No. 85-591 INTHE SUPREME COURT OF THE STATEOF MONTANA 1986

EL-CE STORMS TRUST,CECILH. STORMS and ELSIE S. STORMS, Plaintiffs and Respondents,

PAULALLEN SVETAHOR and ANN GAIL SVETAHOR, Defendants and Appellants.

APPEAL FROM: District Court of theNineteenth JudicialDistrict, In and for the County of Lincoln, The Honorable Robert Holter, Judgepresiding.

COUNSEL OF RECORD:

ForAppellant: Sverdrup & Spencer; Scott Spencer, Libby,Montana

For Respondent: Hedman,Hileman & Lacosta;Donald E. Hedman, Whitefish, Montana

Submittedon Briefs: April 10, 1986 Decided: August 28, 1986Mr. Chief Justice J. A. Turnage delivered the Opinion of the Court.This is an appeal from a judgment entered in theNineteenth 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 StormsTrust. Paulwas unable to be served; however, Ann answered the complaintand setup 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 fullbalance 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 increasehis 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 themoney. Appellant signed the note along with her husband. Within sixtydays of their signing,respondentpaid $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 agreementat 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 weremade on the loan from respondent,and Paul alsodefaulted on the loan fromFirstNational Bank. Respondent took possession of the Shaklee inventory after the loan became delinquent. However, when the bank learned of this, it demanded that the inventorybe delivered to it. Respondentcomplied,and thebank sold the inventory. Respondent subsequently brought suiton thenote. Three issues arepresented forour 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 amountdue on the note.

Timelinessof theAppeal 

### -- 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 judgmentwas entered

on August 13, 1985,and notice of appealwas 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 casewhere service of notice of entry of judgment is required by Rule 77(d) because appellantmade 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 sufficientto 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 judgmentor a description of the nature and amount of relief and damages granted, upon allpartieswho havemade 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 itdid not statewhat the judgmentwas 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), 167Mont. 101, 535 P.2d 1014; Pierce PackingCo. 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 filingher 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 thisCourt. 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 determiningwhat is meant by "anyparty to the instrument." From aplain 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 statutoryinterpretations is to give effect to the purpose of the statute. [Citationomitted.] To give effect to the purpose of the statuteas intendedby 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 determiningwhat is meant by the words "any party." Official Comment 1 provides that the purpose of the section is to make it clear: The words "anyparty to the instrument" remove an uncertainty arising under the original section. The suretyship defenseshere provided are not limited to parties who are "secondarily liable," but are a-vailableto 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 

### - oracceptorknownto 

### -- theholder 

### - to be so. [Emphasisadded.] 

### -- Thus,thedraftersof the Code appear to limit the defense of discharge solely to those "parties"who occupy the position of a surety. Under this view, accommodationmakers, endorsers, and guarantors would be included, but makers and co-makers would not. There is some disagreement among the statesoverwhether $ 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; Rushtonv. U.M.&M. CreditCorporation (Ark. 1968), 434 S.W.2d81. 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 Jerseyv. Pulini (N.J. 1984), 476A.2d 797;United States

v. Unum, Inc. (5thCir. 1981), 658F.2d 300. We find that the majority rule is thebetter 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 formerpays more than his share,he does not have a right of recourse for the entire payment made. However, aparty who occupies the position of a surety does have a right of recourse on the instrument for the full amount owing ifhe ismade to pay. The Restatement of Security defines suretyshipas "the relation which exists where one person has undertaken an obligation and another person is also under an obligation or otherduty to the obligee, who is entitled tobut oneperformance, and as between the twowho are bound, one rather than 

### - ---- the other shouldperform." (Emphasisadded.) Restatementof 

## - Security, $ 82. Thus, as between a maker and a party who signs for accommodation, the maker is ultimately liable onthe 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 themaker. 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 allparties who occupy the position of a surety, including accommodation makers, endorsers and acceptors,but it doesnot apply toprinciples 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-makeror 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. Plaintiffhad no notice that she claimed to be anythingother 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 accommodationparty. 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 

### --- anotherparty

## 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 takerknowsof 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 dependentonhis characteras such. In other cases the accommodationcharactermaybe shown

### & oral proof. [Emphasisadded.] Thus, it is obvious that aperson can sign an instrumentas 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 intentof the parties to the instrument, whether shetook 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. SeeLyons

### v. Citizens CommercialBank (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 accommodationmaker on the instrumentand that respondenthad notice ofher 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 enablingher husband to get the loan. In respondent'sown testimony,he stated thathe 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.ctalone indicates that respondenthad knowledge that appellant signed the note as an accommodation to her husband. Furthermore, appellant took no part in thenegotiations between respondent and Paul leading up to the loan. Additionally, appellantdid not receive any directbenefit from the loan to her husband. She testified, without contradiction, that the entire proceeds of the loanwent to buy inventory for Paul's business. Respondent had knowledge of this fact since the contract itself provided that theproceeds of the loan would go tobuy inventory. Appellant did not take any part in Paul'sbusiness; 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 situationhave found thewife to be an accommodationparty on less evidence thanwaspresented in this case. In Fithianv. 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 ifeach man'swifewould co-sign thenote. The note was signed on its face at the bottom right-hand.

cornerby the two men and theirwives. Since the court found that the wives' signatures were required before the bank would make the loan, itheld that thewives signed as accommodationmakers. In Godfrey State Bank v. Mundy (Ill. 1980), 412N.E.2d 1131, thewife executed a note alongwith her husband signingin 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 theproceeds of the loan. On a finding that the wife signed the note only to lend her name to her husband, the court held that shewas an accommodationmaker. A similar result was also reached in SavingsBank ofManchester v. Kane (Conn. 1978), 396 A.2d 952,and Seaboard Finance Co. of Connecticut, Inc. v. Dorman (Conn. 1966), 227A.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 circumstancesof the transaction. This implication is found primarily in the fact that appellant signed the note solelyto lend her name to her husband to enablehim to obtain the loan,appellantreceived no directbenefit 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 accommodationparty especially if the loanwas 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 appellantwas an accommodationparty, 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 perfecthis security interest in the inventoryconstituted an unjustifiable impairment of collateral. It is undisputedthat 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 thebank 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 appellantpaid the debt immediatelyupon 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 collateralwas unjustifiably impaired. The great majority of courts in other jurisdictions considering the issue have held that the failureto perfect a security interest is an unjustifiable impairmentof 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 equipmentbrought suitagainst the accommodation maker forpayment on the note. The security agreement was never perfected, and the collateralwas 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 collateralto an accommodationparty, is an impairment of the collateral." Farmers State Bank of Oakley, 608 

### -- P.2d at 936. In Huey v. Port Gibson Bank (Miss. 1980), 390So.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 gainpriority. The court held that "the bank's failure to file the financing statementwith 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), 476A.2d 797, 799,the courtheld.: Sincedefendant [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 consideringwhat constitutes an impairmentof collateral,he states: The failure toperfect a security interestunder 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 failuretopreserve 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 toanother securedparty 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 earliestdate that appellantwould 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 shalldetermine thevalue of the collateralas 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 topay the amount of the judgment less the value of the collateral.

Computation

## -- of the Amount Due on theNote 

## ---- Appellant contends that the District Court erred in computing the amount due on thenote. Her contentionon this point is without merit. The computationwas made within the general terms of the note and contract. Reversed inpart and remanded.We concur: