JER SKW Services, Inc. v. Gold

689 N.E.2d 856, 44 Mass. App. Ct. 243, 1998 Mass. App. LEXIS 19

• Court: Massachusetts Appeals Court
• Decided: February 3, 1998
• Docket: No. 96-P-995
• Status: Published

Opinions

Lenk, J.

This matter is before us on the appeal of plaintiff, JER SKW Services, Inc. (JER), general partner of SKW Real Estate Limited Partnership (SKW), from a judgment of dismissal entered on April 11, 1995, pursuant to the allowance of summary judgment in favor of the defendants, Richard A. Gold,² Richard T. Oshana, and Jonah Jacob. The plaintiff appeals from the dismissal of its complaint, and the defendant Jonah Jacob³ cross-appeals from the denial of his motion to dismiss the plaintiff’s appeal.

Background. On September 17, 1991, defendants Jacob, Oshana, and Gold executed and delivered to Shawmut Bank, N.A. (Shawmut), two promissory notes, in the amounts of $791,590.40 and $1,050,000.00, in their capacities as general partners of Northeast Glen Limited Partnership (limited partnership). To secure this debt, the limited partnership granted a mortgage upon Forest Glen Apartments in Westfield to Shawmut. At the same time, in their individual capacities, Jacob, Oshana, and Gold executed and delivered to Shawmut guaranties reaffirming their obligation to pay all of the limited partnership’s debts. SKW subsequently purchased from Shawmut the guaranties, notes, and all related mortgage loan documents. The limited partnership defaulted on its obligations under the note and mortgage by failing to pay the principal as due on the note and real estate taxes on the mortgaged property and by voluntarily filing a chapter 11 bankruptcy petition on May 24, 1994. On April 1, 1994, SKW assigned its interest in the mortgage to State Street Bank and Trust Company (State Street).

On June 15, 1994, State Street filed a complaint in Superior Court alleging that the limited partnership had made, and later defaulted upon, the two promissory notes and that the individual defendants were hable in their capacities as guarantors of the limited partnership’s obligations for the “full amount of the mortgage due.” State Street, through SKW, had twice made demand upon the defendants for the amounts due under the notes before filing suit, but the defendants failed and refused to make payment. On December 16, 1994, SKW held a foreclosure sale and sold the property for $1,606,000.

State Street filed a motion to substitute SKW as plaintiff in this action⁴ and also moved for summary judgment. SKW was substituted as plaintiff on January 17, 1995, and, after hearing oral argument, the motion judge entered summary judgment against the plaintiff and for the defendants, the nonmoving parties. He determined that the defendants’ liability as makers on the notes, in their capacities as general partners of the limited partnership, is exactly the same as the defendants’ liability as individual guarantors. He ruled both that the guaranties of the defendants are mere surplusage and that State Street should have sued the defendants directly on the promissory notes. He also concluded that the initiation of suit on the guaranties was undertaken, in part, to avoid the notice requirement of G. L. c. 244, § 17B, see note 8, infra. A judgment dismissing the complaint was entered on April 11, 1995.

SKW filed a motion for reconsideration on May 8, 1995, and a notice of appeal on May 9, 1995. In support of the motion for reconsideration, SKW submitted an affidavit and attachments to show that notice had been sent to each of the three defendants by certified mail, return receipt requested. The notices sent to Gold and Oshana were returned “unclaimed.” Notices were sent to both defendant Jacob and his attorney; there appears to be a receipt from Jacob’s attorney, but none from Jacob himself. The trial court did not rule on SKW’s motion for reconsideration.

Due to the appearance of new counsel, SKW was unaware that the court had originally assembled the record on June 13, 1995, and, consequently, did not promptly pay the docket fee. Defendant Jacob filed a motion to dismiss the appeal on May 9, 1996, which a different motion judge denied on June 11, 1996, finding excusable neglect on the part of SKW. SKW was granted leave to docket its appeal on June 18, 1996, and on June 19, 1996, the trial court issued a new notice of assembly of record.

SKW contends that it was error to award summary judgment to the defendants. SKW claims that the guaranties executed by the defendants resulted in a liability which is distinguishable from the promissory notes to which they relate, that the guaranties are not merely surplusage, and that the plaintiff may sue on them. SKW also claims that the motion judge’s finding that SKW sought to circumvent the notice requirements of G. L. c. 244, § 17B, by suing on the guaranties rather than on the notes, was neither correct nor relevant.

