Albrecht v. Walter

• Decision Date: 10 December 1997
• Docket Number: No. 970082,970082
• Parties: Jerald ALBRECHT, Gary Bergstrom James Lewis, Lawrence Mertz, and Norman Weckerly, Plaintiffs and Appellants, v. James WALTER, Defendant and Appellee. Civil
• Court: North Dakota Supreme Court

Page 809

572 N.W.2d 809

1997 ND 238

Jerald ALBRECHT, Gary Bergstrom James Lewis, Lawrence Mertz and Norman Weckerly, Plaintiffs and Appellants, v. James WALTER, Defendant and Appellee.

Civil No. 970082.

Supreme Court of North Dakota.

Dec. 10, 1997.

Daniel S. Kuntz, of Zuger Kirmis & Smith, Bismarck, for plaintiffs and appellants. Appearance by Jody Billing Bjornson.

Thomas J. Aljets, of Heinley & Aljets, Carrington, for defendant and appellee.

MARING, Acting Chief Justice.

¶1 Jerald Albrecht, Gary Bergstrom, James Lewis, Lawrence Mertz, and Norman Weckerly (the investors) appealed from a judgment dismissing their action against James Walter for one-sixth of the amount they paid the United States Small Business Administration (SBA) to settle a debt. We reverse and remand.

¶2 In 1985, the investors owned a vacant building on Harvey's Main Street and two adjoining lots. The property had previously been owned by the National Bank of Harvey. Lewis was the President of that bank, Bergstrom was the Vice President, and Weckerly and Mertz were directors. In 1985, the owners of Sheyenne River Enterprises, Inc., which operated "Your Pizza Palace" in Harvey, expressed an interest in selling the restaurant.

¶3 The investors asked Walter, who had been managing Your Pizza Palace since 1983, if he would be interested in managing and eventually owning the restaurant. Walter agreed, and he and the investors began the process of buying the restaurant and moving it to the investors' Main Street property. The investors agreed to invest $7,000 each into the business and to borrow an additional $140,000 through a business loan to be guaranteed by the SBA. Walter did not have the financial ability to purchase stock in the business initially, but the parties agreed he would be able to buy stock from profits of the business and he would eventually own it.

¶4 On December 15, 1985, Lewis and Bergstrom executed an application for a business loan guaranteed by the SBA on behalf of Sheyenne River Enterprises, Inc. Schedule II of the application indicated Walter was the manager and owned 1.96 percent of the stock. ¹ It also indicated "James Walters will be purchasing stock as he has funds available and from Manager's Bonus." Schedule III showed the following costs and use of loan proceeds:

*Includes approximately $16,000 of blue sky considering the market value of the equipment.

                   B.    Source of Funds
                         Capital Injection  $ 35,000.00
                         SBA Loan Proceeds   140,000.00
                                            -----------
                                            $175,000.00
                

Walter helped prepare and signed Exhibit C in the application, showing projected sales, expenses, and net income through June 30, 1987. Exhibit D in the SBA application stated, in part:

The business was started as a pizza shop in about August of 1977....

James Walter became manager of the business in September of 1983 and the business has expanded its menu and now serves breakfasts, as well as the dinner and supper meals.

* * * * * *

The manager, James Walter, will also have an opportunity to purchase an interest in the business and to purchase additional interest from profit sharing.

Exhibit E stated, in part:

James Walter, Sr.--High school graduate and has been working in restaurants for about 13 years. Has 8 years of management experience in the food service business. Has been with the Pizza Palace for the past 2 1/2 years. The Pizza Palace has shown an annual growth in sales of about 25%.

¶5 The restaurant was moved to the investors' Main Street property in January 1986. At that time the restaurant "made a complete menu and went to a food service dining area." On February 18, 1986, Walter signed, as Treasurer, a resolution authorizing the company to execute a promissory note, and any other required instruments. Walter and the investors each signed an SBA Guaranty on February 18, 1986, guaranteeing to the "Lender, its successors and assigns, the due and punctual payment ... of the principal of and interest on" the $140,000 promissory note of Sheyenne River Enterprises, Inc.

¶6 Although Walter managed the investors' restaurant until May 23, 1988, ² he never received any stock in the corporation. Considering depreciation write-offs, the corporation never showed a profit while Walter managed the restaurant. About four months after he left his position as manager of the investors' restaurant, Walter opened a new restaurant in Harvey with about the same menu as the investors' restaurant.

¶7 After Walter left, the investors operated the restaurant for a short time with the help of the restaurant's employees. Lewis and his family then bought the business. They injected $25,000, issued checks to the other investors for $4,500 each and gave each of the other investors a note for $2,500. The first year the Lewis family operated the restaurant, sales dropped by $84,000. The Lewis family injected an additional $67,000 into the business and received and repaid a federal disaster loan for $29,200. The Lewis family closed the restaurant in 1995.

