Cooper Investments v. Conger

• Decision Date: 27 April 1989
• Docket Number: No. 86CA0010,86CA0010
• Citation: 775 P.2d 76
• Parties: 8 UCC Rep.Serv.2d 563 COOPER INVESTMENTS, Robert Rifkin, and Gerald Kernis, Plaintiffs-Appellees and Cross-Appellants, v. Robert L. CONGER, Thomas H. Stroh, and Jack W. Welsh, Defendants-Appellants and Cross-Appellees. . I
• Court: Colorado Court of Appeals

Page 76

775 P.2d 76

8 UCC Rep.Serv.2d 563

COOPER INVESTMENTS, Robert Rifkin, and Gerald Kernis, Plaintiffs-Appellees and Cross-Appellants, v. Robert L. CONGER, Thomas H. Stroh, and Jack W. Welsh,

Defendants-Appellants and Cross-Appellees.

No. 86CA0010.

Colorado Court of Appeals,

Div. I.

April 27, 1989.

Rehearing Denied May 25, 1989.

Dill, Dill & McAllister, Jon Stonbreaker, Lucien Dhooge, Denver, for plaintiffs-appellees and cross-appellants.

Eric J. Pringle, Edward E. Pringle, Denver, for defendants-appellants and cross-appellees.

HUME, Judge.

In this action to enforce a written guaranty agreement for payment of a promissory note, defendants, Robert L. Conger, Thomas H. Stroh, and Jack W. Welsh (guarantors), appeal the judgment in favor of plaintiffs, Cooper Investments, Robert Rifkin, and Gerald Kernis (creditors). Guarantors assert that the trial court erred in rejecting their affirmative defense of discharge by reason of a September 1982 modification in the terms of the note. They further assert that the court erred in finding that they had waived any rights which the Uniform Commercial Code might otherwise have granted them. We reverse and remand with directions.

On May 31, 1978, creditors sold to guarantors all of the outstanding shares of stock in a corporation which owned the assets of a certain restaurant and bar. In exchange, creditors were given a promissory note in which the corporation promised to pay creditors the principal sum of $450,000 together with interest at the rate of 8% per annum. The note called for payment of principal and interest in 67 monthly installments.

As security for the note, creditors were granted a security interest in certain personal property used in the restaurant and bar. In addition, guarantors furnished creditors with a separate written guaranty, which provided that they jointly and severally guaranteed "the prompt payment of the note...." It further provided that: "[T]his shall be a continuing guarantee extended to any note given in extension or renewal of this note notwithstanding the original note may have been surrendered, provided the liability of the [guarantors] shall not be increased over the amount contained in the original note...."

In November 1979, the guarantors entered into a contract to sell the corporation to a third party. Prior to closing that contract, the guarantors renegotiated the obligation due on the existing note, and a "replacement note" in favor of the creditors was generated. That note reaffirmed the corporation's promise to pay the then unpaid principal balance of the existing note, $390,000, together with interest at the rate of 8% per annum. It also extended the required payments beyond the original 67-month period, and further provided that it was understood that the guarantors were not thereby released from their guaranty agreement. Thereafter, the guarantors sold the corporation to the third party and were no longer involved in operating the restaurant and bar or in the management of the corporation.

In October 1981, the corporation entered into a joint venture agreement with Iona, Inc., concerning the operation of the restaurant and bar. As a result, all of the past due payments on the note were brought current, and Iona assumed the corporation's duty to pay the remaining installments.

In September 1982, the president of Iona approached creditors about a change in the payment terms of the note. They reached an oral agreement to reduce the monthly payments of principal and interest from $8,000 to $5,000 per month for eight months and also to increase the rate of interest from 8% to 12% per annum. After May 1983, no further payments were made on the note. Iona later defaulted on the note and creditors brought suit against guarantors. The trial court rejected guarantors' affirmative defenses and entered judgment jointly and severally against them.

I.

Guarantors contend that the trial court erred in rejecting their affirmative defense of total discharge by reason of the September 1982 modification in the terms of the note. They argue that the modification materially altered the obligation to their detriment and without their consent. We agree in part.

A.

Guarantors first argue that the trial court erred in determining that the September 1982 alterations did not constitute a material alteration of the principal debtor's obligation under the note. We agree.

