El-Ce Storms Trust v. Svetahor

• Decision Date: 28 August 1986
• Docket Number: EL-CE,No. 85-591,85-591
• Citation: 724 P.2d 704,223 Mont. 113
• Parties: , 2 UCC Rep.Serv.2d 1593 STORMS TRUST, Cecil H. Storms and Elsie S. Storms, Plaintiffs and Respondents, v. Paul Allen SVETAHOR and Ann Gail Svetahor, Defendants and Appellants.
• Court: Montana Supreme Court

Page 704

724 P.2d 704

223 Mont. 113, 2 UCC Rep.Serv.2d 1593

EL-CE STORMS TRUST, Cecil H. Storms and Elsie S. Storms Plaintiffs and Respondents, v. Paul Allen SVETAHOR and Ann Gail Svetahor, Defendants and Appellants.

No. 85-591.

Supreme Court of Montana.

Submitted on Briefs April 10, 1986.

Decided Aug. 28, 1986.

Sverdrup & Spencer, Scott Spencer, Libby, for defendants and appellants.

Hedman, Hileman & Lacosta, Donald E. Hedman, Whitefish, for plaintiffs and respondents.

TURNAGE, Chief Justice.

This is an appeal from a judgment entered in the Nineteenth 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 divorced. 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 inventory 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 respondent, 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 of the Appeal

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 of notice of entry of judgment ... [Emphasis added.]

This is a case where service of notice of entry of judgment is required by Rule 77(d) because appellant made an appearance 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 appellant. 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 description 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 of the Collateral

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 Sec. 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 instrument 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 P.2d 563, 566.

Montana adopted Sec. 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 provides 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 defenses here provided are not limited to parties who are "secondarily liable," but are available to any party who is in the position of a surety, having a right of recourse either on the instrument or dehors it, including an accommodation maker or acceptor known to the holder 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, endorsers, and guarantors would be included, but makers and co-makers would not.

There is some disagreement among the states over whether Sec. 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 jurisdictions hold that ordinary makers and co-makers are discharged along with parties in the position of sureties. See e.g. Crimmins 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 (1968), 245 Ark. 703, 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. (1975), 62 Ill.2d 16, 338 N.E.2d 179; Peoples Bank, Etc. v. Pied Piper Retreat, Inc. (1974), 158 W.Va. 170, 209 S.E.2d 573; Smiley v. Wheeler (Okla.1979), 602 P.2d 209; Bank of New Jersey v. Pulini (1984), 194 N.J.Super. 163, 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 Sec. 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...