Appeal from Superior Court, Franklin (89-2-50345-2) County; Honorable Dennis Yule, Judge. Judgment Date: 4-16-91.
Durham, C.j., Dolliver, Smith, Guy, Johnson, Madsen, Alexander, Talmadge, J.j., concurring. Sanders, J. (did not participate).
DURHAM, C.J. -- The central issue in this case is whether impairment of collateral releases a guarantor from its obligations under an unconditional guaranty agreement. A jury determined Respondent Glacier Sales had guaranteed Petitioner Century 21 Products payment for the sale of potatoes, and thus awarded Century 21 $13,210.09. Glacier Sales appealed, arguing that Century 21 had impaired the collateral by failing to preserve a lien for payment of the potatoes pursuant to the Perishable Agricultural Commodities Act, 1930, 7 U.S.C. § 499a(1994) (PACA). The Court of Appeals reversed on this basis, holding that impairment of collateral discharges a guaranty
agreement. We agree that a creditor's impairment of collateral generally releases a guarantor from its obligations. Nonetheless, we adhere to the principle that where a guaranty is absolute and unconditional, impairment of collateral has no affect on the agreement. Since the parties in this case have stipulated that their guaranty agreement was unconditional, we reverse the Court of Appeals and reinstate the jury award.
Petitioner Century 21 Products purchases potatoes from farmers, selling its lower grade potatoes to potato processors. These companies, in turn, use the potatoes to make hash browns and other processed foods. Respondent Glacier Sales buys processed potatoes from these companies, selling them to its retail customers.
In December 1988, the president of Century 21, George Yoshino, received a telephone call from Emmett Byrnes, vice president and director of Glacier Sales. Byrnes requested that Century 21 supply low grade potatoes to Sun Russett Potatoes, Inc., a processor of hash brown potatoes. Although no written agreement existed between Glacier Sales and Sun Russett, it appears that Glacier Sales was the primary dealer for Sun Russett's production.
Sun Russett had a history of not paying its debts. Because of this, Yoshino told Byrnes that he would not conduct any business with them. In response, Byrnes stated that Glacier Sales would guarantee Century 21's contract with Sun Russett. Byrnes explained that Glacier Sales held Sun Russett's accounts receivables and thus could make this guaranty. Yoshino had known the president of Glacier Sales for 35 years, and in light of this guaranty, agreed to supply Sun Russett with potatoes. This agreement was reached over the telephone, and as is the practice in this industry, never confirmed in writing.
Glacier Sales had a close relationship with Sun Russett.
Byrnes testified on cross examination that during the course of an average year, Glacier Sales held about $3.5 million in Sun Russett receivables. From the inception of Sun Russett, and until approximately a year before its bankruptcy, Byrnes served on Sun Russett's board of directors. While on the board, Byrnes advised Sun Russett on marketing issues and loaned Sun Russett $35,000 from his pension plan at a favorable rate. Byrnes resigned from the board in 1988 because he disagreed with its business practices and feared becoming financially responsible. This resignation occurred a few months before Glacier Sales offered to guarantee Century 21's contract with Sun Russett.
Based on its guaranty from Glacier Sales, Century 21 provided Sun Russett with seven shipments of potatoes between January and April 1989. During this time, Byrnes and Sun Russett's owner met with Yoshino to request additional quantities of raw potatoes. Century 21 mailed seven invoices to Sun Russett and Sun Russett paid four in full. At some point, Century 21 began sending copies of these invoices to Glacier Sales, but received no response.
Century 21 could have preserved a lien for the payment of the potatoes in the event of Sun Russett's bankruptcy under PACA. A PACA lien gives a produce seller priority over secured creditors when a produce buyer declares bankruptcy. Although Yoshino was familiar with PACA, he believed he could count on his guaranty from Glacier Sales and thus did not file for the PACA lien within the appropriate time frame.
Despite paying for some of the potatoes, Sun Russett filed for bankruptcy owing Century 21 $13,210.09. When Century 21 learned of this, it asked Glacier Sales to honor its guaranty, but Glacier Sales refused to acknowledge one existed. Yoshino immediately filed for a PACA lien, but knew it was untimely. Indeed, the claim was rejected for this reason. Without the PACA lien, Century 21 was unable to recover from Sun Russett's bankruptcy estate because secured creditors' claims depleted the bankruptcy
funds. Subsequently, Century 21 brought suit against Glacier Sales. A jury found a guaranty contract existed between Glacier Sales and Century ...