Starcraft Co. v. C.J. Heck Co. of Texas, Inc.

TIMBERS, Senior Circuit Judge,

dissenting:

Long experience at the bar and on the bench has taught that counsel and their clients expect — indeed are entitled — to have the claims which they address to the court ruled upon by the court. Here they will search the majority opinion in vain for such rulings. The issues upon which the majority rules were neither argued nor briefed before us. They were not raised in the district court.

The majority fashions from whole cloth an “equitable” solution to a purely statutory problem. This exercise reminds me of what John Selden said nearly three centuries ago:

“Equity is a roguish thing. For Law we have a measure, know what to trust to; Equity is according to the conscience of him that is larger or narrower, so is Equity. ‘Tis all one as if they should make the standard for the measure we call a ‘foot’ a Chancellor’s foot; what an uncertain measure would this be! One Chancellor has a long foot, another a short foot, a third an indifferent foot. ‘Tis all the same thing in the Chancellor's Conscience.”

Selden, Equity (1689).

Since, for reasons stated more fully below, I find no sound basis in the Uniform Commercial Code or in Texas case law for the majority’s decision, I respectfully but emphatically dissent.

I.

I have no quarrel with the majority’s summary of the facts,, with one notable exception. The majority omits any mention of the fact that Heck and the Johnsons are insolvent (as we were informed by counsel at oral argument). The significance of this omitted fact will become apparent in the discussion which follows in this dissenting opinion.

The Texas version of U.C.C. § 4-302 imposes strict liability on the payor bank for failure to meet the midnight deadline. New Ulm State Bank v. Brown, 558 S.W.2d 20, 25-27 (Tex.Civ.App.1977). The rule of § 4-302 is a simple one: If the bank misses the deadline, it must pay the face value of the check, regardless of any actual damages sustained by the payee. Goodman v. Norman Bank of Commerce, 565 P.2d 372, 374 (Okla.1977). This sometimes-harsh rule is necessary to promote efficiency and certainty in the collection process. To avoid chaos, the U.C.C. requires that the payor bank take prompt action on an instrument that is payable by it. Failure to so act imposes on the bank the risk that it will be unable to collect the amount of the check from its customer. See Met Frozen Food Corp. v. National Bank of North America, 89 Misc.2d 1033, 1038, 393 N.Y. S.2d 643, 647 (Sup.Ct., Nassau Co., 1977). It is not a “fine”, as suggested by the majority, nor does it operate as one since the bank may be able to charge back against its customer.

The majority states that satisfaction of the statutorily-imposed liability discharges the “debt” represented by the check.1 It *993reasons that, since Heck and Starcraft released their claims against each other, no debt existed; and Starcraft therefore would be receiving a windfall. This reasoning in my view is faulty in two respects.

First, § 4-302 does not refer to, nor does it assume, the existence of a debt. Article 4 of the U.C.C. governs bank deposits and collections. It is a bank-regulatory provision. As the court held in New Ulm State Bank, the accountability of the bank does not depend upon a showing that the instrument is enforceable. 558 S.W.2d at 25. Since the two obligations are totally independent, it follows that even a check given as a gift must be paid or returned-by the midnight deadline. The majority clearly is wrong when it concludes that “the drawee bank’s liability must have some connection with the underlying debt.”

Second, even if § 4-302 required that the check have been tendered in payment of a debt, Heck’s obligation to Starcraft never was satisfied. The majority confuses the concept of release with that of accord and satisfaction. A release is a surrender of a cause of action, while an accord and satisfaction is acceptance of what is intended by the parties to be full compensation of the obligation. McMillen v. Klingensmith, 467 S.W.2d 193, 195 (Tex.1971); Calamari & Perillo, Contracts 771-72 (2d ed.1977). The majority’s reliance on dictum in Knut-son v. Morton Foods, Inc., 603 S.W.2d 805 (Tex.1980), is misplaced. In Knutson, the Texas Supreme Court indicated that an employee-tortfeasor, who is required to indemnify an unreleased employer found liable under respondeat superior, could recover any consideration paid for the release. Id. at 807. The majority concludes that this means that the release satisfies the debt. This conclusion fails to recognize what seems to me to be the obvious: if the consideration paid for the release fully compensated plaintiff, there could be no further recourse against the employer.

Moreover, the “release” in the instant case is a contract. We must look to the intent of the parties to determine its effect. The stated impetus for Starcraft to release Heck and the Johnsons was the insolvency of those parties and not the belief that its claim was thereby satisfied. Indeed, the release specifically provided that “It is acknowledged and understood that Temple National Bank is not a party to this agreement, and this agreement shall not affect any claims asserted by or against Temple National Bank by the parties hereto.” In releasing Heck and the Johnsons, Starcraft believed that it was merely saving the time, trouble and expense of litigating against parties who were judgment-proof and that its claim on the check was preserved as against the Bank. Thus, the Mutual Release was not intended by the parties to be an accord and satisfaction of the claim. It did not fully compensate Starcraft.

