Case Name: WEST POINT CORPORATION, et al. v. NEW NORTH MISSISSIPPI FEDERAL SAVINGS & LOAN ASSOCIATION
Court: Mississippi Supreme Court
Jurisdiction: Mississippi
Decision Date: 1986-11-26
Citations: 506 So. 2d 241
Docket Number: No. 55449
Parties: WEST POINT CORPORATION, et al. v. NEW NORTH MISSISSIPPI FEDERAL SAVINGS & LOAN ASSOCIATION.
Judges: WALKER, C.J., PRATHER, ANDERSON, and GRIFFIN, JJ., concur.
Reporter: Southern Reporter, Second Series
Volume: 506
Pages: 241–254

Head Matter:
WEST POINT CORPORATION, et al. v. NEW NORTH MISSISSIPPI FEDERAL SAVINGS & LOAN ASSOCIATION.
No. 55449.
Supreme Court of Mississippi.
Nov. 26, 1986.
Rehearing Denied May 13, 1987.
Robert G. Krohn, Price Krohn & McLe-more, Corinth, Omar D. Craig, Terry Morris, Oxford, for appellants.
Clifford B. Ammons, W.F. Goodman, Jr., P.N. Harkins, III, George R. Fair, Watkins & Eager, Jackson, for appellee.

Opinion:
ROY NOBLE LEE, Presiding Justice,
for the Court:
North Mississippi Savings & Loan Association (North Mississippi) filed its declaration in the Circuit Court of Lafayette County, against the West Point Corporation (West Point), John R. Young (Young), Gor-den E. Brent (Brent), Woodford S. Lovejoy (Lovejoy), W.C. and Laura E. Hudson (Hud-sons), and other parties seeking collection of a defaulted promissory note in the original amount of one hundred ninety-six thousand dollars ($196,000). At the conclusion of all the evidence, the lower court granted a directed verdict in favor of North Mississippi in the amount of one hundred thirty-nine thousand five hundred fifty-three dollars forty-six cents ($139,553.46), with interest at the rate of nine percent (9%) per annum, together with attorney's fees. The total amount of the judgment was one hundred sixty-three thousand six hundred ninety-two dollars sixty-seven cents ($163,-692.67). West Point Corporation, Lovejoy, Young, Brent, and Hudsons have appealed to this Court from that judgment.
Facts
On November 10, 1972, West Point executed a promissory note in the principal sum of one hundred ninty-six thousand dollars ($196,000) to North Mississippi, together with interest and attorney's fees. The monthly installments of nineteen hundred eighty-eight dollars five cent ($1,988.05) began on December 1, 1972, and were payable seriatim with the last payment being due November 1, 1987. As to Lovejoy, Young and Brent, the note contained the following condition and guaranty:
As a condition of the Corporate obligation evidenced by this Promissory Note, the undersigned individuals, in order to induce the lendor to advance the funds evidenced hereby, have agreed to and do hereby execute this Note as personal sureties for the prompt payment of this indebtedness by the Corporate obli-gor; with payment guaranteed, with the provision, however, that the responsibility of the undersigned personal sureties is limited to the principal obligation plus such lawful interest thereon as may be permitted to be charged to individuals under the laws of the State of Mississippi.
PAYMENT GUARANTEED:
/s/ WOODFORD S. LOVEJOY WOODFORD S. LOVEJOY
/s/ JOHN R. YOUNG JOHN R. YOUNG
/s/ GORDON R. BRENT GORDON R. BRENT
The note was secured by a deed of trust on a motel and motel property. Subsequently, the note and deed of trust were transferred to, and payment thereof was assumed by, other parties who are not involved in this appeal.
The appellants filed answers and set up numerous equitable affirmative defenses, and moved the court to transfer the cause to the Chancery Court of Lafayette County in order that those defenses could be presented. The lower court held that the Circuit Court properly had jurisdiction of the cause and denied the motion to transfer to the chancery court. At the conclusion of the evidence, the lower court entered judgment in favor of North Mississippi.
