O’CONNELL, J.
This is an action on a promissory note brought against the makers Patton and Maxwell and W. E. and Marion Schoenleber, who assumed and agreed to pay it. Defendants Patton and Maxwell appeal from a judgment for plaintiff.
Defendants Patton and Maxwell purchased dry cleaning equipment from Launderette Sales
&
Equipment Co. on a conditional sales contract for $28,500, of which $2,700 was paid down. They executed their promissory note for the balance.
Launderette assigned the note and contract to plaintiff. Thereafter Patton and Maxwell sold the dry cleaning equipment to defendants, W. E. and Marion Schoenleber, who assumed and agreed to pay the note, to perform the contract, and to save Patton and Maxwell harmless. Plaintiff was also a party to the instrument transferring Patton and Maxwell’s interest to the Schoenlebers. The transfer agreement contained the following provision:
“IT IS EXPRESSLY UNDERSTOOD AND AGREED, that I, the TRANSFEROR, am in no way released from the conditions, covenants, obligations and liabilities of said instrument and prom
issory note but am still firmly bound as though this instrument had never been entered into and the consent of the assignee to the aforesaid sale never obtained, anything to the contrary, herein contained notwithstanding. * *
Plaintiff consented to the assignment upon the following terms:
“Upon the express agreement and understanding that the said TRANSFEROR remains liable on the note and conditional sales contract, chattel mortgage, or lease referred to in the foregoing agreement, and that the said TRANSFEREE assume said obligations and that said instrument is to be and remain in full force and effect and upon all the conditions, covenants, terms, agreements and provisions in the foregoing agreement contained the ASSIGNEE therein mentioned hereby consents to the assignment by TRANSFEROR to TRANSFEREE of TRANSFEROR’S interest in said instrument.”
The Schoenlebers encountered financial difficulties. They advised plaintiff that they were unable to meet the payments on the note. Plaintiff extended the time for payment an additional eleven months and reduced the amount of each monthly payment correspondingly. Defendants Patton and Maxwell were not consulted concerning the extension agreement. The condition of the security deteriorated after the extension agreement. The Schoenlebers made two monthly payments after the extension agreement and then defaulted. Sometime later plaintiff waived its security interest in the equipment, vesting title in the Schoenlebers who eventually sold it. About a year after the extension agreement plaintiff filed this action on tlie note.
The trial court held that the extension agreement did not discharge the obligation of Patton and Maxwell on the note.
The promissory note and the assumption agreement were executed prior to the adoption of the Commercial Code in Oregon. The extension agreement was executed after the Commercial Code was adopted. However, the assumption agreement established the relationship of surety and principal respectively between defendants and the Schoenlebers, the assuming grantees. Consequently, defendants could not be deprived of their rights as sureties by the subsequent extension agreement or by the subsequent change in the statutory law. We must look, then, to the relevant statutes in effect prior to the adoption of the Commercial Code.
The effect of an extension agreement upon the liability of the maker of a negotiable note who has transferred the security to an assuming grantee is left in doubt by our previous cases.
In
Cellers v. Meachem,
49 Or 186, 89 P 426, 10 LRA (NS) 133 (1907), the court held that an accommodation maker was not discharged from liability by an agreement for the extension of time entered into between the holder and the other maker. The basis for this holding was that under the statute then in effect (ORS 71.119) persons primarily liable upon a note, including accommodation makers, were not discharged from liability by an agreement extending time to another party to the note. ORS 71.119, in enumerating the circumstances under which a negotiable instrument is discharged, did not include discharge as a result
of the execution of an extension agreement.
OES 71.120, on the other hand, provided that a person
secondarily
liable on the instrument is discharged “by any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument.”
Both of these sections were a part of the Uniform Negotiable Instruments Law. The court held that the inclusion of the suretyship defenses in OES 71.120 and the omission of any reference to such defenses in ORS 71.119 indicated a legislative intent to confine suretyship defenses to persons secondarily liable.
In adopting this interpretation of the Negotiable Instruments Law the court followed the weight of authority, which, according to one writer, is “almost universally criticized.”
Courts in other -states following the weight of authority have employed the same interpretation in mortgage cases involving negotiable instruments, holding that the mortgagor, being a pri
mary party, is not discharged by an extension agreement entered between the holder of the note and the assuming grantee of the mortgagor.
In Oregon, however, the reasoning in
Cellers v. Meachem, supra,
has not been carried over to the eases in which an action is brought against the mortgagor who has transferred the mortgaged land to an assuming grantee.
In at least two cases decided after
Cellers
we have held that an extension agreement entered into between the assuming grantee and the holder of the note discharged the mortgagor-maker and in neither of these cases was any mention made of the character of the note and no exception was stated for cases involving negotiable instruments.
