Court Opinion

ID: 879721
Source: CourtListenerOpinion
Date Created: 2013-06-04 23:38:06.112633+00
Date Added: 2024-06-11T15:43:16.720983
License: Public Domain

No. 88-334
               IN THE SUPREME COtJRT OF THE STATE OF MONTANA

MONTANA RANK OF LIVINGSTON,
              Plaintiff and Respondent,
        -VS-

OLD SALOON, INC., a Montana corporation,
VERNICE ANN SALYER, an individual, CHARLES
R. PEAVEY, an individual, and MELVIN A. BARBER,
an individual,
              Defendants and Respondents.
............................
MELVIN A. BARBER,
              Third-Party Plaintiff and Appellant,
        -VS-

DAVID BECK And DIANE BECK,
              Third-Party Defendants and Respondents.

APPEAL FROM:        District Court of the Sixth Judicial District,
                    In and for the County of Park,
                    The Honorable Byron Robb, Judge presiding.
COUNSEL OF RECORD:
        For Appellant:
                    Knuchel   &   McGregor; Karl Knuchel, Livingston, Montana
        For Respondent:

        c3     z ~ w a n d a l Douglass Law Firm; Kent R. Douglass,
                              &
       f--i    ,-Z~ivingston,    Montana
        r-l
        p i     I

                                          Submitted on Briefs:   Oct. 27, 1988
                                            Decided: December 29, 1988
Mr. Justice Fred J. Weber delivered the Opinion of the Court.

     This appeal involves the portion of this action in which
Melvin A. Barber was held liable to the Montana Bank of
Livingston (Bank) as a surety on a note. The District Court
for the Sixth Judicial District, Park County, granted summary
judgment to the Bank.     Mr. Barber appeals but we affirm.
     We restate the issues as:
     1. Is Mr. Barber entitled to be discharged from his
surety agreement as a matter of law or equity?
     2. Was summary judgment improper because genuine issues
of material fact remain?
     3. Was summary judgment improper as to Mr. Barber's
counterclaim for breach of an implied covenant of good faith
and fair dealing?
     In November 1983, Vernice Salyer and Charles Peavey, on
behalf of the Old Saloon, Inc. (Old Saloon), signed a $35,020
note to the Bank. At the same time, Ms. Salyer, Mr. Peavey,
and Mr. Barber each individually signed surety agreements for
$35,020 on the same loan.    Old Saloon defaulted in payment
and the Bank brought this suit for the amount owing.       In
answering the complaint, Mr. Barber pled accord and satisfac-
tion based on the Bank's secltrity interest in the Old Sa-
loon's liquor license. Mr. Barber also crossclaimed against
the other defendants Mr. Peavey, Ms. Salyer, and the Old
Saloon, counterclaimed against the Bank, and made a third-
party claim against the Becks. The Becks were the registered
owners of the liquor license. They sold the Old Saloon to
Mr. Peavey and Ms. Salyer and resumed operating it when Mr.
Peavey and Ms. Salyer defaulted on their contract to purchase
the establishment.
     Defaults have been entered aqainst defendants Mr.
Peavey, Ms. Sal-yer, and the Old Saloon. The Becks have been
dismissed by stipulation. The remaining parties, then, are
Mr. Barber and the Bank.     Both filed motions for summary
judgment. The court denied Mr. Barber' s motion for summary
judgment after briefing and a hearing. After briefing and a
hearing on the Bank's motion for summary judgment, the court
granted the motion and entered judgment in favor of the Bank.
The court based its judgment on language in the surety agree-
ment which Mr. Barber signed. The court stated:

