EAC Credit Corporation v. Wilson ( 1971 )

VAUGHN, Judge.

On the first occasion that the question was presented for review, the Supreme Court of North Carolina held that provisions calling for a debtor to pay attorney’s fees incurred by a creditor in the collection of a debt were contrary to public policy and, therefore, unenforceable. Tinsley v. Hopkins, 111 N.C. 340, 16 S.E. 325. The prohibition against the enforcement of such provisions in negotiable instruments was subsequently made statutory. C.S. 2983, G.S. 25-8. Effective as of 1 July 1967, Chapter 25 of the General Statutes was repealed by Chapter 700 of the Session Laws of 1965 and thus removed the express statutory injunction against enforcing provisions in instruments requiring a debtor to pay his creditor’s attorney’s fees. It is our view, however, that sound public policy continues to bar the enforcement of such provisions unless the same are clearly and expressly authorized by statute.

Plaintiff contends and the trial judge held that plaintiff was entitled to recover attorney’s fees by virtue of G.S. 6-21.2 which was enacted effective 1 July 1967. This section, in part, is as follows:

“§ 6-21.2. Attorneys’ fees in notes, etc., in addition to interest. — Obligations to pay attorneys’ fees upon any note, conditional sale contract or other evidence of indebtedness, in addition to the legal rate of interest or finance charges specified therein, shall be valid and enforceable, and collectible as part of such debt, if such note, contract or other evidence of indebtedness be collected by or through an attorney at law after maturity, subject to the following provisions:

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(5) The holder of an unsecured note or other writing (s) evidencing an unsecured debt, and/or the holder of a note and chattel mortgage or other security agreement and/or the holder of a conditional sale contract or any other such security agreement which evidences both a monetary obligation and a security interest in or a lease of specific goods, or his attorney at law, shall, after maturity of the obligation by default or otherwise, notify the maker, debtor, account debtor, endorser or party sought to be held on said obligation that the provisions relative to payment of attorneys’ fees in addition to the ‘outstanding balance’ shall be enforced and that such maker, debtor, account debtor, endorser or party sought to be held on said obligation has five days from the mailing of such notice to pay the ‘outstanding balance’ without the attorneys’ fees. If such party shall pay the ‘outstanding balance’ in full before the expiration of such time, then the obligation to pay the attorneys’ fees shall be void, and no court shall enforce such provisions.”

Plaintiff contends that G.S. 6-21.2 “is sufficiently broad to include guarantors under the instant facts, that a substantial body of case law from other states supports this conclusion, and that the judgment of the trial court should be affirmed.”

The contract of guaranty signed by defendants contains no provisions relating to attorney’s fees. “In situations where the contract of guaranty is silent about costs of collection but the primary obligation provides that such cost shall be payable, the decisions are in disagreement as to the liability of the guarantor.” 4 A.L.R. 2d 138, p. 141. The decisions in several of the jurisdictions which have allowed the plaintiff to recover attorneys’ fees have been cases in which the action was brought against the maker and the guarantor jointly. College National Bank v. Morrison, 100 Cal. App. 403, 280 P. 218; California Standard Finance Corp. v. Bessolo & Gualano, 118 Cal. App. 327, 5 P. 2d 480; Bank of California v. Union Packing Co., 60 Wash. 456, 111 P. 573; Franklin v. The Duncan, 133 Tenn. 472, 182 S.W. 230. In these cases where the maker and guarantor were sued together and the plaintiff was successful, the attorney’s fees were viewed as a valid indebtedness of the maker which the guarantor had agreed to pay. Other jurisdictions have also reasoned that when a guarantor guarantees a note his agreement covers everything in the note, including a provision for attorney’s fees. National Bank & Trust Co. of South Bend v. Becker, 50 Ill. 2d App. 151, 200 N.E. 2d 40; McGhee v. Wynnewood State Bank, 297 S.W. 2d 876, Texas App. Court; Dean v. Allied Oil Co., 261 S.W. 2d 900, Texas App. Court; Townsend v. Alewel, 202, S.W. 447, Mo. App. In National Bank v. Becker, supra, the Court stated at p. 43:

“Since the maker undertook to pay these attorney’s fees to bring about payment, the guarantor is necessarily liable since his obligation here is coextensive with that of the maker.”

