Jack Holt, Jr., Chief Justice.
Johnnie Myers, appellant, argues that he should have been discharged from liability as a guarantor of notes held by First State Bank of Sherwood, appellee, to the extent that First State Bank unjustifiably impaired the collateral securing those notes. We disagree and affirm.
First State Bank (FSB), made several loans, evidence by promissory notes, to Mary Myers and Commercial Insurance Specialists, Inc. (CISI). Mary was the president of CISI, and Johnnie Myers, her father, was chairman of its board of directors. Johnnie was originally the sole incorporator of CISI. The articles of incorporation were later amended to include other incorporators, however, Johnnie retained shares of stock which were later transferred to Mary.
One of the promissory notes given by CISI provided FSB with a security interest in the furniture, fixtures and equipment of CISI. This note, as well as the other notes, contained provisions to the effect that the security interest given in the note will also secure all other obligations between the parties. Therefore, the security interest in the furniture, fixtures and equipment applied to all notes.
Johnnie was not a party to the individual notes, but he executed two continuing general guaranty agreements with FSB obligating him to pay “if they were not paid at maturity.” When Mary was unable to continue making payments on the notes, FSB brought suit against Mary and CISI for the balance owing on the notes. FSB also named Commercial American Insurance, Inc. as a defendant, alleging that Mary had sold CISI, and some or all of the collateral, to Commercial American and that FSB had the right to possession of the collateral.
Later, FSB amended its complaint to add as defendants Dorothy Myers, Johnnie Myers, Louise Abbott, James Levander, Marjorie Levander, and Anne Turner, stating Mary and CISI had sold some of the collateral subject to the security agreements between CISI and FSB to these parties, and claiming its right to immediate possession of the transferred collateral. In addition, FSB sued Johnnie Myers for the unpaid balance of the notes under the continuing guaranty agreements he executed in its favor. Johnnie in turn filed a cross-complaint against the Levanders, Turner and Commercial American, alleging fraud in the acquisition of the assets of CISI, which caused CISI and Mary to default on the notes, and resulted in his potential liability as a guarantor. Prior to trial, the court, upon oral motion by FSB, entered orders dismissing with prejudice FSB’s claims against the third parties allegedly in possession of the collateral. Johnnie subsequently dropped his cross-complaint against these parties.
Johnnie contends FSB’s action in causing the dismissal of these claims unjustifiably impaired the collateral and thereby released him from liability as guarantor, to the extent that it precluded his right of recourse against the collateral. If FSB had not released the parties in possession of the collateral, Johnnie claims he would have been subrogated to the right of FSB to recover the collateral after he paid the balance owed on the notes.
Johnnie and FSB argue this case under the Uniform Commercial Code, in particular Ark. Stat. Ann. § 85-3-606(1) (Add. 1961), which provides:
Impairment of recourse or of collateral. (1) The holder discharges any party to the instrument to the extent that without such party’s consent the holder
(a) without express reservation of rights releases or agrees not to sue any person against whom the party has to the knowledge of the holder a right of recourse or agrees to suspend the right to enforce against such person the instrument or collateral or otherwise discharges such person, except that failure or delay in effecting any required presentment, protest or notice of dishonor with respect to any such person does not discharge any party as to whom presentment, protest or notice of dishonor is effective or unnecessary; or
(b) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse. [Emphasis added]
We do not consider this provision controlling, because it only applies to “any party to the instrument,” and does not encompass a person who has signed a separate guaranty agreement. In 5 W. Hawkland, Uniform Commercial Code Series, § 3-606:01 (1984), the author states:
Although intended to codify general suretyship defenses, section 3-606 is limited neither to parties generally regarded as sureties nor to parties who are “secondarily liable.” Rather it applies to any person who as a party to the instrument is injured by the impairment of either his right of recourse against another person or the collateral. Section 3-606 does not provide a discharge to persons who have signed a separate guaranty or other nonnegotiable instrument and not the instrument itself. To determine the rights of these parties, reference must be made to the general suretyship law of the jurisdiction, [footnotes omitted]
See also Ishak v. Elgin Nat’l Bank, 48 Ill. App. 3d 614, 363 N.E.2d 159 (1977); National Bank of Detroit v. Alford, 65 Mich. App. 634, 237 N.W.2d 592 (1976) and Fewox v. Tallahassee Bank & Trust Co., 249 So. 2d 55 (Fla. App. 1971).
Under our general suretyship law, a creditor has an obligation to preserve a surety’s right of recourse in the collateral. In First Nat’l Bank v. Waddell, 74 Ark. 241, 85 S.W. 417 (1905), this court stated:
The creditor who has effects of the principal in his hand or under his control for the security of the debt is a trustee for all parties concerned; and if such effects are lost through the negligence or want of ordinary diligence of the creditor, the surety is discharged, to the extent that he is injured, the same as if the effects had been lost by the positive act of the creditor.
