Home Center Supply of Maryland, Inc. v. Certainteed Corp.

BELL, Judge. In this case, Appellant indorsed a promissory note representing an antecedent obligation owed by the maker of the ⁴⁹⁹ note to the payee. During the discussions about the note, the payee promised to extend a line of credit to the maker of the note. The maker defaulted on the note.

The question now before us is whether the alleged failure of the payee to fulfill its promise to extend credit excused liability on the part of the indorser of the note. We hold that it did not. Before we address the merits of this issue, a brief factual background is in order. CertainTeed Corporation, a manufacturer of roofing materials and other building products, entertained a compatible business relationship with Home Center Supply of Maryland, Inc., for approximately ten years prior to March 1982.

Joseph DelPo, as president of Home Center, personally supervised its business with CertainTeed. As of March 1982, Home Center owed CertainTeed over $170,000, of which about $100,000 was delinquent. In order to reduce the amount in arrears and to formulate a basis upon which the two companies could continue their business relationship, a meeting was held on March 31, 1982 among DelPo, F. Lee Seery, regional credit manager of Certain-Teed, and his immediate supervisor, Bing Miller. At the meeting, CertainTeed agreed to reduce the indebtedness owing from Home Center to CertainTeed through October 1981 to a debt evidenced by a promissory note so that it could be removed from CertainTeed’s books as a past due debt on an open account.

The principal amount of the note was $41,968.47 with no interest and was to be paid in monthly installments of $3,497.37. DelPo personally indorsed the note. To help reduce the remaining indebtedness, it was further agreed that with each new order from CertainTeed, Home Center would pay $500.00 in addition to the purchase price of the materials and that CertainTeed would continue to sell to Home Center on an open account up to $150,000.00. The note did not contain any reference to these further agreements. ⁵⁰⁰ Home Center made five payments on the note none of which, CertainTeed alleges, was timely made.

Beginning in October of 1982, no further payments were forthcoming. Several prior checks had been dishonored for lack of sufficient funds or were subject to stop payment orders. DelPo claims that he stopped payment on the checks because he was confident the amount owed to CertainTeed was below $150,000.00. As a result of the defaults by Home Center, CertainTeed accelerated the balance due on the note, $24,481.62, and called for immediate payment in full.

When no payment was forthcoming, CertainTeed initiated the present action to collect the entire balance due of $121,284.40 on the open account. As to that summary judgment was entered against Home Center and DelPo. At trial, the only issue contested was the liability of DelPo as an indorser on the promissory note made by Home Center in the original amount of $41,968.47. DelPo defended against his liability as an indorser on the ground that CertainTeed did not fulfill its obligation to extend Home Center a $150,000.00 line of credit, which he alleged it had promised to do as consideration for his indorsement.

Home Center had paid the note down to $24,481.62. After taking evidence, the court found in favor of CertainTeed. DelPo appeals from the decision of the Circuit Court for Montgomery County, Maryland, entering judgment against him for $24,481.62. Although DelPo raises three specific allegations in his brief, the thrust of his argument is that he should be relieved of his obligation as an indorser on the promissory note because the consideration for which he allegedly bargained, the $150,000.00 line of credit, never materialized.

To address DelPo’s contention, we must first determine if the promissory note represents a negotiable instrument. If the note qualifies as a negotiable instrument, we then ask whether CertainTeed has the status of a holder in due course. If CertainTeed is a holder in due course, we then ⁵⁰¹ must consider whether DelPo can raise the defense of failure of consideration on the part of CertainTeed. And finally, if the defense can in fact be raised against Certain-Teed, we will proceed to analyze whether CertainTeed’s alleged failure of consideration relieved DelPo from liability- At the outset, however, we note the status of DelPo as an indorser and his obligations resulting therefrom.

In this case, DelPo, by his personal indorsement, undertook to “back up” the performance of Home Center and thereby give CertainTeed the added assurance of having another party to the obligation. It is a common practice for a surety such as DelPo to appear on a note as either a co-maker or as an indorser. In either case, he becomes an accommodation party and owes the holder of the note the obligation of either the maker or the indorser. It makes little difference in this case whether appellant is a maker or an indorser, though, since the contract and warranty liabilities of each class of signatories to a note are not so dissimilar as to predicate liability upon the distinction between a maker and an indorser.

