Marshall-Wells Co. v. Tenney

244 P. 84, 118 Or. 373, 45 A.L.R. 1382, 1926 Ore. LEXIS 57

• Court: Oregon Supreme Court
• Decided: February 11, 1926
• Status: Published

Opinion

BEAN, J.

At the close of plaintiff’s testimony, counsel moved for a nonsuit in favor of defendants, which was denied. The principal question on this appeal is, Did the agreement between the plaintiff and other directors of the Multnomah Iron Works, whereby the creditors took charge of the affairs of the Multnomah Iron Works, and the acts performed by the Marshall-Wells Company pursuant to the agreement, in any way affect or release the defendants from liability under the guaranty?

The evidence in the case shows that the creditors’ agreement was entered into without the knowledge or consent of defendant John S. Beall, and that after the creditors’ agreement the directors of the Mult nomali Iron Works had practically no voice in the conduct or operation of the business of the company, except under control of the committee.

The defendants H. 0. Tenney and 0. B. Prael, at the time the creditors' agreement was made, were directors and officers of the Multnomah Iron Works and took part in the arrangement and in the execution of the agreement and in the proceedings afterward, in the conduct of the business, under the control and supervision of the creditors’ committee. They apparently assented to the agreement.

It is contended on behalf of defendant Beall that the creditors ’ agreement, made without his knowledge or consent, changed the terms of the contract of guaranty and, therefore, discharged the guarantor. In effect, the defendant Beall urges that, after the creditors’ agreement was executed, and a committee of the creditors took charge of and conducted the business of the manufacturing plant, sold the products, hired and discharged the help, purchased supplies of merchandise, the plaintiff is attempting to hold Beall as a guarantor of the concern, while it was in the hands of the creditors by their committee; and that this is a different guaranty from what he executed when he signed the letter of credit and substantially changed his contract.

In Gile Groc. Co. v. Lachmund, 75 Or., at page 124 (146 Pac. 519), we find the language of Mr. Justice Wolverton in the case of Delsman v. Friedlander, 40 Or. 33 (66 Pac. 297), quoted as follows:

“Primarily, it may be stated as a legal proposition sustained and established by the very great weight of judicial opinion that a guaranty of the payment of a note or other obligation is an absolute undertaking to pay it when due, and that no demand or notice of nonpayment is necessary or requisite to fix the liability of the guarantor; and that mere passiveness on the part of the holder will not release such guarantor, even if the maker was solvent at its maturity, and thereafter became insolvent,’’ — citing authorities.

Letters of credit or guaranty are contracts of an extensive use in the commercial world upon the faith of which large credits and advances are made. A letter of credit should not receive a strict and technical interpretation but a fair, and reasonable one, according to the true import of its terms, and what may be fairly presumed to have been the intention and understanding of the parties, with a view to the furtherance of its spirit and in order to attain the object designed: 28 C. J., p. 936, sec. 81, and notes; First Nat. Bank v. Hawkins, 73 Or. 186, 189 (144 Pac. 131); Staver & Walker v. Locke, 22 Or. 519, 524 (30 Pac. 497, 29 Am. St. Rep. 621, 17 L. R. A. 652); W. T. Raleigh Co. v. McCoy, 96 Or. 474, 482 (190 Pac. 311).

It is well settled that, after the intention of the parties or the scope of the guarantor’s undertaking has been determined, by the ordinary rules of construction either from the instrument itself in which it is clearly expressed, or from the instrument and the surrounding circumstances, the rule of strictissimi juris applies, that is, that the guarantor is entitled to have his undertaking as thus determined strictly construed and that it cannot be extended by construction or implication beyond the precise terms of his contract; and he has the right to insist upon the strict performance of any terms or conditions which have been stipulated, and it is incumbent upon one who claims the benefit of a guaranty to show that its terms have been strictly complied with: 28 C. J., p. 935, § 80.

