SW Legal studies in Business

Lender's Failure to Comply with Notice to Cosigner of Note Extinguished Liability for Note
Description A Vermont high court held that the purchaser of a note that was in default was not a holder in due course who could sue a cosigner on the note because the cosigner had not been notified by the issuer of the note of its move against collateral that backed the note. Failure to follow the terms of the agreement extinguished the liability of the cosigner.

Topic Negotiable Instruments and Credit
Key Words Holder in Due Course; Cosigner
C A S E   S U M M A R Y
Facts Kimball obtained a $40,000 construction loan from a bank in 1991. Patoine cosigned the loan as an accommodation maker and thus was equally liable for payment in case of default. Kimball died shortly before the note was due and his estate did not have the funds to satisfy the note. Five months after the note was due, the bank granted the estate a six month extension to pay the debt. Patoine was not involved in that agreement, nor was she mentioned in it. Eventually, the bank foreclosed on the real estate that served as collateral for the loan, leaving a deficiency of $21,000. The bank became insolvent and was taken over by the FDIC, which sold the note to Cadle Company, which sued Patione for payment of the debt as cosigner. The trial court held Patione liable; she appealed.
Decision Reversed. The key issue is whether the FDIC was a holder in due course, in which case Cadle would also be a holder in due course, which would make Patoine liable for the debt. Before the FDIC acquired the bank's assets, the asset at issue (the note) was extinguished by the bank's failure to comply with UCC requirements regarding notice for the sale of collateral (the real estate). The bank failed to notify Patoine of its actions and allow her the opportunity to intervene, so her status as cosigner was eliminated at that time and did not carry forward to the FDIC or Cadle.
Citation Cadle Company v. Patoine, 772 A.2d 544 (Sup. Ct., Vt., 2001)

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