Keybro Enterprises v. Four Seasons Country Club Caterers, Inc.

• Decision Date: 28 April 1966
• Parties: KEYBRO ENTERPRISES, Plaintiff-Appellant, v. FOUR SEASONS COUNTRY CLUB CATERERS, INC., Jack Dubov Associates, Inc., JackDubov, Albert Dubov, Larry Dubov a/k/a Lawrence Dubov, Defendants-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 291

269 N.Y.S.2d 291

25 A.D.2d 307

KEYBRO ENTERPRISES, Plaintiff-Appellant, v. FOUR SEASONS COUNTRY CLUB CATERERS, INC., Jack Dubov

Associates, Inc., JackDubov, Albert Dubov, Larry

Dubov a/k/a Lawrence Dubov,

Defendants-Respondents.

Supreme Court, Appellate Division, First Department.

April 28, 1966.

Julius Lentz, New York City, for appellant.

Herbert W. Solomon, New Hyde Park, of counsel (Silverstein, Balin, Pares & Soloway, New Hyde Park, attorneys), for respondent Four Seasons Country Club Caterers, Inc.

George Knopp, New York City, for respondent Jack Dubov Associates, Inc.

Before BREITEL, J.P., and RABIN, McNALLY, STEVENS and EAGER, JJ.

STEVENS, Justice.

Plaintiff appeals from an order entered February 16, 1965, and judgment entered April 9, 1965, which granted defendants' motions for summary judgment dismissing the complaint.

The action was brought for accrued interest allegedly due on a series of twelve promissory notes, and to recover a sum as an attorney's fee. The notes were made to the order of Seymour Hirschhorn by Four Seasons Country Club Caterers, Inc. (Four Seasons) as payment for services rendered the corporation.

Larry Dubov, an individual defendant and also an officer of Jack Dubov Associates, Inc. (Associates) alleges in an affidavit that the notes were endorsed to Associates in the same form as delivered to plaintiff, by Seymour Hirschhorn, May 2, 1962, and when purchased by plaintiff were in same form as when received from Hirschhorn.

The notes were executed May 1, 1961, in the amount of $1,000 each, the first becoming due May 1, 1963, and monthly thereafter until June 1, 1964. Four Seasons asserts when the notes were executed and delivered each, by its terms, was payable without interest; that the provision for interest appearing on the face of four of the notes was added subsequent to delivery. Eight of the notes bore no such notation for interest.

On or about May 2, 1962, the defendants, excluding Four Seasons, executed an instrument of guaranty. In the initial paragraph thereof it is stated '(f)or the purpose of inducing Keybro * * * to purchase a series of twelve promissory notes dated May 1, 1961 * * * each in the sum of $1,000 with interest * * *'. Associates warranted the notes were valid and subsisting notes issued for value, the prior endorsements genuine, and that at least two-thirds of Associates' stockholders consented to the sale of the notes. In the instrument the defendants, excluding Four Seasons, then undertook to unconditionally guarantee jointly and severally, payment of the notes 'in accordance with the terms thereof, when due', and to pay a reasonable attorney's fee should legal action be necessary for recovery on the obligation.

When the first note became due, it was presented to Four Seasons' bank for payment. Four Seasons refused to pay interest and notified plaintiff that when the notes were executed by it and delivered the notes did not contain any provision for the payment of interest; that they were altered thereafter. Only four of the notes contain an interest provision, eight bear no such notation. All of the notes were paid as presented, each in the amount of $1,000, but without interest.

Thereafter plaintiff instituted this action against Four Seasons as maker and the other defendants as guarantors to recover the sum of $1,858.80 as accrued interest allegedly due on the notes, and the sum of $619 as a reasonable attorney's fee.

Four Seasons in addition to denials pleaded as affirmative defenses alteration of the notes after delivery without its knowledge or consent, waiver, and accord and satisfaction. The other defendants interposed general denials in their answer.

Subsequently Four Seasons moved for summary judgment pursuant to CPLR 3212, and in support of its application submitted affidavits by its vice-president Swartz and treasurer Fromer, whose signatures appear on the notes, and also one by their attorney. Swartz and Fromer swear that when delivered the notes were payable without interest. Four were altered thereafter to include interest, eight were not so altered. Solomon, attorney for Four Seasons, refers to that situation in his affidavit and, additionally, asserts waiver and accord and satisfaction. In a later affidavit Solomon points out in answer to plaintiff's affidavits in opposition to the motion wherein it refers to the agreement of guaranty of May 2, 1962, that Four Seasons was not a party to the agreement.

The other defendants who had sold the notes to plaintiff for $8,000, also moved for judgment pursuant to CPLR 3212, and recited they did so upon all affidavits and exhibits submitted by Four Seasons and upon the affidavit of defendant Larry Dubov. Dubov's affidavit incorporated by reference as a part thereof, the affidavits of Swartz, Fromer and Solomon, and the exhibits and other papers upon which Four Seasons based its motion. Plaintiff requested that both motions be read and considered together.

