Cottonport Bank v. Reason
1 La.App. 3 Cir. 1039, 801 So. 2d 1236, 2001 La. App. LEXIS 2972 (2001)
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Rule of Law:
A continuing guaranty that explicitly covers a borrower's present and future indebtedness remains enforceable for subsequent loans, even after the initial debt is extinguished. The prescriptive period (statute of limitations) for enforcing the guaranty on a new debt begins when that new debt becomes due, not when the original debt was paid.
Facts:
- In March 1990, Alfred and Rose Reason each signed a 'Consumer Guaranty' agreement for $5,000 for the benefit of their son, Brent Reason, with The Cottonport Bank.
- The agreements were explicitly labeled 'Continuing Guaranty' and covered Brent Reason's 'present and future indebtedness' to the bank.
- The language specified that the guaranties would remain in full force and effect until the lender agreed to cancel them in writing.
- The initial loan taken by their son, which prompted the guaranties, was extinguished in May 1991.
- In October 1999, nearly a decade later, Brent Reason executed a new promissory note with The Cottonport Bank.
- Brent Reason subsequently defaulted on the payments for the October 1999 promissory note.
Procedural Posture:
- The Cottonport Bank (Plaintiff) filed a suit against Alfred and Rose Reason (Defendants) in a Louisiana trial court to collect on consumer guaranty agreements.
- The Reasons filed an exception of prescription, arguing the bank's claim was time-barred.
- The trial court denied the Reasons' exception of prescription.
- Following a trial on the merits, the court entered a judgment in favor of the Bank, ordering each of the Reasons to pay $5,000.
- The Reasons (Appellants) appealed the trial court's judgment to the Louisiana Court of Appeal, Third Circuit, with the Bank as the Appellee.
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Issue:
Does a continuing guaranty, which by its terms covers all present and future indebtedness of a borrower, become unenforceable due to prescription when the borrower's initial debt is extinguished, or does the prescriptive period for a subsequent debt begin only when that subsequent debt becomes due?
Opinions:
Majority - Doucet, C.J.
No, a continuing guaranty does not become unenforceable when the initial debt is paid. The prescriptive period for a debt secured by a continuing guaranty begins when that specific debt becomes due. The court found that the contracts signed by the Reasons were unambiguously 'continuing guaranties' that were not tied to a specific debt but rather to all 'present and future indebtedness' of their son. The principal obligation being enforced was the 1999 note, which only became due in 2000, making the bank's suit timely. The court rejected the defendants' claims that they did not understand the agreement, citing the legal principles that an alleged oral agreement cannot vary the clear terms of a written contract and that failure to read a document before signing it does not provide a basis for relief.
Analysis:
This decision solidifies the legal power of 'continuing guaranty' agreements and serves as a strong protection for lenders. It clarifies that the statute of limitations on such agreements runs from the default of each specific underlying debt, not from the satisfaction of the initial debt. This holding underscores the importance for guarantors to understand that their liability can persist long after the original transaction and will cover future extensions of credit unless the guaranty is formally revoked according to its terms. It also reinforces the 'plain meaning' rule of contract interpretation, giving precedence to the clear, unambiguous language of a written agreement over a party's later claim of misunderstanding.
