Rehearing Denied April 19, 1968.
Robert Y. Iwasaki, Los Angeles, for defendant and respondent.
Judge of the Superior Court sitting under assignment by Chairman of the Judicial Council.
In this action plaintiff (appellant), a California banking corporation, seeks to enforce a Continuing Guaranty and to recover from defendant (respondent) the principal sum of $5,000 plus attorneys' fees and costs. Defendant's answer admitted the execution of the agreement, but denied the indebtedness, alleging as an affirmative defense that at the time of execution defendant understood that the guaranty extended only to one specific loan of $5,000. This affirmative defense was rejected by the trial court and is not now urged on this appeal. The answer also pleaded as an affirmative defense that the bank, without knowledge or consent of defendant, subsequently loaned the borrowers additional sums which they failed to repay, so that their total indebtedness exceeded $5,000 at the time they were adjudicated bankrupts in June 1962. The present appeal urges as error the trial court's finding that plaintiff was culpably negligent in failing to inform defendant before making the last loan.
At trial the following pertinent facts were established: In February 1961 the Nagayama brothers, operators of a grocery store, being in need of working funds, sought the aid of defendant who had been their insurance broker. Defendant arranged an introduction at plaintiff bank. On February 23, 1961, plaintiff loaned the Nagayamas $10,000. ByJuly 1961 this indebtedness had been reduced to approximately $6,000 but the Nagayamas were in need of further funds, so they applied for an additional $5,000 loan. Since the total loans outstanding would then exceed $10,000, the bank requested some collateral and guaranty. It was arranged that four insurance policies would be put up as the collateral and the defendant signed the Continuing Guaranty agreement which plaintiff bank submitted to him.
On January 22, 1962, the Nagayamas arranged for a third loan of $5,900 at the bank for the stated reason that "the federal tax people were demanding tax payment." From the proceeds of the loan the bank was repaid $1,717.24 representing principal and interest then remaining unpaid on the first loan, and the balance of $4,182.76 was deposited in the borrower's checking account. The bank did not notify defendant at the time it made the third loan; it merely relied on the Continuing Guaranty which it had in the loan file; it did not explain to the borrowers whether the loan was being made on their own financial strength or on the basis of defendant's continuing guaranty. On January 22, 1962, the borrowers were not in default on installments payable on the prior loans although during the latter part of 1961 they had been making payments tardily; also, on January 22, 1962, their checking account showed a credit balance of $1,300, but the bank did not know whether they were "any checks on float" which might be chargeable later to the account. The bank took the position that it had no right to apply funds from the checking account to cover delinquent installment payments on the loan because the borrowers had not given the bank any authorization to debit the checking account for monthly loan payments.
The borrowers were adjudicated bankrupt on June 25, 1962, on an involuntary petition. The bank received no payment out of the bankruptcy court and the borrowers' Defendant admitted that in January 1962 he had knowledge that the financial situation of Nagayama brothers "wasn't very good at that time," that their checks for insurance premiums "were bouncing," and when this continued he had to cancel their automobile insurance; that he did not learn of the January 1962 loan until about six months later, after the bankruptcy adjudication.
The trial court found that the bank was "culpably negligent" in January 1962 in failing to notify defendant that the borrowers were in financial difficulties at the time it made a new loan of $5,900 thereby increasing their total obligation to $10,000. The court calculated defendant's obligation to consist of two items, namely, $1,397.70 owing on the first loan, and $855.34 owing on the second loan, totaling $2,253.15, together with interest and attorneys' fees; and the court held there was no liability on account of the balance outstanding on the third loan.
The issue for this court to decide is whether plaintiff's failure to notify defendant of the borrowers financial plight in January 1962 bars it from enforcing the Continuing Guaranty in the full amount of $5,000. No California decision factually parallel to the case has been found. The trial court placed reliance on section 124, subsection (2) of the Restatement of the Law of Security, which reads as follows (p. 328):
"(2) Where, during the existence of the suretyship relation, the creditor discovers facts unknown to the surety which would give the surety the privilege of terminating his obligation to the creditor as to liability for subsequent defaults, and the creditor has reason to believe these facts are unknown to the surety and has a reasonable opportunity to communicate them to the surety without a violation of a confidential duty, the creditor has a duty to notify the surety, and breach of this duty is a defense to the surety except in respect of his liability for defaults which have occurred before such disclosure should have been made."
