Iola State Bank v. Biggs

• Decision Date: 29 April 1983
• Docket Number: No. 55134,55134
• Citation: 233 Kan. 450,662 P.2d 563
• Court: Kansas Supreme Court
• Parties: The IOLA STATE BANK, Appellant, v. Joe BIGGS, Jan Biggs, Biggs Feed & Grain, Inc., and Dolores M. Bybee, Appellees.

Page 563

662 P.2d 563

233 Kan. 450

The IOLA STATE BANK, Appellant, v. Joe BIGGS, Jan Biggs, Biggs Feed & Grain, Inc., and Dolores M. Bybee, Appellees.

No. 55134.

Supreme Court of Kansas.

April 29, 1983.

Syllabus by the Court

1. A guaranty is a contract between two or more persons, founded upon consideration, by which one person promises to answer to another for the debt, default or miscarriage of a third person, and, in a legal sense, has relation to some other contract or obligation with reference to which it is a collateral undertaking. Trego WaKeeney State Bank v. Maier, 214 Kan. 169, Syl. p 2, 519 P.2d 743 (1974).

2. A contract of guaranty is to be construed, as other contracts, according to the intention of the parties as determined by a reasonable interpretation of the language used, in the light of the attendant circumstances. After the intention of the parties or the scope of the guarantor's undertaking has been determined by application of general rules of construction, the obligation is strictly construed and may not be extended by construction or implication. Trego WaKeeney State Bank v. Maier, 214 Kan. 169, Syl. p 3, 519 P.2d 743 (1974).

3. The original contract of the guarantor's principal is not the guarantor's contract, and extinguishment of the principal's contract extinguishes the guarantor's obligation at the same time.

4. Equitable estoppel is the effect of the voluntary conduct of the person whereby he is precluded, both at law and in equity, from asserting rights against another person relying on such conduct. A party asserting equitable estoppel must show that another party, by its acts, representations, admissions, or silence when it has a duty to speak, induced it to believe certain facts existed. It must show it rightfully relied and acted upon such belief and would now be prejudiced if the other party were permitted to deny the existence of such facts. Cosgrove v. Young, 230 Kan. 705, Syl. p 6, 642 P.2d 75 (1981).

5. Generally, attorney's fees are not allowable as damages in the absence of a statute. Lines v. City of Topeka, 223 Kan. 772, Syl. p 7, 577 P.2d 42 (1978).

6. Where a contract for payment of attorney's fees in a note is prohibited by K.S.A. 58-2312, a contract for payment of attorney's fees contained in a guaranty agreement for the note is also prohibited by the same statute.

Charles N. Henson of Eidson, Lewis, Porter & Haynes, Topeka, argued the cause, and Anne L. Baker, Topeka, of the same firm, and Toland & Thompson, Iola, were with him on the brief for the appellant.

Herbert A. Marshall of Marshall, Hawks, Hendrix, Schenk & Nichols, Topeka, argued the cause, and Robert J. Perry, Topeka, of the same firm, was with him on the brief for the appellee.

LOCKETT, Justice:

This is an action brought by the Iola State Bank (Bank) to enforce certain guaranty agreements executed by Dolores M. Bybee and others who are not parties to this appeal. The first two contracts, executed in 1974, guaranteed the obligations of Joe Biggs and Jan Biggs d/b/a Biggs Feed & Grain. A third contract executed in 1975, guaranteed the obligations of Biggs Feed & Grain, Inc. (Corporation), corporate successor to the individual business.

The facts are undisputed. Parties filed cross-motions for summary judgment; after oral argument the district court found only the third guaranty contract was enforceable against Dolores M. Bybee. The Bank appeals.

On May 21, 1974, the Iola State Bank loaned Joe Biggs and Jan Biggs d/b/a Biggs Feed & Grain, $37,500.00. The loan was secured by a note signed by Joe Biggs and Jan Biggs and a guaranty agreement executed on the same day by Jack L. Bybee and Dolores M. Bybee in the same amount. The bank retained a security interest in all the inventory and accounts receivable of the Biggs Feed & Grain business. A second guaranty agreement in the amount of $50,000.00 was executed by Dolores M. Bybee and Jack L. Bybee June 17, 1974, enabling Joe Biggs and Jan Biggs d/b/a Biggs Feed & Grain to obtain additional credit. There was a figure of $41,196.55 in outstanding obligations to the Bank by the Biggs when the second guaranty agreement was executed.

On April 29, 1975, Articles of Incorporation of Biggs Feed & Grain, Inc. were filed with the Secretary of State of the State of Kansas. The incorporators and initial directors were Joe Biggs, Jan Biggs, and Jack L. Bybee. The Corporation's annual reports filed with the Secretary of State for the years 1975 through 1979, inclusive, showed that the directors continued to be Joe Biggs, Jan Biggs, and Jack L. Bybee. Joe Biggs was the sole stockholder of the Corporation. Jack L. Bybee was the treasurer of the Corporation. The Bybees' sole interest in the Corporation was to assist their daughter, Jan Biggs. At the time of incorporation Joe Biggs and Jan Biggs were obligated to the Iola State Bank in the amount of $99,802.58.

