Shur-Gain Feed Division William Davies Co., Inc. v. Huntsville Production Credit Ass'n

• Decision Date: 11 July 1979
• Docket Number: SHUR-GAIN
• Citation: 372 So.2d 1317
• Parties: FEED DIVISION WILLIAM DAVIES CO., INC. v. HUNTSVILLE PRODUCTION CREDIT ASSOCIATION. Civ. 1779.
• Court: Alabama Court of Civil Appeals

Page 1317

372 So.2d 1317

SHUR-GAIN FEED DIVISION WILLIAM DAVIES CO., INC. v. HUNTSVILLE PRODUCTION CREDIT ASSOCIATION.

Civ. 1779.

Court of Civil Appeals of Alabama.

July 11, 1979.

James R. Knight, Cullman, for appellant.

B. Don Hale of Hale & Williams, Cullman, for appellee.

HOLMES, Judge.

This is an action on a contract.

The plaintiff sued defendant on a contract of guaranty. After an Ore tenus hearing, the trial court entered judgment for the plaintiff in the amount of $4,500. Plaintiff appeals.

The dispositive issue on appeal is whether the trial court erred in determining that defendant was not plaintiff's guarantor. We hold that it did and reverse.

The record reveals the following: Plaintiff is in the business of manufacturing and selling chicken feed. The defendant is a financial institution which makes agricultural loans to farmers.

In 1974, defendant became a creditor of one Douglas M. Smith, an individual who owned and operated a chicken farm. Smith's income was derived from the sale of eggs.

In February, 1976, Smith, although in serious financial difficulty with defendant, applied for and received an additional loan of $166,168 from defendant. The loan was to finance an expanded hen laying operation of 70,000 birds. Defendant took a security interest in Smith's birds to secure the loan. In addition, and although it does not do so in the ordinary course of business, defendant took active control and management of Smith's daily operations in order to protect its interest. Defendant was to collect all of Smith's receivables and disburse these funds jointly to Smith and Smith's creditors.

Plaintiff became interested in supplying feed to Smith shortly after defendant's agreement to finance the operation, but prior to Smith's receipt of his new birds. Plaintiff, however, determined that Smith was a poor credit risk and accordingly, on March 9, 1976, requested that defendant guarantee payment of Smith's feed bills in the event he defaulted.

Defendant gave plaintiff the following document in response to this request:

TO WHOM IT MAY CONCERN: This is to certify that the feed will be paid from the proceeds of the egg check and the feed check will be made joint to Douglas M. Smith and who he purchases feed from.

/s/ Jack Dye

/s/ Jack Dye

/s/ Cullman County Manager

Plaintiff commenced delivering feed to Smith in reliance on this document.

Several days later, the parties exchanged letters in which defendant agreed that feed bills would be paid prior to any reduction of Smith's indebtedness to defendant. As to this, the defendant wrote plaintiff:

The Huntsville Production Credit Association will have complete control of the operation. All egg checks will be made joint to Mr. Smith and HPCA. The feed and grower costs will be paid by joint check and all over will be applied to Mr. Smith's loan.

The record further reveals that in April, 1976, plaintiff became concerned that in the event Smith's receivables, i. e., "proceeds from the egg checks," were insufficient to pay the feed bills, it might not collect its debt. Plaintiff, therefore, sought a promise from defendant that it would unconditionally guarantee the payment of Smith's debt. The defendant, however, replied:

After hens get into production the sale of eggs should pay all expenses of feed and grower costs, etc., plus pay some on Mr. Smith's loan. At any time they fail to pay costs plus some on his loan we plan to sell the hens. We don't plan to have a $10,000 feed bill or even a $10 feed bill. . . .

Sincerely,

Jack Dye

County Manager

(Emphasis supplied.)

Thereafter, plaintiff furnished feed to Smith until defendant foreclosed upon the operation in February, 1977.

