Goeke v. Merchants Nat. Bank and Trust Co. of Indianapolis, 1-883A271

Decision Date21 August 1984
Docket NumberNo. 1-883A271,1-883A271
Citation467 N.E.2d 760
PartiesRobert W. GOEKE, Defendant-Appellant, v. MERCHANTS NATIONAL BANK AND TRUST COMPANY OF INDIANAPOLIS, Plaintiff-Appellee.
CourtIndiana Appellate Court

Michael V. Gooch, Harrison & Moberly, Indianapolis, Peter D. Shumacker, Shumacker & Amick, Greenfield, for defendant-appellant.

John D. Nell, Daniel D. Trachtman, Wooden, McLaughlin & Sterner, Indianapolis, for plaintiff-appellee.

NEAL, Presiding Judge.

STATEMENT OF THE CASE

Defendant-appellant, Robert W. Goeke (Goeke), appeals a judgment rendered by the Hancock Circuit Court in favor of plaintiff-appellee, Merchants National Bank and Trust Company of Indianapolis (Merchants), on Goeke's continuing limited guaranty.

We affirm in part and reverse in part.

STATEMENT OF THE FACTS

James P. Farley (Farley) and Goeke were partners in enterprises which involved land development and construction of apartment complexes named Arrowood, Tomahawk and Tippecanoe Village. Farley had other such enterprises called Lodestar, Thunderhawk, Aztec and Mohawk. In financing the enterprises, Farley and Goeke dealt extensively with Merchants over a course of years. Throughout that period, Farley negotiated the loans, then took whatever documents necessary to Goeke for signature, and returned them to Merchants. The documents even included a mortgage on Goeke's personal residence. One of the transactions was a note by the entity Lodestar to Merchants in the amount of $96,500.00 on which Goeke was a maker and endorser; these acts had the effect of making him a guarantor. That note, which was a renewal of past indebtedness, was secured by a pledge of corporate stock owned by Goeke. In connection with the Lodestar note, Goeke executed to Farley an unlimited power of attorney which remained unrevoked at all times relevant. The Lodestar note remained unpaid on January 9, 1975. It appeared at that time that Farley had begun to have financial problems with his numerous entities, and all of the events which thereafter occurred appear to be unsuccessful efforts to avoid a collapse.

On January 9, 1975 a trust, designated as 1903, was created by Farley and his wife, Sharon, naming Lake County Trust Company as trustee and in which the Farleys remained beneficiaries. Upon direction of the beneficiaries, the trustee was empowered to execute notes and mortgages. On the same day as its creation, 1903 took title to 18.5 acres of real estate referred to as "Tomahawk Commercial Land" located in On January 13, 1975, in addition to the Farleys' guaranty, Goeke executed a "Continuing Limited Guaranty" to Merchants which reads as follows:

Marion County, Indiana. Pursuant to the direction of the beneficiaries, 1903 executed a note to Merchants in the amount of $310,072.21 on January 13, 1975, which was secured by a mortgage containing a future advance clause on the Tomahawk property, due to mature on June 13, 1975. On January 15, 1975, a second note was executed by 1903 to Merchants in the amount of $54,927.79, which matured on June 15, 1975. These transactions, totaling $365,000.00, were a refinancing of a number of Farley-Goeke debts which included the Lodestar note.

"CONTINUING LIMITED GUARANTY

In consideration of credit which MERCHANTS NATIONAL BANK & TRUST COMPANY OF INDIANAPOLIS ('Merchants') may from time to time extend to Lake County Trust Company, as Trustee under a Trust Agreement dated January 9, 1975, known as Trust # 1903 ('Borrower'), the undersigned hereby individually, jointly and severally, and unconditionally guarantee to Merchants its successors and assigns, the payment when due, without presentment or demand, protest, or notice of dishonor, and with a right of set-off against the accounts of the undersigned with Merchants, together with costs of collections and reasonable attorneys' fees and without relief from valuation or appraisement laws, of the principal of and interest on all present and future indebtedness or obligations incurred by Borrower to Merchants in accordance with the terms and conditions of such indebtedness or obligations and all extensions or renewals thereof, whether evidenced by promissory notes, checks, drafts, bills of exchange, overdrafts, open accounts or otherwise.

This guaranty is executed under and shall be construed in accordance with the laws of the State of Indiana.

Notice of the acceptance of this Guaranty by Merchants is hereby waived by the undersigned. This guaranty may be terminated by the undersigned as to future indebtedness or obligations of Borrower to Merchants after the date of receipt by Merchants at its principal banking offices of written notice from the undersigned.

Notwithstanding the foregoing, the individual liability of each of the undersigned for indebtedness or obligations of Borrower to Merchants shall in no event exceed the sum of Ninety-Six Thousand, Five Hundred and No/100--Dollars ($96,500.00)."

