Present: All the Justices
ROGER J. MCDONALD
v. Record No. 001773 OPINION BY JUSTICE CYNTHIA D. KINSER
June 8, 2001
NATIONAL ENTERPRISES, INC.
FROM THE CIRCUIT COURT OF HENRICO COUNTY
George F. Tidey, Judge
National Enterprises, Incorporated (NEI), filed an
action against Roger J. McDonald on a Guaranty Agreement
that McDonald had executed in 1988 to secure a loan to
Lafayette Associates, a Virginia general partnership.
McDonald was one of two partners in Lafayette. 1 After the
close of the evidence during a jury trial, the circuit
court granted NEI’s motion to strike McDonald’s evidence
and its motion for summary judgment. After considering
McDonald’s post-trial motions, the court entered judgment
in favor of NEI in the amount of $462,839.60, together with
interest at the judgment rate. Based on an affidavit from
NEI’s counsel, the court also awarded NEI attorney’s fees
and costs in the amount of $14,834. McDonald appeals.
On appeal, McDonald contends that the circuit court
erred in entering judgment for NEI on the Guaranty
Agreement because NEI was not in possession of the original
note evidencing the primary obligation, and because
1
Lawrence T. Phillips was the other partner.
liability on that note had been adjudicated in favor of the
maker of the note in a prior action filed by NEI. McDonald
further claims that the circuit court erred by ruling, as a
matter of law, that the statute of limitations did not bar
the present action on the Guaranty Agreement. Finally, in
his last two assignments of error, McDonald challenges the
admissibility of certain documents and the award of
attorney’s fees to NEI. Because we find no error in the
judgment of the circuit court on these issues, we will
affirm that judgment.
FACTS
On October 3, 1988, Lafayette obtained a loan from
Seasons Mortgage Corporation. 2 That indebtedness was
evidenced by a Deed of Trust Note (the Note) executed by
McDonald and Phillips as the general partners of Lafayette. 3
McDonald and Phillips, in their individual capacities, also
signed a Guaranty Agreement bearing the same date. In that
agreement, they unconditionally guaranteed “full and prompt
2
Seasons Mortgage Corporation is a wholly owned
subsidiary of Seasons Federal Savings Bank, formerly
Seasons Savings Bank.
3
Lafayette, through its general partners, also
executed a Deed of Trust and Security Agreement to secure
payment of the Note.
2
payment . . . of all obligations payable by” Lafayette
pursuant to the Note.
In October 1989, the Resolution Trust Company (RTC)
was appointed as the receiver for Seasons Savings Bank. 4
Subsequently, RTC sold a package of loans and collateral to
NEI. As evidenced by a Bill of Sale and Assignment of
Loans dated December 15, 1992, the loan and Guaranty
Agreement at issue in this case were included in that
package. 5
After that purchase, NEI filed an action against
Lafayette, the maker of the Note, and against McDonald and
Phillips, as the guarantors. The circuit court denied
Lafayette’s motion to dismiss that action, but in an order
dated August 25, 1998, the court granted NEI’s motion to
nonsuit the case. However, in that order, the court stated
that, “[i]n the event of any refiling[,] . . . the
4
As receiver for Seasons Savings Bank, RTC received
authorization to incorporate and issue a federal charter as
Seasons Federal Savings Bank. RTC was then appointed as
the conservator for Seasons Federal Savings Bank.
5
In January 1992, prior to NEI’s purchase of the loan
package, RTC foreclosed on the property secured by the Deed
of Trust. RTC then sold the outstanding balance on the
loan to NEI.
3
plaintiff shall be allowed to proceed on the guarantee, but
not on the note.” 6
NEI filed the present action on September 21, 1998,
naming only McDonald as a defendant. NEI alleged that RTC
had conveyed its interest in the loan evidenced by the Note
and Guaranty Agreement to NEI, and that McDonald was
indebted to NEI under the Guaranty Agreement. McDonald
defended the action primarily on the grounds that the
statute of limitations had expired, and that NEI cannot
proceed on the Guaranty Agreement since NEI is not in
possession of the original Note. Finally, McDonald argued
that the first action was resolved on the merits in favor
of Lafayette and that, therefore, NEI is precluded from
pursuing this cause of action on the Guaranty Agreement.
