Associates Financial Services Co., Inc. v. First Nat. Bank of Mobile

• Decision Date: 07 March 1974
• Citation: 292 Ala. 237,292 So.2d 112
• Parties: ASSOCIATES FINANCIAL SERVICES CO., INC. v. The FIRST NATIONAL BANK OF MOBILE et al. SC 378.
• Court: Alabama Supreme Court

Page 112

292 So.2d 112

292 Ala. 237

ASSOCIATES FINANCIAL SERVICES CO., INC. v. The FIRST NATIONAL BANK OF MOBILE et al.

SC 378.

Supreme Court of Alabama.

March 7, 1974.

Rehearing Denied April 11, 1974.

Mylan R. Engel, Mobile, for appellant.

Edward P. Turner, Jr., Chatom, Jerry A. McDowell and Edmund R. Cannon, Mobile, for appellees.

JONES, Justice.

This is an appeal by defendant, Associates Financial Services Company, Inc., from a judgment for plaintiff, The First National Bank of Mobile, as Executor of the Estate of E. L. Jordan, deceased, in action based on § 108, Title 7, Code of Alabama 1940 (legal fraud).

Two substantive issues are here presented:

1. Whether the trial court erred in not requiring plaintiff to plead by way of replication facts invoking the 'saving' clause of § 42, Title 7 (one year after discovery), where in the absence of such pleading, these issues were nevertheless fully framed, tried, and embraced in the court's charge.

2. Whether the trial court erred in refusing defendant's request for the general affirmative charge as to the sufficiency of the evidence.

We answer both questions in the negative and affirm.

The factual context in which these dispositive issues arose can be summarized:

R. E. Massey, D. B. A. Chatom Motors, operated a General Motors dealership under a floor plan whereby Associates advanced money to Massey to pay General Motors for automobiles. These cars were security for the loan. As cars were sold, Massey was to pay Associates from proceeds of the sale, and for protection, Associates sent its branch manager (Eddings) monthly to assure that cars not paid for were physically present on Chatom's lot. If not, and if they had not been paid for, the cars were 'sold out of trust' (s.o.t.).

Chatom Motors was in an s.o.t. condition as of November, 1968, through June, 1969. Eddings falsified reports to his employer and did not reveal the s.o.t. condition until August 1, 1969, when he filed his July report. On June 20, 1969, with Chatom Motors $285,000 in debt to Associates, Jordan--original plaintiff--was induced to co-sign a continuing guaranty with Massey in favor of Associates. Jordan was not informed of the s.o.t. condition by anyone; that is, Jordan's signature was obtained without his being informed by either the debtor or creditor that security for the existing indebtedness was no longer in the debtor's possession.

August 8, 1969, Massey, his wife, and Jordan executed a deed of trust and promissory note collateralizing the continuing guaranty with the further concealment from Jordan of the s.o.t. status of the security. Jordan paid the indebtedness upon demand in May, 1970. The instant suit was filed July 6, 1971, claiming $500,000 damages, alleging that on June 20, 1969 Associates induced Jordan to execute the continuing guaranty by fraud through concealment, suppression of the truth, or failure to disclose material facts relied upon by Jordan in the June 20, 1969, transaction.

The first of the two issues, as hereinabove posed, presupposes the correctness of appellant's contention, i.e., where the defense pleads specially the statute of limitations to a claim of fraud under the system of pleading then prevailing, the proper method for plaintiff to interpose the 'saving' clause ¹ is by way of replication. Williams v. Bedenbaugh, 215 Ala. 200, 110 So. 286 (1926); see also Johnson v. Shenandoah Life Insurance Company, 291 Ala. 389, 281 So.2d 636 (1973).

The argument that such failure constitutes error to reverse, however, overlooks the equally well-established rule so aptly stated by Mr. Justice Coleman, speaking for the Court, in Western Railway of Alabama v. Brown, 280 Ala. 543, 196 So.2d 392 (1967):

'The rule is that if there is some defect of averment in the complaint and the court has erred in holding such pleading good, nevertheless, if there is evidence of the matter so omitted and both parties try the issue as though such allegation were made, and the court instructs the jury that such matters must be proven, and both parties have full opportunity to offer and do offer all the evidence they wish on that issue, we will not reverse the judgment for the error in such ruling on the pleading. Turner v. Blanton, 277 Ala. 536, 540, 173 So.2d 80, and authorities there cited.'

