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Bradford v. First National Bank of Anchorage (2/21/97), 932 P 2d 256
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Notice: This opinion is subject to formal correction before
publication in the Pacific Reporter. Readers are requested to
bring errors to the attention of the Clerk of the Appellate
Courts, 303 K Street, Anchorage, Alaska 99501, telephone (907)
264-0607, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
GEORGE H. BRADFORD and )
ELIZABETH BRADFORD, ) Supreme Court Nos. S-7323/7503
)
Appellants/ )
Cross-Appellees, ) Superior Court No.
) 3KN-94-645 CI
v. )
) O P I N I O N
FIRST NATIONAL BANK OF )
ANCHORAGE, indenture trustee ) [No. 4786 - February 21, 1997]
and bondholder, )
)
Appellee/ )
Cross-Appellant, )
______________________________)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District, Kenai,
Jonathan H. Link, Judge.
Appearances: Kenneth J. Cusack, Cusack &
Knowles, P.L.L.C., Seattle, Washington, for
Appellants/Cross-Appellees. John R. Beard,
Anchorage, for Appellee/Cross-Appellant.
Before: Compton, Chief Justice, Rabinowitz,
Eastaugh, and Fabe, Justices. [Matthews,
Justice, not participating.]
FABE, Justice.
I. INTRODUCTION
The First National Bank of Anchorage (First National)
brought an action against the 4M 2B Investors partnership (4M 2B)
and each of 4M 2B's past and present general partners to collect
the unpaid balance of a loan it made to 4M 2B. George H.
Bradford and Elizabeth Bradford, two of 4M 2B's eleven original
general partners, appeal from the superior court's judgment
against them in that action. First National cross-appeals the
superior court's decision to award it only a portion of the
attorney's fees that it incurred in attempting to collect the
debt. We affirm the judgment against the Bradfords and reverse
and remand the award of attorney's fees.
II. FACTS AND PROCEEDINGS
The Bradfords, along with four other couples and one
individual, formed 4M 2B in 1983 to build, operate, and own the
Peninsula Center Mall in Soldotna. To finance this project, the
partnership borrowed $3 million from the Alaska Industrial
Development Authority (AIDA). AIDA made this loan pursuant to a
loan agreement (Loan Agreement) setting forth the general terms
of 4M 2B's obligation, a promissory note (1983 Note) stating the
interest rate and monthly payments on the loan, and a deed of
trust and security agreement providing the shopping center as
security for the debt.
AIDA raised the money that it loaned to 4M 2B by
issuing a $3 million tax-free revenue bond (1983 Bond). The
repayment terms of the 1983 Bond were identical to those of the
1983 Note. Payments on the bond, however, were limited to the
loan payments made to AIDA by 4M 2B. AIDA sold the bond to First
National and, under a trust indenture (Indenture), also appointed
First National trustee of the bond. To provide First National
with security for the bond, AIDA transferred its interest in 4M
2B's promissory note and deed of trust to First National. In
addition, the individual partners in 4M 2B personally guaranteed
the bond debt.
In 1985 the Bradfords and another couple, James C.
Benson and Sandra K. Benson, withdrew from the 4M 2B partnership.
Under an agreement with the continuing partners (Assumption
Agreement), the Bradfords relinquished "their entire interest in
the partnership"in consideration of the "distribution to them by
the partnership of certain real property." The continuing
partners agreed to "assume and . . . satisfy all debts and
liabilities of the old partnership"and promised to "indemnify
and hold the Retiring Partners harmless from all such debts and
liabilities." 4M 2B notified First National of this change in
the partnership on July 1, 1985, enclosing a copy of the
withdrawal agreement.
In 1986, 4M 2B signed a modification agreement that
lowered the interest rate and monthly payments that it was
required to make on the loan made to it by AIDA. The continuing
partners of 4M 2B signed this modification agreement, but the
Bradfords and the Bensons did not. To account for the modified
loan repayment terms, AIDA, First National, and 4M 2B agreed to
modify the Indenture. Pursuant to the modified Indenture, AIDA
cancelled and replaced the 1983 Bond with a "revenue refunding
bond"(1986 Bond). The terms of the 1986 Bond reflected the 1986
modification of the interest rate and repayment terms of the
loan.
