Federal Deposit Insurance v. Hiatt

872 P.2d 879, 117 N.M. 461

• Court: New Mexico Supreme Court
• Decided: April 6, 1994
• Docket: 20379
• Status: Published

Opinions

■ OPINION

BACA, Justice.

Defendants-Appellants, James A. Hiatt and Laurel Ann Hiatt (the Hiatts), appeal the denial of their motion to set aside a default judgment entered against them. The Hiatts argued to the trial court that the judgment should have been set aside under SCRA 1986, 1-060(B)(4) (Repl.Pamp.1992), because the trial court lacked personal jurisdiction over them when it entered the default judgment, and that, consequently, the judgment was void. On appeal, the Hiatts present a single issue: Whether the trial court had personal jurisdiction over them when it entered the default judgment. We review this case pursuant to SCRA 1986, 12-102(A)(1) (Repl.Pamp.1992), and reverse.

I

This case arose out of two loans made to the Deerfield Development Corporation (Deerfield), a New Mexico corporation, by First National Bank of Lea County (the Bank). Both loans were made pursuant to an agreement, which was executed on June 28, 1982, in Lea County, New Mexico. The loan principal was for $735,000. The agreement was also signed by four guarantors: Thomas and Janet David, who were residents of New Mexico, and the Hiatts, who were residents of California. After the agreement was signed on behalf of the Bank and Deer-field and by the Davids as guarantors on June 28, it was forwarded to California, where it was signed by the Hiatts as guarantors on July 9, 1982. On the same day, the Hiatts also signed a guaranty agreement, which was expressly incorporated by reference into the loan agreement, guaranteeing Deerfield’s payment of loans made pursuant to the loan agreement in an amount not to exceed $735,500. The guaranty agreement recited that the Bank was unwilling to extend credit to Deerfield unless the guaranty was duly executed by the Hiatts. Mr. David, an officer of Deerfield, had requested the Hiatts to guarantee the loan in early 1982. Pursuant to the terms of the loan agreement, Deerfield gave the Bank a promissory note dated June 28, 1982, in the amount of $640,000, due and payable in full, with interest, on June 28, 1983. Contemporaneously with its execution of the promissory note, Deerfield executed and delivered to the Bank a mortgage on real property in Lea County as security for payment of the note. The note indicated that it was also secured by the Davids’ and the Hiatts’ guarantees, as well as by an assignment of a certificate of deposit for $140,000 and an assignment of life insurance on Mr. David’s life.

Some payments were made on the promissory note. On December 16, 1982, the Bank made an additional loan to Deerfield and Deerfield accordingly gave the Bank another promissory note, dated December 16,1982, in the principal amount of $211,000, due and payable on December 16, 1983. The second note did not mention on its face whether it was secured by the Hiatts’ guaranty and the record fails to disclose that the Hiatts guaranteed the second loan. Sometime before February 6, 1984, Deerfield defaulted on both notes. The total amount owing on the first note as of February 6, 1984, was $255,-306.23. The total amount owing on the second note as of the same date was $228,452.50, and the total on both notes was $483,748.73. Although the complaint ultimately filed by the Bank, which by then had changed its name to First City National Bank (First City), alleged that the second loan was made pursuant to the terms of the June 28, 1982, loan agreement, we do not assume this allegation to be true because we find that the Hiatts are not subject to personal jurisdiction in New Mexico courts, and, therefore, will not further discuss the second loan.

On February 20, 1984, First City¹ filed a complaint in the District Court of Lea County, New Mexico, naming Deerfield, as well as various parties who had signed guarantees on behalf of Deerfield, or who had an interest of record in the subject real property, as defendants. On March 19, 1984, the Hiatts were personally served in California with the summons and complaint. The Hiatts did not file an answer or any other responsive pleading and did not enter an appearance. On September 19, 1986, the ease proceeded to judgment against all parties. On October 14, 1988, a deficiency judgment was entered in favor of the FDIC and against the Hiatts in the sum of $580,692.82.

On February 12, 1991, the Hiatts filed a motion to set aside the judgment under SCRA 1986, 1-060(B). The Hiatts argued in their motion that the judgment was void because the court lacked personal jurisdiction over them.

