Dugas v. Modular Quarters, Inc. - 561 So. 2d 192 (La. Ct. App. 1990)

Rule:

La. Rev. Stat. Ann. § 10:3-119 applies to negotiable instruments the ordinary rule that writings executed as a part of the same transaction are to be read together as a single agreement. As between the immediate parties, a negotiable instrument is merely a contract and is no exception to the principle that the courts will look to the entire contract in writing. Accordingly, a note may be affected by any other relevant term in the separate writing. "May be modified or affected" does not mean that the separate agreement must necessarily be given effect. There is still room for construction of the writing as not intended to affect the instrument at all.

Facts:

On March 4, 1980, the plaintiffs signed a written agreement to sell approximately 71 acres of immovable property in Iberia Parish to Modular Quarters and Melyn Industries for $ 262,643.09. The purchase agreement, among other items not pertinent to this litigation, provided that: (1) no cash would be transferred at the time of sale; instead, the plaintiffs agreed to accept two promissory notes, one for $ 164,643.09 and the other for $ 100,000, executed by the two corporations and personally endorsed by the stockholders of both corporations to render themselves liable in solido for the obligations; and, (2) the sale was made subject to the plaintiffs' existing mortgage on the property in favor of the Federal Land Bank in New Orleans (hereafter Federal Land Bank) and with the understanding that the plaintiffs would make timely annual payments due to the Federal Land Bank. On May 2, 1980, the plaintiffs sold the 71 acres to Modular Quarters and Melyn Industries in an authentic act signed by the plaintiffs and authorized officers of the two corporations. Included in that deed was the following provision: "It is understood that the liability of purchaser defined in the act as Modular Quarters and Melyn Industries J is limited to the value of the land transferred herein regardless of any balance which may be due on the promissory notes executed in connection herewith." None of the other defendants signed the sale. On that same day, the two corporations and Larry C. Degeyter, Kenneth J. Barras, Jefferson Prados, and Robert J. Savoy, Modular Quarters' stockholders, and Lynn Meadows, Melyn Industries' stockholder, executed two promissory notes payable to the plaintiffs. To secure payment of the promissory notes, Modular Quarters and Melyn Industries mortgaged the 71 acres for $ 264,643.09 in favor of the plaintiffs. The special provision quoted hereinabove was not included in either the promissory notes or the act of mortgage.

Because of adverse economic times, Melyn Industries sold its interest in the 71 acres on January 18, 1984, to Profit Sharing Trust. In that document, Profit Sharing Trust assumed payment of the two promissory notes dated May 2, 1980, as well as the mortgage of that same date. The plaintiffs intervened in the act of sale with assumption of mortgage to specifically release Melyn Industries and Lynn Meadows, individually, from any and all obligations in connection with the May 2, 1980, sale, the two promissory notes, and the real estate mortgage. At the same time, the plaintiffs reserved all other rights they may have against Modular Quarters, Profit Sharing Trust, Larry Degeyter, Kenneth J. Barras, Jefferson Prados, and Robert J. Savoy, each of whom also intervened in the instrument to acknowledge the release and the plaintiffs' reservation of rights against them. On May 29, 1985, when the defendants' were unable to make payments on the principal of the $ 100,000 promissory note, the plaintiffs granted an extension until May 2, 1986, to all the original signatories of the $ 100,000 promissory note, together with Profit Sharing Trust which assumed the indebtedness thereon, to begin making payments on the principal of that note. When the defendants defaulted on their payment on the promissory notes, the plaintiffs brought suit seeking to recover on the two promissory notes and also sought recognition of the real estate mortgage executed in their favor. The trial court found the defendants liable in solido on two promissory notes signed by them, and recognized the real estate mortgage granted by Melyn Industries.

Issue:

May defendants assert the limitation of the liability clause in the cash deed?

Answer:

Yes.

Conclusion:

Modular Quarters is the only defendant who was an original party to the sale, the promissory notes and the mortgage. Under these facts, LSA-R.S. 10:3-119, set out below in pertinent part, applicable: "As between the obligor and his immediate obligee or any transferee the terms of an instrument may be modified or affected by any other written agreement executed as a part of the same transaction, . . . ." Thus, it is clear that as an immediate party to the contract Modular Quarters can invoke the liability limitation. 

As to Degeyter, Barras, Savoy, and Prados, they were not identified as parties to the acquisition deed, and their signatures appear only on the two promissory notes. However, as accommodation endorsers, they too can invoke the limitation of the liability clause. In the case sub judice, it is clear that Barras, Savoy, Prados, and Degeyter, all stockholders of Modular Quarters, were accommodation endorsers for Modular Quarters, signing the promissory notes to provide the additional security required in the buy/sell agreement. Therefore, pursuant to the jurisprudence and statutory law cited hereinabove, they could assert the defense which Modular Quarters may have held as a result of the limitation of liability language contained in the sale document from the plaintiffs.

Lastly, Profit Sharing Trust may also assert the limitation of the liability agreed to by Melyn Industries in the original sale from the plaintiffs. In the act of sale, Profit Sharing Trust assumed whatever obligations were imposed on Melyn Industries, an original signatory to the cash deed from the plaintiffs, in the two promissory notes and the real estate mortgage. A person who, by agreement with the obligor, assumes the obligation of the latter is bound only to the extent of his assumption. The assuming obligor may raise any defense based on the contract by which the assumption was made. Likewise, the assuming obligor may raise any defense based on the relationship between the original obligor and obligee.