Johnson Drilling Co. v. Bank of South, N.A.

Pope, Judge.

Summary judgment was granted to defendant-appellee Bank South based upon the following undisputed facts. In 1980 John and Hubert Johnson, owners of appellant Johnson Drilling Company, set up two mining companies, J. J. Mining Company and J & P Coal Company (hereinafter “the mining companies”). In order to obtain a reclamation bond as required by the State of Tennessee, the Johnsons requested Bank South to issue the mining companies a letter of credit in the amount of $40,000. The letter of credit was issued and payment of all sums advanced against it was guaranteed by Johnson Drilling Company, as a long-time customer of the bank. The agreement for the letter of credit also provided that Bank South had the right to set-off any sums owed the bank against any funds of Johnson Drilling Company held by the bank. When the letter of credit was drawn upon by the bonding company to which it was given, Bank South paid $40,000 to that company and, acting pursuant to its rights under the guaranty, set-off that amount against the general account of Johnson Drilling Company.

The Johnsons objected to this set-off and met with Bank South officials, who agreed to return the funds to the Johnson Drilling Company account and to accept in lieu thereof two unsecured promissory notes from the mining companies totaling $40,000. According to the deposition testimony of its officers who participated in this transaction, Bank South in accepting these notes viewed Johnson Drilling’s pre-existing obligation as guarantor under the agreement for the letter of credit to be continuing. Paragraph 11 of that agreement provided in pertinent part: “As security for the payment and performance of any and all of our [Johnson Drillings’] obligations and liabilities to you [Bank South], direct and indirect, absolute or contingent, due or to become due, now existing or hereafter arising, each of us hereby pledges to you and/or gives you a general lien upon and/ or right of set-off of, all right, title and interest of each of us in and to the balance of every deposit account, now or at any time hereafter existing, of each of us with you, or any other claims of any of us against you, . . . and in any other property, rights and interests of each of the undersigned, or any evidence thereof, which have been or at any time shall be delivered to or otherwise come into your possession, custody or control . . . ; and you shall be deemed to have possession, custody or control of any such property actually in transit to or set apart for you or any of your agents, correspondents or others acting in your behalf.”

After no payments were made on the promissory notes by the mining companies, Bank South again set-off the $40,000 against the Johnson Drilling Company account, plus accrued interest. Johnson Drilling sued for the return of these funds, contending that it was not contemplated that it would have any continued liability as guarantor on the second transaction. Bank South moved for summary judgment based upon the premise that the set-off was to compensate the bank for a debt that Johnson Drilling Company had guaranteed, for which the subsequent promissory notes executed by the mining companies did not act as a novation. Appeal is from the ruling of the trial court that the set-off was permitted as a matter of law. Held:

The issue presented in this appeal, to wit, whether the substitution of the mining companies’ notes for the original account indebtedness resulted in the discharge of the guarantor Johnson Drilling Company from liability under the guaranty agreement, has previously been decided adversely to appellant. In Columbia Nitrogen Corp. v. Mason, 171 Ga. App. 685, 686 (320 SE2d 838) (1984), it was held “that the mere execution by an account debtor of a promissory note evidencing the indebtedness due on the account does not constitute a novation of the original obligation and does not otherwise operate to discharge a guarantor of the account indebtedness from liability. [Cit.]” See generally Haynie v. First Nat. Bank, 117 Ga. App. 766 (162 SE2d 27) (1968). Bank South would not have issued or renewed the letter of credit on behalf of the mining companies without Johnson Drilling as a guarantor. As explained by one of the participating bank officers, “the only reason for the bank to be doing business with J & P and J & J Coal was because of the relationship with Johnson Drilling. . . . Their credit was Johnson Drilling’s credit, because they were to us a subsidiary function of Johnson Drilling.”

“If the [guaranty agreement] was intended to restrict liability to particular transactions, words to that effect should have been chosen. As written, it did not accomplish this. [Cit.]” White v. Chapman, 149 Ga. App. 409, 412 (254 SE2d 434) (1979). Thus, there was no need to require any other collateral as security for the promissory notes subsequently executed by the mining companies, because Johnson Drilling’s status as guarantor of the letter of credit was not affected by this transaction. See Crutchfield v. Trust Co. Bank, 157 Ga. App. 557 (1a) (278 SE2d 138) (1981). Any negligent act of the bank which caused the bond forfeiture necessitating drawing against the letter of credit might give rise to a cause of action against Bank South in tort, but it would not relieve Johnson Drilling of liability as guarantor.

The language of the guaranty agreement covering “any and all” present and future obligations and liabilities was plain and unambiguous, and thus not subject to construction by the trial court. See Remler v. Coastal Bank, 179 Ga. App. 25, 27 (345 SE2d 79) (1986). There was no evidence presented that either the debt or the obligation under the guaranty was extinguished and, except for the first offset which was replaced in Johnson Drilling Company’s account, Bank South has never received any compensation or consideration for paying $40,000 on the letter of credit. The rule is that a bank may apply the amount of the account of one of its depositors to a matured debt owed to the bank regardless of whether the indebtedness of the depositor be that of a principal or upon an obligation on which the depositor is only secondarily liable. See Nat. City Bank v. Busbin, 175 Ga. App. 103 (3) (332 SE2d 678) (1985), and cits. It follows that summary judgment was properly granted in favor of Bank South.

Judgment affirmed.

Birdsong, C. J., McMurray, P. J., Banke, P. J., Benham and Beasley, JJ., concur. Carley, J., concurs in judgment only. Deen, P. J., dissents. Sognier, J., disqualified.