The circuit court denied McDonald’s motions based on these
defenses. In entering judgment for NEI, the court accepted
the testimony of McDonald’s sole witness regarding the
amount due and owing on the primary obligation guaranteed
by McDonald.
ANALYSIS
I. POSSESSION OF NOTE AND DISPOSITION OF PRIOR ACTION
6
NEI obtained a default judgment against Phillips in
that first action.
4
McDonald’s first two assignments of error, concerning
the fact that NEI does not have possession of the original
Note and the disposition of the first action filed by NEI,
involve the relationship between a guaranty contract and
the primary obligation. This Court has defined a guaranty
as “an independent contract, by which the guarantor
undertakes, in writing, upon a sufficient undertaking, to
be answerable for the debt, or for the performance of some
duty, in case of the failure of some other person who is
primarily liable to pay or perform.” B.F. Goodrich Rubber
Co., Inc. v. Fisch, 141 Va. 261, 266, 127 S.E. 187, 188
(1925); accord American Indus. Corp. v. First & Merchants
Nat’l Bank, 216 Va. 396, 398, 219 S.E.2d 673, 675 (1975);
Bourne v. Board of Supervisors, 161 Va. 678, 683-84, 172
S.E. 245, 247 (1934). In an action to enforce an
independent contract of guaranty, the obligee is proceeding
on the guaranty, not on the underlying note. Thus, to
recover on a guaranty, the obligee must establish, among
other things, the existence and ownership of the guaranty
contract, the terms of the primary obligation and default
on that obligation by the debtor, and nonpayment of the
amount due from the guarantor under the terms of the
guaranty contract. Delro Indus., Inc. v. Evans, 514 So.2d
976, 979 (Ala. 1987); Torrey Pines Bank v. Superior Court,
5
216 Cal. App. 3d 813, 819 (Cal. Ct. App. 1989); Stewart
Title Guar. Co. v. WKC Restaurants Venture Co., 961 S.W.2d
874, 880 (Mo. Ct. App. 1998); Wiman v. Tomaszewicz, 877
S.W.2d 1, 8 (Tex. App. 1994); cf. Bowman v. First Nat’l
Bank, 115 Va. 463, 466, 80 S.E. 95, 96 (1913) (averments
that defendant, for consideration, guaranteed payment of
notes were sufficient to imply that plaintiff was owner and
legal holder of notes).
Accordingly, in the present case, the circuit court
did not err in failing to dismiss this action because NEI
did not have possession of the original Note. In arguing
otherwise, McDonald confuses the difference between the
enforceability of the Note against Lafayette, the maker of
that Note, and the question whether the debt has been
extinguished, i.e., whether there is an obligation on the
part of Lafayette. The non-enforceability of a note as to
the maker does not necessarily extinguish the obligation.
See Fidelity & Cas. Co. v. Lackland, 175 Va. 178, 187, 8
S.E.2d 306, 309 (1940) (running of statute of limitations
against primary obligor does not extinguish debt of
guarantor). However, if there is no obligation on the part
of the principal obligor, then there is also none on the
guarantor. Bourne, 161 Va. at 684, 172 S.E. at 247.
6
In the present case, NEI established the existence of
the Guaranty Agreement executed by McDonald, the terms of
the primary obligation, Lafayette’s default on that
obligation, and McDonald’s failure to pay the amount due
under the Guaranty Agreement. Notably, McDonald has never
asserted that the primary indebtedness has been paid. His
only witness at trial, an attorney who practices in the
area of real estate foreclosures and related fields,
testified that the original Note evidencing the loan from
Seasons Mortgage to Lafayette, if it were available, would
reflect on its face a credit of $283,654.55 resulting from
the foreclosure by RTC. Consequently, he opined that the
copy of the Note introduced into evidence did not bear the
same information that the original Note would contain. In
calculating the amount of the judgment rendered against
McDonald, the circuit court accepted this witness’s
testimony regarding the amount that had been paid on the
primary indebtedness.
As to the effect of the disposition of the first
action on the present one, McDonald took inconsistent
positions before the circuit court in this case with regard
to the outcome of that first action. In a pre-trial
memorandum, McDonald stated that, in the first case, “NEI
. . . non-suited its claim against Lafayette Associates,
7
the alleged maker of the note, and Roger J. McDonald, the
alleged guarantor of the note.” Later, in a post-trial
memorandum, McDonald asserted that “Lafayette Associates,
which was sued on the alleged note[,] won on its defenses
and was dismissed with prejudice by the final order.” “A
litigant cannot assume positions which are inconsistent
with each other and mutually contradictory.” McLaughlin v.
