Hughes v. Tyler, 55035

• Decision Date: 26 February 1986
• Docket Number: No. 55035,55035
• Citation: 485 So.2d 1026
• Parties: 42 UCC Rep.Serv. 1699 John E. HUGHES, Jr. v. Maurice F. TYLER.
• Court: Mississippi Supreme Court

Page 1026

485 So.2d 1026

42 UCC Rep.Serv. 1699

John E. HUGHES, Jr. v. Maurice F. TYLER.

No. 55035.

Supreme Court of Mississippi.

Feb. 26, 1986.

John E. Hughes, III, Wells, Wells, Marble & Hurst, Jackson, for appellant.

P.J. Townsend, Jr., Townsend, McWilliams & Holladay, Drew, for appellee.

Before WALKER, P.J., and HAWKINS and DAN M. LEE, JJ.

HAWKINS, Justice, for the Court:

John E. Hughes Jr., appeals from an order of the Leflore County Circuit Court dismissing Maurice F. Tyler from his obligation as surety on a promissory note held by Hughes.

The issues presented by this appeal are (1) whether Tyler, who was the original maker of the note is entitled to the protections of § 75-3-606 Miss.Code Ann.; and (2) whether Hughes by executing a partial release and subordination agreement unreasonably impaired the collateral and thereby released Tyler from his obligation on the note.

We affirm on both issues.

FACTS

On March 15, 1977, Tyler bought 1,256 acres of land in Leflore County, from Hughes. The Travelers Indemnity Company made Tyler a loan on the land for $1,000,000, which was secured by a first deed of trust. To secure part of the purchase price, Tyler gave Hughes a promissory note for $100,000 due on or before March 15, 1982. On September 1, 1978, Tyler conveyed the land to Whisenhunt and others (hereinafter Whisenhunt), and by the mutual agreement of all parties, Whisenhunt was allowed to assume the Travelers and Hughes loans.

Although the record is not clear on the circumstances surrounding the financial arrangements Whisenhunt made to purchase the property, apparently Whisenhunt assumed the $980,000 mortgage that was outstanding with Travelers, paid off $500,000 of that loan, reducing it to a total of $480,000 and Travelers in turn released 776 On September 5, 1978, Hughes executed and delivered a subordination instrument in favor of Travelers which further subordinated his $100,000 promissory note to the two deeds of trust which Travelers held against Whisenhunt.

acres as security for the loan. Whisenhunt obtained a new loan from Travelers Insurance Company in the amount of $790,000 which consisted of the $500,000 used to pay down on the original loan and an increase of $290,000. As security for this loan, Whisenhunt put up the 776 acres released by Travelers on the original loan plus an additional 15 acres it had acquired.

Hughes agreed to the assumption of the Tyler note by Whisenhunt and from that point on Hughes accepted Whisenhunt as his debtor under the Tyler note. Hughes accepted principal and interest payments from Whisenhunt.

On February 4, 1980, Whisenhunt prepaid the sum of $50,000 on the principal balance of the Tyler note, leaving a principal balance of $50,000 on the note. In exchange of the prepayment of the $50,000 principal, Hughes executed another subordination agreement in favor of the Travelers Insurance Company. This subordination agreement permitted Travelers to cancel the $480,000 loan and make a new loan for $600,000.

As further consideration of the prepayment of the $50,000 principal, Hughes executed a partial release to Whisenhunt. In the partial release, Hughes released 776 acres of land from his second mortgage. ¹

The property that remained after the subordination agreement and partial release to secure the remaining $50,000 principal left on the Hughes note was a second mortgage to 480 acres of the original Hughes property behind a first mortgage of $600,000 at an interest rate of 11%.

Tyler was not aware of the last subordination agreement and partial release executed by Hughes in favor of Whisenhunt prior to its execution and Tyler did not consent to it.

The only testimony in the record as to the fair market value of the property is the testimony of Hughes that in February, 1980, the land surrounding the property in question was selling for between $1,400 and $1,600 per acre. The parties in their stipulation agreements stipulated that on February 4, 1980, the fair market value of the property was in excess of $1,000 per acre.

The balance of the promissory note became due and payable on March 15, 1981, and is now past due, no amount having been paid to Hughes. Hughes made a demand upon Tyler for payment of the promissory note, but Tyler failed or refused to pay the note.

