Lesson. Lenders are well served to get the signatures of all parties to a loan, including all guarantors and mortgagees, if the loan is renewed or modified. Otherwise, there is a risk that the guarantor or even a mortgage could be released.
Legal issue. Whether a mortgage was discharged due to a material modification of the guaranteed indebtedness.
Vital facts. Husband and Wife granted a mortgage in the amount of $300,000 on two properties they owned to secure a promissory note executed by Husband’s business. Following a divorce, Wife got Property 1, and Husband got Property 2. Thereafter, Husband’s business and Lender consolidated debts and renewed the note multiple times without Wife’s knowledge. The debt amount increased to nearly $450,000. Husband later sold Property 2 and gave about $110,000 in net proceeds to Lender. Ultimately, Husband was discharged of his debts in a Chapter 7 bankruptcy proceeding. Lender then sought to foreclose on Property 1 to satisfy the remaining debt owed by Husband’s business.
Procedural history. The trial court granted summary judgment for Wife, and Lender appealed.
Key rules. In Indiana, one who mortgages her land to secure another’s debt is called a surety. Indiana does not distinguish guarantors from sureties. A surety’s collateral can be released by a creditor’s actions “such as the extension of the time of payment of the debt, the acceptance of a renewal note, or the release of other security.” When a principal “alters the terms of the contract without the consent of the surety, the surety is discharged, even if the alteration is to the benefit of the surety.” To result in a discharge, the alteration “must be a change which alters the legal identity of the principal’s contract, substantially increases the risk of loss to the guarantor, or places the guarantor in a different position.”
Holding. The Court of Appeals affirmed the trial court’s summary judgment in favor of Wife.
Policy/rationale. Wife originally was a surety for Husband’s business’s debt, but she contended that Property 1 was no longer subject to Lender’s mortgage. Lender argued that there had been no material alteration to the debt but, if there had been, the debt that existed at the time of any material obligation was not discharged. The First Federal Bank opinion thoroughly outlined the complex facts and applicable law, including the Keesling case (see post below). The Court concluded that the alteration of the loan terms between Lender and Husband’s business constituted material alterations of the underlying obligation guaranteed by Wife such that both Wife, as a surety, and Property 1 were discharged.