No. 85-591 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1986 

EL-CE STORMS TRUST, CECIL H. STORMS 

and ELSIE S. STORMS, 

Plaintiffs and Respondents, 

PAUL ALLEN SVETAHOR and ANN GAIL 

SVETAHOR, 

Defendants and Appellants. 

APPEAL FROM: District Court of the Nineteenth Judicial District, 

In and for the County of Lincoln, 

The Honorable Robert Holter, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Sverdrup & Spencer; Scott Spencer, Libby, Montana 

For Respondent: 

Hedman, Hileman & Lacosta; Donald E. Hedman, Whitefish, 

Montana 

Submitted on Briefs: April 10, 1986 

Decided: August 28, 1986 
Mr. Chief Justice J. A. Turnage delivered the Opinion of the 

Court. 

This is an appeal from a judgment entered in the Nineteenth Judicial District, in and for the County of Lincoln. 

Cecil Storms, as trustee of El-Ce Storms Trust, brought suit 

on a contract and promissory note executed by Paul and Ann 

Svetahor in favor of El-Ce Storms Trust. Paul was unable to 

be served; however, Ann answered the complaint and set up the 

affirmative defense of discharge for failure to adequately 

protect the collateral. After a bench trial, the trial court 

entered judgment in favor of Storms for the full balance due 

on the note. Ann Svetahor has appealed from that judgment. 

We reverse in part and remand for findings consistent with 

this opinion. 

During October 1982 respondent and Paul Svetahor began 

negotiations concerning a loan. Paul wanted to borrow 

$10,000 from respondent so that he could increase his stock 

in Shaklee Products. At that time, Paul was married to 

appellant, although at the time of trial the two were divorced. At no time during the negotiations for the loan did 

respondent have any discussion with appellant as to her role 

on the note or in her husband's business. At some point, 

respondent drafted the note and contract at issue here; 

however, he told Paul that he would not loan him the money 

without appellant's signature on the note. Appellant had no 

knowledge of the note until Paul brought it home for her to 

sign. Paul told her that respondent insisted she sign the 

note; otherwise, he would not loan Paul the money. Appellant 

signed the note along with her husband. Within sixty days of 

their signing, respondent paid $10,000 to Paul and appellant 

in three separate checks. They endorsed the checks, and the 

money was used to buy Shaklee products for Paul's business. 
The agreement between respondent and the Svetahors 

granted the former a security interest in the Shaklee inventory used in Paul's business. However, respondent did not 

record the security agreement at that time. In January 1983, 

Paul obtained a loan from the First National Bank of Eureka. 

The bank took a security interest in the Shaklee products 

used in Paul's business and immediately filed a financing 

statement. 

Only seven payments were made on the loan from respondent, and Paul also defaulted on the loan from First National 

Bank. Respondent took possession of the Shaklee inventory 

after the loan became delinquent. However, when the bank 

learned of this, it demanded that the inventory be delivered 

to it. Respondent complied, and the bank sold the inventory. 

Respondent subsequently brought suit on the note. 

Three issues are presented for our consideration: 

1. Whether the appeal is timely. 

2. Whether appellant is discharged from liability on 

the note due to respondent's impairment of the collateral. 

3. Whether the District Court erred in computing the 

amount due on the note. 

Timeliness -- of the Appeal 

Respondent contends that appellant did not perfect her 

appeal within the time restraints imposed by law. He bases 

this contention solely on the fact that judgment was entered 

on August 13, 1985, and notice of appeal was not filed until 

November 4, 1985. Rule 5 of the Montana Rules of Appellate 

Civil Procedure states the applicable time limit for filing 

notice of appeal: 
The time within which an appeal from a 

judgment or an order must be taken shall 

be 30 days from the entry thereof, 

except that in cases where service of 

notice of entry of judgment is required 

by Rule 77 (d) of the Montana Rules of 

Civil Procedure the time shall be 30 

days from the service of notice of - - entry 

of iudament . . . [Emphasis added.] 

This is a case where service of notice of entry of judgment 

is required by Rule 77 (d) because appellant made an appearance in the action. Therefore, under Rule 5, M.R.App.Civ.P., 

the time within which the appeal must have been taken by 

appellant was thirty days from the "service" of notice of 

entry of judgment. 