Examining the letter of credit, we notice that it provided—

“This shall be an open and continuing guaranty and shall continue in force notwithstanding any change in the form of such indebtedness, or renewals or extensions granted by you, without obtaining my consent thereto and until expressly revoked by written notice from me to you * * ”

Referring particularly to the word “extensions,” stipulated in the document, we believe that by giving the language used a fair, liberal and reasonable interpretation, as it was intended by the parties at the time the guaranty was given, the extensions contemplated and stipulated were the ordinary and usual extensions for time of payment, such as usually given in the transactions of business. Such an extension of time was consented to by the guarantor at the time he signed the letter of credit. The ordinary extension of time is a mutual arrangement and is usually intended to give the debtor a chance to obtain money to pay the debt. It does not necessarily follow that a radical change in the method and business of the principal debtor and the turning over of the entire business of the principal debtor to the new parties and at the same time agreeing to refrain from enforcing payment, all in such a manner that the guarantor would not be in a position to protect himself by taking proper measures to be subrogated to the rights of the creditor, would come within the purview of such a consent.

We notice in Stearns on Suretyship (3 ed.), page 109, Section 78, that — ■

“If the contractual relation of principal and creditor are changed by the substitution of new parties in place of those originally contracting, either by the original party assigning his interest in the contract to another in whole or in part, or by associating new parties by partnership agreements, the surety or guarantor will be discharged.”

Any material change in the obligation or duty of the principal debtor to which the guaranty relates, by a change or alteration either in the terms of the contract between the guarantee and the principal or in the manner of its execution, will release a guarantor from liability unless made with his consent if such change takes place before the guarantor’s liability is finally settled: 28 C. J., p. 994, § 155, and notes; Stearns on Suretyship (3 ed.), p. 106, §76, p. 211, § 132, and notes.

It is contended on behalf of each of defendants that there is no testimony to show that the guaranty was accepted by Marshall-Wells Company. We see no merit in this contention. The letter of credit was executed by defendants who at that time were all interested in the Multnomah Iron Works, in order to obtain further credit for that concern, and was delivered to Marshall-Wells Company. Under the circumstances of the case, the guaranty appears to have been accepted and acted upon by the parties. In a note in 16 L. R. A. (N. S.), page 355, we read:

“A writing by which a person eugages to secure sales made by the parties addressed, to a third person, in a specified sum, is an original undertaking-binding on delivery; and no notice of acceptance is necessary.” Citing Newcomb Bros. Wall Paper Co. v. Emerson, 17 Ind. App. 482 (46 N. E. 1018).

Again, on page 356 of the same volume we read a note as follows:

“One who signs a letter in which he states that, if the parties addressed will send a specified person such goods as she may order, not exceeding a given amount, he will guarantee payment in full, enters into an absolute guaranty, and is not entitled to notice of acceptance.” Fisk v. Stone, 6 Dak. 35 (50 N. W. 125).

As to the mere extension of time of payment or forbearance given or suffered by the Marshall-Wells Company, in conjunction with the other principal creditors to the Multnomah Iron Works by virtue of the agreement, without tying up the assets and business of the Multnomah Iron Works, the terms of the letter of credit permits “extensions” to be granted by Marshall-Wells without obtaining the consent of the guarantor.

This leaves the question as to the effect of Marshall-Wells Company with others on February 7, 1921, binding itself to take over all of the assets of the Multnomah Iron Works, conduct the manufacturing plant and carry on the business of selling machinery and other products, purchasing more goods and merchandise, increasing, at least for the time being, the indebtedness of the Multnomah Iron Works, and generally speculating with the affairs of the distressed concern without notice to, or the knowledge or consent of John S. Beall, one of the guarantors.

In considering this phase of the case it may be necessary to notice as nearly as we can how it might work out, and how it did work out, as far as affecting the obligation of this guarantor. It should be remembered that when the letter of credit was signed, the guarantors were sponsoring the Multnomah Iron Works and no other concern or combination. Their liability was affected, either increased or diminished, by the contracts, ventures and speculations of the Multnomah Iron Works. The skill and experience of the movers of that concern entered into the undertaking. Even the time of operation and manufacturing, as disclosed by the record, was an important factor to be taken into consideration. When the creditors’ agreement was consummated John S. Beall to all intents and purposes was practically a creditor, or liable to be a creditor, of the Multnomah Iron Works and entitled to notice of the arrangements and to have a voice as to what should be done. He had severed his connection with the Multnomah Iron Works some time before this, and was not a participant in the affairs of the concern.

