Okla. Stat. tit. 12A § 3-605
Okla. Stat. tit. 12A, § 3-605
Oklahoma Code Comment
19. Suretyship is a three-party relationship involving the creditor, the principal debtor and its surety. Under the Code, the word "surety' includes all guarantors under sub section 1-201(40) , and all accommodation parties under sub section 3-419(c) . A surety or accommodation party who pays an instrument is entitled to reimbursement from the principal debtor under sub section 3-419(e) , and is subrogated to the creditor's rights and obtains rights to any security interest or other collateral that secures payment of the instrument under Section 3-419. See UCC § 3-419, Official Comment 5. Oklahoma has long recognized that a surety or guarantor teas rights of reimbursement from its principal debtor. See 15 O.S. § 381(1910); Apache Lanes, v. National Educators Life Ins. Co., 529 P.2d 984 (Okla. 1974). A surety or guarantor has the right of subrogation. See Moore v. White, 603 P.2d 1119 (Okla. 1979). Further, a surety or guarantor has the right of contribution against any co-sureties or co-guarantors to the extent it has paid more than its ratable share of the debt. See 15 O.S. 382 (1910)Moore v. White, 603 P.2d 1119 (Okla. 1979).
20. Subsection (b) is a dramatic departure from pre-revision Section 3-604 . As Official Comment 3 explains, if a creditor releases a debtor, in whole or in part, pursuant to Section 3-604 , the surety or accommodation party is not released. Prior Oklahoma law held that release of a principal debtor operated as a release of the surety. See Shuttee v. Coalgate Grain Co., 70 Okla. 6,172 P. 780 (1918). Official Comment 3 states that a release of the primary debtor by the creditor does not affect the right of the surety or accommodation party to obtain reimbursement from the primary debtor if the surety or accommodation party pays the creditor. However, the surety's or accommodation party's right of subrogation has been impaired by the amount of debt forgiven by the creditor. See Moore v. White, 603 P.2d 1119 (Okla. 1979). A surety or accommodation party can protect its right of subrogation by contract with the creditor to the effect that the creditor will not release the security or collateral. See UCC § 1-102(3).
21. Insulation from discharge under sub section 3-605(b) is limited to a discharge under Section 3604 . Consequently, a discharge not accomplished pursuant to Section 3-604 is not governed by sub section 3-605(b), but is governed by the common law. Thus, a creditor who fails or neglects to file a motion for a deficiency judgment in a real estate mortgage foreclosure proceeding within the required 90-day period pursuant to 12 O.S. § 686 (1941), still should be able to pursue a deficiency judgment against any sureties or indorsers if the instrument so provides. See Riverside Nat'l Bank v. Manolakis, 613 P.2d 438 (Okla. 1980). On a related issue, cf. Founders Bank & Trust Co. v. Upsher, 830 P.2d 1355 (Okla. 1992). In a consumer credit sale of goods, if the seller repossesses or voluntarily accepts surrender of goods in which the seller has a security interest, and the cash price of the goods repossessed or surrendered was $1,000 or less (subject to changes in the dollar amount pursuant to 14A O.S. § 1-106), then the buyer is not liable for any deficiency. 14A O.S. § 5-103 (1979). However, the creditor should still be able to pursue a deficiency against sureties and indorsers if the instrument so provides. Cf. Riverside Nat'l Bank v. Manolakis, 613 P.2d 438 (Okla. 1980). Note that a deceptive credit practice would occur if the creditor failed to give a cosigner notice as required by the Federal Trade Commission under 16 C.F.R. § 444.3 .
22. Sub section 3-605(c) is consistent with pre-revision Oklahoma law holding that to the extent a surety or accommodation party does not waive suretyship defenses or otherwise consents, an extension of an obligation's maturity date by the creditor discharges the surety or accommodation party. See 15 O.S. § 338 (1910)- 15 O.S. § 377 (1910); Kremke v. Radamaker, 60 Okla. 138, 159 P. 475 (1916). Thus, if a surety so agrees, then the surety is not discharged so long as the surety's agreement or consent is not unconscionable. See 14A O.S. § 5-108 (1969); Barnes v. Helfenbein, 548 P.2d 1014 (Okla. 1976). However, Section 3-605 changes pre-revision Oklahoma law so that now the surety or accommodation party is discharged only to the extent the party meets its burden of proving the extension caused loss to the surety or accommodation party.
