Provident Bank v. Gast

• Decision Date: 28 March 1979
• Docket Number: No. 78-571,78-571
• Parties: , 11 O.O.3d 284, 26 UCC Rep.Serv. 114 The PROVIDENT BANK, Appellant, v. GAST et al., Appellees.
• Court: Ohio Supreme Court

Page 102

57 Ohio St.2d 102

386 N.E.2d 1357, 11 O.O.3d 284, 26 UCC Rep.Serv. 114

The PROVIDENT BANK, Appellant, v. GAST et al., Appellees.

No. 78-571.

Supreme Court of Ohio.

March 28, 1979.

Syllabus by the Court

When one of several co-guarantors on a note is completely released from his obligation by the holder, without an express reservation of rights, the release operates to discharge the remaining co-guarantors, pursuant to R.C. 1303.72(A) (1), to the extent of their right to contribution from the co-guarantor so released.

On April 24, 1973, William Gast signed a note for $54,000, payable to The Provident Bank, appellant herein, in return for a loan from the bank. The note was co-signed by Gerald B. Tonkens and Beverly Tonkens as co-guarantors.

On the same day, appellees, Hamilton R. Gast and Ruth L. Gast, parents of William Gast, ¹ signed a separate instrument in which they guaranteed their son's indebtedness to the extent of $15,000, plus eight percent interest.

On November 14, 1974, the appellant bank, finding the note to be in default, demanded payment of the remaining balance, $47,479.16, from the Tonkens. The appellant also demanded the $15,000 previously guaranteed by Hamilton and Ruth Gast.

On November 20, 1974, Gerald and Beverly Tonkens filed an action against the appellant and its officers in the Court of Common Pleas of Butler County alleging various wrongdoings. The suit was settled by a written agreement on January 20, 1975. A portion of that agreement released the Tonkens from any further liability on the note and read as follows:

"(7) To forever and completely release TONKENS from their liability as Guarantors of a certain note from William Gast in the original amount of Fifty-Four Thousand and 00/100 Dollars ($54,000.00) dated April 24, 1973, with a balance due in the sum of Forty-Seven Thousand Four Hundred Seventy-Nine and 16/100 Dollars ($47,479.16) as of November 25, 1974, plus interest at the rate of Ten and 42/100 Dollars ($20.42) per day thereafter."

Appellant filed an action against William Gast and his parents on August 7, 1975, seeking to recover on the note and the $15,000 guaranty. William Gast was adjudicated a bankrupt and took no part in the lawsuit.

On November 24, 1976, the trial court entered judgment on behalf of the appellant in the sum of $7,500. The court also concluded in its opinion that there was no evidence presented to justify a finding of an accord and satisfaction of the debtor's loan obligation to the bank as a result of obtaining an entry of dismissal in the settlement agreement with the Tonkens.

The Court of Appeals reversed, holding, pursuant to R.C. 1303.72(A)(1), that the release of the Tonkens operated to discharge the appellees of any further liability on the note.

The cause is now before this court pursuant to the allowance of a motion to certify the record.

Keating, Muething & Klekamp and Lanny R. Holbrook, Cincinnati, for appellant.

Charles A. Brigham, Jr., and Robert W. Brigham, Cincinnati, for appellees.

CELEBREZZE, Chief Justice.

The fundamental issue raised in this appeal requires a statutory analysis of R.C. 1303.72(A)(1) (Uniform Commercial Code Section 3-606(1)(a)), and can be phrased as follows: When a holder of a note releases two of four co-guarantors from their guaranty, does that release totally discharge the remaining guarantors or does it discharge them only to the extent of their right to contribution from the previously released parties?

The trial judge concluded that the discharge was limited, in that the $15,000 guaranty of the appellees was reduced by $7,500, or the extent of their right of contribution from the Tonkens. In contrast, the Court of Appeals read the statute to permit a discharge identical to that outlined in the release, $47,479.16 and, therefore, well in excess of appellees' original guaranty of $15,000. The effect of that construction of the statute was to give the appellees a total discharge.

