Continental Bank & Trust Co. v. Akwa, 316

• Decision Date: 20 April 1973
• Docket Number: No. 316,316
• Citation: 58 Wis.2d 376,206 N.W.2d 174
• Parties: CONTINENTAL BANK & TRUST CO., Respondent, v. Phillip AKWA et al., Appellants.
• Court: Wisconsin Supreme Court

Page 174

206 N.W.2d 174

58 Wis.2d 376

CONTINENTAL BANK & TRUST CO., Respondent, v. Phillip AKWA et al., Appellants.

No. 316.

Supreme Court of Wisconsin.

April 20, 1973.

Gimbel, Gimbel & Boyle, Milwaukee, Robert L. Steuer, Milwaukee, of counsel, for appellants.

Stanley F. Hack, Milwaukee, for respondent.

CONNOR T. HANSEN, Justice.

The dispositive issue in this case is whether the allegations of plaintiff's second amended complaint state a cause of action. To state a cause of action it must appear that there is a right in the plaintiff and a violation of this right by the defendant. ⁴

When challenged by demurrer, pleadings are to be liberally construed with a view to substantial justice to the parties and are entitled to all reasonable inferences in favor of the pleadings which can be drawn from the facts pleaded. Padilla v. Bydalek (1973), 56 Wis.2d 772, 203 N.W.2d 15; Jennaro v. Jennaro (1971), 52 Wis.2d 405, 190 N.W.2d 164; Walley v. Patake (1956), 271 Wis. 530, 74 N.W.2d 130. Where this court reviews an order overruling a demurrer made on the ground that the complaint did not state a cause of action, it gives the complaint a liberal construction in favor of stating a cause of action. Libowitz v. Lake Nursing Home, Inc. (1967), 35 Wis.2d 74, 150 N.W.2d 439, 151 N.W.2d 680. ⁵

The complaint alleges the existence of and elements essential to the contract of guaranty; the validity and terms of the underlying obligation that corresponds to the guaranty; ant the performance of the conditions precedent to the right of action on the contract of guaranty, including a demand for payment the debtor with the subsequent nonperformance and resulting deficiency thereby, and a demand on the defendants, an guarantors, to perform the contract of guaranty and the nonperformance of the guaranty by the defendants. We are of the opinion that the complaint sets forth facts sufficient to state a good cause of action on a contract of guaranty. First Nat. Bank v. Schellenberg (1910), 143 Wis. 647, 128 N.W. 279.

Defendant argue, however, that the complaint allges facts that create or concede affirmative defenses that are fatal to its validity. This court in Thomas v. Kells (1971), 53 Wis.2d 141, 145, 191 N.W.2d 872, 874, said:

'. . . While a complaint need not specifically deny the existence of any and all affirmative defense, it can, by inadvertence or otherwise, create or concede an affirmative defense fatal to its validity. . . .'

Defendants contend that the following affirmative defenses are demonstrated in the plaintiff's complaint and are fatal to its cause of action as a matter of law: (1) The plaintiff is not the holder of the notes evidencing the Akwa-Downey indebtedness and cannot, therefore, proceed against the defendants to collect thereon; (2) the settlement agreement constitutes satisfaction and payment in full, discharging the underlying obligation and the liability of the defendants, as guarantors; and (3) the settlement agreement releases Akwa-Downey from further liability upon the notes and, therefore, it must discharge the defendants as to liability thereon.

Plaintiff as Holder of the Notes.

Defendants rely upon Chapter 3 of the Uniform Commercial Code which has been adopted in this state ⁶ and argue that the execution of the notes suspends any underlying obligation of the principal (Akwa-Downey) ⁷; that the factual predicate to recovery upon the notes is production of the instruments ⁸; that the cancellation of the notes discharges the guarantor ⁹; that acquisition of the notes by the Downeys, as coguarantors, discharges defendant's liability thereon ¹⁰; and that the above acts, concerning the transfer and cancellation of the notes effectively destroys any recourse the defendants would have against Akwa-Downey if they were compelled to pay plaintiff upon the notes. Defendants conclude that the transfer and cancellation of the notes effectively destroys, as a matter of law, any action on the instruments against the defendants by the plaintiffs.

Based upon the allegations of the complaint and the papers incorporated therein, ¹¹ construed according to the rules enumerated above, the plaintiff is not proceeding on the Akwa-Downey notes but upon a breach of the contract of guaranty. The complaint does not allege nor do the notes show that the defendants' signatures appear thereon as guarantors of the notes. Under Wisconsin statutes, liability on a negotiable instrument is statutorily limited to persons whose signatures appear thereon. ¹² Jennaro v. Jennaro, supra. The remedy against a guarantor is not primary and direct, but collateral and secondary, and an action to enforce the liability of the guarantor must be in the form of an action for damages for a breach of the contract of guaranty, and not an action upon the underlying indebtedness. ¹³ While the affirmative defenses, as asserted by the defendants, concerning the possession, transfer and cancellation of the notes, may be fatal to plaintiff's cause of action, if he were proceeding upon the instruments, ¹⁴ they are not necessarily fatal to plaintiff's cause of action upon its separate and independent contract of guaranty with the defendants. Payment and Satisfaction.

