Dennis Coggins, John Stowers, and Connie Stowers v. City of Hoxie, Arkansas

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CA 04-813

MARCH 16, 2005



[NO. CIV-02-92]




John B. Robbins, Judge

Appellant Dennis Coggins appeals the deficiency judgment entered against him regarding a promissory note he co-signed with John and Connie Stowers. His sole point for reversal is that the trial court was clearly erroneous to conclude that appellee, City of Hoxie, did not impair the collateral securing the loan. We disagree with his argument and affirm.

The events leading to the judgment give proper context to the argument on appeal. Appellant is a businessman who has built, rented, and sold residential and commercial real estate in Hoxie and Walnut Ridge for approximately twenty years. He is a licensed contractor and a certified electrician. One piece of property he owned was a restaurant located at 503 South Lindsey Street in Hoxie. Appellant attained a portion of the funds necessary for that building from a low-interest loan extended by the City of Hoxie. These loans were made for the purpose of encouraging local business and job growth, commonly called "Job Stimulus" or "Re-Use" loans.

Appellant decided to sell the Lindsey Street property to John and Connie Stowers, and he encouraged the Stowerses (hereinafter collectively called "Stowers") to apply for a city-sponsored re-use loan. On January 11, 2000, the city agreed to loan $55,000 for the purchase of the property by Stowers from appellant. On that same date, appellant and his wife deeded the property to Stowers. The loan was evidenced by a promissory note signed by John Stowers, Connie Stowers, and appellant as obligors, and was secured by a mortgage. The mortgage named John Stowers and Connie Stowers as mortgagors, named the city as grantee, and listed the collateral as the Lindsey Street real property and undeveloped real property owned by Stowers. Appellant received the loan proceeds as seller, and appellant gave Stowers $5,000 of that money as a "start-up" loan.

Stowers made payments on the loan to the city and rented the Lindsey Street property to restauranteurs. In August of 2000, the business was damaged by fire and smoke, and after Stowers notified the insurance company, it directed him to acquire three bids for repair. Stowers notified appellant "because he was on the note" and because he was qualified to render a damage-estimate bid. After appellant observed the damage and suspected arson, he "decided to stay out of it." The repairs took about three months to complete. Stowers later told appellant that he was having problems getting the insurance funds released. The insurance company issued a check in the amount of $14,582.40 payable to both Stowers and the city as loss-payees under the policy. The city did not endorse the check until after the city's loan committee twice inspected the property and was satisfied that Stowers made adequate repairs.

The restaurant business resumed until closing in March 2001. Stowers notified appellant of financial trouble around April 2002, and discontinued making payments on the loan in May 2002. The city sent a letter notifying the debtors of default, and it filed aforeclosure action on July 29, 2002. Appellant thereafter inspected the premises and believed that many of the repairs required after the fire were not made.

The mortgaged properties were sold at public auction, bringing a total of $26,500. After crediting the sale proceeds, there remained a deficiency owed of $31,020.65. The city pursued a deficiency judgment in personam against the three obligors on the note.

At the bench trial, appellant argued that the city breached its duty to protect him with regard to the collateral (1) by releasing the insurance proceeds to Stowers without appellant's consent and without ensuring that the repairs were properly or completely done, and (2) by not preventing the removal of fixtures from the property. The trial court disagreed and entered judgment jointly and severally against the three obligors for the amount of the deficiency, plus costs and attorney fees. Appellant filed a timely notice of appeal, and he argues on appeal that the city impaired the collateral by releasing the insurance proceeds.

Appellant asserts that Ark. Code Ann. § 4-3-605 (Repl. 2001) supports his total or partial discharge from responsibility as an accommodation party on the promissory note.1 The statute provides in relevant part that where collateral securing an indebtedness has been impaired, an obligor may be discharged to some extent, but the proponent of discharge bears the burden of proving the impairment. See id. at subsections (e) and (f). See also Furst & Thomas v. Varner, 156 Ark. 327, 245 S.W. 818 (1922). The discharge involves proof of two elements - (1) that the holder of the note was responsible for the loss or impairment of the collateral, and (2) the extent to which that impairment results in loss. See Van Balen v. Peoples Bank & Trust Co., 3 Ark. App. 243, 626 S.W.2d 205 (1982). Arkansas Code Annotated section 4-3-605(g) provides specific examples of what constitutes impairing the value of collateral:

(i) failure to obtain or maintain perfection or recordation of the interest in collateral, (ii) release of collateral without substitution of collateral of equal value, (iii) failure to perform a duty to preserve the value of collateral owed, under Chapter 9 of this subtitle or other law, to a debtor or surety or other person secondarily liable, or (iv) failure to comply with applicable law in disposing of collateral.

Appellant alleges that the city failed to perform a duty to preserve the value of this commercial property, subsection (g)(iii). The trial court found no duty to protect appellant's interest in the collateral or the insurance policy on the collateral, that it was appellant's duty to protect himself in the sale to Stowers, and that there was no impairment of the collateral. We cannot conclude that this finding is clearly erroneous or clearly against the preponderance of the evidence.

A creditor is not mandated to discharge a guarantor when the guarantor is found by the trial court to be a person who at least in part created the problem. Myers v. First State Bank of Sherwood, 293 Ark. 82, 732 S.W.2d 459 (1987)(quoting from Bank of Ripley v. Sadler, 671 S.W.2d 454 (Tenn. 1984)). The test of whether a secured party has unjustifiably impaired collateral not in his possession is that of reasonable care under all the relevant circumstances of the case. Womack v. First State Bank of Calico Rock, 21 Ark. App. 33, 728 S.W.2d 194 (1987). In the instant appeal, appellant was fully aware of the fire loss, was requested to provide a repair estimate given his expertise, and chose not to participate. Appellant did not intervene when Stowers complained to him of difficulty in attaining a release of the insurance proceeds. The city conducted two inspections to satisfy itself that the repairs after the fire were completed to its satisfaction. Appellant did nothing for the two years following the fire until foreclosure was instituted. The trial judge did not clearly err in finding that the city owed no duty to appellant to protect the value of the collateral via the insurance proceeds. Even were we to hold that the city did owe such a duty, appellant failed to prove the extent of impairment caused where appellant did not inspect the premises until approximately two years after the fire occurred. On these undisputed facts, we cannot conclude that the trial judge clearly erred.

We affirm.

Pittman, C.J., and Neal, J., agree.

1 Appellant's argument is premised on his contention that he was a mere accommodation party on the promissory note in issue. This status was not expressly addressed in the trial court's decision, but appears to have been presumed by the parties in their respective briefs. An accommodation party is one who signs an instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument. Ark. Code Ann. § 4-3-419 (Repl. 2001). Appellant's testimony, as abstracted in appellant's brief, suggests that the $55,000 proceeds from the promissory note was disbursed by check payable directly to appellant. However, inasmuch as we would affirm even if appellant were an accommodation party, our opinion will not address such issue.