The testimony of Mr. Foss B. Lewis, one of the members of the committee representing the creditors, explained the situation to a certain extent. He testified in part as follows: It was a typical war case. “They [Multnomah Iron Works] were victims of the war boom.” Mr. E. R. Newbegin, who was interested in the settlement and taking over of the plant and assets of the Multnomah Iron Works, which concern still had the same at the time of the trial, testified relating to the time of the creditors’ agreement as follows:

“Q. What was the condition of the market at that time with respect to—

“A. (Interrupting.) Well, that material was very poor; that was what was the reason — the matter with the company; there was no demand for their goods. In the meantime, taxes and insurance and interest were going on, and they couldn’t realize anything from the stuff they had, and that’s what got them into trouble.

“Q. There wasn’t any market value for this property at that time?

“A. It wasn’t saleable at that time.”

The trial court found in regard to the creditors’ agreement as follows:

“Finding of Fact. IX.

“That on or about the 7th day of February, 1921, the plaintiff herein and other creditors of said Multnomah Iron Works, entered into an agreement in writing with said Multnomah Iron Works, a copy of which is attached to the amended answers of the defendants herein, and marked Exhibit ‘A.’ That thereafter and until July 18, 1922, the business of said Multnomah Iron Works was managed by the defendant H. O. Tenney, under the supervisory control of the committee of creditors named in said agreement, except that J. G. Beckett ceased to act as a member of said committee until some time in April, 1922. That about July 18, 1922, an arrangement was effected by which the assets of said Multnomah Iron Works were transferred so as to pay the creditors of said Multnomah Iron Works the sum of 25^' on the dollar of their claims, and by which the plaintiff received payment of the sum of $3,714.86.

“That at the time that said agreement of February 7, 1921, was entered into, the liabilities of Multnomah Iron Works amounted to about $121,000.00, and its assets at said time ‘had no market value,’ and said corporation was insolvent. That after the 7th of February, 1921, and until the transfer of the assets of said corporation in July, 1922, as aforesaid, the business of said Multnomah Iron Works was conducted and managed with prudence and care and sound business judgment, and nothing- was done by said creditors’ committee or any of the members thereof with respect to the conduct of said business which in any way depleted or depreciated the value of the assets of said corporation; that the making of said agreement of February 7th, 1921, as well as the supervision thereafter exercised over said business by said creditors’ committee, tended to promote the best interests of said corporation and of the creditors thereof.”

It will be noticed that the Circuit Court found that at the time of the agreement the liabilities of the Multnomah Iron Works amounted to about $121,000 and its assets at said time “had no market value.” We do not understand that the court found that the property of the Multnomah Iron Works at the time of the inventory had no value. It often occurs when the value of property is necessary to be fixed, that while it has value it has no fixed market value. The record does not disclose what the actual value of the property of the Multnomah Iron Works was at that time.

The court also found that the creditors’ committee did nothing to deplete or depreciate the value of the assets of the Multnomah Iron Works. The conduct of the committee is not subject to criticism. No doubt they acted in good faith. But the evidence in the case does not warrant the finding that during the administration of the creditors’ committee there was not a shrinkage of the sum total of the assets of the Multnomah Iron-Works, when taking into consideration amounts paid out for overhead expenses in running the manufacturing establishment, the purchase of new goods and the general venture. The arrangement was eminently fair to all those who agreed to the same. They thereby stipulated to take their chances as they had the right to do. It is evidently different with one who did not so. consent, if he was a creditor or in a situation similar to a creditor.

It appears that a few years before the embarrassment of the Multnomah Iron Works it had made a profit in the business so that some $15,000 or $16,000 was due the United States government as income taxes for the year. The former management of the business by the Multnomah Iron Works is not criticised. The trouble was, as stated by Mr. Newbegin, and other witnesses, the prevailing conditions.

