George King et al. v. Ston Investments

ARKANSAS COURT OF APPEALS

NOT DESIGNATED FOR PUBLICATION

JOHN B. ROBBINS, CHIEF JUDGE

DIVISION IV

GEORGE KING, et al.

APPELLANTS

V.

STON INVESTMENTS

APPELLEE

CA 00-352

NOVEMBER 8, 2000

APPEAL FROM THE CRAIGHEAD

COUNTY CIRCUIT COURT,

WESTERN DISTRICT,

[NO. CIV00-74]

HONORABLE CHARLES DAVID

BURNETT, CIRCUIT JUDGE

AFFIRMED IN PART; REVERSED

AND REMANDED IN PART

This case concerns a lease and the liability of the lessees and guarantors for delinquent rent. Appellee Ston Investments, Incorporated (Ston), entered into a contract with Kirtley Enterprises, Incorporated (Kirtley), on July 10, 1996, wherein Ston agreed to construct a restaurant building in Jonesboro, Arkansas, and to lease the building to Kirtley, doing business as Ole South Pancake House. Wes Kirtley agreed to personally guarantee the lease payments. An addendum was executed on November 18, 1996, which raised the rental rate due to increased construction costs, and granted Ston a security interest in the restaurant equipment. Near completion of the building and prior to Kirtley taking up occupancy, Kirtley surrendered its franchise to operate an Ole South Pancake House in Jonesboro so that this

franchise could be granted to Destiny Investment Group, LLC (Destiny), which would undertake to operate the restaurant. To effect this transaction, asecond addendum to the lease was executed on December 11, 1996, wherein Kirtley remained the lessee, Mr. Kirtley remained as personal guarantor, Destiny agreed to be added as an "additional lessee," and Mary Helen Peters, Buzz Looney, and George King (Destiny shareholders) signed on as personal guarantors of the lessee's obligations "to be jointly and severally bound by the terms of the above-referenced Lease and Addendum as if originally executed by each (sic) these parties as personal guarantors." All other terms and conditions of the original lease remained in force.

Once the building was completed in mid-December 1996, Destiny entered into possession and commenced operation of the restaurant. King ceased to be a stockholder of Destiny on December 4, 1997, at which time he conveyed his twenty-five percent stock interest over to appellant Mary Helen Peters in exchange for other equities. However, no documents were executed between Ston and King to release King from his lease obligations as personal guarantor.

Some time in June 1998, Destiny wanted out of the Jonesboro restaurant, so Kirtley resumed operation and paid rent through the end of November 1998. Thereafter, no rent was paid. On February 16, 1999, Ston filed an action to recover unpaid rent and for an order of immediate recovery of possession without termination of the lease, which was a remedy permitted by Paragraph 17(b) of the lease agreement. The restaurant closed on March 11, 1999.

Although it had not obtained an order for immediate possession of the property, Ston took possession of the premises by entering with the aid of a locksmith and changing thelocks on March 16th, because Ston, acting through its officers, believed that items were being or might be removed from the restaurant subsequent to its closing. Although the restaurant was closed, Kirtley's store manager was on the premises when this occurred. Thereafter, Ston sent correspondence to all parties' counsel notifying them of the change of locks and stating that the action was taken to preserve the security of the contents of the building. The letter also stated that Ston possessed a key should anyone desire to enter the building or to resume operation. Otherwise, Ston was moving forward with this litigation in order to clear the way for a new tenant.

Appellants responded to the lawsuit with an allegation that appellee terminated the lease by its forcible re-entry and by materially changing appellants' obligations under the lease after the lease term had commenced. After a trial to the bench on November 4, 1999, in Craighead County Circuit Court, Ston prevailed. The circuit judge determined that appellants were guarantors of the delinquent rent that had accrued from December 1, 1998, through October 31, 1999. Though Kirtley was found liable by default in failing to appear for the proceedings, there was no judgment entered against Mr. Kirtley personally, because he had sought relief in a Chapter 7 Bankruptcy proceeding that was filed in June 1999.

