Southwest Sav. and Loan Ass'n v. SunAmp Systems, Inc., 1

Citation172 Ariz. 553,838 P.2d 1314
Decision Date26 March 1992
Docket NumberCA-CV,No. 1,1
PartiesSOUTHWEST SAVINGS AND LOAN ASSOCIATION, an Arizona corporation, Plaintiff, Counter-defendant-Appellant, v. SUNAMP SYSTEMS, INC.; Harvey R. McElhanon; Lloyd D. Seese and Donna G. Seese, his wife; Darrel L. Wilson and Sharon E. Wilson, his wife; Lane S. Garrett and Ursula E. Garrett, his wife, Defendants, Counter-claimants-Appellees. 88-270.
CourtCourt of Appeals of Arizona

FIDEL, Judge.

We consider in this case whether the evidence at trial was sufficient to support a jury's conclusion that a lender froze and later terminated its borrower's line of credit in bad faith. Finding the evidence insufficient, we reverse and instruct the trial court to enter judgment in the lender's favor upon remand.


SunAmp Systems, Inc. was founded in June 1983 to manufacture and sell photovoltaic systems, which generate voltage from sunlight. SunAmp established a dealer network and was chosen by Mobil Solar Energy Corporation and Kyocera International, Inc., to distribute their photovoltaic modules. In the spring of 1984, SunAmp sought financing from Southwest Savings and Loan Association to expand its operations.

Pat Richardson, a Southwest vice president and commercial loan officer, met with Lane Garrett, SunAmp's president, and Lloyd Seese, a SunAmp director, to arrange a line of credit. Richardson explained that, as a start-up company unlikely to quickly turn a profit, SunAmp would need to supply personal guarantees from its investors. Garrett and Seese identified Harvey McElhanon as the company's major investor. After reviewing McElhanon's financial statement, which showed a six million dollar net worth, Richardson described him as a "heavy hitter." Although Garrett, Seese, and Darrel Wilson, a SunAmp manager, also agreed to guarantee a portion of the credit line, Richardson indicated that the McElhanon guarantee would be essential to the loan.

In June of 1984, Garrett, acting for SunAmp, executed a loan agreement and revolving credit note, both prepared by Southwest. When Ursula Garrett, SunAmp's secretary-treasurer, delivered these and other loan documents, Richardson looked them over and commented that everything seemed in order. Among the documents was the McElhanon guarantee; although the form included a space for Mrs. McElhanon's signature, it was signed by Harvey McElhanon alone.

Harvey McElhanon had met earlier with Richardson to discuss his guarantee. The participants describe that meeting differently. McElhanon testified that he informed Richardson from the outset that he would not ask his wife to sign. According to McElhanon, Richardson stated, "I don't know if this will fly without your wife's signature," and McElhanon responded that Richardson should not make the loan if that were so. Richardson testified, however, that McElhanon never told her that his wife would not sign the guarantee. She testified that Southwest expected spouses to sign guarantees, that it was against Southwest's policy to accept a guarantee without a spouse's signature, and that she did not think she would have funded the loan had she known that Mrs. McElhanon would not sign.

Under the loan agreement, Southwest took a security interest in SunAmp's accounts receivable, inventory, equipment, and other fixed assets as collateral for the credit line. Funds were to be advanced based on the value of this collateral, called the "borrowing base," and the agreement set forth a formula for determining its value. 1

On June 13, 1984, after closing the transaction, Southwest advanced SunAmp $43,000 in cash and issued letters of credit in SunAmp's favor to two of its suppliers, one for $40,000 to Mobil Solar Energy Corp. and the other for $80,000 to Kyocera International. By July 20, 1984, cash advances had risen to $87,012.

On July 20, 1984, Richardson telephoned SunAmp to discuss a problem with the credit line. Ursula Garrett took the following message: "Pat Richardson of Southwest Savings.... Got advice from Lawyer. Harvey [McElhanon's] guarantee not legal because wife didn't sign. Can't adv[ance] any more money till we straighten this out."

Upon discovering the absence of Mrs. McElhanon's signature, Richardson had consulted house counsel and had learned that the assets listed on McElhanon's financial statement were community property that his lone signature could not bind. Consequently, when Lane Garrett returned her call, Richardson explained what she had discovered and told him that she was forced to freeze the credit line. Neither in that phone call nor in a similar call to Seese did Richardson request updated SunAmp financial statements; nor did she mention that SunAmp had exceeded its borrowing base. Richardson also contacted McElhanon, who refused to seek his wife's signature, stating that if Southwest would not accept his signature alone, he would have nothing more to do with the loan or guarantee. This conversation left Richardson "panicked" about the security of Southwest's loan and concerned for SunAmp's other guarantors, whose exposure would be magnified by an invalid McElhanon guarantee.

Richardson informed her supervisor, Don Dixon, that she could not determine whether SunAmp had sufficient assets to collateralize credit already outstanding on the line. SunAmp had provided no financial information since its statement of March 31, 1984, reflecting its condition before the credit line commenced. The parties' loan agreement required SunAmp to file monthly financial statements no later than thirty days from the end of each preceding month. 2 However, Southwest had approved the loan on June 4 without a financial statement for the month of April and had not specifically requested statements for April or May prior to the crisis of July 20.

Using the March statement, Richardson calculated SunAmp's borrowing base to be $63,679, insufficient under the terms of the agreement to support the $87,000 in cash already advanced and the $120,000 already committed in letters of credit to SunAmp suppliers. Yet on June 13 Southwest had issued the letters of credit and advanced $43,000 in cash; thus, Southwest had permitted SunAmp to exceed its borrowing base at the loan's start.