The trial court adopted this statement literally and in toto in its conclusions of law. Plaintiff contends that this was error, that the Restatement is not the law in California. Alternatively, plaintiff argues that even if the Restatement is a correct synthesis of existing law, defendant did not meet the tests required for exoneration of his guaranty. Specifically, plaintiff contends that the evidence shows the following: (1) The bank, as creditor, did not discover or have knowledge of facts which were unknown to defendant as guarantor at the time of the third loan. Plaintiff cites defendant's testimony during the first stage of the trial that he knew in January that the borrowers' financial condition was not good because their checks to him for insurance premiums "were bouncing" and, ultimately, he had to cancel their automobile insurance. It is true that after counsel had rested and partially stated their summation and the judge had indicated his views, request to reopen the case was granted, at which time defendant testified that it was sometime after January that he learned of the borrowers' financial plight.
(2) The bank, as creditor, had no reason to believe that the facts relating to the borrowers were unknown to defendant. In addition to the admission made by defendant in his initial testimony at trial, it is pointed out that borrowers were defendant's insurance customers and he was aware of their need for money when loans were obtained in February 1961 and July 1961. (3) Assuming that plaintiff knew facts which were unknown to defendant, nevertheless plaintiff had no reasonable opportunity to communicate the facts to defendant. Plaintiff cites testimony to the effect that on January 22, 1962, the borrowers came to the bank just before closing time and explained that they needed additional funds because they were delinquent on their withholding tax payments to the federal government; and the loan was consummated It is not necessary for the purposes of this appeal that we adopt or, by dictum, endorse the synthesis of law stated in Restatement of Security, section 124, subsection (2). It is enough that we take note and give application to decisions which have treated the respective rights and obligations of creditors vis-a-vis their sureties.
In Anaheim Union Water Co. v. Parker, 101 Cal. 483, P. 494, 35 P. 1048, 1051, the court stated the nature of the relation as follows: " * * * unless there was fraud--an actual intent to conceal, or culpable negligence--the sureties would not be released from their liability. (Guardian Fire etc. Assur. Co. v. Thompson, 68 Cal. 208, 9 P. 1 [and other cited cases].)"
As to what negative conduct constitutes a breach of duty to a surety, the court in West American Finance Co. v. Pacific Indemnity Co., 17 Cal.App.2d 225, p. 234, 61 P.2d 963, 968 citing American National Bank v. Donnellan, 170 Cal. 9, 148 P. 188, stated: " * * * mere nondisclosure of the circumstances affecting the situation of the parties which are material for the surety to be acquainted with and are within the knowledge of the person obtaining the surety bond, is undue concealment even though not wilful or intentional or with a view to any advantage to himself."
On the basis of the record and law as stated, it is our function as a reviewing court to determine whether the trial court's evaluation of the facts was reasonable.
"It is too well settled to require citation if authority that if the findings of the trial court are supported by any substantial evidence not inherently improbable they will not be disturbed on appeal." (Weissbaum v. Eibeshutz, 211 Cal. 170, 171, 294 P. 396.)
Despite what might be our own individual evaluation of the evidence as gleaned from a printed record, we repeat what was said in Weissbaum, supra, at page 171, 294 P. at page 397: "We are of the view that the findings in this case may, by a liberal indulgence of the rule, be held to be supported by the evidence. * * * Each party was the chief witness in his or [its] own behalf, with but slight corroborating evidence of a conclusive character sustaining either."
We conclude that the trial court's finding of negligence on the part of the bank has support in the record and that such negligence operated to excuse defendant from any liability on the third loan. Accordingly, the judgment is affirmed.
FILES, P.J., and JEFFERSON, J., concur.