United States v. Stump Home Specialties Manufacturing

905 F.2d 1117 (1990)

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Nature of the Case

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Facts

Ds who makes sewing chairs and cabinets, applied for a loan of $270,000 to be guaranteed by the SBA. Without the guaranty, the bank would not have made the loan. The loan was to be for seven years. Ds preferred a fixed rate of interest. The bank's loan officer demanded, and Ds agreed to, a fixed rate of 9.5 percent, and the SBA approved the loan on those terms. The bank's loan committee approved the loan at a floating rate of 1.5 percent over the bank's prime rate. The bank's loan officer prepared two promissory notes for D to sign; one specifying the fixed rate of 9.5 percent, the other the variable rate of 1.5 percent above the bank's prime. The loan agreement itself stated that the interest rate was a flat 9.5 percent. At the closing were Ds' two principal officers, plus five other members of the Stump family who, did not and do not participate in the company's management. The officers signed both notes on behalf of the company, along with the loan agreement itself; at the same time, all seven Ds along with D itself) signed a standard-form SBA guaranty that authorized the lender, 'in its uncontrolled discretion and without any notice to the undersigned, . . . to modify or otherwise change any terms of all or any part of the liabilities or the rate of interest thereon (but not to increase the principal amount of the note . . .).' The bank handed over the money at the closing, and the bank's loan officer then sought the SBA's approval for the variable-interest note, that being the form of loan that the bank preferred. The SBA approved everything but the use of the bank's prime rate as the basis for computing the variable interest. It asked that the loan agreement be amended to make the interest rate 1.5 percent over the New York prime rate. The bank agreed and mailed D a draft agreement amending the loan agreement to change the interest rate from the flat 9.5 percent in the agreement to 1.5 percent above the New York prime rate. No notice of the amendment was sent to the guarantors as such, although the two officer-guarantors must have had notice, for they signed the amended agreement and mailed it back to the bank. Ds defaulted in 1982, and the bank assigned its rights to the SBA. At that time, the New York prime rate was 16 percent; the interest rate called for by the amended agreement was therefore 17.5 percent. D could not pay, and the guarantors would not pay. P sued Ds. P got the verdict and Ds appealed.