Tenet Healthsystem TGH, Inc. v. Silver

52 P.3d 786, 203 Ariz. 217, 381 Ariz. Adv. Rep. 10, 2002 Ariz. App. LEXIS 128

• Court: Court of Appeals of Arizona
• Decided: August 27, 2002
• Docket: 2 CA-CV 2001-0172
• Status: Published

Opinions

OPINION

ESPINOSA, Chief Judge.

¶ 1 This appeal arises from an action for breach of a guaranty executed by defendants Tucson Orthopaedic and Fracture Surgery, P.C., and Richard and Margot Silver (collectively, the Silvers) in favor of plaintiffs Tenet HealthSystem TGH, Inc., and Tenet Health-System WRF, Inc. (collectively, Tenet). The trial court granted the Silvers’ motion for partial summary judgment in Tenet’s action to enforce the guaranty and entered judgment pursuant to Rule 54(b), Ariz.R.Civ.P., 16 A.R.S., Pt. 2. On appeal, Tenet contends the trial court erroneously found that Tenet’s credit purchase of the secured property at a trustee’s sale extinguished the Silvers’ liability and erred by denying Tenet’s application for a writ of attachment on property the Silvers owned and by awarding them attorney’s fees. We agree and reverse.

Background

¶ 2 We view the facts of this case in the light most favorable to Tenet, the party opposing summary judgment. Nestle Ice Cream Co. v. Fuller, 186 Ariz. 521, 924 P.2d 1040 (App.1996). Tenet owned former Tucson General Hospital and, in December 1999, agreed to sell it to Tucson Clinical Care (TCC). As part of the transaction, TCC executed a $7 million promissory note as part of the purchase price, due in sixty days and secured by a deed of trust on the hospital. At the same time, the Silvers guaranteed $1.5 million of TCC’s obligation to Tenet under the note and several other agreements. The guaranty agreement provided, in part:

2. [The Silvers] guarantee[ ] that if [TCC] does not timely perform or pay [the note] ... in full when due, [the] Silverfs] shall, upon demand by [Tenet], forthwith satisfy [the note]____[The Silvers] liability under this Agreement shall continue until and only until payment of One Million Dollars ... or more has been made on the outstanding principal balance of the Note. This Agreement is a guaranty of due and punctual performance and payment and is not merely a guarantee of collection.

3. [The Silvers] hereby:

(a) Consentí ] that [Tenet] may, without affecting the enforceability or effectiveness of this Agreement ... and without affecting ... the liability of [the Silvers], ... at any time ... and without notice or demand

(i) Waive or delay the exercise of any of its rights or remedies against [TCC] or any other person or entity;

(iv) Apply payments by [TCC], the [Silvers], or any other person or entity to the Guaranteed Obligations; and

(b) Waive[ ] all notices whatsoever with respect to this Agreement....

4. The liability of [the Silvers] under this Agreement is absolute, unconditional and irrevocable, without regard to the liability of any other guarantor[] and shall not in any manner be affected by reason of any action taken or not taken by [Tenet], which action or inaction is herein consented and agreed to, nor by the partial or complete unenforceability or invalidity of any other guaranty or surety agreement. ... All of [Tenet’s] rights and remedies shall be cumulative....

7. [Tenet] may bring and prosecute a separate action or actions against [the Silvers] whether or not [TCC], any other guarantor, or any other person is joined in any such action or a separate action or actions are brought against [TCC], any other guarantor, or any other person for all or any part of the [note]....

(Underlining in original.)

¶ 3 TCC failed to make the first principal payment of $1 million, due January 10, 2000. On January 11, Tenet demanded payment from TCC and notified the Silvers of TCC’s default. Ten days later, Tenet demanded payment from the Silvers. In February, because no payment had been made, Tenet filed this suit against TCC on the note and against the Silvers and other guarantors, who had guaranteed an additional $3.5 million of TCC’s obligation, on their guaranties.¹ In September, Tenet filed a motion for partial summary judgment against the Silvers, arguing that their liability was fixed by the guaranty. The Silvers filed a cross-motion for summary judgment, arguing their obligation had been extinguished because Tenet had recently given notice of a trustee’s sale of the hospital property, the value of which exceeded the Silvers’ discharge limit of $1 million.

