Federal Deposit Ins. Corp. v. Crouch
| Decision Date | 04 June 1987 |
| Docket Number | No. 85-6005,85-6005 |
| Parties | FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Plaintiff- Appellee, v. M.F. CROUCH, Clifford E. Hemingway, and Mary Hemingway, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Russell D. Carroll, Taylor and Groover, Knoxville, Tenn., Jack Hamilton (argued), Charlotte, N.C., for defendants-appellants.
Rex R. Veal, Knoxville, Tenn., Patricia Horton (argued), for plaintiff-appellee.
Before KRUPANSKY and RYAN, Circuit Judges, and EDWARDS, Senior Circuit Judge.
This is an action on a promissory note. The maker and guarantors appeal the district court's order granting summary judgment in favor of F.D.I.C. Appellants contend that North Carolina law, which governs this case, requires F.D.I.C. to foreclose upon the collateral securing the note before personal judgment may enter against them. The district court disagreed and held that even though foreclosure was pending in a separate jurisdiction, F.D.I.C. was entitled to judgment as a matter of law. We agree.
On July 19, 1978, appellant Crouch, as maker, executed a promissory note to the United American Bank of Knoxville in the amount of $340,000. The note is secured by a deed of trust on a leasehold estate located in North Carolina. On the same day, the Hemingways, as guarantors, also executed a guaranty agreement securing the note. The guaranty provides that North Carolina law governs the construction and interpretation of its terms.
F.D.I.C. was appointed receiver when the United American Bank collapsed in 1982. The bank's assets, including the note and guaranty involved in this case, were transferred to First Tennessee Bank. After default upon the note, First Tennessee Bank brought suit in state court against Crouch and the Hemingways. Subsequently, F.D.I.C. purchased the note from the bank, was substituted as plaintiff in this action, and removed the case to federal district court.
Thereafter, the Hemingways notified F.D.I.C. that, pursuant to N.C.Gen.Stat. Sec. 26-7, F.D.I.C. would be required to attempt to satisfy its claim against Crouch and the deed of trust before proceeding against them. F.D.I.C. initiated foreclosure proceedings in North Carolina as required by the statute.
In the district court, F.D.I.C. obtained a partial summary judgment of liability against the appellants. The court rejected the appellants' argument that N.C.Gen.Stat. Sec. 26-7 and the pending foreclosure reduced F.D.I.C.'s claim to a mere contingency for such deficiency as may result. The court determined that a cause of action accrued against the maker and guarantors at the time of default on the promissory note. On August 27, 1985, the district court granted F.D.I.C.'s motion for summary judgment, holding the appellants jointly and severally liable on the note.
In this appeal, Crouch and the Hemingways contend that the district court erred in granting F.D.I.C.'s motion for summary judgment. They raise three assignments of error: (1) that N.C.Gen.Stat. Sec. 26-7 precludes personal judgment prior to realizing upon the collateral securing the note; (2) that the maker's right under N.C.Gen.Stat. Sec. 45-21.36 to challenge the sufficiency of value received from the sale of collateral is impaired by the district court's decision to allow F.D.I.C. to pursue personal judgment while simultaneously proceeding with foreclosure; and (3) that F.D.I.C. elected its remedy by initiating foreclosure on the deed of trust. Since there are no factual issues in dispute, our duty is to determine whether F.D.I.C. is entitled to judgment as a matter of law.
North Carolina courts adhere to the general principles which govern the relationship between makers and guarantors of a debt. In Gillespie v. DeWitt, 53 N.C.App. 252, 280 S.E.2d 736, review denied, 304 N.C. 390, 285 S.E.2d 832 (1981), the court stated:
Id. at 741 (quoting Properties v. Norburn, 281 N.C. 191, 188 S.E.2d 342, 345 (1972)). Thus, in Exxon Chemical Americas v. Kennedy, 59 N.C.App. 90, 295 S.E.2d 770 (1982), the court rejected the guarantor's contention that when the debtor's bankruptcy terminated the debtor's obligation, the guarantor's liability also terminated. The North Carolina court held that the guaranty created a primary obligation arising immediately upon default and independent of the principal debtor's obligation. Accordingly, the creditor was not required to exhaust his remedies against the principal before proceeding against the guarantor.
The Hemingways' guaranty agreement provides, in pertinent part:
[Emphasis added.]
It is beyond dispute that this agreement provides for the accrual of a cause of action against the guarantors upon the default of the maker. Indeed, the Hemingways expressly waived any right to require F.D.I.C. to proceed first against Crouch and the collateral. This guaranty, like that considered in Exxon Chemical, is a primary obligation.
However, N.C.Gen.Stat. Sec. 26-7 provides:
"(a) After any note, bill, bond or other obligation becomes due and payable, any surety, endorser, or guarantor thereof may give written notice to the holder or owner of the obligation requiring him to use all reasonable diligence to recover against the principal and to proceed to realize upon any securities which he holds for the obligation."
The Hemingways asserted their rights under this statute by notifying F.D.I.C., in writing, to proceed first against Crouch and the deed of trust. The Hemingways contend that the statute requires F.D.I.C. to "realize upon any securities" prior to obtaining a personal judgment against the guarantors.
Although there are no North Carolina cases interpreting this statute, we must nevertheless decide this case in accord with North Carolina law. Therefore, "this Court is obligated to exercise its best judgment as to how the [North Carolina court] would rule if confronted with this issue." Cathey v. Johns-Manville Sales Corp., 776 F.2d 1565, 1569 (6th Cir.1985). See also Andrew v. Bendix Corp., 452 F.2d 961 (6th Cir.1971), cert. denied, 406 U.S. 920, 92 S.Ct. 1773, 32 L.Ed.2d 119 (1972).
Chapter 26 of North Carolina General Statutes is entitled "Suretyship." The general provisions of Secs. 26-1 et seq. govern the relationship between guarantors and the principal obligor on a debt. Section 26-1 allows the guarantor to assert and prove his status. Section 26-2 requires the sheriff to levy first on the principal's property to satisfy the judgment; and "for want of sufficient property," only then to proceed against the guarantor for satisfaction.
These provisions contemplate that a creditor will proceed simultaneously against the maker and guarantor to establish liability. However, nothing prevents a creditor from proceeding against a guarantor alone. Sections 26-1 et seq. are unavailing to the guarantor who fails to establish his suretyship. Therefore, nothing prevents the sheriff from selling the guarantor's property to satisfy a resulting judgment. Indeed, Sec. 26-3 provides a summary remedy in subrogation for the guarantor who pays the principal's debt. Peebles v. Gay, 115 N.C. 38, 20 S.E. 173, 175 (1894).
In this case, however, the creditor did not proceed against the Hemingways alone, as it might have done. Instead, suit was initially brought against both Crouch and the Hemingways. Only later, and at the Hemingways' insistence, did F.D.I.C. initiate foreclosure proceedings on the deed of trust. Therefore, the crux of the Hemingway's argument is that Sec. 26-7 is more protective of their rights as guarantors than the more general provisions of Secs. 26-1 et seq. We agree with this contention. Nevertheless, the Hemingways' argument that Sec. 26-7 envinces the North Carolina legislature's intent to estop a creditor from proceeding against the guarantors before attempting to satisfy the debt against the maker is untenable. Section 26-7 is essentially an enforcement provision. Once the guarantor invokes this section, as the Hemingways have done in this case, the creditor's delay in pursuing the principal will result in exoneration for the guarantors. First National Bank v. Homesley, 99 N.C. 531, 6 S.E. 797 (1888). Though not as extensive as the Hemingways contend, this is substantial protection for the guarantor who deems himself in danger of loss. See A Survey of Statutory Changes in North Carolina in 1951: Suretyship, 29 N.C.L.Rev. 351, 413 (1951).
Additionally, the plain language of Sec. 26-7 belies the Hemingways' contention. It requires only that the creditor "use all reasonable diligence to recover against the principal." 1 F.D.I.C. began foreclosure proceedings on the deed of trust in a North Carolina state court. However, there is evidence in the...
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...action against the guarantor ripens immediately upon the failure of the principal debtor to pay the debt. See Federal Deposit Ins. Corp. v. Crouch (C.A.6, 1987), 816 F.2d 1110 (applying North Carolina law). Moreover, defendants expressly waived all forms of notice under the guaranty: "The u......