Cook v. Citizens National Bank of Beaumont

• Court: Texas Civil Court of Appeals
• Writing for the Court: KEITH; STEPHENSON
• Citation: Cook v. Citizens National Bank of Beaumont, 538 S.W.2d 460 (Tex. Ct. App. 1976)
• Decision Date: 10 June 1976
• Docket Number: No. 7845,7845
• Parties: Walter G. COOK, Appellant, v. CITIZENS NATIONAL BANK OF BEAUMONT, Appellee.

Page 460

538 S.W.2d 460

Walter G. COOK, Appellant, v. CITIZENS NATIONAL BANK OF BEAUMONT, Appellee.

No. 7845.

Court of Civil Appeals of Texas Beaumont.

June 10, 1976.

Timothy E. Thompson, Fort Worth, for appellant.

Bill R. Bludsworth, Houston, for appellee.

KEITH, Justice.

Citizens National Bank of Beaumont brought this suit against the Zobo Corporation as maker of a note and Walter Cook and Patrick Morgan as guarantors on the note. Plaintiff alleged that the note was in default and sought payment for the balance due. Zobo Corporation filed a plea in abatement on the basis that it had filed for an 'Arrangement' under Chapter XI of the Bankruptcy Act. The 'arrangement' is still pending in federal court an no final decree has yet been entered.

Plaintiff Bank then moved to sever the action against Zobo from Cook and Morgan, which motion was objected to by Cook on the grounds that trial could not proceed without joinder of the original maker of the note. The trial court severed the action against Zobo and proceeded with the cause against Cook and Morgan. The lower court then rendered summary judgment against Cook and Morgan, jointly and severally, for the balance due on the note. It is from this order of severance and summary judgment that the defendant Cook, but not Morgan, appeals. We reverse the judgment of the trial court and remand the cause for retrial. We will refer to the parties as they were in the lower court.

The guaranty agreement provides in relevant part:

'Whenever any indebtedness guaranteed hereunder shall become due and remain unpaid, the Guarantors, jointly and severally, will, on demand, and without further notice of dishonor . . . or of Borrower's default, pay the amount due thereon to the Bank, . . . such payment to be applied to the indebtedness of the Borrower . . . and it shall not be necessary for the bank . . . to first institute suit or exhaust its remedies against the Borrower . . ..

'. . . Guarantors hereby waive presentment for payment, notice of nonpayment, protest and notice thereof and diligence in bringing suit against Borrower . . .. It is agreed that the liability of each of the Guarantors for the payment of the indebtedness shall be primary and not secondary, and that suit may be brought against the Guarantors, jointly and severally, and against any one or more of them, less than all, without impairing the rights of the Bank against the other Guarantors . . ..

'. . . The liability of any Guarantor shall not be impaired, reduced or affected by the fact that the indebtedness at any time exceeds the amount above specified as the extent of Guarantor's liability . . . or by the death, insolvency, bankruptcy, incapacity or disability . . . of Borrower or of any other Guarantor whether now existing or hereafter occurring.'

Defendant's first point of error is that the trial court erred in granting the severance between himself and the original borrower, Zobo Corporation, because Tex.R.Civ.P. 31 requires joinder of the first obligor before a guarantor can be sued on the debt. It is plaintiff's position that Rule 31 and related statutes do not apply when a guarantor has become primarily liable by contract on the debt. It asserts that defendant has become primarily liable because of the language in the guarantee agreement.

Tex.R.Civ.P. 31 states that '(n)o surety shall be sued unless his principal is joined with him, or unless a judgment has previously been rendered against his principal, except in cases otherwise provided for in the law and these rules.' Other laws which govern guaranty cases include Tex.Rev.Civ.Stat.Ann. art. 1986 and art. 1987 (1964).

Art. 1986 provides:

'The acceptor of a bill of exchange, or a principal obligor in a contract, may be sued either alone or jointly with any other party who may be liable thereon; but no judgment shall be rendered against a party not rimarily liable on such bill or other contract, unless judgment be also rendered against such acceptor or other principal obligor, except where the plaintiff may discontinue his suit against such principal obligor as hereinafter provided.'

Art. 1987 states:

'The assignor, indorser, guarantor and surety upon a contract, and the drawer of a bill which has been accepted, may be sued without suing the maker, acceptor or other principal obligor, when the principal obligor resides beyond the limits of the State, or where he cannot be reached by the ordinary process of the law, or when his residence is unknown and cannot be ascertained by the use of reasonable diligence, or when he is dead, or actually or notoriously insolvent.'

