Court Opinion

ID: 9670323
Source: CourtListenerOpinion
Date Created: 2023-08-24 03:18:57.588518+00
Date Added: 2024-06-11T18:16:03.893500
License: Public Domain

WUEST, Retired Justice
(dissenting).
I dissent. We give lip service to the legal principle, “we do not reverse the circuit court on factual questions unless it is clearly erroneous.” In my opinion, the majority decision does exactly that. This court must not disturb findings by the circuit court, which are supported by the evidence, even if we would have reached a different conclusion on the same evidence. Bass v. Happy Rest, Inc., 507 N.W.2d 317, 324 (S.D.1993). The circuit court found Maxon was a surety and the Bank’s own acts discharged Maxon from liability on the note when it changed the terms of payment and rate of interest. While Max-on agreed to “any extensions and renewals” when he signed the original note, he did not consent to an increased rate of interest or altered payment terms. Maxon did not sign the new note nor did he otherwise assent to be bound. I would affirm the circuit court’s decision.
The majority cites trial testimony indicating the Bank’s president, who wrote the new note, believed the note to be Maxon’s obligation. However, Maxon testified the Bank president told him “ T will not loan [Schaefer and Parker] the money unless you guarantee it.’ ” This statement by the Bank president, along with other evidence discussed herein, justified the circuit court in finding Maxon was a guarantor, rather than a primary obli-gor on the debt. Maxon further testified his understanding was that his original obligation was paid off with the money loaned to Schaefer and Parker from this note. As Schaefer’s co-maker on the note, Parker testified his understanding when he signed the note was “[t]hat it was a one-time payment and ... that it relieved Mr. Maxon of his obligation, and that was part of our [$]75,000 that we owed Mr. Maxon.” Schaefer testified it was never his intention that Maxon have any liability on this debt. The circuit court found the Bank omitted Maxon’s name from both the promissory note and the Truth-in-Lending Disclosure Statement when it executed the new note. Also significant is that although the Bank exercised its set-off rights against other accounts of Schaefer’s to repay the note, it never exercised these same rights against accounts held by Maxon with the Bank.
Whether a person is an accommodation party is a question of fact, and the circuit court makes this determination by focusing on “ ‘the intention of the parties as reflected by the language of the pertinent instrument and by the surrounding circumstances.’ ” Huron County Banking Co., N.A. v. Knallay, 22 Ohio App.3d 110, 489 N.E.2d 1049, 1054 (1984) (quoting Campo v. Maloney, 122 N.H. 162, 442 A.2d 997, 1001 (1982)). See also In re Baker & Getty Financial Serv., Inc., 974 F.2d 712, 716 (6th Cir.1992); Godfrey State Bank v. Mundy, 90 Ill.App.3d 142, 45 Ill.Dec. 549, 552, 412 N.E.2d 1131, 1134 (1980) (simply because a party signs a note as a maker does not preclude that party from being an accommodation party to that note). “Whether a person is an accommodation party is a question of intent.” Branch Banking & Trust Co. v. Thompson, 107 N.C.App. 53, 418 S.E.2d 694, 698 (1992). The parties’ intention is the significant element in determining whether a party is an accommodation party within the meaning of § 3-4150.).1 Holcomb State Bank v. Adamson, 107 Ill. *46App.3d 908, 63 Ill.Dec. 704, 707, 438 N.E.2d 635, 638 (1982). See also Mobley v. Harmon, 304 Ark. 500, 803 S.W.2d 900, 901 (1991); Farmers State Bank of Oakley v. Cooper, 227 Kan. 547, 608 P.2d 929, 934 (1980); Peoples Bank of Point Pleasant v. Pied Piper Retreat, Inc., 158 W.Va. 170, 209 S.E.2d 573, 578 (App.1974). The intention of the parties is a factual question to be resolved by the trier of fact. Catania v. Catania, 26 Conn. App. 359, 601 A.2d 543, 546 (1992); Airstream, Inc. v. CIT Financial Serv., Inc., 111 Idaho 307, 723 P.2d 851, 857 (1986). I am convinced, after reviewing the record in this ease, the circuit court could infer from the circumstances, conversations, and conduct of the parties that Maxon signed the note as an accommodation party.2
The original note, written January 4, 1988, was due July 4, 1988 and called for a single lump sum payment on that date. Interest accruing on the loan was to be paid every six months at the fixed rate of 12%. Schaefer made two interest payments but did not pay the debt in full by its due date. In October 1988, the Bank extended the period of payment and changed the rate of interest from the fixed rate of 12% to a variable rate starting at 12.5%, with rates not to exceed 15.5% or go below 9.5%. Principal and interest payments were now due on a monthly installment basis, the amount of the monthly payments to increase as the loan neared maturity in October 1989. When this extended due date passed without the loan being paid in full, the Bank granted a second extension of the note. Schaefer’s was the only signature on these extended notes.