In August 1989 AIDA and First National again agreed
with 4M 2B to refinance the loan. The continuing partners in 4M
2B signed a new promissory note (1989 Note), and AIDA issued
another revenue refunding bond (1989 Bond) to cancel and replace
the 1986 Bond. As part of this refinancing, 4M 2B provided
additional real property as security for the new note.
In 1992, four more partners in 4M 2B retired. At the
same time, one new partner joined the three remaining partners to
continue the partnership.
4M 2B stopped making payments on the loan in February
1994, and in May 1994, First National sent a notice of default to
4M 2B, the three original continuing partners, and the four
partners who retired in 1992. The notice declared the
outstanding principal and interest to be immediately due and
payable and warned that First National would take "steps . . . to
enforce the personal liability of the borrower and partners of
the borrower and to protect and enforce the interests in property
securing payment of the note." On June 13, 1994, First National
brought suit against 4M 2B and each past and present partner.
First National also joined other defendants with claims against
the real property securing the promissory note. In the suit,
First National sought judgment for the entire amount of the debt,
enforcement of its right in the property securing the loan, and
recovery of certain costs.
On September 28, 1994, 4M 2B filed for bankruptcy
protection, and on January 9, 1995, three of the four continuing
partners and all of the partners who retired in 1992 also filed
petitions for bankruptcy. First National moved for summary
judgment against the Bradfords, the Bensons, and the one
continuing partner who had not filed for bankruptcy. The
superior court granted this motion on March 19, 1995. First
National then moved for entry of final judgment against the
Bradfords and the Bensons under Civil Rule 54(b). After first
denying this motion, the court reconsidered and granted the
motion, entering judgment against the Bradfords and the Bensons
on July 31, 1995. (EN1)
The court limited execution on the judgment to the
amount by which the outstanding balance of the judgment exceeded
$1.4 million, the estimated maximum value of the real property
securing the loan. The court later adjusted the judgment to
reflect the bankruptcy court's conclusion that the value of the
real property was only $1,244,578.59.
First National then moved for an award of $95,900 in
attorney's fees that it incurred in obtaining judgment against
the Bradfords and Bensons and for the relief it secured in
bankruptcy court. The superior court awarded First National
$35,715 in attorney's fees, the amount attributable to the
proceedings in superior court leading to the final judgment.
The Bradfords appeal the superior court's grant of
First National's motion for summary judgment and entry of final
judgment. First National cross-appeals the superior court's
decision to award only a portion of the attorney's fees it
requested.
III. DISCUSSION
A. The Bradfords Are Liable as Sureties for 4M 2B's Debt
to AIDA.
1. The Bradfords became sureties when they withdrew
from 4M 2B.
To resolve the question of the Bradfords' liability for
the debt to First National, we focus on the Loan Agreement, on
the promissory note between 4M 2B and AIDA, and on the agreement
the Bradfords made when they withdrew from the partnership. (EN2)
We conclude from these documents that upon their withdrawal from
4M 2B, the Bradfords became sureties with respect to the
partnership's debt. We base this conclusion on the rule that
"[t]he suretyship relation is created where the surety[,] . . .
having been one of several principal obligors, one or more of the
other co-principals contracts to assume the entire duty of
performance." Restatement of Security sec. 83(d) (1941). The
Restatement's comment on this clause addresses the precise issue
before us:
Two persons, after binding themselves as
principals, may subsequently change their
relations so that between themselves one has
the entire duty of performance, that is, so
far as they are concerned, they have become
principal and surety. A common situation to
which the rule stated in this Clause applies
is where a partner retires and the old
partners assume all the firm obligations.
The retiring partner is a surety in respect
of the others.
Id. sec. 83 cmt. f. (EN3) A creditor is bound by the suretyship
relationship created in this way when it receives notice of the
assumption agreement between the continuing and retiring
partners. Id. sec. 114 cmt. f.
We applied this rule in State v. McKinnon, 667 P.2d
1239, 1241-42 & n.4 (Alaska 1983). In that case, two half-
brothers entered into a partnership and took out a loan from the
State of Alaska. Id. at 1240-41. When the men dissolved the
partnership, they signed a termination agreement providing that
the partner continuing the business "agreed to assume the
obligation of repaying the loan . . . ." Id. at 1242. They
notified the State of this agreement. Id. at 1241. We held that
the agreement and the notice of the agreement to the creditor
changed the withdrawing partner's status from co-obligor to
surety. Id. at 1242.
When the Bradfords withdrew from 4M 2B in 1985, the
continuing partners agreed to "assume and . . . satisfy all debts
and liabilities of the old partnership"and to "indemnify and
hold the Retiring Partners harmless from all such debts and
liabilities." 4M 2B notified First National of this agreement.
(EN4) Thus, in light of McKinnon and general surety law, we hold
that the Bradfords became sureties for 4M 2B's debt upon their
withdrawal from the partnership.
The Bradfords argue that they did not "agree to become
. . . sureties for the remaining 4M 2B partners' obligation."
They assert that, under McKinnon, such an agreement on their part
is necessary for the creation of suretyship status. This
assertion is not correct. While we noted in McKinnon that the
withdrawing partner agreed to remain personally liable for the
debt and that the change in status from co-obligor to surety was
"consistent with the intent of the parties,"we did not state
that such agreement or intent is required to create suretyship
status. 667 P.2d at 1242. Indeed, partnership law imposes
liability for existing partnership debts on withdrawing partners
whether or not they agree to remain personally liable. AS
32.05.310(a). The Assumption Agreement impliedly recognizes this
basic rule by providing that the retiring partners will indemnify
the Bradfords against their continuing personal liability.
2. The Bradfords' liability as sureties was not
discharged.
The Bradfords concede that First National did not
expressly agree to release them from liability for 4M 2B's note.
Instead, they argue that First National impliedly discharged them
under AS 32.05.310(b). This section provides:
(b) A partner is discharged from an existing liability
upon dissolution of the partnership by an agreement to that
effect between the partner, the partnership creditor and the
person or partnership continuing the business. The agreement
may be inferred from the course of dealing between the creditor
who has knowledge of the dissolution and the person or
partnership continuing the business.
The Bradfords argue that First National's failure to notify them
of the modifications to the promissory note, to require them to
approve those modifications, and to provide them with notice of
default supports the inference that First National intended to
discharge them. We disagree.
As sureties, the Bradfords ceased to be the principal
obligors, but they remained liable for the loan upon default.
McKinnon, 667 P.2d at 1244. First National had no right of
recourse against the Bradfords until the partnership defaulted.
Id.; 2 Partnership, supra n.3, sec. 7.14(d), at 7:155. It thus
had no obligation or reason to notify them of or secure their
approval for the modifications to the loan, nor did it have a
duty to give them notice of default. See McKinnon, 667 P.2d at
1241, 1244; Restatement of Security sec. 136 (stating that "the
surety's obligation to the creditor is not affected by the
creditor's failure to notify him of the principal's default
unless such notification is required by the terms of the surety's
contract"). First National's course of dealing exclusively with
the continuing partners was entirely consistent with the
Bradfords' surety status. Therefore, we hold that First
National's course of dealing under these circumstances could not
as a matter of law support an inference that it intended to
discharge the Bradfords.
This conclusion is supported by AS 32.05.310(c). That
subsection provides:
(c) Where a person agrees to assume the existing
obligations of a dissolved partnership, the partners whose
obligations have been assumed are discharged from liability to a
creditor of the partnership who, knowing of the agreement,
consents to a material alteration in the nature or time of payment
of the obligations.
It is this subsection that expressly provides for discharge of a
surety. Under this subsection, a surety is discharged only when
the creditor "consents to a material alteration in the nature or
time of payment of the obligations." AS 32.05.310(c). By
implication then, a surety is not discharged when the creditor
consents to nonmaterial alterations in the nature or time of
payment, regardless of whether the surety has notice or approves
of the alteration. The Bradfords acknowledge that subsection (c)
does not release them from liability in this case. Thus, they
apparently agree that First National's agreement to lower the
interest rate and monthly payment on 4M 2B's loan was not the
kind of modification of the partnership's obligation that would
discharge them. Accepting the Bradfords' argument would
therefore require the conclusion that the same course of dealing
that specifically does not discharge the Bradfords under
subsection (c) does discharge them under subsection (b). Such an
interpretation would violate the general rule that this court
"interprets each part or section of a statute with every other
part or section, so as to create a harmonious whole." Rydwell v.