The record discloses evidence reasonably affording an inference as to whether plaintiff was defrauded, and whether plaintiff could have reasonably discovered the fraud within the 15-day period (between June 20, 1969--the date of the fraud--and July 6, 1969--one year prior to the filing of the complaint); thus, it was within the province of the jury to resolve the conflicts in the evidence and to determine whether, on all of the evidence, the statute of limitations created a bar to the suit. Letson v. Mutual Loan Society, 208 Ala. 285, 94 So. 288 (1922); see also Birmingham Bond & Mortgage Company v. Lovell, 81 F.2d 590 (Fifth Circuit, 1936).

We have treated the foregoing issue somewhat summarily due to the now extinction of the system of common law pleading under which it arose.

We feel constrained, however, to comment on the prospective application of the Alabama Rules of Civil Procedure to the facts at hand. Rule 9(b) requires:

'In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.'

Rule 8(c) requires that the statute of limitations be affirmatively set forth. Since the rules do not contemplate formal responses to affirmative defenses, we are of the conclusion that a plaintiff in a fraud action seeking to invoke the 'saving' clause (permitting the filing of a suit within one year after the discovery) in order to withstand a motion to dismiss, should show the time and the circumstances of the discovery of the alleged fraud. This observation is not to be construed as in any manner obviating the operative effect of Rule 15(b) relating to amending the pleadings to conform to the evidence.

The second substantive issue set out above raises the preliminary issue of whether Associates, the guarantee, owed a duty to disclose to Jordan, the guarantor, the non-existence of the cars which formed the security for the debtor's (Chatom Motors) indebtedness. We answer in the affirmative and hold that where a guarantor is induced to enter into a contract of guaranty, covering present and future indebtedness, by a fraudulent representation or concealment by the guarantee as to some material fact affecting the liability or potential obligation of the guarantor, such misrepresentation or concealment operates to make the guaranty voidable since the guarantor is entitled to full disclosure of every point which is likely to bear upon his disposition to become such. See Carroll v. Hanahan, 221 Ala. 553, 130 So. 197 (1930); Anderson v. Bellenger & Rails, 87 Ala. 334, 6 So. 82 (1888); 28 C.J., Guaranty, § 65, pp. 925--26; and 38 C.J.S. Guaranty § 32, p. 1171.

In Magee v. Manhattan Life Ins. Co., 92 U.S. 93, 23 L.Ed. 699 (1875), a case involving a New York creditor and Alabama sureties, it was stated:

'A surety is 'a favored debtor.' His rights are zealously guarded both at law and in equity. The slightest fraud on the part of the creditor, touching the contract, annuls it . . .

'But there is a duty incumbent on him. He must not rest supine, close his eyes, and fail to seek important information within his reach. If he does this, and a loss occurs, he cannot, In the absence of fraud on the part of the creditor, set up as a defense, facts then first learned which he ought to have known and considered before entering into the contract.' (Emphasis supplied.)

While Magee places a duty of inquiry on the surety absent fraud on the part of the creditor, it also clearly Discharges the surety in the event of even 'slight fraud' of the creditor.

In setting out principles relating to fraud and concealment, Magee sets forth the following:

'A fraudulent concealment is the suppression of something which the party is bound to disclose . . .

'To constitute fraud, the intent to deceive must clearly appear . . .

'The concealment must be willful and intentional . . .

'The test is, whether one of the parties knowingly suffered the other to deal under a delusion . . .'

In 72 C.J.S. Principal and Surety § 77--Concealment, b. Duty to Disclose, at p. 560, it is stated:

'Where the obligee knows, or has good grounds for believing, that the surety is being deceived or misled, or that he is being induced to enter into the contract in ignorance of facts materially increasing the risks, of which the obligee has knowledge, and he has a reasonable opportunity, before accepting his undertaking, to inform him of such facts, good faith and fair dealing demand that he should make such disclosure to the surety, as where material facts exist, and are known to the obligee, of a character which the surety may reasonably assume do not exist.'

A question presented...