Questions
I. DID THE LOWER COURT ERR IN OVERRULING THE MOTION OF APPELLANTS TO TRANSFER THE CAUSE TO THE CHANCERY COURT?
II. DID THE LOWER COURT ERR IN STRIKING THE AFFIRMATIVE DEFENSES OF THE APPELLANTS?
A.
Stated differently, these assignments present the question of whether or not North Mississippi had the right to sue and recover in a court of law on the promissory note, without first proceeding to a foreclosure of the deed of trust. We are of the opinion that North Mississippi had the unconditional right to choose its forum for suit and to institute suit on the note alone for its collection, without resort to the deed of trust or foreclosure thereon. In 55 Am. Jur.2d Mortgages § 541 (1971), the general law is stated as follows:
While there is some authority for the view, and statutes to the effect, that an independent action on the mortgage debt or note is a bar to a subsequent foreclosure, and that a foreclosure is a bar to an action of law on the debt, the general rule, in the absence of a statute to the contrary, is that a creditor whose debt is secured by mortgage may pursue his remedy in personam for the debt, or his remedy in rem to subject the mortgaged property to its payment.
In Rea v. O'Bannon, 171 Miss. 824, 158 So. 916 (1935), the Court discussed the right of a promissory note holder to elect his remedy and stated:
There is no inconsistency in the two remedies here available to Rea, receiver. He could pursue the foreclosure to conclusion, or, if he deemed it advantageous to himself, he could forego the foreclosure and proceed at law to collect his debt in the law forum.... There is no inconsistency between the legal and equitable remedial rights possessed by a mortgagee in case of a breach, and he may exercise them all at the same time, and resort to one is not a waiver of the other.
171 Miss, at 832, 158 So. at 918. See also Ramon v. Mitchell, 227 Miss. 360, 86 So.2d 315 (1956) and Cooper v. Mississippi Land Company, 220 So.2d 302 (Miss.1969).
In Cooper, the Court cited Rea v. O'Ban-non, supra, and held that the payees of corporate notes could sue on the note without resorting to the security of a deed of trust, and that the holder of the note had the right to forego use of the burdensome collateral. This Court approved their right to sue directly on the promissory note.
Since the appellee had the right to file and proceed with his suit on the promissory note in the Circuit Court of Lafayette County, it follows that the lower court did not err in declining to transfer the cause to the chancery court and in striking the equitable defenses filed by the appellants.
B.
Under Assignments I and II, appellants urge that they were entitled to rely upon the equitable defense of "impairment of collateral." Appellants cite no authority on facts comparable to this case in support of such a position. Huey v. Port Gibson Bank, 390 So.2d 1005 (Miss.1980) and Hughes v. Taylor, 485 So.2d 1026 (Miss.1986), have been brought to our attention as authority on "impairment of collateral" in the case sub judice. Neither case is applicable here.
Huey v. Port Gibson Bank, supra, involved a note executed in favor of Port Gibson Bank with collateral consisting of a security agreement on inventory, furniture and appliances. The bank failed to file a financing statement with the Secretary of State, which amounted to an unjustifiable impairment of collateral, thereby relieving the endorser of his obligation on the loan to the extent of collateral impaired. That case is distinguished from the case sub judice.
In Hughes v. Tyler, supra, collateral for the indebtedness was 1,256 acres of land. Without setting out the details, holder of the note, Hughes, executed a subordination releasing 776 acres of land and there was a substantial impairment of the collateral to Tyler, the debtor. Hughes is not similar to the present case.
On the other hand, in Kane v. Citizens Fidelity Bank & Trust, 668 S.W.2d 564 (Ky.App.1984), the Court of Appeals of Kentucky held that there was no duty on the creditor to preserve collateral which was not in its possession, citing Commercial Credit Equipment Corp. v. Hatton, 429 F.Supp. 997 (N.D.Tex.1977), at 1001, as follows:
[T]he imposition of such a duty flies in the face of commercial, realities_ In addition to the practical problems involved in such a system, it would not appear to be sound public policy to encourage creditors and sureties to follow debtors about to insure that the value of collateral in their possession is not deteriorating.
