Warrior Constructors v. Small Bus. Inv. Co.

• Decision Date: 17 March 1976
• Docket Number: No. 1244,1244
• Citation: 536 S.W.2d 382
• Parties: WARRIOR CONSTRUCTORS, INC., Appellant, v. The SMALL BUSINESS INVESTMENT COMPANY OF HOUSTON, Appellee. (14th Dist.)
• Court: Texas Court of Appeals

Page 382

536 S.W.2d 382

WARRIOR CONSTRUCTORS, INC., Appellant, v. The SMALL BUSINESS INVESTMENT COMPANY OF HOUSTON, Appellee.

No. 1244.

Court of Civil Appeals of Texas,

Houston (14th Dist.).

March 17, 1976.

Rehearing granted in part and Rehearing Denied in part with

opinion, April 14,

1976.

William M. Coats, Wilson & Guest, Houston, for appellant.

Robert L. Hines, Houston, for appellee.

CURTISS BROWN, Chief Justice.

This is a suit by a creditor against a partial guarantor to collect on a note on which the debtor has defaulted.

The Small Business Investment Company of Houston (SBIC or appellee) filed suit against Warrior Constructors, Inc. (Warrior or appellant) to recover the sum of $35,000, which was the remaining unpaid principal on a $60,000 note that Warrior had guaranteed to the extent of $50,000. After a non-jury trial, the trial court rendered judgment that SBIC recover $30,000 in principal, plus interest thereon from the date of the acceleration of the note, along with attorney's fees and the costs of a previous suit by SBIC against the debtor. Warrior has perfected this appeal.

Most of the facts relevant to this appeal have been stipulated by the parties and are set out in their 'Agreed Statement of the Case.' On April 14, 1966, the corporate predecessor of National Electric Corporation (National) borrowed $60,000 from SBIC and executed a promissory note in that amount payable to SBIC. The note called for interest at 8% To be paid quarterly as it accrued, and for the principal to be paid in twenty-four consecutive quarterly payments of $2,500 each. The first principal payment was due on April 1, 1967. The note also contained acceleration provisions in the event of default, calling for 10% Interest on the unpaid balance and attorney's fees in the amount of 10% Of the principal and interest.

Also on April 14, 1966, Warrior executed a written Guaranty Agreement in which it unconditionally guaranteed the prompt payment of the aforementioned promissory note 'to the extent of $50,000.00 principal, plus all accrued interest on the sum of $50,000.00 principal, and all costs and expenses, including attorney's fees and Court costs, for which the Borrower may be or become liable, and which may arise in the enforcement of this guaranty.'

The principal payments due April 1, 1967 and July 1, 1967 were paid by a Warrior check dated July 21, 1967. This $5,000 check was made payable jointly to National and SBIC, was endorsed without restriction by National, and was forwarded by letter dated July 21, 1967, along with a $2,400 interest payment, from Warrior to SBIC. The cover letter, on Warrior letterhead and signed by Warrior's president, stated:

'Gentlemen:

Enclosed please find two checks; one check, No. 1544 is in the amount of $5,000.00 and the other check, No. 1545 is in the amount of $2,400.00. Both checks are drawn on behalf of National Electric Corporation and made payable jointly to National Electric Corporation and your company.

The subject checks are being forwarded to you to be applied against that certain loan, made by your company to National Electric Corporation, which loan was in the amount of $60,000.00.

It is understood by Warrior Constructors, Inc. that the check for $2,400.00 will be applied against interest that has accrued on the subject loan and that the check for $5,000.00 will be applied to reduce the principal amount of the loan, and the following terms and conditions are imposed as conditions precedent to your negotiation and/or transfer of the checks:

The $2,400.00 will be applied against accrued interest, as required. The $5,000.00 will be applied against the principal amount of the loan and will reduce Warrior Constructors, Inc.'s liability, if any, as a surety by that same amount, i.e. by $5,000.00.

If the above stated terms and conditions are acceptable to your Company, negotiate and/or transfer the checks at your convenience. If you, for any reason, do not wish to accept the terms and conditions as set out above, then return the subject checks to this office, to the attention of the undersigned.

Yours very truly,

WARRIOR CONSTRUCTORS, INC.'

By a letter dated July 28, 1967, SBIC advised Warrior that it would accept the July 21, 1967 checks subject to the conditions set out in the cover letter, but that SBIC

'will not be bound by these conditions with regard to any subsequent payments of principal and/or interest which may become due on the National Electric Corporation obligation. With regard to such future payments, The Small Business Investment Company of Houston reserves the right to require that such payments be made directly by National Electric Corporation. .. .'

