Developers Small Business Investment Corp. v. Hoeckle

Decision Date13 May 1968
Docket NumberNo. 21849.,21849.
CitationDevelopers Small Business Investment Corp. v. Hoeckle, 395 F.2d 80 (9th Cir. 1968)
PartiesDEVELOPERS SMALL BUSINESS INVESTMENT CORPORATION, a corporation, Appellant, v. Robert G. HOECKLE, Blanche Bateman, Jean N. Bell, Surjit Singh, H. Linn Hinkle, Louis Bonomi and Edmond V. Bayer, Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Kurt W. Melchior(argued), David Self, of Severson, Werson, Berke & Bull, San Francisco, Cal., for appellant.

Robert A. Thompson(argued), of Gottesman & Thompson, San Francisco, Cal., James B. McKenney, of Pendergrass, McKenney, Perry & Ward, San Rafael, Cal., for appellees.

Before POPE, BROWNING and CARTER, Circuit Judges.

JAMES M. CARTER, Circuit Judge.

This appeal involves an action on a guaranty executed by the appellees individually, (hereafter "Appellees").This action was grounded for jurisdiction on diversity of citizenship under 28 U.S.C. § 1332.This court's jurisdiction rests on 28 U.S.C. § 1291.

Two questions are involved, (1) whether the law of New Jersey or California applies, and (2) whether under applicable law, the holder of a guaranty may enforce its obligation by an action on the guaranty without first exhausting its security under a deed of trust secured by a separate note also held by the holder of the guaranty, the obligation of the note being the obligation guaranteed.

The complaint by Developers Small Business Investment Corporation, a corporation, (hereafter "S.B.I.C."), alleged that pursuant to a loan agreement executed under the laws of the state of New Jersey, by S.B.I.C., and Pelican Hill Apartments, Inc., a California corporation, (hereafter "Pelican"), and dated August 15, 1965, Pelican made, executed and delivered a promissory note to S.B.I.C.The note was delivered on August 26, 1965, payable at Teaneck, New Jersey, and secured by a deed of trust on the Pelican Real Properties.S.B.I.C. is the owner and holder of the note.

Pursuant to the loan agreement, the appellees, (defendants below) and each of them made, executed and delivered a personal guaranty of the indebtedness represented by the promissory note to S.B.I.C., as an inducement to grant financial accommodations to Pelican.The appellees each jointly and severally and unconditionally guaranteed payment of the note.

The complaint was for money against the appellees, signers of the guaranty, in the sum of $89,500, plus interest and attorney's fees allegedly due and payable upon default of payment of installments of the note executed by Pelican.

No responsive pleading or answer was filed to the complaint, but appellees filed a motion to dismiss the action, pursuant to F.R.Civ.P. 12(b)(6), or in lieu thereof to quash a writ of attachment previously issued "in that plaintiff(S.B.I.C.) has failed to exhaust the principal security for the obligation allegedly guaranteed by defendants as more clearly appears in the affidavit of Jean N. Bell, attached hereto."The affidavit stated:

"The exact value of said real property is unknown to affiant, although that portion constituting a first deed of trust in favor of plaintiff is appraised by the Marin County Assessor as having a market value of $41,000.00."(R. 22).

S.B.I.C. opposed the motion and contended that, (1) New Jersey law applied; (2) that under New Jersey law and also under California law, if it applied, it was unnecessary to exhaust other security for the promissory note before proceeding against the guarantors; (3) that exhaustion of other security would be an idle, vain and useless act; (4) that in any event failure to exhaust security would be, under the law of either state, an affirmative defense which must be raised by appellees and need not be alleged by S.B.I.C. in the complaint.

S.B.I.C. also filed an affidavit of its President, stating that a portion of the property, through a scrivener's oversight, was not covered by a prior deed of trust and refers to the claims of the holder of the prior deed of trust and its effect on S.B.I.C.'s second.The affidavit also stated that in affiant's expert opinion and in the opinion of attorneys for the holder of the prior deed of trust, the entire property involved in the transaction between S.B.I.C. and Pelican, was not worth the remaining unpaid balance to the prior trust deed holder, the senior encumbrancer; that any attempt to foreclose the security would be an idle and expensive act.