¶ 4 In October, TCC filed a petition in the United States District Court under Chapter 11 of the United States Bankruptcy Code. The trial court ruled that the automatic stay resulting from the filing of the petition prevented it from ruling on the parties’ summary judgment motions. See 11 U.S.C. § 362(a). The stay was lifted in February 2001, and Tenet proceeded with its deed of trust sale, at which Tenet purchased the hospital with its credit bid of $4.6 million. Tenet later sold the hospital for that amount. As a result, the Silvers supplemented their cross-motion for summary judgment, contending that their “obligation ha[d] been satisfied.” The trial court agreed and entered partial summary judgment in their favor. This appeal by Tenet followed.

Standard of Review

¶5 On appeal from summary judgment, we review de novo whether the trial court correctly applied the law. Hahn v. Pima County, 200 Ariz. 167, 24 P.3d 614 (App.2001). Contract and statutory interpretation issues are questions of law subject to our de novo review. Bothell v. Two Point Acres, Inc., 192 Ariz. 313, 965 P.2d 47 (App. 1998) (interpretation of release provision); Hartford Accident & Indem. Co. v. Federal Ins. Co., 172 Ariz. 104, 834 P.2d 827 (App. 1992) (statutory interpretation).

The Silvers’ Guaranty

¶ 6 We first address whether, as the Silvers argued and the trial court implicitly found, the proceeds Tenet received from the sale of the hospital extinguished the Silvers’ liability under the guaranty. Tenet argues that, under the terms of the guaranty agreement, a partial principal payment could cancel the Silvers’ liability only if timely and voluntarily made. The Silvers counter that any partial principal payment in excess of $1 million, including an involuntary one by trustee’s sale or foreclosure, extinguishes their liability.

¶ 7 The nature and extent of a guarantor’s liability depends upon the terms of the guaranty contract. Provident Nat’l Assurance Co. v. Sbrocca, 180 Ariz. 464, 885 P.2d 152 (App.1994). As with any question of contract interpretation, our goal is to effectuate the parties’ intent, giving effect to the contract in its entirety. Id.; see also Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 854 P.2d 1134 (1993). And, although we generally construe a guaranty to limit a guarantor’s liability, we must give effect to its clear and unambiguous terms. Consolidated Roofing & Supply Co. v. Grimm, 140 Ariz. 452, 682 P.2d 457 (App. 1984). Neither party contends the guaranty is ambiguous; they merely suggest alternate interpretations. See Millar v. State Farm Fire & Cos. Co., 167 Ariz. 93, 96, 804 P.2d 822, 825 (App.1990) (a contractual term “is not ambiguous ... merely because one party assigns a different meaning to it in accordance with his or her owm interest”); see also Taylor.

¶ 8 Preliminarily, we disagree with the Silvers that this case presents an issue that can be resolved by A.R.S. § 33-814(C). That statute provides in part: “If ... a trustee’s sale is held, the liability of a person who is not a trustor for the deficiency is determined pursuant to subsection A of this section and any judgment for the deficiency against the person shall be reduced in accordance with subsection A of this section.” As anticipated by that subsection, the deficiency judgment against the principal debtor “shall be for an amount equal to the sum of the total amount owed the beneficiary as of the date of the sale, as determined by the court less ... the sale price at the trustee’s sale.” § 33-814(A). Although we agree with the Silvers that § 33-814 requires reduction of the principal amount due, the statute does not address whether the sale price of a property at a trustee’s sale necessarily extinguishes a guarantor’s liability like that of the Silvers under the guaranty here.