Two other considerations lead to the conclusion that the interpretation of the Negotiable Instruments
Law in
Cellers v. Meachem, supra,
was not intended to be applied in actions against a mortgagor. First, it appears from the briefs in
Hurst v. Merrifield,
144 Or 78, 23 P2d 124 (1933) that the note executed by the mortgagor was negotiable in character. Second, in the
Hurst
case, the court relied upon
Zastrow v. Knight,
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O’CONNELL, J.
This is an action on a promissory note brought against the makers Patton and Maxwell and W. E. and Marion Schoenleber, who assumed and agreed to pay it. Defendants Patton and Maxwell appeal from a judgment for plaintiff.
Defendants Patton and Maxwell purchased dry cleaning equipment from Launderette Sales
&
Equipment Co. on a conditional sales contract for $28,500, of which $2,700 was paid down. They executed their promissory note for the balance.
Launderette assigned the note and contract to plaintiff. Thereafter Patton and Maxwell sold the dry cleaning equipment to defendants, W. E. and Marion Schoenleber, who assumed and agreed to pay the note, to perform the contract, and to save Patton and Maxwell harmless. Plaintiff was also a party to the instrument transferring Patton and Maxwell’s interest to the Schoenlebers. The transfer agreement contained the following provision:
“IT IS EXPRESSLY UNDERSTOOD AND AGREED, that I, the TRANSFEROR, am in no way released from the conditions, covenants, obligations and liabilities of said instrument and prom
issory note but am still firmly bound as though this instrument had never been entered into and the consent of the assignee to the aforesaid sale never obtained, anything to the contrary, herein contained notwithstanding. * *
Plaintiff consented to the assignment upon the following terms:
“Upon the express agreement and understanding that the said TRANSFEROR remains liable on the note and conditional sales contract, chattel mortgage, or lease referred to in the foregoing agreement, and that the said TRANSFEREE assume said obligations and that said instrument is to be and remain in full force and effect and upon all the conditions, covenants, terms, agreements and provisions in the foregoing agreement contained the ASSIGNEE therein mentioned hereby consents to the assignment by TRANSFEROR to TRANSFEREE of TRANSFEROR’S interest in said instrument.”
The Schoenlebers encountered financial difficulties. They advised plaintiff that they were unable to meet the payments on the note. Plaintiff extended the time for payment an additional eleven months and reduced the amount of each monthly payment correspondingly. Defendants Patton and Maxwell were not consulted concerning the extension agreement. The condition of the security deteriorated after the extension agreement. The Schoenlebers made two monthly payments after the extension agreement and then defaulted. Sometime later plaintiff waived its security interest in the equipment, vesting title in the Schoenlebers who eventually sold it. About a year after the extension agreement plaintiff filed this action on tlie note.
The trial court held that the extension agreement did not discharge the obligation of Patton and Maxwell on the note.
The promissory note and the assumption agreement were executed prior to the adoption of the Commercial Code in Oregon. The extension agreement was executed after the Commercial Code was adopted. However, the assumption agreement established the relationship of surety and principal respectively between defendants and the Schoenlebers, the assuming grantees. Consequently, defendants could not be deprived of their rights as sureties by the subsequent extension agreement or by the subsequent change in the statutory law. We must look, then, to the relevant statutes in effect prior to the adoption of the Commercial Code.
The effect of an extension agreement upon the liability of the maker of a negotiable note who has transferred the security to an assuming grantee is left in doubt by our previous cases.
In
Cellers v. Meachem,
49 Or 186, 89 P 426, 10 LRA (NS) 133 (1907), the court held that an accommodation maker was not discharged from liability by an agreement for the extension of time entered into between the holder and the other maker. The basis for this holding was that under the statute then in effect (ORS 71.119) persons primarily liable upon a note, including accommodation makers, were not discharged from liability by an agreement extending time to another party to the note. ORS 71.119, in enumerating the circumstances under which a negotiable instrument is discharged, did not include discharge as a result
of the execution of an extension agreement.
OES 71.120, on the other hand, provided that a person
secondarily
liable on the instrument is discharged “by any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument.”
Both of these sections were a part of the Uniform Negotiable Instruments Law. The court held that the inclusion of the suretyship defenses in OES 71.120 and the omission of any reference to such defenses in ORS 71.119 indicated a legislative intent to confine suretyship defenses to persons secondarily liable.
In adopting this interpretation of the Negotiable Instruments Law the court followed the weight of authority, which, according to one writer, is “almost universally criticized.”
Courts in other -states following the weight of authority have employed the same interpretation in mortgage cases involving negotiable instruments, holding that the mortgagor, being a pri
mary party, is not discharged by an extension agreement entered between the holder of the note and the assuming grantee of the mortgagor.
In Oregon, however, the reasoning in
Cellers v. Meachem, supra,
has not been carried over to the eases in which an action is brought against the mortgagor who has transferred the mortgaged land to an assuming grantee.
In at least two cases decided after
Cellers
we have held that an extension agreement entered into between the assuming grantee and the holder of the note discharged the mortgagor-maker and in neither of these cases was any mention made of the character of the note and no exception was stated for cases involving negotiable instruments.
