Opinion
Case No. 03-4083-SAC
August 19, 2003
MEMORANDUM AND ORDER
This case, removed from state court on the basis of diversity jurisdiction, comes before the court on defendant s motion to dismiss for failure to state a claim on which relief can be granted, pursuant to Fed.R.Civ.P. 12(b)(6). In this action, plaintiff seeks to enforce a personal guaranty agreement. Standards governing motions to dismiss
A court may dismiss a complaint for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). Dismissal should not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief," GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)), or unless an issue of law is dispositive, Neitzke v. Williams, 490 U.S. 319, 326 (1989). "The purpose of Rule 12(b)(6) is to allow a defendant to test whether, as a matter of law, the plaintiff is entitled to legal relief even if everything alleged in the complaint is true." Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir. 1993); see Hospice of Metro Denver, Inc. v. Group Health Ins. of Oklahoma, 944 F.2d 752, 753 (10th Cir. 1991) ("Dismissal of a case pursuant to Fed.R.Civ.P. 12(b)(6) requires the legal determination that the plaintiff can prove no set of facts in support of his claim to entitle him to relief.") (citations omitted). The Tenth Circuit has observed that the federal rules " `erect a powerful presumption against rejecting pleadings for failure to state a claim.' " Maez v. Mountain States Tel. and Tel., Inc., 54 F.3d 1488, 1496 (10th Cir. 1995) (quoting Morgan v. City of Rawlins, 792 F.2d 975, 978 (10th Cir. 1986)).
Although a plaintiff need not precisely state each element of his claims, he must plead minimal factual allegations on those material elements that must be proved. See Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991). Put another way, " `conclusory allegations without supporting allegations are insufficient to state a claim.'" Erikson v. Pawnee County Bd. of County Com'rs, 263 F.3d 1151, 1154 (10th Cir. 2001) (quoting Hall, 935 F.2d at 1110), cert. denied, 535 U.S. 971 (2002). "[A]llegations of conclusions or opinions are not sufficient when no facts are alleged by way of the statement of the claim." Bryan v. Stillwater Board of Realtors, 578 F.2d 1319, 1321 (10th Cir. 1977); see Bryson v. City of Edmond, 905 F.2d 1386, 1390 (10th Cir. 1990) (district court is not required to accept "footless conclusions of law" in deciding motion to dismiss). " `It is true that the Federal Rules of Civil Procedure do not require a plaintiff to set out in detail the facts upon which a claim is based. Nevertheless, a plaintiff must allege sufficient facts to outline a cause of action, proof of which is essential to recovery.' " Stevens v. Umsted, 131 F.3d 697, 700 (7th Cir. 1997) (quoting Ellsworth v. City of Racine, 774 F.2d 182, 184 (7th Cir. 1985), cert. denied, 475 U.S. 1047 (1986)).
A court judges the sufficiency of the complaint accepting as true all well-pleaded facts, as distinguished from conclusory allegations, Maher v. Durango Metals, Inc., 144 F.3d 1302, 1304 (10th Cir. 1998), and drawing all reasonable inferences from those facts in favor of the plaintiff. Witt v. Roadway Express, 136 F.3d 1424, 1428 (10th Cir.), cert. denied, 525 U.S. 881 (1998); see Southern Disposal, Inc. v. Texas Waste Management, 161 F.3d 1259, 1262 (10th Cir. 1998) (court "need not accept . . . conclusory allegations as true."). It is not the court's function "to weigh potential evidence that the parties might present at trial." Miller v. Glanz, 948 F.2d 1562, 1565 (10th Cir. 1991). The court construes the allegations in the light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Hall v. Bellmon, 935 F.2d 1106, 1109 (10th Cir. 1991). These deferential rules, however, do not allow the court to assume that a plaintiff "can prove facts that it has not alleged or that the defendants have violated the . . . laws in ways that have not been alleged." Associated General Contractors v. California State Council of Carpenters, 459 U.S. 519, 526 (1983) (footnote omitted). Dismissal is a harsh remedy to be used cautiously so as to promote the liberal rules of pleading while protecting the interests of justice. Cayman Exploration Corp. v. United Gas Pipe Line Co., 873 F.2d 1357, 1359 (10th Cir. 1989). Facts
The relevant facts are undisputed. On or about December 9, 1983, Health Futures Investment Corporation ("HFIC")executed and delivered to plaintiff a promissory note in the amount of one million, five hundred thousand, one hundred fifty-nine dollars and eighty-three cents ($1,500,159.83), bearing interest at the rate of 12% per annum. The note states that the "principal of this Note shall be amortized over a twenty-five (25) year period, with a balloon payment of the entire outstanding principal balance on December 9, 1993." The language included as the last paragraph of the note, which constitutes defendant's personal guaranty, states:
FOR VALUE RECEIVED, the undersigned hereby personally guarantees the collection by Seller of the principal of and interest on this Note when due, whether by reason of acceleration or otherwise, up to a maximum of Five Hundred Thousand Dollars ($500,000.00).