¶ 9 The guaranty clearly recites that the Silvers “agreed to execute” it “as an inducement to [Tenet] to execute the Sale Agreement and to close the transactions contemplated by the Sale Agreement.” Under the guaranty, the Silvers would be liable for $1.5 million “until payment of One Million Dollars ... or more has been made on the outstanding principal balance of the Note,” and they expressly acknowledged their guaranty was one of “due and punctual performance.” As noted earlier, Tenet simultaneously filed actions against TCC on the promissory note and against the guarantors on their respective guaranties before giving notice of a trustee’s sale of the property and, until the sale occurred and the hospital was sold, no principal payment had been made on the note. The question, then, is what effect application of the post-default proceeds should have on the Silvers’ liability, which in turn depends on the parties’ discernable intent in executing the guaranty. See Taylor.

¶ 10 Contrary to the guaranty’s express provision that the Silvers had induced Tenet to sell the hospital to TCC by assuring TCC’s “performance” up to the discharge amount, the Silvers’ interpretation suggests that the parties intended to allow Tenet to collect on the Silvers’ guaranty only if it could not recover at least the amount of the Silvers’ discharge limit through a trustee’s sale or foreclosure proceedings. In effect, the Silvers contend that the parties intended that their agreement be a secondary, and perhaps a tertiary, guaranty of collection of only the first $1 million of the underlying obligation. But this contravenes the express language of the guaranty: “This Agreement is a guaranty of due and punctual performance and payment and is not merely a guarantee [sic] of collection.” (Emphasis added.) As other language in the guaranty declares, the Silvers agreed their liability was “absolute, unconditional and irrevocable,” language indicative not of a guaranty of collection, but a guaranty of payment. See AMA Management Corp. v. Strasburger, 309 S.C. 213, 420 S.E.2d 868, 872 (App.1992) (a guaranty of payment “is an absolute or unconditional promise to pay a particular debt if it is not paid by the debtor” at the time it is due); CIT Fin. Servs. v. Herb’s Indoor RV Center, Inc., 118 Idaho 185, 795 P.2d 890, 892 (App. 1990) (“An unconditional guaranty is a promise by the guarantor to pay the debt or perform the obligation upon default without requiring the secured party to first exhaust its remedies against the [principal obligor].”); Restatement (Third) of Suretyship and Guaranty § 15(b) emt. d (1995) (“In the absence of language or circumstance indicating the contrary [such as the obligation’s express designation as a guaranty of collection], the secondary obligation is the agreement of [the guarantor] to be jointly and severally liable for the [principal obligor’s breach]____”). A guaranty of collection, on the other hand, permits a creditor to collect from a guarantor only if the principal obligor is insolvent or cannot otherwise pay the underlying obligation. Restatement § 15(b).

¶ 11 We agree with Tenet that the Silvers’ interpretation would vitiate the guaranty of payment provision and thereby render the agreement substantially meaningless, if not illusory. Such an interpretation conflicts with some of our most fundamental rules of contract interpretation. See Ash v. Egar, 25 Ariz.App. 72, 76, 541 P.2d 398, 402 (1975) (“A written contract will, if possible, be construed so as to give effect to all its parts.”); Kirkeby-Natus Corp. v. Kramlich, 12 Ariz.App. 376, 382, 470 P.2d 696, 702 (1970) (“It is true that a construction which gives effect to all portions of a contract is to be preferred to an interpretation which leaves one or some parts without effect.”). Their interpretation also vitiates the guaranty’s language that the Silvers promised “due and punctual performance” of their obligation because it would make their liability contingent on Tenet’s subsequent actions despite the fact that the Silvers’ liability was already triggered under the express terms of the agreement.

