This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480A.08, subd. 3 (1996).

STATE OF MINNESOTA

IN COURT OF APPEALS

C5-96-2406

James A. Trapp,

Respondent,

vs.

Lowell L. Hancuh,

Appellant.

Filed July 15, 1997

Affirmed in part, reversed in part.

Amundson, Judge

Ramsey County District Court

File No. CX956856

Kevin M. Busch, Moss & Barnett, 4800 Norwest Center, 90 South Seventh Street, Minneapolis, MN 55402-4129 (for Respondent)

John A. Pecchia, Christoffel, Elliott & Albrecht, 805 Capital Centre, 386 North Wabasha Street, St. Paul, MN 55102 (for Appellant)

Considered and decided by Norton, Presiding Judge, Peterson, Judge, Amundson, Judge.

U N P U B L I S H E D O P I N I O N

AMUNDSON, Judge

Appellant Lowell L. Hancuh challenges the district court's order determining that (1) respondent James A. Trapp's claim for usurious interest payments was not barred by the statute of limitations and (2) Hancuh's counterclaim on a guaranty signed by Trapp was barred by the statute of limitations. We affirm in part and reverse in part.

FACTS

Respondent James A. Trapp and Glen W. Mischke formed a Minnesota partnership, Law Properties, which was the sole owner of the Maplewood Auto Mall. On June 7, 1989, Trapp and Mischke signed a promissory note in favor of appellant Lowell L. Hancuh for $50,000 to be paid on or before December 1, 1989. Between July 1989 and November 1989, Trapp made four monthly usurious interest payments of $1,000 each to Hancuh. See Trapp v. Hancuh, 530 N.W.2d 879 (Minn. App. 1995) (holding that the interest payments made by Trapp to Hancuh were usurious). Thereafter, Trapp made no further payment and defaulted on the loan. In June 1995, Trapp filed a complaint against Hancuh, seeking recovery for usurious interest payments, arguing that he is entitled to the return of the $4,000 he paid to Hancuh, plus an additional $4,000 pursuant to Minn. Stat. § 334.011 (1988).

In response to Trapp's action, Hancuh filed a counterclaim, which was derived from an assignment to Hancuh of a receivable from Rod J. Rubens of Rubens Marion Truck Plaza, Inc. The receivable was in the form of a guaranty in the amount of $49,000 and was signed by Trapp as the guarantor on July 26, 1990.[1] In the guaranty, Trapp acknowledged and personally guaranteed a debt of $49,000, owed by Metro Travel Plaza Inc., a Minnesota corporation in which Trapp is a shareholder and director.[2]

Neither party disputes that the statute of limitations had run on this debt, which was acknowledged by the guaranty signed by Trapp on July 26, 1990. More than six years before the date this suit was commenced, Rod J. Rubens advanced $47,861.79 to Metro Travel Plaza. The loan from Rubens to Metro was essentially an obligation or a contract for which the applicable statute of limitations is Minn. Stat. § 541.05, subd. 1 (1988):

Subdivision 1. Except where the uniform commercial code otherwise prescribes, the following actions shall be commenced within six years:

(1) Upon a contract or other obligation, express or implied, as to which no other limitation is expressly prescribed.

See Troup v. Rozman, 286 Minn. 88, 90, 174 N.W.2d 694, 696 (1970)) (applying Minn. Stat. § 541.05 to an obligation under a non-negotiable promissory note)

A statute of limitations runs from the date the cause of action accrues; accordingly, the statute of limitations on a loan will begin to run on the date the loan was made. Troup v. Rozman, 286 Minn. at 90, 174 N.W.2d at 696 (1970). However, where the loan agreement contains a date when payment will be made or demanded, the statute of limitations will begin to run on that date. Bannitz v. Hardware Mut. Casualty Co., 219 Minn. 235, 237, 17 N.W.2d 372, 373 (1945) (holding that a cause of action on a demand note would accrue and the six-year limitation period would begin to run upon the demand for payment).