The trial court in its findings of fact and conclusions of law determined that the Hiatts had been personally served in California with a summons and a copy of the complaint on March 19, 1984. The trial court found that the Hiatts neither pleaded nor otherwise defended in the case until February 12, 1991, when they filed their motion to set aside the default judgment entered against them on September 19, 1986. The trial court also made additional findings and conclusions to support its judgment that the Hiatts had sufficient minimum contacts with New Mexico to be constitutionally subject to suit in this state.

II

The question before us is whether merely signing a guaranty in another state, by itself, subjects the guarantor to personal jurisdiction in New Mexico. In order for our courts to exercise personal jurisdiction over nonresident, out-of-state defendants, the following three-part test must be satisfied:

(1) the defendant’s act must be one of the five enumerated in the long-arm statute; (2) the plaintiffs cause of action must arise from the act; and (3) minimum contacts sufficient to satisfy due process must be established by the defendant’s act.

State Farm Mut. Ins. Co. v. Conyers, 109 N.M. 243, 244, 784 P.2d 986, 987 (1989) (citing Salas v. Homestake Enterprises, Inc., 106 N.M. 344, 345, 742 P.2d 1049, 1050 (1987)). The first and third step of this test have been “repeatedly equated” with the due process standard of “minimum contacts.” Kathrein v. Parkview Meadows, Inc., 102 N.M. 75, 76, 691 P.2d 462, 463 (1984) (citing Telephonic, Inc. v. Rosenblum, 88 N.M. 532, 534, 543 P.2d 825, 827 (1975)). Because we have interpreted the long-arm statute as extending our personal jurisdiction as far as constitutionally permissible, United Nuclear Corp. v. General Atomic Co., 91 N.M. 41, 42, 570 P.2d 305, 306 (1977), it is not necessary to determine whether the Hiatts transacted business within New Mexico in any technical sense. When the state courts have construed the state long-arm statute as being coextensive with the requirements of due process, “the usual two-step analysis collapses into a single search for the outer limits of what due process permits.” Forsythe v. Overmyer, 576 F.2d 779, 782 (9th Cir.), cert. denied, 439 U.S. 864, 99 S.Ct. 188, 58 L.Ed.2d 174 (1978).

A state court may exercise personal jurisdiction over a non-resident defendant only if there are “minimum contacts” between the defendant and the forum state. The contacts must be enough so that the maintenance of the suit does not offend “traditional notions of fair play and substantial justice.” International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158, 90 L.Ed. 95 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, 343, 85 L.Ed. 278 (1940)). Before personal jurisdiction can be exercised, “it is essential in each case that there be some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.” Hanson v. Denckla, 357 U.S. 235, 253, 78 S.Ct. 1228, 1240, 2 L.Ed.2d 1283 (1958).

Although it is essential that the defendant’s conduct and connection with the forum state be such “that he should reasonably anticipate being haled into court there,” World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 S.Ct. 559, 567, 62 L.Ed.2d 490 (1980), “‘foreseeability’ alone has never been a sufficient benchmark for personal jurisdiction under the Due Process Clause.” Id. at 295, 100 S.Ct. at 566. In fact, this Court recently held that the purposeful availment test of Hanson is the “key focus” in analyzing minimum contacts questions. Conyers, 109 N.M. at 245, 784 P.2d at 988 (emphasis added). Therefore, our inquiry will focus on whether the transaction entered into by the Hiatts amounts to a purposeful decision by the Hiatts to participate in the local economy and to avail themselves of the benefits and protections of New Mexico law. Applying this standard, we conclude that the Hiatts’ contacts were insufficient to satisfy the requirements of due process.