In such case he is bound to be diligent in preserving such effects, to the same extent that any other trustee, similarly situated, is bound to use diligence. The kind of diligence required will be governed by the circumstances of each particular case.
72 C.J.S. Principal and Surety, § 150 (1987), provides substantially the same rule:
An obligee, who has securities or funds in his possession or control applicable to the payment of the secured debt, is under the obligation to the surety to use ordinary care and prudence to preserve them for the surety’s benefit, and the surety is discharged from liability if the creditor relinquishes or loses them, or consents to a material alteration of the security to the prejudice of the surety, or by any act deprives the surety of the right of subrogation.
Although § 85-3-606 is not applicable, it appears to have its genesis in the common law. For this reason, the court of appeals’ analysis in Van Balen v. Peoples Bank & Trust Co., 3 Ark. App.
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Jack Holt, Jr., Chief Justice.
Johnnie Myers, appellant, argues that he should have been discharged from liability as a guarantor of notes held by First State Bank of Sherwood, appellee, to the extent that First State Bank unjustifiably impaired the collateral securing those notes. We disagree and affirm.
First State Bank (FSB), made several loans, evidence by promissory notes, to Mary Myers and Commercial Insurance Specialists, Inc. (CISI). Mary was the president of CISI, and Johnnie Myers, her father, was chairman of its board of directors. Johnnie was originally the sole incorporator of CISI. The articles of incorporation were later amended to include other incorporators, however, Johnnie retained shares of stock which were later transferred to Mary.
One of the promissory notes given by CISI provided FSB with a security interest in the furniture, fixtures and equipment of CISI. This note, as well as the other notes, contained provisions to the effect that the security interest given in the note will also secure all other obligations between the parties. Therefore, the security interest in the furniture, fixtures and equipment applied to all notes.
Johnnie was not a party to the individual notes, but he executed two continuing general guaranty agreements with FSB obligating him to pay “if they were not paid at maturity.” When Mary was unable to continue making payments on the notes, FSB brought suit against Mary and CISI for the balance owing on the notes. FSB also named Commercial American Insurance, Inc. as a defendant, alleging that Mary had sold CISI, and some or all of the collateral, to Commercial American and that FSB had the right to possession of the collateral.
Later, FSB amended its complaint to add as defendants Dorothy Myers, Johnnie Myers, Louise Abbott, James Levander, Marjorie Levander, and Anne Turner, stating Mary and CISI had sold some of the collateral subject to the security agreements between CISI and FSB to these parties, and claiming its right to immediate possession of the transferred collateral. In addition, FSB sued Johnnie Myers for the unpaid balance of the notes under the continuing guaranty agreements he executed in its favor. Johnnie in turn filed a cross-complaint against the Levanders, Turner and Commercial American, alleging fraud in the acquisition of the assets of CISI, which caused CISI and Mary to default on the notes, and resulted in his potential liability as a guarantor. Prior to trial, the court, upon oral motion by FSB, entered orders dismissing with prejudice FSB’s claims against the third parties allegedly in possession of the collateral. Johnnie subsequently dropped his cross-complaint against these parties.
Johnnie contends FSB’s action in causing the dismissal of these claims unjustifiably impaired the collateral and thereby released him from liability as guarantor, to the extent that it precluded his right of recourse against the collateral. If FSB had not released the parties in possession of the collateral, Johnnie claims he would have been subrogated to the right of FSB to recover the collateral after he paid the balance owed on the notes.
Johnnie and FSB argue this case under the Uniform Commercial Code, in particular Ark. Stat. Ann. § 85-3-606(1) (Add. 1961), which provides:
Impairment of recourse or of collateral. (1) The holder discharges any party to the instrument to the extent that without such party’s consent the holder
(a) without express reservation of rights releases or agrees not to sue any person against whom the party has to the knowledge of the holder a right of recourse or agrees to suspend the right to enforce against such person the instrument or collateral or otherwise discharges such person, except that failure or delay in effecting any required presentment, protest or notice of dishonor with respect to any such person does not discharge any party as to whom presentment, protest or notice of dishonor is effective or unnecessary; or
(b) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse. [Emphasis added]
We do not consider this provision controlling, because it only applies to “any party to the instrument,” and does not encompass a person who has signed a separate guaranty agreement. In 5 W. Hawkland, Uniform Commercial Code Series, § 3-606:01 (1984), the author states:
Although intended to codify general suretyship defenses, section 3-606 is limited neither to parties generally regarded as sureties nor to parties who are “secondarily liable.” Rather it applies to any person who as a party to the instrument is injured by the impairment of either his right of recourse against another person or the collateral. Section 3-606 does not provide a discharge to persons who have signed a separate guaranty or other nonnegotiable instrument and not the instrument itself. To determine the rights of these parties, reference must be made to the general suretyship law of the jurisdiction, [footnotes omitted]
See also Ishak v. Elgin Nat’l Bank, 48 Ill. App. 3d 614, 363 N.E.2d 159 (1977); National Bank of Detroit v. Alford, 65 Mich. App. 634, 237 N.W.2d 592 (1976) and Fewox v. Tallahassee Bank & Trust Co., 249 So. 2d 55 (Fla. App. 1971).
