State v. McKinnon, 6510

• Decision Date: 05 August 1983
• Docket Number: No. 6510,6510
• Citation: 667 P.2d 1239
• Parties: 36 UCC Rep.Serv. 1679 STATE of Alaska, Appellant, v. Arthur B. McKINNON and Marilyn McKinnon, Appellees.
• Court: Alaska Supreme Court

Page 1239

667 P.2d 1239

36 UCC Rep.Serv. 1679

STATE of Alaska, Appellant, v. Arthur B. McKINNON and Marilyn McKinnon, Appellees.

No. 6510.

Supreme Court of Alaska.

Aug. 5, 1983.

Leslie J. Ludtke and Peter B. Froehlich, Asst. Attys. Gen., and Wilson L. Condon, Atty. Gen., Juneau, for appellant.

Douglas L. Gregg, Juneau, for appellees.

Before BURKE, C.J., and RABINOWITZ, MATTHEWS and COMPTON, JJ.

OPINION

MATTHEWS, Justice.

In this case, the State appeals the superior court's dismissal of its suit to collect the unpaid balance of a veteran's business loan from Arthur B. McKinnon, one of the initial co-obligors. The superior court held that McKinnon had become a surety on the note by virtue of a partnership termination agreement and was subsequently released from his obligation because an agreement entered into by the State and his former co-partner and co-obligor, Charles Donald Tandy, had impaired McKinnon's right of recourse. We modify the judgment and affirm it as modified.

Defendant, McKinnon, and his half-brother, Tandy, purchased their father's business, Tandy Food Equipment, and entered into a partnership on March 17, 1967. On March 18, 1972, the half-brothers, both veterans, borrowed $25,000 each from the State of Alaska, Division of Veterans Affairs [the Division]. A single ten-year note for $50,000 was executed. McKinnon, Tandy, and their respective wives, who were not partners in the business, were all parties to the note--the men as co-makers, and the women as accommodation parties. By the terms of the note, each signatory was jointly and severally liable. The promissory note further provided that the signatories "expressly agree that this note or any payment thereunder may be extended from time to time ... without in any way affecting the liability of such parties." Collateral consisting of stock and inventory in Tandy Food Equipment was used as security for the note. The proceeds of the loan were deposited into the business account of Tandy Food Equipment.

On October 18, 1972, McKinnon and Tandy terminated their partnership. The partnership termination agreement provided that Tandy would

assume payment of any and all debts and obligations of the partnership including, but not limited to, all accounts payable and the balance owing to the State of Alaska Division of Veterans Affairs on that Promissory Note dated March 17, 1972, in the original principal sum of $50,000.00 and agrees to indemnify and hold withdrawing partner harmless from any and all claims which have or could arise out of the operation of the business known as Tandy Food Equipment.

Jack Tinsley, the director of the Division, was given notice of the termination through a letter from Tandy and McKinnon. The letter stated that Tandy "assumed McKinnon's obligation ... on the loan," but that "McKinnon [would remain] personally liable."

In December of 1979 the State brought suit against the McKinnons and the Tandys because loan repayments were delinquent. The McKinnons were, however, residing in Kodiak at the time, and were not served with process. ¹ In that suit, Tandy confessed judgment for the entire amount owing on the original promissory note, and entered into a settlement agreement with the State whereby the State agreed not to execute on the judgment on the condition that Tandy repay the loan through reduced monthly payments over an extended period of time and that he sell the property securing the loan and apply the proceeds therefrom directly toward reducing the outstanding loan balance.

On December 12, 1980, the state loan collection office sent a demand letter to McKinnon. On March 25, 1981, the State of Alaska filed a complaint against Arthur and Marilyn McKinnon seeking collection of the outstanding balance of the $50,000 loan plus interest.

On June 18, 1981, the State moved for summary judgment under Civil Rule 56. The defendants opposed the motion and filed a cross motion for summary judgment. The superior court granted summary judgment to the McKinnons. It found that McKinnon had become a surety by virtue of the partnership termination agreement and that the State's action of entering into the confession of judgment and agreement not to execute with Tandy impaired the McKinnons' right of recourse within the meaning of AS 45.03.606(a)(1) ² and, therefore, discharged the McKinnons. The State appeals.

I

We first address the court's characterization of McKinnon as a surety. ³ We believe that this characterization was correct and therefore affirm this part of the summary judgment.

