Rempa v. LaPorte Production Credit Ass'n
444 N.E.2d 308, 35 U.C.C. Rep. Serv. (West) 1646, 1983 Ind. App. LEXIS 2536 (1983)
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Rule of Law:
Under Article 9 of the Uniform Commercial Code, the 'agreement' creating a security interest is the factual bargain of the parties, allowing extrinsic evidence to determine intent, even for documents signed in blank; however, a party claiming discharge from a note due to a creditor's unjustifiable impairment of collateral must establish both the impairment and the monetary damages incurred.
Facts:
- Daniel Rempa sought a loan to contribute to a new concrete pouring and finishing business partnership.
- The LaPorte Production Credit Association (PCA) loan officer suggested Daniel discuss the loan with his parents, Daniel J. and Stephanie Rempa, who were farmers and eligible for PCA loans.
- On November 2, 1976, Daniel and Stephanie went to PCA to pursue a $20,000 loan for Daniel, and Stephanie emphasized they did not want another lien on their farm equipment.
- A loan application and a blank demand note, security agreement, and financing statement requiring additional signatures from Daniel's wife and father were provided to the Rempas.
- On November 4, 1976, Stephanie returned the signed blank documents to PCA, and Daniel received the loan proceeds.
- In 1979, Daniel's concrete business failed, and the PCA loan remained largely unpaid.
- The security agreement introduced by PCA at trial listed numerous items of the senior Rempas' farm equipment as collateral, despite Stephanie's testimony that she signed blank forms with the understanding that the loan would be secured by construction equipment Daniel would purchase.
- In early 1977, PCA officers allegedly told Stephanie that they had a lien on Daniel's construction equipment, not her farm equipment, as security for the loan.
Procedural Posture:
- LaPorte Production Credit Association (PCA) commenced suit against Daniel E. Rempa, his wife, Daniel J. Rempa, and Stephanie Rempa for the unpaid loan balance and attorney fees.
- The Rempas answered the suit, asserting an affirmative defense that PCA had promised to perfect a security interest in construction equipment purchased with the loan proceeds, failed to do so, and therefore should be precluded from recovering.
- The Rempas also asserted a counterclaim against PCA for actual and punitive damages, alleging PCA's failure to perfect a security interest and harassment.
- Before trial, the parties stipulated to the unpaid loan balance, a reasonable attorney fee, and that the senior Rempas (Daniel J. and Stephanie) had signed the promissory note as accommodation makers.
- Daniel E. Rempa and his wife failed to appear at trial, and judgment was taken against them.
- A trial by jury was held against the senior Rempas.
- At the conclusion of all the evidence, the trial court granted a judgment on the evidence (directed verdict) in favor of PCA.
- The trial court denied the Rempas' subsequent motion to correct errors, stating that no claim of fraud or mistake was pleaded, evidence concerning PCA's agreement about security interest would violate the parol evidence rule, and there was a failure of proof regarding ownership and value of equipment to assess damages.
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Issue:
Does an accommodation maker asserting a defense of impaired collateral under the UCC, based on a creditor's failure to perfect a security interest as agreed or by completing a blank security agreement contrary to the parties' understanding, bear the burden of proving the monetary extent of the damage caused by such impairment to be discharged from liability?
Opinions:
Majority - Garrard, Judge
Yes, an accommodation maker asserting a defense of impaired collateral must establish the monetary extent of the damage caused by the impairment to be discharged from liability. While the trial court erred in concluding that the parol evidence rule barred extrinsic evidence regarding the true agreement for the security interest, and that the question of whether PCA completed the blank security agreement contrary to the parties' understanding was a question of fact for the jury, this error was ultimately moot. The 'agreement' under UCC Article 9 (IC 26-1-1-201(3)) refers to the factual bargain of the parties, allowing extrinsic evidence to ascertain intent, even for documents signed in blank. A security agreement signed in blank implicitly authorizes the creditor to complete it according to the agreed terms, not the creditor's preferences, making the validity of the lien a question of fact. However, for accommodation makers to be discharged under IC 26-l-3-606(l)(b) due to an unjustifiable impairment of collateral, they bear the burden of proving both the failure to properly protect the security and the damage that accrued as a result of that failure, limited to the value of the impaired security. The senior Rempas failed to introduce sufficient evidence (e.g., manufacturer names, serial numbers, ownership, acquisition method, or value at default) to establish the monetary value of the construction equipment or the damages incurred by PCA's alleged failure to perfect a security interest in it. Without such proof, any jury assessment of damages would be speculative. The Rempas' fraud claim also failed because it was premised on a promise of future action rather than a misrepresentation of existing fact. Therefore, despite the trial court's initial error regarding the parol evidence rule, its final judgment in favor of PCA was correct due to the Rempas' failure to prove damages.
Concurring - Staton, Judge
I concur. The Rempas' right to be discharged from their obligation on the note is limited to the financial loss they actually suffered due to PCA's failure to properly perfect a security interest in the construction equipment. To prove this loss, the Rempas needed to present evidence showing how much money PCA could have obtained from selling the construction equipment if the security interest had been properly set up. Since the Rempas did not provide this evidence, they failed to establish their defense of partial release, and therefore, the trial court's judgment should be affirmed.
Analysis:
This case clarifies the interplay between the parol evidence rule and the Uniform Commercial Code (UCC) concerning security agreements, particularly when documents are signed in blank. It establishes that under UCC Article 9, the 'agreement' is the factual bargain, permitting extrinsic evidence to determine the parties' true intent regarding collateral. This is a crucial distinction from traditional contract law principles where the parol evidence rule might strictly limit such inquiry. However, the ruling also reinforces the high evidentiary burden on parties claiming a discharge from liability due to impaired collateral, emphasizing that not only must impairment be proven, but also its specific monetary impact. This means debtors must meticulously document and prove the value of lost or unperfected collateral to succeed with this defense, impacting future litigation involving UCC security interests and accommodation makers.