In determining what constitutes proper service under 

Rule 5 sufficient to start the thirty-day time limit running, 

reference must again be made to Rule 77 (d) , M.R.Civ.P. The 

prevailing party in an action has the duty of serving notice 

of entry of judgment, together with a copy of the judgment or 

a description of the nature and amount of relief and damages 

granted, upon all parties who have made an appearance. Since 

respondent was the prevailing party in this action, he had 

the burden of serving proper notice of the judgment on appellant. Nothing in the record indicates that respondent ever 

served any notice on appellant nor does respondent contend 

that he did so. It does appear that the District Court 

mailed a notice of entry of judgment to counsel for both 

parties; however, that notice was totally insufficient since 

it did not state what the judgment was nor provide a description of the nature of the relief granted. The thirty-day 

period for filing a notice of appeal does not begin to run 

until proper notice, as required by Rule 77(d), is served on 

the losing party who has made an appearance. Haywood v. 

Sedillo (1975), 167 Mont. 101, 535 P.2d 1014; Pierce Packing 
Co. v. District Court, Etc. (1978), 177 Mont. 50, 579 P.2d 

760. Since proper notice of entry of judgment was never 

served on appellant, the time for filing her notice of appeal 

never began to run. Consequently, this appeal was timely 

filed. 

Impairment -- of the Collateral 

Appellant contends that she is completely discharged 

from liability on the note because the respondent failed to 

perfect his security interest in the inventory causing an 

impairment of the collateral. Respondent answers by saying 

that appellant signed as a co-maker and, as such, she is 

primarily liable on the note without the benefit of any 

defenses. Under what circumstances, and to what extent, a 

party to a note is discharged from liability because the 

holder has impaired the collateral appears to be a case of 

first impression in this Court. 

Under 5 30-3-606, MCA, a "holder discharges any party 

to the instrument to the extent that without such party's 

consent the holder 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." The first 

problem encountered under the statute is determining what is 

meant by "any party to the instrument." From a plain reading 

of the statute, it would appear that any person on the instrument could be discharged, which would include makers, 

endorsers, guarantors--in short, any person who appears on 

the instrument. Under this interpretation, appellant would 

be entitled to the defense offered by the statute since she 

is clearly a party to the instrument. However, statutes 

cannot be interpreted in a vacuum. "The goal of statutory 
interpretations is to give effect to the purpose of the 

statute. [Citation omitted.] To give effect to the purpose 

of the statute as intended by the legislature, the context in 

which the words are used is more important than precise 

grammatical rules or a dictionary definition." Burritt v. 

City of Butte (1973), 161 Mont. 530, 535, 508 ~.2d 563, 566. 

Montana adopted § 3-606 of the Uniform Commercial Code 

verbatim; therefore, the official code comment and the law 

applied in other jurisdictions is helpful in determining what 

is meant by the words "any party." Official Comment 1 provides that the purpose of the section is to make it clear: 

The words "any party to the instrument" 

remove an uncertainty arising under the 

original section. The suretyship defenses here provided are not limited to 

parties who are "secondarily liable," 

but are a-vailable to any party --- who is in 

- the position -- of a surety, having a right 

- of recourse either -- on the instrument or 

dehors it, including an accommodation 

maker - oracceptor knownto -- the holder - to 

-- be so. [Emphasis added.] 

Thus, the drafters of the Code appear to limit the defense of 

discharge solely to those "parties" who occupy the position 

of a surety. Under this view, accommodation makers, endorsers, and guarantors would be included, but makers and 

co-makers would not. 

There is some disagreement among the states over whether $ 3-606 should apply to all parties to an instrument or 

whether it should extend only to accommodation parties and 

others who occupy the position of sureties. Some jurisdictions hold that ordinary makers and co-makers are discharged 

along with parties in the position of sureties. See e.g. 