     the surety agreement was one that rendered defen-
     dant Barber "liable as an original obligor", and
     under its terms the bank could look directly to him
     for payment without first proceeding against the
     borrowers ...   [Als Barber has no valid defense to
     the bank's action, his counterclaim against the
     bank has no merit and no trial thereon is
     necessary.
Mr. Barber appeals.
     The Bank has moved to strike certain portions of Mr.
Barber's reply brief as not within the record. In reaching
its decision, the Court has ignored those portions of the
brief which are not within the record.
                              I
     Is Mr. Barber entitled to be discharged from his surety
agreement as a matter of law or equity?
     Mr. Barber claims that he is protected as a surety under
Montana statutes on the remedies and rights of a surety. He
states that the unconsented release of collateral by a credi-
tor which exposes a surety to increased liability discharges
the surety from the surety agreement. The Bank relinquished
its security interest in the Old Saloon's liquor license to
the Becks for $6,000. Mr. Barber estimated the value of the
license at $60,000 to $70,000 and viewed his liability as a
surety as secondary to that collateral. He admits there is
no written agreement to that effect, however.     Mr. Barber
further maintains that the Bank's failure to inform him of
additional loans extended to the Old Saloon justifies his
discharge from his security agreement. He cites as authority
this Court's opinion in Security Rank, N.A. v . Mudd (~ont.
1985), 696 P.2d 458, 42 St.Rep. 323.
     In Security Bank, defendant Mr. Mudd had guaranteed a
note issued by Security Bank (Security) to a borrower. The
note was secured with the borrower's contract receivable and
stock certificates.   The borrower's contract was paid.   It
would have covered the entire amount of the note. However,
Security applied $13,500 of the contract receipts to the
$16,000 note and released the rest to the borrower.      The
borrower later defaulted on a note advanced as a renewal of
the original note. This Court affirmed the District Court's
judgment dismissing the action against Mr. Mudd because
Security had failed to notify Mr. Mudd that it had not used
the money from the contract receivable to satisfy the note.
The Court cited the finding that the contract receivable was
inextricably linked with the guaranty.    The Court approved
application of a test from the Restatement - Security as to
                                            of
the duty of the creditor to disclose to the surety facts it
knows about the debtor.
     The surety agreement in the present case contained a
provision in boldface type which read as follows:

    Surety has entered into this surety agreement at
    the request of Borrower, and for the purpose of
    securing to Borrower, Bank's agreement to loan
    money to Borrower.    Surety hereby makes himself
    responsible for Borrower's performance of the
    original contract and any additional consideration.
    Surety agrees that Surety is liable as an original
    obligor, and that Surety's obligation to pay Bank
    under the terms of this agreement is not dependent
    on any default of Borrower or on any intervening
    contract or event of any nature whatsoever.
The security agreement also contained a provision waiving
notice to and consent from the surety for " [alny deviations
from, additions to, or modifications in the obligations of
the original contract."     Further, the agreement provided
that, "Bank may .. .   realize or neglect to realize upon any
collateral held in connection therewith .   . .   without the
necessity of any notice to or consent from Surety and all
without affecting Surety's liability hereunder."
     Mr. Barber asks us to elevate general principles of the
law on sureties above the specific and clear provisions of
the surety agreement he signed. -Security Bank does not apply
because Mr. Barber's surety agreement contained the clauses
providing that the bank could release or substitute collater-
al without his consent. No such clause was present in the
surety agreement in Security Bank.      The Restatement test
includes an element of increased risk to the surety. Because
of the clauses set forth above, Mr. Barber took on liability
for the entire amount of $35,020 from the time he signed the
surety agreement. The surety agreement makes no reference to
Mr. Barber's liability being secondary to the liquor license.
There is no increased risk. Additionally, Mr. Barber has not
provided satisfactory evidence supporting his valuation of
the Old Saloon liquor license. We hold that Mr. Barber is
not entitled to be discharged from his liability as an origi-
nal obligor under the clear language of the surety agreement.
                             11
     Was summary judgment improper because genuine issues of
material fact remain?
     Mr. Barber asserts that several issues of material fact
preclude summary judgment.     These factual issues include
whether he loaned money to the Old Saloon or was making an
investment in it, whether he was a gratuitous surety or a
principal for the Old Saloon, whether his liability was as a
primary or other surety, and whether he was discharged as a
matter of law from the surety agreement.
     These factual questions are irrelevant as a result of
the surety agreement clauses discussed under Issue I.     Mr.
Barber agreed to be liable as the original obligor on the
note and to forego notice and consent to release of collater-
al. We hold that there is no issue of material fact. which
precludes summary judgment.

     Was summary judgment improper as to Mr. Barber's coun-
terclaim for breach of an implied covenant of good faith and
fair dealing?
     Mr. Barber asserts that his counterclaim's allegation of
breach of the covenant of good faith and fair dealing is not
susceptible to summary judgment. He cites Weinberg v. Farm-
ers State Bank of Florden (Mont. 1988), 752 P.2d 719, 45
St.Rep. 391, as authority that banks have a fiduciary duty
toward their customers.   But the only connection between Mr.
Barber and the Bank is the surety agreement. Weinberg does
not state that there is a fiduciary duty in such a relation-
ship. We hold that summary judgment as to the counterclaim
was proper.
     Affirmed.

       Justices
Mr. Justice John C. Sheehy, concurring:
     Melvin A. Barber is d.ue a more extended discussion in
this case, because the statutes applying to suretyship in
this state seem to require a result in his favor. That he
does not recover requires a deeper look at the law.
     The statutes upon which Barber relies are these:
     28-11-401. Surety defined. A surety is one who,
     at the request of another for the purpose of secur-
     ing to him a benefit, becomes responsible for the
     performance by the latter of some act in favor of a
     third person or hypothecates property as security
     therefore.
     28-11-412.    Exoneration - surety.
                               of              A   surety is
     exonerated:

     (2) To the extent to which he is prejudiced by any
     act of the of the creditor which will naturally
     prove injurious to the remedies of the surety or
     inconsistent with his rights or which lessens his
     security;

     28-11-418. Surety entitled to benefit of security
     held by creditor - " c o s u r e t ~ " A surety is enti-
      - -
                      or - .
     tled to the benefit of every security for the
     performance of the principal obligation held by the
     creditor or by a cosurety at the time of entering
     into the contract of suretyship or acquired by him
     afterwards, whether the surety was aware of the
     security or not.
      Under the facts of this case, the security agreement
signed by Barber to secure the promissory note to the Bank of
Old Saloon, Inc., was secured by a liquor license under which
Old Saloon, Inc., operated. It appears from the facts that
the liquor license was actually owned by the Becks and that
the Becks had a lien upon the liquor license, even though
held. b ~ 7 the Bank as security for the principal debt. Thus
when the default of Old Saloon occurred, the Bank returned
the liquor license to the Becks for a payment by them to the
Bank of $6,000, which was applied to Old Saloon's debt. It
is Barber's contention that the liquor license was actually
worth $60,000 to $70,000 which, if applicable to his surety
agreement, would completely exonerate him under the statutes
above recited.
     The Restatement, Security, treats of the liability of
the surety where the creditor has security from the principal
obligor. Section 132 states:
     Where a creditor has security from the principal
     and knows of the surety's obligation, the surety's
     obligation is reduced pro tanto if the creditor:
     (a) Surrenders or releases the security or
     (b) Willfully or negligently harms it, or
     (c) Fails to take reasonable action to preserve
     its value at a time when the surety does not have
     an opportunity to take such action.
     The Restatement sets out the ordinary law that applies
to the duty of a creditor to protect security given by the
obligor in favor of a surety. This facet of the law is not
singular. The same idea is expressed in the Uniform Commer-
cial Code.   If one party to an instrument under the U.C.C.
has a right of recourse against another party to the same
instrument, the holder of the instrument has a duty with
respect to collateral given by the principal obligor on the
instrument. Thus 30-3-606 provides:
    30-3-606. Impairment of recourse - - collateral.
                                     or of
    (1) The holder discharges any party into the
    instrument to the extent that without such party's
    consent the holder:
     (b) Unjustifiably impairs any collateral for the
     instrument given by or on behalf of the party or
     any person against whom he has a right of
     recourse. . .
     However, the party entitled    to rely on the preservation
of collateral under the U.C.C.       can also waive his right
thereto under S 30-3-606(2), MCA:
     (2) By express reservation     of rights against the
     party with a right of          recourse the holder
     preserves:
     (a) All his rights against such party as of the
     time when the instrument was originally due; and
     (b) The right of the party to pay the instrument
     as of that time; and
     (c) All rights of such party to recourse against
     others.
     Thus a party to commercial paper under the Uniform
Commercial Code can expressly waive his rights to the preser-
vation of collateral which would otherwise favor him. Courts
have extended the same waiver possibility to the case of
sureties.   For example, it was held in American Bank of
Commerce v. Covolo (New Mexico 1975), 540 P.2d 1294 that
where a grantor or surety expressly and unequivocally con-
sents to a waiver or release of his rights in the collateral,
he will not be heard to complain of the failure of the credi-
tor to perfect the security interest therein in the first
instance. In Idaho, in a case where the creditor modified a
sales contract by agreement with the principal debtor without
the consent of the surety, it was held that the surety re-
mained liable on his obligation of suretyship where the
