Rosenbloom v. Feiler

• Decision Date: 02 July 1981
• Docket Number: No. 96,96
• Citation: 290 Md. 598,431 A.2d 102
• Parties: , 13 A.L.R.4th 1140 Benjamin ROSENBLOOM et al. v. Alfred W. FEILER.
• Court: Maryland Court of Appeals

Page 598

290 Md. 598

431 A.2d 102, 13 A.L.R.4th 1140

Benjamin ROSENBLOOM et al. v. Alfred W. FEILER.

No. 96.

Court of Appeals of Maryland.

July 2, 1981.

Stuart M. Salsbury, Baltimore (Max R. Israelson and Israelson & Jackson, P. A., Baltimore, on the brief), for appellants.

Bernard W. Rubenstein, Baltimore (Edelman & Rubenstein, P. A., Baltimore, on the brief), for appellee.

Argued before MURPHY, C. J., and SMITH, DIGGES, ELDRIDGE, COLE, DAVIDSON and RODOWSKY, JJ.

RODOWSKY, Judge.

This case involves an oral indemnification by an individual of the guarantors of payment of a bank loan to a business corporation. The guarantors sued the indemnitor and obtained judgment following a trial to the court which rendered a written opinion. The Court of Special Appeals modified the judgment and, as modified, affirmed. Feiler v. Rosenbloom, 46 Md.App. 297, 416 A.2d 1345 (1980). Each side petitioned for, and was granted, certiorari. As the case comes to us the issues involve (1) whether the oral agreement between the indemnitor and the guarantors is within the Statute of Frauds; (2) whether the indemnitor's liability was terminated by the extension of the loan; (3) the period during which interest on the loan falls within the indemnitor's promise; (4) the amount of loan principal which falls within the indemnitor's promise; and (5) whether the guarantors were obligated to mitigate damages. As a result of our review, we shall reinstate the judgment of the trial court.

The borrower was Togs, Inc. It was engaged in developing, manufacturing and marketing a patented form of button developed by Edward J. Kahn (Kahn). All parties to this action were directors, officers and shareholders of Togs, Inc. Benjamin Rosenbloom (Rosenbloom), Charles Ellerin (Ellerin), Adolph Farber (Farber) and William Chanoff (Chanoff), hereinafter collectively the "Plaintiffs," were guarantors. The defendant-indemnitor is Alfred W. Feiler (Feiler). Plaintiffs seem principally to have been investors in the business. Feiler had for many years been engaged in the button business in New York City and was brought into the group primarily because of his expertise. Day-to-day management was in the hands of Kahn, as president, and of an executive vice president. In December 1972 Togs, Inc. was planning a nationwide marketing of its product and on "going public." Financing of this expansion, prior to receipt of the anticipated new equity capital, was by borrowing. Togs, Inc. turned to Maryland National Bank, where it had one or more loans outstanding, for an additional line of credit of $250,000.

By a promissory note dated December 18, 1972 Togs, Inc. promised to pay to the order of Maryland National Bank $250,000 six months after that date with interest at 71/2% per annum. The note was prepared to have "PAYMENT GUARANTEED" by Rosenbloom, Kahn, Ellerin, Farber, Feiler and Chanoff. Rosenbloom signed as guarantor on December 18 and effected a $50,000 advance to Togs, Inc. that day. The next day, at a meeting of the board of directors, the note was presented for the signatures of the balance of the directors, as guarantors. When Feiler was unwilling to sign, the other directors were unwilling to go on, or remain on, the note, absent the signatures of all. The trial court found that there then ensued a conversation between Rosenbloom, Farber and Feiler in which "an agreement was reached whereby (Feiler) was not required to sign as a guarantor, but would still accept his responsibility for a pro rata one-sixth share of the loan payable to the five signatory guarantors who would be required to pay in the event of default by the corporation." The other directors signed as guarantors on the note. ¹ At that meeting Feiler was elected chairman of the executive committee of the board of directors.

The next day Feiler wrote to Farber the following letter.

I want to confirm to you that I accept my share of the last note in the amount of $250,000.00 signed by you and (Rosenbloom) with the Maryland Bank.

It is my understanding that my share will be one sixth of the total amount.

This Note is to be repaid to the bank from proceeds of the public offering and this authorization, therefore, will be voided at that time.

I would also like to make the point that my share of the financial responsibility would automatically be considered as void if for any reason there might be a change in the executive committee as established in yesterday's meeting of the Board of Directors.

However, based upon an admission by Feiler in his deposition, which was placed in evidence, the trial court further found that "at the time (Feiler) orally promised the plaintiffs to be partially responsible for the loan guarantee, which promise induced the plaintiffs to become guarantors, no condition or qualification of liability was mentioned."