To the extent that a surety feels insecure and believes a debtor is in default, he is always entitled to pay off the indebtedness, be subrotated to the right of the creditor, and then repossess....
In Federal Deposit Insurance Corp. v. Kirkland, 251 S.E.2d 750 (1979), the Supreme Court of South Carolina said:
As an additional sustaining ground, respondent contends that Code Section 36-3-606(l)(b) relieves him from liability. This section states that the holder discharges any party to the instrument to the extent the holder unjustifiably impairs any collateral for the instrument. Basically, respondent contends that collateral was impaired due to vandalism on the mortgaged property and a general decline in real estate values in the area. The referee correctly held that any dam age from vandalism or deterioration in values did not result from any act of appellant and, therefore, it was not responsible therefor.
251 S.E.2d at 752. See also Commercial Credit Equipment Corp. v. Hatton, supra.
We do not interpret Mississippi Code Annotated § 75-3-606 (1972), which deals with impairment of collateral, to impose a duty upon the mortgagee, in a mortgage covering real estate collateral, who is not even in possession of the real estate, to look after, care for, maintain and upkeep same. If that duty were imposed, it would be to the interest of the creditor not to take such collateral as security, but only rely upon makers, endorsers and sureties who, without doubt, were worth the amount of the note. American Bank of Commerce v. Covolo, 88 N.M. 405, 540 P.2d 1294 (1975), holds that a bank does not owe a fiduciary duty to its debtors and obligors under the UCC.
What a chilling effect such a duty would have on business. It would be prohibitive for lenders, even within the state, to keep up with, inspect, and maintain the collateral. It would hardly be feasible for lending institutions within this state to purchase notes secured by real estate mortgages in other states because of the cost, hardship and impossibility to inspect and maintain the collateral. Banks and individuals frequently loan money on promissory notes with endorsers, and, incidental to the note, take a mortgage on real property and without an inspection or title certificate. They could have problems if the impairment of collateral argument of appellants were adopted.
III. WAS WEST POINT AS MAKER OF THE NOTE PRIMARILY LIABLE ON THE NOTE?
The promissory note executed by West Point contained an unconditional promise to pay the note at definite times. Mississippi Code Annotated § 75-3-413 (1972), provides the following:
(1) The maker or acceptor engages that he will pay the instrument according to its tenor at the time of his engagement or as completed pursuant to § 3-115 [§ 75-3-115] on incomplete instruments.

(3) By making, drawing or accepting the party admits as against all subsequent parties including the drawee the existence of the payee and his then capacity to indorse.
The liability of a maker on a promissory note is discussed in 2 Bender's Uniform Commercial Code Service § 5.01 (1984):
The maker's liability is said to be primary, using that term in a contractual, and not the suretyship sense. The Code actually omits the term "primary," but unfortunately refers to endorsers and drawers as "secondary parties." Thus, the Code implicitly applies the label "primary" to the other two contracting parties: makers and acceptors. Because the same terms, primary and secondary, are used with entirely different meanings with reference to suretyship obligations, confusion would be avoided by not using them at all.
What primary liability means in the case of the maker is that there are no conditions precedent to his liability. At the time stated in the instrument, he must seek out and pay the holder. Nothing more need be done before the holder's cause of action arises, and at least theoretically, the holder may proceed at once to a lawsuit....
Obviously, the maker promises to perform (pay) as agreed when the maker issues the instrument. He does not undertake to pay according to alterations later made in his contract by someone else until he assents to them. Because of the preferred status of a holder in due course, he must pay such a holder even though there has been an alteration, but only according to this original contract; and he will not have to pay others at all if such changes are fraudulently made by holder.
Appellants cite Gilliam v. McLemore, 141 Miss. 253, 106 So. 99 (1925), which held that the grantee of a deed of trust becomes primarily liable to the mortgagor because they had bound themselves and assumed to pay the mortgage debt of the grantor's mortgagors. However, Gilliam did not hold, or discuss, the liability of the original mortgagors-makers as to any obligation under a promissory note, and only related to the status of the mortgagor-maker under the deed of trust.
