McDonald v. National Enterprises, Inc.

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

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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

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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,

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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.

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 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,

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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

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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.

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 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

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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

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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.

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