Intent Overrides General Guaranty Law

In Fagen’s of North Carolina, Inc. v. Rocky River Real Estate Company, et al., 451 S.E. 2d 872 (N.C. App. 1995), the Court of Appeals of North Carolina held that it is the specific terms of a contract and the intent of the parties involved, not general statements of law, that control any agreement. In Fagen, the customer failed to pay the creditor $19,425.68 for building supplies. The creditor in turn sued the customer and two guarantors of the customer’s debt. The credit application provided in part:

In consideration of credit being extended by (creditor) to me/us/it, I … certify the truthfulness and veracity of the statement appearing on opposite side, and I … guarantee and bind (myself) to the faithful payment of all amounts purchased or now owing, by us or either of us, or any other person, firm or corporation for our benefit. If credit is extended to a corporation in which we, or I am an officer, or in which an interest exists, I … will personally faithfully guarantee the payment of all credit extended to said corporation.

The trial court found that the guarantors were jointly and severally liable to the creditor because they did benefit from the extension of credit. However, the Court of Appeals found no evidence of a benefit to the guarantors because there was no evidence that the guarantors had an interest in the customer. Therefore, the guarantors were not liable because the terms of the contract and the intent of the parties conditioned liability on the guarantors receiving personal benefit.

What should creditors learn from Fagen? Creditors should learn courts may reject a guaranty contract is there are conditions of liability that are not met. While that conclusion may seem obvious, in this case the creditor found out the hard way that it should have had a better grasp of the _obvious._

                                    Contributed by James R. Vann
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