D. W. Jaquays & Co. v. First Sec. Bank

• Citation: 419 P.2d 85,101 Ariz. 301
• Decision Date: 19 October 1966
• Docket Number: No. 8035,8035
• Parties: D. W. JAQUAYS & CO., an Arizona corporation, Appellant, v. FIRST SECURITY BANK, an Arizona banking corporation, Appellee.
• Court: Supreme Court of Arizona

Page 85

419 P.2d 85

101 Ariz. 301

D. W. JAQUAYS & CO., an Arizona corporation, Appellant, v. FIRST SECURITY BANK, an Arizona banking corporation, Appellee.

No. 8035.

Supreme Court of Arizona, In Banc.

Oct. 19, 1966.

Rehearing Denied Nov. 15, 1966.

Lovell B. Lieurance, Phoenix, for appellant.

Johnson, Shelley, Roberts & Riggs, Mesa, for appellee.

UDALL, Justice.

This is an appeal from an award of a summary judgment to the plaintiff, First Security Bank (hereinafter referred to as plaintiff).

On July 25, 1961 the defendant (D. W. Jaquays & Company) sold and delivered to Mesa Steel and Manufacturing Company one air compressor, on a conditional sales contract. Subsequent to the execution and delivery of the contract, defendant assigned and transferred to the Valley National Bank all of its right, title and interest in the contract.

On or about September 20, 1961 the purchaser Mesa Steel requested, and defendant agreed to transfer the conditional sales contract from the Valley National Bank to plaintiff First Security Bank. Instead of taking an assignment of the contract from the Valley National Bank, plaintiff prepared an identical contract; the defendant transferred to plaintiff all of defendant's interest in the contract and executed, on the instrument, the following unconditional guaranty:

'The undersigned unconditionally guarantees to the First Security Bank the faithful performance of the above contract, and in connection therewith, consents, without notice, to any extensions or forbearance by assignee, and waives any demand or notice of default.

'D. W. Jaquays & Co.

By /s/ D. R. Lindsay

Title Sales Mgr.'

At some time between the 1st and 19th day of September, 1961 the defendant and Mesa Steel executed a second conditional sales contract by which Mesa Steel purchased one air drill and one air hoist. The defendant transferred this second contract to plaintiff and executed thereon, on September 19, 1961, an unconditional guaranty exactly like the guaranty previously executed in conjunction with the first conditional sales contract.

Subsequent to the transactions above, Mesa Steel was adjudicated a bankrupt. Defendant petitioned the bankruptcy court for reclamation of the equipment covered by the sales contracts, but the petition was denied on the ground that neither of the contracts was recorded in the office of the Maricopa County Recorder, as required by A.R.S. § 33--753, with the result that title was not effectively reserved as against the trustee in bankruptcy.

Following refusal of the bankruptcy court to allow reclamation, defendant refused to honor its unconditional guaranty agreements with the plaintiff. Plaintiff then brought this suit against defendant, alleging a breach of the guaranty agreement and seeking to recover the unpaid balance of the principal sum due under the sales contracts, with accrued interest, and the sum of $1,000 as reasonable attorney's fees, under the provisions of the sales contracts which obligated the purchaser to pay the costs of collection. After giving due consideration to the pleadings, to supporting memoranda and to defendant's answers to plaintiff's interrogatories, the trial court granted plaintiff's motion for summary judgment.

On this appeal defendant claims the trial court erred in granting summary judgment because, as a matter of law, defendant was entitled to a judgment awarding him a setoff or a release to the extent of his injury caused by plaintiff's failure to record the conditional sales contracts.

In his amended answer, the allegations of which we must accept as true for the purpose of reviewing the correctness of an award of a summary judgment to the plaintiff, defendant alleged that at all times the plaintiff had exclusive control, custody and possession of the two sales contracts. This allegation was never disputed by the plaintiff. Defendant argued that consequently (1) the plaintiff had a duty to record the contracts, and (2) the breach of the duty relieved defendant from liability on the guaranties to the extent of his injury.