In Patty v. Price, 304 P.2d 289 (Okla. 1956) (citing Adams v. Ferguson, 44 Okla. 544, 147 P. 772 (1915)), the court recognized six elements necessary to constitute an extension that will discharge the surety: (1) valid consideration, (2) an agreement, (3) the extension must be for a definite time, (4) it must be without the surety's consent, (5) it must be without reservation of remedy against the surety, end (6) the agreement must be with the principal in the obligation. The court held that the consideration for an extension must include an agreement not to sue in order to release a surety. In Stetler v. Boling, 52 Okla. 214, 152 P. 452 (1915), the court held that an extension by a creditor of the time for payment or performance by the principal debtor without the guarantor's consent discharged the guarantor, if the extension was something more than a mere indulgence and was based upon a binding agreement for a definite time and founded upon consideration.
Because sub section 3-605(d) provides that an extension can be without consideration and reservation of rights is no longer recognized, this Section overrules contrary provisions of the Patty, Adams and Stetler decisions, leaving only the remaining elements of the Adams/Patty test as relevant.
23. Sub section 3-605(d) is consistent with pre-revision Oklahoma law holding that to the extent a surety or accommodation party does not waive suretyship defenses or otherwise consents, a material modification of the obligation by the creditor discharges the surety or accommodation party. See 15 O.S. § 338 (1910); 15 O.S. § 377 (1910); Bank of Commerce of Sulphur v. Webster, 70 Okla. 73,172 P. 942 (1918) (creditor who obtained additional signer to note after execution of guaranty discharged guarantors because their rights of contribution were adversely impacted), Dynalectron Corp. v. Jack Richards Aircraft Co., 337 F.Supp. 659 (W.D. Okla. 1972) (changes in terms of an option to purchase contained in a lease agreement subsequent to execution of guaranty discharged the guarantors). However, Section 3-605 changes pre-revision Oklahoma law so that a surety or accommodation party now is discharged only to the extent the material modification caused loss to the surety or accommodation party. Note that the creditor has the burden of proof to show that either no loss resulted from the modification or the amount of the loss was less than the amount guaranteed. Otherwise, the surety or accommodation party is discharged in full.
24. As Official Comment 2 states, it is standard practice to include a waiver of suretyship defenses in notes given to financial institutions or other commercial creditors, and sub section 3-605(i) allows such waivers. In the occasional instance when the instrument does not include a waiver of suretyship defenses, the creditor can no longer extend the maturity date or materially modify a note without the surety's consent and maintain the surety's liability by a reservation of rights. Official Comment 3 states that the reservation of rights doctrine is abolished in Section 3-605 with respect to instruments.
Under prior sub section 3 606(2) , by express reservation of rights against a party with a right of recourse, the holder preserved: (1) all his or her rights against such party as of the time when the instrument was originally due, (2) the party's right to pay the instrument as of that time, and (3) all rights of such party to recourse against others. Prior sub section 3-606(2) did not impose any formal requirements for the reservation of rights. The only requirement as to the content of a reservation of rights was that it be "express," which meant that it must be "clear, definite, explicit, plain, direct, and unequivocal, as opposed to a reservation that is inferred or implied." Utah Farm Prod Credit Ass'n v. Watts, 737 P.2d 154 (Utah 1987). Further, there was no requirement for notice to be given to an accommodation party that rights against it had been reserved when an extension of time was given to the primary debtor or other modification was made to the terms of the original agreement. See Parnes v. Celia's, Inc., 99 N.J. Super. 179, 239 A.2d 19 (1968).
In those instances where a surety or guarantor executes a separate guaranty agreement that is not an instrument, the creditor still may be able to reserve its rights effectively as to the surety or guarantor. Under common law, the rule that an extension of time without the surety's consent discharges the surety does not apply where the creditor or obligee reserves his or her rights against the surety or reserves the right to sue the principal at the surety's request. Such a reservation cannot be implied, but must be express, clear and definite. The creditor not only must retain the original instrument of indebtedness, but also must expressly reserve the right to sue the surety. Thus, the surety has retained its rights of reimbursement, exoneration and subrogation. See SIMPSON ON SURETYSHIP §73 (West 1950).