Crimrnins v. Lowry (Tex. 1985), 691 S.W.2d 582; Southwest 

Florida Production v. Schirow (Fla. 1980), 388 So.2d 338; 

Rushton v. U.M.&M. Credit Corporation (Ark. 1968), 434 S.W.2d 
81. However, the majority of jurisdictions take the view 

that only parties who occupy the position of sureties are 

entitled to discharge. See e.g. Wohlhuter v. St. Charles 

Lumber & Fuel Co. (Ill. 1975), 338 N.E.2d 179; peoples ~ank, 

Etc. v. Pied Piper Retreat, Inc. (W.Va. 1974), 209 ~.~.2d 

573; Smiley v. Wheeler (Okla. 1979), 602 P.2d 209; Bank of 

New Jersey v. Pulini (N.J. 1984), 476 A.2d 797; United States 

v. Unum, Inc. (5th Cir. 1981), 658 F.2d 300. 

We find that the majority rule is the better approach. 

The comments to S 30-3-606 make it clear that the statute 

discharges "any party who is in the position of a surety, 

having a right of recourse. . . " Makers and co-makers are 

not sureties and do not have a right of recourse on the 

instrument. A maker is primarily liable on the instrument 

and cannot look to anyone else for payment. Similarly, 

co-makers are primarily liable on an instrument. As between 

co-makers, each is ultimately liable for the obligation. 

Although one co-maker may have a right of contribution from 

the other co-maker if the former pays more than his share, he 

does not have a right of recourse for the entire payment 

made. However, a party who occupies the position of a surety 

does have a right of recourse on the instrument for the full 

amount owing if he is made to pay. 

The Restatement of Security defines suretyship as "the 

relation which exists where one person has undertaken an 

obligation and another person is also under an obligation or 

other duty to the obligee, who is entitled to but one performance, and as between the - ---- two who are bound, one rather than 

- the other should perform." (Emphasis added.) Restatement of 

Security, $ 82. Thus, as between a maker and a party who 

signs for accommodation, the maker is ultimately liable on 
the note and is the one who is expected to pay. If the 

surety or accommodation party pays the instrument, he is 

subrogated to the rights of the creditor and has full right 

of recourse against the maker. Section 30-3-415, MCA. This 

principle applies equally well whether the party signs as an 

accommodation maker, an accommodation endorser or a surety. 

See Comment 1 to 5 30-3-415. Therefore, we hold that 

5 30-3-606 applies to all parties who occupy the position of 

a surety, including accommodation makers, endorsers and 

acceptors, but it does not apply to principles and co-makers. 

Having decided that accommodation makers are entitled 

to the defense of discharge under 5 30-3-606, we must now 

determine whether appellant signed as a co-maker or an accommodation maker. The District Court found as a fact that 

appellant "signed the Promissory Note. There is no language 

in the Note or Contract limiting her signatory capacity. 

Plaintiff had no notice that she claimed to be anything other 

than a maker." The court then concluded that appellant was 

liable for the full amount due on the note. In its findings 

and conclusions, it appears that the court failed to fully 

analyze the individual rights and obligations of the parties 

to the note in question in light of the statutory definition 

of an accommodation party. 

Section 30-3-415, MCA, provides: 

(1) An accommodation party is one who 

signs the instrument in any capacity for 

the purpose of lendinq --- his name to 

another party to -- it. 

(2) When the instrument has been taken 

for value before it is due the accomrnodation party is liable in the capacity 

in which he has signed even though the 

taker knows of the accommodation. 

(3) As against a holder in due course 

and without notice of -- the accommodation 
oral proof of the accommodation is not 

admissible to give the accommodation 

party the benefit of discharges dependent on his character as such. In other 

cases the accommodation charactermay be 

shown & oral proof. [Emphasis added.] 

Thus, it is obvious that a person can sign an instrument as a 

co-maker for the purpose of lending his name to the other 

maker and still be considered an accommodation party. Although the accommodation maker will be liable on the instrument as a maker, he will be entitled to the defenses of a 

surety--in this case, discharge under 5 30-3-606. 

