International Multifoods Corp. v. Mardian

• Decision Date: 22 October 1985
• Docket Number: Nos. 14868,14878,s. 14868
• Citation: 379 N.W.2d 840
• Parties: INTERNATIONAL MULTIFOODS CORPORATION, Plaintiff and Appellee, v. Carlyle F. MARDIAN, Raymond S. Gruby, Joyce Gruby, Robert J. Wagner, and Paulette M. Wagner, Defendants and Appellants. . Considered on Briefs
• Court: South Dakota Supreme Court

Page 840

379 N.W.2d 840

INTERNATIONAL MULTIFOODS CORPORATION, Plaintiff and Appellee, v. Carlyle F. MARDIAN, Raymond S. Gruby, Joyce Gruby, Robert J Wagner, and Paulette M. Wagner, Defendants and Appellants.

Nos. 14868, 14878.

Supreme Court of South Dakota.

Considered on Briefs Oct. 22, 1985.

Decided Dec. 31, 1985.

Charles B. Kornmann of Richardson, Groseclose, Kornmann, Wyly, Wise & Klinkel, Aberdeen, for plaintiff and appellee.

Harvey C. Jewett and Joseph P. Barnett of Siegel, Barnett & Schutz, Aberdeen, for defendants and appellants.

HENDERSON, Justice.

ACTION/PARTIES

This is an appeal arising from a summary judgment granted to a plaintiff in, essentially, a collection lawsuit on promissory notes for hog feed sold and delivered--and thereafter consumed by defendants' hogs. The law of guaranty is most pertinent to this appeal. We affirm.

Plaintiff-appellee is International Multifoods Corporation (Multifoods). Multifoods is a Delaware corporation and is involved in the business of producing and manufacturing animal feeds. Defendants-appellants are Carlyle F. Mardian, Raymond S. Gruby, Joyce Gruby, Robert J. Wagner, and Paulette M. Wagner (defendants). Defendants are the officers and sole stockholders of W.M.G. Pork Farms, Inc. (W.M.G.). W.M.G. is a South Dakota corporation engaged in the business of swine production near Roslyn, Day County, South Dakota. Robert J. Wagner (Wagner) is the president of W.M.G. and manages its operations on a daily basis.

FACTS

In July 1981, Multifoods, through its sales agent and local dealer at the Roslyn Elevator, convinced Wagner to switch from the swine feed concentrate W.M.G. was then using, to Multifoods' swine feed concentrate. The Multifoods swine feeder concentrate was represented by Multifoods to be a complete swine supplement which required no additives. On July 20, 1981, W.M.G. executed a Finance Credit Application and Agreement with the Roslyn Elevator which gave W.M.G. a maximum credit line of $9,000. On September 15, 1981, the Board of Directors of W.M.G., by resolution, authorized itself to borrow from Multifoods and give the latter such mortgages, security agreements, or other documents as were required. Also, on September 15, 1981, the defendants individually executed documents entitled "Guaranty." These documents provided, inter alia:

In consideration of credit to be extended by [Multifoods] ... to WMG Pork Farms Inc. ("Debtor") the undersigned jointly and severally guarantee to [Multifoods] the prompt payment at maturity, without deduction for any claim of setoff or counterclaim of Debtor or loss of contribution from any other guarantors, the full amount of all indebtedness, direct or indirect, absolute or contingent, secured or unsecured, which may now or hereafter exist or be owing from Debtor to [Multifoods], including interest thereon and any expenses of collection thereof, including court costs and attorneys' fees.

This is an absolute, unlimited guaranty and liability hereunder shall in no way be affected or diminished by extensions, renewals, modifications, compromises or releases made by [Multifoods] of the indebtedness in whole or in part and [Multifoods] shall not be obliged to give notice thereof to any of the undersigned nor to proceed first against Debtor or against any other guarantors or against collateral given as security for payment of the indebtedness. (Emphasis supplied.)

In the Fall of 1982, Wagner noticed that W.M.G.'s herd of breeding sows was experiencing breeding problems. Sows were not becoming pregnant. Litters were unhealthy and smaller in size and many pigs died at birth or shortly thereafter. These problems increased at W.M.G. until the Spring of 1983. Between February 2, 1983, and April 20, 1983, W.M.G. received $8,868.40 of swine feeder concentrate on credit from Multifoods under the terms of the Finance Credit Application and Agreement. These deliveries are evidenced by invoices and secured by promissory notes executed by W.M.G. Said sum of $8,868.40 has not been paid and is the subject of the present action.

In the Summer of 1983, after expert consultation, Wagner began adding Vitamin A to Multifoods' swine concentrate and the breeding problems thereafter ceased. In October 1983, Lyle Petersen (Petersen), a feed and nutrition specialist employed by A & L Mid West Agricultural Laboratories, Inc., of Omaha, Nebraska, tested samples of Multifoods' swine concentrate supplied by Wagner. Petersen's conclusion, reached from the testing, was that the feed samples "were deficient in Vitamin A, and so excessively deficient in Vitamin A that the feed is defective and clearly below the standard Vitamin A levels required in the swine feed industry."