Note the closely related concept that if the extension of time is conditioned upon the sureties' assent, then the sureties are not released. See Kuhlman v. Leavens, 5 Okla. 562, 50 P. 171 (1897). Extension of a conditional contract dependent upon the sureties' assent will not release them because until their assent is given, the extension is not binding between the holder and maker of the note and consequently cannot prejudice the sureties' rights. It should be noted that this is still good law and not in conflict with Section 3-605 . Also, the concept of preserving a secondary obligor's recourse under Section 34 of the proposed RESTATEMENT (THIRD) OF SURETYSHIP is consistent with Section 3-605 .
25. Official Comment 6 defers to Oklahoma law, which recognizes that a real property grantee who assumes the grantor's obligation as maker of a note secured by a mortgage encumbering real property becomes, by operation of law, a principal debtor and the grantor becomes a surety. See Stalcup v. Easterly, 351 P.2d 735 (Okla. 1960); Harden v. American-First Nat'l Bank, 154 Okla. 11, 6 P.2d 1060 (1931); Sawyer v. Bahnsen, 102 Okla. 41, 226 P. 344 (1924). If the mortgagee extends the grantee's time to pay the mortgage indebtedness without the grantor's consent, then the grantor is released from personal liability unless the note provides otherwise. Rice v. Federal Life Ins. Co. 172 Okla. 358, 45 P.2d 49 (1935). If the secured creditor extends the grantee's time to pay indebtedness secured by personal property without the grantor's consent, then the grantor may be released from personal liability See Smiley v. Wheeler, 602 P.2d 209 (Okla. 1979).
26. Section 9-504 requires that a secured creditor sell or dispose of collateral in a commercially reasonable manner. Sub section 9-504(3) requires, except in certain instances, that the secured creditor give reasonable notification to the debtor of the time and place of any public sale of the collateral or the time after which any private sale or other intended disposition is to be made. In interpreting sub section 9-105(1)(d) the majority of jurisdictions hold that the definition of "debtor" includes a surety or accommodation party. See, e.g., Hallmark Cards, Inc. v. Peevy, 293 Ark. 594, 739 S.W.2d 691 (1987); National Acceptance Co. of America v. Medlin 538 F.Supp. 585 (N.D. 111. 1982). But see First Nat'l Park Bank v. Johnson, 553 F.2d 599 (9th Cir. 1977). There are no Oklahoma decisions on point. If the secured creditor does not dispose of the collateral in a commercially reasonable manner, then the debtor has the right to recover from the secured creditor any loss caused by the creditor's failure to comply with the provisions of Article 9, Part 5. UCC § 9-507(1).
The relationship between the debtor's liability for a deficiency and the secured creditor's liability for noncompliance with the required default procedures has been approached in three different ways: (1) the absolute preclusion approach, in which recovery of a deficiency is denied if the secured creditor has failed to give the debtor notice of the sale of collateral, or the sale was commercially unreasonable; (2) the rebuttable presumption approach, which holds if the secured creditor fails to fulfill its Section 9-504 obligations, then a rebuttable presumption is created that the value of the collateral equaled the amount of the debt, and the secured creditor has the burden of proving that the collateral was worthless in order to recover a deficiency; and (3) the damage set-off approach, which views the secured party's right to a deficiency and the debtor's right to damages as independent rights which must be separately established, with the debtor having the burden of proving his damages and then obtaining a set-off of the damages against the deficiency claim. See In re Nardone, 70 Bankr. 1010 (Bankr. D. Mass 1987). Oklahoma has adopted the damage set-off approach. See In re Reed. 102 Bankr. 243 (Bankr E.D. Okla. 1989); Equico Lessors, Inc. v. Wetsel, 576 F.Supp. 13 (W.D. Okla. 1983); Beneficial Fin. Co. v. Young, 612 P. 2d 1357 (Okla 1980)
Other jurisdictions have held that a surety or guarantor is entitled to notice prior to the secured creditor's disposition of the collateral See Honor State Bank v Timber Wolf Constr. Co., 151 Mich. App. 681, 391 N.W.2d 442 (1986); First Galesburg Nat'l Bank & Trust Co. v. Joannides, 103111. 2d 294. 469 N.E.2d 180 (1984). But see McNulty v. Codd. 157 Ga. App. 8, 276 S.E.2d 73 (1981). There is authority that a surety or guarantor can avail itself of the defense of commercial unreasonableness as to the secured creditor's disposition of repossessed collateral. See Sedalia Mercantile Bank & Trust Co. v. Loges Farm, Inc., 740 S.W.2d 188 (Mo. Ct. App. 1987); Mack Fin Corp. v. Scott, 100 Idaho 889, 606 P.2d 993 (1980); T & W Ice Cream, Inc. v. Carriage Barn, Inc., 107 NJ. Super. 328, 258 A.2d 162 (Bergen County Ct. 1969). However, the commercial reasonableness defense can be waived in a guaranty agreement. See Chrysler Credit Corp. v. Curley, 753 F.Supp. 611 (E.D. Va. 1990); United States v. H & S Realty Co., 837 F.2d 1 (1st Cir. 1987); Clay v. Presidential Fin. Corp., 175 Ga. App. 226, 332 S.E.2d 924 (1985). But see Barnett v. Barnett Bank of Jacksonville, N.A., 345 So. 2d 804 (Fla. Dist. Ct. App. 1977).
Sub section 3-605(e) makes it clear that the obligation of an indorser or accommodation party is discharged only to the extent of the impairment, and the burden of proof is on the party asserting d discharge Subsection (e) adopts the damage set-off approach recognized in Oklahoma. Therefore, if the secured creditor has impaired the collateral, an indorser or accommodation party is not automatically discharged. If the obligation of a surety or guarantor is not on the instrument, and the guarantor executes a continuing guaranty not tied to collateral, then the guarantor cannot raise impairment of collateral as a defense. See Fast City Bank, N.A. v. Air Capitol Aircraft Sales, Inc., 820 F.2d 1127 (10th Cir. 1987). But see State Capitol Bank of Okla. City v. Norick, 550 P.2d 587 (Okla. Ct. App. 1976) (only debt the parties had in mind when guaranty was executed was a certain promissory note; concept of "continuing guaranty" did not apply to the transaction).
27. Subsection (g) describes three other examples of impairing the value of an interest in collateral: (1) the failure to obtain or maintain perfection or recording of the interest in collateral, (2) release of collateral without substitution of collateral of equal value, or (3) failure to perform a duty to preserve the value of collateral owed, under UCC Article 9 or other law, to a debtor or surety or other person secondarily Gable. This list of examples is illustrative of impairing the value of an interest in collateral, but is not exhaustive.
Under pre-revision Section 3-606 , Oklahoma courts have held that a creditor must act with reasonable care with regard to preservation of collateral in its possession. See Madill Bank & Trust Co. v. Herrmann, 738 P.2d 567 (Okla. Ct. App. 1987); Beneficial Fin. Co. of Norman v. Marshall, 551 P.2d 315 (Okla. Ct. App. 1976). Thus, impairment of collateral has been determined where a creditor failed to file a continuation statement of an existing financing statement. See Smiley v. Wheeler, 602 P.2d 209 (Okla. 1979). Impairment of collateral also has been found where the creditor gave the debtor express authority to sell the collateral without verifying that the proceeds would be applied to the debt. See Beneficial Fin. Co. of Norman v. Marshall, 551 P.2d 315 (Okla. Ct. App. 1976). However, where accommodation parties did not demand that the secured creditor apply monies from accounts payable to a certain promissory note, the note was being paid according to its terms, and the accommodation parties and secured creditor had equal knowledge of the arrangement, the actions of the secured creditor were reasonable and did not result in unjustifiable impairment of collateral. See Wilmont v. Central Okla. Gravel Corp., 620 P.2d 1350 (Okla. Ct. App. 1980).
