MARC NELSON OIL PRODUCTS v. GRIM LOGGING

• Decision Date: 13 April 2005
• Citation: 110 P.3d 120,199 Or. App. 73
• Parties: MARC NELSON OIL PRODUCTS, INC., an Oregon corporation, Respondent, v. GRIM LOGGING COMPANY, INC., an Oregon corporation, Defendant, and Robert Grim, Appellant.
• Court: Oregon Court of Appeals

110 P.3d 120

199 Or. App. 73

MARC NELSON OIL PRODUCTS, INC., an Oregon corporation, Respondent, v. GRIM LOGGING COMPANY, INC., an Oregon corporation, Defendant, and Robert Grim, Appellant.

02C12988; A123447.

Court of Appeals of Oregon.

Argued and Submitted January 13, 2005.

Decided April 13, 2005.

Thomas C. Tankersley, McMinnville, argued the cause for appellant. With him on the briefs was Drabkin & Tankersley, LLC.

Gina Anne Johnnie, Salem, argued the cause for respondent. With her on the brief was Sherman, Sherman, Johnnie & Hoyt, LLP.

Before LINDER, Presiding Judge, and HASELTON¹ and ORTEGA, Judges.

LINDER, P.J.

This is a proceeding seeking to hold defendant, Robert Grim, liable as a guarantor of a debt incurred by Grim Logging Company, Inc. (Grim Logging). Grim Logging contracted to purchase diesel fuel from Hance Oil Company (Hance Oil), and defendant signed as a personal guarantor of the account. Hance Oil later assigned the contract to plaintiff, Marc Nelson Oil Products, Inc. The trial court concluded that defendant was not discharged as a guarantor as a result of the assignment because there was no material increase in risk to defendant as guarantor and that defendant therefore was liable as a matter of law to plaintiff. As a result, the trial court granted plaintiff's motion for summary judgment, denied defendant's cross-motion for summary judgment, and awarded plaintiff damages and attorney fees. We conclude, contrary to the trial court, that the assignment did materially increase defendant's risk as guarantor and, as a result, it operated to discharge defendant as a matter of law. We therefore reverse and remand.

On appeal, defendant challenges the denial of his cross-motion for summary judgment as well as the grant of plaintiff's motion for summary judgment.² Consequently, both rulings are subject to review. See Cochran v. Connell, 53 Or.App. 933, 939-40, 632 P.2d 1385, rev. den., 292 Or. 109, 642 P.2d 311 (1981). Each party has the burden of demonstrating that there are no material issues of fact and that the movant is entitled to judgment as a matter of law. ORCP 47 C; Jones v. General Motors Corp., 325 Or. 404, 939 P.2d 608 (1997); McKee v. Gilbert, 62 Or.App. 310, 321, 661 P.2d 97 (1983). We review the record for each motion in the light most favorable to the party opposing it. Yartzoff v. Democrat-Herald Publishing Co., 281 Or. 651, 655, 576 P.2d 356 (1978). Unless otherwise noted, however, the facts are undisputed. Primarily, the parties dispute the legal significance of the facts.

Grim Logging is a family business of which defendant, during the period in question, was a one-third owner and an officer of the company. At that time, the remaining shares in the company were owned by defendant's brother and father, who were also officers of the company, and by defendant's mother. In October 1987, Grim Logging entered into a contractual agreement with Hance Oil by which Grim Logging agreed to purchase diesel fuel from Hance Oil. So that Grim Logging could make those purchases on credit, defendant filled out, on Grim Logging's behalf, a "New Customer Information" form supplied by Hance Oil and personally signed a section entitled "Agreement and Guaranty." That section stated:

"I have made the above statements for the purpose of obtaining credit. I certify they are true and authorize you to make a credit investigation. Billings shall be issued twice each month and payment will be due in full within 10 days of invoice date. I agree to pay a finance charge of 1½% per month (18% per year) on any delinquent balances. This agreement includes the terms and conditions on the reverse side hereof.

"Notwithstanding that this account is established in the name of [Grim Logging], I personally guarantee payment of the account."

(Emphasis added.) From October 1987 until July 1996, Grim Logging regularly purchased fuel from Hance Oil, as well as from other fuel suppliers.