We first begin with the proposition that a guaranty is "an undertaking by one person to be answerable for the payment of some debt or the performance of some contract or duty by another person, Who himself remains liable." Wood v. Canfield Paper Co., 117 Tex. 399, 5 S.W.2d 748, 749 (1928) (emphasis supplied); Coleman Furniture Corporation v. Lieurance, 405 S.W.2d 646, 647 (Tex.Civ.App.-- Amarillo 1966, writ ref'd n.r.e.). While there is a notable distinction between a guarantor and a surety, ¹ this distinction becomes blurred almost to the point of nonexistence when the guarantor becomes primarily liable for the debt. Finger Contract Supply Company v. Webb, 438 S.W.2d 112, 114 (Tex.Civ.App.--Houston (14th) 1969), rev'd on other grounds, 447 S.W.2d 906 (Tex.1969); 53 A.L.R.2d 522, 525 (1957) and cases therein; see also Tex.Bus. & Comm.Code Ann. § 34.01 (1968).

Irrespective of nomenclature, one looks to the nature of the obligation to determine the classification of resulting rights and duties of the parties. Wood v. Canfield Paper Co., supra (5 S.W.2d at 750); Diamond Paint Company of Houston v. Embry, 525 S.W.2d 529, 532 (Tex.Civ.App.--Houston (14th) 1975, writ ref'd n.r.e.). All language of a guaranty agreement is to be given effect when possible, and all rights thereunder are to be determined by the language of the contract. Mid-States General Agency, Inc. v. Bank of Texas, 450 S.W.2d 428, 431 (Tex.Civ.App.--Houston (1st) 1970, writ ref'd n.r.e.).

But construction of the above statutes, rules and principles has not produced uniformity of judicial decisions in this State. Based upon the principle that contract language is to be given primary effect as far as possible, several cases have enunciated the rule, with minor variations in phraseology, that a gurantor who unconditionally guarantees payment on a debt becomes a primary obligor and may be held liable without joinder of the original borrower. See, e.g., Rice v. Travelers Express Co., 407 S.W.2d 534 (Tex.Civ.App.--Houston 1966, no writ); McGhee v. Wynnewood State Bank, 297 S.W.2d 876 (Tex.Civ.App.--Dallas 1956, writ ref'd n.r.e.); ² Mid-States General Agency, Inc. v. Bank of Texas, surpa; Finger Supply Contract Company v. Webb, supra; and Skyline Furniture, Inc. v. Gifford, 433 S.W.2d 950 (Tex.Civ.App.--El Paso 1968, no writ).

But a different conclusion was reached in the dominant case in this area, and the only Supreme Court case which we have found--Wood v. Canfield Paper Co., supra (5 S.W.2d 748). There, the paper company instituted suit against Wood, the guarantor of a loan which the paper company had made to another corporation--the original borrower not being made a party to the suit. Wood had unconditionally guaranteed the note up to the limits of the amount borrowed. Wood demurred to the pleadings on the basis that the initial borrower should be made a party to the suit; the demurrer being overruled by the trial court. In certifying the correctness of this action to the Supreme Court, the Court of Civil Appeals noted that there was no excuse offered as to why the original borrower was not made a party nor was there an allegation that a judgment had first been obtained against it (as required in what is now Tex.R.Civ.P. 31).

The Court discussed in detail the statutes involved ³ which are also before this court. In certifying the question, the Court of Civil Appeals said that "the statutes are plain and unambiguous, Applying to guarantors generally without any distinction between absolute and conditional guarantors. In other words, since the statutes seem to us plainly to refer to all contracts of guaranty alike without any distinction between absolute and conditional guaranties, we are inclined to the opinion that the Courts are not warranted in reading into them, as it were, the distinction made by the decisions . . .." Wood v. Canfield Paper Co., supra (5 S.W.2d at 749, emphasis supplied). The Supreme Court recognized the plain terms of the statutes as stated by the intermediate court and held that '(w)e do not find in any case presented, or with which we are otherwise familiar, warrant for denying to a 'guarantor' (such as Wood) the substantial benefits given in the words of the statute (meaning the present art. 1987) . . ..' Id. at 753. In referring to art. 6336 (now Rule 31), the Court said that 'The Legislature had the right thus to ignore distinctions in fact and to rest the procedural statute upon arbitrary selection. That situation renders unimportant, so far as the present case is concerned, most of the discussion to be found in text-books and opinions classifying guarantors into those who are such 'absolutely' and those who are such 'conditionally." Id. at 750.

See also, 27 Tex.Jur.2d Guaranty §§ 61--62 (1961 and 1975 Supp.).

The Court then ruled that the trial court should have sustained the defendant's demurrer and joined the original borrower in the suit regardless of whether he was an absolute or conditional guarantor. This holding has continuing vitality. We have found no subsequent Supreme Court opinion which is in conflict with, or has modified, the holding in Wood v. Canfield Paper Co., supra. ⁴ It is worthy of notation that none of the cases cited to support plaintiff's position discussed Wood. Regardless of the isolation which has been accorded Wood, these cases also appear...