Gholson, 210 Va. 498, 501, 171 S.E.2d 816, 818 (1970).
Irrespective of McDonald’s inconsistency, we do not
believe that there was an adjudication in the first action
with regard to the question whether the primary obligation,
through payment or otherwise, has been extinguished. The
circuit court’s order dated August 25, 1998, clearly
nonsuited NEI’s cause of action. Although the court also
stated that, in any future case, NEI could proceed only on
the Guaranty Agreement, that statement was not an
adjudication that the primary obligation had been
satisfied. Thus, we conclude that the court’s disposition
of NEI’s first case does not preclude this action to
enforce the Guaranty Agreement against McDonald.
II. STATUTE OF LIMITATIONS
With regard to his plea of the statute of limitations,
McDonald presents two theories in support of that defense.
Relying on the Restatement (Third) of Suretyship and
8
Guaranty § 43 (1996), he states that “where the statute of
limitations is a bar to the note, it is a bar to the
enforcement of the guaranty.” However, in Whitehurst v.
Duffy, 181 Va. 637, 648, 26 S.E.2d 101, 106 (1943), this
Court stated “that the running of the statute of
limitations against the primary obligation did not bar a
cause of action on the contract of guaranty or suretyship.”
See also Lackland, 175 Va. at 187, 8 S.E.2d at 309 (running
of the statute of limitations against principal obligor
merely bars creditor’s remedy, but does not extinguish debt
or obligation of guarantor). Thus, this argument has no
merit.
McDonald also asserts that the statute of limitations
applicable to the Guaranty Agreement itself bars this
action. In response, NEI claims that McDonald never
presented this argument to the circuit court and that the
argument is, therefore, waived under Rule 5:25. We do not
agree with NEI.
McDonald affirmatively pled the statute of limitations
in his grounds of defense to NEI’s motion for judgment. In
a memorandum in support of his affirmative defenses,
McDonald addressed the applicability of the five-year
statute of limitations set forth in Code § 8.01-246(2) and
the six-year statute of limitations provided in 12 U.S.C.
9
§ 1821(d) 14 (A) and (B). He also discussed the
availability of the tolling provision in Code § 8.01-
229(E)(3) if NEI relied on the federal statute of
limitations. Finally, during his motion to strike NEI’S
evidence after both parties rested, McDonald stated, “the
statute of limitations began to run on the guarantee when
it began to run on the maker.” Thus, we conclude that
McDonald did present this argument regarding the statute of
limitations to the circuit court. Accordingly, we will
address the merits of that issue.
In denying McDonald’s motion to dismiss based on his
plea of the statute of limitations, the circuit court did
not articulate the rationale for its decision. The court
did, however, state in its letter opinion dated May 25,
1999, that “[u]nless the plaintiff states to the contrary,
I am assuming that [it is] relying on the Virginia Statute
of limitations of five years rather than the federal
statute.” NEI never advised the circuit court that it was
not relying on the five-year statute of limitations
contained in Code § 8.01-246(2), nor did it indicate that
it was relying on the federal six-year statute of
limitations. Thus, in accordance with the circuit court’s
direction to NEI, we resolve this issue by applying the
five-year statute of limitations.
10
In Guth v. Hamlet Assoc., Inc., 230 Va. 64, 75, 334
S.E.2d 558, 565 (1985), this Court concluded that a cause
of action on the guaranty at issue there accrued at the
same time as the statute of limitations began to run on the
underlying obligation. Thus, relying on that decision,
McDonald argues that the statute of limitations commenced
to run on the Guaranty Agreement and the Note at the same
time, specifically no later than September 18, 1990. On
that date, Seasons Federal sent a letter to Lafayette,
advising Lafayette that it was in default and demanding
payment in full from Lafayette of all amounts due under the
Note. Based on that letter, McDonald argues that the five-
year statute of limitations expired before NEI filed the
first action in July 1996, thus barring the present action
because NEI would not be entitled to the tolling provision
in Code § 8.01-229(E)(3) after it nonsuited the first case.
