First Dakota Nat. Bank v. Maxon

Decision Date17 October 1994
Docket NumberNo. 18558,18558
Citation534 N.W.2d 37,28 UCCRep.Serv.2d 921
Parties28 UCC Rep.Serv.2d 921 FIRST DAKOTA NATIONAL BANK, Plaintiff and Appellant, v. William MAXON and John T. Parker, Jr., Defendants and Appellees, and Jack Schaefer, Defendant. . Considered on Briefs
CourtSouth Dakota Supreme Court

Michael F. Marlow and Robert C. Brown of Johnson, Heidepriem, Miner & Marlow, Yankton, for plaintiff and appellant.

Gale E. Fisher, Sioux Falls, for appellee, Maxon.

John A. Schlimgen of Stuart and Gerry, Sioux Falls, for appellee, Parker.


First Dakota National Bank appeals the circuit court's judgment discharging persons on a promissory note. We reverse.


William Maxon owned the Skyline Motel and Chateau Lounge located in Yankton, South Dakota. He sold it in September 1987 on a contract for deed to J & J Hotels, Inc. (J & J), a corporation formed by Jack Schaefer and John Parker. Under the terms of the sale contract, J & J assumed Maxon's remaining unpaid obligation on his contract for deed on the property and agreed to pay Maxon a down payment of $100,000. J & J borrowed $50,000 from First Dakota National Bank from which it paid Maxon only $25,000 on the down payment. The balance of $75,000 was due Maxon January 1, 1988, but Schaefer and Parker were unable to borrow it. So Maxon, Schaefer and Parker attempted to arrive at an arrangement whereby in lieu of the remaining cash down payment, Schaefer and Parker would take over Maxon's debt to his lender, American State Bank, on a wholly separate note Maxon made.

Maxon first approached American State with the express purpose of having it loan Schaefer and Parker new money to pay off Maxon's note. He testified at trial that American State's president responded, "I will not loan them the money unless you guarantee it." In Maxon's deposition, which he was confronted with at trial and which he agreed was accurate, Maxon testified the president said, "I will not loan Jack Schaefer and John Parker that money unless you co-sign it." Maxon explained that "co-signing would I guess mean I would be a co-maker of the note and guarantor would be just that." In response to a question from his attorney Maxon admitted he sometimes used "guarantor" and "co-maker" interchangeably. In any event, American State would not loan Schaefer and Parker any money as its president was unsure of their credit standing. Instead, it agreed to write a "renewal" note of Maxon's debt adding Schaefer and Parker as co-signers, but only if Maxon also signed the new note, because in the president's words:

In my mind the loan--the original loan was to Mr. Maxon, and I agreed to let Mr. Schaefer and Mr. Parker sign that note, but I also stated that Mr. Maxon would have to sign the note because it was actually in the eyes of American State Bank that was his obligation.

When Maxon was told his signature would be required on the note, he requested another favor. A former banker and finance company loan officer himself, Maxon entreated, "I don't want them to know I'm on the note." American State acceded. The note showed only Schaefer's and Parker's names typed on its face and on the truth in lending statement. On January 4, 1988, Schaefer and Parker signed first and after they left, Maxon arrived and also signed. All signed in the lower right hand corner, the portion of the note reserved for co-makers' signatures. On the back of the note there was a specific place for a guarantor to sign, which was not used. The apparent result was to renew Maxon's pre-existing debt in a new note with three co-makers. This "due on demand" note (Exhibit # 10) contained language allowing "any extensions and renewals hereof without notice to any maker, co-maker, endorser, surety or guarantor."

In May 1988, First Dakota purchased American State's assets including the note at issue here. When no payment had been made on the note, First Dakota sent Schaefer a letter dated July 22, 1988 stating the current balance with interest on "your Maxon loan assumption" and asked for payment. Five days later, First Dakota sent Maxon a letter stating in part: "The note is still due at this time, so you may want to make a contact with the other people involved." First Dakota sent no notice to Parker. Schaefer paid the interest due on August 17, 1988 and made another payment of interest on October 27, 1988. On that date, First Dakota prepared another renewal note (Exhibit # 18) in the same principal amount as Exhibit # 10, listing Schaefer and Parker as borrowers, with a new due date of October 27, 1989. Unlike Exhibit # 10 the new note provided for installment payments and a variable interest rate. On the lower right hand portion of the note, a signature line for Schaefer, Parker and Maxon was reserved for each, with their names typed underneath. Schaefer explained, however, that he had purchased Parker's stock in J & J and that Parker was no longer associated with the motel contract, so First Dakota crossed out Parker's typewritten name and Schaefer signed. First Dakota did not assign a new number to this renewal note, but carried over the number that had been assigned to the first note.

