dissenting. I believe the chancellor’s decision should be reversed because of NBC’s non-disclosure of Gurvis Vines’ financial condition to appellant. Although appellant was clearly obligated on the 1986 note for $ 120,000.00, I believe that NBC’s actions with regard to appellant’s guaranty of the 1988 note provides a defense to appellant.
In affirming the chancellor’s decision, the majority refuses to apply the protection of § 124(1) of the Restatement of Security (1941), adopted by the Arkansas Supreme Court in Camp v. First Financial Federal Savings and Loan Association, 299 Ark. 455, 772 S.W.2d 602 (1989), to appellant. Section 124(1) provides a defense to the surety if the creditor knows facts, unknown to the surety, that materially increase the risk beyond that which the creditor has reason to believe the surety intends to assume and does not communicate these facts to the surety. Although I agree with the majority that whether this nondisclosure is material is a question of fact, I strongly believe that the chancellor’s finding that NBC did not conceal material facts about Mr. Vines from appellant is clearly erroneous.
The majority opinion states § 124 is merely an application of the rule of contract law that fraud creates a defense. I strongly disagree with the majority’s implication that one seeking to use this section as a defense must establish fraud. In Camp v. First Fin. Fed. Sav. and Loan Ass’n, 299 Ark. at 457, 772 S.W.2d at 604, the Arkansas Supreme Court held that it is not necessary for the surety to prove bad faith or fraudulent misrepresentation; only the elements set forth in § 124 need be proved. I am convinced that appellant proved these elements.
When appellant signed the guaranty of the 1988 note, he was ignorant of Gurvis Vines’ poor financial situation and of Mr. Vines’ lengthy, close relationship with NBC and its president, Mr. Cook. Although Mr. Cook testified that he informed appellant that Mr. Vines was a “problem borrower” and could not borrow this amount of money on his own, this information did not adequately inform appellant of the pertinent facts affecting the risk he was undertaking. The majority opinion does not attach enough significance to Mr. Cook’s long relationship with Mr. Vines and his extensive personal knowledge of Mr. Vines’ poor financial situation. He knew that Mr. Vines was not able to pay off his $420,000 note to NBC. Indeed, Mr. Cook had intimate knowledge of Mr. Vines’ prior history of being unable to pay off his debts. He knew that, when Mr. Vines signed the $420,000 note, his older notes to NBC were not performing as planned. Mr. Cook also had information about Mr. Vines’ bad financial situation that he had obtained during their partnership in an oil investment; in fact, he knew that Mr. Vines still owed money on that venture. Mr. Cook had reason to believe that appellant was ignorant of these facts, yet he withheld this information from appellant. It is clear that the information withheld from appellant materially increased appellant’s risk far beyond that which Mr. Cook had reason to believe he intended to assume.
Additionally, the majority’s description of the oil wells’ performance as a “disappointment” is not completely appropriate. When the 1988 note was signed, the oil wells were not producing at all, and the evidence reveals little justification for Mr. Vines’ optimism that he could make them produce adequate income to retire the debt.
Appellant’s argument that, had he known these facts, he would not have signed the 1988 guaranty, is thoroughly believable and persuasive. I also cannot agree with this court’s approval of the chancellor’s refusal to extend the protection of § 124 of the Restatement of Security to appellant because he is a well-educated, sophisticated businessman. That section makes no such distinction among sureties. Although appellant clearly understood the liability of a guarantor, he did not know the full extent of the risk he was undertaking. In sum, Mr. Cook knew facts about Mr. Vines, which he had reason to believe appellant did not know, that materially increased appellant’s risk beyond that which appellant intended to assume in executing the guaranty. Because I believe appellant established his defense under § 124,1 would reverse.