Anchorage Sch. Dist., 864 P.2d 526, 528 (Alaska 1993).
The Bradfords rely on cases in which they claim courts
found an implied discharge under the section of the Uniform
Partnership Act codified at subsection (b). These cases,
however, are easily distinguishable because they do not
specifically discuss the issue of discharge of a surety. See
Wester & Co. v. Nestle, 669 P.2d 1046, 1047-48 (Colo. App. 1983);
Victoria Air Conditioning, Inc. v. Southwest Texas Mechanical
Insulation Co., 850 S.W.2d 720, 724 (Tex. App. 1993). (EN5)
3. The Bradfords were not discharged under the
doctrine of implied waiver.
The Bradfords also argue, relying on the same course of
dealing described above, that First National impliedly waived its
claim for 4M 2B's debt against them. This court recently
reiterated the doctrine of implied waiver in Airoulofski v.
State, 922 P.2d 889, 894-95 (Alaska 1996):
An implied waiver arises where the course of
conduct pursued evidences an intention to
waive a right, or is inconsistent with any
other intention than a waiver, or where
neglect to insist upon the right results in
prejudice to another party. To prove an
implied waiver of a legal right, there must
be direct, unequivocal conduct indicating a
purpose to abandon or waive the legal right,
or acts amounting to an estoppel by the party
whose conduct is to be construed as a waiver.
Id. at 894 (quoting Milne v. Anderson, 576 P.2d 109, 112 (Alaska
1978)) (citations omitted).
The argument based on implied waiver fails for the same
reason as the argument under AS 32.05.310(b). As discussed
above, First National was bound after notice of the assumption
agreement to treat the Bradfords as sureties rather than as
principal obligors. Far from the "direct, unequivocal conduct
indicating a purpose to abandon"required under the doctrine,
First National's actions were entirely consistent with an intent
to hold the Bradfords liable as sureties for 4M 2B's debt.
Therefore, we hold that the trial court did not err in granting
First National's motion for summary judgment and ruling that the
Bradfords are liable for 4M 2B's debt under the Loan Agreement.
(EN6)
B. The Superior Court Did Not Err in Entering Final
Judgment against the Bradfords under Civil Rule 54(b).
(EN7)
The Bradfords argue that even if the trial court
properly granted First National's motion for summary judgment, it
erred in entering final judgment against them under Civil Rule
54(b). They seek to delay the entry of final judgment against 4M
2B and the partners now in bankruptcy court.
Rule 54(b) provides that "when multiple parties are
involved [in an action], the court may direct the entry of a
final judgment as to one or more but fewer than all of the . . .
parties only upon an express determination that there is no just
reason for delay and upon an express direction for the entry of
judgment."
The Bradfords first argue that, while First National
"might suffer a delay in collecting on its judgment"because the
proceedings against the primary obligors are stayed by the
bankruptcy proceedings, the potential delay "is not the sort of
hardship which justifies"entry of final judgment under Rule
54(b). This assertion is contrary to our decisions discussing
Rule 54(b). In Williams, 890 P.2d at 587, we held specifically
that a court could "properly consider"the delay resulting from
bankruptcy proceedings in deciding whether to enter a Rule 54(b)
judgment. Furthermore, First National was entitled to repayment
of the balance of the loan at the time 4M 2B defaulted on it; to
force it to wait indefinitely to enforce its right to collect the
debt would be to impose exactly the type of hardship Rule 54(b)
was designed to avoid. See S & B Mining Co. v. Northern
Commercial Co., 813 P.2d 264, 269 (Alaska 1991) (holding delay in
collecting debt sufficient hardship to justify entry of final
judgment under Rule 54(b)).
The Bradfords also contend that they should not be held
liable as secondary obligors when First National may still
collect from the principal debtors. First National, however, was
entitled to judgment against the Bradfords as sureties as soon as
the principal obligors defaulted. State v. McKinnon, 667 P.2d
1239, 1244 (Alaska 1983). We hold, therefore, that the trial
court was within its discretion in granting First National's
motion for entry of final judgment under Rule 54(b).