Discussion. Generally, a guarantor is liable for the full amount of the borrower’s debt according to the terms of the guaranty. Shawmut Bank, N.A. v. Wayman, 34 Mass. App. Ct. 20, 23 (1993). When the person primarily liable for the debt, typically the maker, also agrees to guarantee payment, however, this additional guarantor liability is surplusage insofar as it neither subtracts from nor adds to the liability of the primary party. “If one is primarily liable as a maker, jointly and severally, it adds nothing to say one is liable all over again, and, in general, ‘when a maker also signs a note as guarantor, the guaranty is surplusage.’ ” Seronick v. Levy, 26 Mass. App. Ct. 367, 371 (1988), quoting from Ligran, Inc. v. Medlawtel, Inc., 86 N.J. 583, 589 (1981). The guaranty merely duplicates the already existing liability of the primary party.

Still, there are situations where a maker can also sign on as a guarantor and thereby expand his liability. Where a guarantor is the same person as the maker, he may sign in different capacities when signing as maker and guarantor.⁵ Ligran, Inc. v. Medlawtel, Inc., 86 NJ. 583, 589 (1981). Alternatively, where the maker and the guarantor are the same person, the guarantor could pledge some additional collateral to guarantee the debt. See Federal Deposit Ins. Corp. v. Singh, 977 F.2d 18 (1st Cir. 1992) (hereinafter Singh). Indeed, SKW relies upon Singh to argue that there is a distinction between the defendants’ liability on the guaranties and their liability on the promissory notes. In Singh, the partners in a general partnership incurred separate and distinct liability in their capacities as makers and guarantors because of a nonrecourse provision in the note preventing the bank from looking to the personal assets of the partners for satisfaction of the obligation of the partnership. Id. at 25. The partners also signed a guaranty promising to deliver additional collateral from personal assets.⁶ Ibid. In analogizing to Singh, SKW argues that the guaranties here are significantly broader than the notes because they expose the defendants to liability both for the amounts due on the promissory notes as well as for any future advances made to the partnership. SKW also contends that the written guaranties enlarge the scope of the defendants’ liability by altering the conditions, pursuant to G. L. c. 244, § 17B, under which they could be held liable for a deficiency. These contentions are unpersuasive.

To be sure, the defendants’ written guaranties of the debts of the limited partnership could potentially enlarge the scope of the defendants’ liability by exposing them to liability for any future advances made to the limited partnership as well as for the amounts due on the notes. However, the key consideration is whether the defendants’ liability was actually enlarged. It was not, since no other advances were in fact made to the limited partnership. The defendants’ actual liability remains identical with respect to the notes and the guaranties.

Nor, unlike Singh, do the defendants’ written guaranties obligate them to deliver any additional collateral for the debts. Here, the defendants are jointly and severally liable for the entire amount of the notes in their capacities as general partners of the limited partnership. In signing the notes as general partners of the limited partnership, the defendants obligated the assets of the limited partnership as well as any personal assets they may have as collateral for the debts. See G. L. c. 109, § 24; Fusco v. Rocky Mountain I Invs. Ltd. Partnership, 42 Mass. App. Ct. 441, 447-448 (1997) (general partners of a limited partnership are personally liable for the debts of the limited partnership). In executing the written guaranties, the defendants became jointly and severally liable for the amount of the notes under the terms of the guaranties as well. The defendants once again committed all of their own assets as security for the debts. The defendants’ attempt collaterally to guarantee their own unlimited obligation on the promissory notes essentially duplicates their liability under the notes, under which they were already primarily and directly liable for the entire obligation. See Riddle v. Lushing, 203 Cal. App. 2d 831, 834 (1962) (where defendants purchased real property as a general partnership and guaranteed payment as individuals, “[s]ince [they] were already primary obligors, both jointly and severally, they could not also be sureties or guarantors on the partnership note. The purported guaranty added nothing to the primary liability which arose when they as partners executed the note in the name of the partnership”); Rock Island Bank & Trust Co. v. Stauduhar, 59 Ill. App. 3d 892, 901 (1978) (where guarantor signed note as one of two makers, guarantee of debt by comaker essentially surplusage).

