First Nat. Bank of Crossett v. Griffin

• Decision Date: 29 June 1992
• Docket Number: No. 91-65,91-65
• Court: Arkansas Supreme Court
• Parties: FIRST NATIONAL BANK OF CROSSETT, Crossett, Arkansas, v. Richard E. GRIFFIN, Appellee.

Page 816

832 S.W.2d 816

310 Ark. 164

FIRST NATIONAL BANK OF CROSSETT, Crossett, Arkansas, v. Richard E. GRIFFIN, Appellee.

No. 91-65.

Supreme Court of Arkansas.

June 29, 1992.

Thomas S. Streetman, Crossett, for appellant.

Gary M. Hopkins, Little Rock, for appellee.

ROBERT M. CEARLEY, Jr., Special Chief Justice.

This is a suit on a guaranty. Our jurisdiction is pursuant to Rule 29(c) as the case involves the interpretation or construction of an act of the General Assembly, namely, 1961 Ark. Acts 185, § 3-606. Appellant, First National Bank of Crossett (the Bank), raises three issues on appeal. First, it argues that the trial court erred in admitting parol evidence to vary the terms of the guaranty agreement which, it maintains, is clear and unambiguous. Second, it argues that the impairment of collateral defense contained in Ark.Stat.Ann. § 85-3-606 (Add.1961) (currently Ark.Code Ann. § 4-3-606 (1987) (repealed 1991)), is not available to one who executes a separate guaranty and, alternatively, that the defense was waived by the express language of the guaranty agreement. Third, it argues that the trial court erred in failing to award an attorney's fee pursuant to the terms of the guaranty agreement. We reverse and remand.

FACTS

On May 1, 1986, the Bank loaned Bearhouse, Inc. $490,000.00. The note was payable on demand or on May 1, 1987, and was secured by a mortgage on Ashley County real estate on which was situate a grain warehouse and office. Bearhouse stock was owned in equal shares by Appellee Richard E. Griffin, Cockrum, Couch and Young. Each was an officer and director of the corporation. The Bank required that each shareholder execute a separate guaranty agreement guaranteeing payment of 25% of the Bearhouse note. Before the note matured, Bearhouse closed its business in Ashley County and ceased operations. Bearhouse was later placed in involuntary bankruptcy and defaulted on the note. The Bank made demand upon each of the guarantors to pay his pro rata share of the debt. No payment was made and the Bank sued each of the guarantors. Couch filed bankruptcy and the proceedings were stayed as to him. Appellee Griffin answered alleging that the Bank had impaired the collateral by failing to properly perfect its security interest and failing to realize upon the collateral in a commercially reasonable manner, resulting in his release pursuant to Section 85-3-606. Griffin counterclaimed alleging misrepresentation, negligence, and breach of fiduciary duty. The Bank contended (1) that the defense of impairment of collateral does not apply to a party who executes a separate guaranty, and (2) that Griffin waived the defense under the express wording of the guaranty agreement.

The Bank moved for summary judgment. Cockrum and Young failed to appear at the hearing on the motion for summary judgment and summary judgment was granted as to each of them in the amount of $162,224.61. Griffin filed a response to the motion but did not file counter affidavits or other evidence in opposition. The motion was taken under advisement but never decided.

The case was tried to the court without a jury on February 13, 1990. The evidence established that, as of that date, there was due and owing on the note $683,413.91, including $490,000.00 in principal, plus accrued interest, and advances for taxes and insurance and attorney's fees. Griffin was allowed to testify, over the objection of the Bank, that he had held separate discussions with an officer of the Bank prior to the execution of the guaranty and that Griffin had only agreed to guarantee 25% of any deficiency. Griffin further testified that the value of the collateral was at least $450,000.00 at the time of the bankruptcy of Bearhouse and that, if the guarantors had been allowed to sell the property at that time, his share of the resulting deficiency would have been $17,000.00. The trial court held, in a three sentence opinion, that Griffin owed $17,000.00 of the original debt plus interest from the date of default. Judgment was entered in favor of the Bank in the amount of $17,000.00. From that Judgment comes this appeal.

