Kane v. Citizens Fidelity Bank and Trust Co.

• Decision Date: 24 February 1984
• Citation: 668 S.W.2d 564
• Parties: 38 UCC Rep.Serv. 254 Maurice KANE and David D. Massie, Appellants/Cross-Appellees, v. CITIZENS FIDELITY BANK AND TRUST COMPANY, Appellee/Cross-Appellant.
• Court: Kentucky Court of Appeals

Page 564

668 S.W.2d 564

38 UCC Rep.Serv. 254

Maurice KANE and David D. Massie Appellants/Cross-Appellees, v. CITIZENS FIDELITY BANK AND TRUST COMPANY Appellee/Cross-Appellant.

Court of Appeals of Kentucky.

Feb. 24, 1984.

Rehearing Denied May 4, 1984.

Fred M. Goldberg, James S. Goldberg, Edward L. Schoenbaechler, Goldberg & Simpson, P.S.C., Louisville, for appellant/cross-appellee, Massie.

Raymond J. Naber, Jr., Louisville, for appellant/cross-appellee Kane.

Richard Frockt, Lester I. Adams, Jr., Barnett & Alagia, Louisville, for appellee/cross-appellant.

Before COOPER, DUNN and HOWERTON, JJ.

HOWERTON, Judge.

Kane and Massie appeal from a judgment of the Jefferson Circuit Court holding them jointly and severally liable to Citizens Fidelity Bank and Trust Company for $164,165.63, plus interest. They argue that the judgment is erroneous because they are entitled to the defense of "impaired collateral" under KRS 355.3-606, which would discharge their liability as sureties on a note. They also argue that equitable principles preclude the bank from asserting its claim against them. Citizens has filed a cross-appeal claiming that the trial court erred in refusing to grant it a reasonable attorney's fee.

On June 19, 1980, Makilba Mining Company, Inc., executed a promissory note and security agreement to the bank for $225,000. Kane and Massie signed the note as sureties. On the same date, Kane and Massie signed a continuing guaranty agreement as additional security for the loan.

Shortly after the execution of the note, Kane and Massie notified the bank that Makilba might default in its payment of the note. Citizens took no action at that time, but on September 12, 1980, it notified Makilba that it considered the loan to be in jeopardy and it began demanding direct payment from the company's debtors. The loan was not paid in full when it was due in December, and this action was filed by Citizens in February 1981. Kane and Massie offered to assist the bank in locating and attaching Makilba's assets to help satisfy the debt, but Citizens declined to levy on the assets because it did not believe they would satisfy the amount due. The court granted summary judgment in favor of the bank against Kane and Massie for the unpaid balance plus interest on June 25, 1982.

Kane and Massie first argue that the bank dealt with the collateral in a commercially unreasonable manner and significantly impaired their right of recourse making them vulnerable as sureties. They argue that such action discharges their obligation under the Uniform Commercial Code and equitable principles.

If Kane and Massie were merely sureties on the note, they would have a stronger argument and possible defense. They are not mere sureties, however. When they executed the continuing guaranty agreement, Kane and Massie waived their rights to assert the defenses which they now raise. The guaranty agreement reads, in part:

CITIZENS FIDELITY shall not be required to enforce any of its rights or pursue any of its remedies against DEBTOR ... or to enforce any security interest in any collateral granted to CITIZENS FIDELITY to secure payment of said credits as a condition precedent to enforcing the terms of this agreement or the liability of GUARANTOR hereunder.

The agreement also gave the bank the right to "in any manner deal with any collateral" without prior notice to or consent of the guarantors. These terms are valid and enforceable and are not affected by KRS 355.3-606, which relates only to negotiable instruments. The continuing guaranty agreement is not a negotiable instrument.

No Kentucky court has yet decided the effect of such guaranty terms, but other courts have decided the question under facts and circumstances similar to this case. In National Acceptance Co. of America v. Demes, 446 F.Supp. 388 (N.D.Ill.1977), the court granted summary judgment against the guarantors, who argued that the creditor should be required to first pursue the debtor and his collateral. In National Acceptance Co. of America v. Wechsler, 489 F.Supp. 642 (N.D.Ill.1980), the court evaluated the function of guaranty agreements in commercial transactions. At page 648, the opinion reads:

Such agreements facilitate the issuance of loans by insuring that the lender has a ready source from which it can collect in the event of default by the debtor. To this end, it would not be unusual for a lender to require a guarantor to waive objections to payment that otherwise might be available.

In Union Planters National Bank of Memphis v. Markowitz, 468 F.Supp. 529 (W.D.Tenn.1979), the court addressed the guarantor's argument that he was discharged by an impairment of collateral given by the principal debtor. At page 535, the court provided:

A continuing guarantor does not guarantee a particular note, but rather guarantees an overall indebtedness. A continuing guarantor is thus obliged to pay the debts of the defaulting principal whether those debts are secured by collateral or not. In short, a continuing guarantor cannot rely on the presence of collateral securing a particular note. As long as the continuing guaranty in this case was in effect, nothing prevented Markowitz Bros. from incurring new debts to plaintiff secured by no collateral whatever. Under these circumstances, the fact that the note in question here was secured by collateral was largely fortuitous from the point of view of the continuing guarantors.

Kane and Massie attempt to distinguish Markowitz on the basis that the guarantors were not signers and...