In Graham v. Anderson, 397 So.2d 71 (Miss.1981), this Court held that an agreement by the grantee of mortgaged premises to assume and pay the mortgage debt does not release the grantor-mortgagor of the mortgaged premises from the liability for the debt. Graham followed Smith v. General Investments, Inc., 246 Miss. 765, 150 So.2d 862 (1963). In General Investments, suit was brought by the mortgagee for a deficiency judgment, after foreclosure sale against mortgagors and their grantees, who had assumed the mortgage debt. Suit was filed in the circuit court, which rendered judgment for the mortgagee against all the defendants. This Court, citing Gilliam, supra, held that the mortgagee in a suit for deficiency judgment could recover against the original mortgagor and its grantee, who assumed the debt. The Court said:
An agreement by the grantee of mortgaged premises to assume and pay the mortgage debt inures to the benefit of the holder of the mortgage. Hence a grantee who has thus assumed it incurs a personal liability to the mortgagee.... And since there was no agreement by Choctaw [mortgagee] to accept the grantee in place of the Hemphills [mortgagor-maker of the note] as the debtor, the assumption of a mortgage, by Smith [grantee] did not deprive the mortgagee of any rights it possessed against the mortgagors, or relieve the latter from liability for the debt.
Moreover, a grantee, such as Smith, is not relieved of liability by conveying the property to a third person, whether in conveying he exacts, or neglects to exact (as here) a promise of assumption from his grantee.
246 Miss, at 770, 150 So.2d at 864.
White and Summers, Uniform Commercial Code § 13-7 (2d ed. 1980), sets forth liability of a maker on a promissory note:
The contract liability of the maker of a note is as easy to understand as the words "I promise to pay_" Section 3-413(1) provides that the maker "engages that he will pay the instrument according to its tenor at the time of his engagement or as completed pursuant to § 3-115 on incomplete instruments." Thus, the maker's liability is unconditional and absolute; he is obliged to pay a time instrument "on the day after maturity" and a demand instrument "upon its date, or if no date is stated, the date of issue."
We are of the opinion that West Point's obligation is to pay the note as maker and that its status as principal was not affected. See § 3-413(1).
IV. ARE LOVEJOY, YOUNG, BRENT AND THE HUDSONS AS SURETIES, PRIMARILY LIABLE ON THE NOTE?
Mississippi Code Annotated § 75-3-416 (1972), states the following law:
(1) "Payment guaranteed" or equivalent words added to a signature mean that the signer engages that if the instrument is not paid when due, he will pay it according to its tenor without resort by the holder to any other party.
The guarantor's liability becomes indistinguishable from that of a co-maker since a guarantor waives presentment, notice of dishonor and protest and demand upon the maker of the promissory note. See Comment, UCC 3-416. Lovejoy, Young and Brent became sureties by guaranteeing payment of the note. Miss.Code Ann. § 75-1-201 (1972); Brent v. National Bank of Commerce of Columbus, 258 So.2d 430 (Miss.1972); White & Summers, Uniform Commercial Code (2d ed. 1980), § 13-14.
We are of the opinion that Lovejoy, Young and Brent are sureties on the promissory note on account of their guaranty agreement and that the Hudsons are liable on the promissory note pursuant to their assumption agreement. See Miss.Code Ann. § 75-3-415 and Official UCC Comment to § 3-415; Gilliam v. McLemore, supra; Smith v. General Investments, Inc., supra; and McLeod v. Building & Loan Ass'n of Jackson, 168 Miss. 457,151 So. 151 (1933).
We have considered all other questions presented by the assignments of error and are of the opinion that there is no merit in them. Therefore, the judgment of the lower court is affirmed.
AFFIRMED.
WALKER, C.J., PRATHER, ANDERSON, and GRIFFIN, JJ., concur.
HAWKINS, P.J., and DAN M. LEE, ROBERTSON and SULLIVAN, JJ., dissent.