Beneficial Finance Co. of Norman v. Marshall

• Citation: 551 P.2d 315,18 UCC Rep. 1014
• Decision Date: 17 February 1976
• Docket Number: No. 1,No. 48265,48265,1
• Parties: 18 UCC Rep.Serv. 1014 BENEFICIAL FINANCE CO. OF NORMAN, Appellant, v. Michael L. MARSHALL et al., Appellees
• Court: United States State Court of Criminal Appeals of Oklahoma. Court of Civil Appeals of Oklahoma

Page 315

551 P.2d 315

18 UCC Rep.Serv. 1014

BENEFICIAL FINANCE CO. OF NORMAN, Appellant, v. Michael L. MARSHALL et al., Appellees.

No. 48265.

Court of Appeals of Oklahoma, Division No. 1.

Feb. 17, 1976.

Rehearing Denied April 6, 1976.

Released for Rublication by Order of Court of Appeals April 29, 1976.

Yon & Yon by Clair Yon, Oklahoma City, for appellant.

Stockwell & Pence by James E. Pence, Norman, for appellee Alva D. Garren.

BOX, Judge:

An appeal by Beneficial Finance Company, plaintiff in the trial court, from judgment entered in favor of the defendant below Alva D. Garren, in an action to recover on a note.

The payee on a note brought an action against an accommodation maker to recover the unpaid balance. The trial court held that the accommodation maker had been discharged under Section 3--606 of the Uniform Commercial Code, 12A O.S.1971, § 3--606, and under a surety exoneration statute, 15 O.S.1971, § 377, and the payee appealed. The question is whether a nonconsenting accommodation party is discharged under 12A O.S.1971, § 3--606(1)(b) when the collateral is sold by the principal debtor with the express authority of the secured creditor.

Some time in the latter part of May, 1974, Mr. and Mrs. Marshall contacted appellant Beneficial Finance Company of Norman (Beneficial) for the purpose of borrowing some money and were directed to Mr. Puckett, the office manager. After conferring with them for a few moments, Puckett reached the conclusion that the Marshalls were a bad credit risk and told them that they did not have a sufficient credit record for a loan. The Marshalls then stated that they had a friend, Doug Garren (the appellee) who would be willing to co-sign a note for them if necessary. Puckett replied that he would be glad to discuss the matter with Garren.

Shortly thereafter the Marshalls met with Garren, discussed their financial plight with him and asked him to co-sign. Garren agreed to do so and arranged a meeting with Puckett on May 29, 1974. At this meeting, Puckett told Garren that the Marshalls were a bad credit risk and advised Garren not to co-sign. Puckett's admonition did not dissuade Garren from signing a note but it did cause him to become concerned about having security for the obligation. Consequently he requested that Beneficial take a security interest in Mr. Marshall's custom built Harley Davidson motorcycle, then worth over a thousand dollars. Puckett acceded to this request and prepared a security agreement and accompanying papers for the Marshall's signature. Puckett then approved a loan in the total amount of $480.00, and a note was executed by all parties. Beneficial subsequently perfected a security interest in the motorcycle by filing a financing statement in accordance with 12A O.S.1971, § 9--401.

The controversy leading to this action began shortly after execution of the note. A week before the first monthly installment was due Garren began to suspect that default was imminent. Garren had also learned that Mr. Marshall was attempting to sell the motorcycle which had been put up for collateral and promptly went to the Beneficial office to ask for protection of the collateral. Garren discussed the matter with one of the Beneficial employees, but the substance of the discussion is not entirely clear because the trial testimony is conflicting. It is clear, at least, that Garren demanded that Beneficial do something to protect the collateral and that Beneficial refused because the Marshalls were not then in default. Puckett testified at this point that Garren 'wanted me to pursue them to get it, to get the money, and I told him that was the purpose of putting him on the loan.' At some point in time, either before or after the collateral had been sold, Garren also requested that Beneficial assign the security agreement to him as a condition to his payment of the debt.

Beneficial took no action until the Marshalls had defaulted on the first payment. Afterwards, on or about July 24, 1974, it notified Garren of the default and advised him that it was looking to him for complete payment. The crucial events of this case began unfolding in rapid succession thereafter. Upon learning of the default Garren sought out Mr. Marshall and demanded that he go to the Beneficial office and straighten the matter out. That same day, the 24th of July, Mr. Marshall did confer with one of the Beneficial employees as Garren had requested. Shortly thereafter Garren received a telephone call from a Beneficial employee and was told that Mr. Marshall was going to sell the motorcycle so that he could pay off the loan.

