Court Opinion

ID: 9633783
Source: CourtListenerOpinion
Date Created: 2023-08-22 11:59:44.075709+00
Date Added: 2024-06-11T18:08:42.059181
License: Public Domain

Guy, J.
(concurring in part, dissenting in part)—This case presents the question whether the trial court erred in ruling on summary judgment that the maker of a note became a surety by operation of law when an assignee contractually assumed the maker's debt. I agree with the majority that reasonable minds could differ as to whether the Millers actually knew of, and consented to, the assignee's assumption of the Hemenways' debt to the Millers. Therefore I agree that whether the Hemenways became sureties by operation of law should not have been disposed of by summary judgment.
I disagree, however, with the majority's treatment regarding whether the Millers unjustifiably impaired the collateral by failing to file a continuation statement.4 *744Assuming that the Hemenways became sureties in relation to the Millers by operation of law, I would hold that the Millers' failure to file a continuation statement constitutes unjustifiable impairment of the collateral. The law regarding this issue is clear. A creditor has a duty not to impair the collateral unjustifiably. What constitutes "unjustifiable" impairment depends on equitable considerations specific to the transaction, as the majority asserts, but those considerations must be viewed against the backdrop of the creditor-surety relationship. "The accommodation party has every right to assume that his or her obligation is only that over what can be realized from enforcement of the security interest, either by the holder or by himself or herself if he or she pays and subrogates to the holder's right of enforcement." 2A F. Hart & W. Willier, Commercial Paper under the Uniform Commercial Code § 13.24[1], at 13-107 (1989). Therefore, the surety is entitled to assume that the creditor will take steps to prevent impairment of the collateral. Such steps include "those steps customarily taken by creditors with reference to the collateral". F. Hart & W. Willier § 13.24 [1], at 13-104. Such steps also include those the creditor can take with convenience: the creditor need not take burdensome steps to protect the collateral, such as expensive and prolonged litigation. L. Simpson, Suretyship § 75 (1950). In this case, all the Millers needed to do to protect the security interest in the inventory was to file a continuation statement. Such an action is a convenient, nonburdensome action customarily taken by creditors with reference to collateral. As such—assuming the Hemenways were sureties—the Millers' failure to take that action constituted an unjustifiable impairment of collateral.
Moreover, most courts have held that failure to perfect a security interest constitutes an unjustifiable impairment of collateral. See, e.g., In re Estate of Voelker, 252 N.W.2d 400 (Iowa 1977) (creditor took security interest in crop but, *745by omitting description of real estate on which crop was planted, failed to perfect); North Bank v. Circle Inv. Co., 104 Ill. App. 3d 363, 432 N.E.2d 1004 (1982) (creditor failed to obtain a signed security agreement); Executive Bank of Fort Lauderdale v. Tighe, 66 A.D.2d 70, 411 N.Y.S.2d 939 (1978) (secured party filed security agreement in wrong office); El-Ce Storms Trust v. Svetahor, 223 Mont. 113, 724 P.2d 704 (1986) (creditor failed to file until after second creditor perfected its interest); see generally F. Hart & W. Willier § 13.24[1], at 13-107. If failure to perfect is unjustifiable impairment, then I can see no sound basis for holding that failure to continue perfection is not.
The majority's argument for the contrary position cannot be supported. In the initial step of its argument, the majority reasons that to determine whether a creditor has unjustifiably impaired the collateral, the court must inquire whether the creditor owed a duty to the surety in relation to the collateral. The majority opines that such a duty could arise only from the equities of the case, and it notes a fact that, in its view, militates against finding any such duty: "the security agreement here involved prohibits the debtor-surety (and therefore its successor) from creating any lien on the secured property without the written consent of the creditor. ... If that prohibition had been complied with here there would have been no competing lien against the collateral." Majority opinion, at 736.
This initial step in the majority's analysis is unsupported for three reasons. First, the existence of the prohibition against creating second liens without the Millers' consent should not be taken as an equitable consideration that weighs in favor of the Millers and against the Hemenways. If the Hemenways had been the ones who violated this provision, then perhaps fairness would support making them bear the burden of the loss. But it was the assignee, not the Hemenways, who violated that provision. The Hemenways, as well as the Millers, were entitled to rely on the provision for their protection.
*746Second, the majority's analysis does not consider the relevant facts that might establish on remand that the Hemenways became sureties by operation of law, but these facts are relevant to the fairness of holding that the Millers' actions constituted unjustifiable impairment. For example, ;before they executed the second consent to assignment agreement, the Millers required the assignee to produce a financial statement. In addition, the Millers accepted payments on the note directly from the assignee, and they knew that their collecting bank had changed the account collecting name from "Hemenway" to "Miller". Moreover, the Millers did not look to the Hemenways for payment until after the assignee defaulted. These facts should be weighed when considering the fairness of holding the Millers to a duty to file a continuation statement.