The instrument at issue shows that appellant signed as 

a co-maker. The note states that "the undersigned promise to 

pay, " and appellant ' s signature appears under her husband ' s 

at the lower right-hand corner of the note without any limitation on her liability thereon. However, this fact is not 

the sole consideration in determining whether appellant is an 

accommodation party. Several factors are important in this 

determination; namely, her purpose in signing the instrument, 

the intent of the parties to the instrument, whether she took 

part in any negotiations leading up to the loan, whether she 

received any benefit from the transaction, and whether her 

signature was necessary in enabling the other party to get 

the loan. See Lyons v. Citizens Commercial Bank (Fla. 1983), 

443 So.2d 229. We find, on the basis of these factors and in 

light of the undisputed evidence, that appellant was an 

accommodation maker on the instrument and that respondent had 

notice of her status as such. 

One of the most important indications that appellant 

signed as an accommodation to her husband is the fact that 

she signed solely for the purpose of enabling her husband to 

get the loan. In respondent's own testimony, he stated that 
he would not make the loan without appellant's signature. 

Likewise, Paul Svetahor told appellant before she signed the 

note that Storms insisted that she sign. This fa.ct alone 

indicates that respondent had knowledge that appellant signed 

the note as an accommodation to her husband. Furthermore, 

appellant took no part in the negotiations between respondent 

and Paul leading up to the loan. Additionally, appellant did 

not receive any direct benefit from the loan to her husband. 

She testified, without contradiction, that the entire proceeds of the loan went to buy inventory for Paul's business. 

Respondent had knowledge of this fact since the contract 

itself provided that the proceeds of the loan would go to buy 

inventory. Appellant did not take any part in Paul's business; she did not even have a key to his office. Thus, it 

appears that appellant signed the note solely to enable her 

husband to get the loan, and she did not receive any direct 

benefit from it. 

Cases in other jurisdictions considering a similar 

situation have found the wife to be an accommodation party on 

less evidence than was presented in this case. In Fithian v. 

Jamar (Md. 1979) , 410 A. 2d 569, two partners sought a loan 

from a bank in order to enable them to purchase some new 

equipment for their business. The bank agreed to loan the 

men the money only if each man's wife would co-sign the note. 

The note was signed on its face at the bottom right-hand. 

corner by the two men and their wives. Since the court found 

that the wives' signatures were required before the bank 

would make the loan, it held that the wives signed as accommodation makers. 

In Godfrey State Bank v. Mundy (Ill. 1980), 412 N.E.2d 

1131, the wife executed a note along with her husband signing 
in the lower right-hand corner without any limitation on her 

capacity as a maker. She took no part in the negotiations 

prior to execution of the note nor did she derive any direct 

benefit from the proceeds of the loan. On a finding that the 

wife signed the note only to lend her name to her husband, 

the court held that she was an accommodation maker. A similar result was also reached in Savings Bank of Manchester v. 

Kane (Conn. 1978), 396 A.2d 952, and Seaboard Finance Co. of 

Connecticut, Inc. v. Dorman (Conn. 1966), 227 A.2d 441. 

Although there may have been no express understanding 

between appellant and her husband as to which one would be 

ultimately liable on the note, such an understanding is 

implied in the circumstances of the transaction. This implication is found primarily in the fact that appellant signed 

the note solely to lend her name to her husband to enable him 

to obtain the loan, appellant received no direct benefit from 

the loan, and appellant took no part in the negotiations 

prior to the loan. 'I [Tlhe failure of a party to receive a 

benefit is strong evidence of the party's accommodation 

status. . . . [Wlhere R comakes a note with A to obtain a 

loan to be used solely by A, B will be presumed to be an 

accommodation party especially if the loan was negotiated by 

A with C, the lender, who requested that A obtain a 

co-maker." Hawkland and Lawrence UCC Series, 5 3-415:03 

(Art. 3). We hold that appellant was an accommodation party, 

and the District Court erred in finding her to be otherwise. 

Having found that appellant is an accommodation party 

who is entitled to the benefit of the defense provided by 

S 30-3-606, we now decide whether respondent's failure to 

perfect his security interest in the inventory constituted an 

unjustifiable impairment of collateral. It is undisputed 
that respondent could have filed a financing statement perfecting his security interest in the collateral at least as 

early as November 3, 1982. However, respondent did not 

perfect his security interest in the inventory at that time. 

Instead, he waited until after the First National Bank of 

Eureka perfected its security interest in the same inventory. 

