No. 85-591
IN THE SUPREME COURT OF THE STATE OF MONTANA
1986
EL-CE STORMS TRUST, CECIL H. STORMS
and ELSIE S. STORMS,
Plaintiffs and Respondents,
PAUL ALLEN SVETAHOR and ANN GAIL
SVETAHOR,
Defendants and Appellants.
APPEAL FROM: District Court of the Nineteenth Judicial District,
In and for the County of Lincoln,
The Honorable Robert Holter, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Sverdrup & Spencer; Scott Spencer, Libby, Montana
For Respondent:
Hedman, Hileman & Lacosta; Donald E. Hedman, Whitefish,
Montana
Submitted on Briefs: April 10, 1986
Decided: August 28, 1986
Mr. Chief Justice J. A. Turnage delivered the Opinion of the
Court.
This is an appeal from a judgment entered in the Nine-
teenth Judicial District, in and for the County of Lincoln.
Cecil Storms, as trustee of El-Ce Storms Trust, brought suit
on a contract and promissory note executed by Paul and Ann
Svetahor in favor of El-Ce Storms Trust. Paul was unable to
be served; however, Ann answered the complaint and set up the
affirmative defense of discharge for failure to adequately
protect the collateral. After a bench trial, the trial court
entered judgment in favor of Storms for the full balance due
on the note. Ann Svetahor has appealed from that judgment.
We reverse in part and remand for findings consistent with
this opinion.
During October 1982 respondent and Paul Svetahor began
negotiations concerning a loan. Paul wanted to borrow
$10,000 from respondent so that he could increase his stock
in Shaklee Products. At that time, Paul was married to
appellant, although at the time of trial the two were di-
vorced. At no time during the negotiations for the loan did
respondent have any discussion with appellant as to her role
on the note or in her husband's business. At some point,
respondent drafted the note and contract at issue here;
however, he told Paul that he would not loan him the money
without appellant's signature on the note. Appellant had no
knowledge of the note until Paul brought it home for her to
sign. Paul told her that respondent insisted she sign the
note; otherwise, he would not loan Paul the money. Appellant
signed the note along with her husband. Within sixty days of
their signing, respondent paid $10,000 to Paul and appellant
in three separate checks. They endorsed the checks, and the
money was used to buy Shaklee products for Paul's business.
The agreement between respondent and the Svetahors
granted the former a security interest in the Shaklee inven-
tory used in Paul's business. However, respondent did not
record the security agreement at that time. In January 1983,
Paul obtained a loan from the First National Bank of Eureka.
The bank took a security interest in the Shaklee products
used in Paul's business and immediately filed a financing
statement.
Only seven payments were made on the loan from respon-
dent, and Paul also defaulted on the loan from First National
Bank. Respondent took possession of the Shaklee inventory
after the loan became delinquent. However, when the bank
learned of this, it demanded that the inventory be delivered
to it. Respondent complied, and the bank sold the inventory.
Respondent subsequently brought suit on the note.
Three issues are presented for our consideration:
1. Whether the appeal is timely.
2. Whether appellant is discharged from liability on
the note due to respondent's impairment of the collateral.
3. Whether the District Court erred in computing the
amount due on the note.
Timeliness - - Appeal
of the
Respondent contends that appellant did not perfect her
appeal within the time restraints imposed by law. He bases
this contention solely on the fact that judgment was entered
on August 13, 1985, and notice of appeal was not filed until
November 4, 1985. Rule 5 of the Montana Rules of Appellate
Civil Procedure states the applicable time limit for filing
notice of appeal:
The time within which an appeal from a
judgment or an order must be taken shall
be 30 days from the entry thereof,
except that in cases where service of
notice of entry of judgment is required
by Rule 77 (d) of the Montana Rules of
Civil Procedure the time shall be 30
days from the service - notice - entry
of of
of iudament ... [Emphasis added.]
This is a case where service of notice of entry of judgment
is required by Rule 77 (d) because appellant made an appear-
ance in the action. Therefore, under Rule 5, M.R.App.Civ.P.,
the time within which the appeal must have been taken by
appellant was thirty days from the "service" of notice of
entry of judgment.
