ATTORNEYS FOR APPELLANT: ATTORNEYS FOR APPELLEES:
CASEY D. CLOYD JOHN PAYTON
Brooke & Cloyd, P.C. Lehman & Payton
Muncie, Indiana Indianapolis, Indiana
JOHN T. DRICS HARRY A. WILSON, JR.
OBryan, Brazill & Drics Wilson Kehoe & Winingham
Indianapolis, Indiana Indianapolis, Indiana
IN THE COURT OF APPEALS OF INDIANA
S-MART, INC. ) ) Appellant-Plaintiff, ) ) vs. ) No. 29A05-0002-CV-79 ) SWEETWATER COFFEE CO., LTD., ) HARRY A. WILSON, JR. and BETTY A. ) WILSON, ) ) Appellees-Defendants. )
APPEAL FROM THE HAMILTON SUPERIOR COURT
The Honorable Steven R. Nation, Judge
Cause No. 29D01-9806-CP-351
OPINION - FOR PUBLICATION
As a material inducement to the Landlord to enter into this Lease with
the Tenant, and in consideration thereof, Harry A. Wilson and Betty A. Wilson
(Guarantor(s)), as husband and wife, hereby jointly and severally, and unconditionally and continuously,
1) guarantee the prompt and full payment to the Landlord when due all
financial obligations and liabilities of any kind (including, without limitation, rent and lease
payments) for which the Tenant is now or may herein after [sic] be
or become liable to the Landlord, under this Lease or otherwise, and 2)
guarantee the prompt and full performance of all other duties and obligations for
which the Tenant is now or may herein after [sic] be obligated to
perform under this Lease, whether any such obligations, liabilities or duties are primary
or secondary, absolute or contingent, direct or indirect, and any and all renewals,
modifications, extensions of or substitutions of any of the foregoing liabilities, obligations or
duties, including interest thereon, reasonable attorneys fees and other costs and expenses of
collection or enforcement that are or may be incurred by the Landlord in
connection therewith (collectively, the Debt).
Each Guarantor acknowledges receipt of reasonably equivalent value in consideration for the granting
of this Guaranty. This Guaranty is a continuing guaranty. Guarantors waive
notice of acceptance of this Guaranty, and waive any notice, presentment, demand, protest,
notice of protect [sic] and notice of dishonor of and with respect to
any Debt that is the subject of this Guaranty. No extension of
time, forbearance or other indulgence granted by the Landlord to the Tenant, or
any Guarantor, and no bankruptcy or insolvency proceeding against or by the Tenant,
will release or in any way affect the obligations of the Guarantors.
No omission or delay on the Landlords part in exercising any right thereunder
or in taking any action to collect or enforce payment of any Debt
or to enforce its right under the Lease will be a waiver of
any such right, or release or affect the obligations of Guarantors hereunder, even
if any such omission or delay results in any loss to the Landlord.
Record at 813-15 (emphasis added).
Sweetwater started operating its business in November 1996, which consisted of preparing and selling gourmet coffee, bakery goods, and sandwiches. In the spring of 1997, S-Mart began expansion and operation of an outdoor grill that it had previously operated on its parking lot as a promotion to attract customers.
Because the outdoor grill served food, and would utilize the kitchen area leased to Sweetwater, both of which would potentially interfere with Sweetwaters bakery and sandwich business, the parties subsequently negotiated an Amendment to the Lease Agreement (the Lease Amendment). The Lease Amendment allowed S-Mart to operate the outside grill and use the kitchen area in exchange for which it agreed to reduce Sweetwaters rent by $750.00 per month. During negotiations, Harry Wilson informed Johnson that the Wilsons would not personally guarantee the Lease Amendment.
