Lane v. Travelers Indem. Co.

• Decision Date: 26 June 1997
• Docket Number: No. 19753,19753
• Citation: 1997 SD 58,563 N.W.2d 423
• Parties: Thomas E. LANE, Plaintiff and Appellee, v. The TRAVELERS INDEMNITY COMPANY, a Connecticut Corporation, Defendant and Appellant and First American Holding Company, Inc., a South Dakota Corporation, and E.J. Smith, individually, Defendants.
• Court: South Dakota Supreme Court

Page 423

563 N.W.2d 423

1997 SD 58

Thomas E. LANE, Plaintiff and Appellee, v. The TRAVELERS INDEMNITY COMPANY, a Connecticut Corporation Defendant and Appellant and First American Holding Company, Inc., a South Dakota Corporation, and E.J. Smith, individually, Defendants.

No. 19753.

Supreme Court of South Dakota.

Argued Feb. 19, 1997.

Decided May 21, 1997.

Rehearing Denied June 26, 1997.

Curtis S. Jensen, DeMersseman Jensen, Rapid City, for plaintiff and appellee.

Roger W. Damgaard, James E. Moore of Woods, Fuller, Schultz & Smith, Sioux Falls, for defendant and appellant.

GILBERTSON, Justice.

¶1 Travelers Indemnity Company appeals from the judgment denying its motion for summary judgment and granting Thomas E. Lane's [hereinafter Lane] cross-motion for summary judgment. We reverse.

FACTS AND PROCEDURE

¶2 In October 1988, Lane entered into a stock purchase agreement with E.J. Smith [hereinafter Smith] and First American Holding Company [hereinafter Holding Company] whereby Lane sold all of his shares of common stock in First American Systems. Smith was the president of the Holding Company. He purchased Lane's stock through the Holding Company but also personally guaranteed the obligation. Lane was the majority stockholder in First American Systems, d/b/a Kluthe and Lane Insurance Agency in Rapid City. Lane's and Smith's agreed purchase price for the shares of stock was $507,960. Lane's and Smith's agreement provided for an initial payment of $50,000 plus nine percent interest on January 1, 1989, with annual payments of $56,815 due on November 1. These annual payments were to commence November 1, 1989 and continue until November 1, 2003, when the remaining balance would be due.

¶3 Lane entered into a separate agreement with Travelers whereby Travelers guaranteed the payment of the unpaid principal in the amount of $250,000. This guaranty was specifically negotiated by Lane and Travelers and included a Paragraph 3, which provided:

Seller agrees that any change in the terms of the Promissory Note, including but not limited to a change relative to the repayment thereof or extension of time of payment, shall automatically release and discharge the Guarantor from any obligation under the guarantee set forth in paragraph (1) hereof, unless the Guarantor shall have agreed in writing to such extension or modification. (Emphasis added.)

This paragraph was specifically negotiated, the final clause of said paragraph having been suggested by Lane's attorney, who wrote the following to Lane:

Finally with respect to paragraph 3, I would suggest that at the end of the paragraph there be added the phrase "unless the guarantor shall have agreed in writing to such extension or modification." This would protect Travelers against any unilateral action on your part to change the terms of the obligation which Travelers has guaranteed; however, it would permit all of you (seller, purchaser and Travelers) to work out an extension or modification of terms, if all parties agreed such would be in their mutual interest. (Emphasis added.)

¶4 Smith made the initial payment on January 5, 1989. On November 3, 1989, he made the payment due November 1. The following year, Smith contacted Lane on October 29 to advise him he could not make the entire payment due on November 1, 1990. On the November 1 due date, Lane received a payment of $20,000 from Smith along with a letter indicating he appreciated Lane's "help" and promising to send the balance, by check dated January 1, by the end of December. Upon receipt of this payment and Smith's letter, Lane calculated interest at ten percent for two months and planned his taxes according to Smith's promise to pay effective January 1.

¶5 On January 2, 1991, Lane received a check from Smith in the amount of $36,815, dated December 26, 1990, with a notation indicating it was payment for November 1991, not November 1990. Lane returned the check to Smith so he could correct the date and informed Smith he expected interest. Lane received a corrected check from Smith on February 4, 1991, but with no interest. Lane made a second written request for the interest on February 25, 1991. No interest has ever been paid for the delayed payment.

¶6 Lane received a check for the November 1991 payment on November 4, 1991, after receiving a call from the Kluthe & Lane Insurance Agency to come to the office to pick up the check.

