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Chase Manhattan Bank v. May

November 29, 1962

THE CHASE MANHATTAN BANK
v.
MILTON MAY, APPELLANT.



Author: Hastie

Before McLAUGHLIN and HASTIE, Circuit Judges, and DUMBAULD, District Judge.

HASTIE, Circuit Judge.

In the district court, The Chase Manhattan Bank sued Milton May on his guaranty of certain loans and recovered. May has appealed.

The suit is within federal jurisdiction solely because of diversity of citizenship. The parties properly recognize that the contacts of the relevant transactions with New York are such that New York law controls contested legal issues concerning the reach of the parol evidence rule and the validity of alleged oral modifications of a written guaranty.

The circumstances of the original contracting are undisputed. May was the organizer and majority shareholder of States Grain Corporation, which engaged in the buying and selling of grain. Beginning in 1940 and thereafter in the normal course of business, the corporation financed many of its transactions by borrowing from The Chase Manhattan Bank. In 1947, when the corporation's line of credit was substantially increased, May, at Chase's request, personally guaranteed future loans to the corporation. The instrument of guaranty, a form prepared for general use by Chase, comprehensively covered loans "with or without security". Subsequently, the corporation was unable to repay its borrowings, and this suit was filed against May as guarantor for about $700,000, plus interest.

In defending against this claim, May sought to prove that when the guaranty was given the parties understood and Chase orally promised that loans to the corporation would be made only upon adequate security in the form of collateral supplied by the borrower. May also offered to prove a custom of the trade to the same effect. The district court held both lines of testimony inadmissible. The correctness of those rulings is the first question on this appeal.

The New York decisions applying the parol evidence rule distinguish contemporaneous oral agreements contradictory to a written contract from those which supplement the writing. While the latter may be enforceable, it is clear that the former are not. With Fadex Foreign Trading Corp. v. Crown Steel Corp., 1947, 272 App.Div. 273, 70 N.Y.S.2d 892, aff'd, 1948, 297 N.Y. 903, 79 N.E.2d 739, and American Trust Co. v. Sullivan, 1955, 285 App.Div. 1043, 140 N.Y.S.2d 184, aff'd, 1957, 2 N.Y.2d 954, 162 N.Y.S.2d 358, 142 N.E.2d 423, compare Hicks v. Bush, 1962, 10 N.Y.2d 488, 225 N.Y.S.2d 34, 180 N.E.2d 425. See also Restatement, Contracts ยง 240, comment b. Recognizing this distinction, appellant argues that the alleged oral understanding between lender and guarantor, that only adequately secured loans would be made, is somehow consistent with the written promise to guarantee both secured and unsecured loans.

But it is not asserted that the alleged oral understanding was an independent contract, a promise supported by its own consideration. The appellant claims merely that an oral assurance that there would be no unsecured loans constituted a defense against the otherwise enforceable contemporaneous written promise to guarantee unsecured loans. Thus analyzed, the offer of proof was an inadmissible parol contradiction of a plain provision of a written contract.

Appellant's reliance upon a usage and custom of requiring security for such loans as these is also misplaced. The New York cases follow the teaching of Hopper v. Sage, 1889, 112 N.Y. 530, 535, 20 N.E. 350, 351-352, that "[usage] and custom cannot be proved * * * to alter or contradict the express or implied terms of a contract free from ambiguity or to make the legal rights or liabilities of the parties to a contract other than they are by the terms thereof". See Western Union Tel. Co. v. American Communications Ass'n, 1949, 299 N.Y. 177, 86 N.E.2d 162; Russell v. Marboro Books, 18 Misc.2d 166, 183 N.Y.S.2d 8; George Colon Contracting Corp. v. Morrison, Sup.Ct.1954, 162 N.Y.S.2d 841, 880-881, aff'd, 1956, 2 App.Div.2d 869, 157 N.Y.S.2d 927, appeal denied, 1957, 3 App.Div.2d 690, 158 N.Y.S.2d 797, appeal denied, 1957, 2 N.Y.2d 710, 141 N.E.2d 319. Moreover, in this case proof that loans are normally not made without security would not help the appellant. For the existence of such a custom would indicate no more than that appellant's guaranty expressly covered unusual loans as well as customary ones. Certainly, the guaranty would be no less binding on that account.

Next, even if the oral agreement said to have attended the execution of the guaranty is invalid, appellant argues that the court below erred in excluding testimony concerning alleged subsequent conversations wherein the bank agreed with May that only loans secured by adequate collateral would be made to the corporation.

Relevant to this issue is the following provision of the guaranty itself:

"This guaranty shall continue in full force and be binding upon the undersigned * * * and the Bank may continue to act in reliance hereon until the receipt by the Bank of written notice from the undersigned * * * not to give further accommodation hereunder."

We think the plain meaning of this provision is that modification or revocation of the guaranty can be accomplished only by an appropriate written communication from the guarantor to the prospective lender.

The legal effect of this stipulation must be determined in the light of Section 33-c of the New York Personal Property Law, 40 Consolidated Laws, c. 41, ...


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