White v. Household Finance Corp.

• Decision Date: 31 October 1973
• Docket Number: No. 2--473A92,2--473A92
• Citation: 158 Ind.App. 394,302 N.E.2d 828
• Parties: , 13 UCC Rep.Serv. 858 Charles J. WHITE and Catherine White, Appellants (Defendants, Below), v. HOUSEHOLD FINANCE CORPORATION, Appellee (Plaintiff Below).
• Court: Indiana Appellate Court

Page 828

302 N.E.2d 828

158 Ind.App. 394, 13 UCC Rep.Serv. 858

Charles J. WHITE and Catherine White, Appellants (Defendants, Below), v. HOUSEHOLD FINANCE CORPORATION, Appellee (Plaintiff Below).

No. 2--473A92.

Court of Appeals of Indiana, Third District.

Oct. 31, 1973.

Daniel J. Harrigan, Bayliff, Harrigan, Cord & Maugans, Kokomo, for appellants (defendants below)

Merton Stanley, Shirley & Stanley, Kokomo, for appellee (plaintiff below).

STATON, Judge.

I. STATEMENT ON THE APPEAL

Charles and Catherine White's nephew, Rickey L. Butzin, was under twenty-one (21) years of age. He wanted to purchase a 1968 Dodge Charger automobile. Charles and Catherine White signed a promissory note and security agreement so that the automobile could be financed. The 1968 Dodge Charger was destoryed in a single car accident. The insurance company paid $1,850.00 for the loss which was applied by Rickey L. Butzin and Household Finance Corporation to a second automobile, a 1969 Plymouth. Rickey L. Butzin defaulted upon his payments and Household Finance Corporation filed a complaint against Charles and Catherine White to recover $2,094.25 plus $10.20 interest due on the promissory note. The trial court heard the evidence and entered judgment for Household Finance Corporation in the sum of $2,094.25. The Whites' motion to correct errors presents this question for our review on appeal:

Did Household Finance Corporation's endorsement of the insurance check to Hendrickson Motor Sales impair the collateral thereby releasing the Whites on the promissory note pro tanto?

Our opinion concludes that the endorsement of the insurance check by Household Finance Corporation and the purchase of a second automobile was not a substitution of collateral but constituted an impairment of the collateral. We reverse the judgment of the trial court with instructions.

II. STATEMENT OF THE FACTS

On October 5, 1970, Household Finance Corporation loaned Rickey L. Butzin $2,484.00 to purchase a 1968 Dodge Charger. The loan agreement was signed by Charles J. White, Catherine L. White and their nephew, Rickey L. Butzin, who was under the age of twenty-one. Also on this date, Charles White and Catherine White signed a security agreement covering the 1968 Dodge Charger. Rickey Butzin took out insurance on the Dodge Charger and had Household Finance Corporation named a beneficiary. This appears not to have been a requirement of Household Finance Corporation. The title to the Dodge Charger was in the names of Charles J. White and Rickey Butzin and showed a lien in favor of Household Finance Corporation.

In November, 1970, the Charger was destroyed in a single car accident. The insurance company paid Rickey Butzin and Household Finance Corporation $1,850.00. Charles White, Rickey Butzin and Household Finance Corporation released their respective interests on the title of the 1968 Dodge Charger. Upon receiving the insurance check Rickey Butzin went to Household Finance Corporation to inquire about using the insurance proceeds to purchase a 1969 Plymouth. Without executing a new promissory note or security agreement, Household Finance Corporation endorsed the check payable only to Hendrickson Motor Sales from whom Rickey Butzin then purchased a 1969 Plymouth with the $1850.00 insurance check. The title to the 1969 Plymouth was also in the names of Charles White and Rickey Butzin with Household Finance Corporation listed as a lienholder. Mr. and Mrs. White were not notified by Household Finance Corporation or their nephew, Rickey Butzin, that the insurance check had not been applied to their loan until Rickey Butzin stopped making payments and Household Finance

Corporation contacted the Whites about the delinquent note. The Whites refused to make payments contending that the insurance check should have been applied to their indebtedness, and Household Finance Corporation sued the Whites on the promissory note.

III.