Now, then, if conditions were such that the Multnomah Iron Works could not make any profit but conducted the business at a loss, did the plaintiff, according to the terms of the guaranty, have the right without notice to the guarantor, to enter into the agreement and subject the principal, the Multnomah Iron Works, under the control of the committee, to the hazard of carrying on a manufacturing business under the conditions mentioned, for a period of eighteen months, incurring new indebtedness by purchasing new goods, and all the time bearing the overhead expense of the manufacturing, all or most of which must of necessity be met with the proceeds of the “quick assets” of the principal debtor. Some of the business done during the time was in an experimental line. The new supplies purchased were mingled with the old assets. The salaries and wages paid the manager and employees either increased the indebtedness, or what is in effect the same thing, were paid out of the assets of the principal, and largely from the “quick assets.” These expenses together with “such other details of the business as may be necessary to conduct the same,” together with taxes, rent and insurance, according to the agreement, were to be paid first from the “moneys derived from the sale of merchandise, collections and other sources of revenue.’’ The agreement then provides:

“That after meeting these current obligations the surplus on hand shall from time to time be trans ferred to E. L. Sabin, Secretary of the Merchants’ Protective Association, for pro rata distribution among the respective creditors. * * That the business of the corporation shall be continued during such time as said committee or its successors shall deem it in the best interest of the creditors to have it continue; that the same shall be discontinued, liquidated and wound up at any time said committee may so recommend. ’ ’

During this eighteen-month period the result of the venture had a material effect upon the rights and liability of the guarantor. The amount claimed by plaintiff as the liability of defendant Beall was fixed as of the date of the sale of the assets. What the net loss was during this time is not shown by the record. It appears to be impossible to segregate the new business from the old, so as to show the net result. It all went in with the old assets and liabilities. It is plain from the record that if the new arrangement, under the creditors’ committee, had continued long enough there would have been nothing to pay the creditors a percentage. During this period of eighteen months of speculation, John S. Beall is claimed to be a guarantor, not of the Multnomah Iron Works, according to the contract of guaranty, but for a different concern, viz., the Multnomah Iron Works, under the control and direction of the creditors’ committee. The agreement provides that the committee “shall have control of the amount, kinds and quality of goods purchased, salaries and wages to be paid the manager and other employees, and such other details of the business as may be necessary to conduct the same to the best possible advantage in the interest of the creditors * * .” The agreement further stipulated:

“It is further agreed by the creditors of said Multnomah Iron Works that they will extend the time of the payment of their respective claims and demands, and receive and accept the pro rata payments in accordance with the tenor of this agreement, and that they will not bring any suits or actions or otherwise endeavor to enforce payment of their claim by legal process, but having full trust and confidence above named will give such extension of time for payment of their demands as in the opinion of the committee may be advisable.”

When the plaintiff entered into this stipulation and ignored the interests of the guarantor, Beall, it in effect elected to look to the concern, under the control of the committee, for the payment of the claim, and not to Beall. Marshall-Wells Company agreed that it “will give such extension of time for the payment of their demands as in the opinion of the committee may be advisable.” While the letter of credit provided that Mar shall-Wells Company might grant extension to the debtor it did not provide that Marshall-Wells Company might transfer its right to grant extensions to a creditors’ committee, so that the claim of plaintiff could never mature or become due, except in the discretion of the creditors’ committee. As it developed, this time was about eighteen months. During this time defendant Beall was absolutely powerless to do anything’ to protect his rights. Nothing was done by plaintiff after the date of the agreement to indicate to Beall that plaintiff contemplated looking to him, until about two months thereafter, when plaintiff wrote a letter to Beall stating that his guaranty was still in effect. Plaintiff, on May 31, 1921, notified Beall that they were holding him on the guaranty and making demand for the amount of $10,000, due it from the Multnomah Iron Works.

After plaintiff received its 25 per cent of its claim, the same was reduced to about $11,000 so that any material adverse speculation with the assets of the Multnomah Iron Works, or the outlay for expenses of running the manufacturing plant under the control of the committee, when it did not produce any substantial income, would prevent a reduction of the original amount of the guaranty which was limited to $10,000.