Defendants contend that the settlement agreement reached between the plaintiff and Akwa-Downey demonstrates a full and complete accord and satisfaction between the parties, and that the payment made under that agreement by Akwa-Downey to plaintiff was not a part payment resulting in a deficiency but a payment in full satisfaction of the Akwa-Downey indebtedness to the plaintiff. Defendants conclude that payment or satisfaction of the principal debt discharges the guarantors.

A guarantor's liability depends upon the terms of his engagement. Zrimsek v. American Automobile Ins. Co. (1959), 8 Wis.2d 1, 98 N.W.2d 383; 50 Am.Jur., Suretyship, p. 921, sec. 29. Defendants' contract of guaranty promises 'to pay or cause to be paid' all the indebtedness, obligations and liability from or by Akwa-Downey to the plaintiffs. A guaranty, in its technical sense, is collateral to and made independently of, the principal contract which it guarantees, and the guarantor's liability is secondary rather than primary or original. Associates Financial Services v. Eisenberg (1971), 51 Wis.2d 85, 186 N.W.2d 272; 38 C.J.S., Guaranty § 2 p. 1130. As a general rule the payment or other satisfaction or extinguishment of the debt or obligation of the principal discharges the guarantor. ¹⁵ As stated in 50 Am.Jur., Suretyship, p. 983, sec. 121:

'. . . Since a surety is bound only by the condition of his obligation, the principal's performance of the condition will release him. Since the natural limit of the obligation of a surety is to be found in the obligation of the principal, when that is extinguished, the surety is, in general, liberated. . . .' ¹⁶

Since the guarantor's promise is to pay or perform if the debtor does not, the guarantor will be discharged when the principal pays the debt or performs the undertaking. The creditor is entitled to but one performance, and if he receives that, by payment or other satisfaction, the surety is discharged. ¹⁷

However, the duty of the principal must be fully satisfied and, if the principal only partially performs, a surety's obligation continues, although the amount which the creditor can recover from the surety is reduced by what he has received from the principal. The Restatement, Security, p. 304, sec. 115, states:

'It is to the interest of the surety that the creditor be allowed to take reasonable steps to satisfy his claim against the principal without discharging the surety. Any other rule would mean that whenever the principal owed a money obligation and was unable to make an immediate cash payment, the creditor to avoid discharging the surety, would proceed immediately against the latter.'

Defendants draw this court's attention to such words contained in the settlement as 'full and complete settlement' and 'in full payment.' Defendants argue that while the Akwa-Downey indebtedness was $622,579.03, and plaintiff received only $559,000 in cash, plaintiff was also released from disputed claims asserted to be worth $180,000. Defendants conclude that no underlying debt exists and that the guaranty contract of the defendants is satisfied.

Paragraph 7 of the complaint alleges a deficiency due of $86,448, plus interest. Paragraph 9 of the settlement agreement reserves rights in the plaintiff to proceed against the defendants upon the guarantees to assure payment of the loans being 'compromised.' There may be ambiguity in the settlement agreement as to whether the agreement constituted a full and complete payment of the debt. The resolution of this possible ambiguity will eventually rest upon proof of the intent of the parties thereto; however, when challenged by demurrer, this court must construe the above agreement in favor of that interpretation that would support a cause of action. Therefore, for the purposes of this appeal, it cannot be said that the Akwa-Downey debt, alleged in the complaint as underlying defendants' contract of guaranty, has been alleged as fully satisfied. Whether the claims released by Akwa-Downey in favor of the plaintiff are of sufficient value to make up the apparent deficiency is a matter to be decided upon trial, not demurrer.

Release of the Principal.

Defendants argue that inasmuch as the settlement agreement was a release of Akwa-Downey from further liability upon the debts, evidenced by the notes alleged, such release also released the defendants from liability on the debt.

Generally, release of principal also releases the surety. National Bank of La Crosse v. Funke (1934), 215 Wis. 541, 255 N.W. 147; Stearns, Suretyship, p. 174, sec. 6.42; 50 Am.Jur., Suretyship, p. 987, sec. 126. The reasons behind such a rule are stated in Simpson, Suretyship, (hornbook series, 1950), pp. 296--301, sec. 63:

'It has always been held that...