Under our general suretyship law, a creditor has an obligation to preserve a surety’s right of recourse in the collateral. In First Nat’l Bank v. Waddell, 74 Ark. 241, 85 S.W. 417 (1905), this court stated:
The creditor who has effects of the principal in his hand or under his control for the security of the debt is a trustee for all parties concerned; and if such effects are lost through the negligence or want of ordinary diligence of the creditor, the surety is discharged, to the extent that he is injured, the same as if the effects had been lost by the positive act of the creditor.
In such case he is bound to be diligent in preserving such effects, to the same extent that any other trustee, similarly situated, is bound to use diligence. The kind of diligence required will be governed by the circumstances of each particular case.
72 C.J.S. Principal and Surety, § 150 (1987), provides substantially the same rule:
An obligee, who has securities or funds in his possession or control applicable to the payment of the secured debt, is under the obligation to the surety to use ordinary care and prudence to preserve them for the surety’s benefit, and the surety is discharged from liability if the creditor relinquishes or loses them, or consents to a material alteration of the security to the prejudice of the surety, or by any act deprives the surety of the right of subrogation.
Although § 85-3-606 is not applicable, it appears to have its genesis in the common law. For this reason, the court of appeals’ analysis in Van Balen v. Peoples Bank & Trust Co., 3 Ark. App. 243, 626 S.W.2d 205 (1981) of the elements necessary to prove impairment of collateral under that section is helpful in assessing a creditor’s obligation to preserve a surety’s right of recourse in the collateral. In Van Balen, the court of appeals stated that the surety must prove two elements in order to be entitled to discharge — “that the holder of the note was responsible for the loss or impairment of the collateral, and the extent to which that impairment results in loss.” We apply the same test.
We disagree with Johnnie’s contention that it was FSB which was “responsible for the loss or impairment of collateral.” Or, in the language of First Nat’l Bank, supra, that the collateral was “lost through the negligence or want of ordinary diligence of the creditor.” Instead, it was the disbursement of the collateral by CISI, of which Johnnie was the chairman of the board of directors, and by Mary, Johnnie’s daughter, which caused the impairment and led to the dismissal of FSB’s claims for possession of the collateral.
Although the extent of Johnnie’s involvement in the operations of the business of CISI is not totally clear, the record reflects that Johnnie was the sole incorporator of CISI. Johnnie later transferred his stock to Mary, but remained deeply involved in the various loans to Mary and to the corporation. These loans were initiated upon his letter of credit to the bank and were secured by his guaranty agreements. In addition, he continued to help Mary “with things,” including negotiating with FSB for the best rates of interest on renewal of CISI’s certificates of deposit, and maintained his position as chairman of the board of the corporation. When the corporation was on the verge of collapse, and the notes became unpayable, Mary sold the assets of CISI, including the collateral, to Johnnie’s wife, brother- and sister-in-law, and to his ex-wife. Though a party to the litigation, Johnnie did not interpose any objections to the trial court’s order dismissing with prejudice FSB’s claim for possession of the collateral from the other parties to the suit, nor did he take issue with the trial court, sitting as the trier of fact when it determined that FSB was entitled to a judgment against him, Mary and CISI, jointly and severally. It was only prior to the entry of judgment that Johnnie filed a counterclaim alleging that, as a guarantor of the notes, he had a right to assert any rights enuring to the benefits of the principal. The trial court, by amended judgment dismissed the counterclaim and entered judgment against Johnnie.
While we agree that in ordinary circumstances a creditor will discharge a guarantor when it releases parties in possession of collateral securing a note, this rule should not discharge a guarantor when he is found by the trial court to be a person who at least in part created the problem. Johnnie admits in his brief that the transfer made finding the collateral more difficult, but asserts that this did not justify releasing those parties. Under all of the circumstances, the trial court found otherwise, and we cannot say that he was clearly wrong in that determination.
FSB filed a motion in this court pursuant to Sup. Ct. R. 9(e), for costs in supplementing the abstract, alleging that Johnnie’s abstract was deficient in failing to adequately abstract the pleadings and testimony necessary for consideration of this appeal. We find that his abstract was not in violation of Rule 9 and that much, if not all, of FSB’s supplemental abstract was not necessary to the determination of the issue on appeal. The motion for costs is therefore denied. See Arkansas State Hwy. Comm ’n v. Taylor, 238 Ark. 278, 381 S.W.2d 438 (1964).
Affirmed.
Newbern and Purtle, JJ., dissent. Glaze, J., concurs.