Garren received another telephone call from Beneficial moments later and then went to the Beneficial office; when he arrived he was told that Beneficial and Mr. Marshall had reached an agreement that the motorcycle would be sold to Worthy and Sons Motor Shop. The total purchase price was about $700. Marshall was to receive $345 from Worthy and Sons immediately and promised to apply this amount to the balance due and pay the remainder from his own pocket. The motorcycle sold that day.

Later the same day Garren went to the Beneficial office and learned that Mr. Marshall had been in earlier with about $40 of the difference between the proceeds he was receiving immediately from the sale of the motorcycle and the amount due Beneficial. Beneficial had refused to accept the money until Mr. Marshall came up with the remaining portion of the balance due--an additional amount of $50. Marshall eventually returned with some more money and paid Beneficial $89.20.

Shortly thereafter Mr. Marshall telephoned Puckett and stated that he had a check in the amount of $345 to cover the remaining amount due on the note and offered to bring it to the Beneficial office. Puckett objected, however, to Mr. Marshall having possession of the money and demanded instead that Mr. Marshall direct Worthy and Sons to mail the check to his office. Puckett never received the proceeds and the record does not indicate what happened to it. Mr. Marshall left town and has not been seen since then.

Because it was unable to obtain the proceeds of the sale, Beneficial brought suit against Garren in the Small Claims Division of the District Court of Cleveland County. Garren's principal defense was that he signed the note as an accommodation party and was therefore entitled to invoke the suretyship defense of discharge under 12A O.S.1971, § 3--606(1)(b) because the collateral for the loan had been impaired. The trial court agreed and granted judgment in favor of Garren.

I.

Beneficial concedes Garren's status as an accommodation maker. It's sole contention is that notwithstanding his surety status, Garren is 'absolutely liable' to Beneficial since he is a co-maker.

An accommodation party is liable 'in the capacity in which he has signed.' 12A O.S.1971, § 3--415 (Uniform Commercial Code citations are hereinafter cited by section only). Since Garren executed the note as a maker he was, as Beneficial urges, jointly and severally liable on the note as a co-maker. Section 3--118(e) & (f). This is settled law, see Vinick v. Fourth National Bank of Tulsa, 531 P.2d 327 (Okl.), but it does not resolve the instant controversy. An accommodation party possesses certain defenses not ordinarily available to the maker or indorser, which can be asserted against all but holders in due course without notice of his accommodation status. J. White and R. Summers, Uniform Commercial Code § 13--12, at page 426 (1972). The most important of these defenses are found in Section 3--606. Under Section 3--606(1)(b) the accommodation party is discharged when, without his consent, the holder 'unjustifiably impairs any collateral for the instrument.' The major question in this appeal is whether Garren was discharged under this section when the collateral for the loan was sold by the principal debtor with the express authority of the creditor. In order to resolve this question it is first necessary to consider the meaning of 'impairment of collateral' as used in Section 3--606.

Section 3--606 does little to aid this inquiry because it does not define 'impairment of collateral.' Official Code Comment 5 to that section, however, states: 'As to when a holder's actions in dealing with collateral may be 'unjustifiable', the section on rights and duties with respect to Collateral in the possession of a secured party (Section 9--207) should be consulted.' 12A Okl.St.Ann. § 3--606, Official Comment 5. (Emphasis supplied.)

Section 9--207, to which Comment 5 refers, deals exclusively with the conduct of a pledgee with respect to collateral in his Possession. See generally, Comment, Duty of Pledgee under Section 9--207, 10 Bos.Coll.Ind. & Comm.L.Rev. 301 (1968). Subsection (1) of 9--207 provides, in part, that '(A) Secured party must use reasonable care in the custody and preservation of collateral in his possession.' Does this mean that the impairment of collateral defense of Section 3--606 is available to the surety only when the holder has impaired collateral in his Possession? Some courts, relying on the reference to Section 9--207 in Comment 5 to Section 3--606 have so stated. See, e.g., Commerce Union Bank v. May, 503 S.W.2d 112 (Tenn.); First National Bank v. Helwig, 464 S.W.2d 953 (Tex.Civ.App.); White v. Household Finance Corp., 302 N.E.2d 828 (Ind.App.). See also Murray, Secured Transactions--Defenses of Impairment and Improper Care of Collateral, 1974 Commercial L.J. 265. We do not so interpret Section 3--606.

Admittedly at common law a duty of ordinary care was imposed exclusively upon the pledgee in possession of the security. Restatement of Security § 17 (1941). Furthermore Comment 1 to Section 9--207 makes it clear that the duty of reasonable care under this section 'states the duty to preserve collateral imposed on a pledgee at common law.' Nevertheless, we find no justification for interpreting Section 3--606 as reaching only a...