Bohart v. Universal Metals & Machinery, Inc.

• Decision Date: 27 March 1975
• Docket Number: No. 18489,18489
• Citation: 523 S.W.2d 279,17 UCCRep.Serv. 806
• Parties: 17 UCC Rep.Serv. 806 James T. BOHART et ux., Appellants, v. UNIVERSAL METALS AND MACHINERY, INC., Appellee.
• Court: Texas Court of Appeals

Page 279

523 S.W.2d 279

17 UCC Rep.Serv. 806

James T. BOHART et ux., Appellants, v. UNIVERSAL METALS AND MACHINERY, INC., Appellee.

No. 18489.

Court of Civil Appeals of Texas Dallas.

March 27, 1975.

Rehearing Denied April 24, 1975.

Tom James, Blanchette, Shelton & James, Dallas, for appellants.

John H. McElhaney, Turner, Rodgers, Sailers, Jordon & Calloway, Dallas, for appellee.

AKIN, Justice.

Universal Metals and Machinery, Inc., brought suit against James T . Bohart and his wife for payment of their guaranty on a promissory note. Defendants answered asserting the note in question was a forgery, that there was a failure of consideration for the promissory note and guaranty, and that defendants were induced to sign the guaranty through fraudulent misrepresentations of plaintiff . Defendants also filed a cross action against plaintiffs seeking recovery for alleged usurious interest on the note. Prior to the time of trial, defendants filed a plea in abatement based upon Tex.Bus. & Comm.Code Ann. § 34.02 (V.T.C.A.1968), demanding that plaintiff bring action against the alleged maker of the note in the Republic of Mexico. The trial court overruled the plea in abatement . After a trial to a jury, the trial court entered a judgment in plaintiff's favor, and denied defendants all recovery on the cross-action.

The alleged maker of the note in question was Beneficiadora de Minerales de Tlaxcala, S.A. (hereinafter BMT), a foreign corporation . The promissory note, in the amount of $225,000, was dated November 1, 1971, and was allegedly in payment for used machinery previously delivered by the plaintiff to BMT in the Republic of Mexico. The note was followed by a guaranty agreement, to-wit:

For value received, the undersigned _ _, as primary obligor(s), hereby (jointly and severally) unconditionally guarantee(s) the prompt payment of principal and interest on the foregoing promissory note when and as due in accordance with its terms, and hereby waive(s) diligence, presentment, demand, protest, or notice of any kind whatsoever, as well as any requirement that the holder exhaust any right or take any action against the maker of the foregoing promissory note and hereby consent(s) to any extension of time or renewal thereof. _ _

(Name of Guarantor) _ _

(Name of Guarantor)

Both defendants signed this guaranty.

The jury found that the note in question was a forgery; that plaintiff had no knowledge of this fact when it accepted the note; that there was no agreed price between plaintiff and BMT for the machinery, the payment for which the note was allegedly executed.

The primary question presented here is whether or not guarantors who sign an absolute guaranty of a promissory note are liable to the obligee when the note itself is a forgery. We hold that they are not liable for the following reasons: (1) that the guaranty agreement is ambiguous; and it must be construed in the light most favorable to defendants, and, therefore, the defendants are guarantors rather than primary obligors; and (2) that there must exist a valid primary obligation to be guaranteed.

Defendants contend in their first point of error that the trial court erred in granting judgment on the promissory note against defendants after the jury found that the promissory note in question was a forgery. Plaintiff contends that defendants' liability exists solely on their execution of the guaranty here. To sustain plaintiff's position and to overrule defendants' first point of error, we must first construe the meaning of the guaranty in question to ascertain if the guaranty places a primary liability on defendants notwithstanding the fact that the note itself is a forgery, and thus a nullity. In following the generally accepted rules of construction in contract, we must look at the entire agreement as a whole and give effect to all words and phrases used therein to ascertain and give effect to the real intention of the parties as revealed by the language used. See Brown v. Brown, 245 S.W.2d 995, 997 (Tex.Civ.App.--Amarillo 1951, writ ref'd).

