United States v. Houff

• Decision Date: 07 February 1962
• Docket Number: Civ. A. No. 527.
• Citation: 202 F. Supp. 471
• Parties: UNITED STATES of America, Plaintiff, v. Louis B. HOUFF, Jr., and C. E. Keefer, Defendants and Third-Party Plaintiffs, v. The C. F. SAUER COMPANY, Third-Party Defendant.
• Court: U.S. District Court — Western District of Virginia

202 F. Supp. 471

UNITED STATES of America, Plaintiff, v. Louis B. HOUFF, Jr., and C. E. Keefer, Defendants and Third-Party Plaintiffs, v. The C. F. SAUER COMPANY, Third-Party Defendant.

Civ. A. No. 527.

United States District Court W. D. Virginia, Lynchburg Division.

February 7, 1962.

Thomas B. Mason, U. S. Atty., Roanoke, Va., for plaintiff.

John L. Abbot, and William L. Wilson, Lynchburg, Va., for defendants.

R. E. Cabell, Jr., Moncure & Cabell, Richmond, Va., for third-party defendant The C. F. Sauer Co.

MICHIE, District Judge.

This suit was instituted by the United States of America to recover from the original defendants, Louis B. Houff, Jr. and C. E. Keefer, now defendants and third-party plaintiffs but hereinafter sometimes called the Guarantors, a balance due on a loan made by the Small Business Administration, hereinafter called S. B. A., to Famous Virginia Foods Corporation, hereinafter called Famous Foods, now bankrupt, and guaranteed by the Guarantors.

The Guarantors were granted leave to make the C. F. Sauer Company, a Virginia corporation, hereinafter called Sauer, a third-party defendant and did so alleging that Sauer had purchased certain stock of Famous Foods and upon its purchase had agreed with the Guarantors to release them or have them released from any liability on the guaranty.

The Guarantors filed an answer in which eleven separate defenses were set forth. Sauer answered the third-party complaint and counterclaimed against the Guarantors for $500,000.00.

Elaborate interrogatories were filed by all parties and answers thereto were filed, including copies of numerous documents, as well as various motions, including motions for summary judgment with supporting affidavits.

The Court heard various motions on October 9, 1961, including the plaintiff's motion for a summary judgment, but that motion was not granted at that time which was before most of the answers to interrogatories and various affidavits which were attached to the subsequent motions for summary judgment had been filed.

Subsequently the plaintiff renewed its motion for a summary judgment and the Guarantors made a motion for summary judgment on the issue between them and the plaintiff.

I.

The Controversy Between the Plaintiff and the Guarantors.

The Court heard argument on the cross-motions for summary judgment on January 19, 1962 and has now decided to grant the motion of the plaintiff for summary judgment.

To give the reasons for this conclusion involves a consideration of all eleven of the Guarantors' defenses as related to the facts as disclosed by the uncontradicted affidavits, answers to interrogatories, etc. I will do so seriatim.

First Defense.

This is one of the defenses most seriously pressed and is to the effect that it was contrary to law for the S. B. A. to accept the defendant's guaranty of the note of Famous Foods.

The Guarantors rely upon the Small Business Act, Title 15 U.S.C.A. § 631 et seq., and particularly the requirement found in 15 U.S.C.A. 636(a) (1) (7) that:

"All loans made under this sub-section shall be of such sound value or so secured as reasonably to assure repayment."

In their memorandum in support of their motion for summary judgment the Guarantors say:

"The authority is limited to making two kinds of `loans': The first, of `such sound value or the second so secured as reasonably to assure repayment.' The language referred to forbids exacting a guaranty. It is not to be supposed that the Government was making this loan with a view to its being paid by other than the borrower. The object is to help the business, and it is contemplated that the business pay the loan and not third persons. If the payment of a loan is guaranteed, it is readily available from any leading institution provided the guarantor is sound, and guaranteeing the payment of a loan would not of itself make it a loan of `sound value' nor `so secured' as to assure its repayment. The debtor would make `repayment'; that is, would `pay back; refund; restore; return.' Black's Law Dictionary, p. 1531. The guarantor pays in discharge of his obligation, not in the sense of returning, restoring or paying back a sum of money received by him but is paying the debt of another."

To answer the last part of the argument first, it seems just a matter of plain English to say that, no matter who pays the money to the S. B. A., the S. B. A. has received "repayment" when this has been done. The main point to the argument seems to be however that "a guaranty" is not "security".

Lawyers get into the habit of using the word security in connection with mortgages, deeds of trust and collateral security of various kinds, and sometimes forget the true meaning of the word. In Ballentine's Law Dictionary (1949 Ed.) at p. 1179 "security" is thus defined:

"That which makes the enforcement or promise more certain than the mere personal obligation of the debtor or promisor, whatever may be his possessions or financial standing. It may be a pledge of property, or an additional personal obligation; but it means more than the mere promise of the debtor with property liable to general execution." (Emphasis supplied.)

And in Black's Law Dictionary (4th Ed.) at p. 1522 the term is defined as follows:

"Protection; assurance; indemnification. The term is usually applied to an obligation, pledge, mortgage, deposit, lien, etc., given by a debtor in order to make sure the payment or performance of his debt, by furnishing the creditor with a resource to be used in case of failure in the principal obligation. The name is also sometimes given to one who becomes surety or guarantor for another." (Emphasis supplied.)

And in Bouv. Law Dict. (8th Ed., 1914, Rawle's Third Revision) Vol. II at p. 3032 appears the following:

"Security. That which renders a matter sure; an instrument which renders certain the performance of a contract. A person who becomes the surety for another, or who engages himself for the performance of another's contract. See Brown v. White, 3 Blackf. (Ind.) 431. Collateral security is security given for the payment of a debt, or the performance of some other act."

In Reconstruction Finance Corp. v. McCormick, 7 Cir., 102 F.2d 305, the Reconstruction Finance Corporation sued to recover on bank stockholders' statutory liability under the then Illinois law from various stockholders of a defunct bank to which the R. F. C. had lent money. The argument was unsuccessfully made for the defense that the R. F. C. had no power to rely upon any such statutory liability under state law, the argument being that such liability was not "such security" as the R. F. C. was authorized to rely on.

The Court was not impressed, saying:

"A loan contemplates the ultimate return of the moneys lent. If not, the advance had better be called a gift. Common practice is to exact security to insure the repayment of loans. Authority to exact and take security is implied from the grant of authority to make a loan. If restrictions upon the power of the corporation to lend or take security for authorized loans are asserted, those limitations must expressly appear. They are not to be implied, for of necessity they are somewhat inconsistent with a grant of power to lend money.

"There are no limitations upon the power of plaintiff to make loans, save one — the loan shall not `be inconsistent with this Act.'

"Express authority to take security instead of being a limitation upon its power to include all forms of security, implied the contrary. The Act provides that the plaintiff may make the loan upon such terms and conditions not inconsistent with this Act `as it may determine.'

"The provision that `all loans made under the foregoing provisions shall be fully and adequately secured' is stressed by defendants, it being insisted that Congress here intended to accomplish two things: (a) to avoid loss because of inadequately secured loans, and (b) to limit the lender to securities commonly termed collateral, such as notes, bonds, mortgage bonds, stocks, etc. It is their position that this section, with the word `secured' so defined, is exclusive.

"We do not so construe this sentence. It was not intended, as we view it, to be a restrictive sentence or a limitation on the power of plaintiff to lend money or to secure its loan. It was an admonition to the officers of the plaintiff to avoid loss, by adequately securing its loans — an admonition which would have profited plaintiff much had it been followed in this instance."

The similar language in the S. B. A. Act must be given a similar construction. I therefore find no merit in the Guarantors first defense.

Second Defense.

The second defense is "that the guaranty sued on was without consideration." Apparently this defense is based on the fact that the date on the instrument of guaranty looks as shown in the following copy thereof:

From this the Guarantors argue that the guaranty was not actually given until July 11th but was subsequently dated back to correspond to the closing date of the transaction. And they argue that if the money was advanced before the guaranty was received the guaranty was without consideration.

The legal premise upon which this argument is based may be questioned. If I promise a bank that I will guarantee my friend's note and the bank proceeds to lend money on the faith of my promise before they get my signed guaranty they may have trouble holding me to my promise under the statute of frauds. (Va.Code, § 11-2(4)). But, after I carry out my promise by delivering the written guaranty it could hardly be contended that the guaranty was made without consideration. The consideration was the advance of money to my friend.

Be that as it may, the question is foreclosed in this case by the uncontradicted evidence of the President of the participating bank that the guaranty, as well as the original note of Famous Foods and the agreement between the bank and Famous Foods were all received by him before...