Over the next two years an additional $20,000 in principal and $8,800 in interest were paid by checks which were endorsed by, and paid to, SBIC. Every payment (and tender of payment) of principal or interest to SBIC was made in the manner described above; i.e., was made by Warrior check and with Warrior funds, with each check made jointly payable to National and SBIC, with each check endorsed without restriction by National prior to delivery to SBIC, and delivered to SBIC by Warrior with a cover letter on Warrior letterhead signed by a Warrior official identical to the letter set out above except for the amounts of the checks. In this manner Warrior ultimately paid, and SBIC accepted, a total of $25,000 in principal payments and $11,200 in interest payments.

By a letter dated July 30, 1969, National was given notice of SBIC's election to accelerate the entire unpaid balance of principal and interest because of numerous undisputed 'events of default' by National. After acceleration Warrior continued to tender the quarterly payments, each of which was returned by SBIC, until this suit was filed in 1971. SBIC has previously obtained a judgment against National for the principal amount of $35,000, plus interest, attorney's fees, and costs, none of which has been paid by National. SBIC also obtained judgment against the co-guarantor of the note, which has likewise remained unpaid.

Appellant's first point of error asserts that the trial court erred in failing to hold that appellee was obligated to apply the principal payments to the guaranteed portion of the debt. The trial court held that appellee's written acceptance of the conditions upon which the first $5,000 of principal payments were tendered served to reduce appellant's guaranty obligation by that amount. However, the court concluded that '(a)ll other attempts by Warrior to reduce its guaranty obligation to SBIC were unilateral and never accepted by SBIC and did not serve to reduce the guaranty obligations of Warrior either as to principal, interest, attorney's fees or costs.' In so holding the court erred. Warrior's efforts were not unilateral because they involved SBIC's acceptance and use of the funds. SBIC could not accept the benefits and avoid the burdens.

Whether a partial guarantor has the right to direct that a payment it makes on behalf of the debtor be applied to the guaranteed portion of the debt has not been answered in Texas. However, the issue has been addressed by courts in several other jurisdictions. In a few instances, courts have declined to reduce a guarantor's liability even though the funds which were ultimately used to pay off a portion of the debt originated in the guarantor. See Leavenworth Savings & Trust Co. v. Newman, 52 F.2d 813 (W.D.Mo.1931); William Filene's Sons Co. v. Lothrop, 243 Mass. 214, 137 N.E. 255 (1922); Domergue v. Mayer-Israel Co., 161 Miss. 545, 137 So. 486 (1931). However, in each of the above cases not only did the payments to the creditor come directly from the debtor, but there was neither a direction that they be applied to the guaranteed portion of the debt nor any knowledge on the part of the creditor that such was the intention of the guarantor in advancing the funds.

In the instant case the creditor accepted the principal payments knowing that they originated in the guarantor and that it was the guarantor's intention that they be applied to reduce its liability on the guaranty. This is sufficient to require that the payments be applied to the guaranteed portion of the debt. See Ivers & Pond Piano Co. v. Peckham, 29 Wis.2d 364, 139 N.W.2d 57 (1966); Coxe Bros. & Co. v. Milbrath, 116 Wis. 102, 92 N.W. 560 (1902); Bayer v. Lugar, 106 App.Div. 522, 94 N.Y.S. 802 (1905), Aff'd mem., 186 N.Y. 569, 79 N.E. 1100 (1906); Hatch & Brookman v. Kula, 194 Iowa 619,190 N.W. 969 (1922); Cf. Texas Co. v. Schram, 93 S.W.2d 544 (Tex.Civ.App.-Austin 1936, no writ); N. O. Nelson Mfg. Co. v. Wallace, 66 S.W.2d 505 (Tex.Civ.App.-Eastland 1933, writ ref'd). See also 38 C.J.S. Guaranty § 79 (1943); Annot., 57 A.L.R.2d 855 (1958).

Appellant's second and third points of error assert that, irrespective of the preceding issue, the endorsement and negotiation of their checks by appellee constituted an acceptance of the conditions on which they were submitted.

Whether the letters which accompanied the checks that appellant sent to appellee are construed as an offer to modify the existing Guaranty Agreement or as an offer to form a separate agreement, nonetheless each was an offer to create a binding contract. Appellant never owed appellee a duty to make the payments On behalf of National, so the tendered payments represented a sufficient detriment to the offeror to constitute valid consideration for a subsequent agreement between appellant and appellee.

It is universally recognized that a binding contract may be formed by the retention of or exercise of dominion over the thing offered....