Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Hemenway v. Miller

April 4, 1991


En Banc. Brachtenbach, J. Dolliver, Andersen, Durham, and Smith, JJ., and Callow, J. Pro Tem., concur. Guy, J. (concurring in part, dissenting in part). Dore, C.j., and Utter, J., concur with Guy, J. Johnson, J., did not participate in the disposition of this case.

Author: Brachtenbach

This is an action by the original makers of a promissory note who claim they became sureties by operation of law when a third party assumed the obligation to pay the note. The makers of the note allege that the payee of the note, their creditor, allowed the creditor's security interest in collateral to lapse, thereby impairing the makers' recourse to that collateral. The trial court granted partial summary judgment on the creditor's liability for impairment of collateral. Following trial on damages, the court held that the makers were entitled to partial discharge on the note in the amount of $32,724.36, the gross value of the collateral. The Court of Appeals affirmed. Hemenway v. Miller, 55 Wash. App. 86, 776 P.2d 710 (1989). We reverse.

In October 1980, the defendants, Margaret and Ken Miller,*fn1 sold a retail business to plaintiffs, Robert and Patricia Hemenway, who gave the sellers a $93,000 promissory note representing the unpaid purchase price. The note was secured by the inventory, equipment and goodwill of the business sold. The documents are dated October 15, 1980, but the security interest was not perfected until December 17, 1980. No reason for the delay appears in the record; we note that the buyers' attorney was the closing agent.

In June 1984, the original buyers, makers of the note, sold the business to third parties who assumed the original buyers' obligations, including the note. Clerk's Papers, at

270. Perfection of the original security interest lapsed on or about December 17, 1985, for failure of the sellers-creditors to file a continuation statement, RCW 62A.9-403(2). In the meantime the third parties granted a security interest to a bank which obtained priority due to the lapse of perfection in the original security interest. The third parties then went bankrupt and the bank realized on its security interest.

We will refer to the original sellers who were payees on the note as the creditor, to the original buyers who were makers on the note as the maker or debtor or surety and to the second buyers who assumed the note as the assignee. The trial court held there were no genuine issues of material fact and the debtor was entitled to a partial discharge from the note as a matter of law. The legal theory was that when the assignee assumed the note the debtor became a surety by operation of law. The creditor then had a duty to not impair the surety's recourse to the collateral. When the creditor failed to file a continuation statement, it impaired the collateral, thus discharging the debtor to the extent of the value of the collateral. We hold that under the legal principles discussed hereafter there were genuine issues of material fact and the debtor was not entitled to judgment as a matter of law.


The first question is whether the maker of the note became a surety by operation of law when the assignee contractually assumed the debt due the creditor. As between the maker and the assignee, the maker became a surety. A. Stearns, Suretyship § 2.3, at 10 (5th ed. 1951). Fluke Capital & Mgt. Servs. Co. v. Richmond, 106 Wash. 2d 614, 621, 724 P.2d 356 (1986).

[1] However, this conclusion does not answer the issue here. Does the maker-debtor assume the position of surety as to the creditor with the right to assert suretyship defenses? That may be the legal effect of an assumption of the debt, but only if (1) there is definite and specific notice to the creditor so that the creditor is fully apprised of his

changed relationship with the maker, and (2) the creditor consents to the assumption.

If the original obligor becomes a surety, the rights of the creditor are altered. It is elementary that the existing rights of the creditor cannot be altered to include new duties to the alleged surety unless the creditor has knowledge of the event which creates the suretyship. Alaska P. Salmon Co. v. Matthewson, 3 Wash. 2d 560, 564, 101 P.2d 606 (1940) held that the fact that the creditor knew one partner was taking over the partnership operation from another partner did not provide the requisite knowledge that the taking-over partner was purchasing the other's interest. Thus, a suretyship relation was created between the partners, but not as to the creditor. Accord, Moon Bros. Carriage Co. v. Devenish, 42 Wash. 415, 418, 85 P. 17 (1906). The notice to the creditor must be actual notice. Culbertson v. Wilcox, 11 Wash. 522, 524, 39 P. 954 (1895). Thus, the notice must be of the fact of assumption, not merely notice of the transaction.

There is evidence in the record to indicate no such knowledge on the part of the creditor. The affidavit of the creditor-wife in the present case denies that the creditor knew of the assumption of the note by the assignee. When the next annual payment was due after the sale to the assignee, and not timely made, the creditor contacted the maker, not the assignee. More than a year later the creditor learned, for the first time according to her affidavit, that the annual payment had been made by the assignee. The collecting bank had unilaterally changed the name of the payor on the collection account to the assignee. Still a year later the assignee advised the creditor that it would not make the 1986 annual payment and that a bank had a security interest in the inventory. The creditors stated they had no interest in the inventory believing they had waived any interest when they consented to the sale.

