First Nat.Bank, Giddings v. Helwig
| Decision Date | 10 March 1971 |
| Docket Number | No. 11804,11804 |
| Citation | 9 UCCRep.Serv. 98,464 S.W.2d 953 |
| Parties | 9 UCC Rep.Serv. 98 The FIRST NATIONAL BANK, GIDDINGS, Texas, Appellant, v. Walter HELWIG, Appellee. |
| Court | Texas Court of Appeals |
Allan I. Schneider, Giddings, Robert E. Perman, Smithville, for appellant.
Charles J. Sebesta, Jr., Caldwell, for appellee.
This is a suit on a note by appellant, The First National Bank of Giddings, against appellee, Walter Helwig. The trial court entered judgment for appellant for $10,738.58, being one half of appellant's claim. We reverse the judgment of the trial court.
In 1959 Invader Manufacturing Company located in Giddings and began fabricating boats. Appellee was president of Invader until December, 1961 when he sold out his interest. At the same time, appellee co-signed two notes totaling $17,875.00 as surety for Invader in favor of appellant. As security, appellant took a chattel mortgage on all of the inventory and equipment of Invader while appellee took a second and inferior chattel mortgage on the same property.
In July of 1965 Invader was failing financially, and its management agreed 'to turn over' to appellant all of the mortgaged property. However, appellant did not sell this property pursuant to the provisions of the chattel mortgage nor did it obtain actual possession, but rather it permitted Invader to continue in possession hoping that the financial difficulty could be solved. Appellee was aware of this arrangement and did not demand that appellant sell the equipment. Invader fared no better, and new management 'took over' the plant, still using the mortgaged property . An unspecified amount of that property was destroyed by fire in December of 1965.
The court found that in June of 1966 appellant told appellee that a lawsuit would be filed against him as surety on the original notes unless some agreement could be reached. Appellee then on June 10, 1966 signed a note for $17,875.00 in his own name in favor of appellant. Appellee testified on trial that he signed the June 10 note as a favor to appellant to protect appellant against a charge-off by bank examiners. The June 10 note was renewed by appellee in 1967, and again in March, 1968, the latter one being the basis for this appeal.
Upon trial to the court, judgment was entered for appellant for one half the amount claimed. The court filed findings of fact and conclusions of law, and concluded, among other things, that there was adequate consideration for the renewal note.
Appellant has assigned one point of error 1 while appellee has assigned one cross-point. 2
Appellee's position is that the appellant negligently failed to foreclose and dispose of the mortgaged property, and that as a result of such negligence the property was destroyed by fire. Appellee reasons further that appellant, in permitting the security to be destroyed, released in full appellee's obligation on the note, and hence the renewal note was invalid for failure of consideration. Appellant's position is that any negligence involved was merely passive and did not serve to discharge appellee's liability on the note and hence the renewal note was supported by consideration. Additionally, appellant claims its forbearance in suing appellee was adequate consideration for the renewal note.
Many of the earlier cases stated that 'passive negligence' of the creditor, resulting in damage to the secured property, would not serve to discharge the surety's liability on the note, while 'active negligence' would effect a discharge of the surety's liability to the extent that the secured property was damaged. 3 Attempts to characterize the creditor's conduct as 'passive' or 'active' were hardly satisfactory. For example, a creditor's failure to record a chattel mortgage, ostensibly 'passive' in character, was held to be 'active' negligence. 4
We think the better rule is simply that a creditor in possession of property securing a debt owes a duty of ordinary care to secure and preserve that property. Blocksom v. Guaranty State Bank & Trust Company, 251 S.W. 1025 (Tex.Com.App.1923). If the creditor breaches that duty, resulting in the destruction of or damage to the security, the surety is entitled to be discharged from liability on the note to the extent of the reasonable value of such security or to the extent of the loss in value of the security. Blocksom v. Guaranty State Bank & Trust Company, supra...
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