Bissonnette v. Wylie

BISSONNETTE_V_WYLIE.92-406; 162 Vt. 598; 654 A.2d 333

[Filed:  3-Jun-1994]

[Motion for Reargument Denied 28-Oct-1994]

NOTICE:  This opinion is subject to motions for reargument under V.R.A.P.
40 as well as formal revision before publication in the Vermont Reports. 
Readers are requested to notify the Reporter of Decisions, Vermont Supreme
Court, 109 State Street, Montpelier, Vermont 05609-0801 of any errors in
order that corrections may be made before this opinion goes to press. 


                           No. 92-406


Donald & Claudette Bissonnette               Supreme Court

                                             On Appeal from
     v.                                      Franklin Superior Court

Nicholas J.H. Wylie, Daniel E.               December Term, 1992
Mendl and Martin V. Lavin


Ronald F. Kilburn, J.

Donald E. O'Brien, Burlington, for plaintiffs-appellants

Leslie C. Pratt, South Burlington, for defendants-appellees


PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.



     Gibson, J.     Plaintiffs Donald and Claudette Bissonnette appealed
from a summary judgment, which discharged defendants Daniel Mendl and
Martin Lavin from their obligation on a promissory note on the ground that
plaintiffs had unjustifiably impaired the collateral.  They argued that the
court erred (1) in holding that the comakers of a promissory note could be
discharged from their obligation under 9A V.S.A. { 3-606 when the creditor
unjustifiably impairs the collateral, (2) in applying the standard of
reasonable care in 9A V.S.A. { 9-207 when the collateral was not in the
possession of the creditor, and (3) in granting summary judgment when there
were genuine issues of material fact concerning the extent of any
impairment of the collateral. 

 

     Addressing the first issue, we held that the { 3-606 defense is
available to a comaker if the comaker is in the position of a surety, and
that once plaintiffs had actual knowledge that defendant Wylie had assumed
the obligation under the $100,000 promissory note, defendants Mendl and
Lavin became sureties entitled to assert the { 3-606 suretyship defense. 
Bissonnette v. Wylie, No. 92-406, at 9 (June 3, 1994) (Bissonnette I).
Following this decision, plaintiffs filed a motion to reargue, requesting
that we address the other two issues raised by them. Defendants Daniel
Mendl and Martin Lavin concede that plaintiffs are entitled to a ruling on
these issues.  We address these two issues herein. 

     To set the context, we recapitulate some of the facts set forth in
Bissonnette I.  The record reveals only a sketchy overview of the relevant
facts.  In February 1986, plaintiffs and defendants Wylie, Mendl and Lavin
entered into a purchase and sales agreement in which defendants agreed to
purchase a parcel of land and the buildings thereon (parcel 1) from
plaintiffs for $210,000.  Defendants already owned the land adjacent
thereto (parcel 2).  The agreement provided that defendants would pay
plaintiffs $110,000 in cash, obtained from a bank and secured by a first
mortgage, and $100,000 in the form of a promissory note secured by a second
mortgage.  Although the agreement is not in the record, the parties concur
that plaintiffs agreed "to subordinate the second mortgage at Purchasers'
option for any purposes of improving, preserving and developing the
property." The parties completed the sale in June 1986.      

In November 1988, defendants executed a new mortgage deed to secure the
original promissory note to plaintiffs.  The new mortgage was subject to
three mortgage deeds to the Vermont National Bank in the combined amount of

 

$1,650,000, and covered both parcel 1 and parcel 2.  On May 3, 1989,
defendants Wylie, Mendl, and Lavin transferred their interest in both
parcels to defendant Wylie alone, who agreed to assume the mortgage to
plaintiffs and to indemnify the other two defendants if either were
obligated to pay any sums as a result of the mortgage or promissory note. 
Plaintiffs were notified of this transaction by letter on April 28, 1989. 

      Defendant Wylie subsequently requested that plaintiffs subordinate
their mortgage, pursuant to the original purchase and sales agreement, so
that he could obtain a loan to build an office building on parcel 2.  On
June 30, 1989, plaintiffs subordinated their mortgage, as requested, to a
new mortgage to the Bank of Vermont securing a $2,600,000 loan to defendant
Wylie.  Defendants Mendl and Lavin were not notified of this transaction. 
The parties dispute whether plaintiffs were required to subordinate their
mortgage under the terms of the original purchase and sales agreement. 

     Following default, plaintiffs filed suit against all three defendants
to enforce the original $100,000 promissory note. Defendants Mendl and
Lavin asserted that, pursuant to 9A V.S.A. { 3-606, they had been
discharged from any obligation under the note because plaintiffs had
unjustifiably impaired the collateral securing the note.  On cross motions
for summary judgment, the court concluded that plaintiffs had unjustifiably
impaired the collateral by (1) subordinating their mortgage to the
$2,600,000 Bank of Vermont mortgage, and (2) subsequent to filing this
suit, discharging their mortgage on the portion of property mortgaged to
the Bank of Vermont in exchange for approximately $11,000. The court,
therefore, granted defendants' motion for summary judgment.  Plaintiffs
appealed. 

