.

On December 10, 1973, Vahlco executed a note for a $350,000 line of credit with the First National Bank of Seguin. The note was secured by a first lien on Vahlco's accounts receivable and inventory and by certain contracts assigned by Vahlco to the Bank and was guaranteed by the SBA and Frederick H. Vahlsing, Jr. The initial maturity date for the loan was December 10, 1974--one year from the date of execution. At Vahlco's request, the Bank, with the SBA's approval, extended the note on two separate occasions. After the extensions, the note was scheduled to mature on January 15, 1976. Also at Vahlco's request, the Bank, with the approval of the SBA, subordinated its lien on $400,000 of accounts receivable securing the loan. ¹

Vahlco defaulted on the $350,000 note. Thereafter, the Bank sold and assigned the note to the SBA. On February 25, 1976, the SBA demanded payment from Vahlsing, but Vahlsing did not comply. On behalf of the SBA, the United States of America instituted an action on April 8, 1975, in the United States District Court for the Western District of Texas, against Vahlco on the note and against Frederick H. Vahlsing, Jr. to enforce his obligations under the guaranty agreement. The government's action also sought to recover on a $10,000 note executed by Vahlco. Magnum Machine and Tool Corporation ("Magnum"), a subsequent holder of certain collateral securing that $10,000 note was also a defendant in the action. The $10,000 note is not at issue in this case.

A trial on the matter was held in March of 1982. At the conclusion of the government's case and before the defendants were allowed to present evidence, the government requested and the district judge granted a directed verdict in favor of the United States of America, and against Vahlco, Vahlsing, and Magnum. The judge issued a memorandum opinion and order on April 7, 1982, detailing the basis for his decision. With respect to Vahlsing the court held that he had executed an "absolute and unconditional" guaranty of Vahlco's $350,000 note and that he was therefore precluded as a matter of law from raising defenses based upon alterations of the terms of the guaranteed obligation. On June 6, 1982, the court entered judgment against Vahlco, Vahlsing, and Magnum.

Shortly after the district court directed a verdict in favor of the United States, Vahlsing filed for bankruptcy. ² Thereafter only Vahlco and Magnum appealed the district court's judgment in favor of the United States. We affirmed the judgment against Vahlco and Magnum. ³ In August 1985, the United States Bankruptcy Court for the Southern District of Texas entered a judgment denying Vahlsing a discharge in bankruptcy. ⁴ Shortly thereafter, Vahlsing entered this appeal of the district court's judgment against him and in favor of the United States of America. On November 21, 1985, this Court entered an order allowing Vahlsing to prosecute this appeal. ⁵ Because the automatic stay provision of 11 U.S.C. Sec. 362(a) tolled the time limit within which Vahlsing was required to appeal, we ruled that Vahlsing's appeal of the district court judgment three years after it was entered was not untimely. We now consider Vahlsing's claims of error.

II.

At the outset Vahlsing contends that the letter he executed on November 16, 1973, is not and was never an enforceable guaranty with respect to the $350,000 note. We find this contention wholly without merit ⁶ and therefore move directly to his second contention. Vahlsing's second point of error is that the district court erred when it ruled that his guaranty was absolute and unconditional and that he was therefore precluded from raising any defenses based upon alleged alterations to the agreement guaranteed. We need not consider whether Vahlsing's guaranty is absolute and unconditional, because we hold that under Texas law ⁷ even if it is such a guaranty, Vahlsing may raise his defenses.

A guaranty is an undertaking by the guarantor to answer for the payment of some debt or the performance of some contract of another person in the event of default. A guarantor under Texas law is a so-called favorite of the law and as such, a guaranty agreement is construed strictly in favor of the guarantor. ⁸ Any modification of the terms of the underlying contract discharges the guarantor's obligation. "If the creditor and the principal debtor vary in any degree the terms of the contract, then a new contract has been formed, upon which new contract the [guarantor] is not obligated and cannot, therefore, be bound." ⁹ The assumption underlying this rule is that the guarantor has carefully assessed the risk to which he will be exposed by undertaking the guaranty. If the terms of the guaranteed indebtedness are changed, the risks to the guarantor change as well, and it would be unfair to require the guarantor to assume risks other than those he chose to assume. ¹⁰

In an action to enforce a guaranty, the guarantor may assert as a defense that the terms of the guaranteed agreement have been altered materially. ¹¹ Under Texas law, the guarantor of a note is discharged from his obligation to answer for that debt if the creditor grants an extension of time for the payment of the note to the principal debtor. ¹² A guarantor is also discharged if a creditor unjustifiably impairs any collateral securing a note by allowing it to be subordinated or used for purposes other than fulfilling the terms of the indebtedness guaranteed. ¹³ These defenses, based upon changes to the underlying obligation and therefore changes to the guaranty, are termed suretyship defenses. A suretyship defense is an affirmative defense, and the burden of proving a change rests on the guarantor. ¹⁴

The district court found that Vahlsing's guaranty was absolute and unconditional, and as such precluded him from raising the suretyship defenses. The district court ruled that it did not matter that the Bank and the SBA had extended the maturity and impaired certain collateral because:

"[w]here a guaranty is absolute and unconditional, imposing on the guarantor an absolute obligation to make payment for the debt, action taken by SBA to extend the loan or to release collateral will not, as a matter of law, increase the risk to the guarantor. Accordingly, Vahlsing's defenses are insufficient as a matter of law and raise no issues that must be submitted to a jury...." ¹⁵

The district court assumed that an absolute and unconditional guaranty of a debt is one under which the guarantor agrees to answer for the debt no matter how the creditor and principal debtor vary its terms. This, however, is a misperception of the distinction between an absolute and unconditional guaranty and one that is conditional.

The redundant term "absolute and unconditional" is an unfortunate choice of language, because it connotes more than it denotes. Under Texas law, a guaranty that is absolute and unconditional is one that requires no condition precedent to its enforcement against the guarantor other than mere default by the principal debtor. ¹⁶ Such a guaranty is also called a "guaranty of payment". ¹⁷ A conditional guaranty, also termed a "guaranty of collection", ¹⁸ is one under which the creditor can seek performance from the guarantor only after the occurrence of some condition such as the condition that the creditor has unsuccessfully and with reasonable diligence sought to collect the debt from the principal debtor. ¹⁹ That a guaranty is conditional or unconditional has nothing to do with whether the guarantor waives asserting the suretyship defenses; the two are simply not related. The conditional or unconditional nature of a guaranty has to do only with whether there is a condition precedent to...