SKW also argues that the written guaranties enlarge the scope of the defendants’ liability by altering the conditions under which they could be held liable for a deficiency.⁷ A statutory notice requirement is imposed as a prerequisite for seeking and obtaining a deficiency judgment against the maker of an obligation secured by mortgage of real estate, while no such obligation is imposed with respect to pursuing a deficiency judgment against a guarantor. G. L. c. 244, § 17B.⁸ Thus, SKW contends, the guaranties here allow the creditor to pursue a deficiency judgment without complying with the requirements of § 17B and therefore result in a liability which is distinguishable from the liability on the promissory notes to which they relate.

This argument is flawed insofar as it assumes that SKW may, in bringing suit on the guaranties rather than on the notes, avoid the statutory notice requirements and arguably expand the scope of liability under the guaranties. In the very limited circumstances here, where the defendants are primarily liable for the debt as makers of the notes and their guaranties substantively do no more than duplicate this already existing liability, suit may only be brought subject to the statutory notice requirements, regardless of whether it is brought on the notes or on the guaranties.

The duty to warn of potential deficiency liability pertains to the defendant sought to be charged with the deficiency. G. L. c. 244, § 17B. Considerations of fairness underlie the statutory notice required by G. L. c. 244, § 17B, requiring reasonable notice to persons primarily liable on a mortgage note so that they may look out for their interests and not be confronted after the fact by a deficiency or a settlement in which they did not participate. Seronick v. Levy, supra at 372. See IAG Fed. Credit Union v. Laterman, 40 Mass. App. Ct. 116, 117 (1996). The dissent’s reliance on Senior Corp. v. Perine, 16 Mass. App. Ct. 967 (1983), does not persuade us otherwise. The difference between Senior Corp. v. Perine, supra, and the case at bar, which the dissent minimizes but is in fact critical, is that here the makers and guarantors are the very same individuals with identical financial liability. The public policy considerations served by § 17B could be entirely thwarted in such circumstances were the dissenting view to prevail, for mortgage lenders could thereafter demand that mortgagors sign not only a note, but also an “independent” guaranty of the obligation. Upon default and a deficiency, the mortgagee could pursue a deficiency judgment on the guaranty, bypassing entirely the § 17B notice requirements and thereby undermining the legislative intent that persons so situated may look out for their interests and participate in the foreclosure proceedings.

This brings us to the question whether the guaranties are enforceable. In certain situations where a guaranty is surplus-age, the effect may be to render it unenforceable. Some jurisdictions, for example, prohibit or limit deficiency judgments following foreclosure and courts in those jurisdictions accordingly will not permit postforeclosure deficiency judgments against guarantors who were also makers. Valinda Builders, Inc. v. Bissner, 230 Cal. App. 2d 106, 111 (1964); Union Bank v. Dorn, 254 Cal. App. 2d 157, 159 (1967). See First Interstate Bank v. Larson, 475 N.W.2d 538, 542-544 (N.D. 1991). Elsewhere, the law may deny effect to a “guaranty” for one’s own debts. See, e.g., Citizens Bank & Trust Co. of Wash. v. Gibson, 463 N.E.2d 276, 278 n.1 (Ind. Ct. App. 1984). Massachusetts, however, has no similar stated policies. See G. L. c. 244, § 17B. Accordingly, we are particularly reluctant to strip an otherwise bona fide guaranty of its intended effect. See Singh, supra at 25 n.10.

Jacob and Oshana rely upon Seronick v. Levy to argue that the guaranties at issue are without effect. In Seronick, Levy and Schonfeld signed a mortgage note payable to Seronick both as comakers and coguarantors. Seronick gave Levy, but not Schonfeld, notice, under G. L. c. 244, § 17B, of impending foreclosure proceedings, with a warning that he would hold Levy liable for any deficiency. Id. at 368. Levy settled with Seronick for $40,000 and then turned to Schonfeld for $20,000 in contribution as a coguarantor. We held that Schonfeld could not, in the circumstances of that case, be liable in her capacity as coguarantor to make contribution to Levy for the deficiency on their mortgage note, where she was already jointly and severally liable for the debt as maker. Id. at 371. Under the facts of that case, the guaranty was without effect. In Seronick, Levy as comaker had already settled the debt to Seronick without first notifying Schonfeld as comaker, thereby extinguishing the obligation of any guarantor, including Schonfeld. Id. at 373. See also Restatement (Third) of Suretyship and Guaranty § 19(a) (1996). Seronick thus could not sue Schonfeld on the guaranty for contribution any more than he could on the note. This is quite unlike the case now before us. In suing the defendants on the guaranties, it would seem that SKW puts them in no different position than if SKW had proceeded on the notes.

