Gillespie v. DeWitt, 808SC810

• Decision Date: 04 August 1981
• Docket Number: No. 808SC810,808SC810
• Court: North Carolina Court of Appeals
• Parties: , 32 UCC Rep.Serv. 480 C. Edward GILLESPIE, Plaintiff, v. David DeWITT, Defendant and Third-Party Plaintiff, v. Daniel E. KELLY and K & G Health Care Industries, Inc., Third-Party Defendants.

Page 736

280 S.E.2d 736

53 N.C.App. 252, 32 UCC Rep.Serv. 480

C. Edward GILLESPIE, Plaintiff, v. David DeWITT, Defendant and Third-Party Plaintiff, v. Daniel E. KELLY and K & G Health Care Industries, Inc.,

Third-Party Defendants.

No. 808SC810.

Court of Appeals of North Carolina.

Aug. 4, 1981.

Freeman, Edwards & Vinson by George K. Freeman, Jr., Goldsboro, for plaintiff-appellee.

VanCamp, Gill & Crumpler by James R. VanCamp and Douglas R. Gill, Southern Pines, for defendant-appellant.

MORRIS, Chief Judge.

Defendant's sole assignment of error is to the trial court's granting plaintiff's motion for summary judgment. G.S. 1A-1, Rule 56(c) specifies that summary judgment should be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that any party is entitled to a judgment as a matter of law." We need not review again the familiar standards for this motion. For a comprehensive summary of the law with respect to Rule 56 see Justice Moore's opinion in Kessing v. Mortgage Corp., 278 N.C. 523, 180 S.E.2d 823 (1971). It is for us to determine whether the evidence before the trial court created a factual issue that was so essential that the party against whom it was resolved should not prevail, or if a factual issue existed of such a nature as to affect the outcome of the action, or if a factual issue existed of such a nature as to constitute a legal defense. If none of these "situations" existed, the trial court's allowance of plaintiff's motion was correct and will be affirmed.

Several of defendant's arguments rely on and refer in part to the rules of the Uniform Commercial Code, G.S. 25-1-101 et seq. Defendant's references to the U.C.C. are misplaced in this instance. The law of contracts rather than the U.C.C. properly governs the qualities and effects of this guaranty contract. G.S. 25-3-104 sets out the requisite elements which a writing must "possess" in order to be negotiable and, thus, come within the scope of the rules and regulations of the U.C.C. To be a negotiable instrument a writing must be signed by the maker or drawer, contain an unconditional promise or order to pay a sum certain in money, contain no other promise, order, obligation or power given by the maker or drawer except as authorized by G.S. Chapter 25, Article 3, be payable on demand or at a definite time, and be payable to order or to bearer. G.S. 25-3-104. The guaranty contract before us for consideration in this case does not fulfill all of these statutory requirements.

In a recent case analogous to the one before us, Trust Co. v. Creasy, 301 N.C. 44, 269 S.E.2d 117 (1980), the Supreme Court, per Justice Britt, held that a guaranty agreement substantially similar to that in the case sub judice was not a negotiable instrument. The Court based its determination in Creasy upon the absence from the contract of guaranty of two of the elements of negotiability required by G.S. 25-3-104. The Court held that the guaranty agreement did not meet the requirement that it delineate "a sum certain in money." This was so because the document in question in Creasy called for a ceiling of $35,000 on the amount of the principal debtor's indebtedness on which the guarantor agreed to be liable. The guaranty agreement did not specify the actual amount of liability within itself. Resort had to be made to external sources of information to determine the extent of the guarantor's actual liability. Justice Britt stated For the requirement of a sum certain to be met, it is necessary that at the time of payment the holder is able to determine the amount which is then payable from the instrument itself, with any necessary computation, without any reference to an outside source. Official Comment, G.S. § 25-3-106 (1965); Wattles v. Agelastos, 27 Mich.App. 624, 183 N.W.2d 906 (1970). It is necessary for a negotiable instrument to bear a definite sum so that subsequent holders may take and transfer the instrument without having to plumb the intricacies of the instrument's background. Cobb Bank & Trust Co. v. American Mfr's. Mut. Ins. Co., 459 F.Supp. 328 (N.D.Ga.1978)

Such an absence is enough by itself to foreclose any finding that the paper at issue is negotiable.

301 N.C. at 51, 269 S.E.2d at 122. The guaranty agreement now before us resembles the document in Creasy. It is an instrument separate from any specific note, obligation or instrument which evidences the principal debtor's indebtedness. It was not executed simultaneously with or attached to any such instrument. Nor does it refer to any specific instrument which evidences an obligation of the principal debtor. The guaranty agreement guarantees the payment of "any and all indebtedness, liabilities and obligations of every nature and kind of said Debtor to the extent of $30,000." The guaranty does not specify the amount of liability that is to be paid. It only establishes a ceiling on the amount of the guarantor's liability.

