Rosenbloom v. Feiler

Rodowsky, J., delivered the opinion of the Court. This case involves an oral indemnification by an individual of the guarantors of payment of a bank loan to a business corporation. The guarantors sued the indemnitor and obtained judgment following a trial to the court which rendered a written opinion. The Court of Special Appeals modified the judgment and, as modified, affirmed.

Feiler v. Rosenbloom, 46 Md. App. 297 , 416 A.2d 1345 (1980). Each side petitioned for, and was granted, certiorari. As the case comes to us the issues involve (1) whether the oral agreement between the indemnitor and the guarantors is within the Statute of Frauds; (2) whether the indemnitor’s liability was terminated by the extension of the loan; (3) the period during which interest on the loan falls within the indemnitor’s promise; (4) the amount of loan principal which falls within the indemnitor’s promise; and (5) whether the guarantors were obligated to mitigate damages. As a result of our review, we shall reinstate the judgment of the trial court.

The borrower was Togs, Inc. It was engaged in developing, manufacturing and marketing a patented form of button developed by Edward J. Kahn (Kahn). All parties to this action were directors, officers and shareholders of Togs, Inc. Benjamin Rosenbloom (Rosenbloom), Charles Ellerin (Ellerin), Adolph Farber (Farber) and William Chanoff (Chanoff), hereinafter collectively the "Plaintiffs,” were ⁶⁰¹ guarantors. The defendant-indemnitor is Alfred W. Feiler (Feiler). Plaintiffs seem principally to have been investors in the business.

Feiler had for many years been engaged in the button business in New York City and was brought into the group primarily because of his expertise. Day-to-day management was in the hands of Kahn, as president, and of an executive vice president. In December 1972 Togs, Inc. was planning a nationwide marketing of its product and on "going public.” Financing of this expansion, prior to receipt of the anticipated new equity capital, was by borrowing. Togs, Inc. turned to Maryland National Bank, where it had one or more loans outstanding, for an additional line of credit of $250,000.

By a promissory note dated December 18, 1972 Togs, Inc. promised to pay to the order of Maryland National Bank $250,000 six months after that date with interest at TVz% per annum. The note was prepared to have "PAYMENT GUARANTEED” by Rosenbloom, Kahn, Ellerin, Farber, Feiler and Chanoff. Rosenbloom signed as guarantor on December 18 and effected a $50,000 advance to Togs, Inc. that day. The next day, at a meeting of the board of directors, the note was presented for the signatures of the balance of the directors, as guarantors.

When Feiler was unwilling to sign, the other directors were unwilling to go on, or remain on, the note, absent the signatures of all. The trial court found that there then ensued a conversation between Rosenbloom, Farber and Feiler in which "an agreement was reached whereby [Feiler] was not required to sign as a guarantor, but would still accept his responsibility for a pro rata one-sixth share of the loan payable to the five signatory guarantors who would be required to pay in the event of default by the corporation.” The other directors signed as guarantors on the note. 1 At that meeting Feiler was elected chairman of the executive committee of the board of directors. ⁶⁰² The next day Feiler wrote to Farber the following letter. I want to confirm to you that I accept my share of the last note in the amount of $250,000.00 signed by you and [Rosenbloom] with the Maryland Bank. It is my understanding that my share will be one sixth of the total amount.

This Note is to be repaid to the bank from proceeds of the public offering and this authorization, therefore, will be voided at that time. I would also like to make the point that my share of the financial responsibility would automatically be considered as void if for any reason there might be a change in the executive committee as established in yesterday’s meeting of the Board of Directors. However, based upon an admission by Feiler in his deposition, which was placed in evidence, the trial court further found that "at the time [Feiler] orally promised the plaintiffs to be partially responsible for the loan guarantee, which promise induced the plaintiffs to become guarantors, no condition or qualification of liability was mentioned.” The $250,000 loan was not paid by the due date of June 18, 1973. It was extended at a floating rate of interest which at all relevant times exceeded 7x/2%.