Thereafter, the $96,500.00 Lodestar note was cancelled and the collateral returned. The guaranty was prepared by Merchants and given to Farley, who obtained Goeke's signature and returned it to Merchants. Neither the guaranty nor the power of attorney was ever revoked.

The notes of January 13 and January 15 fell into default in the latter part of June, 1975. Pursuant to work out negotiations, Merchants extended the credit. A new note dated September 19, with a due date of December 18, 1975, was executed by 1903 to Merchants in the amount of $362,988.32, representing the original obligation less $2,011.68 previously paid on principal. That note likewise fell into default after maturity and on May 13, 1980, a judgment on the notes was entered as follows:

                Principal      $362,988.32
                Interest        193,394.11
                Attorney Fees    15,000.00
                               -----------
                TOTAL          $571,382.43
                

The January 13, 1975 mortgage was foreclosed and Merchants purchased the Tomahawk property at the Sheriff's sale for $75,000.00.

During the progress of the foregoing events, back in August or September, 1975, Farley managed to sell one acre of the Tomahawk property for $45,000.00, and Merchants released the mortgage on that parcel. The proceeds were applied as follows:

                Interest on the two
                  notes (January
                  13 and 15, 1975)   $28,912.42
                Taxes and attorney
                  fees                 5,075.90
                Principal              2,011.68
                Farley's personal
                  debt on office
                  building             9,000.00
                

Also, in November, 1975, Merchants became obligated to pay an irrevocable letter of credit issued to Guardian Mortgage Investors in the amount of $360,000.00 to finance Farley's enterprises. On December 12, 1975, pursuant to an agreement with Farley, 1903 executed a subsequent mortgage on the Tomahawk property to secure the letter of credit obligation. There is no evidence that the transaction altered, impaired, or subordinated the January 13, 1975 mortgage. There is also no evidence that Goeke was consulted, notified, nor was his personal consent obtained for the September 19 note, the sale of the one acre, and the December 12 mortgage. The trial court found that consent was given for these transactions through Farley and Steven Cohen, an attorney, both acting as authorized agents of Goeke.

The trial court entered a judgment against Goeke on his guaranty as follows:

                Principal       $96,500.00
                Attorney Fees    36,000.00
                Interest         55,118.65
                               -----------
                TOTAL          $187,618.65
                

ISSUES

Goeke raises the following issues on appeal, restated by us as follows:

I. (a) Whether he, as a guarantor or surety, was discharged when the principal gave and the creditor took the new extension note with altered principal and security, maturity dates, and terms of payment, without his consent.

(b) Whether he was discharged by the issuance of the second mortgage on Tomahawk property, which mortgage created a lien for other debts not incurred by 1903 thereby diluting and devaluing the security.

II. Whether he was discharged as guarantor because the collateral was impaired by the sale of the one acre and the imposition of the second mortgage without his consent.

III. Whether the court erred in finding an agency relationship between Goeke and Farley and Cohen.

IV. Whether an enforceable guaranty failed to come into existence because of a lack of consideration.

V. Whether he could have a liability larger than the principal, where the principal had no obligation under the trust agreement.

VI. Whether he is liable for any amount in excess of $96,500.00.

DISCUSSION AND DECISION
Issue I: Modification of Obligation.

Goeke argues that any binding change in the principal contract to which the guarantor does not consent discharges the latter from liability. He then shows that the September 19 note in the amount of $362,988.32 altered the terms of the January 13 and 15 notes in that: (1) interest was payable at maturity rather than monthly; (2) maturity was extended to December 18, 1975; (3) the principal balance was reduced from $365,000.00 to $362,988.32; (4) interest was reduced from 5% over prime to 1/2% over prime; and (5) the debt was secured by one acre less collateral. As a beginning point of the discussion, we examine some relevant rules relating to contracts of guaranty.

Loudermilk v. Casey, (1982) Ind.App. 441 N.E.2d 1379, discusses the extent of the liability of a guarantor:

"The extent of a guarantor's liability is determined by the terms of his contract. Hamilton v. Meiks, (1936) 210 Ind. 610, 4 N.E.2d 536; Crouch and Son v. Parker, (1919) 188 Ind. 660, 125 N.E. 453; Orange-Co., Inc. v. Brown, (1979) Ind.App. , 393 N.E.2d 192. The interpretation of a guaranty is governed by the same rules applicable to other contracts. American Fletcher National Bank & Trust Company v. Pavilion, Inc., (1982) Ind.App., 434 N.E.2d 896; Orange-Co., supra. In the absence of ambiguity, the construction of a guaranty is a question of law. Pavilion, supra; Huntington [Mutual Ins. Co. v. Walker, (1...

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