Here, the underlying debt is $47,861.79 loaned by Rubens to Metro. From the record, there appears to be no date contemplated by the parties upon which a demand for payment would be made. Accordingly, the statute of limitations had run on the underlying debt, as the debt dated beyond six years from the commencement of this suit. However, although the statute of limitations has run on the underlying debt, Hancuh argues that as an assignee of Rubens, he is entitled to a counterclaim based on the personal guaranty executed by Trapp.

On August 1, 1996, the district court held that Trapp was entitled to recover $8,000 from Hancuh for usurious interest rate charges. With regard to the counterclaim, the district court determined, through the uncontroverted testimony of Rod J. Rubens, that Metro Travel Plaza, Inc. was indebted to Rubens in the amount of $47,861.79 and that Trapp had guaranteed the debt on June 26, 1990. The court, however, found that (except for $11 paid on August 31, 1989), the claim on the guaranty executed by Trapp was barred by the statute of limitations. Thus, the court found that Trapp was entitled to collect $7,989 from Hancuh. This appeal followed.

ANALYSIS

I. Statute of Limitations for Usury Claims

Hancuh argues that Trapp's usury claim under Minn. Stat. § 334.011 (1988) is barred by the statute of limitations. Hancuh asserts that because claims under Minn. Stat. § 334.011 (1988) are penal in nature, Minn. Stat. § 541.07(2) (1988) provides the proper limitations period of two years. Thus, Hancuh claims that because Trapp did not bring his claim for usurious interest payments within the statutory period of two years in Minn. Stat. § 541.01(2) (1988), his claim is barred.

The district court rejected Hancuh's argument that the two-year limitation period of Minn. Stat. § 541.07(2) (1988) applied to Trapp's usury claim. The district court determined that because Minn. Stat. § 334.011 (1988) is not penal, Trapp's usury claim is subject to the six-year limitation period of Minn. Stat. § 541.05, subd. 1(2) (1988), which has not yet run.[3] We disagree.

There is no dispute that the liability of Minn. Stat. § 334.011 (1988) is a creature of statute. One of two possible statutes applies to the limitation imposed by Minn. Stat. § 334.011 (1988). Minn. Stat. § 541.05, subd. 1(2), provides for a six year limitations period "[u]pon a liability created by statute, other than those arising upon penalty * * *." (emphasis added), while Minn. Stat. § 541.07(2) provides for a two-year limitations period "upon a statute for a penalty * * *." (emphasis added). Thus, the real issue is whether the statutory liability created under Minn. Stat. § 334.011, constitutes a penalty.

Under Minnesota law, a penalty is punishment "for an offense against the public and not incident to the redress of a private wrong." Freeman v. Q Petroleum Corp., 417 N.W.2d 617, 618 (Minn. 1988). A violation of the usury laws occurs when one charges interest at a rate exceeding the amount prescribed by law. Citizens Nat'l Bank v. Taylor, 368 N.W.2d 913, 918 (Minn. 1985). Minn. Stat. § 334.011, subd. 2 (1988) provides that a party claiming to have made usurious interest payments may "recover in a civil action an amount equal to twice the amount of interest paid."

This statute is clearly penal in nature. Minn. Stat. § 334.011 (1988) authorizes recovery beyond actual losses. Although one's recovery is indirectly tied to what was actually paid by the party, an amount set at the discretion of the district court, beyond the actual amount lost, may be sanctioned upon the party violating the statute. See United Realty Trust v. Property Dev. & Research Co., 269 N.W.2d 737, 743 (Minn. 1978) (recognizing usury laws as penal in nature; "[w]e have recognized that usury laws, which enable the borrower in certain cases to escape a contractual obligation he had entered, are penal in nature and are to be strictly construed").

Therefore, because Minn. Stat. § 334.011 (1988) is penal in nature, the two-year statute of limitations of Minn. Stat. § 541.07(2) (1988) operates to bar Trapp's usury claim. See Neegard v. Miller Const. Co., 396 N.W.2d 833, 836 (Minn. App. 1986) ("any action to recover usurious interest must be brought within two years of its payment"), review denied (Minn. 1987).

