Industrial Inv. Corp. v. Rocca

• Decision Date: 13 June 1979
• Docket Number: No. 12547,12547
• Parties: INDUSTRIAL INVESTMENT CORPORATION, Plaintiff-Appellant, v. C. M. ROCCA, Defendant-Third Party Plaintiff-Respondent, v. J. Robert TULLIS, Third Party Defendant.
• Court: Idaho Supreme Court

Page 100

596 P.2d 100

100 Idaho 228

INDUSTRIAL INVESTMENT CORPORATION, Plaintiff-Appellant, v. C. M. ROCCA, Defendant-Third Party Plaintiff-Respondent, v. J. Robert TULLIS, Third Party Defendant.

No. 12547.

Supreme Court of Idaho.

June 13, 1979.

John C. Hepworth of Hepworth, Nungester & Felton, Buhl, for plaintiff-appellant.

Gerald L. Weston of Gigray, Miller, Downen & Weston, Caldwell, for defendant-third party plaintiff-respondent.

SHEPARD, Chief Justice.

This is an appeal from a judgment in an action in which Industrial Investment Corporation sought enforcement of loan guarantees made by Rocca. Judgment was issued in favor of Rocca and against enforcement of the guarantees. We affirm in part, reverse in part, and remand for further proceedings.

On June 1, 1965, plaintiff-appellant Industrial Investment Corporation (IIC), as a result of a written agreement, loaned $33,000 to Western Vegetable & Cooling Co. Western Vegetable is now a defunct corporation and not a party to this action. The principal of the loan was due on June 1, 1970. Interest on the loan was due every three months throughout the term. Defendant-respondent Curtis Rocca executed a personal guarantee of the loan. Rocca, a resident of California, was a shareholder and director of Western Vegetable. Jun Matsumoto, a resident of Idaho, was a shareholder, director and president of Western Vegetable until his death in October 1968. Matsumoto also executed a personal guarantee of the $33,000 loan. The Matsumoto estate is not a party to this action.

Third-party defendant J. Robert Tullis was a director and president of IIC until the filing of this action. As a result of the loan negotiations, Tullis was elected on May 7, 1965, a director and vice-president of Western Vegetable.

On May 2, 1966, IIC loaned an additional $7,000, to Western Vegetable. The due date of that loan is not clear from the record, but it was repaid. That loan was not guaranteed by Rocca.

As a result of another written agreement, on July 20, 1966, IIC loaned Western Vegetable an additional $30,000. That loan was also personally guaranteed by Rocca and Matsumoto. The total of loans made by IIC to Western Vegetable which were guaranteed by Rocca and Matsumoto then totaled $63,000.

On or about November 19, 1966, Western Vegetable sold some of its real property. Immediately thereafter, a $15,000 payment was made by Western Vegetable to IIC. Of that amount, $7,000 was applied to the liquidation of the May 2, 1966 loan (nonguaranteed), $6,872.66 was applied to reduce the July 20, 1966 loan of $30,000 (guaranteed by Rocca), and the remaining $1,127.34 was applied to the payment of accrued interest. Thereafter, a balance of $23,127.34 remained due on the July 20, 1966 loan. On December 31, 1966, a new five year note was executed by Western Vegetable for that balance due on the July 20, 1966 loan. That new note was due on December 31, 1971, and was personally guaranteed by Rocca and Matsumoto.

An annual meeting of the board of directors of Western Vegetable was held on May 19, 1967, at which Matsumoto was reelected president, Rocca vice president, and Tullis secretary-treasurer. Tullis was given control of the corporate records and it was determined that all checks should be written by either Tullis or one Irene Victory. Victory was an employee of the Trus Joist Corporation, which is a parent corporation of Tara Corporation. Tullis was a director and manager of Tara Corporation.

In August 1967, IIC loaned Western Vegetable an additional $5,000. That loan was not guaranteed by Rocca. On January 18, 1968, Western Vegetable issued a check to IIC which was signed by Tullis in the amount of $7,571.36. That amount was applied to pay off the August 1967 unguaranteed loan and the accrued interest on all the notes to that date.

In the early months of 1968, Western Vegetable continued to have financial difficulty and one creditor, Commercial Credit Corporation, was about to seize Western Vegetable's lettuce cooling machine, which was security for the debt owed Commercial Credit. According to some testimony, that seizure by the creditor would have resulted in substantial financial loss to Western Vegetable.