It is the required purposefulness on the part of the defendants, in establishing their contact with New Mexico, that is lacking in this case. The record fails to disclose that the Hiatts purposefully availed themselves of the benefits and protections of New Mexico laws. Likewise, the record does not indicate that the Hiatts anticipated that they would derive any economic benefit as a result of their guaranty. The Hiatts maintained no residence or business in New Mexico and do not own any real or personal property in New Mexico. The only contact they have had with New Mexico is to have been guarantors on a loan agreement executed in California, which was entered into pursuant to an agreement which Deerfield and First City had already worked out in New Mexico. The Hiatts “stepped into a business arrangement which [Deerfield] and [First City] had already established, and did not purposefully avail [themselves] of the ‘privilege of conducting activities within’ New Mexico, ‘thus invoking the benefits and protections’ of New Mexico law.” Customwood Mfg., Inc. v. Downey Constr. Co., 102 N.M. 56, 58, 691 P.2d 57, 59 (1984) (quoting Hanson v. Denckla, 357 U.S. at 253, 78 S.Ct. at 1240)). Additionally, no choice of law provision favoring New Mexico was included as part of the guaranty agreement,² and because the agreement was executed in California, the application of our traditional lex loci contractus rule results in the application of California law. Walter E. Heller & Co. v. Stephens, 79 N.M. 74, 77, 439 P.2d 723, 726 (1968); Boggs v. Anderson, 72 N.M. 136, 140, 381 P.2d 419, 422 (1963).

Although the Hiatts may have reasonably foreseen that the execution or breach of the guaranty agreement would have some impact in this state, they did not take any actions so as to purposefully avail themselves of the benefits and protections of New Mexico law.

Although this Court has not recently considered the question presented in this case— whether assertion of personal jurisdiction over nonresident guarantors offends the requirements of the due process clause — our holding today is consistent with the many other jurisdictions’ holdings on this issue.³ Federal courts presiding over diversity cases and applying state law have held that nonresident guarantors do not purposefully avail themselves of the benefits and protections of the laws of the forum state merely by executing a guarantee of an obligation of a resident debtor in connection with a local project in favor of a resident creditor, particularly where the guarantor has no financial interest in the debtor. For example, in Arkansas Rice Growers Cooperative Ass’n v. Alchemy Industries, Inc., 797 F.2d 565 (8th Cir.1986), the underlying transaction was the construction of a processing plant in Arkansas. Alchemy Industries, Inc., entered into a contract with an Arkansas corporation for the construction. Several Alchemy shareholders, who were residents of California, guaranteed the construction obligation. After the construction was completed, Alchemy defaulted and the Arkansas corporation sued Alchemy and the individual guarantors. The court upheld a judgment against Alchemy, but reversed the judgment against the guarantors and dismissed those claims for lack of personal jurisdiction. The court held that, “[t]he mere fact that the individual defendants guaranteed an obligation to an Arkansas corporation does not subject the guarantors to jurisdiction in Arkansas.” Id. at 573. In fact, the court stated that it had found “no case in which a court has asserted jurisdiction over a nonresident guarantor merely because the guarantor is a passive investor in the corporation whose debt the guarantor assures.” Id. at 574.

Similarly, in Bond Leather Co. v. Q.T. Shoe Mfg. Co., 764 F.2d 928 (1st Cir.1985), a nonresident guarantor guaranteed a loan to his brother’s corporation, Q.T. Q.T. was a Massachusetts corporation engaged in the manufacture of shoes, and it purchased raw leather from Bond, another Massachusetts corporation. The guarantor, a resident of Ohio, had no financial interest in the debtor corporation. Q.T. went bankrupt and Bond filed suit against Q.T. and the guarantor. The court held that the creditor failed “to identify any contract rights created by the guaranty in [the guarantor] which could have been enforced in the Massachusetts courts and which could fairly be said to represent an intent by [the guarantor] to reap the benefits of Massachusetts law.” Id. at 934. Moreover, the court stated that “absent any intent by [the guarantor] to exploit the local economy, as has been required not only in prior cases addressing jurisdiction over nonresident guarantors but more generally in cases upholding jurisdiction, we cannot say that [the guarantor], on the basis of its isolated acts, availed itself of the benefits of transacting business in Massachusetts and should reasonably have anticipated being haled into court there.” Id. at 934-35 (citing World-Wide Volkswagen, 444 U.S. at 297-98, 100 S.Ct. at 567) (citation omitted); see also United Fed. Sav. Bank v. McLean, 694 F.Supp. 529, 535 (C.D.Ill.1988) (holding that being a guarantor along with making payments in forum state is an insufficient basis to invoke personal jurisdiction)⁴; Reverse Vending Assoc. v. Tomra Systems US, Inc., 655 F.Supp. 1122, 1127 (E.D.Pa.1987) (holding that “a non-resident defendant’s contract, in this case a guaranty, with a Pennsylvania business entity alone cannot automatically establish sufficient minimum contacts.”); Northern Trust Co. v. Randolph C. Dillon, Inc., 558 F.Supp. 1118, 1123 (N.D.Ill.1983) (holding there was no personal jurisdiction over nonresident guarantor of equipment lease although payments were made to Illinois bank, the guaranty was accepted in Illinois, and it provided that it would be governed by Illinois law); Liberty Leasing Co. v. Milky Way Stores, Inc., 352 F.Supp. 1210, 1211 (N.D.Ill.1973) (holding no personal jurisdiction over nonresident guarantor); Misco Leasing, Inc. v. Vaughn, 450 F.2d 257, 260 (10th Cir.1971) (holding that being a guarantor alone is an insufficient basis to invoke personal jurisdiction).

