No. 88-334 

IN THE SUPREME COtJRT OF THE STATE OF MONTANA 

MONTANA RANK OF LIVINGSTON, 

Plaintiff and Respondent, 

-VSOLD SALOON, INC., a Montana corporation, 

VERNICE ANN SALYER, an individual, CHARLES 

R. PEAVEY, an individual, and MELVIN A. BARBER, 

an individual, 

Defendants and Respondents. ............................ 

MELVIN A. BARBER, 

Third-Party Plaintiff and Appellant, 

-VSDAVID BECK And DIANE BECK, 

Third-Party Defendants and Respondents. 

APPEAL FROM: District Court of the Sixth Judicial District, 

In and for the County of Park, 

The Honorable Byron Robb, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Knuchel & McGregor; Karl Knuchel, Livingston, Montana 

For Respondent: 

c3 z~wandal & Douglass Law Firm; Kent R. Douglass, f--i ,-Z~ivingston, Montana 

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Submitted on Briefs: Oct. 27, 1988 

Decided: December 29, 1988 
Mr. Justice Fred J. Weber delivered the Opinion of the Court. 

This appeal involves the portion of this action in which 

Melvin A. Barber was held liable to the Montana Bank of 

Livingston (Bank) as a surety on a note. The District Court 

for the Sixth Judicial District, Park County, granted summary 

judgment to the Bank. Mr. Barber appeals but we affirm. 

We restate the issues as: 

1. Is Mr. Barber entitled to be discharged from his 

surety agreement as a matter of law or equity? 

2. Was summary judgment improper because genuine issues 

of material fact remain? 

3. Was summary judgment improper as to Mr. Barber's 

counterclaim for breach of an implied covenant of good faith 

and fair dealing? 

In November 1983, Vernice Salyer and Charles Peavey, on 

behalf of the Old Saloon, Inc. (Old Saloon), signed a $35,020 

note to the Bank. At the same time, Ms. Salyer, Mr. Peavey, 

and Mr. Barber each individually signed surety agreements for 

$35,020 on the same loan. Old Saloon defaulted in payment 

and the Bank brought this suit for the amount owing. In 

answering the complaint, Mr. Barber pled accord and satisfaction based on the Bank's secltrity interest in the Old Saloon's liquor license. Mr. Barber also crossclaimed against 

the other defendants Mr. Peavey, Ms. Salyer, and the Old 

Saloon, counterclaimed against the Bank, and made a thirdparty claim against the Becks. The Becks were the registered 

owners of the liquor license. They sold the Old Saloon to 

Mr. Peavey and Ms. Salyer and resumed operating it when Mr. 

Peavey and Ms. Salyer defaulted on their contract to purchase 

the establishment. 

Defaults have been entered aqainst defendants Mr. 

Peavey, Ms. Sal-yer, and the Old Saloon. The Becks have been 
dismissed by stipulation. The remaining parties, then, are 

Mr. Barber and the Bank. Both filed motions for summary 

judgment. The court denied Mr. Barber' s motion for summary 

judgment after briefing and a hearing. After briefing and a 

hearing on the Bank's motion for summary judgment, the court 

granted the motion and entered judgment in favor of the Bank. 

The court based its judgment on language in the surety agreement which Mr. Barber signed. The court stated: 

the surety agreement was one that rendered defendant Barber "liable as an original obligor", and 

under its terms the bank could look directly to him 

for payment without first proceeding against the 

borrowers . . . [Als Barber has no valid defense to 

the bank's action, his counterclaim against the 

bank has no merit and no trial thereon is 

necessary. 

Mr. Barber appeals. 

The Bank has moved to strike certain portions of Mr. 

Barber's reply brief as not within the record. In reaching 

its decision, the Court has ignored those portions of the 

brief which are not within the record. 

I 

Is Mr. Barber entitled to be discharged from his surety 

agreement as a matter of law or equity? 

Mr. Barber claims that he is protected as a surety under 

Montana statutes on the remedies and rights of a surety. He 

states that the unconsented release of collateral by a creditor which exposes a surety to increased liability discharges 

the surety from the surety agreement. The Bank relinquished 

its security interest in the Old Saloon's liquor license to 

the Becks for $6,000. Mr. Barber estimated the value of the 

license at $60,000 to $70,000 and viewed his liability as a 

surety as secondary to that collateral. He admits there is 

no written agreement to that effect, however. Mr. Barber 
further maintains that the Bank's failure to inform him of 

additional loans extended to the Old Saloon justifies his 

discharge from his security agreement. He cites as authority 

this Court's opinion in Security Rank, N.A. v. Mudd (~ont. 

1985), 696 P.2d 458, 42 St.Rep. 323. 

In Security Bank, defendant Mr. Mudd had guaranteed a 

note issued by Security Bank (Security) to a borrower. The 

note was secured with the borrower's contract receivable and 

stock certificates. The borrower's contract was paid. It 

would have covered the entire amount of the note. However, 

Security applied $13,500 of the contract receipts to the 

$16,000 note and released the rest to the borrower. The 

borrower later defaulted on a note advanced as a renewal of 

the original note. This Court affirmed the District Court's 

judgment dismissing the action against Mr. Mudd because 

Security had failed to notify Mr. Mudd that it had not used 

the money from the contract receivable to satisfy the note. 

The Court cited the finding that the contract receivable was 

inextricably linked with the guaranty. The Court approved 

application of a test from the Restatement - of Security as to 

the duty of the creditor to disclose to the surety facts it 

knows about the debtor. 

The surety agreement in the present case contained a 

provision in boldface type which read as follows: 

Surety has entered into this surety agreement at 

the request of Borrower, and for the purpose of 

securing to Borrower, Bank's agreement to loan 

money to Borrower. Surety hereby makes himself 

responsible for Borrower's performance of the 

original contract and any additional consideration. 

Surety agrees that Surety is liable as an original 

obligor, and that Surety's obligation to pay Bank 

under the terms of this agreement is not dependent 

on any default of Borrower or on any intervening 

contract or event of any nature whatsoever. 
The security agreement also contained a provision waiving 

notice to and consent from the surety for " [alny deviations 

from, additions to, or modifications in the obligations of 

the original contract." Further, the agreement provided 

that, "Bank may . . . realize or neglect to realize upon any 

collateral held in connection therewith . . . without the 

necessity of any notice to or consent from Surety and all 

without affecting Surety's liability hereunder." 

Mr. Barber asks us to elevate general principles of the 

law on sureties above the specific and clear provisions of 

the surety agreement he signed. - Security Bank does not apply 

because Mr. Barber's surety agreement contained the clauses 

providing that the bank could release or substitute collateral without his consent. No such clause was present in the 

surety agreement in Security Bank. The Restatement test 

includes an element of increased risk to the surety. Because 

of the clauses set forth above, Mr. Barber took on liability 

for the entire amount of $35,020 from the time he signed the 

surety agreement. The surety agreement makes no reference to 

Mr. Barber's liability being secondary to the liquor license. 

There is no increased risk. Additionally, Mr. Barber has not 

provided satisfactory evidence supporting his valuation of 

the Old Saloon liquor license. We hold that Mr. Barber is 

not entitled to be discharged from his liability as an original obligor under the clear language of the surety agreement. 

11 

Was summary judgment improper because genuine issues of 

material fact remain? 

Mr. Barber asserts that several issues of material fact 

preclude summary judgment. These factual issues include 

whether he loaned money to the Old Saloon or was making an 

investment in it, whether he was a gratuitous surety or a 

principal for the Old Saloon, whether his liability was as a 
primary or other surety, and whether he was discharged as a 

matter of law from the surety agreement. 

These factual questions are irrelevant as a result of 

the surety agreement clauses discussed under Issue I. Mr. 

Barber agreed to be liable as the original obligor on the 

note and to forego notice and consent to release of collateral. We hold that there is no issue of material fact. which 

precludes summary judgment. 

Was summary judgment improper as to Mr. Barber's counterclaim for breach of an implied covenant of good faith and 

fair dealing? 

Mr. Barber asserts that his counterclaim's allegation of 

breach of the covenant of good faith and fair dealing is not 

susceptible to summary judgment. He cites Weinberg v. Farmers State Bank of Florden (Mont. 1988), 752 P.2d 719, 45 

St.Rep. 391, as authority that banks have a fiduciary duty 

toward their customers. But the only connection between Mr. 