When the 1986 payment was not made the creditors' attorney wrote the collecting bank advising it that the

maker was delinquent and that action was being commenced against the maker. At the same time the creditors' attorney wrote the makers accelerating payment according to the terms of the note. In response, the makers' attorney tendered payment by the makers upon condition of erasing the default and granting permission to sell the collateral and apply the net proceeds to the makers' debt to the creditor. Clerks's Papers, at 189.

In addition to actual knowledge, the creditor must consent to the alteration of the existing creditor's contractual rights, i.e., the creditor must consent to the original obligor becoming a surety. This has been the law of this state for 100 years. In Wadhams v. Page, 1 Wash. 420, 423, 25 P. 462 (1890) the court dealt with a claim that one partner became a surety because the other partner assumed the partnership debt to the creditor. The court held: "If one partner transfers his liability to another and the creditor does not assent to the transfer, his rights are not affected." McAreavy v. Magril, 123 Iowa 605, 607, 99 N.W. 193, 194 (1904) expresses the principle that the debtors (or the debtor and another) cannot impose upon the creditor new or additional obligations arising from suretyship without the creditor's consent. Consent to assumption is required according to La-Rey, Inc. v. Kowalski, 433 S.W.2d 530, 533 (Tex. Civ. App. 1968). See E. Arnold, Outlines of Suretyship and Guaranty § 9, at 16 (1927).

In finding consent in this case, the trial court and the Court of Appeals relied principally upon Smiley v. Wheeler, 602 P.2d 209 (Okla. 1979). That case is distinguishable because the creditor there specifically agreed to the assumption of the debt. Whether there was such an agreement remains factually unresolved in this case.

In fact, there is considerable evidence to show lack of consent. Some 3 1/2 years after the original sale by the creditor-seller to the debtor-buyer, the debtor asked the creditor to execute a "consent to assignment" to allow the debtor to sell the business to the assignee. Consent was required because the security agreement between maker-debtor

and payee-creditor required consent for a sale of the secured goods. The "consent to assignment" which the debtor originally sought to have the creditor sign referenced the applicable security agreement paragraph which required consent, but also gave consent to "transfer, assignment and assumption of the rights, duties and liabilities" under the contract of sale. It further provided that the creditors "expressly waive, surrender and release all rights against [maker]." Clerk's Papers, at 181. The creditor refused to sign this consent and told the maker that it (the creditor) would agree to the sale only if the maker remained liable for the note. The creditor then did sign a consent; a consent in which there is no mention of the note or assumption of the note. Moreover, the consent provided: "We expressly do not waive, surrender or release any monetary obligation due and owing by [makers] . . . with regard to our sale to them of that certain business. . . ." Clerk's Papers, at 183.

[2, 3] In determining whether summary judgment was properly granted based on the facts in the present case, we must draw all reasonable inferences in the light most favorable to the creditor, the nonmoving party. Wilson v. Steinbach, 98 Wash. 2d 434, 437, 656 P.2d 1030 (1982). We initially note that the trial court entered findings of fact and conclusions of law in the order granting partial summary judgment. However, findings of fact on summary judgment are not proper, are superfluous, and are not considered by the appellate court. Chelan Cy. Deputy Sheriffs' Ass'n v. Chelan Cy., 109 Wash. 2d 282, 294 n.6, 745 P.2d 1 (1987).

Based on the previously recited facts from the record and ignoring the trial court's findings of fact, we cannot say that reasonable minds could reach but one conclusion in this case. The creditor rejected a consent which provided for assumption of the note by the assignee and release of the debtor. The consent which the creditor did sign, in contrast, does not mention the note or its assumption, but rather expressly refused to waive, surrender or release the

makers' obligation. Subsequent demands for payment were made to the makers, not the assignee. This conduct, these documents, and the denial by the creditor of knowledge or consent create genuine issues of fact as to the knowledge and consent requisite to the maker becoming a surety as to the creditor.


Because the matter must be remanded for trial, at which time the debtor may be found a surety vis-a-vis the creditor, we consider the impairment of collateral issue. The debtor's argument on this issue is that it is a surety and as such has recourse to the collateral. When the creditor did not file a continuation statement for the collateral, the subsequent unperfection impaired the debtor's ability to have recourse against the collateral; i.e., impaired the collateral. As a result, the debtor claims that under RCW 62A.3-606 it is discharged from liability to the creditor to the extent of the value of the collateral which the creditor impaired.

There is no doubt that the surety acquires, by operation of law, an interest in the property securing the primary debt and may have a right of recourse against the collateral. National Bank of Wash. v. Equity Investors, 86 Wash. 2d 545, 556, 546 P.2d 440 (1976). While there are no Washington cases providing that failure to perfect or maintain perfection in a security interest is an impairment of collateral, we will assume that it is for purposes of resolving the questions presented to us by the parties in this appeal. See 1 J. White & R. Summers, Uniform Commercial Code § 13-15, at 666 & n.18 (3d ed. 1988). However, just because the collateral has been impaired does not mean that there will be a discharge under RCW 62A.3-606.

RCW 62A.3-606 provides in pertinent part:

(1) The holder discharges any party to the instrument to the extent that without such ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.