The determination of whether or not the guaranty, in and of itself, establishes the liability of the defendants turns on the question of whether or not it is clear and unambiguous on its face. It has been held that a contract is ambiguous only when application of pertinent rules of interpretation to the instrument as written leaves it genuinely uncertain as to which of the two or more meanings is the proper one. See Wynnewood State Bank v. Embrey, 451 S.W.2d 930 (Tex.Civ.App.--Dallas 1970, writ ref'd n.r.e.). Ambiguity is a question of law rather than of fact. Brown v. Payne, 142 Tex. 102, 176 S.W.2d 306 (1943). Plaintiff here contends that the words 'primary obligors' means that defendants are primarily liable as makers. The terms 'guarantee' and 'guarantor,' however, indicate a primary obligation of another by definition. See Southwest Savings Ass'n v. Dunagan, 392 S.W.2d 761, 766 (Tex.Civ.App.--Dallas 1965, writ ref'd n.r.e.). Defendants here cannot be both 'primary obligors,' such as a maker, and secondarily liable, such as guarantors. It can, therefore, be seen that this clause is capable of two different constructions: the construction placed on the clause by plaintiff that would make defendants 'primary obligors'; and the other construction that could reasonably be placed upon this clause is that the defendants are secondarily liable as guarantors. The term 'primary obligor' and the term 'guarantor' are mutually exclusive. We conclude, therefore, that the guaranty contract here is ambiguous on its face. Indeed, even plaintiff recognizes this ambiguity in that he first urges that the defendants are 'primary obligors' under it in order to establish the liability of the defendants on the forged note, and then, in response to defendants' action for usury, replies that they are 'mere guarantors' under the same clause.

Since we conclude that the guaranty clause in question is ambiguous, we must now look to the attending facts and circumstances to ascertain the real intention of the parties and the construction placed on such agreement by the parties prior to the time of litigation. In this regard, it is significant that plaintiff's president in its application to the Foreign Credit Insurance Association (hereinafter referred to as FCIA) for insurance dated August 16, 1971, designated defendant, James T. Bohart, as the 'guarantor.' Again, on July 12, 1972, when plaintiff's president filed a claim with the FCIA for the insurance previously issued on the note in question, again, plaintiff's president listed the names of the defendants as 'guarantors.' It is, therefore, clear to us that plaintiff, both prior to the execution of the guaranty by defendants and after the note was in default, considered the defendants as guarantors rather than persons primarily liable such as a co-maker. All of the documents referred to above were prepared and executed by plaintiff prior to commencement of this ligigation. This evidence is even more compelling since plaintiff's president, Mr. Feinstein, testified that over the years he had done financing through the FCIA and was thoroughly familiar with its procedures.

It has long been held in this state that where the meaning of a contract is ambiguous, that is, rendering it susceptible to two different interpretations, the one most favorable to the guarantor will be given effect. See Southwest Savings Ass'n v. Dunagan, Supra; City State Bank & Trust Co. v. United Paperboard Co., 146 S.W.2d 832 (Tex.Civ.App.--San Antonio 1940, no writ).

Since we have concluded that this is a guaranty agreement and that the defendants are guarantors, the rule of strictissimi juris applies meaning that the guaranty agreement may not be extended by implication or construction beyond the precise terms of the contract . McKnight v. Virginia Mirror Co., 463 S.W.2d 428 (Tex.1971); Southwest Savings Ass'n v. Dunagan, Supra; Hughes v. Straus-Frank Co ., 127 S.W.2d 582 (Tex.Civ.App.--San Antonio 1939), affirmed, 138 Tex . 50, 156 S.W.2d 519 (1941). Since the defendants do not expressly guarantee the genuineness of the maker's signature, we cannot say that the term 'unconditionally guarantee(s) the prompt payment' should be broadly construed to include such a guaranty of genuineness. See Jarecki Manufacturing Co. v. Hinds, 295 S.W. 274 (Tex.Civ.App.--Eastland 1927), writ dism'd, 6 S.W.2d 343 (Tex.Comm'n App.1928); Ryan v. Morton, 65 Tex. 258 (1886).

The principles enunciated above have long been well-settled law in this state. In the early case of Smith v. Montgomery, 3 Tex. 199, 204 (1848), Mr. Justice Wheeler stated:

(I)t is not for the plaintiff now to say, after having treated the undertaking of the defendant throughout as that of a guarantor, and no more, his liability is that of a principal debtor. The question in every case of this class is, to whom did the guarantee originally look for the primary fulfillment of the engagement? If the whole credit be not given to the person who comes in to answer for another, his undertaking is collateral, and his liability that only of a guarantor.

The intention and understanding of the parties is the criterion in every case by which to ascertain the character of the contract and the extent of the liability.

This rule is applicable here inasmuch as plaintiff throughout the entire transaction treated defendants as guarantors and BMT as the principal obligor. It was not until after plaintiff learned through the FCIA investigation that the signature of BMT was a forgery that plaintiff first looked to defendants as 'primary obligors.'

What then is the liability of defendants who have guaranteed the forged note under which, as a matter of law, the principal obligor is not liable? Plaintiff argues that since this type of guaranty has been construed as an 'absolute' guaranty, that the measure of liability of defendants-guarantors here is primary and not secondary ....