On June 15, 1997, S-Mart and Sweetwater executed the Lease Amendment. Betty A. Wilson signed as President of Sweetwater, and Warren K. Johnson signed as President of S-Mart. The Lease Amendment made no reference to the guaranty provision in the Lease Agreement. It did not include a signature line for the Wilsons to sign as guarantors and was not signed by them. Johnson testified that he did not intend the Wilsons to sign the Lease Amendment as guarantors. Id. at 287, 937-38.
Because Sweetwater was losing money, at the end of July 1997 the Wilsons made a decision to reduce operating expenses by becoming a self-serve operation. Customers served themselves coffee and chose baked goods and paid for them at S-Marts cash register. When Johnson learned of this, he informed Sweetwater that he disapproved of this new arrangement and would look for a new tenant. In September 1997, with two years remaining on the lease, Sweetwater stopped operations, abandoned the premises, and ceased paying rent.
S-Mart filed its Complaint for Damages in June 1998, alleging that Sweetwater breached the Lease Agreement by failing to pay rent and that the Wilsons were personally liable for all losses resulting from Sweetwaters breach. Sweetwater subsequently filed a counterclaim, contending that S-Mart frustrated or inhibited its business operations.
Following a two-day bench trial in August 1999, the trial court entered judgment in favor of S-Mart for $37,850.00 for Sweetwaters failure to pay rent, and attorney fees and costs. The court further found in favor of the Wilsons with respect to their liability as personal guarantors. Finally, the court entered judgment in favor of S-Mart on Sweetwaters counterclaim.
In pertinent part, the trial court entered the following Conclusions of Law:
44. This Court finds that a continuing guarantee was created by the language used in Paragraph 32 of the Lease Amendment. However, [the] extent of a guarantors liability depends on the terms of his contract. Orange-Co. Inc. v. Brown, 181 Ind. App. 536, 540, 393 N.E.2d 192, 195 (1979). A guarantor is entitled to a strict construction of the contract in his favor . . . . Thus, the guaranty only continues with respect to risks defined within the terms of the Lease Agreement.
45. The continuing consent given by [the Wilsons], as guarantors, did not
include consent to the Lease Amendment since the risks associated with the Lease
Amendment were beyond the scope of what was contemplated by them as guarantors
when they signed the Lease Agreement. Specifically, their guaranty did not contemplate
the Outdoor Grill.
46. In addition to being outside the scope of the prospective consent
of the continuing guaranty, [the Wilsons], as guarantors, did not specifically consent to
the Lease Amendment. Harry Wilsons testimony that were not going to guaranty
this [the Lease Amendment] combined with the lack of his or Betty A.
Wilsons signatures in their capacity as guarantors clearly demonstrates their lack of consent
to the Lease Amendment.
. . . .
51. Where there is a material alteration of a contract without the
consent of the guarantor, the guarantor is discharged from further liability whether the
change is to his injury or benefit for the reason that it is
no longer his contract. Merchants National Bank & Trust Co. v. Lewark,
503 N.E.2d 415 (Ind. Ct. App. 1987).
52. The Lease Amendment was a material alteration of the Lease Agreement.
A material alteration is defined as a change which alters the legal
identity of the instrument, substantially increases the chance of loss to the surety,
or puts the surety in a different position. Yin v. Society National Bank
Indiana, 665 N.E.2d 58, 64 (Ind. Ct. App. 1996). See Merchants National
Bank & Trust Co. v. Lewark, 503 N.E.2d 415 (Ind. Ct. App. 1987).
In this case, the evidence demonstrated that the Lease Amendment was a
material alteration of the Lease Agreement for the following reasons:
(a) It materially altered the nature of the relationship between S-Mart and Sweetwater from a landlord-tenant relationship to that of business competitors;
(b) Warren Johnson and S-Mart knew and understood that simultaneous sales of prepared food from inside the kitchen area and from the outdoor grill were mutually exclusive . . . S-Mart knew and knows that the premises can not [sic] support two separate food vendors;
(c) [S-Mart] presented testimony regarding several minor modifications of the Lease Agreement during the lease period that did not warrant a writing. However, the opening of the outdoor grill was a significant change and was therefore written down in the Lease Amendment;
(d) Harry Wilson, Betty Wilson and Warren Johnson all testified that the Lease Amendment allowing the Outdoor Grill was a significant change;
(e) The risk to Sweetwater was substantially increased due to the competition from the Outdoor Grill;
(f) The $750.00 reduction in the rent was significant. The $3,000 to $4,000 per month that S-Mart stood to gain from the Outdoor Grill was significant.
