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Godfrey State Bk. v. Mundy





APPEAL from the Circuit Court of Jersey County; the Hon. GORDON D. SEATOR, Judge, presiding.


This case centers on interpretation of the Uniform Commercial Code, particularly section 3-415 and section 3-606.

On April 26, 1977, a complaint was filed alleging that defendant and her former husband, Benton I. Mundy, entered into a mortgage with the Godfrey State Bank dated June 1, 1973. The complaint further asserted that the amount of the original indebtedness was $85,000 and that the total amount due on April 20, 1977, was $38,686.25, in both principal and interest. The bank's complaint also alleged that pursuant to a property settlement agreement entered into on June 7, 1973, defendant became the sole owner of the property in question and prayed for foreclosure of the mortgage in a deficiency judgment against the defendant.

On June 8, 1978, defendant filed an amended answer, affirmative defenses and a counterclaim. The amended affirmative defenses claimed that there was no consideration for defendant's signature and if defendant was liable at all, it was as an accommodation party. Defendant also alleged that the bank released the collateral without her knowledge or consent, thus constituting an impairment of collateral. In her counterclaim, she asserted that the mortgage was a cloud on her title and that she was entitled to have it removed.

In its reply, the bank denied that defendant was an accommodation party but admitted that as a result of damage done by fire to equipment in which plaintiff had a security interest, approximately $26,000 in insurance proceeds was used by Benton Mundy to replace the original equipment and that the bank took a security interest in the new equipment. Plaintiff bank also admitted that certain property was released from a mortgage on May 17, 1974. The bank further admitted loaning Benton Mundy $8,500 at a time when he was delinquent by $2,000 on the note and that there had been a modification in the payments on the $85,000 note.

Following a bench trial, the trial court entered a memorandum of decision finding that defendant was brought into the loan transaction only to lend security to loans made to Benton and was an accommodation party. The court also found that the conduct of the bank and its dealings with Benton were such as to release and discharge the defendant's obligations on the note. Additionally, the court found that there was a novation which discharged the defendant and that the bank fraudulently altered the terms of the instrument, thereby discharging the defendant from liability. A decree was filed on December 13, 1979, finding that defendant had proved all the material allegations of the amended affirmative defenses and amended counterclaim. The court discharged the obligations and removed the mortgage as a cloud on title.

We now affirm the trial court. And our disposition requires that we only address one issue.

Section 3-606 of the Uniform Commercial Code provides in part:

"(1) The holder discharges any party to the instrument to the extent that without such party's consent the holder

(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." Ill. Rev. Stat. 1979, ch. 26, par. 3-606(1)(b).

In Wohlhuter v. St. Charles Lumber & Fuel Co. (1975), 62 Ill.2d 16, 338 N.E.2d 179, our supreme court noted that, on its face, section 3-606 would appear to apply to any party to the instrument. After reviewing the legislative history of that section, however, the court ruled that the term "any party" as used in section 3-606 was intended to include parties who sign ostensibly as makers but who are in fact surety or accommodation makers and the provisions of section 3-606 do not apply to co-makers.


Thus, before this defendant can defend on the basis that the plaintiff bank has unjustifiably impaired collateral, she must establish her status as an accommodation party. To do this, she must show that she falls within the provisions of section 3-415 of the UCC, which provides:

"(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." (Ill. Rev. Stat. 1979, ch. 26, par. 3-415(1).)

In the instant case, the trial court found that defendant had proved both her accommodation status and that there had been an unjustified impairment of collateral.

• 1, 2 An accommodation party is one who signs in any capacity, including that of a maker, for purposes of lending his name to another party generally. Whether he is an accommodation party at the time of signing is a question of fact and intention, and, once his status as a maker has been affirmatively established, it is not subject to change. Wohlhuter v. St. Charles Lumber & ...

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