Had respondent perfected his security interest prior to the 

date that the bank did so, respondent would have had priority 

over the bank in the collateral, and it would have been 

available to him to apply to the debt. See 55 30-9-302, 

30-9-312, MCA. Had appellant paid the debt immediately upon 

demand by respondent, she would have been subrogated to 

respondent's rights against Paul Svetahor, and she would have 

been entitled to apply the collateral to the debt. But, 

because respondent failed to take the necessary steps to 

secure his priority in the collateral which resulted in its 

loss to another creditor, the collateral was unavailable to 

appellant. Thus, the collateral was unjustifiably impaired. 

The great majority of courts in other jurisdictions 

considering the issue have held that the failure to perfect a 

security interest is an unjustifiable impairment of collateral. In Farmers State Bank of Oakley v. Cooper (Kan. 1980) , 

608 P.2d 929, the holder of a note secured by a security 

agreement in office equipment brought suit against the accommodation maker for payment on the note. The security agreement was never perfected, and the collateral was lost. The 

court held that the "failure of the holder of a security 

agreement to perfect it, which failure results in a loss of 

available collateral to an accommodation party, is an impairment of the collateral." Farmers State -- Bank of Oakley, 608 

P.2d at 936. In Huey v. Port Gibson Bank (Miss. 1980), 390 
So.2d 1005, the bank filed suit on two promissory notes 

endorsed by Huey. As collateral, a security agreement was 

imposed on all inventory, furniture, and appliances owned by 

the maker. However, the bank failed to properly file a 

financing statement evidencing its interest which allowed the 

trustee in bankruptcy to gain priority. The court held that 

"the bank's failure to file the financing statement with the 

Secretary of State, thereby permitting other creditors to 

gain priority, was an unjustifiable impairment." Huey, 390 

So. 2d at 1009. Similarly, in Bank of New Jersey v. Pulini 

(N.J. 1984), 476 A.2d 797, 799, the court held.: 

Since defendant [i.e., the accommodation 

maker] had the right to have this collateral assigned to him if he paid off 

the loan balance, the bank's failure to 

perfect its security interest impaired 

the value of that collateral to 

defendant. 

Anderson, in his treatise on the Uniform Commercial 

Code, supports the majority view. In considering what constitutes an impairment of collateral, he states: 

The failure to perfect a security interest under Article 9 is an "impairing" of 

collateral within the discharge provision of Article 3. Consequently, where 

a creditor is given a chattel mortgage 

on an automobile to secure payment of a 

note, the chattel mortgage constitutes 

"collateral" and if the creditor fails 

to file the mortgage with the result 

that it has no effect as against a 

subsequent purchaser of the automobile, 

there is a failure to preserve collateral within the meaning of Code S 9-207, 

and an accommodation maker on the note 

is discharged under Code S 3-606. 

Anderson, Uniform Commercial Code, S 3-606:8. See also, 

Beneficial Finance Co. of Norman v. Marshall (Okla. 1976) , 

551 P.2d 315; Shaffer v. Davidson (Wyo. 1968), 445 ~.2d 13. 

We hold that respondent's failure to perfect his security interest in the inventory which resulted in its loss to 
another secured party constituted an unjustifiable impairment 

of the collateral and entitled appellant to a discharge. 

However, appellant is discharged only to the extent of the 

impairment. Since the entire collateral was lost, she is 

entitled to a discharge to the extent of the value of the 

collateral. The earliest date that appellant would have been 

allowed to look to the collateral was the date demand was 

made on her by the respondent. At that point, appellant 

could have paid the entire debt due and then taken the collateral for sale under her right of subrogation, if it had 

been available. Therefore, on remand, the District Court 

shall determine the value of the collateral as of the date of 

respondent's initial demand against appellant. Since appellant is still liable as a maker on the note, she is still 

obligated to pay the amount of the judgment less the value of 

the collateral. 

Computation -- of the Amount ---- Due on the Note 

Appellant contends that the District Court erred in 

computing the amount due on the note. Her contention on this 

point is without merit. The computation was made within the 

general terms of the note and contract. 

Reversed in part and remanded. 
We concur: