Unpublished Disposition, 872 F.2d 429 (9th Cir. 1990)

MEMORANDUM^* 

The Oregon Bank (the Bank) brought this action to enforce a guaranty against RSG Forest Products, Inc. (RSG) for the long-term debt of Sunrise Forest Products (Sunrise). RSG counterclaimed for breach of contract, rescission, and restitution. The district court granted defendant's motion for summary judgment, concluding that the obligation at issue was not within the scope of the guaranty and that the Bank and Sunrise had materially altered the Bank's risk under the guaranty. The counterclaims were also dismissed on summary judgment. RSG was awarded costs, but denied attorney's fees. The Bank appealed. RSG cross-appealed. We affirm on all issues.

DISCUSSION

The Bank contends there is a material issue of fact as to whether the parties intended that a note due in less than a year is within the scope of the guaranty of long term debt. The Bank's contention lacks merit.

In Oregon, guaranty contracts are subject to the general rules of contract construction. Bank of the Northwest v. Brattain, 73 Or.App. 261, 263, 698 P.2d 536, 537 (1985). Where an ambiguity exists as to the meaning of the guaranty, the court must look to the intent of the parties. Western Bank v. Youngs, 274 Or. 213, 218, 545 P.2d 886, 888 (1976).

Here, the guaranty is ambiguous on its face as to whether it encompasses a short-term note. The guaranty states that it is limited to long-term indebtedness, but also states that it includes Note # 3, a short-term note. The guaranty does not state whether Note # 4 is to be a short or long-term instrument.

To construe an ambiguous instrument, the court may consider extrinsic evidence of the parties' intent. ORS Sec. 42.220 (1987). Such evidence may include the parties' statements during negotiations. Consolidated Ranches, Inc. v. Chase Lane & Cattle Co., 242 Or. 95, 99-100, 408 P.2d 203, 205-206 (1965).

Sanders' affidavit says that Lawrence told him at the meeting that Note # 4 would mature in 1990. Robinson's affidavit says that it was agreed at the meeting that the long-term debt that RSG was to guarantee was a term note that would become due in 1990. Jarrard's affidavit says that the long-term debt that RSG agreed to guarantee was to become due in 1990.

Lawrence, the bank's agent, testified that she could not remember a discussion of the due date of Note # 4, although a five to seven year debt amortization date for the debt was discussed. The Bank's argument that this testimony is in conflict is not persuasive. The only reasonable evaluation of the testimony is that RSG's representatives, when discussing amortization of "a debt," assumed that the discussion applied to Note # 4. Thus, there is no conflict between testimony by the Bank's and RSG's witnesses.

The Bank argues that RSG must have known that Note # 3 was a short term note and that it must have known of the Bank's practice of documenting long-term debt through short-term notes. Sanders testified that he was never aware that Note # 3 was a short-term note; there is no evidence he knew of the Bank's practice of using short-term notes to document long-term debt.

Given the undisputed testimony that the only dates discussed at the August 20th meeting related to a five or seven year amortization or maturity of the obligation RSG was to guaranty, there is no evidence from which a jury could reasonably conclude that RSG intended its guaranty to encompass a short-term note. The district court's grant of summary judgment on the Bank's complaint was correct.

As an additional ground for summary judgment, we conclude that RSG was discharged from liability under the guaranty because the Bank and Sunrise modified the undertaking that RSG was to guarantee by entering into a security agreement that allowed acceleration of the note for reasons other than nonpayment. Oregon has adopted the Restatement, Security, Sec. 128, which provides that material unconsented modifications discharge a surety's obligation. Lloyd Corp. v. O'Connor, 258 Or. 33, 37-38, 479 P.2d 744, 746 (1971). A material modification is one that a "careful and prudent person undertaking the risk would have regarded as substantially increasing the chances of loss." Id. at 37, 479 P.2d at 746 (citations omitted).

The Bank contends that the security agreement did not materially alter Sunrise's obligation because it was the same as the security agreement that accompanied Note # 3. The only ground for default specified in Note # 3 is nonpayment. The security agreement designates various events of default other than nonpayment, including general insolvency and overadvances on the operating line. A reasonable and prudent person would consider tying the guaranty of long-term debt to Sunrise's short-term debt and day-to-day solvency to be a modification that substantially increased risk of loss.