By the terms of the original promissory note the four signatories were jointly and severally liable for the entire $50,000 plus interest. The relationship between Tandy and McKinnon was then altered by the partnership termination agreement. In that agreement, Tandy agreed to assume the obligation of repaying the loan but McKinnon agreed to remain personally liable. The lower court's legal conclusion that this agreement produced a principal/surety relationship between Tandy and McKinnon is consistent with the intent of the parties as expressed in their agreement and in their letter to the Division, as well as with general suretyship law. ⁴ This change in McKinnon's status from co-obligor to surety in relation to third parties occurred through the operation of the October 18 partnership termination agreement regardless of whether the loan is considered a partnership liability. ⁵

II

We now must address the question of the extent to which McKinnon and his wife, as surety and accommodation parties respectively, were discharged by the arrangement between Tandy and the State to suspend enforcement of the judgment.

The court held that McKinnon was discharged under AS 45.03.606, which corresponds with UCC § 3-606. AS 45.03.606 states in pertinent part:

Impairment of recourse or of collateral. (a) The holder discharges a party to the instrument to the extent that without the party's consent the holder

(1) without express reservation of rights releases or agrees not to sue a 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 that person the instrument or collateral or otherwise discharges the person, ....

We disagree with the court's conclusion. Section 606(a)(1) would discharge McKinnon as a surety in three situations. In the first situation, McKinnon would be discharged had the State "without express reservation of rights release[d] or agree[d] not to sue" Tandy. Although the State did not expressly reserve its rights against McKinnon, it also neither released nor agreed not to sue Tandy. In fact, the State did sue Tandy on the note, which suit resulted in Tandy's confession of judgment. In the second situation, McKinnon would be discharged if the State had agreed "to suspend the right to enforce against [Tandy] the instrument or collateral." The State, however, entered no such agreement. Indeed, as noted, the State did enforce the instrument against Tandy and in fact pursued the enforcement to judgment. While the State did agree to suspend the right to enforce its judgment against Tandy, it did not agree to suspend the right to enforce the instrument. McKinnon could finally claim discharge under section 606(a)(1) if the State "otherwise discharge[d]" Tandy. The word "otherwise" is broad and might encompass a discharge reached after judgment on an instrument. Assuming without deciding that that is so, there has clearly been no discharge of Tandy. He is still liable for the judgment on the debt, although he is meeting his liability over a longer time frame than originally contemplated. Therefore, we conclude that AS 45.03.606(a)(1) does not discharge McKinnon.

Our conclusion that the Uniform Commercial Code does not apply here, however, does not compel the conclusion that the State may presently proceed against McKinnon. UCC § 1-103 provides that the common law applies where the UCC's provisions do not. AS 45.01.103. Additionally, we may affirm the judgment on alternative grounds, even if those grounds were not raised by the parties below. Native Village of Eyak v. G.C. Contractors, 658 P.2d 756, 758 (Alaska 1983); see Moore v. State, 553 P.2d 8, 21 (Alaska 1976); Ransom v. Haner, 362 P.2d 282, 285 (Alaska 1961). We believe that appropriate common law analysis supports the conclusion that McKinnon is not presently available for recourse but remains potentially liable on the note.

At common law, the State may pursue Tandy to judgment and still have recourse against McKinnon as surety. Assuming for the sake of analysis that the State obtained a judgment against McKinnon, which he satisfied, McKinnon would step into the State's shoes as its subrogee. L. Simpson, Handbook on the Law of Suretyship § 47 (1950); A. Stearns, The Law of Suretyship § 11.1 (J. Elder 5th ed. 1951); Restatement of Security § 141 (1941). As subrogee, McKinnon could have no more rights than were held by the State as subrogor. Western Casualty & Surety Co. v. Brooks, 362 F.2d 486, 491 (4th Cir.1966); Maryland Casualty Co. v. Brown, 321 F.Supp. 309, 311 (N.D.Ga.1971). The State could not sue Tandy presently to collect on its judgment, because he has remained current under the agreement not to execute. Tandy could raise this fact as a defense should McKinnon as subrogee sue him to recover for the payment made to the State.

In this situation, the traditional common law rule would discharge McKinnon as surety, because his right of subrogation against Tandy had been unilaterally impaired by the State. Stearns § 6.16; see Simpson § 73, at 352-53. McKinnon would be saddled with both a method of collection and an extended payment period to which he never agreed. This is analogous, although not identical to, the rule that an extension of a debt discharges the surety. Simpson § 73; Stearns § 6.16; 10 S. Williston, A Treatise on the Law of Contracts § 1222 (W. Jaeger 3d ed. 1967); Restatement...