In Varga v. Woods, 381 N.W.2d 247 (S.D.1986), we noted “[i]t has long been recognized by this Court ‘that a binding agreement between the creditor and the principal debtor, whereby the creditor extends the time for payment or performance, or agrees for a definite period to forbear or postpone the enforcement of his remedy, entirely discharges the surety, whether he is harmed thereby or not.’ ” Varga, 381 N.W.2d at 252 (quoting Zastrow v. Knight, 56 S.D. 554, 560, 229 N.W. 925, 928, 72 A.L.R. 379, 383 (1930)) (also citing Citizens State Bank v. Rosenwald, 63 S.D. 50, 256 N.W. 264 (1934)). SDCL 57A-3-606, which is identical to UCC § 3-606 and which was also discussed in Varga, further provides the surety will not be discharged where he has previously assented to be bound.
The circuit court’s finding that Maxon signed the original note as an accommodation party made defenses of the law of suretyship available to Maxon. The law of suretyship is codified in SDCL Chapter 56. SDCL 56-2-10 provides “[a] surety is exonerated to the extent to which he is prejudiced by any act of the creditor which would naturally prove injurious to the remedies of the surety or inconsistent with his rights or which lessens his security.” SDCL 56-2-8 states “[a] surety is exonerated in like manner with the guarantor” and SDCL 56-1-22 provides “[a] guarantor is exonerated except so far as he may be indemnified by the principal if by any act of the creditor, without the consent of the guarantor, the original obligation of the principal is altered in any respect or the remedies or rights of the creditor against the principal in respect thereto in any way impaired or suspended.” (Emphasis added).
Other jurisdictions having addressed this issue have held that “[t]he obligation underlying a surety agreement cannot be modified without the surety’s assent. A modification which alters the surety’s obligation will discharge the surety. However, the alteration must be a material change.” First Nat’l Bank of Anthony v. Dunning, 18 Kan.App.2d 518, 855 P.2d 493, 495 (1993). Courts have also noted “the law of suretyship provides that a surety is entitled to stand on the strict letter of the contract upon which he is liable, and where he does not consent to a variation and a variation is made, it is fatal.” First Fed. S & L Ass’n of Gary v. Arena, 406 N.E.2d 1279, 1284 (Ind.Ct.App.1980).
The First Nat’l Bank of Anthony court found an increase in the variable interest *47rate from 11.25% to 12.25% not to be a material modification of the surety agreement where the change in interest rates had been anticipated in the parties’ contract. First Bank of Anthony, 855 P.2d at 496. Similarly, a Georgia appellate court held a party who consented in advance to provisions allowing the bank to “extend or renew for any period ..., alter or exchange any of the liabilities" could not claim the renewal of the original note on different terms of interest operated to discharge him as a surety. Citizens & Southern Nat’l Bank v. Richardson, 190 Ga.App. 36, 378 S.E.2d 159, 160-61 (1989) (emphasis added).
In contrast, however, in an action brought by a bank against a co-maker3 of his son’s promissory note where an interest rate of 8.30% for the original note had been increased to 9% on the third renewal, the court held the surety’s obligation was discharged because “[w]hile the language of the ... provisions in the note would include modification, it cannot be construed as being a general consent to all modifications. There is no mention of a change in interest rate.... [I]t is the unconsented change in potential risk or liability not the imposition of greater liability that causes the discharge.” Bank of Terrell v. Webb, 177 Ga.App. 715, 341 S.E.2d 258, 59-60 (1986). The Bank of Terrell court further noted “[b]esides those specifically enumerated, the UCC provisions for discharge of a party from liability on an instrument to another party includes ‘any other act or agreement with such party which would discharge his simple contract for the payment of money.’ ” Id. 341 S.E.2d at 258 (quoting Georgia’s version of UCC § 3-601(2) which is identical to SDCL 57A-3-601(2)). See also In re Murchison, 102 B.R. 545 (Bankr. N.D.Tex.1988) (applying Nevada common law and also considering Nevada’s version of UCC § 3-606, the surety was discharged when the underlying obligation was materially altered during a bankruptcy restructuring thereby significantly increasing risks without the surety’s consent or knowledge).