By entering into the creditors’ agreement with the Multnomah Iron Works, Marshall-Wells Company, plaintiff, changed the rights and interests of the guarantor, John S. Beall, without his knowledge or consent.

When the demand was made and when this action was instituted, plaintiff’s claim against the Multnomah Iron Works was not due, because, under the creditors’ agreement, plaintiff had agreed not to bring any suit or action, or otherwise endeavor to enforce payment of its claim by legal process, and that it would give, such extension of the time for payment of its demand as in the opinion of the committee might be advisable, and engage in manufacturing and running the machine-shop. This contract was in force until long after demand was made and until long after action was instituted. This contract, made between the creditors, including plaintiff and the Multnomah Iron Works, therefore, materially changed the obligations of the guarantor, Beall; materially changed his right and interests, and as a matter of law discharged him.

One important remedy is secured to the guarantor as against the creditor. If the principal debtor makes default in his obligation and the guarantor is required to pay the same, he has the right to be subrogated to the rights of the creditor and may proceed against the principal debtor for reimbursement: 12 R. C. L., p. 1098, §§ 53 and 54.

As stated in Stearns on Suretyship (3 ed.), page 138, Section 98:

“The entire doctrine of subrogation in suretyship is dependent upon the immediate investment of the creditor with the obligations of a trustee whenever any rights or interests of the debtor, applicable to the debt, are placed in his control, and it is the right of the surety to be discharged if the creditor by his voluntary act deprive him of the benefit of this subrogation.”

If Beall, the guarantor, had paid the claim of plaintiff at the time the demand was made upon him, or at the time suit was commenced, he would have stepped into the shoes of the Marshall-Wells Company and therefore been bound by the creditors’ agreement and would have been compelled to stand by and permit the affairs of the Multnomah Iron Works to be conducted by the creditors’ committee. According to the appraisement made by the committee the value of the assets of the Multnomah Iron Works, estimated at cost, was $140,000, and the liabilities of the Multnomah Iron Works at that time did not exceed $121,000.

Defendant Beall was prevented from protecting his interests in any manner. If the plaintiff had made demand on Beall to pay what was owing on open account prior to February 7, 1921,"and before the creditors’ committee took charge, and he had done so., then the guarantor would have been to the extent of $10,000, subrogated to the rights of the plaintiff. He would have held the claim against the Multnomah Iron Works for $10,000, which was due and owing. He could have brought action on this claim to enforce payment therefor. He could have compelled the sale of the Multnomah Iron Works at any time. The creditors of the Multnomah Iron Works would have been compelled to consult the rights of the defendant Beall when they took charge of the business. The creditors’ agreement would not have been binding upon defendant unless he had consented thereto. Under the guaranty agreement, the defendant Beall had the right to be consulted as one of the creditors of the Multnomah Iron Works.

The plaintiff changed the nature of its claim against the Multnomah Iron Works without the consent of defendant Beall. He was discharged as a guarantor.

It is contended on behalf of plaintiff that the agreement made by plaintiff and the other creditors with the Multnomah Iron Works was for an indefinite time and not valid. The agreement plainly stipulates “that the business of the corporation shall be continued during such time as said committee or its successors shall deem it in the best interests of the creditors to have it continue and that the same shall be discontinued, liquidated and wound up at any time said committee may so recommend * * ”

Plaintiff agrees that it “will give such extension of the time for payment of their demands as in the opinion of the committee may be advisable.” The time fixed was when the business should be wound up or as the committee might advise. We think the agreement was valid and was to extend until the happening of the certain event mentioned.

The findings made by the lower court are not supported by the evidence and are erroneous.

At the close of all the testimony counsel for defendants submitted and requested findings in favor of defendants.

The judgment of the Circuit Court is reversed as against defendant John Beall and affirmed as against defendant H. 0. Tenney and 0. B. Prael.

Affirmed as to Tenney and Prael. Reversed as to Beall. Rehearing Denied.

McBride, C. J., and Brown and Belt, JJ., concur.