However, we do not accept McDonald’s premise that NEI’s
cause of action on the Guaranty Agreement accrued in
September 1990.
This Court has recognized that the statute of
limitations on a guaranty may or may not start to run at
the same time as that on the underlying obligation.
Compare Guth, 230 Va. at 75, 334 S.E.2d at 565 (cause of
action on guaranty accrued at same time as statute of
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limitations began to run on underlying obligation), with
Whitehurst, 181 Va. at 646-47, 26 S.E.2d at 105 (cause of
action on note and guaranty did not accrue at the same
time). In the present case, the circuit court never
specified the date upon which the five-year statute of
limitations commenced to run. However, in order to deny
McDonald’s plea of the statute of limitations, the court
necessarily had to decide that the statute did not commence
to run in September 1990, as argued by McDonald. And, we
conclude that the court was correct.
Under the terms of the Guaranty Agreement, McDonald
agreed to pay all sums owed by Lafayette when in default
“upon demand by the Lender, without notice other than such
demand and without the necessity for additional action by
the Lender.” (Emphasis added). Thus, under the terms of
the Guaranty Agreement, McDonald was not required to pay
until Lafayette defaulted and the obligee demanded payment
from McDonald. See Piedmont Guano & Mfg. Co. v. Morris, 86
Va. 941, 945, 11 S.E. 883, 884 (1890) (“guarantor . . . is
usually not responsible unless notified of the default of
the principal”). Accordingly, we hold that the five-year
statute of limitations did not begin to run on the claim
under the Guaranty Agreement until a demand was made to
McDonald for payment. See United States v. Vanornum, 912
12
F.2d 1023, 1027 (8th Cir. 1990); Western Bank v. Franklin
Dev. Corp., 804 P.2d 1078, 1080 (N.M. 1991); Ocean Transp.,
Inc. v. Greycas, Inc., 878 S.W.2d 256, 267 (Tex. App.
1994).
As the proponent of the bar of the statute of
limitations, McDonald had the burden of proving the date on
which the statute commenced to run. Brown v. Harms, 251
Va. 301, 306, 467 S.E.2d 805, 807 (1996). Based on the
record before us, a demand to McDonald was not made until
September 11, 1991. At that time, an asset manager for the
loan at issue sent a letter to McDonald, advising that
payments under the Note were in default and requesting
payment from McDonald. That letter, unlike the September
1990 letter that was addressed only to Lafayette, was
addressed and sent to McDonald. Thus, we hold, as a matter
of law, that the statute of limitations started to run on
the claim under the Guaranty Agreement on September 11,
1991. That holding means that NEI filed the first action
before the statute of limitations expired. After the
nonsuit of that action, NEI filed the present action on
September 21, 1998, within the six months afforded under
Code § 8.01-229(E)(3). Therefore, the circuit court
correctly denied McDonald’s plea of the statute of
limitations.
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III. EVIDENTIARY RULINGS
McDonald next asserts that the circuit court erred by
admitting into evidence NEI’s Bill of Sale and Assignment
of Loans; a copy of the Note; a settlement statement dated
October 3, 1988, reflecting the loan to Lafayette; a
settlement statement dated July 30, 1992, accounting for
the proceeds from the foreclosure by RTC; and an RTC sales
transaction report; plaintiff’s exhibit numbers one, two,
five, six, and seven, respectively. McDonald contends that
these documents were inadmissible hearsay evidence because
they all contained information not generated by the
employees of either NEI or RTC, and were not records kept
in the regular course of business by either entity. We
find no merit to McDonald’s argument with regard to any of
these documents.
A senior asset manager for NEI testified that NEI
received the Bill of Sale and Assignment of Loans in the
consummation of the transaction in which it purchased the
package of loans from RTC. As such, that document is an
operative legal document that embodies and evidences the
conveyance. It was not offered for the “truth” of its
averments, but for its legal effect; hence, it was not
hearsay. Cf. Remington Investments v. Hamedani, 55 Cal.
App. 4th 1033, 1042 (Cal. Ct. App. 1997) (“Promissory Note
14
document itself is not a business record as that term is
used in the law of hearsay, but rather is an operative
contractual document admissible merely upon adequate
evidence of authenticity”); Cohen v. Maine Sch. Admin.