For the reasons stated in Creasy, this instrument does not supply the requisite certainty in the amount or sum due. Therefore, it is not a negotiable instrument.

The parties to this lawsuit do not contend that this instrument represents any form of agreement other than a contract of guaranty. The document is labeled "Loan Guaranty Agreement". However, labels are not necessarily binding. The substance of the transaction controls. Thompson v. Soles, 299 N.C. 484, 263 S.E.2d 599 (1980); In Re Will of Pendergrass, 251 N.C. 737, 112 S.E.2d 562 (1960).

A guaranty is a promise to answer for the payment of some debt, or the performance of some duty, in case of the failure of another person who is himself liable in the first instance for such payment or performance. Cowan v. Roberts, 134 N.C. 415, 46 S.E. 979 (1904).

O'Grady v. Bank, 296 N.C. 212, 220, 250 S.E.2d 587, 593 (1978). A guarantor's liability arises at the time of the default of the principal debtor on the obligation or obligations which the guaranty covers. Milling Co. v. Wallace, 242 N.C. 686, 89 S.E.2d 413 (1955); Trust Co. v. Clifton, 203 N.C. 483, 166 S.E. 334 (1932). A guaranty of payment is an absolute promise by the guarantor to pay a debt at maturity if it is not paid by the principal debtor. This obligation is independent of the obligation of the principal debtor, "and the creditor's cause of action against the guarantor ripens immediately upon the failure of the principal debtor to pay the debt at maturity." Investment Properties v. Norburn, 281 N.C. 191, 195, 188 S.E.2d 342, 345 (1972). The language of the agreement signed by defendant created an unconditional promise on defendant's part to pay the bank any sums due on the principal debtor's (K & G's) indebtedness at maturity if not paid by the principal debtor. The guaranty agreement provides:

We hereby jointly and severally guarantee the full and prompt payment to said Bank at maturity, and at all times thereafter, and also at the time hereinafter provided, of any and all indebtedness, liabilities and obligations of every nature and kind of said Debtor to said Bank, and every balance and part thereof, whether now owing or due, or which may hereafter, from time to time, be owing or due, and howsoever heretofore or hereafter created or arising or evidenced, to the extent of $30,000.

This language was sufficient to create a guaranty of payment.

The enforceability of the guarantor's promise is determined primarily by the law of contracts. However, a special law of guaranty has developed to answer specific problems inherent in guaranty agreements. O'Grady v. Bank, supra.

Initially, we are confronted with the question of the validity of defendant's guaranty contract. Defendant contends that this guaranty contract was not based upon any consideration. "It is well-settled law in this State that in order for a contract to be enforceable it must be supported by consideration." Investment Properties v. Norburn, supra, at 195, 188 S.E.2d at 345, and cases cited therein. It is unnecessary that the consideration be full or adequate. Any legal consideration will be sufficient to support the guaranty. Cowan v. Roberts, 134 N.C. 415, 46 S.E. 979 (1904).

Defendant suggests that the testimony of the bank officer, J. Newton Thrash, Jr., who administered the notes and guaranty in question created an issue as to whether the guaranty was entirely gratuitous or based upon consideration. The essence of Mr. Thrash's testimony was that defendant wanted to guarantee the two notes which were collateralized by plaintiff's securities and debenture so that plaintiff would not lose his collateral or have to pay the notes. This was being done so that defendant and third-party defendant Kelly could persuade plaintiff to sell them his interest in K & G. Mr. Thrash testified that, "the guaranty itself did not enter into the original decision to loan the money, because the loan was made prior to the guaranty being executed." He also stated: "I am of the opinion that the bank did not require that guaranty for any purpose in connection with these notes. We obviously were holding collateral sufficient to cover both of these notes, and Dr. DeWitt's guaranty really didn't add anything to our position at that point."

The guaranty contract was between defendant-guarantor and the bank-obligee. Consideration for this contract passed between these two parties and not between the guarantor and some third-party, here plaintiff. Mr. Thrash's testimony indicates that his bank did not solicit or need the extra security for these two notes. The reason defendant executed this guaranty was to procure plaintiff's ownership interest in K & G.

When the guaranty contract is shown to have been executed as a part of a transaction which created the guaranteed debt, it is not essential to recovery on the guaranty that the guaranty shall have been supported by consideration...