Court Opinion

ID: 9695069
Source: CourtListenerOpinion
Date Created: 2023-08-25 18:05:33.915487+00
Date Added: 2024-06-11T18:20:08.053645
License: Public Domain

C. L. Levin, J.
(dissenting). I respectfully dissent. Plaintiff, Will H. Hall & Son, Inc., was the general contractor for a construction project in Flint, Michigan. Ace Masonry Construction, Inc., was the *240masonry subcontractor for two buildings in the project. Capitol Indemnity Corporation provided a performance bond for Ace. United States Fidelity & Guaranty Company provided a performance bond for Hall.
After Ace ceased work on the project, Hall hired another subcontractor to finish the masonry work. This litigation followed. Hall commenced an action against Ace. Ace counterclaimed against Hall, and filed a third-party complaint against USF&G.
Hall presented proofs in a jury trial, and rested. The trial court granted Capitol’s motion for a directed verdict on the ground that Hall had not timely declared or notified Capitol of default. Hall and Ace then stipulated to release all their claims against each other. Hall appealed the directed verdict to this Court, which reversed and remanded for trial.1
On remand, Capitol moved for summary disposition on the ground that the release of Ace, the principal on the bond, also released the surety as a matter of law. The motion was granted.
A
I agree with the majority that the record does not show any agreement between Hall and Ace that Hall could continue to pursue Capitol, and does not indicate that Capitol consented to the release and its own continuing liability.2
*241The majority continues that there is no “language or circumstances indicating that [Hall] reserved the right to pursue Capitol,” and that because the release “was broad, open-ended, and all-encompassing, it cannot be said that [Hall] intended to retain a claim against Capitol.” Ante, p 233. The majority further continues that there is no evidence that “[Hall] could not recover its damages from Ace, or that the reason for the settlement and release was the insolvency of Ace. It is just as likely that Hall settled the case with Ace in order to avoid any potential liability on Ace’s counterclaim.” Ante, p 234. The majority concludes that Hall “failed to submit documentary evidence sufficient to create an issue of fact with respect to, and in support of, [Hall’s] proposition that it intended to retain its claim against Capitol.” Id.
B
The majority adverts to the absence of “language or circumstances” indicating that Hall had the right to pursue Capitol, and also to the absence of evidence that Hall could not recover its damages from Ace, or that Ace was insolvent. The words “language or circumstances” are found in the Third Restatement of Suretyship, which provides that when an obligee (Hall) releases the principal obligor (Ace), the secondary obligor (Capitol) is discharged from any unperformed duties unless the release preserves the secondary obligor’s recourse against the principal obligor or the “language or circumstances” of the release otherwise show the obligee’s intent to retain its claim against the secondary obligor, and which further provides that the secondary obligor, if not otherwise dis*242charged from further liability, is so discharged to the extent it can show loss or prejudice.
I would reverse and remand for trial because Capitol — not Hall — had the burden of persuasion on the issues of whether the “language or circumstances of the release otherwise show [Hall’s] intent to retain its claim against” Capitol,3 and of “loss or prejudice [to Capitol] caused by [Hall’s] act” in releasing Ace.4
Release is an affirmative defense. MCR 2.111(F)(3)(a). The affidavit, and other papers, filed in support of Capitol’s motion for summary disposition, did not advert to those issues, and did not claim or show that there was no genuine issue of material fact concerning those issues. On the summary disposition record so far made, there are genuine issues of material fact regarding those issues.
On remand, Capitol would also have the burden of showing, if it were to so claim, that the amount of loss Capitol sustained as a result of the release of Ace is not reasonably susceptible of calculation or requires proof of facts that are not ascertainable, shifting then the burden of persuasion to Hall to show the amount of Capitol’s liability.5
i
Sections 37-49 of the Third Restatement of Surety-ship and Guaranty set forth the authoritative view of the American Law Institute concerning the law applicable when the “obligee” (Hall) of a surety bond does an act that “changes the risks that were the subject of *243the secondary obligor’s [Capitol’s] assessment.” “In most cases, in the absence of the secondary obligor’s agreement to the contrary, this Title discharges a secondary obligor to the extent that such acts would otherwise cause the secondary obligor to suffer a loss.”6 (Emphasis added.)
Hall’s release of the principal obligor (Ace) constituted “an impairment of suretyship status”!7 that may have resulted in the discharge of the secondary obligation, as set forth in sections 38, 39, and 49 of the Restatement.
Sections 38 and 39 concern release of the underlying obligation.8 The Restatement would eliminate the *244historic reservation of rights doctrine, and requires, for there to be an effective reservation of rights, an express statement that the secondary obligor’s — the surety’s — rights of recourse against the principal obli-gor continue as though the release did not occur.9
If the obligee releases the principal obligor, the secondary obligor is discharged from any unperformed duties unless either the terms of the release effect a preservation of the secondary obligor’s recourse or “the language or circumstances of the release otherwise show the obligee’s intent to retain its claim against the secondary obligor.”10
