McGill v. Idaho Bank & Trust Co.

• Decision Date: 13 August 1981
• Docket Number: No. 13201,13201
• Citation: 632 P.2d 683,102 Idaho 494
• Court: Idaho Supreme Court
• Parties: Earl F. McGILL, Plaintiff-Appellant, v. IDAHO BANK & TRUST CO., an Idaho Corporation, Defendant-Respondent.

Page 683

632 P.2d 683

102 Idaho 494

Earl F. McGILL, Plaintiff-Appellant, v. IDAHO BANK & TRUST CO., an Idaho Corporation, Defendant-Respondent.

No. 13201.

Supreme Court of Idaho.

Aug. 13, 1981.

Bert L. Poole, Boise for plaintiff-appellant.

Mikel H. Williams, and Claire L. Dwyer of Collins, Manly & Williams, Boise, for defendant-respondent.

McFADDEN, Justice:

Plaintiff-appellant Earl F. McGill filed a complaint seeking restitution from defendant-respondent Idaho Bank and Trust (I B & T) in the sum of $1,722.88 for payments made to the bank and related expenses incurred under an assignment of a conditional sale security agreement. The bank counterclaimed for $5,177.92 allegedly owed to it by McGill for the balance due under the assignment of the conditional sale security agreement. Following the trial, the district court dismissed with prejudice McGill's complaint and entered judgment in favor of I B & T on its counterclaim. On appeal the judgment is affirmed.

McGill, is the successor in interest to S & E Enterprises, Inc. (S & E), a retail mobile home dealer. S & E entered into a "Dealer Reserve Agreement" with IB & T and began a business relationship in which the bank was to buy conditional sales contracts entered into between S & E and retail buyers. The dispute in the instant appeal arose from the sale of a mobile home by S & E to William J. Nyborg pursuant to a "Conditional Sales Security Agreement." S & E assigned the contract to the bank. Under the assignment S & E agreed to guarantee the payments of the buyer and that its liability as a guarantor would not be affected by any independent action of the bank relating to the principal obligation of the buyer. ¹

Nyborg subsequently defaulted on the contract. Defendant-respondent notified S & E of the delinquency. S & E paid the delinquent payments and repossessed the mobile home. S & E then found another buyer for the mobile home, Derrold Clark. The sale to Clark was consumated by the execution of an instrument entitled, "Transfer of Interest Agreement." By the terms of this agreement, Clark was substituted as the purchaser under the Nyborg contract and assumed liability for the unpaid balance of the purchase price.

Clark became displeased with the mobile home and notified the bank that he wished to be released from the contract. Clark offered to allow the bank to repossess the mobile home with all of the furniture and improvements if the bank would agree to release him from all liability under the "Transfer of Interest Agreement" or under the original sales contract. It appears that bank representatives accepted Clark's offer and completely released him from all of his obligations under the "Transfer of Interest Agreement." The compromise entered into between Clark and the bank apparently was consumated without S & E's consent or knowledge.

The bank located a potential purchaser, Vern Shaver, and surrendered possession of the unit to him upon his agreeing to assume the payments for the mobile home under the terms of the previous contracts with Nyborg and Clark. Shaver assumed this contract by signing a "Transfer of Interest Agreement," identical in form to the one signed by Clark.

Shaver made payments on the contract until November 1976 when he defaulted. At that time the bank approached McGill and informed him that they would hold him responsible under the "Full Recourse" provision of the contract assignment. It was not until this time that McGill became aware of the transfer to Shaver.

McGill then began making payments on the contract. Later, McGill inspected the mobile home and discovered the furniture had been removed as well as the carpets and the appliances. He also noticed that the wheels and axles had been taken, and that the mobile home was in a state of extreme disrepair. Following this inspection, McGill discontinued payments on the contract and thereafter filed this action.

The complaint filed sought restitution of $1,722.78 and an order declaring that McGill was released by the actions of the bank from all legal obligations under the written guaranty and full recourse assignment. The bank counterclaimed for the balance due under the assignment of the "conditional sale security agreement."

A trial was held on the issues raised in the complaint and counterclaim. At the conclusion of his case, McGill moved to amend the complaint to reduce the amount he was seeking from $1,722.78 to $1,244.70. Following the conclusion of the trial, the district court dismissed with prejudice McGill's complaint and entered judgment in favor of the bank. In so holding, the court ruled (1) the provisions of the original assignment authorized the bank to release Clark and substitute Shaver as the principal debtor without notice to McGill as guarantor and still retain the right to collect their debt from McGill; and (2) the agreement authorizing these actions by the bank was enforceable against McGill. The court made no mention of McGill's claim for restitution aside from the statement that there was no allegation or evidence adduced at trial of bad faith, negligence on the part of the bank, adhesion, or other overreaching by the bank which would warrant equitable relief. McGill thereafter timely perfected the instant appeal.