Dist., 393 A.2d 547, 549 (Me. 1978) (letter was legally
operative document standing by itself as approval of
Commissioner and thus not hearsay); Boyd v. Diversified
Fin. Sys., 1 S.W.3d 888, 891 (Tex. App. 1999) (note and
guaranty were admissible as operative facts regardless of
hearsay status); 2 McCormick on Evidence § 249 at 100 & n.2
(John W. Strong, ed., 5th ed. 1999); 6 John H. Wigmore,
Evidence in Trials at Common Law § 1770 at 259-262 (James
H. Chadbourn rev. 1976). Therefore, the Bill of Sale and
Assignment of Loans was properly admitted into evidence.
As to the other documents, assuming without deciding
that the circuit court erred in admitting them into
evidence, we conclude that any such errors were harmless.
The existence and amount of the loan to Lafayette, as
evidenced by the Note and 1988 settlement statement, were
also established by other evidence: (1) McDonald’s
reference to the loan number in a letter dated December 3,
1991; 7 (2) Phillips’ signature on the 1988 settlement
7
That letter, plaintiff’s exhibit number 12, is not
the subject of an assignment of error. See Rule 5:17(c).
15
statement as a partner of Lafayette; and (3) testimony from
McDonald’s witness that the foreclosure on the property
secured by the Deed of Trust (plaintiff’s exhibit number
3), would not have taken place if the loan reflected in the
1988 settlement statement had not been made, and that the
loan was in the amount of $425,000. Finally, the 1992
settlement statement and the RTC sales transaction report
related to the amount of proceeds received from the
foreclosure that were applied to the indebtedness on the
Note. Those two documents were not used by the circuit
court in calculating the amount owed to NEI. Instead, the
circuit court accepted the testimony of McDonald’s witness
on that issue.
IV. ATTORNEY’S FEES
The final issue involves the award of attorney’s fees
and costs to NEI. At the conclusion of the trial, NEI
reminded the court that the terms of the Guaranty Agreement
provided for recovery of costs and attorney’s fees. At
that point, McDonald objected and noted that NEI had not
presented evidence on that issue. The court agreed and
advised NEI that it could “submit something on that.” NEI
then submitted an affidavit to the court, requesting an
award of attorney’s fees in the amount of $40,102.25.
Based on that affidavit, the court determined the amount of
16
attorney’s fees and costs without submitting the issue to
the jury.
McDonald now contends that the award was in error
because NEI presented no evidence to the jury on its claim
for attorney’s fees. After NEI filed the affidavit
regarding its request for attorney’s fees, McDonald
objected to the procedure in a letter to the court dated
April 11, 2000. In that letter, McDonald reminded the
court that he had requested a jury trial and that this
issue should be heard and decided by the jury. He also
noted that the affidavit contained no detailed time records
and that no evidence, expert or otherwise, had been offered
during the course of the trial. For those reasons,
McDonald argued that attorney’s fees should not be awarded.
On brief, NEI references a post-trial hearing during
which NEI allegedly presented detailed time records. 8
However, a transcript of that hearing is not part of the
record before this Court. Without that transcript, we do
not know what evidence and argument, if any, were presented
to the circuit court. Nor do we know what position
8
According to the circuit court’s order entered on May
15, 2000, a hearing was held on April 28, 2000, which is
the date of the court’s order setting the amount of
attorney’s fees and costs awarded to NEI.
17
McDonald took regarding his prior assertion that the matter
of attorney’s fees should be decided by the jury.
Under Rule 5:10, the record on appeal consists of,
among other things, “the transcript of any proceeding or a
written statement of facts, testimony, and other incidents
of the case when made a part of the record as provided in
Rule 5:11.” As the appellant in this appeal, McDonald has
the burden to present a sufficient record on which this
Court can determine whether the circuit court erred as
McDonald contends. Wansley v. Commonwealth, 205 Va. 419,
422, 137 S.E.2d 870, 873 (1964). Because McDonald has
furnished an insufficient record, the judgment of the
circuit court regarding the award of attorney’s fees will
be affirmed. White v. Morano, 249 Va. 27, 30, 452 S.E.2d
856, 858 (1995).
CONCLUSION
For the reasons stated, we find no error in the
judgment of the circuit court and will affirm that
judgment.
Affirmed.
18