Schaeffer v. United Bank & Trust Co., 32 Md.App. 339 , 360 A.2d 461 (1976), aff'd, 280 Md. 10 , 370 A.2d 1138 (1977). As between the surety, DelPo, and the debtor, Home Center, Home Center has the primary obligation to pay the debt. Since the creditor, CertainTeed, is entitled to only one performance and the debtor receives the benefit of the transaction, the surety’s obligation is undertaken with the expectation that the debtor will meet his commitment to the creditors; thus, if the surety is made to pay the principal’s debt, he has the right to recover from the principal. White and Summers, Uniform Commercial Code, § 13-12 (1980).

Section 3-415 of the Commercial Code defines accomodation party as “one who signs the instrument in any capacity for the purpose of lending his name to another party to it.” Md.Code (1974, Repl.Vol.1975) Commercial Law Article, § 3-415(1). It is readily apparent that DelPo ⁵⁰² lent his name to Home Center to facilitate the continuation of the business relationship with CertainTeed. The actual language of § 3-415(1) indicates that an accommodation party also signs in a particular capacity, as a maker, acceptor or indorser of an instrument. The Official Comment 1 to § 3-415 explains that: Subsection (1) recognizes that an accommodation party is always a surety (which includes a guarantor), and it is his only distinguishing feature.

He differs from other sureties only in that his liability is on the instrument and he is a surety for another party to it. His obligation is therefore determined by the capacity in which he signs. An accommodation maker or acceptor is bound on the instrument without any resort to his principal, while an accommodation indorser may be liable only after presentment, notice of dishonor and protest. Moreover § 3-415(2) refers specifically to liability of an accommodation party “in the capacity in which he has signed.” It follows therefore that DelPo is an accommodation party with liability as an indorser of the note.

As an indorser, DelPo promised that “upon dishonor and any necessary notice of dishonor and protest he will pay the instrument according to its tenor at the time of his indorsement to the holder ____” Md.Code (1974, Repl.Vol.1975) Commercial Law Article § 3-414(l). 1 A. Is the promissory note a negotiable instrument? Any writing to be a negotiable instrument within the Commercial Code must (a) Be signed by the maker or drawer; and ⁵⁰³ (b) Contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the maker or drawer except as authorized by this title; and (c) Be payable on demand or at a definite time; and (d) Be payable to order or to bearer. Md.Code (1974, Repl.Vol.1975) Commercial Law Article § 3-104. Home Center and DelPo, individually, signed a promissory note to CertainTeed which provided as follows: May 3, 1982 $41,968.47 For value received I promise to pay CertainTeed Corporation or order, the sum of Forty-One Thousand Nine Hundred Sixty-Eight and 47/ioo Dollars, at the office of Certain-Teed .... in monthly installments, payable as follows, to wit: $3,497.37 dollars on the 10th day of May 1982, and 3,497.37 dollars on the 10th day of each succeeding month thereafter, except final installment of 3,497.40 until the whole sum named is finally paid____ If default is made in the payment of any installment when due, then all the remaining installments shall become due and payable at once .... /S/ Home Center Supply of Md., Inc. /S/ Joseph M. DelPo (President) /Endorsed/ Joseph M. DelPo— Individual Applying § 3-104 to this note, we find that it is signed by the maker, Home Center; it is payable at a definite time; and it is payable to order.

We also find that subpart (l)(b) of § 3-104 is satisfied. That section is intended to make clear that, so far as negotiability is affected, the conditional or unconditional character of the promise or order is to be determined by what is expressed in the instrument itself. This note on its face contains an “unconditional” promise to pay $41,968.47. The agreement by ⁵⁰⁴ CertainTeed to extend Home Center a $150,000.00 line of credit does not render the note conditional.

Section 3-105(l)(a) provides that an instrument is not rendered non-negotiable by the fact that it is subject to implied or constructive conditions. The purpose of this section was to