In determining what constitutes proper service under
Rule 5 sufficient to start the thirty-day time limit running,
reference must again be made to Rule 77 (d), M.R.Civ.P. The
prevailing party in an action has the duty of serving notice
of entry of judgment, together with a copy of the judgment or
a description of the nature and amount of relief and damages
granted, upon all parties who have made an appearance. Since
respondent was the prevailing party in this action, he had
the burden of serving proper notice of the judgment on appel-
lant. Nothing in the record indicates that respondent ever
served any notice on appellant nor does respondent contend
that he did so. It does appear that the District Court
mailed a notice of entry of judgment to counsel for both
parties; however, that notice was totally insufficient since
it did not state what the judgment was nor provide a descrip-
tion of the nature of the relief granted. The thirty-day
period for filing a notice of appeal does not begin to run
until proper notice, as required by Rule 77(d), is served on
the losing party who has made an appearance. Haywood v.
Sedillo (1975), 167 Mont. 101, 535 P.2d 1014; Pierce Packing
Co. v. District Court, Etc. (1978), 177 Mont. 50, 579 P.2d
760. Since proper notice of entry of judgment was never
served on appellant, the time for filing her notice of appeal
never began to run. Consequently, this appeal was timely
filed.
Impairment - - Collateral
of the
Appellant contends that she is completely discharged
from liability on the note because the respondent failed to
perfect his security interest in the inventory causing an
impairment of the collateral. Respondent answers by saying
that appellant signed as a co-maker and, as such, she is
primarily liable on the note without the benefit of any
defenses. Under what circumstances, and to what extent, a
party to a note is discharged from liability because the
holder has impaired the collateral appears to be a case of
first impression in this Court.
Under 5 30-3-606, MCA, a "holder discharges any party
to the instrument to the extent that without such party's
consent the holder 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." The first
problem encountered under the statute is determining what is
meant by "any party to the instrument." From a plain reading
of the statute, it would appear that any person on the in-
strument could be discharged, which would include makers,
endorsers, guarantors--in short, any person who appears on
the instrument. Under this interpretation, appellant would
be entitled to the defense offered by the statute since she
is clearly a party to the instrument. However, statutes
cannot be interpreted in a vacuum. "The goal of statutory
interpretations is to give effect to the purpose of the
statute. [Citation omitted.] To give effect to the purpose
of the statute as intended by the legislature, the context in
which the words are used is more important than precise
grammatical rules or a dictionary definition." Burritt v.
City of Butte (1973), 161 Mont. 530, 535, 508 ~ . 2 d563, 566.
Montana adopted § 3-606 of the Uniform Commercial Code
verbatim; therefore, the official code comment and the law
applied in other jurisdictions is helpful in determining what
is meant by the words "any party." Official Comment 1 pro-
vides that the purpose of the section is to make it clear:
The words "any party to the instrument"
remove an uncertainty arising under the
original section. The suretyship de-
fenses here provided are not limited to
parties who are "secondarily liable,"
but are a-vailable to any party - - -
who is in
-recourse either on the instrument or
the position - -a surety, having a right
of
of
- --
dehors it, including an accommodation
maker -
oracceptor knownto - holder -
- the to
be -
- so. [Emphasis added.]
Thus, the drafters of the Code appear to limit the defense of
discharge solely to those "parties" who occupy the position
of a surety. Under this view, accommodation makers, endors-
ers, and guarantors would be included, but makers and
co-makers would not.
There is some disagreement among the states over wheth-
er $ 3-606 should apply to all parties to an instrument or
whether it should extend only to accommodation parties and
others who occupy the position of sureties. Some jurisdic-
tions hold that ordinary makers and co-makers are discharged
along with parties in the position of sureties. See e.g.