The plaintiff’s materials pertaining to the issue of notice under G. L. c. 244, § 17B, were submitted in support of the plaintiff’s motion for reconsideration after the judge had ruled on the summary judgment motion. The judge did not rule on the reconsideration motion. The issue of the sufficiency of notice of the plaintiff’s intention to seek a deficiency judgment is both material and unresolved.⁹ See Mutual Bank for Sav. v. Silverman, 13 Mass. App. Ct. 1059, 1060-1061 (1982). Additional issues may be presented as the case proceeds. Therefore, while the judge erred in entering summary judgment for the defendants, he was correct to deny the plaintiff’s motion for summary judgment on the record then before him.

Jacob has filed a cross appeal arguing that the motion judge erred in denying his motion to dismiss SKW’s appeal. We see no merit in this claim. We affirm the motion judge’s ruling that any error on the part of the appellant was the result of excusable neglect. See Mailer v. Mailer, 387 Mass. 401, 405 (1982).

Judgment reversed.

Order denying motion to dismiss appeal affirmed.

2 After defendant Gold failed to answer, a default was entered against him; no default judgment followed.

3 Neither defendant Gold nor defendant Oshana moved to dismiss the appeal or filed a cross appeal. Defendant Jacob filed a brief on appeal; defendants Oshana and Gold adopted his arguments.

4 SKW had assigned its interest in the mortgage to State Street on April 1, 1994. SKW, however, remained the holder of the promissory notes, the guaranties, and the related documents. Accordingly, State Street served a motion to substitute SKW as plaintiff, as SKW is the real party in interest in this action to recover on the guaranties.

5 Here, the defendants signed the promissory notes as general partners of the limited partnership and signed the guaranties as individual guarantors. Under the facts of this case, however, the defendants have not signed “in different capacities.”

6 The dissent asserts that, because the guaranty in Singh was not bounded by the terms of the note, the Court of Appeals for the First Circuit concluded the guaranty was “not surplusage by any stretch of the imagination.” Singh at 25. This view of Singh is incomplete and ignores the critical fact that the Singh guaranty provided supplementary and otherwise unavailable collateral. Otherwise put, it was both the fact that the guaranty was not bounded by the terms of any specific note and the fact that the guaranty, unlike the note, obligated the guarantors to deliver additional collateral that together created liability on the Singh guaranty which was separate and distinct from the defendants’ liability on the note. Ibid.

7 SKW apparently operated under the mistaken belief that, as a result of the automatic stay of litigation against the debtor imposed by the bankruptcy laws, it was precluded from initiating proceedings on the notes not only against the limited partnership, but also against the defendants, in their capacities as general partners. Were this the case, the guaranties would operate to broaden the scope of the defendants’ liability. See Allegheny Intl. Credit Corp. v. Bio-Energy of Lincoln, Inc., 21 Mass. App. Ct. 155, 158 (1985) (arm of bankruptcy judge does not stretch out to protect guarantor); Pemstein v. Stimpson, 36 Mass. App. Ct. 283, 293 (1994) (guarantors still liable on entire original primary debt, notwithstanding debtor’s chapter 11 petition). However, the automatic stay provisions of 11 U.S.C. § 362(a) (1994) apply only to actions against the debtor-partnership and do not apply to actions against the general partners of the debtor. See In re Aboussie Bros. Constr. Co., 8 B.R. 302 (D.E.D. Mo. 1981); In re Bank Center, Ltd., 15 B.R. 64 (Bankr. W.D. Pa. 1981). Thus, the defendants’ liability on the guaranties is no different than their liability on the notes and the automatic stay did not, in fact, preclude SKW from suing the defendants on the notes.

8 “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, postage prepaid, by registered mail with return receipt requested, to the defendant sought to be charged with the deficiency. . . .” Inserted by St. 1945, c. 604, § 1.

9 At oral argument, after contending that the issue of notice was irrelevant and that, in any event, appropriate notice had been given, counsel for the plaintiff alternatively argued that “if the concern that the court has voiced [about notice] is an overriding concern, I would respectfully suggest that the case be remanded to the lower court for a determination as to the facts surrounding the notice.”