In general, when a creditor has chosen to alter materially the principal debtor's obligation to the guarantor's detriment, without the guarantor's consent, that alteration discharges the guarantor's liability. C.I.I.S. Partners v. Miller, 762 P.2d 700 (Colo.App.1988); Jackson v. First National Bank, 28 Colo.App. 415, 474 P.2d 640 (1970).

An alteration is material if it changes the nature of the principal debtor's obligation, "either by imposing some new obligation ... or by taking away some obligation already imposed." See A. Stearns, Law of Suretyship § 6.3 (1951). Accordingly, the rate of interest which the principal debtor is required to pay under a promissory note is a material term of that note. See Citizens Bank v. Lair, 687 S.W.2d 268 (Mo.App.1985); First National Bank v. Abraham, 97 N.M. 288, 639 P.2d 575 (1982).

Here, the undisputed evidence in the record establishes that, in September 1982, creditors and the president of Iona orally agreed to modify the terms of the note, by reducing the required monthly payments of principal and interest from $8,000 to $5,000, and by increasing the interest rate from 8% to 12% per annum. We conclude that as a matter of law the change in the rate of interest materially altered the principal debtor's obligation under the note, and since the change involved an increase in the rate, it was detrimental to the guarantors.

B.

Guarantors next argue that they did not consent to these alterations. They urge that the alterations were not within the scope of the written guaranty agreement and that none of them otherwise consented to the alterations. In the alternative, they assert that if guarantor Conger consented, he had no authority to bind the other guarantors.

We agree that the alterations were not within the scope of the written guaranty. Here, however, the record contains some evidence which, if believed by the trial court, may support findings that at least some of the guarantors subsequently consented to the alteration. And, since the trial court made no specific findings as to whether any of the guarantors otherwise consented, or whether any guarantor who did so consent possessed authority to bind the other guarantors, we decline to make such findings on appeal and remand to the trial court for determination of these issues.

The consent of a guarantor to an alteration is binding whether it is expressed as part of the initial obligation or is given later, either before or subsequent to the alteration. C.I.I.S. Partners v. Miller, supra. Such consent need not be evidenced by a writing. Lincoln v. Transamerica Investment Corp., 89 Wash.2d 571, 573 P.2d 1316 (1978); Restatement of Security § 128 comment c (1941).

In determining the scope of a guarantor's consent to future alterations, a guaranty agreement must be "strictly construed and reasonably interpreted according to the intention of the parties as disclosed by the surrounding circumstances." Continental National Bank v. Dolan, 39 Colo.App. 16, 564 P.2d 955 (1977). Further, "[t]he liability of the guarantor is not to be extended by implication beyond the express limits or terms of the instrument, or its plain intent. It has been said a guarantor is, like a surety, a favorite of the law." Burkhardt v. Bank of America, 127 Colo. 251, 256 P.2d 234 (1954).

The guaranty agreement here expressly provided that it shall extend to "any note given in extension or renewal" of the original note. However, such consent to future extensions and renewals was not unlimited. The guaranty specifically provided that the guarantors did not consent to future extensions or renewals that would increase their liability over the amount contained in the original note plus accrued and unpaid interest. The issue before us is whether the parties intended to limit the guarantors' consent to future extensions and renewals to the interest rate set in the original note.

Here, the guaranty agreement does not expressly provide that the guarantors consented to a future increase in the rate of interest. And, the fact that guarantors consented to a future "extension" or "renewal" of the note does not necessarily imply that they also consented to an increase in the interest rate.

An "extension" or "renewal" note extends the time for payment of principal beyond the original period of the note, see Black's Law Dictionary 525 (5th ed. 1979), and necessarily increases the total amount of interest to be paid. However, such an increase in the amount of interest to be paid is dependent on the extension of time rather than a change in the interest rate to be applied to the debt. Since the guaranty must be strictly construed, we conclude that the language in the guaranty authorizing extensions and renewals neither contemplates nor authorizes an increase in the rate of interest. See Liberty National Bank v. Dvorak, 199 N.W.2d 414 (N.D.1972).

C.

Guarantor Conger maintains that if the trial court finds he otherwise consented to the material alterations, and that he had no authority to bind the remaining guarantors, he would still be entitled to a partial discharge. He argues that since, under those circumstances, the remaining guarantors would be totally discharged by operation of law, he should be discharged to the extent that he could have claimed contribution from his discharged co-guarantors. We disagree.

A creditor's release of a guarantor, without the consent of the...