From the outset the parties had regarded the McElhanon guarantee as critical to Southwest's extension of a line of credit to SunAmp. Richardson acknowledged at trial, however, that the written loan agreement nowhere expressly required a binding guarantee from the McElhanon marital community. Richardson also acknowledged seeking and finding an alternative contractual basis to freeze the credit line: SunAmp's failure to provide financial statements for April and May. 3 Dixon testified that Richardson told him she would freeze the line in an effort to get Mrs. McElhanon to sign the guarantee.

Within several days after initiating the freeze, Richardson began seeking accurate financial reports from SunAmp to determine whether the company was doing well enough to permit a thaw. Richardson went to SunAmp's offices, reviewed its financial records, and, through August and September, communicated with Garrett weekly about the state of SunAmp's sales and receivables. Although SunAmp provided financial data, Garrett told Richardson it was inaccurate. SunAmp was hampered in providing accurate data because it was undergoing an independent audit and also undertaking an in-house computer conversion. Richardson could not rely on the data she was given.

Richardson met at least once with Garrett and Seese to discuss ways to resolve the credit freeze, and Richardson proposed two such ways in a letter to Seese on August 30. First, she proposed that Southwest loan $300,000 directly to the four guarantors, who would pay off SunAmp's outstanding balance and loan the remainder to SunAmp. "That," she wrote, "would eliminate the need for Mrs. McIlhannon's [sic] signature and would position Harvey to accept his responsibility on the credit." Alternatively, she proposed, one or more of the guarantors might "provide sufficient collateral to support the loan."

On September 6, 1984, still awaiting financial data, Richardson directed Garrett to charge no more orders to the letter of credit to Kyocera. Then, on September 19 or 20, SunAmp provided a draft of the outside auditor's financial statement reflecting SunAmp's condition as of fiscal year end June 30, 1984. Richardson calculated the borrowing base from this statement as approximately $90,000, higher than in March, but still inadequate to cover cash advances and letter of credit commitments on the credit line. Moreover, the statement fell below projections in two respects. First, when the parties entered their agreement, SunAmp had projected that it would end fiscal 1984 with negative stockholder's equity of $8,523. The statement, however, showed negative equity of $13,733 despite an intervening $50,000 equity contribution by McElhanon. This contribution did not provide new capital; McElhanon exchanged $50,000 in debt for $50,000 in stock. Yet the company's debt-equity ratio, which should have improved, instead had fallen below projection. Second, SunAmp had projected accumulated fiscal year end losses of $283,633. Its actual losses were $338,843, worse by more than 19%.

On September 20, 1984, after receiving the draft financial statement, Richardson wrote the guarantors, cited material deterioration in SunAmp's financial condition, and asked the guarantors to establish an immediate plan to repay the loan.

Shortly after the credit-line freeze, on July 25, 1984, Southwest had advanced SunAmp $1,098.08...

To continue reading

Request your trial
60 cases
  • Winsor v. Glasswerks Phx, LLC, 1 CA-CV 01-0395.
    • United States
    • Court of Appeals of Arizona
    • 4 Febrero 2003
    ...No. 395 Pension Trust Fund, 201 Ariz. 474, 492, ¶ 66, 38 P.3d 12, 30 (2002) (quoting Southwest Sav. & Loan Ass'n. v. SunAmp Sys. Inc., 172 Ariz. 553, 558, 838 P.2d 1314, 1319 (App.1992)). Thus, this too is a factor in our determination that this matter is best left to the legislature, givin......
  • Snyder v. HSBC Bank, USA, N.A., CV–12–0016–PHX–LOA.
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. District of Arizona
    • 26 Diciembre 2012
    ...Pines Homeowners Ass'n, 216 Ariz. 482, 488–89, 167 P.3d 1277, 1283–84 (Az.Ct.App.2007). In Sw. Sav. & Loan Ass'n v. SunAmp Sys., Inc., 172 Ariz. 553, 558, 838 P.2d 1314, 1319 (Az.Ct.App.1992), the Arizona court clarified that “the duty to act in good faith does not alter the specific obliga......
  • Wells Fargo Bank v. Arizona Laborers, CV-00-0062-PR.
    • United States
    • Supreme Court of Arizona
    • 18 Enero 2002
    ...power or discretion under a contract can exercise that power or discretion in a way that breaches the implied covenant of good faith. 172 Ariz. 553, 558, 838 P.2d 1314, 1319 (App.1992). In answering this question, the Sunamp court favorably cited a California decision, stating that "the dut......
  • Olympus Hills Shopping Center, Ltd. v. Smith's Food & Drug Centers, Inc., 930531-CA
    • United States
    • Court of Appeals of Utah
    • 29 Diciembre 1994, the law will impair the predictability that an orderly commerce requires." Southwest Sav. and Loan Ass'n v. Sunamp Sys., Inc., 172 Ariz. 553, 838 P.2d 1314, 1319 (Ct.App.Div. 1 1992). However, contracting parties, hard as they may try, cannot reduce every understanding to a stated te......
  • Request a trial to view additional results
1 books & journal articles
  • Good Faith Performance
    • United States
    • Iowa Law Review No. 98-2, January 2013
    • 1 Enero 2013
    ...Three D Dep’ts, Inc. v. K Mart Corp., 670 F. Supp. 1404, 1408 n.4 (N.D. Ill. 1987) (same); Sw. Sav. & Loan Ass’n v. SunAmp Sys., Inc., 838 P.2d 1314, 1319–20 (Ariz. Ct. App. 1992) (same); Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc., 826 P.2d 710, 726 (Cal. 1992) (“The covenant......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT