Data Sales Co., Inc. v. Diamond Z Mfg.

• Decision Date: 14 August 2003
• Docket Number: No. 1 CA-CV 02-0480.,1 CA-CV 02-0480.
• Citation: 205 Ariz. 594,74 P.3d 268
• Parties: DATA SALES CO., INC., a Minnesota corporation, Plaintiff-Appellee, v. DIAMOND Z MANUFACTURING, an Idaho corporation, Defendant-Appellant.
• Court: Arizona Court of Appeals

74 P.3d 268

205 Ariz. 594

DATA SALES CO., INC., a Minnesota corporation, Plaintiff-Appellee, v. DIAMOND Z MANUFACTURING, an Idaho corporation, Defendant-Appellant.

No. -0480.

Court of Appeals of Arizona, Division 1, Department B.

August 14, 2003.

Quarles & Brady Streich Lang L.L.P. by Charles W. Herf, Brian R. Booker and Nicole France, Phoenix, Attorneys for Plaintiff-Appellee.

Snell & Wilmer L.L.P. by Joel P. Hoxie, Martha E. Gibbs and Todd A. Williams, Phoenix, Attorneys for Defendant-Appellant.

OPINION

IRVINE, Judge.

¶ 1 Diamond Z Manufacturing appeals from the trial court's order denying its request to set aside the judgment finding Diamond Z liable under a guaranty agreement. We find that surety defenses can be expressly or implicitly waived within the guaranty contract. Therefore, we affirm the judgment.

FACTS AND PROCEDURAL HISTORY

¶ 2 Diamond Z is an Idaho corporation that manufactures recycling equipment known as tub grinders. Tub grinders are large industrial machines designed to grind solid materials such as tires, stumps, logs, and railroad ties, into small pieces one inch or less in size. In 1993, Zehr Wood & Tire Grinding, Inc. ("Zehr Wood") purchased a Model 1463T tub grinder, the largest model manufactured by Diamond Z. Vernon and Rodney Zehr, father and son, owned and operated Zehr Wood. Vernon and Rodney are the uncle and cousin, respectively, of Marty Zehr, an owner of Diamond Z. At the time Zehr Wood purchased the tub grinder, Diamond Z neither received nor requested anything in writing from Zehr Wood and Zehr Wood made no written commitment to make scheduled payments for the grinder. The approximate purchase price of the tub grinder was $425,000. As of December 1996, Zehr Wood still owed a balance of $375,000 on the grinder's purchase price.

¶ 3 Data Sales Company, Inc. finances and leases equipment. Equipment Leasing Corporation ("ELC") often brokers these transactions. ELC finds a proposed lessee or buyer and then submits the deal to Data Sales for financing. If Data Sales approves the deal, the buyer or lessee signs the appropriate documents with ELC, and the documents are then assigned to Data Sales, which funds the transaction. Data Sales and ELC have done several financing transactions with Diamond Z, its affiliates, and Zehr family members.

¶ 4 On December 5, 1996, Zehr Wood and ELC entered into a purchase/leaseback transaction in which Zehr Wood sold the grinder to ELC for the outstanding balance due to Diamond Z ($375,000), and ELC leased the tub grinder back to Zehr Wood. The terms and conditions of the purchase/leaseback transaction were set forth in a Master Lease Agreement for Equipment ("the lease"). The lease required 42 monthly payments of $11,844, with total payments over the life of the lease of $497,448. As part of the transaction, ELC required Diamond Z to execute a Continuing Corporate Guaranty ("the guaranty") guaranteeing Zehr Wood's payment obligations under the lease. Diamond Z's general counsel Alan Malone reviewed the guaranty. On December 5, 1996, Diamond Z executed the guaranty in the form ELC requested. Under the guaranty, Diamond Z agreed that it was fully conversant with the financial status and situation of Zehr Wood at the time it signed the guaranty. Diamond Z also agreed that Data Sales had no duty to disclose to Diamond Z any facts or information it may acquire about Zehr Wood.

¶ 5 Data Sales provided the funding for the transaction and transferred the funds directly to Diamond Z. On December 6, 1996, ELC, as lessor, assigned all of its interest in the lease with Zehr Wood to Data Sales. ELC and Data Sales also required Rodney Zehr to personally guarantee the debt.

¶ 6 Within weeks after signing the lease, Rodney and Vernon Zehr informed Data Sales that they wanted out of the grinding business. Marty Zehr was also aware of Rodney's and Vernon's desire to leave the grinding business. In October 1996, prior to signing the lease, Rodney had contacted Global Intermark ("Global"), an equipment broker in Missouri. On December 3, 1996, Zehr Wood entered into a marketing contract with Global, wherein Global agreed to find a party interested in acquiring the tub grinder. Shortly thereafter, Global located a party who was interested in acquiring the grinder, Breaux Bridge Resources, Inc. ("Breaux Bridge"), located in Shreveport, Louisiana.