¶ 12 The guaranty makes clear the parties executed it contemplating not only TCC’s potential inability to make its scheduled principal payments but also, because the guaranty covered several of TCC’s obligations in addition to the purchase money note, the possibility that a trustee’s sale might generate insufficient funds to fully repay TCC’s obligation. Under section seven of the guaranty, the Silvers expressly acknowledged that Tenet’s recourse was not limited to an action against TCC or the other guarantors. Moreover, the Silvers agreed in section four that their guaranty was only one of Tenet’s several possible remedies. Taken together, the terms of the agreement show that the parties intended that the Silvers’ liability would attach upon TCC’s default.

¶ 13 The Silvers’ argument to the contrary ignores other plain language of the guaranty as well, including the covenants that they consented to “any action taken or not taken” by Tenet and that, under section three of the agreement, payment from any other source would not affect them liability. The Silvers cite no authority for the proposition that, “[o]nce Tenet decided to complete its Trustee’s Sale, before obtaining a judgment against Silver, the provisions of the Guaranty Agreement were no longer applicable.” Indeed, the guaranty’s terms, read together, reflect that the only nonapplicable provision following TCC’s default was the discharge provision. Because the record shows that TCC defaulted on the loan before $1 million of the underlying obligation had been paid, the Silvers’ liability under the guaranty attached without qualification when Tenet demanded payment from the Silvers. See Bank of America Nat’l Trust & Sav. Ass’n v. Schulson, 305 Ill.App.3d 941, 239 Ill.Dec. 462, 714 N.E.2d 20 (1999). We will not adopt a different interpretation of the guaranty unless the parties clearly made such an agreement. Provident Nat’l Assurance Co.

¶ 14 Although we have found no Arizona cases directly on point, other jurisdictions that have considered guaranties containing language similar to the one at issue in this context have held that the guarantor remains bound despite the application of trustee’s sale or foreclosure proceeds. The most recent case so holding is Schulson. There, the defendants guaranteed a $13.5 million loan Bank of America had made to the defendants’ limited partnership. The guaranties provided that each defendant “unconditionally guaranteed] the full and prompt payment when due” of the debtor’s obligations, at an amount not to exceed $3 million, but “reduced by an amount equal to 36% of any principal payments made with respect to the Liabilities.” Id. 239 Ill.Dec. 462, 714 N.E.2d at 22, 23. After the debtor defaulted, the bank sent each guarantor a notice of the debtor’s default and demanded payment under the guaranties, then filed a lawsuit against them when they refused to pay. The debtor filed a voluntary bankruptcy petition, which eventually resulted in the sale of its collateral for about $8 million. In counterclaims, the guarantors sought declarations that their liability was reduced by application of the collateral proceeds. The bank opposed the counterclaims and moved for summary judgment, which the trial court denied.

¶ 15 The Appellate Court of Illinois reversed the judgment on that issue, finding that the guaranties reflected the parties’ intent that the guarantors’ “obligations [wejre triggered upon the debtor’s default.” Id. 239 Ill.Dec. 462, 714 N.E.2d at 27. In reaching its decision, the court recognized, as we do here, that the guarantors’ interpretation would nullify specific guaranty provisions, including the guarantors’ promise to provide “ ‘full and prompt payment’ ” upon the debt- or’s default. Id. 239 Ill.Dec. 462, 714 N.E.2d at 25. The court also found that the guaranties’ use of the terms “ ‘absolute’ ” and “ ‘unconditional’ ” made it comparable to a guaranty of payment, id. 239 Ill.Dec. 462, 714 N.E.2d at 26, under which a creditor is not required to collect from the debtor or on the collateral before enforcing the guaranty.

¶ 16 Although we recognize, as the dissent suggests, that an ongoing borrowing relationship probably existed between the debtor and creditor in Schulson, we believe the dissent unduly emphasizes that factual aspect. It is notable that the Schulson court made no distinction between that case and a case on which it relied, Telegraph Savings & Loan Ass’n v. Guaranty Bank & Trust Co., 67 Ill.App.3d 790, 24 Ill.Dec. 330, 385 N.E.2d 97 (1978), in which there is no indication the debtor and creditor had an ongoing borrowing relationship. The Schulson court nevertheless followed Telegraph Savings & Loan in holding that, because the guaranties at issue showed the parties had intended that only voluntary payments could release the guarantors, collateral proceeds were not “principal payments” for the purposes of release. 239 Ill.Dec. 462, 714 N.E.2d at 26.

