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CHARLES LARRY MURRAY v. CECIL H. PAYNE AND JAMES M. FLANAGAN

SEPTEMBER 07, 1983

CHARLES LARRY MURRAY
v.
CECIL H. PAYNE AND JAMES M. FLANAGAN



BEFORE WALKER, P.J., HAWKINS AND ROBERTSON, JJ.

ROBERTSON, JUSTICE, FOR THE COURT:

I.

This case presents questions respecting the duties of guarantors who pay the maker's secured note and pending disposition of the collateral use it to make a profit. The guarantors, statutory subrogees by virtue of their having honored their guaranty obligations in favor of the secured party bank, liquidated the collateral and have here sued the maker for a deficiency judgment. The maker claims setoff for profits earned by the guarantors while the collateral was in their possession and used by them prior to sale. After less than timely objection, the trial judge excluded all evidence of profits. Judgment was entered in favor of the two guarantors after jury verdict for $4,620.00, the amount of the deficiency sued for. Claiming that the two guarantors had an obligation to credit all profits derived from their use of the collateral to the underlying debt - and, therefore, that he should have been allowed to offer proof as to the nature and extent of those profits, the maker appeals. We reverse.

 II.

 A.

 There are three principal players in this civil action.

 (a) Charles Larry Murray (hereinafter "Murray") is an adult resident citizen of Walthall County, Mississippi, who was the Defendant below and is the Appellant here. Murray was the maker and primary obligor on the promissory note, default in the payment of which set in motion the chain of events which led to this civil action.

 (b) Cecil H. Payne (hereinafter "Payne") and James M. Flanagan (hereinafter "Flanagan") are adult resident citizens

 of Rankin County, Mississippi, who were the Plaintiffs below and are the Appellees here. Payne and Flanagan were guarantors of the note in issue.

 From May, 1974, until November 13, 1976, Murray, Payne and Flanagan did business as partners using the trade name Rankin County Flying Service. They were engaged in an agri-flying or crop dusting business. In November of 1976, Murray withdrew from the partnership. Incident thereto, Murray took title to a Grumman G-164A airplane previously owned by the partnership. The plane was at that time subject to a purchase money security interest and debt held by Rankin County Bank in Brandon, Mississippi, of approximately $14,000.00. Murray assumed all obligations incident thereto.

 Murray determined to establish a new business. He would provide air conditioning equipment, installation and servicing for airplanes. To obtain start up and operating capital, Murray negotiated a loan from the Rankin County Bank. The new loan to Murray was combined with a refinancing of the then outstanding original purchase money indebtedness on the Grumman which Murray had assumed following the dissolution of the partnership. The loan was closed on December 1, 1976, when Murray executed in favor of Rankin County Bank his promissory note in the principal amount of $36,479. 99, plus interest. The note was payable in eight months, to be specific, on July 29, 1977. As security for the note, Murray gave to the bank a valid, enforceable and perfected security interest in the Grumman airplane.

 On the same date, December 1, 1976, Payne and Flanagan executed a guaranty agreement in favor of the bank. Without qualification or equivocation, Payne and Flanagan guaranteed payment of Murray's $36,479.99 note, together with interest and expenses of collection and including renewals and extensions thereof.

 As fate would have it, Murray did not pay the note when due. The Rankin County Bank called upon Payne and Flanagan to honor their obligations under their guaranty agreement. Payne and Flanagan responded. They reached an agreement with the bank that they would attempt to sell the collateral, the Grumman airplane, and raise enough money to pay the debt. Exercising remedies lawfully vested in it by virtue of Murray's default, the bank took possession of its collateral and authorized Payne and Flanagan to negotiate a sale. Payne and Flanagan originally advertised the Grumman for sale at $40,000.00. They found no buyers. In May of 1978, they negotiated a deal with a purchaser in Greenwood, Mississippi. The more valuable Grumman was traded for a smaller Cessna

 airplane plus $20,000.00 cash. *fn1 This transaction was consumated, and no challenge is made concerning its commercial reasonableness. *fn2

 On May 25, 1978, Payne and Flanagan took the $20,000.00 and delivered it to the bank which applied it to reduce the Murray note. They then gave their own note to the bank in the principal amount of $21,801.27. This note was a renewal of the principal and interest then outstanding on the original December 1, 1976, note made by Murray. It was payable one year from date, to-wit, on May 25, 1979. The bank, of course, had released its security interest in the Grumman but as security for this new note, took a security interest in the Cessna. The Cessna in fact and in law became substitute security in the place and stead of the Grumman. *fn3 The understanding was that Payne and Flanagan would now try to sell the Cessna as soon as feasible, and discharge the remaining balance of the original Murray note, as now renewed by the Payne and Flanagan note.

 The facts pertinent to the principal issue raised on this appeal occur at this point. The Cessna airplane was in the custody of Payne and Flanagan. Payne and Flanagan were still in the agri-flying business. While seeking a sale for the Cessna, they used it as a spare plane in their business. Payne testified that it was flown approximately 100 hours by them over a two month period. Payne also testified that they had rented an airplane like this for $19.00 an hour to fly an ant contract for the State of Mississippi. He stated that ordinarily, however, he would not charge for this plane by the hour, but by the acre covered and the amount of fertilizer or water applied. He stated that he would normally charge on an hourly basis and that actual charges to the customers would range between $100.00 and $150.00 per hour.

 Thereafter, Payne and Flanagan sold the Cessna for $17,500, which amount was immediately delivered to the Rankin County Bank. Again, there is no question of the commercial reasonableness of the sale of this substituted collateral. *fn4 After interest and expense calculations have been made, and after the $17,500 had been applied to the indebtedness, there remained due and owing to the bank, traceable back to the original Murray note, the sum of $4,620. On July 21, 1978, Payne and Flanagan each paid the bank from their personal funds the sum of $2,310. The original Murray indebtedness to the Rankin County Bank was thus discharged in full.

 B.

 On April 3, 1981, Cecil H. Payne and James M. Flanagan brought this civil action by filing their declaration in the Circuit Court of Walthall County, Mississippi. They recited

 briefly the history stated above and asked that Murray be required to indemnify them for what they had been required to pay under their guaranty agreement. They specifically demanded ...


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