Opinion
No. 12624-5-I.
August 26, 1985.
[1] Guaranty and Suretyship — Scope of Guaranty — Determination. Whether a particular obligation is covered by a written guaranty depends upon the language of the guaranty instrument.
Guaranty and Suretyship — Interest Rate — Commencement.
[3] Consumer Protection — Action for Damages — Unfair or Deceptive Conduct — Necessity. Only conduct which is either unfair or deceptive gives rise to a right of action by an individual under the Consumer Protection Act (RCW 19.86).
[4] Contracts — Costs — Attorney Fees — Contractual Right — Scope. The applicability of an attorney fee provision in a contract depends upon whether the primary issue of the litigation falls within the scope of the provision.
Nature of Action: Action to collect on a shareholder's limited guaranty of a corporate debt. The shareholder counterclaimed for damages for breach of the guaranty and violation of the Consumer Protection Act.
Superior Court: The Superior Court for King County, No. 80-2-02591-1, Gary M. Little, J., on December 1, 1982, entered a judgment in favor of the plaintiff.
Court of Appeals: Holding that the guaranty had not been rescinded or abrogated and covered the obligation on which the corporation had defaulted, and that the plaintiff had not violated the Consumer Protection Act, but that the trial court had applied an incorrect rate of interest, and that the plaintiff was entitled to its attorney fees, the court affirms the judgment as to liability and remands the case for a recomputation of interest owed and for an award of attorney fees.
Hugh W. Townsend, pro se.
Davis, Wright, Todd, Riese Jones and Douglas W. Purcell, for respondent.
Seattle-First National Bank brought this action to recover on a promissory note executed by West Coast Rubber, Inc., a general guaranty of the corporation's debts executed by John Zamelis, and a $25,000 limited guaranty of the corporation's debts executed by Hugh Townsend. Sea-First also sought attorney fees. Townsend counterclaimed for damages for breach of the limited guaranty and violation of the Consumer Protection Act, RCW 19.86, and for attorney fees. Default judgments were entered against West Coast and Zamelis. After a trial to the court, sitting without a jury, judgment was entered against Townsend in the amount of $30,613.70 ($25,000 principal plus $5,613.70 interest). Sea-First's claim for attorney fees was rejected. Townsend appeals, and Sea-First cross-appeals.
In July 1977, Sea-First issued a $100,000 letter of credit to West Coast with an expiration date of April 18, 1978. In return, West Coast pledged a security interest in its accounts receivable and inventory and gave a second deed of trust on real property in Forks, Washington. Shareholders Sam Lincoln, his wife and John Zamelis signed general guaranties of the corporation's debts; shareholder Townsend signed a $25,000 limited guaranty of those debts. See appendix. Townsend also delivered 26 $1,000 bearer bonds to Sea-First as collateral for his guaranty.
On April 10, 1978, West Coast drew on its letter of credit by requesting Sea-First to issue a check for $56,339.19 to Seiberling Tire Company. West Coast gave a promissory note to Sea-First in that amount. On April 18, 1978, West Coast again drew on its letter of credit by requesting Sea-First to issue a check for $31,883.03 to Seiberling. West Coast gave a promissory note to Sea-First in that amount. On May 22, 1978, West Coast consolidated its debts under the letter of credit by executing a promissory note to Sea-First in the amount of $61,190.95. The final payment on this note was due on September 5, 1978.
On June 21, 1978, Townsend sent a letter to Sea-First saying in pertinent part:
As your file and information shows and as was the intention of the parties my $25,000 guaranty to the bank was limited only to the commercial letter of credit and terms expressed in the application was the only basis of the guaranty. I am of the opinion that the obligation established at that time, namely, July 14, 1977 was fully paid, discharged and replaced in complete substitution by the promissory note accepted by the bank from West Coast Rubber Inc. on May 22, 1978 and maturing on September 5, 1978 thereby relieving me and my bonds from any further obligation also.
Defendant's exhibit 12.
In October 1978, the Lincolns, in return for a release from their guaranty, borrowed $20,000 from Sea-First on a note and second deed of trust on their house. This money was used to reduce West Coast's indebtedness. At the same time, Sea-First released its security interest in West Coast's accounts receivable and inventory. On October 6, 1978, West Coast executed a promissory note in the amount of $44,137.04, with the final payment due on January 15, 1984. This note replaced the May 22, 1978 note of $61,190.95, reflecting payments and adjustments made during that period. West Coast defaulted, and Sea-First brought this action on February 15, 1980. By letter (see appendix), Townsend tendered $25,000, and Sea-First returned his bonds.
The first issue is whether Townsend's liability is based on West Coast's promissory note dated October 6, 1978, and his limited guaranty. Townsend contends that the note was never introduced into evidence, the trial court made no findings regarding the validity of the obligations represented by the note, it was executed after Townsend "rescinded" his limited guaranty, and it was executed after the letter of credit expired.
[1] Where a guaranty does not refer to any particular note, the language of the guaranty alone determines the obligation guaranteed. North Am. Bond Mortgage Co. v. Twohy, 159 Wn. 442, 447, 293 P. 717 (1930). The limited guaranty does not refer to any note, but states that Townsend "guarantee[s] payment to the Bank of all liabilities and indebtedness which the Customer [West Coast] has incurred or is under or may incur or be under to the Bank." Thus, Sea-First was required to prove only the validity of the limited guaranty and the indebtedness of West Coast to it. The evidence clearly established both of these propositions.