C. The Superior Court Erred in Not Awarding First National
the Full Amount of Its Requested Attorney's Fees.
First National cross-appeals the trial court's decision
to limit its attorney's fees award to the $35,715 "directly
attributable to this action." The court excluded $60,185 in
attorney's fees attributable to the proceedings in bankruptcy
court and to establishing the validity and priority of First
National's interest in the property securing the loan. First
National argues that under the Loan Agreement the Bradfords
undertook to pay all of its reasonable fees regardless of whether
they were incurred in bankruptcy court, in securing collateral,
or in pursuing its claims against other defendants. The
Bradfords argue that they should not be liable for attorney's
fees incurred in proceedings where they were not parties.
First National bases its claim for attorney's fees
solely on contractual provisions, as allowed by Civil Rule 82(a).
(EN8) See Gudenau v. Bierria, 868 P.2d 907, 912-13 (Alaska 1994)
(concluding that in fixing size of attorney's fee, superior court
correctly followed terms of contract providing for reasonable
attorney's fees rather than Rule 82). Contractual liability for
attorney's fees, as opposed to statutory liability, is a lightly
litigated area. See 2 Stuart M. Speiser, Attorneys' Fees sec.
15.19, at 318-19 (1973) ("The answer to the question what persons
may be held liable on contractual provisions for payment of
attorneys' fees generally seems fairly obvious; and, for that
reason, the issue usually is not even discussed in the cases.").
Because we find no authority addressing the precise issue before
us, we look for guidance to the specific undertaking set forth by
the provisions of the Loan Agreement and to the statutes
governing the liability of partners for partnership debts. (EN9)
The Loan Agreement provides that, in case of default,
4M 2B shall pay, in addition to principal and interest,
such further amount as shall be sufficient to
cover the reasonable costs and expenses of
collection, including a reasonable
compensation to the Trustee, its agents,
attorney and counsel, and any expenses or
liabilities incurred by the Issuer or the
Trustee other than through its negligence or
bad faith.
. . . .
In case the Borrower shall fail
forthwith to pay such amounts upon demand,
the Trustee shall be entitled and empowered
to institute any actions or proceedings at
law or in equity for the collection of the
sums so due and unpaid, and may prosecute any
such action or proceeding to judgment or
final decree, and may enforce any such
judgment or final decree against the Borrower
and collect in the manner provided by law out
of the property of the Borrower the moneys
adjudged or decreed to be payable.
These are broad provisions, and the Bradfords do not dispute that
they cover the attorney's fees sought by First National in this
case. The Bradfords, however, argue that the fees are "a
partnership obligation"and that, because the Loan Agreement does
not "unambiguously impose liability"upon them under the facts of
this case, they should not be held liable. This argument is
contrary to the general rule.
Under partnership law, "[a]ll partners are liable
jointly for . . . debts and obligations of the partnership." AS
32.05.100. (EN10) Once joint liability is imposed, "each partner
is considered liable for the full amount of the contract." 2
Partnership, supra n.3, sec. 5.10(b), at 5:71-72 (citing Midwood
Development Corp. v. K 12th Associates, 537 N.Y.S.2d 237, 239
(App. Div. 1989)). (EN11) Contrary to the Bradfords' argument,
partners are liable for partnership obligations unless the
agreement at issue specifically relieves them of liability. We
hold, therefore, that the Bradfords are liable for the
partnership's obligation to pay First National's reasonable
attorney's fees under the terms of the Loan Agreement. (EN12)
This conclusion is supported by relevant precedent from
this court. In City of Kenai v. McLane, 821 P.2d 717, 719
(Alaska 1991), we determined that an agreement signed by all of
the partners of a partnership in their individual capacity
imposed personal liability upon each partner. Furthermore,
"see[ing] no indication that the parties contracted for limited
liability,"we refused to "read such a limitation into their
agreement." Id. at 720 (citing Moening v. Alaska Mut. Bank, 751
P.2d 5, 9 (Alaska 1988)).
