Court Opinion

ID: 9652727
Source: CourtListenerOpinion
Date Created: 2023-08-23 17:31:04.079116+00
Date Added: 2024-06-11T18:12:53.775143
License: Public Domain

WINTERSHEIMER, Justice,
dissenting.
I respectfully dissent because the plain meaning of the words “any party” controls.
The question is whether under any circumstances a comaker of a note can avail himself of the defense of unjustifiable impairment of collateral under KRS 355.3-606(l)(b) in order to relieve him of his un*36derlying obligation to the holder of the note.
The Alveys conveyed real property to James M. Schmuckie, Sr. and Gretchen Schmuckie, his wife, and Joseph Sostarich and Doris Sostarich, his wife by deed dated November 1, 1977. On that same date the grantees gave the Alveys a First Lien Note. This note read in part, “This is the one installment note mentioned in and secured by a lien retained in a deed of this date from James N. Alvey and Mary E. Alvey to James M. Schmuckie and Joseph Sostarich.” By a deed which on its face is dated November 2, 1977, notarized on April 4, 1978 and recorded on April 28, 1978, Gretchen Schmuckie and the other three grantees conveyed their interest in the realty to Shively Lanes, Ltd., a Kentucky limited partnership. This deed contained the provision that the property was subject to the vendor’s lien.
Subsequent to Gretchen Schmuckie (hereinafter Gretchen) conveying her interest in the property to Shively Lanes, the Alveys without the consent or knowledge of Gretchen, executed a subordination agreement on June 23, 1978 for $540,000 and a second subordination agreement on November 1, 1978 for $52,000. In a pretrial memorandum the Alveys stated:
On or about 11/1/78, the property was refinanced at which time the Plaintiffs (The Alveys) were paid as set forth in the closing statement. Two notes were payable to the Plaintiffs, the first in the amount of $56,000, payable at 9% on 10/8/78 and it was so paid. The final note was in the amount of $79,201.84 payable at 8½% in installments of $403.98 to each of the Plaintiffs monthly with the first payment due on 12/1/78. Payments were made to 4/1/82, with no further payments being made since that time.
The Alveys admit in their answer to interrogatories that the monthly payments on the note from December 1,1978 to April 1, 1982 were made to them by Shively Lanes Ltd. In reply to the question of why Gretchen did not sign the subordination agreement and mortgage, the Alveys stated that her signature was not necessary as she was no longer owner of the property in question. There is no doubt that at the time of the execution of the subordination agreement the Alveys knew Gretchen had no title or interest in the property. It is also apparent from the language of the deed and First Lien note and from the actions of the parties leading up to this lawsuit, that James Schmuckie and Joseph Sostarich were understood by the Alveys to be the principal parties of the property transaction.
The majority opinion states that a negotiable instrument is an unconditional order to pay a sum certain and the maker’s liability is unconditional and absolute. Here we are not dealing with a holder in due course against whom valid defenses cannot be asserted. Certainly if there were a title defect in the property, the makers could assert their defenses to the defect against the Alveys, or any party not a holder in due course. KRS 355.3-306.
The matter of the unconditional promise is a nonissue in this case. The real question is whether under any circumstances a comaker of a note can avail himself of the defense of unjustifiable impairment of collateral under KRS 355.3-606(l)(b) in order to relieve him of his underlying obligation to the holder of the note.
A number of jurisdictions have held that the term “any party” as found in Section 3-606 applies to those individuals signing ostensibly as makers but who are in fact sureties or accommodation makers. The defense does not apply to a principal maker. The majority opinion cites the authority for this view. However, other courts have allowed principal makers to use the defense provided in Section 3-606(l)(b) under various circumstances. Hughes v. Tyler, 485 So.2d 1026 (Miss.1986); Madill Bank & Trust Co. v. Herrmann, 738 P.2d 567 (Okl.App.1987); Farmers & Merchants Bank v. Poe, 19 Ark.App. 151, 718 S.W.2d 457 (1986); Crimmins v. Lowry, 691 S.W.2d 582 (Tex.1985); Bishop v. United Missouri Bank of Carthage, 647 S.W.2d 625 (Mo.App.1983); Southwest Florida Pro*37duction Credit Assn. v. Schirow, Fla.App., 388 So.2d 338 (1980).
In aid of interpreting KRS 355.3-606, the commentary states in part:
The words “any party to the instrument” remove any uncertainty under former KRS 356.120. Suretyship defenses here provided are not limited to parties who are secondarily liable “but are available 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 or acceptor known to the holder to be so.” (Emphasis added.) KRS 355.3-606 paragraph 1 of the Commentary
This commentary includes but does not limit the 3 — 606(l)(b) defense to accommodation makers and acceptors. The plain meaning of KRS 355.3-606 is that the unjustifiable impairment of collateral defense is available to (1) any party to the instrument; (2) who is in the position of a surety and; (3) who has a right of recourse either on or outside of the instrument.
