In re Sanders, Bankruptcy No. ED 84-90M

• Decision Date: 21 January 1987
• Docket Number: Bankruptcy No. ED 84-90M,Adv. No. 85-186M.
• Citation: 75 BR 751
• Parties: In re John SANDERS and Mary Ellen Sanders, Debtors. Mary Ellen SANDERS, Plaintiff, v. FIRST NATIONAL BANK OF CAMDEN, ARKANSAS, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Arkansas

75 B.R. 751 (1987)

In re John SANDERS and Mary Ellen Sanders, Debtors Mary Ellen SANDERS, Plaintiff, v. FIRST NATIONAL BANK OF CAMDEN, ARKANSAS, Defendant.

Bankruptcy No. ED 84-90M, Adv. No. 85-186M.

United States Bankruptcy Court, W.D. Arkansas, El Dorado Division.

January 21, 1987.

Isaac A. Scott, Jr., Little Rock, Ark., for debtors.

Joseph Hickey, El Dorado, Ark., for plaintiff.

Allen P. Roberts, Camden, Ark., for defendant.

MEMORANDUM OPINION

JAMES G. MIXON, Bankruptcy Judge.

On November 1, 1984, John and Mary Ellen Sanders filed a joint voluntary petition for relief under the provisions of chapter 11. Because of the potential conflict of interest, separate counsel was employed by each of the debtors-in-possession. On May 6, 1985, Mrs. Sanders filed this complaint to set aside First National Bank of Camden, Arkansas' (FNB), mortgage on the South ½ of the Southeast ¼ of Section 36, Township 13 South, Range 19 West, Ouachita County, Arkansas, and to determine that Mrs. Sanders' liability on note No. 90-67834 has been discharged.

Other actions were filed by Mrs. Sanders against The Merchants and Planters Bank, Camden, Arkansas, AP 85-183M, AP 85-188M and AP 85-189M, FNB, AP 85-184M and AP 85-187M, and the Stephens Security Bank, AP 85-185M. All of these adversary proceedings were consolidated for trial by agreement. A separate memorandum opinion will be issued in each case.

The proceeding before the Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B) and (K). The Court has jurisdiction to enter a final judgment in the case. The following shall constitute the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule of Procedure 7052.

Mrs. Sanders was born and raised in Camden. She lived and worked in New Orleans for about six years after graduating from college but has not worked from the time of her marriage to Mr. Sanders in 1968 until after the petition was filed. Mr. and Mrs. Sanders moved to Camden in 1969.

Mrs. Sanders inherited as her separate property substantial amounts of property from her father's estate. She also acquired separate property from her mother.

On April 7, 1982, John Sanders, Inc., Architect, a closely held corporation owned solely by Mr. Sanders, executed a promissory note to FNB in the sum of $50,000.00. The note was signed John Sanders, Inc., Architect, by John Sanders. Mrs. Sanders signed the note as an endorser. The note provided that interest accrued at FNB's prime rate but in no event less than 12% per annum. The note was due to be repaid in one installment of principal and all accrued interest on demand and if no demand then ninety days from April 7, 1982.

Also, on April 7, 1982, Mr. and Mrs. Sanders executed a mortgage on Mrs. Sanders' separate property having the following property description:

The South ½ of the SE¼ of Section 36, Township 13 South, Range 19 West, situated in Ouachita County, Arkansas.

This mortgage was given to secure the repayment of the above stated indebtedness. The mortgage was properly recorded. The mortgage has not been released of record.

Mr. Sanders, on behalf of John Sanders, Inc., Architect, executed an extension agreement on July 6, 1982, extending the due date of the note ninety days from July 6, 1982. John Sanders, Inc., Architect, also paid $2,034.24 interest at the time of the execution of the extension. The note was also extended by Mr. Sanders on behalf of John Sanders, Inc., Architect, on October 15, 1982, January 17, 1983, April 14, 1983, August 4, 1983, November 9, 1983, February 7, 1984, and June 11, 1984. Over the period of the various extensions the principal balance was reduced to $39,000.00 and all accrued interest paid. The interest rate was also adjusted upward several times by virtue of the extension agreements. All payments of principal and interest were made by John Sanders, Inc., Architect. At no time was Mrs. Sanders advised that the due date was being extended or the interest rate increased.

I MRS. SANDERS STATUS AS AN ACCOMMODATION ENDORSER

Both sides have presented arguments on the issue of whether Mrs. Sanders signed the note as an accommodation maker or primary maker.