The district court on March 3, 1967, entered its memorandum and order finding that New Jersey law applied and plaintiff must exhaust its primary security before proceeding against the guarantors.The order concluded, "Since it has not done so to date, this action should be dismissed.Accordingly, it is ordered that this action be and the same is hereby dismissed."

The effect of dismissal under Rule 41(b) F.R.Civ.P.

We are met at the outset by the contention that the dismissal as entered under Rule 41(b) F.R.Civ.P., is a dismissal with prejudice, thereby terminating all S.B.I.C.'s rights under the guaranty.Rule 41(b) concerning involuntary dismissal and its effect, states: "Unless the court in its order for dismissal otherwise specifies, a dismissal under this subdivision and any dismissal not provided for in this rule, other than a dismissal for lack of jurisdiction, for improper venue, or for failure to join a party under Rule 19, operates as an adjudication upon the merits."

Even if the trial court was correct as to necessity to exhaust security, it should have permitted an amendment to allege exhaustion of security or the uselessness of such an act.Bonanno v. Thomas, 309 F.2d 320(9 Cir.1962).Nor does the failure of appellees to request leave in the district court to amend affect the problem.Bonanno v. Thomas, supra, andSidebotham v. Robison, 216 F.2d 816, 826(9 Cir.1962).

Since affidavits were filed, there is also a question as to whether the court considered them and should have proceeded pursuant to Rule 56 F.R.Civ.P., that is treated the motion as one for summary judgment pursuant to the provisions of Rule 12(b).There is no express exclusion of the affidavits by the court in its memorandum and order but apparently it did not base its dismissal on the affidavits.The memorandum refers to the failure to exhaust security but the security was alleged in the complaint.In view of our disposition of the case, we need not consider whether the motion should have been treated as one for summary judgment.

The order of dismissal must be reversed for failure of the court to allow S.B.I.C. to amend, and instead adjudicating its rights on the guaranty by the dismissal with prejudice under Rule 41 (b) F.R.Civ.P.But there is more to the case, and we should proceed with further determinations.

Conflict of Law Rule

Both parties agree that in this diversity case, the district court is bound to follow the conflict of laws rule of the state in which the district court is located.Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477(1949).

Section 1646 of California Civil Code provides * * * "A contract is to be interpreted according to the law and usage of the place where it is to be performed, or, if it does not indicate a place of performance, according to the law and usage of the place where it is made."

In determining the place of making, suretyship contracts differ from regular contracts since the creditor must accept the surety's guarantee, either by acting upon it and extending credit, or by communicating his acceptance to the surety.Skaggs-Stone, Inc. v. LaBatt, 182 Cal.App.2d 142, 5 Cal.Rptr. 882(1960).This event clearly occurred in New Jersey.

Furthermore, the district court properly found that the California rule is that when the parties intend that the law of a certain state govern the contract, the intention is usually respected.Bernkrant v. Fowler, 55 Cal.2d 588, 12 Cal.Rptr. 266, 360 P.2d 906(1961);Boole v. Union Marine Ins. Co., 52 Cal. App. 207, 198 P. 416(1912);Ringling Bros.-Barnum & Bailey Combined Shows v. Olvera, 119 F.2d 584(9 Cir.1941).

The appellees were guarantors of the loan between S.B.I.C. and Pelican.The guarantors were named in the loan agreement in Sec. 4(c), which provided expressly that the note would be jointly and severally guaranteed by each of them.The loan agreement was signed in behalf of Pelican by Bell and Singh as President and Secretary of Pelican.The loan agreement specifically provides that "It is understood and agreed by and between the parties hereto that the laws of New Jersey shall control the affect of the agreement and all documents herein referred to. * * *."Emphasis added.