¶ 17 Other courts have reached the same conclusion on agreements similar to the ones at issue in Schulson, Telegraph Savings & Loan, and here. See, e.g., MacCulley v. Fidelity Federal Savings & Loan Ass’n of Oca-la, 335 So.2d 327 (Fla.App.1976); TMG Life Ins. Co. v. Ashner, 21 Kan.App.2d 234, 898 P.2d 1145 (1995); Southern Bank & Trust Co. v. Harley, 292 S.C. 340, 356 S.E.2d 410 (App.1987), aff'd as modified, 295 S.C. 423, 368 S.E.2d 908 (1988); Preston Ridge Fin. Servs. Corp. v. Tyler, 796 S.W.2d 772 (Tex. App.1990); Crown Life Ins. Co. v. LaBonte, 111 Wis.2d 26, 330 N.W.2d 201 (1983); cf. BankEast v. Michalenoick, 138 N.H. 367, 639 A.2d 272, 273 (1994) (foreclosure sale proceeds applied first to extinguish guaranty, which provided: “ ‘This guarantee shall be reduced to the extent of any principal pay-down on the Obligations.’ ”).

¶ 18 In sum, Tenet’s actions to recover the debt did not affect the Silvers’ liability because they had executed a guaranty of “due and punctual” payment and “not merely a guarantee [sic] of collection.” See LaBonte. The record shows Tenet complied with its contractual obligation to initially demand payment from TCC upon its default. Once Tenet had done so and demanded payment from the Silvers, their guaranty obligation was fixed. See Schulson; LaBonte. Their subsequent refusal to perform promptly and the delay caused by this action do not extinguish their liability. We accordingly reverse the grant of summary judgment in favor of the Silvers and remand this matter to the trial court with directions to enter partial summary judgment in favor of Tenet.²

Writ of Attachment

¶ 19 Relying on the guaranty, Tenet applied for a writ of attachment in September 2000 against the Silvers’ property. After a hearing, the trial court declined to issue the writ, finding that TCC’s underlying obligation was “fully secured.” The court later awarded the Silvers attorney’s fees. Tenet contends both orders are erroneous.

¶20 A trial court may issue writs of attachment in a contract action only if the debt “is not fully secured by real or personal property.” A.R.S. § 12-1521(1). Although the Silvers’ guaranty was unsecured, they ask us to uphold the trial court’s orders because Tenet’s deed of trust securing the principal debt would have generated sufficient funds to secure the guaranty. But the Silvers ignore a basic principle of a guaranty: it is an agreement separate from the principal debt. Howard v. Associated Grocers, 123 Ariz. 593, 601 P.2d 593 (1979); Provident Nat’l Assurance Co. Moreover, the Silvers again ignore the purpose and language of the guaranty, that, as guarantors, their liability would not be subject to Tenet’s ability to recover its losses through a trustee’s sale of foreclosure. In light of this and the foregoing discussion, the trial court erred both in denying Tenet’s application for a writ of attachment and in granting the Silvers attorney’s fees. Accordingly, we vacate those orders. Any other result would simply rewrite the parties’ agreement and abrogate Tenet’s rights under the guaranty.

¶ 21 Pursuant to the terms of the guaranty and A.R.S. § 12-341.01, we grant Tenet’s request for attorney’s fees on appeal upon its compliance with Rule 21, Ariz.R.Civ.App.P., 17B A.R.S.

WILLIAM E. DRUKE, Presiding Judge, concurring.

1 . Neither TCC nor the other loan guarantors are parties to this appeal.

2 . We note that while the maximum amount of the Silvers' liability was fixed by their breach, the amount they actually pay, of course, may or may not be the full amount of the guaranty.