Data Sales Company v. Diamond Z Manufacturing

Zehr Wood & Tire Grinding, Inc. (Zehr Wood) (defendant) purchased a large recycling machine called a tub grinder from Diamond Z Manufacturing (Diamond) (defendant). Three years later, Zehr Wood still owed $375,000 for the grinder. Zehr Wood entered into a leaseback agreement with Equipment Leasing Corporation (ELC), selling the grinder to ELC for $375,000 and then leasing the grinder back. As part of the leaseback agreement, Diamond executed a guaranty assuming liability for the lease payments in the event of a default by Zehr Wood. The guaranty agreement expressly permitted an amendment of the lease, including a substitution of parties, without Diamond’s consent. Thereafter, ELC assigned its interest in the lease to Data Sales Company, Inc. (Data Sales) (plaintiff). Data Sales immediately made payment to Diamond. Zehr Wood later assigned the lease to Breaux Bridge Resources, Inc. (Breaux Bridge). After only three payments, Breaux Bridge defaulted on the lease and filed for bankruptcy. Data Sales brought suit against Diamond and Zehr Wood to recover the balance owed under the leaseback agreement. Diamond moved for summary judgment, arguing that § 48 of the Restatement (Third) of Suretyship and Guaranty (Restatement) barred a guarantor from waiving the suretyship defense under Restatement § 41(b)(i), which allowed a guarantor to defend against payment obligations if the guarantor’s underlying obligations were modified without notice or consent. The trial court denied the motion. Diamond appealed.