In addition to the federal courts, state courts also hold that merely signing a guaranty, in and of itself, is insufficient contact to confer personal jurisdiction. See, e.g., Edwards v. Geosource, Inc., 473 So.2d 36, 37 (Fla.Dist.Ct.App.1985) (“signing a promissory obligation, in and of itself, is insufficient contact to confer personal jurisdiction”); Sibley v. Superior Court, 546 P.2d 322, 325 (Cal.1976) (holding that petitioner did not purposefully avail himself of the privilege of conducting business in California or of the benefits and protections of California laws where petitioner-guarantor had executed a guaranty in Florida guaranteeing payments to a California partnership), cert. denied, 429 U.S. 826, 97 S.Ct. 82, 50 L.Ed.2d 89 (1976); accord United Buying Group, Inc. v. Coleman, 296 N.C. 510, 251 S.E.2d 610, 616 (1979) (“The mere act of signing [a guaranty in favor of a resident of the forum] or endorsement does not in and of itself constitute a sufficient contact upon which to base in personam jurisdiction over a nonresident.”); Basic Food Indus., Inc. v. Eighth Judicial Dist. Court, 94 Nev. 111, 575 P.2d 934, 936 (1978) (holding that when “no more appears than that the guarantor has mechanically executed the guaranty and mailed it back to the forum,” finding personal jurisdiction would offend traditional notions of fair play and substantial justice).

The FDIC urges us to find that the Hiatts are subject to the exercise of personal jurisdiction in New Mexico based on several cases cited in its brief in chief. However, in all of these cases, the guarantor has been an officer or a director or an active shareholder in the debtor corporation. For example, in Coleman, the court upheld personal jurisdiction over the defendant who, in addition to having signed a guaranty, had an interest in a corporation that dealt with the in-state corporation. The court held that where the

defendant is a principal shareholder of the corporation and conducts business in North Carolina as principal agent for the corporation, then his corporate acts may be attributed to him for the purpose of determining whether the courts of this State may assert personal jurisdiction over him.

251 S.E.2d at 614.⁵ Similarly, in National Can Corp. v. K Beverage Co., 674 F.2d 1134, 1137 (6th Cir.1982), the court held that where the guarantors were officers and shareholders of the debtor corporation, such direct economic interest in the corporation furnished the necessary minimum contacts. See also Marcus Food Co. v. Family Foods of Tallahassee, Inc., 729 F.Supp. 753 (D.Kan.1990) (guarantor was president and sole shareholder of debtor corporation); First Sec. Bank v. McMillan, 627 F.Supp. 305 (W.D.Mich.1985) (guarantor was officer of debtor corporation); Marathon Metallic Bldg. Co. v. Mountain Empire Constr. Co., 653 F.2d 921 (5th Cir.Unit A Aug. 1981) (guarantor was officer, director and shareholder of debtor corporation); Continental Bank N.A. v. Everett, 742 F.Supp. 508 (N.D.Ill.1990), aff'd, 964 F.2d 701 (7th Cir.), cert. denied, — U.S. -, 113 S.Ct. 816, 121 L.Ed.2d 688 (1992) (guarantors were officers, directors and shareholders of debtor corporation); BRS, Inc. v. Dickerson, 278 Or. 269, 563 P.2d 723 (1977) (guarantors were principals and officers of corporate debtor). When a substantive identity between the guarantor and the debtor is shown, as in the above cases, the guarantor may be said to have purposefully availed himself of the benefits and protections of the laws of the forum state and may have the minimum contacts with the forum state sufficient to meet the due process requirements of the exercise of personal jurisdiction by the forum state.