The Reporter’s notes to § 39 comment that an obli-gee’s release of the principal obligor was traditionally regarded as a complete discharge of the secondary obligor. The Third Restatement, however, “adopts the *245more modem policy generally followed by the Uniform Commercial Code with respect to impairments of recourse by discharging the secondary obligor only to the extent it would suffer loss as a result of the release.”11 (Emphasis added.)
The same concept of discharging the secondary obligor only to the extent that the obligee’s act “impairing suretyship status” causes loss to the secondary obligor is set forth in § 40 (Extensions of lime), § 41 (Modification of Underlying Obligation), and § 44 (Other Impairment of Recourse).
n
Section 49 of the Third Restatement speaks of the “burden of persuasion with respect to impairment of recourse.”12 In general, the secondary obligor, the *246surety, has the burden of persuasion with respect to the occurrence of the act constituting the impairment, and, if the secondary obligor is, as is Capitol, in the business of entering into secondary obligations, it also has the burden of persuasion with respect to loss or prejudice caused by an obligee’s act impairing the secondary obligor’s recourse against the principal obligor.
Although, as the majority states, the summary disposition record does not, indeed, show language or circumstances indicating that Hall had the right to pursue Capitol, or that Hall intended to retain its claim against Capitol, or that Ace was insolvent, Capitol did not, under § 49 of the Restatement (concerning allocation of the burden of persuasion), discharge its burden of persuasion on its motion for summary disposition by simply showing that Capitol had released Ace.
Capitol’s motion for summary disposition did not frame all the pertinent issues that need to be addressed before it can be decided whether Capitol’s discharge of Ace fully discharged Capitol from all liability.
*247m
It was open to Capitol, before moving for summary disposition, to have taken depositions of persons involved in the release, and otherwise knowledgeable regarding Ace and Hall, with a view to establishing that there was no language nor were there circumstances evidencing an intent by Hall to retain its claim against Capitol, and that Ace was solvent and that the release caused loss or prejudice to Capitol. Because Capitol did not so claim or show in moving for summary disposition, genuine issues of material fact remained unaddressed on the summary disposition record, and it was error to grant summary disposition.
A
While the stipulation read onto the record by Ace and Capitol’s lawyers did not include a reservation by Hall of the right to continue this action against Capitol, the understanding, and possibly the agreement, as well, between Hall and Ace may have included a reservation of rights. Lawyers do not necessarily put everything on the record. See Mikedis v Perfection Heat Treating Co, 180 Mich App 189, 195; 446 NW2d 648 (1989). And then, again, there may not have been a reservation of rights.
B
Without regard to whether there was an express reservation of rights by Hall to continue this action against Capitol, it appears likely — having a mind that there was a settlement on the record with Ace and no *248settlement with Capitol — that Hall expected and, indeed, intended to continue, as it did, to prosecute this action against Capitol.
c
The concept that a guarantor is not discharged by an act of the obligee, absent a showing of loss or prejudice, expressed in the Uniform Commercial Code, is, of course, most authoritative, because a legislative enactment is an expression of public policy.
Extending that concept to compensated sureties finds support in the case law.13
D
An Internal Revenue Service tax lien filed against Ace, adverted to in a pretrial motion, is some indication that Ace may have been in financial difficulty.
E
The Third Restatement states, in respect to a release of the principal obligor, an exception — likely to be relied on by Capitol on a remand — to the general principle that the surety must show loss or prejudice. Subsection (c)(iii) of § 3914 states that where the release discharges a duty of the principal obligor other than the payment of money, the secon*249dary obligor is discharged without regard to whether the secondary obligor can show a loss.
This somewhat strange exception to the general principle that a compensated surety must show loss or prejudice is explained in comment g as justified on the ground that where the unperformed obligation is other than the payment of money the “effect on the secondary obligor” “is particularly difficult to quantify.” The comment does not explain why this is not covered adequately by § 49(3) (b), which imposes the burden of persuasion on the obligee where the circumstances of the case indicate that the amount of loss is not reasonably susceptible of calculation or requires proofs of facts that are not ascertainable.
A recent article explains how this exception came about.15 It appears that industry advocates persuaded the governing body of the American Law Institute (ali), the Council, and the membership of the ali, to insert this exception. We have found no case law, before or after, that supports or challenges this exception to the general principle that a compensated surety is required to show loss or prejudice.
In the instant case, in contrast with the example hypothesized in the commentary, the masonry work had been completed by another subcontractor before this action was commenced by Hall against Ace and Capitol. There was pretrial discovery, and active participation by Ace in the trial of this action against Ace and Capitol, until the trial court directed a verdict after Hall rested.
*250It is noteworthy that the industry advocates would unravel the principle that the surety must show loss or prejudice even where a sale of goods is involved,16 and the surety guarantees payment of money, which would seem to put the Restatement at odds with the Uniform Commercial Code.17
I would reverse and remand.

