Restatement (Second) Contracts, §§ 159 through 173, Introductory Note; 17 Am.Jur.2d "Contracts" § 151; Homelite v. Trywilk Realty Co., 272 F.2d 688 (4th Cir. 1959); Fredonia Broadcasting Corporation, Inc. v. RCA Corporation, 569 F.2d 251, (5th Cir.), cert. den., 439 U.S. 859, 99 S.Ct. 177, 58 L.Ed. 2d 167 (1978); Stone v. Lawyers Title Insurance Corporation, 554 S.W.2d 183 (Tex. 1977)).... The Personal Guaranties signed by the [Trawlers' partners] are not enforceable by the [Service] because the [Service] was a participant in the fraud that led to the execution of the Personal Guaranties. Standard Surety Casualty Co. v. Olson, 150 F.2d 385 (8th Cir. 1945); United States v. Basil's Family Supermarket, Inc., 259 F. Supp. 139 (S.D.N.Y. 1966); First Nat. Bank, Henrietta v. Small Business Admin., 429 F.2d 280 (5th Cir. 1970). 661 F. Supp. at 28.
Under most circumstances a loan guaranty agreement may be voided for misrepresentation by the one receiving the guaranty only where the misrepresentation amounts to fraud and the guarantor has participated in or had knowledge of the debtor's fraud or where he has actually committed the fraud. See, e.g., Rabon v. Putnam, 164 F.2d 80 (10th Cir. 1947); Standard Sur. Cas. Co. v. Olson, 150 F.2d 385 (8th Cir. 1945); United States v. Basil's Family Supermarket, Inc., 259 F. Supp. 139 (S.D.N Y 1966) The SBA in this case did not present a case of actual fraud by the Bank. Without getting into the semantic quagmire of whether the Bank was guilty of constructive fraud, we hold that the situation in the instant case is sufficiently distinguishable from the ordinary guaranty agreement so that a negligent misrepresentation of material facts by the Bank here would constitute a complete defense to SBA liability on the guaranty.
" And in Standard Surety Casualty Co. of New York v. Olson, 8 Cir., 150 F.2d 385, 387, this court said: "the undertaking of an indemnitor * * * is that he shall be answerable for the default of another." Based upon the assumption that this is an action for indemnity the appellant contends, also, that the court erred in admitting the transcript of the evidence taken in the Home Insurance Company case. At the trial the complete record and a transcript of the evidence were introduced in evidence.
The Personal Guaranties signed by the individual Defendants are not enforceable by the Plaintiff because the Plaintiff was a participant in the fraud that led to the execution of the Personal Guaranties. Standard Surety Casualty Co. v. Olson, 150 F.2d 385 (8th Cir. 1945); United States v. Basil's Family Supermarket, Inc., 259 F. Supp. 139 (S.D.N.Y. 1966); First Nat. Bank, Henrietta v. Small Business Admin., 429 F.2d 280 (5th Cir. 1970). III.
Turning to the merits of the motion before the court, it is well-settled that when the prime obligor has fraudulently induced a person to sign as guarantor, such fraud may not be used as a defense against the obligee in an action on the note unless the obligee had knowledge of or participated in the fraud. See, e.g., First National Bank, Henrietta v. Small Business Administration, 429 F.2d 280, 287 (5th Cir. 1970); Rabon v. Putnam, 164 F.2d 80 (10th Cir. 1947); Standard Sur. Cas. Co. v. Olson, 150 F.2d 385 (8th Cir. 1945); United States v. Basil's Family Supermarket Inc., 259 F. Supp. 139, 141 (S.D.N Y 1966). Not only do the plaintiffs' answers to interrogatories affirmatively indicate that the SBA did not have knowledge of nor participate in the fraud, but plaintiffs have not even alleged that the SBA had such knowledge or so participated. Clearly, therefore, plaintiffs cannot rely on misrepresentations made to them by Vavaroutsos and Braun to avoid their obligations to the SBA which was unaware that the misrepresentations were ever made. And it borders on the frivolous to assert, as plaintiffs appear to assert, that the guaranties are voidable at their option because of misrepresentations made by them to the SBA in their loan application.
"It is well settled that when the prime obligor has fraudulently induced a person to sign as guarantor, such fraud may not be used as a defense against the obligee in an action on the note unless the obligee participated in the fraud. Rabon v. Putnam, 164 F.2d 80 (10th Cir. 1947); Standard Sur. Cas. Co. of New York v. Olson, 150 F.2d 385 (8th Cir. 1945); Stearns, Suretyship 108 (4th ed. 1934)."
It is well settled that when the prime obligor has fraudulently induced a person to sign as guarantor, such fraud may not be used as a defense against the obligee in an action on the note unless the obligee participated in the fraud. Rabon v. Putnam, 164 F.2d 80 (10th Cir. 1947); Standard Sur. Cas. Co. v. Olson, 150 F.2d 385 (8th Cir. 1945); Stearns, Suretyship 108 (4th ed. 1934). The sole basis upon which plaintiff obligee is alleged to have participated in such fraud was in making the loan to defendant Supermarket "in violation of the most elementary rules of business" and "in violation of the laws enjoined on the Small Business Administration by Congress", or more specifically in violation of Title 15, United States Code, Section 636(a)(7), 72 Stat. 389 (1958), requiring that all loans granted by the SBA "shall be of such sound value or so secured as reasonably to assure repayment."
But the law is well established in this state that misrepresentations by the principal do not release a surety from his contractual obligations to the assured obligee. See, National Surety Co. v. Becklund, 169 Minn. 177, 210 N.W. 882; Schlozer v. Heckeroth, 174 Minn. 525, 219 N.W. 921; Neefus v. Neefus, 209 Minn. 495, 296 N.W. 579; W. T. Rawleigh Co. v. Hoffman, 162 Minn. 57, 202 N.W. 54; Standard Surety Cas. Co. v. Olson (8 Cir.) 150 F.2d 385. See, also, Annotation, 71 A.L.R. 1279. 2.