Honolulu Federal Sav. and Loan Ass'n v. Murphy, 11921

• Decision Date: 12 February 1988
• Docket Number: No. 11921,11921
• Citation: 753 P.2d 807,7 Haw.App. 196
• Parties: HONOLULU FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff-Appellee, v. Thomas H. MURPHY and Grant E. Marsh, Defendants-Appellants, and John Does 1-20, Mary Roes 1-20, Doe Corporations 1-20, Doe Partnerships 1-20, Doe Associations 1-20, Doe Governmental Agencies 1-20, and Other Doe Entities 1-20, Defendants.
• Court: Hawaii Court of Appeals

Page 807

753 P.2d 807

7 Haw.App. 196

HONOLULU FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff-Appellee, v. Thomas H. MURPHY and Grant E. Marsh, Defendants-Appellants and John Does 1-20, Mary Roes 1-20, Doe Corporations 1-20, Doe Partnerships 1-20, Doe Associations 1-20, Doe Governmental Agencies 1-20, and Other Doe Entities 1-20, Defendants.

No. 11921.

Intermediate Court of Appeals of Hawai'i.

Feb. 12, 1988.

Syllabus by the Court

1. Where a written contract of guaranty is complete and unambiguous, the writing will be presumed to contain the entire agreement and parol or extrinsic evidence

is inadmissible to vary the terms of the written instrument.

2. Parol or extrinsic evidence is admissible to show that the execution of a guaranty was procured by fraud.

3. Fraud in the inducement is fraud which induces the transaction by misrepresentation of motivating factors.

4. To constitute fraudulent inducement sufficient to invalidate the terms of a contract, there must be (1) a representation of a material fact, (2) made for the purpose of inducing the other party to act, (3) known to be false but reasonably believed true by the other party, and (4) upon which the other party relies and acts to his damage.

5. To be actionable, the false representation must relate to past or existing material fact. Fraud cannot be predicated upon a statement which is promissory in its nature at the time it is made and which relates to future action or conduct. However, if the promise was made without the present intent to fulfill the promise, it will be actionable.

6. Unless the present state of mind is misstated, there is no misrepresentation. When a promise is made in good faith, with the expectation of carrying it out, the fact that it subsequently is broken gives rise to no cause of action for deceit or for equitable relief.

7. Where defendant has affirmatively interposed fraud in the inducement as a defense, in resisting plaintiff's motion for summary judgment defendant must place in the record affirmative evidence of plaintiff's fraudulent intent.

8. A written contract can subsequently be orally modified if all of the requisites of a valid or enforceable agreement are met. A requisite is that the modification must be supported by new consideration.

9. Plaintiff's agreement to forbear and defendant's agreement to provide certain information desired by plaintiff were mutual reciprocal promises and constituted good and sufficient consideration for a contract.

10. A guaranty agreement is not a negotiable instrument under Hawaii's Uniform Commercial Code, Hawaii Revised Statutes (HRS) Chapter 490 (1985).

11. Where the promissory note does not bear defendant's signature but expressly refers to a guaranty signed by defendant, the defendant-guarantor is a "party to the instrument" within the meaning of HRS § 490:3-606(1)(b), which provides for the discharge of "any party to the instrument to the extent that without such party's consent the holder ... [u]njustifiably impairs any collateral for the instrument given by or on behalf of the party[.]"

12. HRS § 490:3-606(1)(b) imposes essentially the same duties on secured holders in possession of the collateral as HRS § 490:9-207 imposes on secured parties in possession of the collateral.

13. There is no unjustifiable impairment of collateral unless there is a duty, a breach of that duty, and consequential damages.

14. Under HRS § 490:9-207(1), the pledgee's duty of reasonable care is confined to the physical care of the collateral, and he is not liable for a decline in the value of pledged instruments.

James M. Sattler (Frederick W. Rohlfing, III with him on the briefs), Honolulu, for defendant-appellant Grant E. Marsh.

Susan Oki Mollway (Stanley K.W. Chong with her on the brief, Cades Schutte Fleming & Wright, of counsel), Honolulu, for plaintiff-appellee.

Before BURNS, C.J., and HEEN and TANAKA, JJ.

TANAKA, Judge.

In an action involving the collection on a promissory note and the enforcement of a guaranty for the repayment of the note, defendant Grant E. Marsh (Marsh), the guarantor, appeals the summary judgment in favor of plaintiff Honolulu Federal Savings and Loan Association (Honfed), the payee on the note. Since there are genuine issues of material fact regarding a defense raised by Marsh, we hold that the lower court improperly granted the summary judgment. We therefore vacate the judgment and remand the case for further proceedings.

