ON PETITION TO TRANSFER
In Farmers Loan & Trust Co. v. Letsinger (1994), Ind. App., 635 N.E.2d 194, the Court of Appeals held that the Indiana common law rule should be that when a creditor unjustifiably impairs collateral securing a debt, independent, absolute, continuing guarantors of that debt should be discharged to the extent that the creditor has impaired the collateral. Id. at 199-200. Farmers Loan has petitioned this court to transfer the decision of the Court of Appeals, Ind.Appellate Rule 11(B), because it believes that decision is either contrary to ruling precedent of this court, App.R. 11(B)(2)(a), or that the Court of Appeals erroneously decided a new question of law. App.R. (11)(B)(2)(b). We agree with the Court of Appeals.
The Court of Appeals adequately stated the facts of the case, and we simply quote them here:
Letsinger, 635 N.E.2d at 195-96.
The trial court specifically found that the Letsingers, in their capacity as endorsers of the promissory notes, were accommodation parties to the notes under Indiana Code § 26-1-3-415(1) of the Uniform Commercial Code. See now Ind. Code § 26-1-3.1-419(c) (Burns Supp. 1994). As accommodation parties to a negotiable instrument, unless they had consented to the unjustifiable impairment by Farmers Trust of the collateral securing the notes, the Letsingers were entitled to interpose the defense provided for in Indiana Code § 26-1-3-606 (Burns 1992) [§ 3-606], which provided in part:
See now Ind. Code § 26-1-3.1-605(e) (Burns Supp. 1994). The trial court found that the Letsingers, in their capacity as accommodation parties, did not effectively consent to the bank's impairment of the collateral when it allowed its perfected security interest in T-C's corporate property to lapse. Consequently, the trial court permitted the Letsingers to interpose the defense provided for in § 3-606 to defeat the bank's claim against them as accommodation parties to the notes.
The Court of Appeals affirmed the trial court with respect to Farmers Loan's claim against the Letsingers' liability as accommodation parties. Letsinger, 635 N.E.2d at 196-199. In its Petition to Transfer, Farmers Loan does not challenge the decision of the Court of Appeals on this issue. We therefore now summarily affirm, expressly adopt, and incorporate by reference Parts I and II of the opinion of the Court of Appeals. App.R. 11(B)(3).
In its Petition to Transfer and in its brief in support of its petition, Farmers Loan does dispute, however, that the Letsingers were entitled to the same defense on the bank's claim against them on the guaranty, since the guaranty is not a negotiable instrument. Because the guaranty executed by the Letsingers was not a negotiable instrument, Farmers Loan argues, Indiana common law should control, not the UCC and not, in particular, the defense provided for in § 3-606.
We agree with Farmers Loan that the UCC does not control this case. The guaranty executed by the Letsingers was not a negotiable instrument because, inter alia, it was an unlimited guarantee, and so not a promise to pay a sum certain. Ind. Code § 26-1-3-106 (Burns 1992) (See now Ind. Code § 26-1-3.1.-104(a) (Burns Supp. 1994)). Because no particular provision of the UCC governs the bank's claim on the guaranty, Indiana common law and the Indiana law of equity control. Indiana Code § 26-1-1-103 (Burns 1992). In its Petition to Transfer,
None of the cases cited by Farmers Loan, however, addresses the question of whether, under the common law of Indiana, a guarantor may avoid making good its guaranty when the creditor has impaired the collateral securing the principal debt. The Indiana Comment to § 3-606 says:
(Emphasis added). And indeed, the history of the impairment of collateral defense, as it has now come to be known since the adoption of the UCC in Indiana, reaches well beyond the birth of the UCC. In Stewart v. Davis' Executor (1862), 18 Ind. 74, we said:
Id. at 75-76.
That a guarantor may interpose the defense that the creditor impaired the collateral makes sense for two reasons. First, the guarantor at the time of making a guaranty may make the judgment that the collateral for the loan to the guarantor's principal will be sufficient to cover the debt. If the creditor impairs the collateral, and the guarantor has not consented to release or other impairment of the collateral, the guarantor may become exposed to liability beyond the guarantor's expectation at the time the parties entered into the contract.
In this case, it is undisputed that T-C's corporate property would have covered T-C's debt to Farmers Loan had the bank not failed to refile its financing statement at or before the five-year mark on the loan. Because
Second, a guarantor who satisfies the principal debtor's obligation to the creditor generally steps into the shoes of the creditor, becoming subrogated to the creditor's claim and assuming both the creditor's rights and duties. Ertel v. Radio Corp. of America (1974), 261 Ind. 573, 577, 307 N.E.2d 471, 474.
It appears to us clear that the Court of Appeals decision was, in the sense meant by Farmers Loan, neither contrary to the controlling precedent of this Court nor one of first impression in Indiana. The Court of Appeals attempted to harmonize Indiana law by extending to non-negotiable guaranties the impairment of collateral defense provided by § 3-606 for negotiable instruments. This undertaking was not really necessary, however, since § 3-606 had already incorporated the general law of surety. That is, § 3-606 extended to negotiable instruments that defense which had previously and for some time been available for guaranties. See Ind. Code § 26-1-3-606, Indiana Comment.
For the reasons above, we now grant transfer, summarily affirm, adopt, and incorporate Parts I & II of the opinion of the Court of Appeals, App.R. 11(B)(3), and affirm the decision of the trial court.
SHEPARD, C.J., and DeBRULER, DICKSON, and SELBY, JJ., concur.