The record reveals that during this period, defendant actively participated in Smith's operation, collecting and disbursing his receivables. Although Smith's maximum indebtedness to plaintiff reached approximately $70,000, defendant satisfied the debt and brought the account current in late December, 1976. During this time, defendant collected approximately $31,000 of Smith's receivables over and above the amount of plaintiff's feed bills.

Notwithstanding the fact that the account was current in December, 1976, defendant was apparently dissatisfied with the rate at which Smith was reducing the note. Accordingly, defendant applied Smith's January earnings of approximately $16,700 to reduce their note and failed to pay plaintiff's $28,700 feed bill. After four weeks of appropriating these receivables for its own benefit, defendant foreclosed upon Smith.

Upon foreclosure, defendant took possession of Smith's assets including the 70,000 chickens and some $4,500 of plaintiff's feed which was on Smith's premises. When plaintiff sought to collect its debt from Smith, Smith petitioned for bankruptcy and the debt was discharged. Plaintiff then brought suit against defendant as Smith's guarantor. Upon the trial court's determination that defendant was not a guarantor, plaintiff appealed.

On appeal, plaintiff initially contends that the defendant, as guarantor, is liable to plaintiff in the amount of Smith's unpaid debt, I. e., approximately $28,700. Specifically, plaintiff maintains that, in its management of Smith's operation from March, 1976, to February, 1977, defendant collected some $47,700 in proceeds (approximately $16,700 of which were Smith's January earnings) which defendant appropriated to reduce Smith's note, and these should be applied to pay plaintiff's January feed bill. In essence, plaintiff contends defendant absolutely guaranteed the payment of Smith's debt.

While we do not agree that defendant absolutely guaranteed the payment of Smith's debt, we find that the learned and distinguished trial judge erred in not determining that the defendant bound itself under a conditional guaranty. By virtue of the terms of said agreement and the surrounding circumstances as indicated, defendant is liable to plaintiff for the extent of Smith's January Earnings which it appropriated to reduce Smith's note After the account was paid current in December, 1976.

At the outset, we set forth the well settled principles of the law of guaranty which are applicable to the instant controversy.

An absolute guaranty is an unconditional undertaking by the guarantor to pay a debt at maturity if the principal does not. Huckaby v. McConnon & Co., 213 Ala. 631, 105 So. 886 (1925). Under such a guaranty, a creditor is under no obligation to pursue its remedy against the principal as a prerequisite to its right to recover from the guarantor. Ehl v. J. R. Watkins Medical Co., 216 Ala. 69, 112 So. 426 (1927).

A conditional guaranty is one which is not immediately enforceable against the guarantor upon default of the principal but one in which the creditor must take some action in order that liability arise. Russell v. Garrett, 204 Ala. 98, 85 So. 420 (1920). In a conditional guaranty, such as a guaranty of collection, the guarantor agrees to pay a debt only if the claim is not, after exercise of every reasonable effort on the part of the creditor, collectable from the principal. Walker v. T. & G. Forbes, 25 Ala. 139 (1854); Grannis & Co. v. Miller & Wilkins, 1 Ala. 471 (1840).

A special guaranty is a guaranty of a debt to one or more named persons, or persons necessarily embraced in a described class of persons. See, e. g., American Nat. Bank & Trust Co. v. Banco Nacional De Nicaragua, 231 Ala. 614, 166 So. 8 (1936).

A continuing guaranty contemplates a series of future transactions. It is not limited in time or amount and is operative until revoked. See Whitfield v. Birmingham Trust & Savings Co., 244 Ala. 526, 14 So.2d 137 (1943). Where the agreement contains no express limitation as to time or amount, it is encumbent on the guarantor to guard against abuse of his confidence and timely revoke its operation. Cahuzac & Co. v. Samini, 29 Ala. 288 (1856).

Contracts of guaranty must be supported by consideration. However, where such an agreement is made prior to or contemporaneous with the creditor's contract with the principal, and both agreements are part of the same transaction, consideration moving to the guarantor's principal is sufficient consideration to support the contract of guaranty as well. See, e. g., Scharnagel v. Furst, 215 Ala. 528, 112...