Crimrnins v. Lowry (Tex. 1985), 691 S.W.2d 582; Southwest
Florida Production v. Schirow (Fla. 1980), 388 So.2d 338;
Rushton v. U.M.&M. Credit Corporation (Ark. 1968), 434 S.W.2d
81. However, the majority of jurisdictions take the view
that only parties who occupy the position of sureties are
entitled to discharge. See e.g. Wohlhuter v. St. Charles
Lumber & Fuel Co. (Ill. 1975), 338 N.E.2d 179; peoples ~ a n k ,
Etc. v. Pied Piper Retreat, Inc. (W.Va. 1974), 209 ~ . ~ . 2 d
573; Smiley v. Wheeler (Okla. 1979), 602 P.2d 209; Bank of
New Jersey v. Pulini (N.J. 1984), 476 A.2d 797; United States
v. Unum, Inc. (5th Cir. 1981), 658 F.2d 300.
We find that the majority rule is the better approach.
The comments to S 30-3-606 make it clear that the statute
discharges "any party who is in the position of a surety,
having a right of recourse. . ." Makers and co-makers are
not sureties and do not have a right of recourse on the
instrument. A maker is primarily liable on the instrument
and cannot look to anyone else for payment. Similarly,
co-makers are primarily liable on an instrument. As between
co-makers, each is ultimately liable for the obligation.
Although one co-maker may have a right of contribution from
the other co-maker if the former pays more than his share, he
does not have a right of recourse for the entire payment
made. However, a party who occupies the position of a surety
does have a right of recourse on the instrument for the full
amount owing if he is made to pay.
The Restatement of Security defines suretyship as "the
relation which exists where one person has undertaken an
obligation and another person is also under an obligation or
other duty to the obligee, who is entitled to but one perfor-
mance, and - between - - - - bound, one rather than
as the two who are
- other
the should perform." (Emphasis added.) Restatement of
Security, $ 82. Thus, as between a maker and a party who
signs for accommodation, the maker is ultimately liable on
the note and is the one who is expected to pay. If the
surety or accommodation party pays the instrument, he is
subrogated to the rights of the creditor and has full right
of recourse against the maker. Section 30-3-415, MCA. This
principle applies equally well whether the party signs as an
accommodation maker, an accommodation endorser or a surety.
See Comment 1 to 5 30-3-415. Therefore, we hold that
5 30-3-606 applies to all parties who occupy the position of
a surety, including accommodation makers, endorsers and
acceptors, but it does not apply to principles and co-makers.
Having decided that accommodation makers are entitled
to the defense of discharge under 5 30-3-606, we must now
determine whether appellant signed as a co-maker or an accom-
modation maker. The District Court found as a fact that
appellant "signed the Promissory Note. There is no language
in the Note or Contract limiting her signatory capacity.
Plaintiff had no notice that she claimed to be anything other
than a maker." The court then concluded that appellant was
liable for the full amount due on the note. In its findings
and conclusions, it appears that the court failed to fully
analyze the individual rights and obligations of the parties
to the note in question in light of the statutory definition
of an accommodation party.
Section 30-3-415, MCA, provides:
(1) An accommodation party is one who
signs the instrument in any capacity for
the purpose of lendinq - - - to
his name
another party to -
- it.
(2) When the instrument has been taken
for value before it is due the accomrno-
dation party is liable in the capacity
in which he has signed even though the
taker knows of the accommodation.
(3) As against a holder in due course
and without notice - - accommodation
of the
oral proof of the accommodation is not
admissible to give the accommodation
party the benefit of discharges depen-
dent on his character as such. In other
cases the accommodation charactermay be
shown & oral proof. [Emphasis add]
de.
Thus, it is obvious that a person can sign an instrument as a
co-maker for the purpose of lending his name to the other
maker and still be considered an accommodation party. Al-
though the accommodation maker will be liable on the instru-
ment as a maker, he will be entitled to the defenses of a
surety--in this case, discharge under 5 3 0 - 3 - 6 0 6 .