The $250,000 loan was not paid by the due date of June 18, 1973. It was extended at a floating rate of interest which at all relevant times exceeded 71/2%. A public offering never came to fruition and Togs, Inc. invoked Chapter XI of the Federal Bankruptcy Act. The debt was gradually paid down by the Plaintiffs by partial payments of principal, with interest on the declining balance, and was extinguished on June 17, 1977.

The trial court determined that Feiler was liable to the Plaintiffs under the oral indemnity contract for one-sixth of $250,000 at 71/2% interest, that "(s) uch rate of interest shall be calculated as extending from December 19, 1972 until June 17, 1977" ² and that "(t)hereafter and until the date of Judgment the interest rate shall be 6 percent." On May 3, 1979 judgment for $41,666.67 "plus interest as above set out" was entered in favor of the Plaintiffs, with costs. Feiler appealed. The Court of Special Appeals, in modifying the judgment, concluded that the one-sixth indemnification was to be applied only to $200,000 of loan advances and calculated interest at 71/2% on Feiler's share only to June 18, 1973.

In the relationships involved in this appeal, Maryland National Bank is the creditor of Togs, Inc. and the obligee of the Plaintiffs' guaranty of payment. Togs, Inc. is the principal whose debt to Maryland National Bank was guaranteed by the Plaintiffs to that bank. Each of the Plaintiffs, by signing "PAYMENT GUARANTEED" on the note, engaged that "if the instrument is not paid when due he will pay it according to its tenor without resort by the holder to any other party." Md.Code (1975), § 3-416(1) of the Commercial Law Article. The liability of a guarantor of payment is indistinguishable from that of a co-maker. Etelson v. Suburban Trust Co., 263 Md. 376, 380, 283 A.2d 408, 411 (1971). In the terminology utilized by L. Simpson, Handbook on the Law of Suretyship (1950), the Plaintiffs are sureties.

The surety's promise is in form a direct and primary promise to pay the debt of another. It is usually, though not necessarily, made jointly or jointly and severally with the principal and for the same consideration, and gives rise to a primary duty. (Id., § 14, at 16.)

The promises of the Plaintiffs to guarantee payment run to Maryland National Bank, as the holder of the instrument. Feiler, the indemnitor, made a promise running to the Plaintiffs to hold them harmless for one-sixth of the loan. ³ Simpson, supra, § 17, at 28 describes the distinction between suretyship (guaranty of payment) and indemnity as follows:

Like the contract of suretyship, the contract of indemnity has as its purpose security of the promisee against loss. The great difference between the two lies in the character of the promisee. In suretyship the promise runs to an obligee or creditor, present or prospective. In indemnity the promise runs to an obligor or debtor present or prospective. In suretyship the promisee has or is about to extend credit to a third person, the principal, and the promise is made to protect the promisee creditor in case the principal fails to perform. In indemnity, the promisee owes or is about to assume an obligation to a third person, the creditor, and the promisor agrees to save him harmless from loss as a result of his assuming that obligation.

With the distinctions between these relationships in mind, we turn to the arguments of the parties.

I

Feiler contends that his oral promise is unenforceable because it is a "special promise to answer for the debt, default or miscarriage of another person," i. e., Togs, Inc. Md.Code (1957, 1978 Repl. Vol.), Art. 39C, § 1(1). The Court of Special Appeals, in an opinion by Chief Judge Gilbert, after a thorough review of the authorities, applied the majority or Corbin rule which places outside of the Statute of Frauds an oral promise of indemnity made to a surety or guarantor. Under that analysis the indemnitor's promise is not to answer for the debt of the principal, either to the creditor, or to the surety on the debtor's obligation to indemnify the surety. Feiler v. Rosenbloom, supra. Feiler does not seek review by this Court of the determination by the intermediate appellate court to apply the Corbin rule as the law of Maryland. Rather, he raises a mixed factual and legal contention that the parties intended their contract to be one of guaranty. He relies on testimony indicating that the Plaintiffs regarded the responsibility of accepting the obligation of guaranteeing the note was that of each of the directors of Togs, Inc. Feiler, however, would not sign the note and thereby promise as a guarantor to the bank. Consequently, a substitute arrangement was effected, as a business matter, under which Feiler promised the Plaintiffs to be responsible for a one-sixth share of the loss or liability which the Plaintiffs might incur by their promises to the bank. It was the function of the trial court to determine the facts. On the facts found by it, that court correctly concluded as a legal matter that Feiler's promise to the Plaintiffs was a contract of indemnity.

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