The Bank contends a jury could have concluded RSG consented to the modification. However, there is no evidence RSG knew of the modification, let alone consented to it. Sanders denied knowledge of the fact that the security agreement allowed Note # 4 to be accelerated for reasons other than nonpayment. The Bank presents no evidence that Sanders knew of the security agreement's acceleration clause.

In the alternative, the Bank argues that RSG, through Sanders, can be held to have consented through constructive notice. The Bank concedes that RSG never received a controlling stock interest in Sunrise and does not dispute the RSG's assertion that Sanders was never employed by Sunrise in any capacity. The Bank discusses the fact that Sanders signed a Certification of Corporate Status and Borrowing Resolution that authorized him to sign a security agreement on behalf of Sunrise, but the Bank does not contend that Sanders ever actually signed such an agreement. Accordingly, Sanders had no legal relationship with Sunrise upon which consent arising from constructive notice could be based.

Finally, the Bank cites Valley State Bank v. Gibson, 64 Or.App. 385, 388, 668 P.2d 459, 460-61 (1983), for the proposition that RSG had a duty to inform itself of its obligations under the guaranty. The Bank's argument is meritless; RSG had no affirmative duty to inform itself of obligations outside the scope of the guaranty or modifications of the undertaking RSG was to guarantee.

The Bank contends that the guaranty contained nondischarge and waiver provisions that preserved RSG's liability under the guarantee despite material modifications.

A waiver is the intentional relinquishment of a known right, which must be unequivocally manifested. Waterway Terminals Co. v. P.S. Lord Mechanical Contractors, 242 Or. 1, 26, 406 P.2d 556, 567 (1965). If its meaning is in doubt, a guaranty must be construed against its drafter. Youngs, 274 Or. at 218, 545 P.2d at 888. A guarantor is entitled to have his undertaking strictly construed and it cannot be extended by construction or implication beyond the precise terms of his contract. Brattain, 73 Or.App. at 265, 698 P.2d at 538.

The nondischarge provision stated that RSG's liability would be undischarged by any act done by the Bank or the debtor. The parties added to the printed guaranty form an express limitation of the guaranty to long-term debt. Construing the preprinted waiver provisions to allow the Bank and Sunrise to accelerate a long-term debt if Sunrise was insolvent or defaulted on the short-term debt would conflict with the written provision of the guaranty. "When an instrument consists partly of written words and partly of a printed form, and the two are inconsistent, the former controls." ORS Sec. 42.270 (1987). Accordingly, the district court was correct in concluding that RSG did not waive its right to discharge upon a modification that effectively made it responsible for Sunrise's short-term debt.

RSG contends the district court erred in granting summary judgment on its counterclaim for breach of the contract of guaranty, rescission of any agreements it had with the Bank (including the guaranty), and restitution of $500,000 RSG gave the Bank to be applied to Sunrise's operating line of credit. RSG claimed it was entitled to rescission and restitution because the Bank breached the refinancing agreement by overadvancing Sunrise's operating line.

Rescission is a remedy that presupposes a contract between the litigating parties. Reynolds Aluminum Co. v. Multnomah County, 206 Or. 602, 614, 287 P.2d 921, 927 (1955), cert. denied, 350 U.S. 970 (1956). In its counterclaim, RSG alleges it had a contract with the Bank in which the guaranty and the $500,000 RSG loaned Sunrise were consideration for the Bank's promise to RSG to refinance Sunrise's debt. In reality, however, the Bank and RSG entered into a contract of guaranty, while Sunrise and RSG entered into a separate contract for the exchange of $500,000 in return for a controlling interest in Sunrise. The guaranty does not put a maximum on Sunrise's operating line; therefore, overextensions cannot constitute a breach of the contract of guaranty. Similarly, the Bank was not a party to RSG's contract with Sunrise to exchange $500,000 for a controlling interest in Sunrise. Accordingly, the district court was correct in granting summary judgment on the counterclaims.

Motions for relief from judgment in order to amend are left to the sound discretion of the district court. Thompson v. Housing Authority of the City of Los Angeles, 782 F.2d 829, 832 (9th Cir.), cert. denied, 479 U.S. 829 (1986).

The Bank contends the district court abused its discretion by denying the Bank's motions to vacate the judgment and amend its complaint to include a claim for reformation of Note # 4 so that it would mature October 1, 1990.

