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In Re Estate of Tiemann





Appeal from the Circuit Court of Cass County; the Hon. Robert L. Welch, Judge, presiding.


Claimant, Chapin State Bank (Chapin Bank), appeals an order of the circuit court of Cass County entered on May 23, 1985, in the estate of Byron H. Tiemann, deceased. The order allowed a claim of the First State Bank of Beardstown (Beardstown Bank) in the total sum of $101,316.73 representing $74,625.38 of principal and $26,691.35 of interest. The claim arose from a guaranty given by the decedent to Beardstown Bank to secure indebtedness of C & T, Inc., to that bank. The assets of the estate were insufficient to pay all claims. Beardstown Bank and Chapin Bank were both claimants of the seventh class, and Chapin Bank had objected to the claim. We affirm.

The underlying facts are not in dispute. The decedent and Nora Cox had each owned 50% of the capital stock of C & T, Inc. During the summer of 1981, they decided to have C & T, Inc., construct and operate a restaurant at Virginia in Cass County. Pursuant to arrangements to obtain financing at the Beardstown Bank, on September 21, 1981, the decedent and Cox executed and delivered to that bank identical, unlimited, continuing, written personal guaranties for the corporate debts of C & T, Inc. At the end of construction, C & T, Inc., executed and delivered to Beardstown Bank a note for $75,000 together with a purported mortgage executed by that corporation covering the premises on which the restaurant was built. The document purported to secure the note. Additional borrowings were made, and C & T, Inc., executed and delivered a $40,000 demand note.

The debtor corporation fell behind in payments, and, on May 12, 1983, Beardstown Bank accelerated the $75,000 note and made demand for payment on both. The decedent asked for additional time on May 18, 1983. No further proceedings concerning the notes took place before the death of the decedent on July 30, 1983. Sometime thereafter, the Beardstown Bank discovered that the real estate which was listed in the purported mortgage of September 21, 1981, was owned by decedent and Cox as joint tenants and not by C & T, Inc. Upon the decedent's death, his interest had passed, by operation of law, to Cox. After negotiations with Cox, but without the consent of the personal representative of decedent's estate, an agreement was entered into between Cox and Beardstown Bank whereby Cox gave a mortgage to that bank covering the land in question and securing the $75,000 note. The consideration given to Cox for her execution and delivery of the mortgage was recited in that instrument in these words:

"For and in consideration of $1.00 and the forebearance [sic] of the First State Bank of Beardstown, Illinois, to immediately pursue the remedies available to it pursuant to a certain Loan Guaranty Agreement, I, Nora M. Cox, signed on September 24, 1981, this indenture witnesseth * * *." (Emphasis added.)

The instrument did not contain any statement that Beardstown Bank reserved its rights against the estate. See Restatement of Security sec. 135(2) (1941).

• 1 The thrust of the defense which Chapin Bank contends that the estate has to the claim of Beardstown Bank arises from the temporary forbearance Beardstown Bank granted to Cox. Chapin Bank asserts that the forbearance impaired the estate's right to contribution from Cox and thereby discharged it of a portion of its liability under the guaranty. Chapin Bank also maintains that negligent failure of Beardstown Bank to obtain a proper mortgage to secure the $75,000 note worked a discharge of decedent's guaranty. We find the latter argument unpersuasive because: (1) Any detriment to the estate resulting from failure to obtain the mortgage was cured when a mortgage was obtained; and (2) the decedent was clearly a participant in the failure to properly secure the $75,000 when he participated in the execution of a mortgage by the corporation of property that he actually owned.

• 2 The first contention by the Chapin Bank presents a much more complicated and difficult question. Beardstown Bank responds that neither the estate nor Chapin Bank were actually damaged by the transaction in which Cox was given a temporary forbearance but were in fact benefited by the security gained. The Beardstown Bank describes the transaction as a commercially reasonable one. In addition, the Beardstown Bank calls our attention to the following provision of the identical guaranties:

"This is a continuing guaranty and shall not be revoked by death, and shall be binding on the heirs, executors, administrators and assigns of the undersigned and shall continue in force under any and all circumstances as to all indebtedness, obligations and liabilities contracted or incurred prior to the receipt of said Creditor of written notice of the revocation hereof." (Emphasis added.)

The Beardstown Bank contends that the foregoing language constitutes a waiver of any conduct in regard to its forbearance to Cox that might otherwise discharge the estate on the decedent's guaranty.

The trial court agreed with the position of the Beardstown Bank and ruled in its favor for those reasons.

The parties agree that, absent contrary agreement between guarantor and guarantee, the release of a co-guarantor relieves remaining guarantors of liability to the guarantee to the extent of the proportionate value of their respective lost rights of contribution against the released guarantor. (Restatement of Security sec. 135(1) (1941); 38 Am.Jur.2d Guaranty sec. 91 (1968).) Thus, had the Beardstown Bank completely released Cox of her guaranty, the estate would have been released to the extent of one-half of the debt owed to Beardstown Bank. The rationale for this is that upon the release of Cox, the estate would be damaged by no longer having a right of 50% contribution against Cox for any sums it became indebted on the guaranty to Beardstown Bank. This would be similar to the rule that a guarantor is discharged when the creditor improperly releases other security. See Rogers v. Trustees of Schools (1868), 46 Ill. 428; Passman v. Budnizky (1936), 284 Ill. App. 533, 1 N.E.2d 707.

Here, we are not faced with a release of a co-guarantor but merely with a promise of a temporary forbearance against that co-guarantor. No case directly in point has been called to our attention. As the decedent and Cox were liable on separate instruments of guaranty rather than on a negotiable note, the law in regard to negotiable instruments is not applicable. (Ishak v. Elgin National Bank (1977), 48 Ill. App.3d 614, 363 N.E.2d 159.) However, if Cox and the decedent had been guarantors on such an instrument, section 3-606(1) of the Uniform Commercial Code would ...

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