Barber and the Bank is the surety agreement. Weinberg does 

not state that there is a fiduciary duty in such a relationship. We hold that summary judgment as to the counterclaim 

was proper. 

Affirmed. 

Justices 
Mr. Justice John C. Sheehy, concurring: 

Melvin A. Barber is d.ue a more extended discussion in 

this case, because the statutes applying to suretyship in 

this state seem to require a result in his favor. That he 

does not recover requires a deeper look at the law. 

The statutes upon which Barber relies are these: 

28-11-401. Surety defined. A surety is one who, 

at the request of another for the purpose of securing to him a benefit, becomes responsible for the 

performance by the latter of some act in favor of a 

third person or hypothecates property as security 

therefore. 

28-11-412. Exoneration of - surety. A surety is 

exonerated: 

(2) To the extent to which he is prejudiced by any 

act of the of the creditor which will naturally 

prove injurious to the remedies of the surety or 

inconsistent with his rights or which lessens his 

security; 

28-11-418. Surety entitled to benefit of 

held by creditor or "cosuret~" A surety - - - -. tled to the benefit of every security 

security 

is entifor the 

performance of the principal obligation held by the 

creditor or by a cosurety at the time of entering 

into the contract of suretyship or acquired by him 

afterwards, whether the surety was aware of the 

security or not. 

Under the facts of this case, the security agreement 

signed by Barber to secure the promissory note to the Bank of 

Old Saloon, Inc., was secured by a liquor license under which 

Old Saloon, Inc., operated. It appears from the facts that 

the liquor license was actually owned by the Becks and that 

the Becks had a lien upon the liquor license, even though 

held. b~7 the Bank as security for the principal debt. Thus 
when the default of Old Saloon occurred, the Bank returned 

the liquor license to the Becks for a payment by them to the 

Bank of $6,000, which was applied to Old Saloon's debt. It 

is Barber's contention that the liquor license was actually 

worth $60,000 to $70,000 which, if applicable to his surety 

agreement, would completely exonerate him under the statutes 

above recited. 

The Restatement, Security, treats of the liability of 

the surety where the creditor has security from the principal 

obligor. Section 132 states: 

Where a creditor has security from the principal 

and knows of the surety's obligation, the surety's 

obligation is reduced pro tanto if the creditor: 

(a) Surrenders or releases the security or 

(b) Willfully or negligently harms it, or 

(c) Fails to take reasonable action to preserve 

its value at a time when the surety does not have 

an opportunity to take such action. 

The Restatement sets out the ordinary law that applies 

to the duty of a creditor to protect security given by the 

obligor in favor of a surety. This facet of the law is not 

singular. The same idea is expressed in the Uniform Commercial Code. If one party to an instrument under the U.C.C. 

has a right of recourse against another party to the same 

instrument, the holder of the instrument has a duty with 

respect to collateral given by the principal obligor on the 

instrument. Thus 30-3-606 provides: 

30-3-606. Impairment of recourse -- or of collateral. 

(1) The holder discharges any party into the 

instrument to the extent that without such party's 

consent the holder: 
(b) Unjustifiably impairs any collateral for the 

instrument given by or on behalf of the party or 

any person against whom he has a right of 

recourse. . . 

However, the party entitled to rely on the preservation 

of collateral under the U.C.C. can also waive his right 

thereto under S 30-3-606(2), MCA: 

(2) By express reservation of rights against the 

party with a right of recourse the holder 

preserves: 

(a) All his rights against such party as of the 

time when the instrument was originally due; and 

(b) The right of the party to pay the instrument 

as of that time; and 

(c) All rights of such party to recourse against 

others. 

Thus a party to commercial paper under the Uniform 

Commercial Code can expressly waive his rights to the preservation of collateral which would otherwise favor him. Courts 

have extended the same waiver possibility to the case of 

sureties. For example, it was held in American Bank of 

Commerce v. Covolo (New Mexico 1975), 540 P.2d 1294 that 

where a grantor or surety expressly and unequivocally consents to a waiver or release of his rights in the collateral, 

he will not be heard to complain of the failure of the creditor to perfect the security interest therein in the first 

instance. In Idaho, in a case where the creditor modified a 

sales contract by agreement with the principal debtor without 

the consent of the surety, it was held that the surety remained liable on his obligation of suretyship where the 

creditor had expressly reserved his rights: 