 

     In Bissonnette I, we held that the { 3-606 defense was available to
defendants Mendl and Lavin although comakers because, once plaintiffs had
actual knowledge that defendant Wylie had assumed the obligation under the
$100,000 promissory note, defendants Mendl and Lavin became sureties and
were entitled to assert the { 3-606 suretyship defense.  Bissonnette, No.
92-406, at 9.  Plaintiffs' first argument herein is that the court erred in
construing the { 3-606 defense by applying the standard of reasonable care
in 9A V.S.A. { 9-207 where the collateral was not in the possession of the
creditor. 

     Section 3-606(1)(b) states:  "The holder discharges any party to the
instrument to the extent that without such party's consent the holder .  . 
. 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."
 To obtain a discharge under { 3-606, defendants have a two-fold burden.
First, they must establish that the collateral was unjustifiably impaired,
and second, they must establish the extent of that impairment.  Bank South
v. Jones, 364 S.E.2d 281, 284 (Ga. Ct. App. 1987).  The official comment to
{ 3-606 of the Uniform Commercial Code states that, in establishing the
first prong, "the section on rights and duties with respect to collateral
in the possession of a secured party (Section 9-207) should be consulted." 
9 V.S.A. { 3-606 (Uniform Laws Comments).  Section 9-207 imposes upon the
secured party a standard of "reasonable care in the custody and
preservation of collateral in his possession."  9A V.S.A. { 9-207(1). 

     Plaintiffs argue that the court erred in applying the standard of
reasonable care set forth in 9A V.S.A. { 9-207 in determining that
plaintiffs had unjustifiably impaired the collateral because the collateral

 

was not in their possession. We agree that the duties imposed on a secured
party who is not in possession of the collateral must be less than those
imposed where the secured party has possession of the collateral.
Commercial Finance, Ltd. v. American Resources, Ltd., 737 P.2d 1120, 1128
(Haw. Ct. App. 1987).  Moreover, { 9-207 enumerates specific duties of a
creditor in possession of the collateral, while no such duties are
enumerated for a creditor who is not in possession of the collateral.
Nonetheless, { 3-606 codifies an equitable suretyship defense, and we
believe that a standard of reasonable care is appropriate, provided the
court considers all of the circumstances in the case, including whether a
creditor not in possession of the collateral is in a better position than
the surety to protect the surety's interest.  See Bank South v. Jones, 364 S.E.2d  at 284 (adopting this standard); Bank of Ripley v. Sadler, 671 S.W.2d 454, 457 (Tenn. 1984) (same); Hemenway v. Miller, 807 P.2d 863, 869
(Wash. 1991) (same). 

     In the instant case, many of the circumstances giving rise to this
action are in dispute.  Defendants have argued that they are discharged
under 9A V.S.A. { 3-606 because plaintiff unjustifiably impaired the
collateral by (1) subordinating their mortgage to the $2,600,000 Bank of
Vermont mortgage, and (2) discharging their mortgage on all of the
property, except a .27- acre parcel, in return for $11,000.  In response,
plaintiffs claim that, pursuant to the original purchase and sales
agreement, they were required to subordinate their mortgage at the buyers'
request for purposes of development.  They also maintain that the property
released in exchange for $11,000 had no equity value above the value of the
bank mortgages.  None of these issues have been resolved by the trial
court. 

 

     Indeed, plaintiffs' second argument is that summary judgment was
inappropriate because there are material facts in dispute. See V.R.C.P.
56(c) (summary judgment appropriate where there is no genuine issue as to
any material fact).  We agree.  Most importantly, there was no evidence
before the court on the extent of the impairment, the second prong of
defendants' burden.  See Smiley v. Wheeler, 602 P.2d 209, 213 (Okla. 1979)
(defendants must prove value of equipment lost); El-Ce Storms Trust v.
Svetahor, 724 P.2d 704, 710 (Mont. 1986) (remanded to trial court to
determine value of collateral lost).  Failure to prove the value of the
impairment bars any relief.  In re I.A. Durbin, Inc., 49 B.R. 528, 531
(S.D. Fla. 1985). 

     Defendants rely on Hughes v. Tyler, 485 So. 2d 1026 (Miss. 1986), and
claim that, by showing that plaintiffs released most of the acreage
securing the note, they have established the extent of the impairment. 
Hughes is inapposite, however.  In that case, the property securing the
note was land with a per- acre value.  Here, the property involved includes
land and buildings; no one has asserted a per-acre value on the land, and
there is nothing in the record pertaining to the value of the buildings. 
The record is even unclear about the sites of the buildings.  Summary
judgment was not warranted because defendants did not meet their burden of
establishing, as a matter of law, unjustifiable impairment, nor the extent
of any impairment. 

     Reversed and remanded. 

                                        FOR THE COURT:

                                        _________________________________
                                        Associate Justice