I. FACTS

On September 28, 1984, defendant Thomas H. Murphy (Murphy) signed a promissory note for a $400,000 personal loan from Honfed. The note was secured by a pledge of 5,700 shares of stock of M.S.M. & Associates, Inc. (MSM) and a third mortgage covering real property in Colorado. Murphy was the president of MSM. The note required Murphy to pay interest only each month from November 20, 1984, $16,666.67 plus interest per month from October 20, 1985, and the principal balance and interest in full on September 28, 1986. On October 3, 1984, Marsh signed a guaranty agreement (Guaranty) for the repayment of Murphy's note. Murphy defaulted on the note and Honfed filed a complaint for collection against Murphy and Marsh on December 19, 1985. The foregoing facts are not in dispute.

Murphy answered the complaint and counterclaimed, alleging that Honfed's breach of an agreement to loan MSM $30 million ¹ that was to be used for the development of the Ewa Marina Community Project, ² rendered Murphy incapable of repaying his $400,000 loan and caused him, inter alia, "severe and substantial mental anguish and emotional distress." Record, Vol. 1 at 22.

Marsh answered the complaint and cross-claimed, seeking a judgment against Murphy if Honfed was entitled to a judgment against Marsh. The answer also alleged Honfed's agreement to loan $30 million to MSM which Honfed had breached.

Honfed's motion for partial summary judgment ³ against Murphy and Marsh was granted on October 1, 1986. After the lower court denied Marsh's motion for reconsideration and certified the summary judgment as to its finality under Hawaii Rules of Civil Procedure (HRCP) Rule 54(b), Marsh timely appealed. ⁴

Marsh contends on appeal that the granting of summary judgment was error because there are genuine issues of material fact ⁵ regarding the following affirmative defenses he had raised:

1. Honfed had fraudulently induced him to sign the Guaranty by its representation to loan $30 million to MSM;

2. Honfed had fraudulently induced him to sign the Guaranty by its representation that it would seek to recover on the collateral securing Murphy's loan first before proceeding on the Guaranty;

3. Honfed had modified the Guaranty by agreeing to conclude foreclosure on the third mortgage security before proceeding against Marsh; and

4. Honfed had impaired the value of the pledged MSM stock by breaching its agreement to loan $30 million to MSM, thereby discharging Marsh in whole or in part from performing under the Guaranty.

We hold that there were no genuine issues of material fact and Honfed was entitled to a judgment as a matter of law as to defenses 1, 2, and 4, but there were genuine issues of material fact regarding defense 3. We will discuss each of these defenses in order.

II. FRAUDULENT INDUCEMENT--THE MSM LOAN

Marsh initially claims that as indicated in the affidavits in the record, on March 23, 1984, Honfed orally agreed to loan $30 million to MSM, of which he had knowledge because he was a director of MSM. Marsh argues that Honfed made this loan commitment when it "did not have the resources to fund such a loan," and therefore "Honfed either made a representation that it knew was false or made a representation without knowledge whether the representation was true or false[.]" Consequently, Marsh concludes that Honfed's representation which he relied on in signing the Guaranty was fraud in the inducement, and the Guaranty is void.

Marsh contends that there are genuine issues of material fact regarding this defense and Honfed was not entitled to a summary judgment as a matter of law. We do not agree.

A.

Honfed's response is that since the Guaranty is an unambiguous, integrated written instrument, the parol evidence rule precludes Marsh from using extrinsic evidence to contradict, defeat, or modify its meaning or legal effect.

The general rule is as stated by Honfed. Where a written contract of guaranty "is complete and not uncertain or ambiguous, the writing will be presumed to contain the entire agreement, and parol or extrinsic evidence is inadmissible to vary the terms of the written instrument." 38 Am.Jur.2d Guaranty § 124 at 1130 (1968). The rule has been "justified on the basis of reliance by the parties on the written document, and that to remove this reliance would destroy the confidence on which modern business has been built." Id. at 1131. See also Akamine & Sons, Ltd. v. American Sec. Bank, 50 Haw. 304, 309, 440 P.2d 262, 266 (1968).

However, where it appears that a written agreement has been "conceived in fraud[,]" the parol evidence rule is inapplicable. Cosmopolitan Fin. Corp. v. Runnels, 2 Haw.App. 33, 40, 625 P.2d 390, 396 (1981). Parol or extrinsic evidence is admissible "to show that execution of the guaranty was procured by fraud[.]" 38 Am.Jur.2d Guaranty § 124 at 1132.

Here, Marsh claims that he was fraudulently induced to sign the Guaranty. Consequently, he is not barred from the use of parol or extrinsic evidence to prove this defense.

We next consider the elements of fraud in the inducement.

B.

"Fraud in the inducement ⁶ is fraud which 'induces the transaction by misrepresentation of motivating factors[.]' " Adair v. Hustace, 64 Haw. 314, 320 n. 4, 640 P.2d 294, 299 n. 4 (1982) (quoting H. Dobbs, Remedies § 9.6 at 645 (1973)) (footnote added). We have stated:

To constitute fraudulent inducement sufficient to invalidate the terms of a contract, there must be (1) a representation of a material fact, (2) made for the...