Immediately after this language is defendant's signature.
"HFIC" or its successors made monthly payments on the promissory note until April, 2000. After the balloon payment became due in 1993, HFIC, the principal debtor, simply continued making the monthly payments in the previous amount, as if no balloon payment had been owed. See Petition, p. 2, ¶ 4; Dk. 3, p. 4. Thereafter, no payments were made and the note is in default. Plaintiff was granted judgment on the note against the principal on October 23, 2002, and execution of the judgment was returned unsatisfied. This suit was filed against defendant as guarantor on March 13, 2003.
Defendant seeks dismissal of the suit, claiming that either he has been discharged from his obligation due to a material change in the terms of the promissory note, or the suit is barred by the statute of limitations.
Material Alteration — Discharge of Guarantor
Although a distinction exists at law between a surety and a guarantor, the parties agree that for purposes of this motion, the distinction is immaterial. For purposes of convenience, the court will use the term guarantor, rather than surety.
Defendant first contends that the promissory note was materially altered without his consent, resulting in his discharge from liability under the guaranty agreement. It is undisputed that despite the fact that the promissory note provided for a "balloon payment of the entire outstanding principal balance on December 9, 1993," no balloon payment was made on that date or thereafter. Instead, the plaintiff continued to accept monthly payments from HFIC after December 9, 1993 in the same amounts as HFIC had paid before that date, until payments stopped in April of 2000.
Guaranty contracts are strictly construed in favor of the guarantor.
The liability of a guarantor upon an obligation cannot be extended by implication, and he should not be held beyond the precise terms of his contract. ( Kepley v. Carter, 49 Kan. 72, 30 P. 182; and Bank v. Bradley, 61 Kan. 615, 60 P. 322.) The same rule was stated in Dry Goods Co. v. Yearout, 59 Kan. 684, 54 P. 1062, in the following language:
`* * * A contract to pay the debt of another should not be expended beyond the fair import of its terms. A guarantor, like a surety, is a favorite of the law, and he is not held unless an intention to bind himself is clearly manifested; and his liability is never to be extended beyond the precise terms of his obligation. * * *' (pp. 685, 686, 54 P. p. 1062.)George E. Failing Co. v. Cardwell Inv. Co., 190 Kan. 509, 515-516 (1962). See First Nat. Bank of Anthony v. Dunning, 18 Kan. App. 2d 518, 520 (1993) (noting the preferential status accorded a gratuitous surety as adopted by the Kansas Supreme Court, citing Fisher v. Pendleton, 184 Kan. 322, 327 (1959) and Scovill v. Scovill, 144 Kan. 759, 761 (1936)).
In Kansas, the general rule is that a material change in the original contract, without the consent of the guarantor, results in discharge of the guarantor.
The obligation underlying a surety agreement cannot be modified without the surety's assent. A modification which alters the surety's obligation will discharge the surety. However, the alteration must be a material change. (citations omitted)
Dunning, 18 Kan. App. 2d at 520. A material change in the underlying agreement will discharge the guarantor regardless of whether a guarantor is or is not compensated. George E. Failing Co., 190 Kan. at 516 (1962).
Defendant contends that the change from requiring a balloon payment on a date certain to permitting monthly payments continuing an unstated number of years beyond the date set for the balloon payment, is a material change.
. . . a change is material when the nature of the contract is changed. This can happen when new obligations are imposed or when prior obligations are taken away. The ultimate question is whether "[t]he effect of the change is to place the surety in a different position than he occupied before the change was made." Stearns [Stearns, The Law of Suretyship (Elder ed. 1951)] § 6.3, p. 109.
Material change has also been defined as a change that a careful and prudent person would regard as substantially increasing the risk of loss. (citation omitted). Dunning, 18 Kan. App. 2d at 521. See Plow Co. v. Ward, 1 Kan. App. 6, 41 P. 64 (1895) (surety was discharged because a three-year payment plan was modified to require payment of the entire debt within one year).
Both parties recognize the general rule in Kansas that a guarantor is discharged due to material change when the time to pay a debt is extended. See Fisher v. Spillman, 85 Kan. 552, 554, 118 P. 65 (1911); Bank v. Brooks, 64 Kan. 285 (1902); Stove Works v. Caswell, 48 Kan. 689 (1892). But plaintiff contends that this rule applies only when the time for paying the entire debt is extended, and not when the creditor grants an extension of time in which to make installment payments, citing First Nat. Bank of Anthony v. Dunning, 18 Kan. App. 2d 518, 520 (1993).
