Ramsey v. First Nat. Bank and Trust Co. of Corbin, 83-CA-1121-MR

• Decision Date: 24 August 1984
• Docket Number: No. 83-CA-1121-MR,83-CA-1121-MR
• Citation: 683 S.W.2d 947
• Parties: 40 UCC Rep.Serv. 1769 Paul V. RAMSEY, Appellant, v. FIRST NATIONAL BANK AND TRUST COMPANY OF CORBIN, Appellee.
• Court: Kentucky Court of Appeals

Page 947

683 S.W.2d 947

40 UCC Rep.Serv. 1769

Paul V. RAMSEY, Appellant, v. FIRST NATIONAL BANK AND TRUST COMPANY OF CORBIN, Appellee.

No. 83-CA-1121-MR

Court of Appeals of Kentucky.

Aug. 24, 1984.

Discretionary Review Denied Feb. 21, 1985.

Larry G. Bryson, Bledsoe, Little, & Bryson, London, for appellant.

Darrell L. Saunders, Forcht, Hoskins & Saunders, Corbin, for appellee.

Before CLAYTON, McDONALD and MILLER, JJ.

CLAYTON, Judge.

This appeal involves an action on a note made payable to the First National Bank of Corbin, Kentucky, by Granville Brock and Paul Ramsey as co-signers. A judgment for First National of $23,459.83 was entered against Paul Ramsey following a jury trial held in Knox Circuit Court on March 17, 1983. Ramsey now appeals arguing that he was entitled to a directed verdict under KRS 355.3-606, our state's codification of Uniform Commercial Code § 3-606 entitled "impairment of recourse or of collateral." Supposedly, when First National released Brock from his obligation to pay in exchange for one-half the balance then due on the note, $12,500, it simultaneously discharged Ramsey from his own payment obligations under the note by operation of law. This second discharge is allegedly due to the bank's failure to obtain Ramsey's consent to the release. See KRS 355.3-606(1)(a). Alternatively, Ramsey claims that he is otherwise independently entitled to discharge by the bank's unjustified impairment of the equipment collateral put up as security for the loan. See KRS 355.3-606(1)(b). We disagree on both accounts and affirm the judgment of the circuit court.

Ramsey, as a co-maker on the note, is not protected by the discharge provisions of KRS 355.3-606(1). See Wohlhuter v. St. Charles Lumber & Fuel Co., 62 Ill.2d 16, 338 N.E.2d 179, 181-82 (1975); Holcomb State Bank v. Adamson, 107 Ill.App.3d 908, 63 Ill.Dec. 704, 706, 438 N.E.2d 635, 637 (1982); Hooper v. Ryan, 581 S.W.2d 237, 238-39 (Tex.Civ.App.1979). Only those persons who stand in the position of sureties as accommodation parties or guarantors are safeguarded. The "any party to the instrument" language of KRS 355.3-606(1) is intended to apply to those individuals signing ostensibly as makers but who in fact are sureties or accommodation makers. See KRS 355.3-606(1), commentary to Banks-Baldwin edition.

Given the evidence presented at trial we cannot accept the argument that Ramsey's signature appears on the note as an accommodation maker simply to facilitate a loan for Brock. At the time of the loan, the two were partners in B & R Road Boring & Tapping Company (B & R) by a previously executed partnership agreement. Their signatures appear in their capacity as partners on the security agreement accompanying the loan, the proceeds of which were placed in an account especially created for B & R. Further, Ramsey, on behalf of B & R, drew checks against the account for payment of B & R employee wages. He additionally executed a contract for the installation of sewage lines on behalf of B & R with the City Utilities Commission of Corbin, Kentucky, approximately a year after the execution of the note. Therefore, under the "purposes and benefits" test, used to determine the intent of persons signing as makers but claiming accommodation status, Ramsey is a co-maker, not an accommodation maker covered under KRS 355.3-606(1).

KRS 355.3-606(1), receiving very little attention by our courts, provides,

(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; or

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

(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.

In simpler terms, it protects a surety by relieving him, in part, or sometimes totally, of his obligation to answer for the debt or default of the principal debtor where any holder of an instrument: (1) acts to limit the surety's possible recovery against the principal debtor, either by releasing him from his obligation to pay, agreeing not to sue him, or otherwise discharging him; or (2) acts to reduce the surety's protection by unjustifiably impairing collateral taken as security on the instrument. The language of the statute applies not only to actions taken between holders and principal debtors, but also to actions taken between holders and "any person against whom the party [the surety] has to the knowledge of the holder a right of recourse," including persons whose signatures may not appear on the instrument. However, not every release, discharge or agreement not to sue that passes between a holder and a principal debtor, or other person, will automatically result in a surety's discharge. Two separate conditions must both be present in order for discharge to occur under KRS 355.3-606(1)(a). The surety must not have given his consent to the modification of the debtor/creditor relationship. Furthermore, the holder must not have made an express reservation of rights against the surety. Cast in the language of the Uniform Commercial Code,

The creditor can forestall a surety's claim of discharge under 3-606 in either of two ways. First, he may procure the surety's express or implied consent to the modification in the relationship with the debtor. Second, by adding a sentence to the modification agreement to "expressly reserve" his rights against surety, he bars a discharge.

J. White and R. Summers, Uniform Commercial Code § 13-15 (2nd ed. 1980). As for the second part of the quoted portion of the statute, KRS 355.3-606(1)(b), a surety may also be discharged when, without his consent, the creditor handles the collateral carelessly so as to reduce its value, make it unavailable to the surety, or otherwise impair the value of the security interest. In this respect, the creditors' conduct with regard to the collateral is judged under the "reasonable care" standard of KRS 355.9-207. See White & Summers, supra, at 526. Therefore, in general terms, KRS 355.3-606 can be said to protect sureties whose risk of payment under the terms of an instrument has been increased either by agreement between a holder and a person against whom there is a known right of recourse made without a surety's consent or a creditor's reservation of rights, or by careless handling of the collateral by the creditor so as to impair the security interest therein. We do not presume by this abridged explanation of KRS 355.3-606(1) to have fully explored its complexities. Instead, we view the above passages as merely a brief, but beneficial, introduction to an extremely complex area of commercial law.

Turning now to the facts, throughout 1969, Brock and Ramsey were engaged in the construction of waterlines in Harrodsburg and earlier in Paris, Kentucky. While working in Paris, the two men began discussing the formation of a partnership between them. Apparently Brock, Ramsey's brother-in-law by Ramsey's marriage to Brock's sister, had been, until that time, sole owner of the waterline construction business. On March 31, 1969, a partnership agreement creating B & R Road Boring & Tapping Company was entered into by Ramsey and Brock. Under the terms of that agreement Brock, as partner, was to contribute "several thousands of dollars as capital," and Ramsey was to "contribute his time and knowledge to the institution of the partnership business...." During the month following execution of the agreement, Brock approached Randolph Stivers, executive vice-president of First National, about securing a loan. Stivers maintains that in the negotiations that followed between himself and Brock, the loan was discussed in terms of the B & R partnership, though Ramsey was never involved in these meetings. On April 25, 1969, a note in the principal amount of $30,000 at an interest rate of 7% per annum was executed in the bank's favor by Brock. Ramsey's signature was apparently obtained a short time thereafter, Ramsey being in Harrodsburg, Kentucky, on the 25th of April. No indication appears on the face of the note of the capacity in which the partners signed other than the introductory clause, "after this date we promise to pay." (our emphasis). On the same date, a security agreement was executed granting First National a security interest in four pieces of equipment used in the business: a backhoe, a boring machine, a drilling machine, and a tapping machine. Beneath the signatures of Brock and Ramsey is the typed addition "doing business as B & R Road Boring & Tapping Company." Once again, Ramsey's signature was apparently obtained and notarized at a later date. Concurrently with the execution of the note and agreement, an account in the name of B & R was opened at First National by Brock and the entire proceeds of the loan placed therein. Over the course of the next four weeks, Ramsey drew five checks against the B & R account on form checks including the name of the partnership above his signature. Brock did not join in signing the instruments, though a second line was included on the face of the checks. From the testimony at trial, these checks were apparently drawn to pay B & R...