¶7 Smith failed to make timely payment in November 1992. An employee of Smith's telephoned Lane on November 2, 1992, to inform Lane that Smith's payment would be late by one week. Lane confirmed this telephone conversation with Smith by letter indicating: "When [your employee] called on November 2nd to say it would be a week late I said OK but when I called each week and was told it would be another week I mentioned to [your employee] a couple times that I would expect interest and assumed he passed that on to you." Lane calculated interest for thirty-two days. On December 4, 1992, Lane received the November 1992 payment, but without interest.

¶8 In 1993, Smith telephoned Lane shortly before November 1 to advise Lane he would be unable to pay on November 1. By letter dated November 18, 1993, Lane confirmed his earlier telephone conversation with Smith: "Confirming our phone call Monday, I'm willing to accept late payments as long as you pay reasonable interest and don't stretch it out too long. Last year you paid in early December (without interest) and I would not like to go any longer than that." (Emphasis original.) However, by early December, Lane had still not received Smith's payment and so he wrote to Smith again on December 20, 1993, setting the interest rate at two points over prime. Lane received the November 1993 payment on February 7, 1994, along with a note from Smith indicating he would pay the interest due within the next ten days. Lane has still not received this interest.

¶9 In spite of these late payments, Lane did not declare Smith in default and invoke Paragraph 2 of the guaranty with Travelers. Paragraph 2 provided that if Lane declared a default, he could not collect from Travelers until he had made a "commercially reasonable effort" to obtain payment from Smith. Under the terms of the guaranty agreement, a "commercially reasonable effort" would be made if Lane gave Smith written notice of default and demanded a resumption of payments within sixty days. There is no dispute that Travelers was unaware of Smith's late payments, or of any communication between Lane and Smith regarding the delay in these payments.

¶10 On May 12, 1994, First American Systems filed Chapter 7 bankruptcy. On November 4, 1994, Lane's attorney sent notice to Smith, with copies to Travelers' legal counsel, that the Holding Company and Smith were in default under the terms of the stock purchase agreement and demanding payment be resumed within sixty days of said notice. On January 13, 1995, Smith filed Chapter 7 bankruptcy. Ten days later, on January 23, 1995, Lane filed suit to enforce Travelers' guaranty.

¶11 Both parties filed motions for summary judgment. The circuit court granted Lane's motion and entered judgment against Travelers for the principal amount of $250,000 plus prejudgment interest and costs for a total judgment of $305,573.71. By the same judgment, the circuit court entered default judgment against the Holding Company, which is not a party to this appeal, in the amount of $443,675.83. Travelers appeals, raising a single issue:

Whether the terms of the agreement between Lane and Smith were changed such that they would constitute a release of Travelers Indemnity Company as guarantor?

STANDARD OF REVIEW

¶12 Our normal standard of review on a motion for summary judgment is well settled. On review of a grant or denial of summary judgment,

"we must determine whether the moving party demonstrated the absence of any genuine issue of material fact and showed entitlement to judgment on the merits as a matter of law. The evidence must be viewed most favorably to the non-moving party and reasonable doubts should be resolved against the moving party. The non-moving party, however, must present specific facts showing that a genuine, material issue for trial exists. Our task on appeal is to determine whether a genuine issue of material fact exists and whether the law was correctly applied. If there exists any basis which supports the ruling of the trial court, affirmance of a summary judgment is proper."

Petersen v. Dacy, 1996 SD 72, p 5, 550 N.W.2d 91, 93 (quoting Trippet Special Trust v. Blevins, 1996 SD 29, p 6, 545 N.W.2d 216, 221). However, in this case both parties agree there is no question of fact but rather differ upon which of them is entitled to summary judgment as a matter of law. "The existence of a valid express contract is a question of law to be determined by the court, not a jury[.]" Owens v. Moyes, 530 N.W.2d 663, 665 (S.D.1995). As such we review the issue de novo. De Smet Ins. Co. v. Gibson, 1996 SD 102, p 5, 552 N.W.2d 98, 99.

ANALYSIS AND DECISION

¶13. Whether the terms of the agreement between Lane and Smith were changed such that they would constitute a release of Travelers Indemnity Company as guarantor?

¶14 Travelers asks this Court to look particularly at the payments due in 1990, 1992, and 1993 in answering the above question. We first examine the terms of the guaranty agreement which Lane and Travelers negotiated and signed November 1, 1988. It provides, in pertinent part, as follows:

2. Seller [Lane] represents and warrants to Guarantor [Travelers] that he will use a commercially reasonable effort to obtain payment of the Promissory Note from Buyer prior to resorting to the guarantee set forth in paragraph (1) hereof. "Commercially reasonable effort" by Seller to obtain payment of the Promissory Note shall be satisfied by Seller giving written notice to Buyer that Buyer is in default of the Promissory Note and/or Stock Purchase Agreement, by...