The appellants, who were found liable for $53,647 in past due rent plus $247.50 in costs, appeal from the circuit court's finding that the lease agreement was not terminated by Ston's actions. Appellant George King also separately appeals the finding that he remained personally liable after he exited Destiny.

The standard of review of a circuit court's findings of fact after a bench trial is whether those findings are clearly erroneous. Ark. R. Civ. P. 52; Burke v. Elmore, 341 Ark. 129, 14 S.W.3d 872 (2000). A finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed. Wade v. Arkansas Dep't of Human Servs., 337 Ark. 353, 990 S.W.2d 509 (1999). The court must view the evidence in the light most favorable to the appellee, resolving all inferences in favor of the appellee. Id.

When contracting parties express their intention in a written instrument in clear and unambiguous language, it is our duty to construe the written agreement according to the plain meaning of the language employed. Miller v. Dyer, 243 Ark. 981, 423 S.W.2d 275 (1968). It is the court's duty to enforce a valid agreement between parties, not to rewrite them. Curry v. Commercial Loan & Trust Co., 241 Ark. 419, 407 S.W.2d 942 (1966). A guarantor is one who makes a contract, which is distinct from the principal obligation, to be collaterally liable to the creditor if the principal debtor fails to perform. First Commercial Bank, N.A. v. Walker, 333 Ark. 100, 969 S.W.2d 146 (1998). A guarantor, like a surety, is a favorite of the law, and his liability is not to be extended by implication beyond the expressed terms of the agreement or its plain intent. Nat'l Bank of Eastern Arkansas v. Collins, 236 Ark. 822, 370 S.W.2d 91 (1963); Morrilton Security Bank v. Kelemen, 70 Ark. App. 246, 16 S.W.3d 567 (2000). A guarantor is entitled to have his undertaking strictly construed, and he cannot be held liable beyond the strict terms. Inter-Sport, Inc. v. Wilson,281 Ark. 56, 661 S.W.2d 367 (1983). Any material alteration of the obligation assumed, made without the consent of the guarantor, discharges him. Morrilton Security Bank, supra.

Strictly construing the plain words and intent of this lease agreement and the addenda thereto, we cannot conclude that the trial court was clearly erroneous in finding that appellants were liable for the unpaid rent. We do conclude, however, that the chancellor was clearly erroneous in finding appellants liable for any rent after March 16, 1999.

Point one on appeal, as presented solely by appellant George King, is that King should not be held liable as a personal guarantor because the contract, by its terms, meant that Destiny was only obligated to pay rent when it occupied the premises as the lessee, not when Kirtley was in possession. Therefore, he argues that because he was not a stockholder in Kirtley, strict construction would mandate that this contract did not bind him to be responsible for Kirtley's unpaid rent when Kirtley was the lessee that failed to pay rent. We disagree.

The lease contract and the addendum signed by King specifically made him and the other stockholders of Destiny jointly and severally responsible for all payment obligations under the lease. Even if King and the other principals of Destiny executed hold-harmless documents as between them when he terminated his business relationship with Destiny, this would not have extricated him from the contract he entered with Ston. A guarantor cannot unilaterally terminate his contract of guaranty of an existing obligation. See Meek v. U. S. Rubber Tire Co., 244 Ark. 359, 425 S.W.2d 323 (1968).

King additionally argues that he was not fully informed of the ownership status of Kirtley, i.e., that Mr. Kirtley's wife was a one-half owner who did not personally guarantee Kirtley's obligations, and that this lack of disclosure discharged King of responsibility. We find no evidence that this was ever argued to the trial court. Consequently, we will not address it for the first time on appeal. Dobie v. Rogers, 339 Ark. 242, 5 S.W.3d 30 (1999). King also argues that appellee is precluded from seeking a deficiency because it impaired the collateral for King's obligation (the equipment) by not disposing of it in a commercially reasonable manner. Again, he raises this argument for the first time on appeal, and we will not consider it. Id.