A third contract of guaranty dated April 29, 1975, was executed by Dolores M. Bybee, Jack L. Bybee, Joe Biggs and Jan Biggs to enable the corporation to obtain credit from the Bank and guarantee payment of such credit to the extent of $150,000.00.

On the 20th day of May, 1975, the Bank consolidated the balances of three different loans to Joe Biggs and Jan Biggs into one corporate obligation. The outstanding balance of $67,000.00 of the Biggs became a corporate obligation under one note. From May 20, 1975, until December 8, 1981, the sole obligor under all notes was the Corporation. Every note after incorporation was executed by Joe Biggs, president of Biggs Feed & Grain, Inc. The Corporation made payments on the balance of the notes and its subsequent ten renewals as corporate notes. August 15, 1980, the Bank consolidated all debts due and owing from the Corporation into one corporate obligation note in the amount of $294,000.00. On December 8, 1981, the Bank sued to recover the outstanding balance due it from the Corporation under the note and to enforce the three guaranty agreements executed by the parties. After the action was commenced, Joe Biggs and Jan Biggs filed bankruptcy and Jack L. Bybee died. The Bank amended its petition and proceeded against Dolores M. Bybee.

Dolores M. Bybee denied any liability under the 1974 guaranties for the notes signed by Joe Biggs and Jan Biggs, claiming the obligations were extinguished when the business incorporated and a new guaranty was executed for the Corporation in the sum of $150,000.00. Mrs. Bybee admitted owing the sum of $150,000.00 under the last guaranty agreement for credit extended by the Bank to the Corporation.

The appellant Bank contends the district court erred in holding that the 1974 guaranty contracts did not guarantee the obligations of the individuals of the corporate successor.

For reasons hereinafter stated, the position taken by the appellant lacks merit.

The law of guaranty is a part of the law of contracts, a guaranty is a type or kind of contract. For a guaranty there must be at least three parties: a guarantor, a creditor (the individual to whom the promise is made), and a debtor. The guaranty is an obligation collateral to another contractual duty to perform. The contract of the guarantor is a separate contract. It is in the nature of a warranty by the guarantor that the thing guaranteed to be accomplished by the principal shall be done, and is not an engagement jointly with the principal to do the act. See Trego WaKeeney State Bank v. Maier, 214 Kan. 169, 519 P.2d 743 (1974).

The first two guaranty agreements were executed during 1974 by Dolores M. Bybee and Jack L. Bybee in favor of the Bank, obligating them to pay the outstanding indebtedness on notes of Joe Biggs and Jan Biggs d/b/a Biggs Feed & Grain. The third and final guaranty agreement was executed in 1975 by Dolores M. Bybee, Jack L. Bybee, Joe Biggs and Jan Biggs for credit extended to the corporation, Biggs Feed & Grain, Inc.

The general rule is, absent a novation or release, the original obligors remain liable when a corporation assumes an existing debt. The rule stated by Fletcher is as follows:

"The liability of partners or members of an association on contracts, debts and obligations of the firm or association may relate to such as arise prior to and exist at the time of the incorporation, or to those which come into being afterwards. In regard to the former, the rule is that partners or members remain liable as such on all contracts and for all debts made or incurred by them while they were doing business as partners or associates, unless they are released from liability, and this is true notwithstanding there has been assumption of the debts and obligations by the corporation, ... unless upon such assumption there has been a novation or the partners or associates have been released from liability.... It does not alter the rule of liability that the other party to the contract may have known that the partnership articles provided for incorporation, or the members contemplated future incorporation." 8 Fletcher, Cyclopedia of the Law of Private Corporations, § 4019, p. 373 (rev. perm. ed. 1982). Emphasis supplied.

Neither of the Bybees were partners or associates in the feed and grain business with the Biggs.

The authority relied upon by the Bank is distinguishable and not applicable in this case. Each of the Kansas cases cited regarded note renewal; the note was renewed by the original debtor or was merely an extension of time in which to pay the obligation. See Farmers State Bank v. Cooper, 227 Kan. 547, 608 P.2d 929 (1980); Potwin State Bank v. Ward, 183 Kan. 475, 327 P.2d 1091 (1958); and Fourth National Bank v. Hill, 181 Kan. 683, 314 P.2d 312 (1957).

In Farmers State Bank v. Cooper, 227 Kan. 547, 608 P.2d 929, the court reviewed the general rule relative to note renewals:

"The renewal of a note signifies the substitution in place of one engagement of a new obligation on the same terms and conditions; that is, the reestablishment of a...