The provisions of R.C. 1303.72(A)(1) have yet to be construed by this court. In light of that fact, and for the sake of clarity, this opinion will examine the steps preliminary to invoking the "discharge" provision of R.C. 1303.72, as well as the ultimate issue presented for review covering the "extent" of that discharge.

A resolution of the present controversy concerning the "extent" of the discharge envisioned by the General Assembly requires an examination of the following: (1) the legislative intent underlying the statute and, more specifically, the language of both R.C. 1303.72(A)(1) and (A)(2); (2) case law construing R.C. 1303.72(A)(2); (3) pre-Uniform Commercial Code principles of suretyship governing the rights and liabilities of co-sureties and (4) various commentaries on the Uniform Commercial Code.

The statute in dispute, R.C. 1303.72 (U.C.C. 3-606), reads as follows:

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

"(1) 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; or

"(2) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right to recourse.

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

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

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

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

As previously indicated, the issue herein involves the correct interpretation of what the General Assembly intended by the language in R.C. 1303.72(A)(1) that a party to the instrument is discharged "to the extent that" the holder releases any person against whom that party possessed a "right of recourse." In wrestling with this issue the Court of Appeals noted the "abstruse" nature of this portion of the statute. We agree that R.C. 1303.72(A)(1) is ambiguous, and, therefore, various rules of statutory construction become applicable.

The first step in statutory analysis is to ascertain the rationale underlying the act and, second, to determine whether the statute applies to the facts as presented. The Official Comments to U.C.C. 3-606(1)(a) reveal that it was meant to be a codification of various suretyship defenses:

"1. * * * The suretyship defenses here provided are not limited to parties who are 'secondarily liable,' but are available to any party who is in the position of a surety, having a right of recourse either on the instrument or dehors it * * *."

Applying that rationale to the parties in the present appeal it is clear that the appellees and the Tonkens, as co-guarantors, are included within the reach of the statute due to their classification as "sureties." ²

Furthermore, since appellees and the Tonkens were All guarantors to the extent of $15,000, appellees possessed a "right of recourse" against the Tonkens by way of contribution. Beneficial Finance Co. of N. Y. v. Husner (1975), 82 Misc.2d 550, 369 N.Y.S.2d 975. Although the "right of recourse" arose by way of a separate guaranty, it is nevertheless a right "dehors" the instrument and, therefore, encompassed by the statute.

Before turning to the question of the "extent" of appellees' discharge it is necessary to note the statutory prerequisites to effecting that discharge in the first instance. The requirements set forth in R.C. 1303.72(A)(1) can be summarized as follows: (1) The "holder" of the note (appellant) releases a "person" (Tonkens) against whom the aforementioned "right of recourse" exists with knowledge of the existence of that "right of recourse"; (2) the release is executed without the consent of the remaining co-sureties-guarantors (Hamilton and Ruth Gast); and (3) the holder has no "express reservation of rights" against those particular parties. The record reflects the existence of all three requirements.

Turning to the question of whether the discharge is total or partial, it is imperative for this court to consider certain fundamental rules when it is called upon to interpret an ambiguous statute. R.C. 1.49 codifies some of these general principles and reads, in pertinent part:

"If a statute is ambiguous, the court, in determining the intention of the legislature, may consider among other matters:

"(D) The common law or former statutory provisions, including laws upon the same or similar subjects;"

Prior to the adoption of the Uniform Commercial Code in Ohio in 1962, the general rule regarding the release of joint debtors was codified in the predecessors to R.C. 1779.09 through 1779.11 and enunciated by this court in Walsh v. Miller (1894), 51 Ohio St. 462, 38 N.E. 381. In that decision this court held that the release of one of several co-sureties operates to discharge the remaining sureties only to the extent of their right to seek contribution from the party so released. This rule changed the previous common law position providing for a total discharge and is explained further in 74 American Jurisprudence 2d 62, Suretyship, Section 83, as follows:

" * * * But in most jurisdictions this common-law rule has been modified or departed from by the interposition of equitable principles according to which the cosurety is granted a release from liability to the extent to which he suffered actual prejudice, holding him liable for his proportion of the obligation, but exonerating him to the extent to which he could have...