Executive Bank of Fort Lauderdale v. Tighe, 426 N.E.2d 333 (N.Y. 1981)

A guarantor is not released from their obligation when a creditor fails to perfect a security interest in collateral if the guaranty agreement contains language permitting the creditor to release or reduce the collateral.

Summary

Executive Bank loaned money to Austin Sporting Goods, guaranteed by Tighe. The loan was secured by the company’s inventory. The bank filed a financing statement in the wrong location, rendering its security interest unperfected. Austin Sporting Goods declared bankruptcy, and the trustee sold the inventory. The bank sued the guarantors. The New York Court of Appeals held that the guarantors were not discharged because the guaranty agreement contained provisions allowing the bank to reduce or release the collateral, effectively waiving the right to claim discharge due to impairment of collateral.

Facts

Executive Bank of Fort Lauderdale loaned $15,000 to Austin Sporting Goods, Inc., and Stuart and Jacqueline Austin. Mr. Austin represented that defendants Tighe (his aunt and uncle) would endorse the notes, which they did during a visit to Florida. The loan was secured by Austin Sporting Goods’ inventory and equipment. The bank filed a financing statement with the Broward County Clerk but failed to file with the Florida Secretary of State. The defendants delivered certain stock certificates to the bank.

Procedural History

The trial court initially ruled in favor of the bank, but the Appellate Division reversed, holding that the bank’s failure to perfect its security interest discharged the guarantors pro tanto. On remand, the trial court dismissed the complaint due to insufficient proof of value. The Appellate Division reversed again, holding the bankruptcy record as prima facie proof of value. On the second remand, the trial court entered judgment for the bank, deducting the proceeds from the bankruptcy sale. Both parties appealed to the Appellate Division, and the appeal and cross appeal came before the New York Court of Appeals.

Issue(s)

1. Whether the bank was obligated to give the guarantors notice of the bankruptcy sale of the collateral.
2. Whether the bank’s failure to perfect its security interest affects the guarantors’ obligation.
3. Whether the bank is entitled to hold the stock certificates until the judgment is satisfied.

Holding

1. No, because the notice requirement applies only to sales by a secured party, not by a bankruptcy trustee.
2. No, because the guarantors consented to the impairment of collateral through provisions in the notes they signed.
3. Yes, because the shares were pledged as security for the guarantors’ obligations, which remain unsatisfied.

Court’s Reasoning

The court reasoned that Florida Statutes Annotated § 679.9-504(3) (UCC § 9-504(3)) requires notice of sale only when the secured party conducts the sale. Here, the bankruptcy trustee sold the collateral, so the bank had no duty to notify the guarantors. Regarding the failure to perfect the security interest, the court focused on § 3-606 of the Uniform Commercial Code (impairment of collateral). The court referenced Indianapolis Morris Plan Corp. v. Karlen, 28 NY2d 30 stating that a guarantor can consent to impairment of collateral, waiving their right to discharge. The notes stated that “Additions to, reductions or exchanges of * * * the Collateral * * * may from time to time be made without affecting the provisions of this note”, and that “All parties liable for the payment or collection hereof * * * consent to * * * the release of any obligor or collateral or any part thereof, with or without substitution.”
The court cited Etelson v. Suburban Trust Co., 263 Md 376, noting it would be illogical to require the bank to file a financing statement when it could have released the collateral without affecting the guarantor’s obligation. The court concluded the guarantors relieved the bank of liability for misfiling. The court reasoned that until the guarantors’ obligations are liquidated, the bank is entitled to retain the security pledged. The court states, “From a guarantor’s point of view it makes no difference when or with what intent, short of bad faith, the collateral is reduced or released. From his point of view the effect (increase of his potential liability through the decrease of his source of reimbursement) is exactly the same.”