¶ 7 In January 1997, Data Sales, Zehr Wood, and Breaux Bridge executed an assignment of the lease. Zehr Wood remained obligated for the full amount of the lease. At that time, Zehr Wood had already made the January lease payment. Zehr Wood was not in default under the lease at the time of the assignment.

¶ 8 Breaux Bridge made only three lease payments to Data Sales, all of which were late. On May 21, 1997, Data Sales sent a formal default notice to Breaux Bridge. Data Sales did not copy Diamond Z on this notice, nor did Data Sales ever contact Diamond Z with regard to Breaux Bridge's default at the time. Data Sales initially sought payment from Breaux Bridge. Breaux Bridge filed for bankruptcy on October 2, 1997. Data Sales was not able to collect from Rodney Zehr because he filed for bankruptcy.

¶ 9 In February 1999, Data Sales brought suit against Diamond Z, Zehr Wood, and Rodney Zehr. Zehr Wood and Rodney Zehr never answered or appeared, and were ultimately dismissed from this case. ¶ 10 Diamond Z moved for summary judgment, asserting that the assignment of the lease agreement to Breaux Bridge without its knowledge or consent constituted a modification of the underlying obligation and therefore wholly discharged Diamond Z's obligations under the guaranty. Data Sales responded by filing a cross motion for partial summary judgment, asserting that under the language of the guaranty, Diamond Z consented in advance to modifications to the lease agreement and therefore waived its right to the modification/discharge defense.

¶ 11 The trial court denied Diamond Z's motion for summary judgment and granted Data Sales' motion for partial summary judgment. The court found that the lease assignment modified Diamond Z's guaranty obligations to its detriment, without its consent or knowledge, and under Indian Village,¹ "Diamond Z would be discharged from liability on the guaranty." Nevertheless, the trial court found that the express language of the guaranty allowed Data Sales to modify the lease without notice and Diamond Z's consent and that Diamond Z consented in advance to the modifications. Accordingly, Diamond Z had waived its right to assert the surety discharge defense.

¶ 12 Diamond Z filed a motion for reconsideration, asserting that factual issues regarding its intent to waive its right to discharge precluded summary judgment in favor of Data Sales. Initially, the trial court denied relief, stating that:

In the Court's view, there would be basic unfairness if the law allowed a significant change in the position of a guarantor without the guarantor's consent. However, in this case, it appears that the consent was given in advance. A right of substitution and a right of amendment was expressly granted. That right was exercised. In the absence of contract provisions permitting such a change, the Court would hold that the change was a discharge of the guarantee obligation. However, here, advance consent, while somewhat unpalatable, does not seem to be unconscionable or against public policy.

Diamond Z filed a supplemental memorandum, asking the court to consider extrinsic evidence of Diamond Z's intent before determining whether Diamond Z had waived its right to discharge. Furthermore, Diamond Z asserted that under Restatement (Third) of Suretyship & Guaranty § 48 (1996) ("Restatement"), it could not consent in advance to material modifications of the lease as a matter of law. The trial court modified its previous rulings and ordered a limited trial regarding "the parties' intent and their reasonable expectations" under the contract.² The trial court reasoned that because Restatement § 48 addressed waiver of only certain surety defenses, "[i]t can be read as excluding defenses (rights) like the Indian Village defense." Further, the court found that "the intent of the parties and their reasonable expectations, even if contrary to the expressed `contract' intent, are important in this case."

¶ 13 At trial, both parties presented evidence to the jury establishing the parties' intent at the time they formed the contract. Diamond Z moved for judgment as a matter of law and for a directed verdict, both of which the court denied. The jury found the following:

1. That Diamond Z and E.L.C. did intend for Diamond Z to waive its rights to notice and to consent to [an assignment of the lease agreement.]

2. That Diamond Z and E.L.C. did intend that such waiver of rights would apply even if Zehr Wood was not in default.

3. That Diamond Z did not have a reasonable expectation that its guaranty could not be enforced against it if it did not get notice of and a chance to object to [an assignment of the lease agreement] and that Diamond Z did not have a reasonable expectation that its guaranty could not be enforced against it if Zehr Wood was not in default at the time of [the assignment].

(Emphasis added.) Diamond Z timely appealed.

DISCUSSION

¶ 14 Diamond Z claims that the trial court erred in denying its motion for summary judgment because under Restatement § 48 it could not consent in advance to material modifications of the lease. Therefore, when Zehr Wood assigned its rights to Breaux Bridge, Diamond Z was discharged of its obligations under the guaranty contract. We review the trial court's denial of summary judgment de novo. United Bank of Ariz. v. Allyn, 167 Ariz. 191, 195, 805 P.2d 1012, 1016 (App.1990).

¶ 15 The common law recognized that the rights of a guarantor could be changed by actions of the primary parties to the debt transactions. The doctrines collectively known as "suretyship defenses" have...