Id. at 404-08.
Furthermore, 49 Am. Jur. 2d Landlord and Tenant § 822 (1995) (emphasis added)
A material alteration or departure from the contract of guaranty of a lease, without the guarantors consent, will discharge the guarantor, whether or not the guarantor is prejudiced thereby. The guarantor and the surety have a right to stand upon the terms of the contract, and if they do not assent to any variation of it, and a material variation is made, it is fatal to recovery against them. This rule is fully applicable to sureties on leases.
A material alteration of a lease within the meaning of such rule occurs
where an agreement is made between the lessor and lessee changing the terms
of the lease, or the time for the payment or rent, or in
some cases the amount of the rent payable.
In the present case, the trial court found: 1) the relationship between
S-Mart and Sweetwater changed to that of business competitors; 2) the premises could
not support two food operations; 3) all parties agreed that the outdoor grill
was a significant change; 4) the risk of loss to Sweetwater was increased
because of competition from the grill; and 5) S-Mart stood to gain a
significant amount of money from operation of the grill. Based on these
findings the trial court concluded that the Lease Amendment was a material alteration
of the Lease Agreement. In addition to concluding that the Lease Amendment
materially altered the underlying liability, the trial court also concluded that such alteration
was not within the contemplation of the parties at the time the guaranty
A continuing guaranty encompasses all transactions, including those arising in the future, that are within the contemplation of the agreement. 38 Am. Jur. 2d Guaranty § 20 (1999). Here, there is no indication that, at the time the Lease Agreement was executed, the parties either intended or contemplated the series of future events that eventually led to the Lease Amendment. Although the Wilsons undertook continuing liability, the trial court found that this liability did not include consent to the Lease Amendment because the risks were beyond the scope of what they contemplated when they executed the Lease Agreement. The evidence supports this finding.
Notwithstanding the all-inclusive liability contained in the continuing guaranty, the guaranty merely contemplates a series of debts with respect to the accrual of rental payments. The parties contemplated that the Wilsons, as guarantors, would guarantee the payment of rent as it accrued. At the time the guaranty was executed however the parties did not contemplate that within a matter of months they would become business competitors. As a result, the terms of the Lease Agreement as originally contemplated and guaranteed by the Wilsons expanded beyond their original liability. See Farmers Loan & Trust Co. v. Letsinger, 652 N.E.2d 63, 67 (Ind. 1995) (in discussing impairment of collateral defense our supreme court noted that if the creditor impairs the collateral, and the guarantor has not consented to release or other impairment of the collateral, the guarantor may become exposed to liability beyond the guarantors expectation at the time the parties entered into the contract.).
We conclude that where a continuing guaranty provides that it applies to modifications of the underlying agreement, in the absence of consent by the guarantors to the modifications, the continuing guaranty will extend to modifications that were either: 1) non-material alterations of the underlying agreement; or 2) material alterations shown to be within the contemplation of the parties at the time the agreement was executed. The questions of materiality and what the parties contemplated at the time the guaranty was executed are questions of fact that must be analyzed on a case by case basis.
Here, the Lease Amendment was a material alteration that was not within the contemplation of the parties at the time the guaranty was executed. The trial court did not err in determining that the Wilsons were not personally liable for the debts of Sweetwater arising from Sweetwaters breach of the Lease Agreement. See footnote
NAJAM, J., and VAIDIK, J., concur.