The instrument at issue shows that appellant signed as
a co-maker. The note states that "the undersigned promise to
pay," and appellant ' s signature appears under her husband ' s
at the lower right-hand corner of the note without any limi-
tation on her liability thereon. However, this fact is not
the sole consideration in determining whether appellant is an
accommodation party. Several factors are important in this
determination; namely, her purpose in signing the instrument,
the intent of the parties to the instrument, whether she took
part in any negotiations leading up to the loan, whether she
received any benefit from the transaction, and whether her
signature was necessary in enabling the other party to get
the loan. See Lyons v. Citizens Commercial Bank (Fla. 1983),
443 So.2d 229. We find, on the basis of these factors and in
light of the undisputed evidence, that appellant was an
accommodation maker on the instrument and that respondent had
notice of her status as such.
One of the most important indications that appellant
signed as an accommodation to her husband is the fact that
she signed solely for the purpose of enabling her husband to
get the loan. In respondent's own testimony, he stated that
he would not make the loan without appellant's signature.
Likewise, Paul Svetahor told appellant before she signed the
note that Storms insisted that she sign. This fa.ct alone
indicates that respondent had knowledge that appellant signed
the note as an accommodation to her husband. Furthermore,
appellant took no part in the negotiations between respondent
and Paul leading up to the loan. Additionally, appellant did
not receive any direct benefit from the loan to her husband.
She testified, without contradiction, that the entire pro-
ceeds of the loan went to buy inventory for Paul's business.
Respondent had knowledge of this fact since the contract
itself provided that the proceeds of the loan would go to buy
inventory. Appellant did not take any part in Paul's busi-
ness; she did not even have a key to his office. Thus, it
appears that appellant signed the note solely to enable her
husband to get the loan, and she did not receive any direct
benefit from it.
Cases in other jurisdictions considering a similar
situation have found the wife to be an accommodation party on
less evidence than was presented in this case. In Fithian v.
Jamar (Md. 1979) , 410 A. 2d 569, two partners sought a loan
from a bank in order to enable them to purchase some new
equipment for their business. The bank agreed to loan the
men the money only if each man's wife would co-sign the note.
The note was signed on its face at the bottom right-hand.
corner by the two men and their wives. Since the court found
that the wives' signatures were required before the bank
would make the loan, it held that the wives signed as accom-
modation makers.
In Godfrey State Bank v. Mundy (Ill. 1980), 412 N.E.2d
1131, the wife executed a note along with her husband signing
in the lower right-hand corner without any limitation on her
capacity as a maker. She took no part in the negotiations
prior to execution of the note nor did she derive any direct
benefit from the proceeds of the loan. On a finding that the
wife signed the note only to lend her name to her husband,
the court held that she was an accommodation maker. A simi-
lar result was also reached in Savings Bank of Manchester v.
Kane (Conn. 1978), 396 A.2d 952, and Seaboard Finance Co. of
Connecticut, Inc. v. Dorman (Conn. 1966), 227 A.2d 441.
Although there may have been no express understanding
between appellant and her husband as to which one would be
ultimately liable on the note, such an understanding is
implied in the circumstances of the transaction. This impli-
cation is found primarily in the fact that appellant signed
the note solely to lend her name to her husband to enable him
to obtain the loan, appellant received no direct benefit from
the loan, and appellant took no part in the negotiations
prior to the loan. ' [Tlhe failure of a party to receive a
I
benefit is strong evidence of the party's accommodation
status. ... [Wlhere R comakes a note with A to obtain a
loan to be used solely by A, B will be presumed to be an
accommodation party especially if the loan was negotiated by
A with C, the lender, who requested that A obtain a
co-maker." Hawkland and Lawrence UCC Series, 5 3-415:03
(Art. 3). We hold that appellant was an accommodation party,
and the District Court erred in finding her to be otherwise.
Having found that appellant is an accommodation party
who is entitled to the benefit of the defense provided by
S 30-3-606, we now decide whether respondent's failure to
perfect his security interest in the inventory constituted an
unjustifiable impairment of collateral. It is undisputed
that respondent could have filed a financing statement per-
fecting his security interest in the collateral at least as
early as November 3, 1982. However, respondent did not
perfect his security interest in the inventory at that time.
Instead, he waited until after the First National Bank of
Eureka perfected its security interest in the same inventory.