II. Statute of Limitations for the Guaranty

The district court found that the six-year limitations period of Minn. Stat. § 541.05(1) (1988) barred Hancuh's counterclaim for payment on the guaranty executed by Trapp. Because it is undisputed that the statute of limitations had run on the underlying debt, the district court concluded that Trapp was no longer obligated under his guaranty. Thus, the district court found that Trapp's obligation under the guaranty terminated when the original debtor's obligation was extinguished.

Hancuh argues that his counterclaim was not precluded by the statute of limitations. Hancuh asserts that the district court erred in its determination that Trapp's obligation under the guaranty expired at the same time as the underlying debt because the guaranty is a separate obligation. We agree.

The district court improperly determined that Trapp's obligation under the guaranty expired when the limitations period on the underlying debt had run. The guaranty agreement signed by Trapp states:

I, James A. Trapp, do hereby acknowledge one certain debt in the approximate amount of forty-nine thousand dollars ($49,000.00), payable to Rod J. Rubens and Rubens Marion Truck Plaza, Inc. by Metro Travel Plaza, Inc., South St. Paul, Minnesota.

Furthermore, This is to certify that I hereby personally guarantee payment to Rubens Marion Truck Plaza, Inc. in the said approximate amount of Forty Nine Thousand Dollars ($49,000.00).

Where a principal debtor is discharged, guarantors of the debt still remain liable for any deficiency. State Bank of Young America v. Fabel, 530 N.W.2d 858, 863 (Minn. App. 1995), review denied (June 29, 1995). An exception to this rule is where the deficiency or underlying debt has been fully recovered, and nothing remains for which the guarantors can be held liable. Id.

In this case, it is undisputed that the statute of limitations had run on the underlying debt. Thus, Trapp, the guarantor, remains liable for any deficiency. The guaranty is a separate obligation, and the obligation under this guaranty does not expire because the statute of limitations has run on the underlying debt. The limitations period runs from the inception of the guaranty, and because the guaranty does not include an expiration date, its termination occurs after a reasonable time. See Borg-Warner Acceptance Corp. v. Shakopee Sports Center, 431 N.W.2d 539, 541 (Minn. 1988) (stating that if a guaranty lacks a time limitation, then termination after a reasonable period of time may be implied).

The district court's reliance on the National City Bank of Minneapolis v. Lundgren, 435 N.W.2d 588 (Minn. App. 1989), review denied (March 27, 1989) to relieve Trapp from his obligation under the guaranty is misplaced. The rule in Lundgren is taken from Victory Highway Village, Inc. v. Weaver, 480 F. Supp. 71 (8th Cir. 1979), which states that:

Where the principal debtor has not made complete payment or has not completely performed the guaranteed contract, but the effect of the creditor's acts is nevertheless to release or discharge him, the guarantor is also discharged, unless the guarantee's right of recourse against the guaranty is expressly reserved in the contract releasing the principal, or in the guaranty contract.

This rule should only be applied when there is a foreclosure or other act by the creditor that discharges the underlying debt. See Lundgren (guarantors are relieved of obligations when property is foreclosed); See also Victory Highway Village (use of summary foreclosure procedure waived rights to a deficiency judgment against mortgagor). Here, there was no action on the part of the creditor that discharged the debt, rather, the statute of limitations on the underlying debt simply expired. Thus, the district court erred in its determination that Trapp's guaranty expired when the statute of limitations period expired on the underlying debt.

Hancuh further argues that Trapp's signed guaranty of the debt was a reaffirmation of the underlying debt owed. Thus, Hancuh claims that the statute of limitations was tolled, making Hancuh's counterclaim viable until six years from date of signed guaranty; one year after counterclaim was served: June 26, 1996. Because the district court erred in its application of the statute of limitations on the guaranty, there is no need to reach the merits of whether the limitations period was tolled.

III. Consideration of the Guaranty

Trapp contends that the guaranty at issue did not expressly set forth its consideration, and therefore, the guaranty failed to comply with the requirements of the statute of frauds, Minn. Stat. § 513.01(2) (1988). Further, Trapp asserts that the district court erred by concluding that Rubens' testimony regarding his forbearance from suit against the corporation of which Trapp and Rubens were substantial shareholders was sufficient consideration for the guaranty.