The second issue is whether Townsend rescinded the limited guaranty by his letter of June 21, 1978. The letter does not purport to rescind the limited guaranty. Moreover, even if it could be so construed, Townsend had no grounds for rescission. See A. Stearns, Suretyship § 7.8, at 207 (5th ed. 1951). Under the terms of the limited guaranty, the letter was notice to the bank to make no further advances on the security of Townsend's limited guaranty, and the bank so understood it.
The third issue is whether the limited guaranty was abrogated by the bank's taking the October 6, 1978, note as evidence of the amount due, and releasing the other guarantors, the Lincolns and Zamelis, and the collateral without Townsend's consent. In the limited guaranty, Townsend agreed that "[t]he Bank shall not be bound to exhaust its recourse nor to take any action against the Customer or other parties or on the collateral it may hold before being entitled to payment by the undersigned . . ." He also agreed "to remain bound notwithstanding any extensions or renewals of any indebtedness or the liabilities hereby guaranteed or any part thereof," and consented "to the Bank to make such renewals and extensions as the Bank at its option may choose to grant or accept; and . . . release any collateral which it may now or hereafter hold . . ." Thus, all of the actions Sea-First took after receiving Townsend's letter were authorized by the limited guaranty and were directly related to the indebtedness arising from the letter of credit before the receipt of it.
[2] The fourth issue is whether Townsend is liable for interest in excess of the $25,000 principal sum guaranteed. The limited guaranty provides, "[t]he liability of the undersigned at any one time hereunder is limited to the principal sum of Twenty-five Thousand ($25,000) Dollars, together with all interest due or to become due thereon to the Bank." Townsend was liable for interest on the principal amount upon West Coast's default, notice of which had been waived in the limited guaranty. Rainier Nat'l Bank v. Clausing, 34 Wn. App. 441, 447, 661 P.2d 1015 (1983); see also National Bank v. Equity Investors, 81 Wn.2d 886, 918, 506 P.2d 20 (1973).
As to the time of the default, the evidence established that West Coast made three monthly payments on the October 6, 1978 note, the first payment being due on January 15, 1979. Thus, West Coast became in default on April 16, 1979.
Because the limited guaranty does not specify a rate of interest, either directly or by reference, Townsend is liable for interest at the legal rate. 38 C.J.S. Guaranty § 57, at 1213 (1943); RCW 19.52.010 (1979). The trial court's conclusion that Townsend is liable for interest at 12 percent from April 10, 1978, is incorrect.
The fifth issue is whether the trial court erred by excluding the testimony of G. Ben Bryce, Sea-First's vice-president, regarding the intentions and additional agreements of the parties. Because Townsend did not make an offer of proof at trial, as required by ER 103(a)(2), error, if any, has been waived.
The sixth issue is whether Sea-First violated the Consumer Protection Act, RCW 19.86, by any of the terms of the limited guaranty or by adding the following provision to the limited guaranty without Townsend's consent:
Guarantor hereby grants a security interest to bank in the collateral hereby deposited with and pledged to bank to secure to bank the foregoing undertakings of guaranty.[3] In order for a private individual successfully to bring an action under RCW 19.86, the conduct complained of must (1) be unfair or deceptive, (2) be within the sphere of trade or commerce, and (3) affect the public interest. Anhold v. Daniels, 94 Wn.2d 40, 45, 614 P.2d 184 (1980). The terms of the limited guaranty whereby Townsend waived virtually all of his surety defenses and consented to Sea-First's taking any action it deemed appropriate were not deceptive, but were clear and unambiguous. Further, they were not unfair. See Fruehauf Trailer Co. of Can. Ltd. v. Chandler, 67 Wn.2d 704, 409 P.2d 651 (1966). Sea-First's unauthorized addition to the limited guaranty, regarding Townsend's grant of a security interest in his bonds, above quoted, was not an unfair or deceptive act. It was done to clarify Sea-First's possession of the bonds.
The seventh issue is whether Sea-First is entitled to attorney fees. The limited guaranty provides:
If this guaranty be referred to an attorney for enforcement or for collection, the undersigned agree to pay the costs and expenses of such action including reasonable attorney's fees and whether or not suit be commenced.[4] When the action commenced, Townsend did give back the $25,000, the face amount of the guaranty, but it was not an unconditional tender. Rather, the money reclaimed the $26,000 in bonds put up as collateral. The dispute over payment of the $25,000 guaranty was continued by Townsend, who filed a counterclaim seeking return of that sum. Because enforcement of the limited guaranty was the primary issue of the litigation, attorney fees should be awarded to Sea-First. See American Sheet Metal Works, Inc. v. Haynes, 67 Wn.2d 153, 159-60, 407 P.2d 429 (1965).
Accordingly, the judgment is reversed and remanded for redetermination of Townsend's liability for interest and attorney fees. Sea-First, having substantially prevailed, is entitled to costs on appeal. RAP 14.3.
COLEMAN, J., and HOPP, J. Pro Tem., concur.
Reconsideration denied September 26, 1985.
Review denied by Supreme Court November 22, 1985.