FDIC v. Hopping Brook Trust

• Court: Court of Appeals for the First Circuit
• Decided: July 7, 1997
• Docket: 97-1113
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT

                                ____________________


       No. 97-1113


                    FEDERAL DEPOSIT INSURANCE CORPORATION, ETC.,


                                Plaintiff, Appellee,


                                         v.


                            HOPPING BROOK TRUST, ET AL.,


                               Defendants, Appellants.


                                ____________________


                    APPEAL FROM THE UNITED STATES DISTRICT COURT


                          FOR THE DISTRICT OF MASSACHUSETTS


                 [Hon. George A. O'Toole, Jr., U.S. District Judge]


                                ____________________


                                       Before


                               Torruella, Chief Judge,


                         Campbell, Senior Circuit Judge, and


                                Stahl, Circuit Judge.


                                ____________________


            Christopher M. Perry,with whom Brendan J. Perry, Terrance P.

       Perry and Brendan J. Perry & Associates were on brief for appellants.

            Jaclyn C. Taner, with whom Ann S. DuRoss, Assistant General

       Counsel, and Colleen B. Bombardier, Senior Counsel, Federal Deposit

       Insurance Corporation, were on brief for appellee.


____________________


                                    July 3, 1997

                                ____________________


1



Per  Curiam.    This  case  concerns  the  personal


            guaranties 
                      by 
                         James 
                              W. 
                                 Flett and John J. Arno of a loan made to


            Hopping Brook  Trust by the  Home National  Bank of  Milford,


            Massachusetts
                        .  The facts of the case are clearly set forth in


            the 
               district 
                        court's opinion, F.D.I.C. v. Hopping Brook Trust,


            941 F.  Supp. 256 (D.  Mass. 1996).   Because we believe  the


            district  court analyzed  the appealed  issues correctly,  we


            affirm on the basis of the district court's opinion.  We  add


            only a few paragraphs for clarification.


                      Flett and Arno premise their contention that  their


            obligations  under the  guaranties were  discharged on  three


            arguments.  


                      First, they assert that Mass. Gen. Laws ch. 244,  S


            17B  required the F.D.I.C.  to notify them  of its intent  to


            foreclose the mortgage.1  The Massachusetts courts have  held


            that 
                S 
                  17B 
                     does 
                          not 
                              require the notification of guarantors, see


            Senior Corp. v. Perine, 452 N.E.2d 1160, 1161 (Mass. App. Ct.


            1983). 
                   
                   Flett and Arno argue, nonetheless, that S 17B required


            notifying 
                     them 
                         because, 
                                  despite the use of the term "guarantor"


            in the agreements, they are not really guarantors but primary


            obligors.  They point to language in the guaranties providing


1.  Mass. Gen. Laws c. 244, S 17B states, in relevant part,

            "No action for a deficiency shall be brought . . . by the

            holder of a mortgage note or other obligation secured by

            mortgage of real estate after a foreclosure sale by him

            . . . unless a notice in writing of the mortgagee's intention

            to foreclose the mortgage has been mailed . . . to the

            defendant sought to be charged with the deficiency . . . ."  


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for  "primary, direct  and  immediate"  liability,  and  cite


            Chestnut Manor, Inc.  v. Abraham, 452 N.E.2d 258, 259  (Mass.


            App. Ct. 1983),  for the proposition that guarantors who  are


            directly  and  unconditionally  liable  are  really   primary


            obligors. 


                      Flett's and Arno's  reliance on Chestnut Manor,  an


            intermediate appellate decision not involving the application


            of 
              S 
                17B, 
                     is 
                       misplaced. 
                                   
                                   While the short exposition in Chestnut


            Manor
                 
                 leaves 
                        it unclear why the "guarantors" in that case were


            held to be primary obligors, an earlier Massachusetts Supreme


            Judicial Court  case cited in  Chestnut Manor indicates  that


            Flett and Arno were,  in any event, genuine guarantors.   See


            Charlestown 
                       Five Cents Sav. Bank v. Wolf, 36 N.E.2d 390 (Mass.


            1941) (superseded by statute on a separate issue).


                      In Wolf, the  Massachusetts Supreme Judicial  Court


            stated:


                      The intention of  the parties  as to  the

                      character of the liability assumed by the

                      defendant[] . .  . is  to be  ascertained

                      from  a  fair  construction  of  all  the

                      language appearing in the note and in the

                      [guaranty], according to the usual  rules

                      of interpretation,  in the  light of  the

                      subject  matter involved  and  by  giving

                      appropriate 
                                 effect to all the words in the

                      note and in the [guaranty] where that  is

                      reasonably practicable.


            Wolf, 36 N.E.2d at 391.  