Ark.Stat.Ann. § 85-3-606(1)(a) (Add. 1961) provides as follows:

(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, except that failure or delay in effecting any required presentment, protest or notice of dishonor with respect to any such person does not discharge any party as to whom presentment, protest or notice of dishonor is effective or unnecessary.

Courts which have considered the question of whether the defenses under Uniform Commercial Code § 3-606 are available only to accommodation parties are divided. Compare Federal Deposit Ins. v. Blue Rock Shopping Center, 766 F.2d 744, 749 (3rd Cir.1985) (§ 3-606 is meant to apply only to parties who act as sureties and to co-makers who sign a note to accommodate the primary obligor and who have a right of recourse against the primary obligor) with Bishop v. United Missouri Bank of Carthage, 647 S.W.2d 625, 629 (Mo.App. 1983) (plain unambiguous language of statute makes defenses available to any party to the instrument including co-makers). The Supreme Court of Arkansas has held specifically that the defenses under Ark. Stat.Ann. § 85-3-606 (Add.1961) are available to both makers and accommodation parties. Rushton v. U.M. & M. Credit Corporation, 245 Ark. 703, 434 S.W.2d 81 (1968). Regardless of Mrs. Sanders' status, under Arkansas law she is entitled to assert the defenses available pursuant to Ark.Stat.Ann. § 85-3-606 (Add.1961).

II DISCHARGE OF NOTE LIABILITY

Ark.Stat.Ann. § 85-3-606(1)(a) and (2)(a), (b) and (c) (Add.1961) provide as follows:

(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, except that failure or delay in effecting any required presentment, protest or notice of dishonor with respect to any such person does not discharge any party as to whom presentment, protest or notice of dishonor is effective or unnecessary.

(2) By express reservation of rights against a party with a right of recourse the holder preserves

(a) all his rights against such party as of the time when the instrument was originally due; and

(b) the right of the party to pay the instrument as of that time; and

(c) all rights of such party to recourse against others.

If the due date of the note is extended without the consent of a party eligible to rely on U.C.C. § 3-606 that party is discharged from liability to the holder of the note. Holcomb State Bank v. Adamson, 107 Ill.App.3d 908, 63 Ill.Dec. 704, 708, 438 N.E.2d 635, 639 (1982); First Nat. Bank of Layton v. Egbert, 663 P.2d 85, 87 (Utah 1983); Varga v. Woods, 381 N.W.2d 247, 252 (S.D.1986).

Mr. Sanders' note was payable on demand but if no demand was made then the note was due ninety days from April 7, 1982. The due date of the note was extended numerous times by agreements between Mr. Sanders and FNB as recited above.

FNB argues that Mrs. Sanders is deemed to have given her consent to the extension of the due date because of a printed provision in the note which provides as follows:

ENDORSEMENT — SECURED

In consideration of the making at the request of the undersigned of the loan evidenced by the note hereon, the undersigned hereby jointly and severally endorse said note and do guarantee the payment thereof and bind themselves to and with First National Bank of Camden, Arkansas, its successors, endorsers or assigns, for the prompt payment of the said note when due and hereby consent to the terms and conditions of the said note and that the collateral security for the said note may be exchanged for other collateral, or surrendered in whole or in part from time to time, and that the time of payment of said note or of any of the security therefor may be extended, or the rate of interest changed without notice to or further assent from the undersigned, and that the undersigned will remain bound hereon notwithstanding such change, substitution, surrender or extension. (emphasis added).

The proper interpretation of this provision is governed by Ark.Stat.Ann. § 85-3-118(f) (Add.1961). This subsection provides, in part, as follows:

Unless otherwise specified consent to extension authorizes a single extension for not longer than the original period. A consent to extension, expressed in the instrument, is binding on secondary parties and accommodation makers.

Comment 7 of the Official Comments to Ark.Stat.Ann. § 85-3-118 (Add.1961) states, in part, as follows:

Subsection (f): This provision is new. It has reference to such clauses as "The makers and indorsers of this note consent that it may be extended without notice to them." Such terms usually are inserted to obtain the consent of the indorsers and any accommodation maker to extension which might otherwise discharge them under Section 3-606 dealing with impairment of recourse or collateral. An extension in accord with these terms binds secondary parties.

The question presented is the proper interpretation of the "ENDORSEMENT-SECURED" provision. There are three interpretations possible for this provision: (1) the provision cannot reasonably be construed to grant any consent to extension of the due date; (2) the provision can reasonably be construed to grant consent, but...