creditor had expressly reserved his rights:
     Plaintiffs' final assertion, as a basis entitling
     them to summary judgment, is that its letter to
     A.M.R. dated October 31, 1974, acts as an "express
     reservation of rights" under the Uniform Commercial
     Code--Commercial Paper, I .C. 5 28-3-606 (2) . That
     section allows the holder of a negotiable instru-
     ment to modify the obligation of the principal
     debtor, without releasing a co-signor as guarantor
     of the instrument, by an "express reservation of
     rights" against the guarantor.    As stated above,
     the Uniform Commercial Code--Commercial Paper is
     not applicable to the guarantee contract between
     A.M.R. and Heidemann. However, it appears that the
     "reservation of rights" doctrine contained in I.C.
     5 28-3-606(2) is a codification of the common law
     of suretyship and guaranty. "Whether the creditor
     releases the principal or grants him an extension
     of time, an expressed reservation will preserve his
     claim against the surety." Williston on Contracts,
     Contracts of Suretyship and Guaranty, 5 1230, pp.
     738-39 (1967). "The surety is not discharged by a
     purported release of or extension of time to the
     principal debtor if the creditor has reserved his
     remedies against the surety"  ..  .
                         .
Gebrueder Heidemann , K. P G. v . AMR Corporation (Idaho 1984)   ,
688 P.2d 1180, 1185, 1186.
     In Montana, it is the law that the measure of a surety's
obligation to the creditor is that of the principal obligor.
This Court stated in Gary Hay and Greg Company Inc. v.
Carlson (1927), 79 Mont. 111, 123, 255 P.2d 722:
     A surety is one who at the request of another for
     the purpose of securing to him a benefit, becomes
     responsible for the performance by the latter of
     some acts in favor of the third person," etc.
     (Section 8195, revised 1921.)    Such third person
     may enforce the obligation at any time before the
     contract is rescinded (Sections 74, 72, above.)
     Where the bond is given for the performance of a
     contract, the bond is made with relation to the
     contract and as a part of it. [Citing cases.] The
     two are to be construed together. [Citing cases. I
     The obligation of the surety is, therefore, coex-
     tensive with and measured by the promises of the
     principal (the contractor here) to the obligee (the
     state) appearing in the contract, provided proper
     expressions are used in the bond, and the surety by
     the bond binds himself only to the performance of
     those acts which the principal promises to perform
     as part of the contract. [Citing cases.]
     In this case, in the Commercial Surety Agreement which
Barber signed, he agreed that his obligation as surety to the
Eank "is not dependent on any default of the borrower or on
any intervening contract or event of any nature whatsoever,"
and that the "Bank may release any collateral given to Bank
by borrower, with or without the substitution of new collat-
eral."   By that language Barber expressly agreed that the
Rank could deal with the collateral offered by the principal
obligor as the Bank saw fit and by that language he further
waived his right against impairment of collateral held by the
creditor.   The District Court here was constrained to inter-
pret the Commercial Surety Agreement as it would any other
contract:
     28-11-403. Interpretation of contract suretyship.
     In interpreting the terms o f a contract in surety-
     ship, the same- rules are to be observed as in the
     case of other contracts.

     In this case, Barber has contended he was a gratuitous
surety, and as such was entitled to the benefit of the doc-
trine of strictissimi juris, that is, that as a gratuitous
surety, the Commercial Surety Agreement would be construed in
his favor.    There appears some doubt here as to whether
Barber was indeed a gratuitous surety, hut even if he were,
his express waiver militates against him.
     .. . [Iln the instant case, we need not adopt a
    rule of construction weighted against [the credi-
    tor].   In this case the suretyship agreement was
    drafted by the Bank   ... Viewing the language of
    the Guarantee Agreement most strongly for the
    [surety] still compels the conclusion that they
    assumed the risk that there could be a failure,
    neglect or omission to realize upon . . . the
    security.

    The import of that language is clear and there is
    simply no rule of construction that can ascribe a
    different meaning to those words.
National Bank of Washington v. Equity Investors (Wash. 1 9 7 6 1 ,
5 4 6 P.2d 4 4 0 , 4 4 6 - 4 4 7 .
     For the foregoing reasons therefore I concur with the
majority   that   upholds   the   summary   judgment   in this case.

                                  c;Lt--    -
                                                k,              I

                                                Justice     /
                                  J