Court Opinion

ID: 9763650
Source: CourtListenerOpinion
Date Created: 2023-08-29 02:51:18.461658+00
Date Added: 2024-06-11T07:29:47.396814
License: Public Domain

Tom Glaze, Judge, dissenting. The majority held that appellee unjustifiably impaired the collateral given by Virginia Fiberglass to secure the note guaranteed by the appellants. After properly and correctly deciding the impairment issue, my colleagues erred in further holding that appellants were not entitled to be discharged because they failed to prove the extent of their loss due to the impairment. The majority has placed an impossible burden on appellants under the facts of this case, and I must strenuously dissent. I believe the decision reached in this case is in error for at least two reasons. First, Arkansas case law has always favored guarantors. For example, when a modification or extension of payment terms of the underlying obligation has occurred, our courts have fully discharged the surety. See I. E. Moore v. First National Bank of Hot Springs, 3 Ark. App. 146, 623 S.W. 2d 530 (1981), and National Bank of Eastern Arkansas v. Collins, 236 Ark. 822, 370 S.W. 2d 91 (1963). This mystic rule which courts have applied in favor of sureties is discussed by Professors James J. White and Robert S. Summers in their legal text on the Uniform Commercial Code, § 13-14.1 In discussing suretyship defenses available under § 3-606 of the Code [our Ark. Stat. Ann. § 85-3-606 (1961 Addendum)], Professors White and Summers relate the following reason why sureties have been discharged when a debtor is given additional time to pay: A related justification for the general rule is that any release or binding extension diminishes the surety’s rights by depriving him of subrogation to the creditor’s cause of action against the debtor; when creditor releases the debtor, he destroys the creditor’s right to sue on the instrument, the right to which the surety hoped to be subrogated. In the instant case, our court was not confronted with an extension of payment terms. Rather, we have a creditor that impaired the collateral given to secure the debt. In truth, a greater risk may occur when a creditor fails to properly perfect his security interest in collateral than in the situation where he merely gives the debtor more time to pay. In the case at bar, for instance, appellee’s negligence in not perfecting its security interest has completely destroyed appellee’s or appellants’ rights to dispose of the collateral and credit the amount received to the indebtedness owed by Virginia Fiberglass. Although Arkansas had adopted the general rule favoring guarantors, I am aware that our courts have not, as yet, had the opportunity to extend or apply the rule to collateral impairment situations. However, in spite of the language contained in § 85-3-606, which appears to permit the surety to be partially discharged to the extent of his loss, our Arkansas case decisions still adhere to the pre-Code rule which fully discharges the surety where a modification or extension in payments is made in the underlying written obligation. If we are to continue to fully discharge guarantors where payments are extended, as may be the case under § 85-3-606(1 )(a), I see no reason why the same rule should not apply where impairment of collateral occurs under § 85-3-606(1 )(b). Even if a valid reason exists to support the application of different surety discharge rules to extension payments and collateral impairment situations, the facts in the case at hand still dictate that appellants should be fully discharged. Here, the majority held that appellee impaired the collateral, but the court refused to discharge appellants, partially or fully, because they did not prove the extent of impairment and the loss suffered by appellants. Under the circumstances, however, it was impossible for appellants to show the amount of loss they incurred due to appellee’s negligent impairment of the collateral. The debtor, Virginia Fiberglass, filed for bankruptcy, and since appellee failed to perfect its security interest, appellee’s interest in the collateral became subordinate to that of the trustee in bankruptcy. Therefore, appellants’ interest likewise was subordinated and their subrogation rights were diminished. Since the unsecured collateral is now in the hands of the trustee in bankruptcy, I find it unrealistic to require the appellants at this stage of the transaction to attempt to physically locate the collateral and to assign a value to each item. Even if appellants could be successful in this pursuit, which I am unwilling to concede at this point, I find this an onerous burden to place on an innocent surety when it was the creditor who caused the collateral to be impaired in the first place. It is also significant that appellee was unable to provide the monetary value of the collateral. At trial, the appellee’s loan officer testified he did not know the value of the collateral. Appellee prepared all the papers and acquired the necessary information to extend the loan to Virginia Fiberglass. The failure of appellee’s loan officer to know the collateral’s value prompts me to ask the question, how can appellants be expected to prove value? I believe we should adopt the following rule set forth in Langeveld v. L.R.Z.H. Corporation, 74 N.J. 45, 376 A. 2d 931 (1977): If the impairment of collateral can be measured in monetary terms; then the calculated amount of the impairment will ordinarily measure the extent of the surety’s discharge. But there are factual situations — this may or may not be one of them — where a surety may be able to establish that he has sustained prejudice, but be unable to measure the extent of the prejudice in terms of monetary loss. Where such a situation is presented the surety will normally be completely discharged. [Emphasis supplied.] In reviewing this chancery case de novo, I believe our court should reverse the trial court’s holding with directions to discharge the appellants since they showed they had sustained prejudice due to the impairment but were unable to prove the extent of prejudice in terms of monetary loss. Under similar facts to those before us, the Illinois Appellate Court fully discharged the surety without any reference to proof of monetary loss. It based its decision on the following facts: (1) The creditor failed to file the proper financing statement; (2) The debtor then filed for bankruptcy; and (3) The creditor’s security interest became subordinate to the trustee in bankruptcy. People v. Housewright, 9 Ill. App. 3d 803, 293 N.E. 2d 911 (1973). Under the holdings of either Langeveld or Housewright, I believe appellants are entitled to be discharged. At the very least, this case should be reversed and remanded with directions that the trial court conduct further proceedings on the amount of monetary loss appellants sustained. If the extent of loss suffered by appellants cannot be shown, they should be fully discharged. On the other hand, if evidence is available and is presented as to the measure or extent of loss, the total indebtedness guaranteed by appellants should be reduced accordingly and appellants’ liability should be limited to the lesser amount. Corbin, J., joins in this dissent.   J. White & R. Summers, Handbook on the Law under the Uniform Commercial Code, § 13-14 (1972).