Minn. Stat. § 513.01(2) (1988) provides:

No action shall be maintained, in either of the following cases, upon any agreement, unless such agreement, or some note or memorandum thereof, expressing the consideration, is in writing, and subscribed by the party charged therewith:

* * *

(2) Every special promise to answer for the debt, default or doings of another.

The district court found that the guaranty was supported by adequate consideration, stating that "[Trapp] received consideration, i.e. a corporation that he was a 33 percent shareholder of would not be sued if [Trapp] signed the guarantee." The district court stated that although consideration for the guaranty was not written in the guaranty "parol evidence [was] admissible to show the existence of the consideration and the undisputed testimony of Rubens is that the consideration was forbearance."

The parol evidence rule excludes evidence of prior or contemporaneous discussions that contradicts the plain terms and meaning of the written agreement. Material Movers, Inc. v. Hill, 316 N.W.2d 13, 17 (Minn. 1982). Parol evidence, however, is admissible to explain the meaning of the agreement's terms when the written agreement is incomplete. Carlson v. Estes, 458 N.W.2d 123, 127 (Minn. App. 1990).

It is always competent to prove by parol the existence of any separate oral agreement as to any matter on which the document is silent, and which is not consistent with its terms, if, from the circumstances of the case, the court infers that the parties did not intend the document to be a complete and final statement of the whole of the transaction between them.

Phoenix Pub Co. v. Riverside Clothing Co., 54 Minn. 205, 206, 55 N.W. 912, 912 (1893).

Here, the district court used parol evidence to provide consideration for the guaranty. Because the evidence regarding the consideration of the guaranty did not contradict any of the terms of the written agreement, the district court properly considered Rubens' testimony in order to find the said consideration. Thus, the court did not err by determining that the guaranty satisfied the statute of frauds, Minn. Stat. § 513.01(2) (1988). See J.J. Brooksbank Co. v. American Motors Corp., 289 Minn. 404, 410, 184 N.W.2d 796, 799 (1971) (stating that the purpose of the statute of frauds is not served if a guarantor is permitted to renege on a promise for which adequate consideration was given).

The district court also properly determined that Rubens' forbearance from suit against Trapp was adequate consideration for the guaranty. See Baker v. Citizens State Bank of St. Louis Park, 349 N.W.2d 552, 558 (Minn. 1984) (recognizing that a creditor's promise to forbear from calling in a debtor's outstanding loans, whether verbal or implied by the circumstances, is sufficient consideration to support a guaranty by a third-party guarantor).

Affirmed in part, reversed in part.

[ ]1 1988 statutes apply to the 1989 usurious loan and the 1990 guaranty; the pertinent statutes differ little, if any, from their 1996 counterparts.

[ ]2 Trapp, Rubens, and Mischke were each a third shareholder in Metro Travel Plaza. Rubens stated that he had advanced approximately $49,000 to Metro Travel Plaza before July 26, 1989.

[ ]3 The district court also reasoned that because Hancuh's argument that Trapp's usury claim is barred by the statute of limitations of Minn. Stat. § 541.07(2) (1988), was previously rejected by the court of appeals in Trapp v. Hancuh, 530 N.W.2d 879 (Minn. App. 1995), Trapp's usury claim is subject to the six-year limitations period of Minn. Stat. § 541.05, subd. 1(2) (1988).

In Trapp v. Hancuh, the appellate court found that the interest paid by Trapp to Hancuh was usurious. Id. at 882. As a result, the court remanded the case to the district court to determine the amount of Trapp's remedy under Minn. Stat. § 334.011, subd. 2. Id. at 886. Although it is true that the court did not find that the statute of limitations barred Trapp's usury claim, from the face of the opinion, it is unclear whether the court of appeals heard and rejected Hancuh's statute of limitations argument. Thus, the district court's reliance on the Trapp decision is misplaced.