Had respondent perfected his security interest prior to the
date that the bank did so, respondent would have had priority
over the bank in the collateral, and it would have been
available to him to apply to the debt. See 55 30-9-302,
30-9-312, MCA. Had appellant paid the debt immediately upon
demand by respondent, she would have been subrogated to
respondent's rights against Paul Svetahor, and she would have
been entitled to apply the collateral to the debt. But,
because respondent failed to take the necessary steps to
secure his priority in the collateral which resulted in its
loss to another creditor, the collateral was unavailable to
appellant. Thus, the collateral was unjustifiably impaired.
The great majority of courts in other jurisdictions
considering the issue have held that the failure to perfect a
security interest is an unjustifiable impairment of collater-
al. In Farmers State Bank of Oakley v. Cooper (Kan. 1980) ,
608 P.2d 929, the holder of a note secured by a security
agreement in office equipment brought suit against the accom-
modation maker for payment on the note. The security agree-
ment was never perfected, and the collateral was lost. The
court held that the "failure of the holder of a security
agreement to perfect it, which failure results in a loss of
available collateral to an accommodation party, is an impair-
ment of the collateral." Farmers State - -of Oakley, 608
Bank
P.2d at 936. In Huey v. Port Gibson Bank (Miss. 1980), 390
So.2d 1005, the bank filed suit on two promissory notes
endorsed by Huey. As collateral, a security agreement was
imposed on all inventory, furniture, and appliances owned by
the maker. However, the bank failed to properly file a
financing statement evidencing its interest which allowed the
trustee in bankruptcy to gain priority. The court held that
"the bank's failure to file the financing statement with the
Secretary of State, thereby permitting other creditors to
gain priority, was an unjustifiable impairment." Huey, 390
So. 2d at 1009. Similarly, in Bank of New Jersey v. Pulini
(N.J. 1984), 476 A.2d 797, 799, the court held.:
Since defendant [i.e., the accommodation
maker] had the right to have this col-
lateral assigned to him if he paid off
the loan balance, the bank's failure to
perfect its security interest impaired
the value of that collateral to
defendant.
Anderson, in his treatise on the Uniform Commercial
Code, supports the majority view. In considering what con-
stitutes an impairment of collateral, he states:
The failure to perfect a security inter-
est under Article 9 is an "impairing" of
collateral within the discharge provi-
sion of Article 3. Consequently, where
a creditor is given a chattel mortgage
on an automobile to secure payment of a
note, the chattel mortgage constitutes
"collateral" and if the creditor fails
to file the mortgage with the result
that it has no effect as against a
subsequent purchaser of the automobile,
there is a failure to preserve collater-
al within the meaning of Code S 9-207,
and an accommodation maker on the note
is discharged under Code S 3-606.
Anderson, Uniform Commercial Code, S 3-606:8. See also,
Beneficial Finance Co. of Norman v. Marshall (Okla. 1976) ,
551 P.2d 315; Shaffer v. Davidson (Wyo. 1968), 445 ~ . 2 d13.
We hold that respondent's failure to perfect his secu-
rity interest in the inventory which resulted in its loss to
another secured party constituted an unjustifiable impairment
of the collateral and entitled appellant to a discharge.
However, appellant is discharged only to the extent of the
impairment. Since the entire collateral was lost, she is
entitled to a discharge to the extent of the value of the
collateral. The earliest date that appellant would have been
allowed to look to the collateral was the date demand was
made on her by the respondent. At that point, appellant
could have paid the entire debt due and then taken the col-
lateral for sale under her right of subrogation, if it had
been available. Therefore, on remand, the District Court
shall determine the value of the collateral as of the date of
respondent's initial demand against appellant. Since appel-
lant is still liable as a maker on the note, she is still
obligated to pay the amount of the judgment less the value of
the collateral.
Computation - - Amount - - - - Note
of the Due on the
Appellant contends that the District Court erred in
computing the amount due on the note. Her contention on this
point is without merit. The computation was made within the
general terms of the note and contract.
Reversed in part and remanded.
We concur: