First Nat. Bank of Arizona v. Bennett Venture, Ltd.

• Decision Date: 03 September 1981
• Docket Number: No. 1,CA-CIV,1
• Citation: 130 Ariz. 562,637 P.2d 1065
• Parties: , 32 UCC Rep.Serv. 505 FIRST NATIONAL BANK OF ARIZONA, a national banking association, Plaintiff-Appellee, v. BENNETT VENTURE, LTD., a British Columbia, Canada corporation, Defendant-Appellant. 4874.
• Court: Arizona Court of Appeals

Page 1065

637 P.2d 1065

130 Ariz. 562, 32 UCC Rep.Serv. 505

FIRST NATIONAL BANK OF ARIZONA, a national banking association, Plaintiff-Appellee, v. BENNETT VENTURE, LTD., a British Columbia, Canada corporation, Defendant-Appellant.

No. 1 CA-CIV 4874.

Court of Appeals of Arizona, Division 1.

Sept. 3, 1981.

Rehearing Denied Oct. 28, 1981.

Review Denied Nov. 24, 1981.

Streich, Lang, Weeks & Cardon by Wm. S. Hawgood, II, Earl E. Weeks, Phoenix, for plaintiff-appellee.

O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears by Redfield T. Baum, Phoenix, for defendant-appellant.

OPINION

OGG, Judge.

In this appeal we must determine if the trial court properly granted summary judgment to the appellee, First National Bank of Arizona (Bank) against the appellant, Bennett Ventures, Ltd. (Bennett) for the payment of an indebtedness in accordance with Bennett's continuing guaranty agreement with the Bank. The Bank filed an action to recover on the continuing guaranty executed by Bennett, dated August 6, 1976, guaranteeing payment of any and all indebtedness of Tupper Tree Farms, Inc. The continuing guaranty agreement expressly provided that, in the event of a default by Tupper Tree Farms, Inc., the Bank could proceed against Bennett, whether or not it also proceeded against the borrower or against any other co-guarantor. Tupper Tree Farms, Inc. subsequently filed a petition in bankruptcy on May 1, 1978.

Bennett admits signing the continuing guaranty and further concedes that Tupper Tree Farms, Inc. was in default. However, Bennett argues that the court erred in granting the Bank summary judgment because there were questions of material fact relative to the Bank's duty to disclose knowledge it possessed of Lloyd Tupper and Tupper Tree Farms, Inc.'s unstable financial condition before accepting Bennett's guaranty. Further, Bennett argues that, even assuming the Bank is entitled to summary judgment on that issue, such judgment cannot be entered until the Bank has established its rights in the collateral security for the loan in question.

DID MATERIAL FACTS EXIST WHICH PRECLUDED THE ENTRY OF SUMMARY JUDGMENT?

The pertinent facts disclose that the Bank made its initial loan to Tupper Tree Farms, Inc. in December of 1973, in the amount of $20,000. This loan and all subsequent loans to Tupper Tree Farms, Inc. were guaranteed by Back Bay Investment Fund, the parent corporation of Tupper Tree Farms, Inc. and Lloyd Tupper. Lloyd Tupper was an officer and minority stockholder in Tupper Tree Farms, Inc. There is nothing in the record to indicate that Lloyd Tupper had any obligation to lend money or to provide additional capital to Tupper Tree Farms, Inc. By March 1975, the Bank had made loans totaling approximately $70,000 to Tupper Tree Farms, Inc.

In 1975, Bennett became the majority stockholder in Tupper Tree Farms, Inc. During the entire time frame in which Bennett executed the continuing guarantees to the Bank, which form the subject matter of this appeal, Bennett was the majority stockholder of Tupper Tree Farms, Inc. At this time, Tupper Tree Farms, Inc. owed in excess of one million dollars to Bennett for past loans. These substantial loans were made prior to any meetings between the representatives of the Bank and Bennett relative to the continuing guaranty agreements.

Starting in the summer of 1975, and continuing through the end of the year, Bennett had several meetings with the Bank, and in December 1975, Bennett signed the first continuing guaranty. In April and August 1976, Bennett delivered new continuing guarantees to the Bank, and by late 1976, Tupper Tree Farms, Inc.'s total outstanding indebtedness to the Bank was approximately $400,000.00.

When Tupper Tree Farms, Inc. subsequently defaulted on its loan obligations to the Bank, the Bank then made demand upon Bennett for payment in accordance with the continuing guaranty agreement. This suit followed when Bennett refused to comply with its continuing guaranty agreement.

Bennett argues it should be released from the continuing guaranty agreement because the Bank withheld facts which materially increased Bennett's risk under the surety agreement. Bennett claims the Bank knew and failed to inform Bennett's representatives that the co-guarantors were in a poor financial condition and that Lloyd Tupper was not reliable. Two of Bennett's officers state in their affidavits that Bennett would not have signed the guaranty agreement if they had known that Lloyd Tupper had no assets and was not considered reliable by the Bank. Bennett relies on the provisions of Section 124(1) of the Restatement of the Law of Security. Where we have no pertinent Arizona decisions, the Arizona courts will follow the Restatement of the Law whenever applicable. See Bristor v. Cheatham, 75 Ariz. 227, 255 P.2d 173 (1953); Serrano v. Kenneth A. Ethridge Contracting Co., 2 Ariz.App. 473, 409 P.2d 757 (1966). Section 124(1) of the Restatement of the Law of Security states (1) Where before the surety had undertaken his obligation the creditor knows facts unknown to the surety that materially increase the risk beyond that which the creditor has reason to believe the surety intends to assume, and the creditor also has reason to believe that these facts are unknown to the surety and has a reasonable opportunity to communicate them to the surety, failure of the creditor to notify the surety of such facts is a defense to the surety.

Under this section, Bennett could be released from the guaranty agreement where (1) the Bank has knowledge of facts unknown to Bennett that materially increase the risk beyond that which the Bank has reason to believe Bennett intended to assume; (2) the Bank has reason to believe these facts are unknown to Bennett; and (3) the Bank has a reasonable opportunity to communicate such facts to Bennett.

Viewing the facts in a light most favorable to Bennett, we find that the affidavits submitted by Bennett in opposition to the motion for summary judgment are insufficient to establish a valid defense which would release Bennett from the obligations of the continuing guaranty agreement. We find Bennett's attempt to obtain a release from its agreement fails in two respects under the guidelines of the Restatement. First, the Bank did not have knowledge of facts unknown to Bennett that materially increased Bennett's risk beyond which the Bank had reason to believe Bennett intended to assume. Second, the Bank did not have reason to believe these facts were unknown to Bennett. See Marine Midland Bank v. Smith, 482 F.Supp. 1279 (S.D.N.Y.1979), aff., 636 F.2d 1202 (1980). There is no allegation that the Bank withheld any information regarding its customer, Tupper Tree Farms, Inc., whose loans Bennett was guaranteeing. Lloyd Tupper and Back Bay Investment Fund, the co-guarantors, were not the Bank's debtors, and Bennett was not guaranteeing a loan to Lloyd Tupper or Back Bay Investment Fund, the parent corporation of Tupper Tree Farms, Inc. The Bennett affidavits in opposition to the summary judgment do not say the Bank made any representations relative to Lloyd Tupper or Back Bay Investment Fund. The affidavits merely...