¶8 The restaurant's assets were sold and the net proceeds were applied to the SBA indebtedness, leaving a principal balance due the SBA of $60,648.57, plus approximately $15,000 in interest. The SBA accepted a proposal for payment of the principal balance and forgiveness of the interest. Walter refused to pay any portion of the debt to the SBA. The investors paid the balance owed to the SBA. The SBA assigned to the investors its right, title, and interest in the note and in the individual guaranties executed by Walter and the investors.

¶9 The investors sued Walter for $10,108.10, alleging they were entitled to judgment "pursuant to the terms of the guarantee executed by" Walter which had been assigned to them, or "for equitable contribution equal to [Walter's] pro rata share of the amount paid for the assignment of the Note and Guarantees."

¶10 Generally, "guarantors who pay more than their proportionate share of an obligation are entitled to contribution from other guarantors who are jointly and severally liable for the contribution." Citizens State Bank v. Bossard, 226 Mont. 75, 733 P.2d 1296, 1298 (1987); see N.D.C.C. § 9-01-08. A guarantor may compel contribution by a coguarantor by an action at law or in equity. 38 Am.Jur.2d, Guaranty § 129 (1968). A paying coguarantor may be denied contribution for the wrongful nature of his conduct or for fraudulently inducing another to become a co-obligor. 18 Am.Jur.2d, Contribution §§ 97, 98 (1985).

¶11 Some courts have held a guarantor may pay off an obligation, take an assignment of guaranty contracts and the promissory note, and enforce a co-guarantor's guaranty. See, e.g., Estate of Frantz v. Page, 426 N.W.2d 894, 898 (Minn.App.1988) (a guarantor's estate, which paid a note and was assigned the note and guaranties, had "the choice, in its capacity as a creditor-assignee, to proceed directly on the guaranties or, in its capacity as a guarantor, to bring an action for contribution."). "The assignment of an instrument vests in the transferee the same rights the transferrer had therein." Industrial Indem. Co. v. Anderson, 697 F.Supp. 1532, 1535 (D.N.D.1988). However, a paying guarantor taking an assignment may not recover from his co-guarantors more than their proportionate shares of the amount paid. Mandolfo v. Chudy, 5 Neb.App. 792, 564 N.W.2d 266 (1997).

¶12 Other courts have held a paying guarantor may not sue on the note, but is limited to contribution. See, e.g., Koeniger v. Lentz, 462 So.2d 228, 228-29 (La.App.1984) (A guarantor who "in large part paid the principal debts" and "was conventionally subrogated to all rights of the creditor bank ... may not sue on the notes, and [ ] his rights against his co-guarantors are governed by the rules of suretyship.").

¶13 In Mandolfo v. Chudy, 5 Neb.App. 792, 564 N.W.2d 266 (1997), the coguarantor received an assignment of a promissory note and its guaranties. The coguarantor claimed he could recover the entire principal sum and accrued interest from one of the other coguarantors. The Nebraska Court of Appeals held the doctrine of equitable contribution limits the coguarantor's recovery. Id. Citing prior Nebraska law the court stated: " 'A ... co-obligor ... is entitled to no more by way of contribution than will put him on an equality of loss with others in view of his share of the obligation undertaken. This is true even though he obtains an assignment from the creditor....' " Id., 564 N.W.2d at 271, quoting Exchange Elevator Company v. Marshall, 147 Neb. 48, 22 N.W.2d 403, 410-11 (1946). The Nebraska court looked to the jurisprudence of other states to analyze the issue and reviewed Estate of Frantz v. Page, 426 N.W.2d 894 (Minn.App.1988); Koeniger v. Lentz, 462 So.2d 228 (La.App.1984); Weitz v. Marram, 34 Md.App. 115, 366 A.2d 86 (1976) and Curtis v. Cichon, 462 So.2d 104 (Fla.App.1985) and concluded the relationship between the parties as coguarantors operated as a matter of law to restrict the coguarantor's recovery from the other coguarantor, in the absence of insolvent coguarantors, to no more than the pro rata share of the obligation owed.

¶14 We find this analysis persuasive and conclude a coguarantor may purchase an assignment of a note and the guaranties, but the initial relationship as coguarantors will operate as a matter of law to restrict the recovery and will govern the rights of the coguarantors. Accordingly, all of the defenses to an action for contribution are available to the coguarantor in this action.

¶15 Walter raised fraudulent inducement as a defense to the claim on the assigned guaranty. The trial court determined among other things:

[Walter's] agreement to sign the guarantee was fraudulently induced by the plaintiffs. [Walter's] guarantee, as well as the implied agreement of contribution, are therefore void and unenforceable.

The trial court also determined the investors "are barred from seeking...