In Cooper Investments v. Conger, 775 P.2d 76 (Colo.Ct.App.1989), the court held that if some co-guarantors consented to material alteration of the promissory note, their obligation was not affected, but non-consenting guarantors were discharged by operation of the law. Id. at 80. The court noted when a creditor chooses to alter materially the principal debtor’s obligation to the guarantor’s detriment without the guarantor’s consent, that alteration discharges the guarantor’s liability on the note. Id. at 78. “An alteration is material if it changes the nature of the principal debtor’s obligation, ‘either by imposing some new obligation ... or by taking away some obligation already imposed.’ ” Id. (quoting Stearns, Law of Suretyship § 6.3 (1951)). The Cooper court noted the rate of interest a principal debtor is required to pay on a promissory note is a material term of that note. Id. (citing Citizens Bank v. Lair, 687 S.W.2d 268 (Mo.Ct.App.1985) and First Nat’l Bank v. Abraham, 97 N.M. 288, 639 P.2d 575 (N.M.1982)). The court further noted “ ‘[t]he liability of the guarantor is not to be extended by implication beyond the express limits or terms of the instrument, or its plain intent. It has been said a guarantor, is, like a surety, a favorite of the law.’ ” Id. at 79 (quoting Burkhardt v. Bank of America, 127 Colo. 251, 256 P.2d 234 (1954). See also Peters, Suretyship under Article S of the Uniform Commercial Code, 77 Yale L.J. 833, 861-62 (1968) (“The surety’s undertaking, his basic commitment to creditor and principal, represents the high water mark of the surety’s potential liability. Other promisors may find their contractual commitments elastically construed, but the surety’s contract is strictissimi juris; as a favorite of the law, he can safely assume that implied conditions may limit but not extend the scope of his undertaking.”)
In 1988, we held that “once the validity of a guaranty is recognized, the terms of the instrument itself determine whether alterations to the obligations of the principal are sufficient to exonerate the duty of the guarantor.” Sunbank of S.D. v. Precision Specialty Products, Inc., 429 N.W.2d 73, 75 (S.D.*481988) (citing First Nat’l Bank of Beresford v. Nelson, 323 N.W.2d 879 (S.D.1982); U.S. v. Porter, 581 F.2d 698 (8th Cir.1978)). In other words, the terms of the instrument control whether a surety has given his consent to the increased risk or liability. The terms of the note in this case do not evidence such consent by Maxon.4 The circuit court was not clearly erroneous in finding Maxon did not consent to the increased interest rate, and thus the potential increased risk of liability. Maxon was therefore discharged from any obligation on the note Schaefer signed with First Dakota National Bank.
The new note also listed Parker’s name as one of the borrowers. However, Schaefer informed the Bank that Parker was no longer involved in the business and had sold his stock in J & J Hotels, Inc. to Schaefer. Parker did not sign this new note. The circuit court found the Bank then crossed through Parker’s typewritten name on the document, thus discharging Parker from any liability on the note. I would affirm this finding by the circuit court and find its support in law under SDCL 57A-3-606(l)(a). This statute provides, in pertinent part:
(1) The holder discharges any party to the instrument to the extent that without such party’s consent the holder
(a) Without express reservation of rights releases or agrees not to sue any person against whom the party has to the knowledge of the holder a right of recourse or agrees to suspend the right to enforce against such person the instrument or collateral or otherwise discharges such person....
Under SDCL 57A-3-606(l)(a), the Bank discharged Parker and agreed to hold Schae-fer solely liable as principal debtor for the note when it, after learning Parker was no longer associated with J & J, crossed Parker’s name off as borrower. Though there was disputed testimony at trial regarding exactly how and by whom Parker’s name was crossed off this document, the circuit court found against the Bank on this question. Due regard will be given to the trial court to judge credibility of witnesses. SDCL 15-6-52(a). Arnold Murray Constr. v. Wittrock, 487 N.W.2d 33, 35 (S.D.1992); State By and Through DOT v. Garvin, 456 N.W.2d 779, 781 (S.D.1990).
There is evidence in the record to support the circuit court’s findings and these findings support its conclusions of law. I dissent from the majority opinion and would affirm the circuit court’s decision.
I am hereby authorized to state that Justice AMUNDSON joins this dissent.

. UCC § 3-415(1) is identical to SDCL 57A-3-415(1) which provides "[a]n accommodation party is one who signs the instrument in any capacity for the purpose of lending his name to another party to it.”

. The circuit court found the relationship between the parties was that of creditor (Bank), principal debtors (Schaefer and Parker), and surety (Maxon). Although the majority asserts the circuit court never found Maxon to be a guarantor, SDCL 57A-1-201(40) provides that " '[s]urety' " includes guarantor."

. The defendant in this action was able to show by parol evidence that he was an accommodation party thereby establishing his rights as a surety. Bank of Terrell v. Webb, 177 Ga.App. 715, 341 S.E.2d 258, 258 (1986).

. Under the terms of the original note, Maxon consented to "any extensions or renewals,” however, nothing in the terms of the note evidenced consent by Maxon to be bound to a changed rate of interest or altered terms of payment. The note was silent in this regard.