Two other considerations lead to the conclusion that the interpretation of the Negotiable Instruments
Law in
Cellers v. Meachem, supra,
was not intended to be applied in actions against a mortgagor. First, it appears from the briefs in
Hurst v. Merrifield,
144 Or 78, 23 P2d 124 (1933) that the note executed by the mortgagor was negotiable in character. Second, in the
Hurst
case, the court relied upon
Zastrow v. Knight,
56 S D 554, 229 NW 925, 72 ALR 379 (1930) for the proposition that the mortgagor and his grantee stand in the relation of suretyship. In the
Zastrow
case, after noting the conflict of authority on the interpretation of Section 119 of the Negotiable Instruments Law in the extension agreement cases, the court adopted the view that the Negotiable Instruments Law did not abrogate the suretyship rule under which an extension of time discharges the mortgagor-surety.
Upon the basis of the foregoing considerations, we have concluded that the court in the
Hurst
and
Peters
eases intended to adopt the suretyship rule of discharge in the mortgage cases and did not regard as applicable the rule laid down in
Cellers v. Meachem,
to the mortgagor-surety. The suretyship rule applied in
Hurst
and
Peters
discharging the surety when time is extended to the principal debtor became a part of the Commercial Code in Oregon with the enactment of ORS 73.6060.
Thus the suretyship rule of dis
charge in mortgage cases has been continuously in effect in Oregon from 1933 (the date of
Hurst v.
Merrifield) to the present time. The rule has been severely and widely criticized and should be abolished or modified.
However, we decline to disturb the rule by a pronouncement in the present case because any change we might make in the rule would apply only to transactions entered into before the effective date of
OES 73.6060 and inasmuch as the parties may have entered into previous transactions in reliance upon the then existing suretyship rule of discharge, we should not modify or abolish that rule as to them.
Plaintiff argues that even if the suretyship rule of discharge is applicable to mortgagors generally, the rule cannot be asserted by defendants in this case because there was no consideration for the extension agreement.
Plaintiff relies upon
Hurst v. Merrifield,
144 Or 78, 90, 23 P2d 124, 129 (1933), where it is said, “A mere request for the extension of the due date of the mortgage debt at the contract rate of interest, and a consent thereto, do not satisfy the essentials of a binding contract within the rule, under examination; nor is the payment of interest and part of the principal, after all of it has become due, such a valid consideration for an extension of time as will discharge the mortgagor, though it is sufficient if the
grantee agrees to pay an increased rate of interest in advance.”
Plaintiff interprets the foregoing statement as an adoption of the rule applied in some states that an agreement hy the debtor to pay interest during the extended period at the same rate called for in the original obligation is not sufficient consideration for the extension agreement.
If
Hurst
is to he.regarded as the adoption of that view, we can only say that it is not now acceptable and
Hurst
must be overruled on this point. Even if it is agreed that the interest rate will be the same during the extension period, there is consideration and it is binding upon the creditor because:
“* * * He surrenders his right to immediate payment, and secures the advantage of having his money at interest during the extension period, and the principal surrenders the power to pay the debt at any time and stop the accrual of interest, and acquires a privilege not to pay until the expiration of the extension period.”
It is further contended that the extension agreement was not binding upon plaintiff as against the defendants Patton and Maxwell because plaintiff expressly reserved its rights against them in the written agreement hy which plaintiff consented to the transfer of the laundry equipment to the Schoenlebers.
The transfer agreement, the pertinent parts of which are set out above, provides that Patton and
Maxwell are “in no way released from the conditions, covenants, obligations and liabilities” on the note and that they are “still firmly bound as though this agreement had never been entered into and the consent of the assignee [plaintiff] to the aforesaid sale never obtained.”
We do not regard this as reserving to plaintiff the right to enter into an agreement to extend the time of the payment which would be binding upon Patton and Maxwell. It is not reasonable to construe the agreement as including defendant’s consent to be bound by a completely separate agreement to which they were not to be parties and which might adversely affect their interest.
Finally, plaintiff contends that defendants were compensated sureties making applicable the rule followed in
Christensen, Inc. v. Hansen Co.,
142 Or 549, 554, 21 P2d 195, 197 (1933) that “actual prejudice is essential to the discharge of a compensated surety by an extension of time, the rule of
strictissimi juris
being inapplicable to said sureties.”
It must be conceded that a strong argument can be made for the view that a mortgagor should be regarded as a compensated surety.
However, if we accepted that view, we would effect a change in the law only for transactions which were entered into prior to the effective date of ORS 73.6060 (because that section, as we construe it, is applicable to both compensated and uncompensated sureties, discharging them if the holder agrees to extend time to the principal debtor). Since defendants may have relied upon the previous Oregon cases treating a mortgagor as
an uncompensated surety in applying the suretyship rule of discharge, we feel that we should not now change the law.
It is our conclusion, then, that defendants were discharged as a result of the plaintiff’s agreement to extend the time of payment of the note and therefore the judgment of the trial court must he reversed.