28. Subsection (f) states that if the secured creditor impairs the value of an interest in collateral provided by a principal, like a co-maker (or by an accommodation party where the payee has no knowledge of the accommodation), then the co-maker is discharged to the extent the comaker has to pay more, taking into account rights of contribution, than if impairment had not occurred. Under pre-revision sub section 3 606(1) , some jurisdictions recognized that a "debtor" could reduce any deficiency to the extent the secured creditor impaired the value of the collateral, without taking into account any rights of contribution. Current Section 3-605 reflects the intent of the 1992 UCC revisions to change this rule with respect to a party to the instrument. The term "party" means party to the instrument under sub section 1-201(29) . The party can, of course, protect its rights in the event the secured creditor impairs the value of collateral by an agreement with the creditor that the party can set off any deficiency to the extent of the impairment without taking into account any rights of contribution. See UCC § 1-102(3).
29. At common law, when there is more than one surety or guarantor of a debt, each surety or guarantor, as among themselves, is required to bear a ratable portion of the amount guaranteed. In the event one surety or guarantor has paid more than its ratable share of the debt, it is entitled to demand contribution from the other sureties or guarantors. Oklahoma recognizes this right of contribution among sureties and guarantors. See 15 O.S. §382 (1910)Martin v. Coogan, 176 Okla. 391, 55 P.2d 103; (1936); Moore v. White, 603 P.2d 1119 (Okla. 1979). Neither Section 3-605 nor Section 3-116 changes the holdings discussed in the previous Comments or the rule discussed in this paragraph. Further, those sections control over sub section 3-415(a) (the general rule that indorsers are liable in the order in which they sign). There is authority that contribution between guarantors must be equally and ratably made, and if one or more guarantors is insolvent, then the solvent guarantors each must contribute the insolvent guarantor's share in the same proportion. See Wilson v. Crutcher, 176 Okla. 481, 56 P.2d 416 (1936); Kee v. Lofton, 12 Kan. App. 2d 155, 737 P.2d 55 (1987); Mansfield v. McReary, 263 Or. 41, 501 P.2d 69 (1972). Thus, to the extent a co-maker can prove that the impairment of collateral resulted in the co-maker having to pay more than its ratable share, the co-maker should be discharged by an amount equal to its worthless claim of contribution against an insolvent companion co-maker.
When a creditor obtains a judgment against joint debtors or sureties, and either a due proportion of the judgment is upon the property one joint debtor or surety or a joint debtor or surety pays, without a sale of the property, more than its proportion, then that joint debtor or surety may compel contribution from the other joint debtors or sureties if, and only if, within 10 days after payment, the payor debtor or surety files with the clerk of the court where the judgment is rendered notice of the payment and claim to contribution. 12 O.S. § 831 (1910).
The same procedure discussed in the preceding paragraph is applicable to a surety's claim for restitution and repayment from the principal. See 12 O.S. § 831(1910). A surety paying the judgment can claim a right of contribution or repayment only by preparing written notice of such intention and filing the same as a legal document with the clerk of court where the judgment was rendered within 10 days after payment of the judgment. See Miller v. Andrews, 171 Okla. 479, 43 P.2d 415 (1935).
30. Upon payment of the principal's debt, a surety or accommodation party has the right to be substituted to the position of the creditor who received payment. This is known as the surety's right of subrogation. Conventional subrogation comes from the contract or agreement, whether it is express or implied. Legal subrogation is a creature of equity, not dependent upon contract but upon the equities of the parties. See Lawyers' Title Guar. Fund v. Sanders, 571 P.2d 454 (Okla. 1977). Oklahoma recognizes the surety's fight of subrogation. If a surety pays the debt of the principal debtor, then the surety becomes subrogated to the creditor's rights and may proceed against the principal debtor and the collateral. See 15 O.S. § 383 (1910); 12A O.S. § 9-504(5) (1981); Moore v. White, 603 P.2d 1119 (Okla. 1979); Smiley v. Wheeler, 602 P.2d 209 (Okla. 1979). When a surety or accommodation party pays in full an indebtedness it has guaranteed, and the mortgagee or secured creditor inadvertently files a release of a mortgage or security agreement, then so long as there are no intervening bona fide purchasers or encumbrances of the collateral, the surety or accommodation party (1) becomes subrogated to the rights of the mortgagee or secured creditor, (2) is entitled to an assignment of the mortgage or security agreement, and (3) may, in a proper case, compel such assignment. See K & S. Inter'l, Inc. v. Howard, 249 Ark. 901, 462 S.W.2d 458 (1971); Home Owner's Loan Corp. v. Papara, 241 Wis. 112, 3 N.W.2d 730 (1942).