Plaintiffs' final assertion, as a basis entitling 

them to summary judgment, is that its letter to 

A.M.R. dated October 31, 1974, acts as an "express 

reservation of rights" under the Uniform Commercial 
Code--Commercial Paper, I .C. 5 28-3-606 (2) . That 

section allows the holder of a negotiable instrument to modify the obligation of the principal 

debtor, without releasing a co-signor as guarantor 

of the instrument, by an "express reservation of 

rights" against the guarantor. As stated above, 

the Uniform Commercial Code--Commercial Paper is 

not applicable to the guarantee contract between 

A.M.R. and Heidemann. However, it appears that the 

"reservation of rights" doctrine contained in I. C. 

5 28-3-606(2) is a codification of the common law 

of suretyship and guaranty. "Whether the creditor 

releases the principal or grants him an extension 

of time, an expressed reservation will preserve his 

claim against the surety." Williston on Contracts, 

Contracts of Suretyship and Guaranty, 5 1230, pp. 

738-39 (1967). "The surety is not discharged by a 

purported release of or extension of time to the 

principal debtor if the creditor has reserved his 

remedies against the surety" . . . 

Gebrueder Heidemann , K. P . G. v . AMR Corporation (Idaho 19 8 4 ) , 

688 P.2d 1180, 1185, 1186. 

In Montana, it is the law that the measure of a surety's 

obligation to the creditor is that of the principal obligor. 

This Court stated in Gary Hay and Greg Company Inc. v. 

Carlson (1927), 79 Mont. 111, 123, 255 P.2d 722: 

A surety is one who at the request of another for 

the purpose of securing to him a benefit, becomes 

responsible for the performance by the latter of 

some acts in favor of the third person," etc. 

(Section 8195, revised 1921.) Such third person 

may enforce the obligation at any time before the 

contract is rescinded (Sections 74, 72, above.) 

Where the bond is given for the performance of a 

contract, the bond is made with relation to the 

contract and as a part of it. [Citing cases.] The 

two are to be construed together. [Citing cases. I 

The obligation of the surety is, therefore, coextensive with and measured by the promises of the 

principal (the contractor here) to the obligee (the 

state) appearing in the contract, provided proper 

expressions are used in the bond, and the surety by 

the bond binds himself only to the performance of 

those acts which the principal promises to perform 

as part of the contract. [Citing cases.] 
In this case, in the Commercial Surety Agreement which 

Barber signed, he agreed that his obligation as surety to the 

Eank "is not dependent on any default of the borrower or on 

any intervening contract or event of any nature whatsoever," 

and that the "Bank may release any collateral given to Bank 

by borrower, with or without the substitution of new collateral." By that language Barber expressly agreed that the 

Rank could deal with the collateral offered by the principal 

obligor as the Bank saw fit and by that language he further 

waived his right against impairment of collateral held by the 

creditor. The District Court here was constrained to interpret the Commercial Surety Agreement as it would any other 

contract: 

28-11-403. Interpretation of contract suretyship. 

In interpreting the terms ofa contract in suretyship, the same- rules are to be observed as in the 

case of other contracts. 

In this case, Barber has contended he was a gratuitous 

surety, and as such was entitled to the benefit of the doctrine of strictissimi juris, that is, that as a gratuitous 

surety, the Commercial Surety Agreement would be construed in 

his favor. There appears some doubt here as to whether 

Barber was indeed a gratuitous surety, hut even if he were, 

his express waiver militates against him. 

. . . [Iln the instant case, we need not adopt a 

rule of construction weighted against [the creditor]. In this case the suretyship agreement was 

drafted by the Bank . . . Viewing the language of 

the Guarantee Agreement most strongly for the 

[surety] still compels the conclusion that they 

assumed the risk that there could be a failure, 

neglect or omission to realize upon . . . the 

security. 

The import of that language is clear and there is 

simply no rule of construction that can ascribe a 

different meaning to those words. 
National Bank of Washington v. Equity Investors (Wash. 19761, 

546 P.2d 440, 446-447. 

For the foregoing reasons therefore I concur with the 

majority that upholds the summary judgment in this case. 

c;Lt-- k, - I 

J Justice /