On August 1, 1996, Hance Oil sold some of its assets to plaintiff. Included among them was Grim Logging's account. As a result, beginning that date and continuing until early 2002, plaintiff sold fuel to Grim Logging, just as Hance Oil had before August 1996. Although plaintiff notified Hance Oil customers generally of the assignment of the assets, and thus may have so notified Grim Logging, plaintiff did not notify defendant, as Grim Logging's guarantor, of the assignment.³

Nor did defendant learn of the assignment through some other means. At the time of Hance Oil's sale of Grim Logging's account to plaintiff and until 2001, defendant's primary work responsibilities included overseeing Grim Logging's on-site logging operations and dealing with logging customers. Defendant did not work in Grim Logging's business office or have responsibility for the company's financial operations, although he occasionally undertook certain of those responsibilities. For example, defendant would sign checks if he was available to do so and his father, his brother, or an employee with check-writing authority were not available. Due to the nature and scope of defendant's duties at Grim Logging, however, he was not involved in tracking or paying suppliers. Consequently, until the events that gave rise to this proceeding, defendant was not aware that Hance Oil had sold its assets to plaintiff, including the Grim Logging account, and defendant did not know that he was potentially a guarantor for any fuel purchased from plaintiff.

In August 2001, defendant discovered that the company was in financial peril because of an employee's theft of company funds. After that discovery, defendant began working on financial matters in the office in an effort to keep the company solvent by paying creditors and investing personal assets in the company. Simultaneously, defendant took steps to insulate himself from potential personal liability on those accounts for which he was a personal guarantor. For example, defendant had personally guaranteed Grim Logging's debts to Valley Oil, another of Grim Logging's fuel providers. To protect himself from personal liability on that guaranty, defendant and the other principals in Grim Logging pledged assets of the company to Valley Oil in an amount approximately equal to the balance owed, thus covering the company's obligation to that creditor.

Meanwhile, Grim Logging continued to struggle financially. In early 2002, Grim Logging became delinquent in its account with plaintiff. In April 2002, plaintiff brought an action against Grim Logging and defendant to recover the amount due for diesel fuel that it had sold to Grim Logging. One week later Grim Logging filed for bankruptcy protection. The bankruptcy filing automatically stayed the proceeding as against Grim Logging. Plaintiff therefore pursued the action solely against defendant, as the guarantor of the debt.

As noted, before trial the trial court granted plaintiff's motion for summary judgment and denied that of defendant. Relying on Nike, Inc. v. Spencer, 75 Or.App. 362, 707 P.2d 589, rev. den., 300 Or. 451, 712 P.2d 110 (1985), the trial court concluded that a guarantor is released from liability if "there is a material change to the underlying agreement" and that, if a "change does not increase the risk [to] the guarantor, the guarantor is not released from liability." The court determined that, in this case, "the risk to the guarantor was not increased or changed in any way. Grim Logging and [defendant] continued to receive and use products. The only change being the name of the supplier and successor in interest to Hance Oil." Because there were no disputes of material fact presented by the summary judgment record, the court concluded that defendant was liable on the debt as a matter of law and awarded damages to plaintiff in the amount outstanding on the account. The trial court also awarded plaintiff attorney fees.

Defendant's first assignment of error challenges the trial court's ruling on the cross-motions for summary judgment. In support of that challenge, defendant first argues that the trial court misunderstood the law that applies to the modification of a contract containing a personal guaranty. Relying on an 1892 case, defendant contends that, in the absence of language permitting his guaranty to be assigned to a third party, we must conclude that the guaranty was unassignable per se, with the result that the assignment from Hance Oil to plaintiff discharged him from his obligation. See Staver & Walker v. Locke, 22 Or. 519, 524, 30 P. 497 (1892) (In "determining the liability of a surety or a guarantor, it must be remembered that he is a favorite of the law, and has the right to stand upon the strict terms of his obligation, when such terms are ascertained[.]").

Defendant's position, however, overlooks the fact that the law in this area has evolved since 1892. We need not trace that full evolution. It is enough to observe that, in Equitable Savings & Loan v. Jones, 268 Or. 487, 491-92, 522 P.2d 217 (1974), the Oregon Supreme Court expressly disavowed the mechanical approach by which "a surety is discharged by any alteration of the contract." (Emphasis added.) Instead, the court endorsed the "modern rule," which discharges a personal guarantor or other surety only when the change to a contract is "material." Id. at 491, 522 P.2d 217. Moreover, as the court observed, the rule is even more demanding in the case of a compensated guarantor. In such a circumstance, it is not enough that there be a material alteration of the contract. Rather, the change must be "actually or potentially" detrimental to the surety. Id. at 492, 522 P.2d 217. In support of that rule, the court cited Restatement of Security section 128 (1941), which states, in part:

"Where without the surety's consent, the principal and the creditor modify their contract otherwise than by extension of time of payment

"(a) the surety, other than a compensated surety, is discharged unless the

...