Tullis contacted Tara Corporation, of which he was director and manager, and discussed the possibility of refinancing that equipment of Western Vegetable. Tara was unwilling to enter into any financial transaction involving Western Vegetable unless IIC would guarantee such a financial arrangement. IIC, through Tullis, agreed to guarantee the transaction. Western Vegetable and Tara entered into an agreement whereby all of the assets of Western Vegetable were sold to Tara Corporation for $60,000. ¹ As part of the transaction, all those assets were leased back to Western Vegetable at 19 quarterly rent payments of $4,200, and one final payment of $1,396.01. Although not referred to in the Tara-Western Vegetable transaction documents, IIC orally guaranteed that transaction.

The agreement required that Western Vegetable prepay $8,400 in rental payments. Thus, Western Vegetable received a net amount of $51,600 from that transaction. Apparently, $5,346.51 was applied to liquidate the Commercial Credit Corporation debt and the security interest in the lettuce cooler. In January 1968, Western Vegetable's bank account had an overdraft in the amount of $4,000, and Tullis had covered that overdraft with his personal check. Upon the receipt of the money from the Tara transaction, Western Vegetable issued a check signed by and made out to Tullis for $4,125, to repay Tullis the $4,000 overdraft advance, plus interest. According to Rocca's testimony, he was unaware of that overdraft transaction.

Following the Tara transaction, Western Vegetable issued a check to IIC for $42,413.41. $23,127.34 was applied to the repayment of the entire outstanding principal balance of the December 31, 1966 note (which was personally guaranteed by Rocca). $17,000 of the amount was applied to the principal balance of the June 1, 1965 $33,000 loan (personally guaranteed by Rocca). Thus, a balance of $16,000 remained on the loans guaranteed by Rocca.

Rocca testified that during all the above mentioned times, he resided in California, that he had not been advised of any directors' meetings since 1967, and that the Tara transaction and the application of the funds resulting therefrom were all without his knowledge or approval. On the other hand, Tullis testified that although he had never personally informed Rocca of the Tara transaction, it was his understanding that Matsumoto had so informed Rocca.

In October 1968, Matsumoto died and all of the equipment of Western Vegetable, with the exception of the lettuce cooler, was repossessed by other creditors who held priority liens. Western Vegetable failed to make the equipment lease payments to Tara, and IIC paid Tara $48,600 on its oral guarantee of the Western Vegetable-Tara agreement. On payment of the guarantee amount, Tara transferred the lettuce cooler to IIC, who ultimately sold it in 1974 for.$19,000.

At trial it was argued that the guarantees made by Rocca should be extended to cover not only the $16,000 remaining on the loans made by IIC to Western Vegetable and guaranteed by Rocca, but also those amounts which IIC was required to pay under its guarantees of the Western Vegetable-Tara transaction. The trial court held that the guarantees made by Rocca could not be so extended and further concluded that a conflict of interest of its president Tullis was imputed to IIC, and that a court of equity should not enforce Any of the guarantees of Rocca. We again note that Tullis was president of IIC, as well as director and an officer of Western Vegetable, during the time of the repayment of the aforesaid loans to the creditors of Western Vegetable. Tullis was also a director and officer of Tara at the time of the Tara-Western Vegetable transaction and IIC's guarantee of that transaction.

We also note that Rocca brought suit against Tullis as a third party defendant alleging Tullis' breach of fiduciary duty toward the stockholders of Western Vegetable. As to that allegation, the trial court found in favor of Tullis. No appeal was taken from that ruling of the trial court.

At this point then we are required to examine the "conflict of interest" and "breach of fiduciary duty" allegations and findings in light of Rocca's status as a guarantor rather than a stockholder of Western Vegetable.

A guarantee is an undertaking or promise on the part of the guarantor which is collateral to a primary or principal obligation and binds the guarantor to performance in the event of non-performance of the principal obligor. Commercial Credit Corp. v. Chisolm Bros. Farm Equip. Co., 96 Idaho 194, 525 P.2d 976 (1974); Durant v. Snyder, 65 Idaho 678, 151 P.2d 776 (1944). It is a general rule that payment or satisfaction of a principal obligation discharges a guarantor and being once discharged a revival of the debt in any way will not renew his liability. Holcombe v. Solinger & Sons Co., 238 F.2d 495 (5th Cir. 1956); Continental Bank & Trust Co. v. Akwa, 58 Wis.2d 376, 206 N.W.2d 174 (1973); 38 C.J.S. Guaranty § 77. In addition, once a creditor has applied a payment to an...