31. Most forms of promissory notes and guaranty agreements contain elaborate provisions waiving suretyship defenses. Such agreements normally waive diligence, presentment, protest notice of dishonor, demand for payment, extension of time for payment, notice of acceptance, enforcement without resorting to collateral release or subordination of collateral, partial release liability, and other like provisions. Such waivers of suretyship defenses have been upheld. See, e.g.,Riverside Nat'l Bank v. Manolakis, 613 P.2d 438 (Okla. 1980); Black v. O'Haver, 567 F.2d 361 (10th Cir. 1977), cert. denied, 435 U.S. 969(1978) .
Notwithstanding the statutory mandate in 15 O.S. § 334 (1910), that a surety's or guarantor's obligation can be neither larger in amount nor in other respects more burdensome than that of the principal, in certain instances, the surety's or guarantor's liability can remain the same even though the principal's obligation may be decreased. Thus, when a guaranty agreement expressly waives the right of set-off the guarantors are not entitled under 12 O.S. § 686 (1941) to a credit on the mortgagee's judgment against them for the fair market value of the mortgaged property sold at sheriff's sale. See Founders Bank & Trust Co. v. Upsher, 830 P.2d 1355 (Okla. 1992).
Sub section 3-605(i) recognizes both consent to conduct constituting, and waiver of, suretyship defenses either specifically or by general language. Subsection (i) further recognizes waiver of defenses based on impairment of collateral. Waiver language need not be either precise or extensive to be effective, and a simple statement in the body of the instrument that "suretyship defenses are waived" should be sufficient to bind all accommodation parties and indorsers as a waiver of normal suretyship defenses. Section 42 of the propose RESTATEMENT (THIRD) OF SURETYSHIP recognizes that general language indicating defenses based on suretyship are waived is sufficient.. However, if additional waiver of defenses is desired, such as waiver of presentment under Section 3-501 or waiver of trial by jury such specific waivers also should be included in the agreement. If the instrument states that all makers waive all suretyship defenses, but the instrument makes no reference to indorsers, sureties, guarantors or accommodation parties then the waiver would extend to an accommodation party who signs as a co-maker under Section 3-419 , but not to an indorser, surety, guarantor or accommodation party.
A waiver of defenses does not have to be on the instrument but can be effected by a separate agreement. Thus, a subsequent holder of the instrument who takes the instrument without knowledge of the waiver of defenses contained in a separate agreement should be able to enforce the waiver of defenses agreement under normal theories of contract interpretation. See UCC § 3-117; 15 O.S. § 158 (1910). The same result should follow under the theory of waiver and estoppel. See Alexander v. Standard Acc. Ins. Co., 122 F.2d 995 (10th Cir. 1941). Because an accommodation party can, under sub section 3-305(d) , assert any defenses under sub section 3-305(a) except for the defenses of discharge in insolvency proceedings, infancy and lack of legal capacity, it is not known whether these defenses available to an accommodation party can be waived by the accommodation party. But see Chicago City Bank & Trust Co. v. Davidson, 42 Ill. App. 3d 386, 356 N.E.2d 128 (1976) (waiver of defenses clause in retail installment contract does not confer holder-in-due-course status on contract's holder; holder's rights are governed law relating to secured transactions, rather than law concerning negotiable instruments, thus buyer not prevented by waiver clause from raising seller's failure to provide insurance, as a defense).
32. Voluntary discharge is dealt with in Section 3-601 . However, an indorser or accommodation party's liability can also be discharged by the creditor's failure to take any required action to protect the enforceability of the debt. If the primary debtor files bankruptcy or dies and the creditor fails or neglects to file a proof of claim in the bankruptcy or probate proceeding, then the liability of the indorser or accommodation party is discharged to the extent the creditor would have realized anything from the bankruptcy or probate estate.