United States District Court, Central District of Illinois, Springfield Division
October 23, 1986
FEDERAL DEPOSIT INSURANCE CORPORATION, IN ITS CORPORATE CAPACITY, PLAINTIFF,
THEODORE HARDT, DEFENDANT.
The opinion of the court was delivered by: Mills, District Judge:
Is the guarantor discharged from liability where the
creditor fails to perfect its security interest in the
Summary judgment for Plaintiff.
This suit is brought by the Federal Deposit Insurance
Corporation (FDIC), in its corporate capacity. The FDIC seeks
to collect on a note and related guaranty which it purchased
from the receiver of an insolvent bank. Dennis Hardt is the
maker of the note and Theodore Hardt is the guarantor of the
note. The first count seeks collection against the maker and
the second count predicates liability on the guaranty
agreement. This Court has since dismissed Count I for failure
to serve process on Defendant Dennis Hardt.
The matter is now before the Court on cross motions for
summary judgment as to Count II. Because the FDIC appears in
its corporate capacity, jurisdiction is properly based on
12 U.S.C. § 1819 (1982). See Federal Deposit Ins. Corp. v.
Braemoor Associates, 686 F.2d 550 (7th Cir. 1982). The issue
raised on the cross motions is whether the guarantor is
discharged from the liability on the guaranty agreement due to
the creditor's failure to perfect a security interest in
collateral securing the underlying obligation.
The facts are not in dispute. Dennis Hardt signed and
executed a promissory note payable to First National Bank of
Danvers on April 28, 1983. The note was to be secured by a
Ford van. In connection with the note, Theodore Hardt entered
into a guaranty agreement with the bank on April 20, 1983. He
agreed to guarantee repayment of the obligation up to $18,000.
The bank failed to perfect a security interest in the Ford
On or about August 5, 1983, the Comptroller of the Currency
determined that the bank was insolvent, ordered the bank
closed, and tendered to FDIC the appointment as Receiver of
the bank. FDIC, as receiver, solicited bids and sold certain
assets and liabilities of the bank. FDIC, in its corporate
capacity, purchased the note and guaranty in question. FDIC
made a demand for payment upon both the maker and the
guarantor and both parties defaulted on the respective
agreements. We are now concerned only with the liability of
the personal guaranty of Theodore Hardt.
Summary judgment is proper only when "there is no genuine
issue as to any material fact and . . . the moving party is
entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c).
Cross motions for summary judgment require no less careful
scrutiny of the factual allegations. Lac Courte Oreilles Band
of Lake Superior Chippewa Indians v. Voight, 700 F.2d 341, 349
(7th Cir. 1983).
In determining whether such undisputed facts entitle one of
the parties to judgment in their favor, the Court's inquiry
"unavoidably asks whether reasonable jurors could find by a
preponderance of the evidence that the [moving party] is
entitled to a verdict — `whether there is [evidence] upon
which a jury can properly proceed to find a verdict for the
party producing it, upon whom the onus of proof is imposed.'"
Anderson v. Liberty Lobby, Inc., ___ U.S. ___, 106 S.Ct. 2505,
2511, 91 L.Ed.2d 202 (quoting Improvement Co. v. Munson, 14
Wall. 442, 448 (1872) (emphasis in original)).
The parties are essentially in agreement as to the facts
that are necessary to resolve the issues presented by the
motions now before the Court. The entry of summary judgment is
Plaintiff, FDIC, bases its claim of liability on the
guaranty agreement executed by Defendant, Theodore Hardt.
Hardt defends on the basis of the predecessor bank's failure
to perfect a security interest
in the collateral securing the loan. Ill.Rev. Stat., ch. 26,
§ 3-606(1)(b) (1985).*fn1
The FDIC's reply to the defense is twofold. Initially it
argues that Defendant waived his right to complain about the
impairment of collateral by express provision of the guaranty
agreement. Next, the FDIC asserts that § 3-606 is not
applicable because the guaranty agreement is not a negotiable
instrument. We will discuss these contentions in the reverse
order from which they were raised. Logically, a discussion of
the applicability of statutory language providing a defense
precedes a discussion of a purported waiver of that defense.
Ill.Rev.Stat., ch. 26, § 3-606 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
Defendant relies upon this section of the Uniform Commercial
Code (UCC) for the proposition that he is released from
liability on the guaranty agreement. Defendant is correct in
maintaining that failure by the holder to perfect a security
interest in the collateral securing the debt does constitute
unjustifiable impairment of collateral within the meaning of
the Code. North Bank v. Circle Investment Co., 104 Ill. App.3d 363,
369, 60 Ill.Dec. 105, 108, 432 N.E.2d 1004
, 1007 (1982).
However, this is only part of the inquiry under § 3-606 of the
UCC. In order to benefit from the discharge from liability, the
Defendant must be a "party to the instrument" within the
meaning of the UCC.
Therefore, prior to considering what constitutes
unjustifiable impairment of collateral, we must determine
whether the guaranty agreement is an instrument under Article
3 of the Illinois version of the UCC.
The FDIC cites two cases for the proposition that a guaranty
agreement is not an instrument under Article 3 of the UCC. In
Ishak v. Elgin National Bank, an Appellate Court of Illinois
construed a similar guaranty agreement as "a separate contract
for value entered into by the plaintiff independent of the
promissory note." 48 Ill.App.3d 614, 617, 6 Ill.Dec. 630, 632,
363 N.E.2d 159, 161 (1977). On this reasoning the Court found
that the guaranty agreement was not a negotiable instrument. A
federal district court applying Illinois law adopted
essentially the same reasoning and result. Exchange National
Bank of Chicago v. Brown, 41 UCC Rep.Serv. 895, Slip Op. No.