 Hall & Son, Inc v Capitol Indemnity Corp, unpublished opinion per curiam of the Court of Appeals, issued June 15, 2001 (Docket No. 222262).

 The surety’s consent is not a prerequisite to an effective reservation of rights. Notice thereof to the surety “may be advisable.” Restatement Suretyship and Guaranty, 3d, § 38, comment b, 165-166.

 Id., § 39(b)(ii) and § 49(1).

 Id., § 39(c), § 49(2).

 Id., § 49(3). See discussion in Part n, infra.

 Id., p. 157.

 Id., § 37.

 Section 39 of the Restatement provides:
To the extent that the obligee releases the principal obligor from its duties pursuant to the underlying obligation:
(a) the principal obligor is also discharged from any corresponding duties of performance and reimbursement owed to the secondary obligor unless the terms of the release effect a preservation of the secondary obligor’s recourse (§ 38);
(b) the secondary obligor is discharged from any unperformed duties pursuant to the secondary obligation unless:
(i) the terms of the release effect a preservation of the secondary obligor’s recourse (§ 38); or
(ii) the language or circumstances of the release otherwise show the obligee’s intent to retain its claim against the secondary obligor;
(c) if the secondary obligor is not discharged from its unperformed duties pursuant to the secondary obligation by operation of paragraph (b), the secondary obligor is discharged from those duties to the extent:
(i) of the value of the consideration for the release;
(ii) that the release of a duty to pay money pursuant to the underlying obligation would otherwise cause the secondary obligor a loss; and
(in) that the release discharges a duty of the principal obligor other than the payment of money;
*244(d) the secondary obligor has a claim against the obligee to the extent provided in § 37(4).
Section 38 of the Restatement provides:
(1) When an obligee releases the principal obligor from, or agrees to extend the time for performance of, a duty to pay money pursuant to the underlying obligation, the release or extension effects a “preservation of the secondary obligor’s recourse” with respect to that duty if the express terms of the release or extension provide that:
(a) the obligee retains the right to seek performance of the secondary obligation by the secondary obligor; and
(b) the rights of the secondary obligor to recourse against the principal obligor (§§ 21-28) continue as though the release or extension had not been granted.
(2) When the obligee effects a preservation of the secondary obligor’s recourse in conjunction with a release or extension, the principal obligor’s duties of performance and reimbursement and the secondary obligor’s rights of restitution and subrogation continue as though the release or extension did not occur.

 Section 38, n 8, supra.

 Section 39(b), n 8, supra.

 Section 39, p. 175.

 Section 49 provides:
(1) A secondary obligor asserting discharge from a secondary obligation due to the obligee’s impairment of the secondary obli-gor’s suretyship status (§ 37) has the burden of persuasion with respect to the occurrence of the act constituting the impairment.
(2) Except as provided in subsection (3), the burden of persuasion with respect to loss or prejudice caused by an obligee’s act impairing the secondary obligor’s recourse against the principal obligor is allocated as follows:
(a) the burden of persuasion is on the secondary obligor if:
(i) the secondary obligor is in the business of entering into secondary obligations, received a business benefit for entering into the secondary obligation, or otherwise was induced to enter into the secondary obligation by separate consideration that directly benefits the secondary obligor; or
(ii) the act impairing recourse is a modification of the underlying obligation, unless the secondary obligor establishes that the modification is material;
(b) otherwise, it is presumed that the act impairing recourse caused a loss of impairment equal to the secondary obligor’s liabil*246ity pursuant to the secondary obligation and the burden of persuasion as to the nonexistence or lesser amount of such loss is on the obligee.
(3) Notwithstanding subsection (2)(a), if:
(a) the secondary obligor demonstrates prejudice caused by the impairment of recourse; and
(b) the circumstances of the case indicate that the amount of loss is not reasonably susceptible of calculation or requires proof of facts that are not ascertainable.
It is presumed that the act impairing recourse caused a loss or impairment equal to the secondary obligor’s liability pursuant to the secondary obligation, and the burden of persuasion as to any lesser amount of such loss is on the obligee.

 See Becker-Boter Oil & Gas Co v Massachusetts Bonding & Ins Co, 254 Mich 94, 96; 235 NW 869 (1931); In re Landwehr’s Estate, 286 Mich 698; 282 NW 873 (1938); Ramada Development Co v United States Fidelity & Guaranty Co, 626 F2d 517, 521 (CA 6, 1980); 72 CJS, Principal and Surety, §§ 125, 146.

 See n 8, supra, for the text of § 39.

 Mungall & Arena, Effect on surety of obligee’s release of principal: A critical look at the rules in the restatement, 70 Def Couns J 328 (2003).

 Id., p 336.

 See MCL 440.3605.