Since § 4-302, to be operable, does not require the existence of a debt and since, even if a debt were required, Starcraft never was “compensated” for its claim, I would hold that the Bank is absolutely liable to Starcraft for the face value of the check.

II.

The majority suggests that Heck is béing required to discharge its debt to Starcraft twice as a result of the release and the judgment of the district court holding Heck liable to the Bank from which no appeal' has been taken. The majority therefore concludes that Heck has a right of restitution from Starcraft to which the Bank is subrogated and which results in circuity of action. This conclusion with due respect strikes me as standing the U.C.C., and common sense, on their heads.

Clearly the Bank is not entitled to be subrogated to the claims of Heck. Unlike § 4-407, which governs where a bank wrongfully pays despite a stop payment *994order, § 4-302 does not expressly grant to the payor bank the right to be subrogated. In the § 4-407 situation, furthermore, the bank by definition already has paid out on the instrument. The majority’s reliance on Bryan v. Citizens National Bank, 628 S.W.2d 761 (Tex.1982) is misplaced. While § 1-103 provides that general common law and equitable principles are not superceded by the Code unless contrary to its provisions, the very purpose behind § 4-302— promoting certainty in the bank collection process — strongly indicates that the bank’s only recourse is against its customer.

Finally, the claims that Heck had against Starcraft were unrelated to the particular transaction for which the check in question was given. The majority in effect holds that a bank is subrogated to all claims its customer may have against the payee. There would be no basis for this conclusion even under § 4-407 where the right to sub-rogation is expressly granted.

III.

I turn now to that portion of the judgment which rejected the Bank’s claim against the Johnsons. Prior to trial the parties stipulated that in 1975 the Johnsons had signed and delivered to the Bank an agreement in which they guaranteed the debts of Heck to the Bank. By the terms of the document, the parties agreed that they had entered into a continuing guaranty. Under Texas law a continuing guaranty is defined as follows:

“ ‘A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions, within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable.’ 38 C.J.S. Guaranty § 7, p. 1142.”

Blount v. Westinghouse Credit Corp., 432 S.W.2d 549, 553 (Tex.Civ.App.1968).

The duration of a continuing guaranty presents a nice question. In view of its divisible nature, a guarantor, under certain circumstances, may revoke a continuing guaranty. In the instant case, it is doubtful that the Bank’s redelivery to the John-sons of the guaranty agreement in 1979 (subsequent to payment having been stopped on the check) may be considered a revocation since by its terms the guaranty was to “remain in full force and effect until revoked in writing”. Moreover, even if a continuing guaranty such as this one were revoked, the guarantor would be immune only from liability arising out of transactions between the obligor and the creditor subsequent to the revocation. Casey v. Gibson Products Co., 216 S.W.2d 266, 268 (Tex.Civ.App.1948). It is undisputed that the Bank redelivered the guaranty to the Johnsons after Heck's outstanding indebtedness to the Bank had been paid. Although neither the Bank nor Heck was aware of the Bank’s statutory liability at the time of redelivery of the guaranty, the stop payment and late return of the check had taken place the previous year. In view of this chronology, the Starcraft check episode plainly was a transaction which took place prior to redelivery of the guaranty. Even if the redelivery may be viewed as a revocation of the continuing guaranty, the Johnsons nevertheless remain liable for this transaction which occurred prior to revocation.

The Johnsons argue, in the alternative, that the redelivery should be viewed as a release from liability for prior and pending transactions. The Bank argues that the Johnsons waived the affirmative defense of release. The Johnsons assert that the issue of release was tried by implied consent. It is neither necessary nor appropriate to decide this procedural matter because, even if the affirmative defense had been raised and decided, the claimed release would not be binding.

There are several problems in viewing the redelivery of the guaranty agreement to the guarantors as a release, e.g., whether the parties intended the act of redeliv*995ery to constitute a release. Assuming that all these problems were resolved in favor of the Johnsons, there remains the matter of lack of consideration. The general rule is that a release is not a valid defense by a guarantor unless the release was supported by consideration. 38 Am.Jur.2d Guaranty § 80 at 1087-88 (1968). Texas courts, faced with releases in situations other than in conjunction with a guaranty, have held that a release is not binding unless supported by consideration. E.g., Southwestern Fire and Casualty Co. v. Atkins, 346 S.W.2d 892, 897 (Tex.Civ.App. 1961) (due to lack of consideration, plaintiffs cashing a check offered for undisputed portion of his claim held not a release of plaintiffs claim for additional payments). In the instant case, the Johnsons’ defense of release must fail because the record discloses no consideration having been given or recited for the Bank’s release of the Johnsons’ liability for prior transactions between the Bank and Heck covered by the guaranty agreement.