STATEMENT OF THE ISSUE

The issue to be decided by this appeal is:

Was the endorsement of the insurance check to Hendrickson Motor Sales an impairment of collateral releasing the Whites on the promissory note pro tanto or was it a mere substitution of collateral?

Our opinion concludes that the release of the insurance proceeds was not a substitution of collateral but an impairment of collateral. We reverse.

IV. STATEMENT ON THE LAW

The Whites contend that they are accommodation makers on the note which was also signed by their nephew, Rickey L. Butzin. They further contend that the release of the insurance proceeds to Hendrickson Motor Sales released them on the promissory note pro tanto.

We agree with the Whites' contention that they are accommodation makers under I.C.1971; 26--1--3--415; Ind.Stat.Ann. § 19--3--415 (Burns 1964):

'Contract of accommodation party.--(1) An accommodation party is one who signs the instrument in any capacity for the purpose of lending his name to another party to it.

(2) When the instrument has been taken for value before it is due the accommodation party is liable in the capacity in which he has signed even though the taker knows of the accommodation.

(3) As against a holder in due course and without notice of the accommodation oral proof of the accommodation is not admissible to give the accommodation party the benefit of discharges dependent on his character as such. In other cases the accommodation character may be shown by oral proof.

(4) An indorsement which shows that it is not in the chain of title is notice of its accommodation character.

(5) An accommodation party is not liable to the party accommodated, and if he pays the instrument has a right of recourse on the instrument against such party.'

It is clear from the record that the Whites signed the promissory note only to enable their twenty (20) year old nephew, Rickey Butzin, to buy a car. ¹ Rickey Butzin testified:

'Q. Had you been to Household Finance before? Before you went in with your Uncle about financing the Charger or talked to them?

'A. Yes, I did, I talked to them about it.

'Q. And what did they say to you and what did you say to them?

'A. Well, they told me I had to have co-signers. I said Okay, and they explained everything to me about having to have a co-signer. I was only 20 years old.

'Q. And then you and your uncle Charles went in?

'A. Yes.'

Mr. White testified as follows:

'Q. How was it that you went down and co-signed this note for rickey?

'A. Well, he wanted to buy that Dodge Charger and for him to buy the Dodge Charger he had to have co-signers. And, he got me as a co-signer, me and my wife.

'Q. Did you receive any compensation for co-signing?

'A. Nope.

'Q. Did your wife?

'A. Nope.' ²

The importance of determining the status of the Whites for the purposes of this appeal has been adequately expressed by J. White and R. Summers, Uniform Commercial Code, 428--429 (1972):

'. . . An accommodation maker's basic liability to a holder is identical to that of any other maker, . . . As we will see, however, surety status of an accommodation party may give him special defense unavailable to the general run of parties on instructions.

'A surety who has signed an instrument is like other parties in that he is generally liable in the capacity in which he signed. Unlike other parties the surety may have special defenses, for: (1) he is not liable to the party accommodated (3--415(5)) (even if his contract on the instrument would normally make him liable to such person); (2) he may be discharged if the holder 'releases or agrees not to sue' the party accommodated or extends the time for payment or otherwise 'suspends' the right to enforce his obligation against the party accommodated, and (3) he may be discharged if the holder 'unjustifiably impairs any collateral for the instrument' (for example, fails to perfect a security interest).'

When a creditor releases or negligently fails to protect security put in his possession by the principal debtor, the surety is released to the extent of the value of the security so impaired. Stewart v. Davis (1862), 18 Ind. 74; Sample v. Cochran (1882) 82 Ind. 260; Crim v. Fleming (1885) 101 Ind. 154; Owen County State Bank v. Guard (1940), 217 Ind. 75, 26 N.E.2d 395. ³ This right to discharge is also available to any party to a promissory note with a right of recourse ⁴ under I.C.1971, 26--1--3--606(1)(b); Ind.Stat.Ann. § 19--3--606(1)(b) (Burns 1964) which provides:

'Impairment of recourse or of collateral.--

(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.'

Household Finance Corporation contends that the signature of Mr. White on the title to the 1968 Dodge Charger was a consent to release of the insurance proceeds. At common law and under I.C.1971, 26--1--3--606(1), supra, consent to the release of collateral operates as a waiver of a right to discharge. The consent may be given in advance by a consent to release of collateral provision in the...