Executive Bank of Fort Lauderdale v. Tighe, 54 N.Y.2d 330 (1981)
A surety or guarantor may waive their right to object to the release of collateral securing a debt, and such a waiver, if clear and unambiguous, is enforceable, preventing the surety from being discharged by the creditor’s release of the collateral.
Summary
This case addresses whether a secured lender can release collateral security without discharging the sureties when the instrument of indebtedness, signed by the sureties, authorizes such release. The New York Court of Appeals held that sureties are not discharged when they expressly consent to the release of collateral, distinguishing the debtor’s unwaivable equity of redemption from the surety’s waivable rights in the collateral. The court emphasized that absent fraud or undisclosed benefit to the lender, a surety’s explicit consent to collateral release is enforceable, supporting commercial practices allowing for collateral substitution with the surety’s advance consent.
Facts
Executive Bank of Fort Lauderdale loaned $26,206.14 to Newton Advertising Agency, Inc., evidenced by a promissory note co-signed by the agency’s principals (the defendants). The note was secured by a chattel mortgage on kitchen equipment in a Florida restaurant owned by the debtor. The promissory note contained the provision: “no release of any or all of the security * * * shall release any other maker, comaker, surety, guarantor or other party hereto in any capacity.” Subsequently, the restaurant and its equipment were sold to EGA Corp., and at EGA’s request, the lender agreed to substitute gas equipment for the mortgaged electrical equipment. The gas company later repossessed the substituted equipment due to a prior lien, resulting in the loss of the collateral security for the lender’s note.
Procedural History
The lender sued the guarantors (the co-signers) to recover the unpaid balance on the note. The Supreme Court denied the lender’s motion for summary judgment, arguing that the lender’s release of collateral may have breached its duties to the guarantors, creating a factual issue. The Appellate Division affirmed this denial. The New York Court of Appeals granted leave to appeal.
Issue(s)
Whether a secured lender may release collateral security, as authorized by the instrument of indebtedness signed by the sureties/guarantors, without discharging those sureties from their obligations.
Holding
Yes, because sureties may waive their right to object to the release of collateral securing a debt. A clear and unambiguous waiver is enforceable and prevents the surety from being discharged by the creditor’s release of the collateral.
Court’s Reasoning
The Court of Appeals reasoned that a surety’s rights in collateral can be waived, distinguishing this from a debtor’s unwaivable equity of redemption. The court stated that consent to release collateral may be given in advance and is commonly incorporated in the instrument; it requires no consideration and operates as a waiver of the consenting party’s right to claim discharge. The Court cited Uniform Commercial Code (UCC) section 3-606, which addresses the discharge of obligations due to impairment of collateral, noting the importance of consent. The court emphasized that absent any evidence of fraud or undisclosed benefit to the lender from the collateral substitution, the surety’s consent is controlling. The court observed that commercial and banking practices commonly allow collateral substitution with the advance consent of sureties, a practice that would be undermined if such consent was not enforceable. The court explicitly rejected the argument that any substitution of collateral automatically raises a factual issue regarding the equivalence in value of the substituted collateral. According to the court, “the cause of the difficulty in this case was solely the confusion between a borrower’s nonwaivable right of redemption with a surety’s waivable right to rely on the collateral securing the debt.”