In conclusion, we hold that the signing of a guaranty by a nonresident of a debt owed to a New Mexico creditor does not in and of itself constitute a sufficient contact upon which to base in personam jurisdiction over a nonresident. Rather, the circumstances surrounding the signing of such obligations must be closely examined in each case to determine whether the quality and nature of defendant’s contacts with New Mexico justify the assertion of personal jurisdiction over him in an action on the obligation. Here, the Hiatts did nothing more than sign a guaranty for a New Mexico corporation in which they had no interest. The Hiatts did not purposefully avail themselves of the benefits and protections of New Mexico law by merely guaranteeing a loan, and hence their activity does not meet the due process requirement of minimum contacts. The judgment of the trial court is REVERSED.

IT IS SO ORDERED.

RANSOM, FRANCHINI and FROST, JJ., concur. MONTGOMERY, C.J., Dissenting.

1 . After the filing of the complaint, First City changed its name to Moncor Bank, N.A., which later went into receivership, and FDIC ultimately succeeded to its interest.

2 . Even had such a clause existed, it is unclear whether that would have been enough to confer personal jurisdiction. See Telco Leasing, Inc. v. Marshall County Hosp., 586 F.2d 49 (7th Cir.1978) (holding that a choice of law provision in a lease did not serve as a basis for jurisdiction); see also Northern Trust Co. v. Randolph C. Dillon, Inc., 558 F.Supp. 1118, 1123-24 (N.D.Ill.1983) (holding that a choice of law provision is not sufficient to confer personal jurisdiction over a nonresident defendant).

3 . We note that in Hunter-Hayes Elevator Co. v. Petroleum Club Inn Co., 77 N.M. 92, 419 P.2d 465 (1966), we found that jurisdiction existed over an Oklahoma resident and a California resident where the defendants were actively engaged in the negotiations of the loan, had been present in New Mexico several times to attend these negotiations, and had been partly responsible for procuring the underlying loan to the corporation. In Hunter-Hayes we held that the traditional notions of fair play and substantial justice were not offended by the exercise of jurisdiction. However, Hunter-Hayes is not dispositive where, as here, the guarantors mechanically executed the guaranty and mailed it back to the forum. Additionally, Hunter-Hayes, was decided before any of the recent seminal Supreme Court cases involving minimum contacts were decided, such as Asahi Metal Ind. v. Superior Court, 480 U.S. 102, 107 S.Ct. 1026, 94 L.Ed.2d 92 (1987), Burger King v. Rudzewicz, 471 U.S. 462, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985), Keeton v. Hustler Magazine, 465 U.S. 770, 104 S.Ct. 1473, 79 L.Ed.2d 790 (1984), Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984), World-Wide Volkswagen, 444 U.S. 286, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980), and Kulko v. Superior Court, 436 U.S. 84, 98 S.Ct. 1690, 56 L.Ed.2d 132 (1978).

4 . Cases from Illinois may be "persuasive authority” since our long-arm statute was taken from that state. Customwood, 102 N.M. at 58, 691 P.2d at 59.

5 . The North Carolina Supreme Court also held that the second defendant-guarantor who had no ties with the debtor corporation was not subject to in personam jurisdiction in North Carolina. The court stated, "[t]he mere act of signing such a guaranty or endorsement does not in and of itself constitute a sufficient contact upon which to base in personam jurisdiction over a nonresident.” Id. at 616.