Provident Bank v. Gast , 57 Ohio St. 2d 102 ( 1979 )

Celebkezze, C. J.

The fundamental issue raised in this appeal requires a statutory analysis of R. C. 1303.72(A) (1) (Uniform Commercial Code Section 3—606[1] [a]), and can be phrased as follows: When a holder of a note releases two of four co-guarantors from their guaranty, does that release totally discharge the remainiixg guarantors or does it discharge them only to the extent of their right to contribution from the previously released parties?

The trial judge concluded that the discharge was limited, in that the $15,000 guaranty of the appellees was reduced by $7,500, or the extent of their riglxt of contribution from the Tonkens. In contrast, the Court of Appeals, read the statute to permit a discharge identical to that outlined in the release, $47,479.16 and, therefore, well in excess of appellees’ original guaranty of $15,000. The effect of that construction of the statute was to give the appellees a total discharge.

The provisions of R. C. 1303.72(A)(1) have yet to. be construed by this court. In light of that fact, and for the sake of clarity, this opinion will examine the steps preliminary to ixxvoking the “discharge” provision of R. C. 1303.72, as well as the ultimate issue presented for review covering the “extent” of that discharge.

A resolution of the present controversy concernixxg the-“extent” of the dischax*ge envisioned by the G-eneral Assembly rcqxxires axx examination of the following: (1) the-legislative intent underlying the statute and, more specifically, the language of both R. C. 1303.72(A)(1) and (A) (2); (2) case law construing R. C. 1303.72(A) (2); (3) preUniform Commercial Code principles of suretyship governing the rights and liabilities of co-sureties and (4)' various commentaries on the Uniform Comercial; Code.

The statute in dispute, R. C. 1303.72(U. O. C. 3—606), reads as follows:

“(A) The holder discharges any party to the instrument to the extent that without such party’s consent the holder:

“(1) without express reservation of rights, releases ■or agrees not to sue any person against whom the party has to the knowledge of the holder a right of recourse or -agrees to suspend the right to enforce against such per-non the instrument or collateral or otherwise discharges •such person, except that failure or delay in effecting any required presentment, protest or notice of dishonor with respect to any such person does not discharge any party as to whom presentment, protest, or notice of dishonor is effective or unnecessary; or

“(2) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right to recourse.

“(B) By express reservation of rights against a party with a right of recourse the holder preserves:

“(1) all his rights against such party as of the time when the instrument was originally due; and

“ (2) the right of the party to pay the instrument as of that time; and

“(3) all rights of such party to recourse against others. ’ ’

As previously indicated, the issue herein involves the correct interpretation of what the General Assembly intended by the language in R. C. 1303.72(A)(1)—that a party to the instrument is discharged “to the extent that” the holder releases any person against whom that party possessed a “right of recourse.” In wrestling with this issue the Court of Appeals noted the “abstruse” nature of this portion of the statute. We agree that R. C. 1303.72 (A) (1) is ambiguous, and, therefore, various rules of statutory construction become applicable.

The first step in statutory analysis is to ascertain the rationale underlying the act and, second, to determine whether the statute applies to the facts as presented. The Official Comments to U. C. C. 3—606(1) (A) reveal that it was meant to be a codification of various suretyship defenses :

“1. * * * The suretyship defenses here provided are not limited to parties who are ‘secondarily liable,’ but. are available to any party who is in the position of a surety, having a right of recourse either on the instrument or dehors it * *

Applying that rationale to the parties in the present appeal it is clear that the appellees and the Tonkens, as. co-guarantors, are included within the reach of the statute due to their classification as “sureties.”²

Furthermore, since appellees and the Tonkens were all guarantors to the extent of $15,000, appellees possessed a “right of recourse” against the Tonkens by way of contribution. Beneficial Finance Co. of N. Y. v. Husner (1975), 82 Misc. 2d 550, 369 N. Y. Supp. 2d 975. Although the “right of recourse” arose by way of a separate guaranty, it is nevertheless a right “dehors” the instrument and, therefore, encompassed by the statute.

Before turning to the question of the “extent” of appellees’ discharge it is necessary to note the statutory prerequisites to effecting that discharge in the first instance. The requirements set forth in R. C. 1303.72(A)(1) can bo summarized as follows: (1) The “holder” of the note (appellant) releases a “person” (Tonkens) against whom the aforementioned! “right of recourse” exists with knowledge, of the existence of that “right of recourse”; (2) the release is executed without the consent of the remaining co-sureties-guarantors (Hamilton and Ruth Cast); and (3) the holder has no “express reservation of rights” against those particular parties. The record reflects the existence of all three requirements.

Turning to the question of whether the discharge is total or partial, it is imperative for this court to consider •certain fundamental rules when it is called upon to interpret an ambiguous statute. R. O. 1.49 codifies some of •these general principles and reads, in pertinent part:

“If a statute is ambiguous, the court, in determining the intention of the legislature, may consider among other matters:

ti# # #

“ (D) The common law or former statutory provisions, including laws upon the same or similar subjects;”

Prior to the adoption of the Uniform Commercial Code in Ohio in 1962, the general rule regarding the release of joint debtors was codified in the predecessors to R. C. 1779.09 through 1779.11 and enunciated by this court in Walsh v. Miller (1894), 51 Ohio St. 462. In that decision this court held that the release of one of several co-sureties operates to discharge the remaining sureties only to the extent of their right to seek contribution from the party so released. This rule changed the previous common law position providing for a total discharge and is explained further in 74 American Jurisprudence 2d 62, Suretyship, Section 83, as follows:

* * But in most jurisdictions this common-law rule has been modified or departed from by the interposition of equitable principles according to which the cosurety is granted a release from liability to the extent to which he suffered actual prejudice, holding him liable for his proportion of the obligation, but exonerating him to the extent to which he could have claimed contribution from his cosurety had the latter not been released. This is also the rule supported by the Restatement.”