Third, the majority's analysis also fails to consider the principle that the surety is entitled to assume that the creditor will take reasonable precautions to protect the collateral. This principle is itself based on equitable considerations. L. Simpson § 75, at 380. Applied here, it implies that the Hemenways, as sureties, were entitled to assume that the Millers would take convenient, nonburdensome actions to prevent impairment of the collateral.
For the above reasons, I disagree with the majority's suggestion that equity weighs in favor of the Millers on the impairment of collateral issue. I also disagree with the majority's analysis in the second step of its argument. Quoting L. Simpson, Suretyship § 75, at 376 (1950) as authority, the majority relies on the principle that the creditor owes the surety no duty to act affirmatively to preserve security where the surety is in a position to preserve the security, but fails to do so. Majority opinion, at 737. Applying this principle, the majority argues that the Hemenways could themselves have preserved the security either by having requested the Millers to file a continuation statement or by having taken a security interest in the inventory when they sold the business to the assignee. Majority opinion, at 737-38.
*747I cannot agree with the second step of the majority's argument. The majority partially quotes Simpson. I read Simpson differently on the principle regarding the creditor's lack of duty to preserve the collateral in all situations. Simpson does state that where the surety is in a position to preserve the security but fails to do so, the creditor has no duty to protect the collateral; but he also states that the creditor has a duty to take nonburdensome action to protect the collateral. L. Simpson § 75, at 376. Simpson's subsequent discussion makes clear that the creditor's duty to take nonburdensome actions to protect the collateral may exist even if the surety also could have taken steps to protect it. Simpson states:
[W]here the only action necessary to perfect the security, taken when the surety contracts, is recording a mortgage or registering an assignment, the surety has generally been held to be discharged to the extent of the value of the security if it is lost through the creditor's failure to do the necessary act. In a leading case the basis for the rule is stated as follows: "There was property sufficient to protect the creditor and sureties. . . . The simplest act on the part of the mortgagee and custodian of the paper could save the surety harmless by reason of his friendly act for the benefit of the plaintiff. . . . Can it be contended that the [surety] must have first interested himself in the matter of filing and recording the mortgage? This would have been unusual. The plaintiff, and not the sureties on the note, took the mortgage. . . . Can he who has taken the security stop short, and omit to do so that which makes it chiefly valuable, under the excuse that others did not urge him to file it, or furnish the pittance necessary to pay the recorder?"
L. Simpson § 75, at 378-80 (quoting Burr v. Boyer, 2 Neb. 265, 271 (circa 1870)). Thus Burr v. Boyer, supra, the leading case on which Simpson relies, expressly provides that a creditor cannot defend its failure to file a mortgage by arguing that the surety should have urged it to do so or should have interested itself in the matter of filing and recording. Here, the majority argues that the Millers may defend their failure to file a continuation statement by arguing that the Hemenways should have urged them to do so or should have perfected a second security interest in *748favor of themselves when they sold the business to the assignee. Equivalent arguments were rejected in Burr v. Boyer, supra, and, by implication, rejected by Simpson. Thus the majority's application of the principle—that ; where the surety is in a position to preserve the security but fails to do so, the creditor has no duty to protect the collateral—is actually rejected by Simpson, the very authority on which the majority purports to rely.
In sum, I concur with the majority that the issue whether the Hemenways became sureties by operation of law should not have been disposed of on summary judgment. I dissent, however, from the majority's treatment of the impairment of collateral issue. I would hold that if the Hemenways became sureties by operation of law, then the Millers unjustifiably impaired the collateral by failing to file a continuation statement.
Dore, C.J., and Utter, J., concur with Guy, J.

Note that, strictly speaking, this issue is not before the court and therefore the majority's discussion of it is dicta. In holding that the trial court erred in granting summary judgment on the issue whether the Hemenways became sureties by operation of law, we create the possibility that on remand the court will conclude that the Hemenways did not become sureties. Since the unjustifiable *744impairment issue arises only if the Hemenways were sureties, such a conclusion by the trial court would render irrelevant this court's discussion of that issue.