In order for Gretchen to use this defense, she must meet the preceding three criteria. It is evident from the note that she is a party to the instrument. The second requirement is that she must be in the position of a surety. The Supreme Court of Texas in Crimmins v. Lowry, supra, held that a comaker of a note is in the position of a surety to the extent he promises to answer for the portion of the debt that benefits his comakers. To this extent, he has a potential right of recourse against his comaker. But in this case, we do not have to reach the holding of Crim-mins, because Lowry was in the same position at the time of the alleged impairment of collateral as he was when he executed the note. Here Gretchen had changed her position to that of a surety only with the knowledge and acquiescence of the Alveys. The facts of this case are similar to those in Hughes v. Tyler, supra. In that case, Tyler gave Hughes a promissory note for $100,000 due on or before March 15, 1982 for partial payment on certain real estate. Later, Tyler conveyed the land to Whisen-hut, and by mutual agreement of all parties, Whisenhut assumed the loans on the property, which included the Tyler note. Hughes subordinated the Tyler note to a loan which greatly exceeded the value of the property and to which Tyler did not consent. Upon Whisenhut's default on its loans to Travelers, Travelers foreclosed on their deed of trust on the real estate and no proceeds from the sale of the property were available to pay the Tyler note.
The Tyler court stated:
“Today, we hold this much, that the mortgagee or security holder cannot escape some responsibility to such nonse-curity interest debtor to avoid a harmful value impairment in the collateral. Any party, who has no right, title or interest in the security, will be released under the provisions of Section 75-3-606 by such an action of the security holder. We conclude that Tyler is such a party. Something approaching a trust relationship exists between the holder of a note and a party who has signed a note but has no right title, or interest in the security. The holder cannot be at liberty to dispose of the collateral as he sees fit to the detriment of such nonprotected party, and then expect such party to make up the difference between the impaired security and the debt. To hold otherwise would put the parties to the note at the mercy of the security holder.” Hughes v. Tyler, supra, at 1029.
From this language, it is obvious the Tyler court believed that Tyler was in the position of a surety after he conveyed away his interest in the property.
K.R.S. 355.1-103 provides that general principals of law and equity shall supplement this chapter unless displaced by a particular provision. The Restatement of Security, Section 83 (1941) would consider Schmuckie to be in a surety position. Section 83 states in part:
The suretyship relationship is created where the surety:
(e) having been a principal obligor, his obligation, without a novation, has been assumed by another or his property has been transferred under such circumstances as to place the property under *38the primary burden of the obligation. (Emphasis added.)
Comment (e) to Section 83 states in part:
Where the grantee takes subject to the mortgage, but without assuming the debt it secures, the land is regarded as bearing the principal burden of the mortgage and the mortgagor, is a surety to the extent of the value of the land. (Emphasis added.)
Furthermore, Section 114 of the Restatement of Security states:
Where a person whom the creditor reasonably believes to be a principal is in fact a surety, or where a principal becomes a surety the creditor is affected by the incidence of suretyship from the time he has knowledge of it. (Emphasis added.)
The Alveys had knowledge of the fact that Gretchen was in a surety position at the time they executed the subordination agreement and their consent to this changed position was not required to bind them to this suretyship relationship. Cf. Comment (a) to Section 114.
The last requirement to be able to use the defense is that Gretchen must have had a right of recourse against the debtor Shively Lanes, either on the instrument or outside the instrument. Her right of recourse was outside of the instrument. The deed transferring the property to Shively Lanes provided that the property was subject to the First Lien Note. Upon default of payment on the note by Shively Lanes, Gretchen had a right of recourse against the partnership and could have foreclosed on the property to satisfy her indebtedness on the promissory note.
Gretchen is a party to the instrument entitled to use the unjustifiable impairment of collateral defense, and but for the impairment of collateral by the Alveys, the property was of sufficient value to satisfy her promissory note.
The majority opinion points out that the rationale for disparate treatment between makers and accommodation parties is that makers receive consideration and accommodation parties do not. However, the subordination agreement benefited only Shively Lanes and the Alveys. The Alveys accepted the subordination agreement as part of the refinancing of the property. The Al-veys also accepted the benefits of this refinancing and should be made to bear its risks. The Alveys could not reasonably have believed that Gretchen was other than a surety.
I would reverse the Court of Appeals.