Court Opinion

ID: 8902564
Source: CourtListenerOpinion
Date Created: 2022-11-27 01:20:11.435737+00
Date Added: 2024-06-11T17:07:57.879888
License: Public Domain

SEITZ, Chief Judge,
dissenting.
The issue here is whether the debtor, Brokers Financial Corporation, defaulted on any obligations under its note to the Bank within the term of the Financial Guarantee Bond. The district court concluded that Brokers had failed to comply with a good faith timely demand for additional collateral, and that the Bank was therefore justified in calling the principal when Brokers defaulted on its obligation to so comply. The court found that Brokers’ failure to pay interest from November 7, 1971 to March 7, 1972 was sufficient to “make a reasonable and honest creditor doubt the security of [the] loan beyond the first year.” I see no basis for overturning this finding of fact. But while the finding is relevant, it is not a sufficient basis on which to conclude that Northwestern may be held liable on the Bond. The Bond and a $500,-000 Second Mortgage on certain real estate, which the Bank also held, were clearly sufficient to secure all obligations which could be due during the first year of the note. Unless the note was to be renewed beyond the first year, the Bank had no reason to worry about the security of its obligations. Thus, the mere fact that the note might be renewed is not, in my view, sufficient to allow the Bank to make a good faith demand for additional collateral.
This, however, does not end the problem. The note was payable April 7, 1972, unless validly renewed. The Financial Guarantee Bond expired April 15, 1972. Thus, unless all obligations under the note were paid on April 7, 1972, or the note was validly renewed, the Bank could demand that Northwestern make good its obligations under the Bond.
The principal due under the note was never paid. Nor was the note validly renewed, though Brokers’ attorney attempted to renew it. It is true that the note states that: “[although written for a period of 1 year, if interest is paid as agreed, this Note may be renewed.” Moreover, the Bond states that: “[i]f, during the term of the note, Principal defaults in the payment of any monthly installment of interest, Obligee shall notify Surety forthwith, and Surety shall have ten days after receipt of such notice in which to cure the default and thereby preserve all of the Principal’s rights which, in that event, shall remain in full force and effect.” Thus, since Northwestern made good its obligation to tender the interest payments on which Brokers had defaulted, Brokers’ default in paying interest did not preclude it altogether from renewing the note. Nonetheless, I conclude that Brokers was not entitled to renew the note, because it had failed to comply with the Bank’s demand that it provide additional collateral1—a demand which, as the district court found, was based on good faith uncertainty as to the Bank’s security beyond the first year.
The note does not expressly give the Bank the right to condition renewal upon satisfaction of any good faith demands for additional collateral. But I believe that this right is inherent in the right to demand additional collateral: even if one should give Brokers the unqualified right to renew, the Bank would still have the option of immediately demanding additional collateral on the renewed note, and then calling all obligations due if this demand were not satisfied. Moreover, the course of dealings between the parties to the transaction shows that the Bank did demand additional collateral in connection with the renewal of the note. The Bank’s letter dated March 8, 1972 to Rocco J. Molinari, President of Brokers, said that “at or prior to [March 14, 1972] you will present to us an extension of the Financial Guarantee Bond, Promissory Note of the Northwestern National Insurance Company . . . ” The extension of the Bond must contemplate renewal of the note.
I do not understand the majority to question the proposition that the Bank could, in the proper circumstances, demand more col*373lateral to secure obligations which had not yet matured. Rather, the majority stress that “[t]o allow the Bank to declare a default during the term of the bond, while the bond itself completely covered the full indebtedness, would be to convert the very act of executing a bond for a term shorter than that of the principal debt into a sufficient condition for the declaration of a default which triggers liability on the bond.” I believe this conclusion to be in error. The Bank would have no right to demand additional collateral of Brokers unless it could do so in good faith. In my view, this requirement of good faith would not be satisfied if the sole basis for the demand were the impending expiration of the Financial Guarantee Bond. The present case, however, is different, since Brokers had failed to pay interest from November 7, 1971 to March 7, 1972.
While the result reached by the district court may seem harsh, I believe that it is correct because the Bond extends Northwestern’s obligations as surety until April 15, 1972, and thus to any default in the payment of principal at the end of the first year of the note.
I would affirm the grant of summary judgment for the plaintiff.

. I need not discuss the Bank’s contention that there was no effective renewal of the note because Brokers never tendered a proper renewal note.