Rea Construction Co. v. Ervin Co.

235 S.E.2d 418 (1977)

REA CONSTRUCTION COMPANY
v.
The ERVIN COMPANY.

No. 7626SC862.

Court of Appeals of North Carolina.

June 15, 1977.

Fleming, Robinson & Bradshaw, P. A. by Richard A. Vinroot and C. Richard Rayburn, Jr., Charlotte, for plaintiff-appellant.

Caudle, Underwood & Kinsey by William E. Underwood, Jr., Charlotte, for defendant-appellee.

VAUGHN, Judge.

The arguments in the briefs concentrate on whether defendant was released from its guaranty by plaintiff's acceptance of Queen City's note. Plaintiff argues that there were no material alterations in Queen City's obligations and that the execution of the note did nothing to prejudice defendant. Plaintiff further argues that the facts show that the note was taken with at least the implied assent of defendant. Defendant argues that the mere acceptance of the note, without the assent of defendant as surety, operated to discharge the surety without a showing of prejudice. Defendant further argues that the facts show that defendant was prejudiced.

The trial judge's conclusion of law No. 2 was obviously based on the following well established rule:

"It is well settled that if the creditor enters into any valid contract with the principal debtor, without the assent of the surety, by which the rights or liabilities of the surety are injuriously affected, such contract discharges the surety. A familiar instance of this is where a creditor binds himself not to sue for or collect the debt for a given time, and thereby puts it out of the power of the surety to pay the debt and sue the principal debtor." Deal v. Cochran, 66 N.C. 269, 270.

A reason for the rule is that the surety cannot be deprived of his right to pay the debt and immediately proceed against the principal for indemnity. Chemical Co. v. Pegram, 112 N.C. 614, 17 S.E. 298. See Restatement, Security, sections 128 and 129.

The rule is sound. The question is whether it comes into play on the facts of this case. We conclude that it does not.

The facts as found by the trial judge are not disputed on appeal. Neither is his conclusion that defendant guaranteed the account. The judgment, therefore, discloses the following: Defendant guaranteed the account on 17 February 1971. On 29 October 1971, the account was past due. Plaintiff demanded that defendant pay the account. Defendant denied that it had guaranteed the account and refused to recognize that it had any obligation to plaintiff. Thereafter defendant did nothing to protect its rights against the debtor. On 22 June 1973 (nearly 18 months after defendant had refused plaintiff's demand for payment) the debtor, in consideration of the account, executed a note to plaintiff for the amount of the account. The debtor paid the installments as due except for the final payment that became due on 22 June 1975. The present suit was started against defendant on its guaranty on 4 January 1974, and (with defendant continuing to deny the existence of this guaranty) judgment was entered on 26 April 1976. That judgment judicially determined the validity of defendant's guaranty about 10 months after the "extension" granted by plaintiff had expired. We conclude that defendant breached its contract with plaintiff on 29 October 1971, and it is clear [finding of fact No. 12] that it did not intend to pursue the principal debtor until the validity of the guaranty had been judicially determined. After defendant breached its contract, plaintiff exercised ordinary business prudence in successfully attempting to mitigate its damages. Of this, defendant will not be heard to complain.

That part of the judgment dismissing plaintiff's action is reversed and the case is remanded for entry of judgment awarding plaintiff the unpaid balance due on the account.

Reversed and Remanded.

BROCK, C. J., and CLARK, J., concur.