Two issues are presented on appeal: (1) Did the language of guaranty in the original assignment of the conditional sale security agreement authorize I B & T to release the principal debtor and substitute another person without notice to McGill (the guarantor) and still retain the right to collect the balance of the partially satisfied debt from McGill; and (2) did the district court err in dismissing McGill's claim for restitution under the alternative theories that (a) the installment payments were made under duress, and (b) the payments were made under the erroneous belief that he was legally obligated to so act?

Turning to McGill's first issue, we note that it is a well-accepted rule of law that satisfaction of the principal debt or a release of the principal debtor discharges the guarantor. Knight v. Cheek, 369 A.2d 601 (D.C.App.1977); First National Bank of Anthony v. King, 2 Kan.App. 519, 583 P.2d 389 (1978); Louisiana Bank & Trust Co. v. Boutte, 298 So.2d 884 (La.App.1974), amended and aff'd, 309 So.2d 274 (La.1975); Industrial Mercantile Factors Co. v. Daisy Sportswear, Inc., 56 Misc.2d 104, 288 N.Y.S.2d 209 (1967), aff'd, 56 Misc.2d 584, 289 N.Y.S.2d 332 (Sup.1968); Eastman Oil Well Survey Co. v. Hamil, 416 S.W.2d 597 (Tex.Civ.App.1967). Moreover, as a corollary of this rule of law, it has been stated in the Restatement of Security § 122 (1941) which uses the words guarantor and surety interchangeably that the burden is on the releasing creditor if he wants to retain his right of recourse against the guarantor.

"Where the creditor releases a principal, the surety is discharged, unless

(a) the surety consents to remain liable notwithstanding the release, or

(b) the creditor in the release reserves his rights against the surety."

See Warner Lambert Pharmaceutical Co. v. Sylk, 348 F.Supp. 1039 (E.D.Pa.1971) (applying Pennsylvania state guaranty law), aff'd, 475 F.2d 1398 (3d Cir. 1973); United States v. Krochmal, 318 F.Supp. 148 (D.Md.1970) (applying Maryland state guaranty law), Maestro Music, Inc. v. Rudolph Wurlitzer Co., 88 Ariz. 222, 354 P.2d 266 (1960); Fruehauf Trailer Co. of Canada Ltd. v. Chandler, 67 Wash.2d 704, 409 P.2d 651 (Wash.1966).

In this case, the principal concern of the court is whether the guaranty language in the assignment of the conditional sale security agreement effectively waives the guarantor McGill's defense of release. The pertinent language from the assignment is to the effect that McGill's predecessor in interest, S & E,

"(H)ereby guarantees due and punctual payment of all sums due or to become due thereunder ...."

"The undersigned hereby waives (a) the right, if any, to the benefit of, or to direct the application of any security hypothecated to the Bank, until all indebtedness of the buyer to the Bank, howsoever arising, shall have been paid; (b) the right to require the Bank to proceed against the Buyer, or to pursue any other remedy in the Bank's power, and agrees that the Bank may proceed against any of the undersigned directly and independently of the Buyer, and that the cessation of the liability of the Buyer, for any reason other than full payment, or any extension, forbearance, change or rate of interest, or acceptance, release or substitution of security, or any impairment or suspension of the Bank's remedies or rights against the buyer, shall not in anywise affect the liability of any of the undersigned hereunder."

In interpreting this language, the court is mindful of the well-settled rule that guaranty agreements are to be construed strongly in favor of the guarantor. Industrial Investment Corp. v. Rocca, 100 Idaho 228, 596 P.2d 100 (1979); J. R. Watkins v. Clark, 65 Idaho 504, 147 P.2d 348 (1944). However, the court is also mindful of the equally well-settled rule that where the language in the guaranty agreement is unequivocal, the agreement must be interpreted as a matter of law according to the language employed therein. Industrial Investment Corp. v. Rocca, supra; Commercial Credit Corp. v. Chisholm Bros. Farm Equip. Co., 96 Idaho 194, 525 P.2d 976 (1974).

The district court concluded in its memorandum decision that the above quoted language of guaranty contained in the assignment "insuring the liability of the guarantor regardless of the liability of the Buyer contemplates actions of the bank affecting such liability as well. There can be little doubt that this all-inclusive language embraces the situation before the court." Based on the cases of Fruehauf Trailer Co. of Canada, Ltd. v. Chandler, 67 Wash.2d 704, 409 P.2d 651 (1966), and United States v. Beardslee, 562 F.2d 1016 (6th Cir. 1977) cert. denied, 439 U.S. 833, 99 S.Ct. 113, 58 L.Ed.2d 128 (1978), the...