In Dunning, the court held that the bank's granting of an extension of time for the principal debtor to pay installment payments, but not the whole debt, was not a material change, for purposes of determining whether forbearance discharged a gratuitous surety. There, the original agreement was for the debtor to make nine equal installment payments, commencing August 1988, then a 10th payment, which was to be a balloon payment. In January 1989, the Bank and the debtor executed a modification, extending the due date for the initial payment from August 1988 to April 1989. In September 1989, the debtor and the Bank entered into another extension agreement, extending the time for the August 1989 payment to October 31, 1989. The debtor failed to make that payment, resulting in the bank's foreclosing on the mortgage. The court found no discharge of the surety, despite the modifications of the original agreement, however, because the term of the debt was neither extended nor shortened. "The only real change was to give [the debtor] some flexibility in repaying the loan during the term." Id., at 522. The court found that the extension of time for the debtor to make two installment payments, long before the balloon payment was due, did not prejudice the surety.
The facts of the present case are clearly distinguishable from those in Dunning, and the court has no hesitancy in finding the change to be material. Here, the nature of the change placed the defendant, as guarantor, in a different position than he occupied before the change was made, and in a position that substantially increased his risk of loss. The change obligated defendant not just to guarantee collection of the stated amount until a date certain, but to do so indefinitely thereafter.
Plaintiff notes that no formal agreement between plaintiff and HFIC to extend the time for payments has been shown, and contends that the guarantor is thus not released from the contract of guaranty. The court agrees that the extension of time of payment must have been the result of mutual assent between the creditor and the principal debtor, but finds it immaterial whether that assent is manifested in a formal agreement. See GE Capital Mortg. Services, Inc. v. Pinnacle Mortg. Inv. Corp., 897 F. Supp. 842, 28 U.C.C. Rep. Serv.2d (CBC) 348 (E.D. Pa. 1995), on reconsideration on other grounds, 897 F. Supp. 854 (E.D. Pa. 1995) (an oral modification of a principal obligation, if legally enforceable, releases the guarantor.)
The controlling fact is that plaintiff continued to accept monthly payments after the balloon payment was due in lieu of demanding the past due balloon payment, and HFIC continued to pay on a monthly basis. Those actions evidence an agreement to alter the terms and conditions of payment stated in their written contract. "The intent of parties to modify a contract can be implied from their conduct if they do not continue to act according to the original terms of the contract. See W-V Enterprises, Inc. v. Federal Savings Loan Ins. Corp., 234 Kan. 354, Syl. ¶ 3, 673 P.2d 1112 (1983)." Galindo v. City of Coffeyville, 256 Kan. 455, 465-466 (1994). Here, the parties' acts after the balloon payment became due do not evidence merely a unilateral change by one party, but show knowledge of and agreement to the change in the underlying principal obligation by both parties. If the change was not in writing, that does not preclude a finding that the change is binding on the principals.
Plaintiff additionally contends that even if there was mutual assent by the principals to extend the terms and conditions of payment, that agreement was not supported by adequate consideration. Plaintiff relies upon 94 Am. Jur.2d Guaranty (1999), which states:
In order to release the guarantor, an extension of time of payment must be binding on the creditor. Thus, the extension of time of payment must have been the result of mutual assent between the creditor and the principal debtor, and must be supported by some consideration. The debtor's promise to the debt which he is already obligated to pay is not a consideration to support the promise of the creditor to extend the time for payment of the debt; in that case, the agreement to extend the time for payment is not binding, and the guarantor is not discharged by the creditor's gratuitous promise. On the other hand, an advance payment of interest or additional interest payments may provide sufficient consideration to support an extension of payment.
If the agreement as to extend the time of payment is binding on the creditor and debtor, a further agreement between the debtor and creditor that the guarantor will not be released does not prevent the guarantor's discharge.
94 Am. Jur.2d Guaranty (1999) (footnotes omitted).
In Miller, the Kansas Court of Appeals rejected a similar contention that there was no consideration for a guaranty agreement, in stating:
It is a longstanding rule of law that for a contract to be enforceable it must be supported by consideration. Temmen v. Kent-Brown Chevrolet Co., 217 Kan. 223, 231, 535 P.2d 873 (1975). The principle that forbearance may constitute consideration to support a contract is established in Kansas. Evco Distributing, Inc. v. Brandau, 6 Kan. App. 2d 53, 57, 626 P.2d 1192, rev. denied, 230 Kan. 817 (1981). Forbearance to sue can be good consideration for a promise, regardless of the actual validity of the claim, if the one who forbears has reasonable and sincere belief in its validity. Schiffelbein v. Sisters of Charity of Leavenworth, 190 Kan. 278, 280, 374 P.2d 42 (1962).Mitchell v. Miller, 27 Kan. App. 2d 666, 672 (2000).
Here, adequate consideration is evidenced by plaintiff's forebearance to sue HFIC for not making the balloon payment, and in HFIC's additional interest payments inherent in extending monthly payments. The court thus rejects plaintiff's contention that the change of the agreement was not supported by consideration.
For all the reasons stated above, the court finds on the face of the petition that the promissory note was materially altered without defendant's consent, resulting in his discharge from liability as a guarantor under the guaranty agreement. The court finds it unnecessary to address defendant's alternative argument concerning the statute of limitations.
IT IS THEREFORE ORDERED THAT defendant's motion to dismiss (Dk. 2) is granted. The case is thus dismissed with prejudice.