Appellant King argues also that there was no consideration for the guaranty that he executed. This contention holds no merit because Destiny was given a benefit, the right to conduct business as an additional lessee during the term of the lease, in exchange for King's personal guaranty of all rent payments due. As long as there is a benefit to a principal debtor or guarantor, or a detriment to the guarantee, a guaranty contract is supported by sufficient consideration. Marsh v. Nat'l Bank of El Dorado, 37 Ark. App. 41, 822 S.W.2d 404 (1992); Bass v. Service Supply Co., 25 Ark. App. 273, 757 S.W.2d 189 (1988).

Appellant King further argues that he should not be liable inasmuch as the contract was materially changed because there was never a sublease or a written consent entered that gave Kirtley the right to resume operations. However, an alteration is not material unless the guarantor is placed in the position of being required to do more than his original undertaking. Continental Ozark, Inc. v. Lair, 29 Ark. App. 25, 779 S.W.2d 187 (1989). King was required to do no more than was required of him in the initial addendum; he was responsible, along with Kirtley, Peters, and Looney, for any payments due under the lease. The lessor Ston's primary interest was not which lessee was operating the restaurant, but in seeing the rent paid and the structure maintained. In short, parties were only added in this contract; no one was ever released.

All appellants join in the second point on appeal, that is, whether the trial court clearly erred when it ruled that the lease agreement was not terminated by the actions taken by Ston. Pursuant to Paragraph 17 of the original lease agreement, after a default (including failure to pay rent), Ston could exercise one or more of the following options:

(1) to terminate the lease with the lessee immediately to surrender the possession;

(2) to enter and take possession of the premises, expelling the tenant, with or without termination of the lease, provided that expulsion would not occur except pursuant to a judgment entered or a writ issued in an appropriate legal proceeding.

The following facts are undisputed: That Ston filed this civil action asking for judgment or writ of possession in February 1999; that on March 16, 1999, Ston entered the premises, changed the locks, and asked the on-duty manager to leave; that Ston wrote a letter dated March 17, 1999, to the appellants to inform them of the lock change and the availability of access by any party interested in resuming operation; and that there was no writ or judgment in place when the locks were changed. This, appellants argue, constitutes an ouster of the tenant and terminated the lease. Consequently, they conclude, rent ceased to accrue after March 16, 1999. We agree with appellants that Ston's entry and changing of the locksterminated the lease and absolved the guarantors from liability for any further rentals after March 16, 1999.

The trial court found that Ston did not repossess the premises, reasoning that this action fell under another relevant portion of the lease at issue, Paragraph 12:

RIGHT OF ENTRY. Lessor reserves the right during the term of this lease to enter the premises at reasonable hours and upon reasonable notice to Lessee, which notice shall be waived in case of emergency, for the purpose of inspecting the premises as Lessor may deem necessary for the protection and preservation of the premises.

While we agree that the lessor had a right of entry, upon notice to the lessees, for the purpose of inspecting the premises, we disagree that Ston acted within its rights in this instance.

As long as a landlord does no more than exercise the rights accorded it under the lease, the lessor's conduct will not result in a surrender of the lease by operation of law. Weingarten/Arkansas, Inc. v. ABC Interstate Theaters, Inc., 306 Ark. 64, 811 S.W.2d 295 (1991). Paragraph 12 only permits entry for the purpose of inspection; it does not authorize repossession. The re-entry, the changing of the locks, and the expulsion of the tenants without a judgment or a writ constituted a termination of the lease agreement, and we conclude that the trial court clearly erred in finding that rent continued to accrue. Because we find error on this point, we remand for the trial court to enter judgment for the appropriate amount of unpaid rent that appellants owe that accrued prior to termination of the lease on March 16, 1999.

Affirmed in part; reversed and remanded in part.

Bird and Neal, JJ., agree.