On November 8, 1983, Multifoods filed suit against the defendants individually, under the terms of the Guaranty documents executed on September 15, 1981, for the $8,868.40 of swine concentrate delivered to W.M.G. Defendants answered and counterclaimed for $88,000.00. Defendants' counterclaim asserted, inter alia, that W.M.G.'s claims against Multifoods had been assigned to them; that Multifoods negligently produced a swine product deficient in Vitamin A; that Multifoods breached its implied warranty that its product was a complete product which contained all the nutrients and foodstuffs for healthy and fertile swine; that Multifoods breached its express warranty that its product was a complete supplement which required no additives; that Multifoods was strictly liable for producing an unfit and defective product containing insufficient Vitamin A and inadequate warnings and instructions; and that because of the defective feed and breached warranties, there has been a breach of contract and failure of consideration which bans Multifoods from recovering for the swine concentrate delivered to W.M.G. and guaranteed by defendants.

Multifoods moved for partial summary judgment as to the matters alleged in its complaint. The trial court granted Multifoods partial summary judgment, denied Multifoods' request for attorney fees, and ordered that defendants be allowed to proceed upon their counterclaim. Multifoods thereafter moved to be relieved from that portion permitting defendants to proceed upon their counterclaim. An action had been instituted in Day County, South Dakota, by the Roslyn Elevator against W.M.G. in which the latter was asserting its claims against Multifoods as third-party defendant. The trial court granted Multifoods' motion to be relieved and the counterclaim is not before us. Appeal from summary judgment is taken.

DECISION

I.

ARE GUARANTORS, SUED INDIVIDUALLY, ENTITLED TO RAISE THE PRINCIPAL DEBTOR'S DEFENSES ARISING OUT OF THE UNDERLYING CONTRACT? CIRCUMSTANCES OF THIS CASE DO NOT SO WARRANT.

"A guaranty is a promise to answer for the debt, default, or miscarriage of another person." SDCL 56-1-1. A guaranty creates a secondary liability or responsibility to pay only if another does not. Western Petroleum Co. v. First Bank Aberdeen, 367 N.W.2d 773, 776-77 (S.D.1985). Under SDCL 56-1-18, the guarantor's obligation "must be neither larger in amount nor in other respects more burdensome than that of the principal, and if in its terms it exceeds it, it is reducible in proportion to the principal obligation." Additionally, a guaranty is conditioned upon the underlying obligation between the principal debtor and the creditor, and thus, the guarantor is liable only in the event and to the extent that the principal debtor is liable. Richter v. Industrial Finance Co., Inc., 88 S.D. 466, 474-75, 221 N.W.2d 31, 36 (1974). See also, Midcontinent Broadcasting Co. v. AVA Corp., 329 N.W.2d 378, 381 (S.D.1983), and 38 Am.Jur.2d Guaranty Secs. 51 and 77 (1968).

Defendants contend that W.M.G., the principal debtor, is not liable to Multifoods because Multifoods provided defective swine concentrate and breached implied and express warranties; therefore, the defendants maintain they are not liable as guarantors. Defendants, in sum, are asserting that as guarantors, they may raise their principal debtor's defenses in order to defeat guaranty liability.

Multifoods advocates that defendants cannot raise W.M.G.'s defenses because (1) the guaranties were absolute; (2) the guaranties were not guaranties but were instead letters of credit for which defendants are primarily liable; and (3) the defendants, through the language of the guaranties, waived the right and ability to assert the principal's defenses. We address the parties' contentions seriatim.

If the contract between the principal and the creditor is unlawful, a guarantor is not liable. SDCL 56-1-19. However, notwithstanding any mere personal disability of the principal, under SDCL 56-1-19, the guarantor is liable even though the disability is such so as to make the contract void against the principal. As for whether a guarantor can raise the principal's defenses of breach of warranty or failure of consideration, some courts have held the guarantor cannot, see 38 C.J.S. Guaranty Sec. 88, at 1261 (1943), and some courts have held the guarantor can. See Deep South Services, Inc. v. Wade, 248 Ga. 80, 281 S.E.2d 561 (1981). We view the principal debtor and guarantors in this case as really one in the same persons.

In Walcutt v. Clevite Corp., 13 N.Y.2d 48, 55, 241 N.Y.S.2d 834, 838, 191 N.E.2d 894, 898 (1963), the New York Court of Appeals held that a guarantor could assert the principal's defense of failure of consideration where the principal was a corporation and the guarantor was its president and sole stockholder who was also involved in all negotiations. In the case at bar, the guarantors--the five defendants--are the officers and sole stockholders of the principal debtor W.M.G. Under these circumstances, absent any infirmities hereinafter discussed, this Court could very well hold that defendants, as guarantors, may therefore raise their principal's defenses to liability.

As for Multifoods' contentions, an absolute...