                      The 
                         state's 
                                 highest court went on to reason that the


            use of the term "guaranty" and the inclusion of certain types


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of waivers  in the  agreement would  only make  sense if  the


            agreement was in fact a guaranty.  The Supreme Judicial Court


            wrote:


                      The  word "guarantee"  appearing  in  the

                      memorandum suggests, not a primary, but a

                      collateral  undertaking  .  .  .  .   The

                      phrases, "waiving demand and notice", and

                      "No extension  or indulgence  or  partial

                      release shall prevent my remaining  fully

                      liable",  are  superfluous  if,  as   the

                      plaintiff contends, the parties  intended

                      that 
                          the 
                              defendant[] . . . should become a

                      comaker of the note.  A demand or  notice

                      is not necessary in order to hold a party

                      who is primarily liable  on a note and  a

                      comaker of a note would not be discharged

                      by any  indulgence or  extension of  time

                      granted by the payee to another  comaker.

                      But  the  phrases  above  quoted   would,

                      however, have  real significance  if  the

                      obligation of the defendant[] . . .   was

                      that of a guarantor.


Id. at 391-92 (citations omitted).


                      Similarly,  in this  case, the  agreement was  titled


          "Guaranty," 
                     contained 
                              an 
                                 explicit waiver of "presentment and demand


          for payment  and  protest of  non-payment"  (paragraph 4  of  the


          guaranties), and stated that  the guarantors would remain  liable


          even 
              if 
                 the 
                    lender 
                           "waive[d] compliance with, or any default under,


          or 
            grant[ed] 
                      any 
                         other 
                               indulgences with respect to, the Note or any


          agreement or instrument  securing the Note," (paragraph 2 of  the


          guaranties).  These waivers would have been superfluous if  Flett


          and Arno were primary obligors  rather than guarantors.  Id.   We


          agree with  the district court that  Flett and Arno were  genuine


          guarantors.  See Hopping Brook Trust, 941 F.Supp. at 261 n.1.


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                                          4



Flett's and Arno's second argument, not discussed  by


          the district court, is that they are discharged under a provision


          of Massachusetts' version of  the Uniform Commercial Code,  Mass.


          Gen. Laws ch. 106, S 3-606.2  The short answer to this contention


          is that  Article 3  of the U.C.C.  does not  apply to  guaranties


          because 
                 guaranties 
                           are 
                               not negotiable instruments.  See Pemstein v.


          Stimpson, 630 N.E.2d 608, 613 (Mass. App. Ct. 1994).  Flett's and


          Arno's attempts to avoid this rule  of law by claiming not to  be


          guarantors but primary obligors  fails for the reasons  discussed


          above.


                      Flett's and Arno's third and final contention is that


          they 
              are 
                 discharged 
                            under the common law because of an amendment to


          the 
             Construction 
                         Loan 
                              Agreement effected some three weeks after the


          other agreements were signed.  The amendment provided,  "Borrower


          shall 
               pay 
                   to 
                     Lender, 
                             on 
                                a partial release basis, the sum of $40,000


2.  Mass. Gen. Laws ch. 106, S 3-606 states, in relevant

            part:


               (1) The holder discharges any party to the instrument

               to the extent that without such party's consent the

               holder

                    (a) without express reservation of rights

                    releases or agrees not to sue any person

                    against whom the party has to the knowledge

                    of the holder a right of recourse or agrees

                    to suspend the right to enforce against such

                    person the instrument or collateral or

                    otherwise discharges such person, except that

                    failure or delay in effecting any required

                    presentment, protest or notice of dishonor

                    with respect to any such person does not

                    discharge any party as to whom presentment,

                    protest or notice of dishonor is effective or

                    unnecessary . . . .


                                         -5-
                                          5



per acre  on the  sale or transfer  by Borrower  of any  property


          covered under and secured by the Mortgage."  Flett and Arno argue


          that  this amendment  materially  and prejudicially  altered  the


          underlying 
                    loan 
                        which 
                              they had guarantied, resulting in a discharge


          under the doctrine of Warren  v. Lyons, 25 N.E. 721 (Mass.  1890)


          (holding that a  guarantor's obligations may  be discharged by  a


          prejudicial change  to  the  guarantied agreement  to  which  the


          guarantor did not consent).


                      To  the district  court's  clear explanation  of  its


          rejection of this argument we add only that language in paragraph


          2  of the  guaranties  expressly waived  any  claim of  legal  or


          equitable discharge.  The guaranties stated, "The obligations  of


          guarantor 
                   under this guaranty shall be unconditional, irrespective


          of the genuineness, validity, regularity or enforceability of the


          Note or  any  other  [sic] circumstances  which  might  otherwise


          constitute  a  legal  or  equitable  discharge  of  a  surety  or


          guarantor." 
                      
                      Such 
                          broad 
                                waivers are enforceable under Massachusetts


          law. 
               
               See
                   
                   Sha
                      wmut Bank, N.A. v. Wayman, 606 N.E.2d 925, 927 (Mass.


          App. Ct. 1993).


                      Affirmed.


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