Whisenhunt defaulted on the payments to Travelers and on April 17, 1982, Travelers foreclosed its deed of trust on the property. No party other than Travelers bid any amount at the foreclosure sale, and Travelers bid in the property for the principal, interest and cost of the sale that was due on its loans. Hughes received no funds from the sale to apply to his note as a second lien holder. Appendix A is an explanation of the transactions which took place in this case and is designed to show the effect Hughes's subordination agreement and partial release of February 4, 1980, had on Tyler's security as a surety for Whisenhunt.

The trial court found that Hughes released Tyler from his obligation to pay the promissory note when he executed the partial release and subordination agreement without the knowledge or consent of Tyler.

STATEMENT OF THE LAW

A preliminary consideration must be resolved by this Court before considering Hughes's contentions, that being whether the U.C.C. applies to a negotiable promissory note secured by a real estate mortgage. The resolution of this consideration is not however, outcome determinative as the common law rule is the same as that embodied in § 75-3-606 Miss.Code Ann. (1972). Zastrow v. Knight, 56 S.D. 554, 229 N.W. 925 (1930).

Section 75-3-112 Miss.Code Ann. (1972) states that "The negotiability of an instrument is not affected by ... a statement that collateral has been given to secure obligations .." This Court concludes, as did the Arizona Supreme Court in Best Fertilizers of Arizona, Inc. v. Burns, 117 Ariz. 178, 571 P.2d 675 (1979), that while the U.C.C. does not apply to security interest in realty, the promissory note is not a security interest in realty. The note does not cease to be negotiable even though it is secured by a mortgage. This view is further supported by Anderson, in his treatise on the U.C.C., Vol. 6, at 563.

Hughes's first contention is that § 75-3-606 and the discharge rules therein are not available to the original maker of a note. There is conflict of authority as to whether the term "any party" as found in U.C.C. § 3-606 applies to a primary party who did not sign for accommodation. A literal reading of the language of § 3-606 makes it so applicable. ² There is however, a respectable line of authority that holds contra, and refuses to discharge a primary party unless he is in the position of a surety or is an accommodation party. ³ Today, we hold this much, that the mortgagee or security holder cannot escape some responsibility to such non-security interest debtor to avoid a harmful value impairment in the collateral. Any party, who has no right, title or interest in the security, will be released under the provisions of § 75-3-606 by such an action of the security holder. We conclude that Tyler is such a party.

Something approaching a trust relationship exists between the holder of a note and a party who has signed the note but has no right, title, or interest in the security. The holder cannot be at liberty to dispose of the collateral as he sees fit to the detriment of such non-protected party, and then expect such party to make up the difference between the impaired security and the debt. To hold otherwise would put the parties to the note at the mercy of the security holder.

The final issue to be decided by this appeal is whether Hughes unreasonably impaired the security so as to release Tyler under § 75-3-606 Miss.Code Ann. (1972).

As can be seen from the chart, which is Appendix "A" to this opinion, after Hughes executed the subordination agreement, allowed Travelers to issue a new increased loan to Whisenhunt, released the 776 acres of collateral in exchange for $50,000.00 payment on the principal and allowed an increase in the interest rate to 11%, there technically still remained on paper sufficient collateral to secure the loans.

Hughes argues that the time for determining whether there has been an impairment of collateral security is the time of the transaction which is alleged to have impaired the security, as opposed to some later date. We need not address that issue as we conclude that Hughes unreasonably impaired the security on February 4, 1980, when he executed the subordination agreement and released the 776 acres of land as security.

Real estate is not a liquid commodity. It is rarely readily marketable at its current appraised market value. Each parcel is unique, its sale depending upon locating a buyer willing to pay the price asked. For these and other reasons, it is common practice for lending institutions to require a comfortable margin between the amount of money loaned and the current appraised market value of the realty on which it is loaned.

According to Hughes, the realty was worth from $1,400 to $1,600 per acre. Until he executed the partial release on February 4, 1980, the debt was 71% of a $1,400 per acre land value and 62% of a $1,600 per acre land value. The partial release increased the debt percentage to 89% of a $1,400 per acre land value and 78% of a $1,600 per acre land value. See Appendix A.

An individual who sells real estate to another and allows the buyer to assume the mortgage and agrees to stay on that mortgage with the buyer has a right not to have the margin of security of the loan diminished to his detriment, even though on paper the loan would remain completely secured.

This Court is not without sympathy to Hughes, who no doubt was trying to be helpful to Whisenhunt. We must also observe, however, that if Hughes wanted to see how close he could put his foot to the fire without getting burned, he should be required to use his own and not Tyler's foot.

A...