84C10801 (N.D.Ill., August 9, 1985) [Available on WESTLAW, DCTU
We agree with the result reached in these cases. Hence, we
find that the guaranty agreement in the present case is not a
negotiable instrument. However, we speak further to explain
precisely why the guaranty is not a negotiable instrument.
To say that the agreement is "separate" from the promissory
note does not fully explain why the agreement is not an
instrument under § 3-606 of the Code.
The Code defines an instrument as a negotiable instrument.
Ill.Rev.Stat., ch. 26, § 3-102 (1985). Thus, to be an
instrument at all, the instrument must be negotiable. A
negotiable instrument is defined as:
(1) Any writing to be a negotiable instrument
within this Article must
(a) be signed by the maker or drawer; and
(b) contain an unconditional promise or order
to pay a sum certain in money and no other
promise, order, obligation or power given by the
maker or drawer except as authorized by this
(c) be payable on demand or at a definite time;
(d) be payable to order or to bearer.
Ill.Rev.Stat., ch. 26, § 3-104(1) (1985).
If § 3-606 is indeed applicable to this case, the guaranty
agreement must meet the statutory definition of negotiable
instrument delineated above. However, a guaranty agreement by
its very definition does not meet this requirement. A
negotiable instrument must contain an "unconditional promise to
pay a sum certain." Ill.Rev.Stat., ch. 26, § 3-104 (1985). A
guaranty agreement, however, is conditioned on non-payment by
the principal debtor. This is true regardless of whether the
agreement is labeled as an unconditional or conditional
guaranty. The fact that the agreement itself is conditional is
demonstrated in that "a creditor may not refuse a tender of
payment by the principal debtor and then force the guarantor to
make good on his guaranty." Federal Deposit Insurance Corp. v.
Galloway, 613 F. Supp. 1392, 1400-01 (D.Kan. 1985); accord
United States v. Meadors, 753 F.2d 590, 599 (7th Cir. 1985).
Further, the guaranty fails to meet the "sum certain"
requirement of negotiability. A "sum certain" is not payable
because the amount due on the guaranty is dependent upon how
much has been paid by the principal obligor. Cobb Bank & Trust
Co. v. American Manufacturers Mutual Ins. Co., 459 F. Supp. 328
Finally, McHenry State Bank v. Y & A Trucking, Inc., a case
cited by Defendant, is distinguishable. In McHenry State Bank,
the Court found that a guaranty executed on the back of a
promissory note was negotiable and that § 3-606 was applicable.
117 Ill.App.3d 629, 632, 73 Ill.Dec. 485, 487, 454 N.E.2d 345,
348 (1983). More specifically, the Court found that the
promissory note itself was negotiable. Id. Thus, because the
guaranty was part of a note, which itself was a negotiable
instrument, § 3-606 was applicable. Here, the guaranty is not
part of an instrument which is in and of itself negotiable. It
is in this narrow instance that the "separateness" of the
guaranty may be dispositive of whether § 3-606 applies.
For these reasons we find that the guaranty agreement
executed by Defendant is not a negotiable instrument under
Article 3 of the UCC. Therefore, we hold that the defense of
unjustifiable impairment of collateral provided by § 3-606 of
the UCC is not applicable to this transaction.*fn2
Because we have held that § 3-606 is inapplicable to this
case, it is not essential that we discuss waiver. Nevertheless,
because it provides an additional ground for our holding, we
will briefly discuss this question.
We believe that Defendant waived any right to complain of
the failure to perfect the security interest through the
express language of the agreement.
The agreement executed by Defendant provided in part:
The undersigned consent that without notice to,
and without impairing or affecting the
obligations of, the undersigned (1) said Bank,
its successors or assigns, may from time to time
change the manner, place or terms of payment
and/or extend the time of payment of, or
renew, in whole or in part, any obligation of the
Borrower for such time or times as it may
determine, and the guaranty herein made shall
apply to any obligation changed and/or extended
in any manner, (2) any property by whomsoever and
at any time and from time to time pledged or
mortgaged to secure such obligations may be
exchanged, released, surrendered, realized upon, or
otherwise dealt with in any manner, as said Bank,
its successors or assigns, may determine, (3) and
said Bank may settle or compromise with the
Borrower and any other person or persons liable in
any manner on such obligations hereby guaranteed on
such terms and to such extent as it sees fit and
may subordinate the payment of all or any part
thereof to the payment of any obligations which may
be due to it or others. (Emphasis added).
In Exchange National Bank of Chicago v. Brown, a similar
provision was held to be a valid consent to an act waiving or
releasing a security interest in collateral securing the
underlying debt. We believe the language of this agreement,
while not precisely the same, is close enough to the language
in Brown to warrant the same conclusion. 41 UCC Rep.Serv. 895,
Slip Op. No. 84C10801 (N.D.Ill. August 9, 1985) [Available on
WESTLAW, DCTU database]. See also National Acceptance Co. v.
Wechsler, 489 F. Supp. 642
Defendant argues that because the guaranty in question does
not specifically waive any "failure, neglect or omission" on
the part of the creditor, there is no valid waiver as to the
bank's failure to perfect the security interest. We disagree.
Consent to affirmatively release or surrender or otherwise
deal with collateral certainly includes an ability to release
the collateral through neglect or omission. To say that the
creditor can completely dispose of collateral but would retain
liability to perfect on the very same collateral does not make
sense. The fact that the collateral is surrendered by act or
omission is not of great significance so long as there exists
a valid consent to its release. Therefore, we find that
Defendant waived the right to complain about the failure to
perfect the security interest.
For all of the foregoing reasons, Plaintiff's motion for
summary judgment is ALLOWED. Defendant's motion for summary
judgment is DENIED. Case CLOSED.