In Re Estate of Melvin
283 N.E.2d 303, 5 Ill. App. 3d 463, 11 U.C.C. Rep. Serv. (West) 109 (1972)
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Rule of Law:
Under the Uniform Commercial Code, words on a negotiable instrument stating a 'guarantee against loss by reason of non-payment' constitute a guarantee of collection, not payment, requiring the holder to exhaust remedies against the primary obligor before pursuing the guarantor.
Facts:
- On April 14, 1959, Melco, Inc., through its president Charles W. Melvin, issued a negotiable promissory note in the principal amount of $12,000 to Marjorie Irene Floor.
- On the back of the note, below the statement 'For and in consideration of funds advanced herein to Melco, Inc., we irrevocably guarantee Marjorie Irene Floor against loss by reason of non-payment of this note,' appeared the signature of Charles W. Melvin, along with others.
Procedural Posture:
- Marjorie Irene Floor instituted an action in the Circuit Court of La Salle County to recover money alleged to be due on a promissory note.
- Mildred B. Melvin, executrix of the estate of Charles W. Melvin, deceased, filed a motion to dismiss the claim for failure to state a cause of action.
- The Circuit Court of La Salle County entered an order dismissing Marjorie Irene Floor's claim.
- Marjorie Irene Floor appealed the dismissal order to the Appellate Court of Illinois, Third District.
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Issue:
Does language on a promissory note stating 'we irrevocably guarantee Marjorie Irene Floor against loss by reason of non-payment of this note' constitute a guarantee of payment, which can be sued upon immediately, or a guarantee of collection, which requires the holder to first pursue collection against the maker, under the Uniform Commercial Code?
Opinions:
Majority - Mr. Justice Alloy
No, language on a promissory note stating 'we irrevocably guarantee Marjorie Irene Floor against loss by reason of non-payment of this note' does not constitute a guarantee of payment; rather, it creates a guarantee of collection, which requires the holder to first pursue collection against the maker under the Uniform Commercial Code. The court interpreted the phrase 'guarantee against loss by reason of non-payment' as a conditional undertaking, functionally equivalent to a guarantee of collection, not an absolute guarantee of payment. Citing Illinois Revised Statutes, Ch. 26, § 3-416 (UCC § 3-416), the court distinguished between 'payment guaranteed' (which allows direct action against the guarantor without first resorting to the maker) and 'collection guaranteed' (which requires the holder to first reduce the claim against the maker to judgment and have execution returned unsatisfied, or demonstrate the maker's insolvency). The court found that the phrase 'guarantee against loss' implies a condition—that a loss must first occur and be proven after efforts against the primary obligor. The court rejected the plaintiff's argument that the general rule in subsection (3) of § 3-416 (that words of guaranty not otherwise specifying guarantee payment) should apply, explaining that subsection (3) is limited to instances where no conditional language is used. The court also affirmed that the construction of a guaranty contract does not change based on whether the underlying agreement is a negotiable instrument, finding persuasive an Oregon case with similar 'indemnify against loss' language. Since Marjorie Irene Floor did not allege that she prosecuted her claim against Melco, Inc. to judgment with an unsatisfied execution or that Melco, Inc. was insolvent, she failed to meet the conditions for enforcing a guarantee of collection.
Analysis:
This case provides crucial guidance on the interpretation of ambiguous guaranty language under the Uniform Commercial Code, specifically differentiating between absolute guarantees of payment and conditional guarantees of collection. It establishes that phrases like 'guarantee against loss' will be construed as requiring the creditor to first exhaust remedies against the primary debtor, thereby shifting the burden of initial collection efforts to the creditor rather than allowing immediate recourse to the guarantor. This decision is significant for drafters of commercial paper, underscoring the necessity of using clear and unequivocal language to establish an absolute payment guarantee if that is the parties' intent, and impacts litigation strategy for creditors seeking to enforce such agreements.