In signing the Loan Agreement, the Bradfords, along
with the other partners, undertook to pay the reasonable
attorney's fees First National would incur in collecting the debt
should 4M 2B default. Their promise as partners was part of the
bargain inducing First National to make the loan. When the
Bradfords withdrew from the partnership, they gave up their voice
in 4M 2B voluntarily and in exchange for consideration. Just as
that decision to withdraw did not relieve their liability for 4M
2B's debt, neither did it discharge their other obligations as
former partners. Absent a substitute contract in which all the
parties agree to discharge the Bradfords, they remain liable for
First National's reasonable attorney's fees as provided in the
Loan Agreement. (EN13) See Restatement (Second) of Contracts
sec. 279(1) (1979) ("A substituted contract is a contract that is
itself accepted by the obligee in satisfaction of the obligor's
existing duty.").
IV. CONCLUSION
For the reasons above, we AFFIRM the superior court's
grant of First National's motion for summary judgment and entry
of final judgment against the Bradfords. We REVERSE the superior
court's award of attorney's fees and REMAND to the superior court
for award of the entire amount of the attorney's fees requested
by First National.
ENDNOTES:
1. The final continuing partner filed for bankruptcy before the
court granted First National's motion for entry of final
judgment.
2. The agreements setting forth the terms of the loan and the
partnership form the undisputed basis for deciding this case.
The interpretation of contracts is a matter of law which we
review de novo. Neal & Co. v. Association of Village Council
Presidents Regional Hous. Auth., 895 P.2d 497, 502 (Alaska 1995).
3. See also 2 Alan R. Bromberg and Larry E. Ribstein,
Partnership sec. 7.14(d), at 7:154 (1996) (hereinafter
Partnership) ("[T]he assuming partners become principal debtors,
and the outgoing partner becomes a surety."); Restatement of
Suretyship and Guaranty sec. 2 (1995) ("The secondary obligation
may be created . . . by contract between an obligor and another
person pursuant to which, without a novation, the other person
assumes a duty of the obligor to the obligee, with the result
that the other person becomes the principal obligor and the
original obligor becomes the secondary obligor . . . .").
4. In a letter to First National, 4M 2B stated that the
"Bradford's [sic] have retired from the 4M 2B Partnership." 4M
2B attached to the letter a copy of the agreement by the
remaining partners to assume the debts of the partnership.
5. Since the continuing partner in Nestle agreed with the
retiring partner to assume the partnership obligations, that case
did involve discharge of a surety. 669 P.2d at 1047-48. The
court, however, never considered the issue of the withdrawing
partner's suretyship status.
6. Because we hold that the Bradfords are liable for the debt
to First National under the Loan Agreement, we do not need to
consider whether they are also liable under the Guaranty
Agreement.
7. We review an entry of judgment under Rule 54(b) for abuse of
discretion. Williams v. Mammoth of Alaska, Inc., 890 P.2d 581,
586 (Alaska 1995).
8. Rule 82(a) states that attorney's fees may be provided as
"agreed to by the parties . . . ."
9. We review the trial court's interpretation of these
contractual provisions and statutes de novo. Neal & Co. v.
Association of Council Presidents Regional Hous. Auth., 895 P.2d
497, 502 (Alaska 1995).
10. Courts have held that to enforce this joint liability (as
opposed to joint and several liability), the creditor must bring
suit against all the partners generally. 2 Partnership, supra
n.3, sec. 5.10(b), at 5:71. The Bradfords do not argue that
First National has failed to do this.
11. This liability is also limited by a rule, not explicit in
the Uniform Partnership Act, but frequently applied by courts,
that creditors first exhaust the partnership assets. 2
Partnership, supra n.3, sec. 5.08(e), at 5:59-62. The Bradfords
make no argument that First National has failed to do this.
12. Because we decide that the Bradfords are liable for the
attorney's fees at issue under the Loan Agreement, we do not
address whether they are also liable under the Guaranty
Agreement.
13. The Bradfords also argue that since First National did not
sue them for breach of the Loan Agreement, "it cannot now avail
itself of the terms of that agreement." Since the Bradfords
failed to raise this issue in the court below, we decline to
review it on appeal. Tommy's Elbow Room, Inc. v. Kavorkian, 754
P.2d 243, 245 n.7 (Alaska 1988).
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