A public offering never came to fruition and Togs, Inc. invoked Chapter XI of the Federal Bankruptcy Act. The debt was gradually paid down by the Plaintiffs by partial payments of principal, with interest on the declining balance, and was extinguished on June 17, 1977. The trial court determined that Feiler was liable to the Plaintiffs under the oral indemnity contract for one-sixth of $250,000 at 7x/2% interest, that "[s]uch rate of interest shall be calculated as extending from December 19, 1972 until June 17,1977” 2 and that "[thereafter and until the date of Judgment the interest rate shall be 6 percent.” On May 3, 1979 judgment for $41,666.67 "plus interest as above set ⁶⁰³ out” was entered in favor of the Plaintiffs, with costs. Feiler appealed.

The Court of Special Appeals, in modifying the judgment, concluded that the one-sixth indemnification was to be applied only to $200,000 of loan advances and calculated interest at 1¥¿% on Feiler’s share only to June 18, 1973. In the relationships involved in this appeal, Maryland National Bank is the creditor of Togs, Inc. and the obligee of the Plaintiffs’ guaranty of payment. Togs, Inc. is the principal whose debt to Maryland National Bank was guaranteed by the Plaintiffs to that bank. Each of the Plaintiffs, by signing "PAYMENT GUARANTEED” on the note, engaged that "if the instrument is not paid when due he will pay it according to its tenor without resort by the holder to any other party.” Md. Code (1975), § 3-416 (1) of the Commercial Law Article.

The liability of a guarantor of payment is indistinguishable from that of a co-maker. Etelson v. Suburban Trust Co., 263 Md. 376, 380 , 283 A.2d 408, 411 (1971). In the terminology utilized by L. Simpson, Handbook on the Law of Suretyship (1950), the Plaintiffs are sureties. The surety’s promise is in form a direct and primary promise to pay the debt of another.

It is usually, though not necessarily, made jointly or jointly and severally with the principal and for the same consideration, and gives rise to a primary duty. [Id., § 14, at 16.] The promises of the Plaintiffs to guarantee payment run to Maryland National Bank, as the holder of the instrument. Feiler, the indemnitor, made a promise running to the Plaintiffs to hold them harmless for one-sixth of the loan. 3 Simpson, supra, § 17, at 28 describes the distinction between suretyship (guaranty of payment) and indemnity as follows: ⁶⁰⁴ Like the contract of suretyship, the contract of indemnity has as its purpose security of the promisee against loss. The great difference between the two lies in the character of the promisee. In suretyship the promise runs to an obligee or creditor, present or prospective.

In • indemnity ¡the promise runs to an obligor or debtor present or prospective. In suretyship the promisee has or is about to extend credit to a third person, the principal, and the promise is made to protect the promisee creditor in case the principal fails to perform. In indemnity, the promisee owes or is about to assume an obligation to a third person, the creditor, and the promisor agrees to save him harmless from loss as a result of his assuming that obligation. With the distinctions between these relationships in mind, we turn to the arguments of the parties.

I Feiler contends that his oral promise is unenforceable because it is a "special promise to answer for the debt, default or miscarriage of another person,” i.e., Togs, Inc. Md. Code (1957, 1978 Repl. Vol.), Art. 39C, § 1 (1). The Court of Special Appeals, in an opinion by Chief Judge Gilbert, after a thorough review of the authorities, applied the majority or Corbin rule which places outside of the Statute of Frauds an oral promise of indemnity made to a surety or guarantor. Under that analysis the indemnitor’s promise is not to answer for the debt of the principal, either to the creditor, or to the surety on the debtor’s obligation to indemnify the surey.

Feiler v. Rosenbloom, supra. Feiler does not seek review by this Court of the determination by the intermediate appellate court to apply the Corbin rule as the law of Maryland. Rather, he raises a mixed factual and legal contention that the parties intended their contract to be one of gua-mty. He relies on testimony indicating that the Plaintiffs regarded the responsibility of accepting the obli ⁶⁰⁵ gation of guaranteeing the note as that of each of the directors of Togs, Inc. Feiler, however, would not sign the note and thereby promise as a guarantor to the bank.

Consequently, a substitute arrangement was effected, as a business matter, under which Feiler promised the Plaintiffs to be responsible for a one-sixth share of the loss or liability which the Plaintiffs might incur by their promises to the bank. It was the function of the trial court to determine the facts. On the facts found by it, that court correctly concluded as a legal matter that Feiler’s promise to the Plaintiffs was a contract of indemnity. Next, Feiler points to the rule illustrated by Crown Realty Corp. v. Weinstein, 177 Md. 260, 263 , 9 A.2d 602, 603 (1939) that: [W]henever the main purpose of the promisor is to subserve some pecuniary or business purpose of his own, his promise is not within the statute, although it may be in form a promise to pay the debt of another, and although the performance of it may incidentally have the effect of extinguishing that liability.

