St. James Bank & Tr. Co. v. S & H Enters., Inc. - 532 So. 2d 915 (La. Ct. App. 1988)

Rule:

The original creditor or subrogor is always preferred to the subrogee in such a case; he comes before the latter, and the subrogee can only claim that which remains after the subrogor has been paid. The Civil Code expressly recognizes this right of preference accorded to the subrogor against the subrogee. 

Facts:

S & H Enterprises, Inc. executed a series of promissory notes with a continuing line of credit of $ 100,000 to the Bank. J. Bruce Pasley and James M. Stephenson signed as personal guarantors on the notes. On April 12, 1985, the Bank and LAMBDA entered into an agreement whereby LAMBDA agreed to guarantee up to 90% of the S & H Enterprises, Inc. loan. In May, 1986, the total amount owed to the Bank pursuant to the promissory notes was $ 98,050.88. When, according to the terms of the notes, they became delinquent, the Bank informed LAMBDA of its intent to call in the loan. In June, 1986, the Board Chairman of LAMBDA, wrote a letter to the vice-president of the Bank informing him that LAMBDA was fully prepared to pay the agreed upon 90% of any monies borrowed by S & H Enterprises, Inc., but it had come to his attention that there was a possible misunderstanding with respect to the terms of the Guarantee Agreement. In this letter, the Board Chairman stated that the Bank would be obligated to transfer and assign to LAMBDA any promissory notes executed by S & H Enterprises, Inc. and any guaranty agreements executed by the parties. The actual signed agreement entered into between the Bank and LAMBDA was silent as to any such requirements on the part of the Bank. Notwithstanding the disagreement, on August 27, 1986, LAMBDA paid the Bank the sum of $ 88,245.79 pursuant to the guaranty agreement between the two parties. Although the Bank did assign some notes to LAMBDA, it retained one note as evidence of the remaining amount owed to the bank. On December 4, 1986,  the Bank filed suit against S & H Enterprises, Inc. and J. Bruce Pasley and James M. Stephenson personally and in solido for the balance of the note in the amount of $ 13,535.25. On February 23, 1987, LAMBDA filed a petition of intervention asserting that the defendants to the suit were indebted to intervenor in the sum of $ 88,245.79 and, without the note, its rights to recover and collect sums due it were substantially impaired. The trial court ruled that the Bank had preference for the unpaid balance of a loan.

Issue:

Did the trial court err in denying a subrogated obligor the right to proceed against the principal obligor for the amount paid to the original oblige?

Answer:

No.

Conclusion:

The Authorization and Loan Agreement (Guarantee Loans) between LAMBDA and the Bank is silent as to the requirement that the Bank submit all notes to LAMBDA upon payment or, more particularly, partial payment of the loan upon default of S & H Enterprises, Inc. If LAMBDA had made payments equal to 100% of the loan made by S & H Enterprises, Inc., silence in the agreement would be inconsequential; however, since only partial payment was made, we must look to the Civil Code for further guidance. Accordingly, LSA-C.C. Art. 3040 and 3048 must be read in conjunction with LSA-C.C. Art. 1826, which states in pertinent part: “An original obligee who has been paid only in part may exercise his right for the balance of the debt in preference to the new obligee.” Additionally, it is well established in Louisiana jurisprudence that before a surety is entitled to recover any amount paid to the principal creditor by virtue of legal subrogation, the principal creditor's claim must be fully satisfied. As mentioned, the Authorization and Loan Agreement between LAMBDA and the Bank was silent as to the requirement that the Bank turn over all notes to LAMBDA. Consequently, the applicable Code articles and jurisprudence of this state must be complied with. Since the Bank, the original creditor, did not receive full payment for the S & H Enterprises loan, LAMBDA, who did become legally subrogated to the rights of St. James Bank, is subrogated subordinately to the rights of the Bank to be paid the balance of the loan due