Reformation is a remedy granted upon a showing of either mutual mistake or a showing that the nonmistaken party behaved inequitably. Schaffner v. Oregon Central Credit Union, 63 Or.App. 118, 122, 663 P.2d 1275, 1278 (1983) (quoting Jensen v. Miller, 280 Or. 225, 228-29, 570 P.2d 375, 377 (1977)). The Bank does not allege that the mistake was mutual or that RSG behaved inequitably. Therefore, the proposed amendment is without merit as a matter of law, and the district court did not abuse its discretion by denying the Bank's motions.

We review denial of a motion to vacate judgment and supplement the record for abuse of discretion. Ellis v. Brotherhood of Ry., Airline & S.S. Clerks, 685 F.2d 1065, 1071 (9th Cir. 1982), aff'd in part, reversed in part on other grounds, 466 U.S. 435 (1984).

The Bank contends the district court abused its discretion by denying the Bank's motion to supplement the record, to vacate the judgment, and for reconsideration. The Bank sought to bring before the court additional evidence that purportedly demonstrated discrepancies between the affidavit and deposition testimony of RSG's witnesses and demonstrated that the Bank reasonably believed Sanders owned a controlling interest in Sunrise. The Bank admits that the evidence was previously available and that it is not crucial to the Bank's arguments. Under these circumstances, the district court did not abuse its discretion in denying the motion.

We review an award of costs under Rule 54(d) for abuse of discretion. Moore v. Hughes Helicopters, Inc., 708 F.2d 475, 486 (9th Cir. 1983). Pursuant to Fed. R. Civ. P. 54(d), "costs shall be allowed as of course to the prevailing party unless the court otherwise directs...."

The Bank contends that the district court erred in awarding costs to RSG because RSG's counterclaim was dismissed. However, costs are generally awarded a successful party even if he is not awarded his entire claim. Thomas v. S.S. Santa Mercedes, 572 F.2d 1331, 1335 (9th Cir. 1978). A defendant who successfully fends off a large claim may be awarded costs despite failure to prevail on a counterclaim. 6 J. Moore, W. Taggart, & J. Wicker, Moore's Federal Practice, p 54.70, at 54-325-26 & n. 8 (2nd ed. 1988).

Here, the parties agreed before the trial court that ninety percent of their time was spent on plaintiff's claims and ten percent on defendant's counterclaim. The trial court's award of costs was not an abuse of discretion.

RSG contends it was entitled to attorney's fees under the guaranty for its successful defense of the Bank's action to enforce the guaranty.

In diversity actions, state law governs the award of attorney's fees. Shakey's, Inc. v. Covalt, 704 F.2d 426, 435 (9th Cir. 1983). Under ORS Sec. 20.096(1) (1987), a one-sided attorney's fees provision such as that contained in the guaranty results in a fee award to whichever party prevails on an action under the contract. Under ORS Sec. 20.096(5), the "prevailing party" is defined as "the party in whose favor final judgment or decree is rendered." Here, the district court denied RSG's request for attorney's fees on the ground that neither party prevailed on their claims and counterclaims. "To the extent the trial judge found an award of fees 'inappropriate' because neither party 'prevailed' under the controlling Oregon law, our review of that decision is de novo." Miller v. Safeco Title Ins. Co., 758 F.2d 364, 369 (9th Cir. 1985).

In Lawrence v. Peel, 45 Or.App. 233, 607 P.2d 1386 (1980), the Oregon appellate court stated " [w]e have held that there can be only one prevailing party for purposes of an award of attorney fees, but that there need not always be a winner.... If both parties prevailed, or neither of them prevailed, an award of attorney's fees would not be appropriate or required." Id. at 243, 607 P.2d at 1392 (footnote omitted). In Wilson v. Matthews, 48 Or.App. 491, 496, 617 P.2d 302, 304 (1980), the rule in Peel was applied to deny contractual fees to both parties when the plaintiff was unsuccessful on its FED claim and the defendant unsuccessful on its counterclaim for specific performance of a purchase option.

Here, neither RSG nor the Bank prevailed on their claims or counterclaims. Thus, the case would seem to fall within the rule of Peel and Wilson, justifying the district court's denial of fees to either party.

AFFIRMED.