Feiler says his promise does not fall within that rule. From this he leaps to the conclusion that the Statute of Frauds must apply. The rule referred to deals with a class of promises which are made to a creditor and which, although they may be in form a promise to pay the debt of another, are original and not collateral to the promise of the debtor. 4 In ⁶⁰⁶ this case Feiler’s promise was not to Maryland National Bank and there is no contention that it fell outside of the Statute of Frauds because of the main purpose rule. II When the $250,000 note of Togs, Inc. was not paid at maturity, the obligation was extended by the bank with the consent of the Plaintiffs at increased interest and ultimately was placed on a demand basis.

The loan was not retired until June 17,1977. Feiler was advised by the Plaintiffs in a letter dated June 15, 1973 of an extension to October 17, 1973 at 8Vz%. Demands on Feiler for his share of the interest were made on October 19,1973, January 24, 1974 and on August 9,1974. Suit was filed October 25,1974.

There is no evidence that Feiler expressly consented to any extension. Relying on principles of suretyship, he contends that the extension of the principal’s obligation without his consent operated as a discharge of his obligation. The courts below correctly rejected this contention. There was no express element of Feiler’s agreement with the Plaintiffs which terminated the indemnification obligation as of the due date of the December 18, 1972 note executed by Togs, Inc. Indeed, Feiler’s letter of December 20, 1972 reflects that the parties contemplated possible loan renewal beyond June 18, 1973 since they anticipated that repayment by Togs, Inc. would be from the proceeds of the public offering, an event which was not certain to occur by June 18, 1973 as subsequent events so forcefully demonstrated.

Further, the note executed by Togs, Inc. provided that the "makers, endorsers, sureties and guarantors agree and consent that the holder may, without notice, extend the time of payment of this note in whole or in part and from time to time by notation hereon.” Decisions in other states have not treated the obligation to indemnify a surety as terminated because of an extension of time, without the indemnitor’s consent, for the performance of the principal’s obligation, where there is an absence of ⁶⁰⁷ prejudice to the indemnitor. In Northcott v. Nieman, 117 W. Va. 313 , 185 S.E. 217 (1936) the landlord leased for 25 years with the right in the tenant to build and ultimately to buy. A construction loan was obtained by the tenant, secured by a deed of trust in which the landlord joined. To protect the landlord against loss because of the deed of trust, the tenant, as principal, and certain individuals, as sureties, agreed to indemnify the landlord.

Deed of trust notes were extended with the landlord’s consent, but without the consent of the sureties on the indemnity bond. The latter obtained an injunction against the landlord suing on the bond, claiming they had been discharged by the extension of time for payment of the principal’s obligation. This injunction was reversed. The court reasoned as follows (id. at 318, 185 S.E. at 220 ): "An extension of time for payment or performance of the principal obligation does not release an indemnitor against loss from liability, especially where he consents thereto; and this rule has been held to apply, even though the extension of time is given without the indemnitor’s consent.” 31 C.J., p. 445.

"It appears to be the general rule that one who agrees to indemnify a surety or guarantor on a contract is not released from liability by an extension of the time for payment or performance on the contract, although this extension is given without his knowledge or consent. Thus, it is held that one who contracts to indemnify a surety or guarantor on a note is not freed from his obligation by a renewal of the note, or the issuance of a new one by the same parties, when the original note is due, or by any other arrangement extending the time for payment, although this is done without his knowledge or consent.” [quoting Annot., Extension of Time or Other Modiñcation of Original Contract as Releasing Indemnitor of Surety or Guarantor, 43 A.L.R. 1368 (1926).] ⁶⁰⁸ To like effect is Watanabe v. Ota, 137 Wash. 368 , 242 P. 379 (1926) which arose on demurrer. There the plaintiff cosigned with the debtor a note to a bank. Four individuals then signed a note to the plaintiff for a somewhat larger amount in order to protect the plaintiff against the liability he assumed on the note to the bank.

After the note to the bank had been renewed, the plaintiff paid it and sued the makers of the second note. They were held not to have been discharged. Their liability is not to the bank, but to the [plaintiff]. It