There remains to be considered whether that guaranty was broad enough to cover the indebtedness of Heck to the Bank which followed from stopping payment on the check and which resulted from the court’s judgment after trial. I start by recognizing the principle that contracts of guaranty are to be construed in favor of the guarantor and may not be extended beyond their terms. McKnight v. Virginia Mirror Co., 463 S.W.2d 428, 430 (Tex.1971). The terms of the instant guaranty are plain and require no extension by us because it provides that the Johnsons

“have absolutely and unconditionally guaranteed, and do hereby absolutely and unconditionally guarantee to the said Bank, its successors and assigns, the punctual payment when due of each and every claim, demand, and cause of action of every kind, class and character of said Bank against [Heck], now existing or which may hereafter arise . . . .”

I would hold that this broad and unambiguous language encompasses Heck’s indebtedness to the Bank under the court’s judgment.

I would further hold that the court erred in reciting in its judgment that the Bank presented no material evidence with respect to its claim against the Johnsons. The Bank claimed that the Johnsons were liable as guarantors, presented evidence that the Starcraft check episode occurred before the guaranty was redelivered to the Johnsons, and offered in evidence the very broad guaranty the Johnsons signed. I would also hold that the court erred in reciting in its judgment that the Bank failed to request submission of any issues to the jury on its claim against the John-sons. The legal effect of a guaranty agreement, including the obligations of the parties, is to be decided by the court, not the, jury. Maykus v. Texas Bank & Trust Co. of Dallas, 550 S.W.2d 396, 398 (Tex. Civ.App.1977).

Finally, even if the redelivery operated to relieve the Johnsons of liability for Heck transactions subsequent to the redelivery, the Johnsons remained liable for Heck indebtedness which resulted from transactions with the Bank which took place prior to the redelivery and which were covered by the guaranty — including the Starcraft check transaction. I would hold that the guaranty agreement is broad enough to cover Heck’s indebtedness under the judgment of the court, which is a result of the prior transaction.

With respect to the Bank’s claim against the Johnsons, I would reverse and remand the case to.the district court with instructions to enter an amended judgment which will include a provision awarding to the Bank and against the Johnsons the sum of $158,392.15, together with interest according to law.

IV.

In this relatively simple, straightforward case, the majority’s reasoning is destined, I fear, to produce endless mischief in the interpretation and application of the Uniform Commercial Code.

The majority reaches the result that it does in the belief that Starcraft is reaping *996a windfall and that the Bank is an innocent victim. This simply is not the case. Star-craft never has been compensated for its claim against Heck. The Bank is far from a disinterested third party. It must be remembered that the funds represented by the check ultimately were applied to offset loans the Bank had made to Heck. The result of the majority opinion is to allow the Bank, in the name of “equity”, to benefit, at the expense of Starcraft, from the Bank’s failure to adhere to the statutory requirements.

I recognize that the majority has strained mightily to limit its decision to the peculiar facts of this case and thus to strip its decision of any precedential value.2 Despite these valiant efforts, however, the ad hoc imposition of “equitable” principles, where statutory and contractual obligations should control, has the unfortunate effect of undermining certainty in bank collections under Article 4 of the Uniform Commercial Code.

The radiations of the majority opinion are sure to reach beyond the confines of this case — indeed beyond the boundaries of this Circuit. I wish I could believe that such radiations would be for the good.

To summarize:

(1) I would affirm that portion of the judgment which awarded the sum of $158,392.15, plus interest, in favor of Starcraft against the Bank.
(2) I would reverse that portion of the judgment which rejected the Bank’s claim against the Johnsons and remand the case to the district court with instructions to proceed as stated above.3

From the majority’s refusal to do so, I respectfully but emphatically dissent.

. The Bank argues somewhat differently that the mutual release entered into by Heck and the Johnsons with Starcraft was an accord and satisfaction; and that the Bank, as "surety”, with Heck as principal, therefore is released from *993paying the obligation represented by the check. This is but one example of a claim urged by one of the parties and never ruled upon by the majority. Rather, the majority chooses to reverse on grounds not urged by the parties before us or before the district court. This strikes me as eminently unfair to the district court, as well as to the parties and their counsel.

. I note, however, that the author of the majority opinion has designated it for publication.

. I note again that no appeal has been taken from that portion of the judgment which awarded to the Bank, pursuant to its right of charge back against its customer Heck, a sum in the same amount as was awarded in favor of Star-craft against the Bank.