Section 135 of the Restatement of Security also incorporated this general rule advocating a proportionate discharge, as well as containing language similar to the “reservation of rights” provision set forth in R. C. 1303.72 (B). Section 135 reads as follows:

“(1) Subject to the rule stated in Subsection (2), where the creditor releases one of several cosureties, the obligations of the remaining sureties to the creditor are reduced to the extent that upon performance of their obligations the released surety could have been compelled to-make contribution.

“ (2) Where the creditor releases one of several cosureties and as a part of the release reserves his rights against the remaining sureties, the release as such does not have the effect of discharging or reducing the obligations of the remaining sureties.”

The principle has also been paraphrased in Simpson’s-Handbook on the Law of Suretyship, Section 79, at page-400, as follows:

“If a creditor releases one of several cosureties, the-remaining sureties are discharged to the extent of thecontributive share of the surety released. Where the creditor reserves his rights against the remaining sureties, the release is construed as a covenant not to sue. As such, it does not have the effect of discharging to any extent the-obligations of the remaining sureties. * * *"³

With the enactment of the Uniform Commercial Code-in Ohio, it became clear that the provisions of R. C. 1303.--72 govern the release and discharge of co-sureties such as-co-guarantors on a negotiable instrument. However, there-is no indication, from a reading of that statute, that the-General Assembly intended to change the pre-Uniform Commercial Code position both in this state and as enunciated in the Restatement of Security with respect to the-general rule advocating a proportionate discharge. Furthermore, a reasonable construction of the “to the extent that” language, as it is applied in R. C. 1303.72(A) (1),. leads this court to the conclusion that the General Assembly intended to limit the discharge of a non-consenting co-surety to his right of contribution.

This particular construction of R. C. 1303.72(A)(1) (U. C. C. 3—606 [1] [a]), providing for a partial, as opposed to a total, discharge, has also been espoused by various •commentaries on the Uniform Commercial Code. See, generally, 3 Anderson, Uniform Commercial Code 127, at fn. 1, Discharge by Release, Section 3-606:4; 2 Bender’s Uniform Commercial Code Service, Hart & Willier, Commercial Paper, page 13-44, Section 1319 [1], and page 13-69, Section 13.24 [4]; White & Summers, Uniform Commercial Code 434, at note 121, Section 13-14.⁴

In addition, division (A) of R. C. 1303.72, which contains the critical phrase, “to the extent that,” also modifies subdivision (A)(2) of that statute dealing with a discharge wherein the holder “unjustifiably impairs any collateral.” Courts from other jurisdictions construing that portion of the statute have held that the extent of the discharge permitted is limited by the extent of the injurv or impairment of the collateral. See, e. g., Langeveld v. L. R. Z. H. Corp., (N. J. Sup. Ct. 1977), 22 UCC Rep. Ser. 106; First National Bank, Giddings, v. Helwig (Tex. Civ. App. 1971), 464 S. W. 2d 953; Christensen v. McAtee(1970), 256 Ore. 333, 473 P. 2d 659. Thus, the pro tanto< discharge available under subdivision (2) is further evidence of a legislative intent to provide for a similar proportionate discharge pursuant to a release under subdivision (1).

In conclusion, when one of several co-guarantors on a note is completely released from his obligation by the' holder, without an express reservation of rights, the release operates to discharge the remaining co-guarantors,, pursuant to R. C. 1303.72(A)(1), to the extent of their right to contribution from the co-guarantor so released. The trial judge was correct in so interpreting the statute' and concluding that the appellees remained liable in the-sum of $7,500.

Therefore, the judgment of the Court of Appeals must, be reversed.

Judgment reversed.

Herbert, W. Brown and Sweeney, JJ., concur. P. Brown and McCormac, JJ., dissent. Holmes, J., not participating. McCormac, J., of the Tenth Appellate District, sitting for Locher, J.

2 R. C. 1301.01 (NN) states: “‘Surety’ includes guarantor.”

3 In his discussion of this general principle of law, Professor Simpson sets forth three different theories that have been used to justify limiting the discharge of the remaining sureties to the extent of the contributive share of the surety released. See the analysis at pages 400-403.

4 In note 121, the authors discuss a hypothetical situation, analogous to the current appeal, wherein a holder releases one of two co-makers •on a note bringing into operation the provisions of R. C. 1303.72(A) (1) (U. C. C. 3—606[1] [a]) :

“When two makers sign a note but neither is an accommodation party, and the holder extends time for one or releases him, what result under section 3—606? On its face, section 3—606 seems to discharge the other co-maker to the extent of half his liability, even though such co-maker is not an accommodation party. This is so because 3—606 ‘discharges any party to the instrument to the extent that without such party’s consent the holder . . . releases or agrees not to sue any person against whom the party has to the knowledge of the holder a right recourse. . . .’ If the parties were co-makers.to a note and neither was an accommodation party, one co-maker would have a right of recourse by way of contribution against the other party for one-half the note. Thus even though the co-maker is not an accommodation party, b« would be discharged to the extent of one-half by 3—606(1) (a).” (Emphasis sic.)

For an interesting discussion of the problems inherent in an interpretation of U. C. C. 3—606(1) (a) and the cryptic “to the extent that” language contained therein, see Note, Suretyship in Article 3 of the Uniform Commercial Code, 17 West. Res. L. Rev 318-25 (1965).