In January, 1989 when Maxon was in First Dakota on business, the president asked Maxon to also sign this note the same as he had with Exhibit # 10. Maxon refused. The president responded that Maxon would remain liable on the first renewal note. First Dakota had told Schaefer that the second renewal note would not be valid until Maxon also signed it, but it nonetheless continued collecting monthly installments from Schaefer.

On October 27, 1989 the second renewal note became due but was still not paid in full. So First Dakota extended the due date and Schaefer continued making payments until August 10, 1990. Two months later First Dakota sent past due notices on this note to both Schaefer and Maxon. The notices stated the amount past due as $2,000. When Schaefer defaulted on the note, it had a remaining balance of $36,571.72. J & J also defaulted on the sale contract, so Maxon repossessed the motel and lounge and later sold it to another buyer. Schaefer filed for bankruptcy. First Dakota brought suit on the first renewal note (Exhibit # 10) against Maxon and Parker. The trial court found that Maxon became an involuntary surety and his liability was discharged when Schaefer signed the second renewal note with different terms of payment and interest; Parker's liability was likewise discharged when First Dakota crossed his name out on Exhibit # 18. Judgment was entered against First Dakota and it now appeals.


A trial court's findings of fact are presumed correct and we will not seek reasons to reverse. Matter of Estate of Perkins, 508 N.W.2d 597, 600 (S.D.1993); R & S Construction Co. v. BDL Enterprises, 500 N.W.2d 628, 630 (S.D.1993); Insurance Agents, Inc. v. Zimmerman, 381 N.W.2d 218, 219 (S.D.1986). We cannot set aside factual findings unless we are convinced they are clearly erroneous; on the entire evidence this Court must be left with a definite and firm conviction that a mistake has been made. In re A.R.P., 519 N.W.2d 56, 61 (S.D.1994); In re Kindle, 509 N.W.2d 278, 283 (S.D.1993); Perkins, 508 N.W.2d at 600. This Court will not disturb a finding of fact supported by evidence, even if we would have reached a different conclusion on that same evidence. Bass v. Happy Rest, Inc., 507 N.W.2d 317, 324 (S.D.1993); In re Estate of Hobelsberger, 181 N.W.2d 455, 458-59 (S.D.1970). Findings of fact must support conclusions of law. Kindle, 509 N.W.2d at 283; Centrol, Inc. v. Morrow, 489 N.W.2d 890, 894 (S.D.1992); Knodel v. Board of County Comm'rs, 269 N.W.2d 386, 390 (S.D.1978).


Which rules apply when determining accommodation status on a promissory note?

In its Memorandum Opinion (incorporated in the findings) the trial court relied on Varga v. Woods, 381 N.W.2d 247, 250 (S.D.1986) (citing 72 C.J.S. Principal and Surety § 40 (1951)):

A common instance of involuntary suretyship, at least as between the principal and surety themselves, occurs where one party to a contract, as a part of the agreement, assumes an indebtedness owing by the other to a third person, the one assuming the indebtedness becoming the principal, and the former debtor a surety....

Without making specific findings about the parties' intent and without resort to Uniform Commercial Code (UCC) standards for determining accommodation (surety) status, the trial court thereupon concluded

Schaefer and Parker assumed Maxon's indebtedness to the Bank and the Bank accepted this by thereafter receiving payments and negotiating terms with Schaefer. In this case, the relationship of the parties was that of creditor, Bank; principal debtors, Schaefer and Parker; and surety, Maxon.

Upon labeling Maxon a surety, the court reasoned that by extending the time for payment on the note and changing its terms, First Dakota discharged him pursuant to SDCL 57A-3-606(1)(a). South Dakota adopted the UCC in 1966. As this case involves a promissory note--an instrument immured in the UCC--Varga's pre-UCC rationale is inapplicable here. SDCL 57A-1-103; SDCL 57A-3-104(1). 1

Analyzing the facts under the UCC, we begin with SDCL 57A-3-606(1)(a), which provides in part:

(1) The holder discharges any party to the instrument to the extent that without such party's consent the holder

(a) Without express reservation of rights releases or agrees not to sue any person against whom the party has to the knowledge of the holder a right of recourse or agrees to suspend the right to enforce against such person the instrument or collateral or otherwise discharges such person....

A majority of courts have interpreted the term "any party to the instrument" as used in UCC § 3-606 as applying only to accommodation parties, whether appearing as makers or indorsers, and not to nonaccommodation makers. See Ronald A. Anderson, UNIFORM COMMERCIAL CODE §...

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