The single question then is whether payment of the notes discharged the maker and the guarantors on the note, or whether, as to the guarantors, liability continued by reason of the agreement.

It should be noted the notes were paid and surrender thereof made prior to the enactment of the Uniform Commercial Code which became effective September 27, 1964. The Negotiable Instruments Law (NIL) was then in effect and is here applicable. Section 200 NIL provides insofar as pertinent, '(a) negotiable instrument is discharged: 1 By payment in due course by or on behalf of the principal debtor;' and '5 When the principal debtor becomes the holder of the instrument at or after maturity in his own right.' The notes were paid and delivered up to Four Seasons which now holds the same. Clearly Four Seasons as maker is discharged (Gerard v. Bank of New York & Trust Co., 265 N.Y. 336, 193 N.E. 165, rearg. denied 266 N.Y. 544, 195 N.E. 192; Larkin v. Hardenbrook, 90 N.Y. 333).

Section 201 NIL provides that persons secondarily liable on the instrument are discharged '1 By an act which discharges the instrument;' or '5 By a release of the principal debtor, unless the holder's right of recourse against the party secondarily liable is expressly reserved.' (See also 42 N.Y.Jur., Negotiable Instruments, § 607.) The defendants as guarantors undertook only to pay the notes 'in accordance with the terms thereof, when due.' The motion for summary judgment was pursuant to CPLR 3212, which permits support thereof 'by affidavit, by a copy of the pleadings and by other available proof' and declares the 'motion shall be granted if, upon all the papers and proof submitted, the cause of action or defense shall be established sufficiently to warrant the court as a matter of law in directing judgment in favor of any party.'

A unilateral reservation of rights by a promisee against the guarantor or surety is of no avail where the obligation is discharged absolutely by such a surrender because the guarantor or surety would be deprived of his rights to subrogation (Spies v. National City Bank, 174 N.Y. 222, 226, 228--230, 66 N.E. 736, 738--739, 61 L.R.A. 193; Farmers' Bank of Amsterdam v. Blair, 44 Barb. 641; Meyn v. Schutte, 20 Misc.2d 471, 473, 186 N.Y.S.2d 965, 968--969; Anno.--Reserving Rights Against Surety, 139 A.L.R. 85, 108--116 and cases cited; 50 Am.Jur., Suretyship, § 129, p. 990; Note, The Effect Upon the Surety of a Reservation Clause in a Release of the Principal Debtor, 50 Yale L.J. 1485, 1487--1490).

A surety agreement might readily enough be converted into a subsisting separate and independent agreement between the promisee and original guarantor, notwithstanding the discharge of the principal underlying obligation. But this would have to be done by a valid contract embodying a new and independent consideration beneficial to the guarantor or set forth in a writing enforceable under the statute of frauds (General Obligations Law, § 5--701(2); White v. Rintoul, 108 N.Y. 222, 15 N.E. 318; Bulkley v. Shaw, 289 N.Y. 133, 44 N.E.2d 398; Newton v. Van Ingen, 21 A.D.2d 425, 250 N.Y.S.2d 874, aff'd 16 N.Y.2d 596, 261 N.Y.S.2d 55, 209 N.E.2d 102; Kahn v. Naitove, 171 Misc. 504, 12 N.Y.S.2d 144 (Conway, J.)).

Of course, where a statute specifically allows interest, the interest may be considered a part of the claim (Matter of Crane v. Craig 230 N.Y. 452, 130 N.E. 609). Or, where interest is provided for in the contract, 'the payment of the principal debt will not defeat the right to recover accrued interest by a subsequent suit' (47 C.J.S. Interest § 71b). A check of the cases cited in the footnote indicates the application of the principle in New York chiefly in connection with the moratory statutes or matter involving realty. (C.P.A., Art. 65, §§ 1077--1080; see White v. Wielandt, 259 App.Div. 676, 20 N.Y.S.2d 560, aff'd 286 N.Y. 609, 36 N.E.2d 452; Central Hanover Bank and T. Co. v. Roslyn Estates, 266 App.Div. 244, 42 N.Y.S.2d 130.) 'The rule, however, appears to be that where the interest is not payable by the terms of the contract, but is simply allowable as damages for the default in payment, then the interest is not regarded as part of the debt, but as a mere incident to it, and the receipt of the principal bars a subsequent claim for the interest, for the reason that in such cases interest, being a mere incident, cannot exist without the debt, and the debt being extinguished, the interest must necessarily be extinguished also (citation). But where interest is specifically reserved By the instrument and forms an integral part of the debt, the rule is different, for then the acceptance of the principal without the interest does not extinguish the debt, and the mere acceptance of part, either of principal or interest, does not bar a subsequent claim for the whole, whether with or without protest, for the payment of part is not generally a satisfaction of the whole, unless there is an agreement of some kind that the payment made...