I. PAROL EVIDENCE

The parol evidence rule prohibits introduction of extrinsic evidence, parol or otherwise, which is offered to vary the terms of a written agreement. It is a substantive rule of law rather than a rule of evidence. Its premise is that the written agreement itself is the best evidence of the intention of the parties. In Farmers Coop. Ass'n v. Garrison, 248 Ark. 948, 952, 454 S.W.2d 644, 646 (1970), we said: "It is a general proposition of the common law that in the absence of fraud, accident or mistake, a written contract merges, and thereby extinguishes, all prior and contemporaneous negotiations, understandings and verbal agreements on the same subject." On the other hand, the parol evidence rule does not prohibit the introduction of extrinsic evidence where it would aid the court in interpreting the meaning of particular language of a contract, such as when the contract contains terms of art or words which have acquired their meaning through a course of dealing or custom or usage. Les-Bil, Inc. v. General Waterworks Corp., 256 Ark. 905, 511 S.W.2d 166 (1974). Nor does the parol evidence rule prohibit the court's acquainting itself with the circumstances surrounding the making of the contract. Stokes v. Roberts, 289 Ark. 319, 711 S.W.2d 757 (1986); Schnitt v. McKellar, 244 Ark. 377, 427 S.W.2d 202 (1968). The initial determination of the existence of ambiguity rests with the court and, if the writing contains a term which is ambiguous, parol evidence is admissible and the meaning of the ambiguous term becomes a question of fact for the factfinder. C & A Constr. Co., Inc. v. Benning Constr. Co., 256 Ark. 621, 509 S.W.2d 302 (1974).

The Bank contends that the trial court erred in admitting parol evidence to vary the terms of the guaranty agreement which, it maintains, is clear and unambiguous. Each guaranty agreement was prepared on a printed form. The printed language in each form is identical. The guaranty agreement executed by Griffin contains the following typewritten language: "guarantee (sic) limited to 25% of outstanding debt." The other three guaranty agreements contain the following language which is typewritten: "GUARANTEE (sic) LIMITED TO 25% OF TOTAL INDEBTEDNESS." Griffin first argued in the trial court and here that the language of the guaranty agreement which he executed is clear and unambiguous and that the term "outstanding debt" limits his liability to only 25% of the amount outstanding after application of proceeds from the sale of collateral. Alternatively, Griffin urged that the term "outstanding debt" is ambiguous and that parol evidence is therefore admissible to establish the intention of the parties.

We cannot agree to either proposition. In reaching our conclusion, we apply three well-established principles of contract law. First, as we have long recognized, the first rule of interpretation of a contract is to give to the language employed the meaning which the parties intended. Lee Wilson & Co. v. Fleming, 203 Ark. 417, 156 S.W.2d 893 (1941). Second, in construing any contract, "[w]e must consider the sense and meaning of the words used by the parties as they are taken and understood in their plain, ordinary meaning." Farm Bureau Mut. Ins. Co. of Arkansas, Inc. v. Milburn, 269 Ark. 384, 386, 601 S.W.2d 841, 842 (1980). Third, "[d]ifferent clauses of a contract must be read together and the contract construed so that all of its parts harmonize, if that is at all possible, and, giving effect to one clause to the exclusion of another on the same subject where the two are reconcilable, is error." Continental Casualty Co. v. Davidson, 250 Ark. 35, 41, 463 S.W.2d 652, 655 (1971). In Fowler v. Unionaid Life Ins. Co., 180 Ark. 140, 144-145, 20 S.W.2d 611, 613 (1929), we set out the rules of construction to which we have consistently adhered:

It is also a well-settled rule in construing a contract that the intention of the parties is to be gathered, not from particular words and phrases, but from the whole context of the agreement. In fact, it may be said to be a settled rule in the construction of contracts that the interpretation must be upon the entire instrument, and not merely on disjointed or particular parts of it. The whole context is to be considered in ascertaining the intention of the parties, even though the immediate object of inquiry is the meaning of an isolated clause. Every word in the agreement must be taken to have been used for a purpose, and no word should be rejected as mere surplusage if the court can discover any reasonable purpose thereof which can be gathered from the whole instrument. The contract must be viewed from the beginning to end, and all its terms must pass in review, for one clause may modify, limit or illuminate the other. Taking its words in their ordinary and usual meaning, no substantive clause must be allowed to perish by construction, unless insurmountable obstacles stand in the way of any other course. Seeming contradictions must be harmonized, if that course is reasonably possible. Each of its provisions must be considered in connection with the others and, if possible, effect must be given to all. A construction which entirely neutralizes one provision should not be adopted if the contract is susceptible of another which gives effect to all of its provisions. [Citation omitted].

We must then look to the contract as a whole and the circumstances surrounding its execution to determine the intention of the parties.

The guaranty agreement here contains the following language:

This guaranty shall be a continuing, absolute and unconditional guaranty....

....

Said Bank shall have the exclusive right to determine how, when and what application of payments and credits, if any, shall be made on said indebtedness, obligations and liabilities, or any part of...