The question is whether New Jersey law was intended to apply to the guaranty contract.We are of the opinion that it was so intended.A guaranty given to guarantee the execution of a contract becomes part of such contract, and to that contract the guarantors become parties the same as though they had actually made and executed the contract itself.Ryan v. Shannahan, 209 Cal. 98, 285 P. 1045(1930);Callan v. Empire State Surety Co., 20 Cal.App. 483, 129 P. 978(1912);Harm v. Frasher, 181 Cal.App.2d 405, 5 Cal.Rptr. 367(1960).

The "contract" here is the note secured by the deed of trust and examined by Pelican.The guaranty, signed by all appellees, states they"jointly and severally do hereby guarantee payment of the note, copy of which is attached hereto."Emphasis added.

Moreover, it can be inferred that appellees knew all about the transaction they were entering into, including the provision in the loan agreement that New Jersey law should apply and that the note attached to the signed guaranty had written on the upper right thereof, "Teaneck, New Jersey, Aug. 26, 1965."

We conclude that the guaranty contract is governed by New Jersey law.But we further conclude that both New Jersey and California law permit the maintenance of the action against the guarantors.

New Jersey Law

The New Jersey case law clearly establishes the rule that in the case of...

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8 cases
  • First Pennsylvania Bank, NA v. Lugli
    • United States
    • U.S. District Court — Northern District of California
    • Julio 06, 1982
    ...the chosen law would not be contrary to a fundamental policy of a state law which might otherwise apply. Smith, Valentino and Smith, Inc. v. Superior Court, 17 Cal.3d 491, 494, 131 Cal. Rptr. 374, 551 P.2d 1206 (1976); Developers Small Business Investment Corp. v. Hoeckle, 395 F.2d 80, 83 (9th Cir. 1968). The parties' choice of Pennsylvania law was reasonable in that Pennsylvania has a substantial relationship with the guarantees. It is the state where the guarantees wereregardless of the parties' choice of law as the state where the guarantees were made and delivered. California Civil Code § 1646; Skaggs-Stone, Inc. v. LaBatt, 182 Cal.App.2d 142, 5 Cal.Rptr. 882 (1960); Developers Small Business Investment Corp. v. Hoeckle, supra, 395 F.2d at 83. The question, then, is, under the law of Pennsylvania, may the Bank pursue this action without first foreclosing on the New Jersey property? The Court concludes that it The Supreme Court...
  • Marin v. HEW, Health Care Financing Agency
    • United States
    • U.S. Court of Appeals — Ninth Circuit
    • Agosto 22, 1985
    ...v. Susquehanna Corporation, 419 F.2d 1112 (7th Cir.) cert. denied, 400 U.S. 826, 91 S.Ct. 51, 27 L.Ed.2d 55 (1970) (appeal from dismissal of complaint with prejudice and denial of leave to file amended complaint); Developers Small Business Corp. v. Hoeckle, 395 F.2d 80 (9th Cir.1968) (dismissal with prejudice can be appealed). However, he did not appeal. Because Marin accepted the court's final rejection of his claims in one instance without appealing, he can claim no fairness...
  • Lumia v. Roper Pump Co.
    • United States
    • U.S. District Court — Northern District of California
    • Julio 28, 1989
    ...conservative Georgia case law. In determining what state's law should apply in diversity cases, a federal court must look to the choice of law rule of the state where the district court is situated. Developers Small Business Investment Corp. v. Hoeckle, 395 F.2d 80, 83 (9th Cir.1968). California courts generally will uphold a choice of law provision absent substantial prejudice and injustice to a party to an adhesion contract. Bos Material Handling, Inc. v. Crown Controls Corp.,...
  • In re Pajaro Dunes Rental Agency, Inc.
    • United States
    • U.S. District Court — Northern District of California
    • Mayo 19, 1993
    ...suretyship provisions of California Civil Code § 2845. California Civil Code § 2845 allows a surety/guarantor, upon demand, to require the creditor to pursue remedies first against the principal debtor. Developers Small Business Inv. Corp. v. Hoeckle, 395 F.2d 80 (9th Cir.1968). The text of § 2845 reads in pertinent A surety may require the creditor . . . to proceed against the principal, or to pursue any other remedy in the creditor\'s power which the surety...
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