Defendant's proposition that plaintiff had an implied-in-law duty to record the contracts is based on the following principles of the law of suretyship and subrogation, as stated in 50 Am.Jur., Suretyship, § 109 and § 118:

'109. Generally.--A surety is entitled to be subrogated to the benefit of all the securities and means of payment under the creditor's control, and so, in the absence of assent, waiver, or estoppel, he is generally released by any act of the creditor which deprives him of such right * * *.'

'118. Failure to Perfect or Record Security.--The collateral security taken by a creditor may require some act on the part of the creditor to make it a valid security. Where such is the case, the law implies an agreement on his part to perform that act. If he neglects or fails to do so and the security is thereby lost or impaired, the surety may be discharged to the extent of his loss or injury * * *.'

Although the above principles are supported by the weight of authority, Sullivan v. State, to Use of School Fund, 59 Ark. 47, 26 S.W. 194; Hendryx v. Evans, 120 Iowa 310, 94 N.W. 853; Lewis v. Paul Brown Realty & Investment Co., 354 Mo. 1025, 193 S.W.2d 13; Bennett v. Taylor, 43 Tex.Civ.App. 30, 93 S.W. 704, the plaintiff claims that they do not apply in a case involving an unconditional guaranty.

Unquestionably the defendant, as a guarantor, had a right of subrogation. Winklemen v. Sides, 31 Cal.App.2d 387, 88 P.2d 147; Union Trust Co. of Rochester v. Willsea, 274 N.Y. 164, 9 N.E.2d 820, 112 A.L.R. 1175; Winter v. Trepte, 234 Wis. 193, 290 N.W. 599. However, plaintiff argues that the legal effect of an unconditional guaranty is such that it is no defense to the guarantor that the creditor destroyed or impaired the subrogation right by failing to record and thus preserve the value of security for the benefit of the guarantor.

In support of his proposition that such is the effect of an unconditional guaranty, plaintiff refers to the case of Joe Heaston Tractor & Implement Co. v. Securities Acceptance Corporation, 243 F.2d 196 (10 Cir. 1957). In the Heaston case the contract of the guarantor contained the following provision, 243 F.2d 196, at 198:

'* * *. The undersigned grants to the Finance Company (the guarantee) full power to modify or change terms of any of the Liabilities, to agree to forbearance with respect thereto, To consent to the substitution or exchange or release of collateral thereto, and extension of time of payment of the Liabilities.' (emphasis added)

Although it is not entirely clear to what extent the court in the Heaston case was influenced by the fact that the guarantor consented to an exchange or release of collateral securities by the guarantee, the fact that such consent was unequivocally given in the contract of guaranty sufficiently distinguishes the Heaston case from the one before us on this appeal. If we assume without deciding that a guarantor who consents to a release of collateral security by the guarantee cannot avoid liability on his guaranty because a release has prejudiced his subrogation rights, it does not necessarily follow that an unconditional guarantor, who in his contract does not unequivocally consent to an exchange or surrender of securities, is likewise precluded from defending on the ground that subrogation rights have been impaired.

It is argued by the plaintiff that the guaranties executed by the defendant in this case do express a consent to the failure of the plaintiff to record the conditional sales contracts. Plaintiff refers to the following language of the guaranties:

'* * * and in connection therewith consents without notice to any extensions or forbearance by assignee, and waives any demand or notice of default.'

On the basis of the above language the plaintiff concludes that the defendant consented to Any forbearance by the plaintiff, including any failure of the plaintiff to pursue any legal right against the purchaser Mesa Steel.

We do not agree with plaintiff's conclusion that an unconditional guarantor, by consenting to 'any extension or forbearance', thereby loses his defense that a subrogation right has been impaired or destroyed by the guarantee's failure to preserve security by recording. The doctrine of subrogation arises not from contract but from principles of equity. As this Court stated in Mosher v. Conway, 45 Ariz. 463, at 468, 46 P.2d 110, at 112:

'* * * Subrogation is the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt. It is a creature of equity * * * Its purpose is the prevention of injustice and is the mode which equity adopts to compel...