Also, in Townsend v. Alewel, supra, it was stated at p. 448:

“Defendant guaranteed payment of the note. That meant the note as written, and the note included the payment of an attorney’s fee.”

Jurisdictions that do not allow recovery of attorneys’ fees by a successful plaintiff when such are called for in the note but not in the guaranty agreement, and the latter is the instrument sued upon, base their decisions on the fact that the two instruments are separate and distinct, each with its own provisions regarding the liability of the parties. Collins v. Kingsberry Homes Corp., 243 F. Supp. 741, Aff’d 347 F. 2d 351; Continental Supply Co. v. Tucker Rose Oil Co., 146 La. 671, 83 So. 892; Schauer v. Morgan, 67 Mont. 455, 216 P. 347. The Court in Schauer v. Morgan, supra at p. 352 states this position as follows:

“The note delivered to plaintiff with the guaranty provided for a reasonable attorney’s fee, if the note was placed in the hands of an attorney for collection. This' action is upon the guaranty. The provision for an attorney’s fee relates only to proceedings to collect the note, and since the action is not upon the note the attorney’s fee was improperly allowed.”

North Carolina also recognizes that the obligation of the guarantor and that of the maker, while often coextensive are, nonetheless, separate and distinct. In a case holding that payment of interest by the maker of a note, after maturity, did not prevent an action against the guarantor thereon from being barred by the lapse of three years from maturity of the note, the Court said:

“A guaranty is a contract, obligation or liability arising out of contract, whereby the promisor, or guarantor, undertakes to answer for the payment of some debt, or the performance of some duty, in case of the failure of another person who is himself in the first instance liable to such payment or performance. Cowan v. Roberts, 134 N.C. 415, 46 S.E., 297; Carpenter v. Wall, 20 N.C. 279; Chemical Co. v. Griffin, 202 N.C., 812. And the right to sue upon said contract or guaranty arises immediately upon the failure of the principal debtor to pay the debt at maturity or to meet his obligation according to its tenor. Beebe v. Kirkpatrick, 321 Ill., 612, 152 N.E., 539, 47 A.L.R., 891.”

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“Guarantors are not sureties; nor are they endorsers, though with respect to the plea of the statute of limitations, their liability is more nearly analogous to that of the latter than to that of the former. Coleman v. Fuller, 105 N.C. 328, 11 S.E., 175. The obligation of a surety is primary, while that of a guarantor is collateral. Rouse v. Wooten, 140 N.C. 557, 53 S.E., 430; Dole v. Young, 24 Pick. (Mass.), 252. A surety may be sued as a promisor with the principal debtor; a guarantor may not; his contract must be especially set forth or pleaded. Coleman v. Fuller, supra; Bank v. Haynes, 8 Pick. (Mass.), 423, 19 Am. Dec., 334.” Trust Co. v. Clifton, 203 N.C. 483, 166 S.E. 334.

Defendants’ contract of guaranty is their own separate contract with plaintiff to pay the debts of Landmark Inn of Durham, Inc. when due, if not paid by Landmark. They are not in any sense parties to the note executed by Landmark. Milling Co. v. Wallace, 242 N.C. 686, 89 S.E. 2d 413; G.S. 6-21.2. Defendants’ contract does not call for the payment of plaintiff’s attorneys’ fees. The statute on which plaintiff relies, G.S. 6-21.2, does not authorize the collection of attorneys’ fees except in cases where the instrument on which suit is brought expressly so provides. That part of the judgment which awards plaintiff attorney’s fees is reversed. The cause is remanded for entry of judgment consistent with this opinion.

Reversed and remanded.

Judge Britt concurs. Judge Brock dissents.