Rights of the Guarantor. On October 1, 1985, Wallace and Helen Brunson contracted with Bear Park, Inc, to sell certain real estate in Taney County, Missouri, for $366,200. At the closing, Bear Park gave the Brunsons a promissory note for $285,000 in

Question

partial payment. Several of Bear Park's shareholders and directors, including Ronald Todd, signed a guaranty agreement on the back of the note. According to the terms of the note, Bear Park was to make quarterly payments of principal and interest, with the first payment of $68,800 due on January 7, 1986. The remaining quarterly payments, beginning April 7, 1986, would each be $7,226.80. When Bear Park failed to make the first payment, the Brunsons agreed to accept $7,000 in lieu of the full $68,800 and to increase the amount of the subsequent payments to cover the difference. Todd and the others knew nothing about the new terms. When Bear Park failed to make the next payment, the Brunsons declared the note in default and eventually demanded that the guarantors pay the amount due. No payments were made. The Brunsons assigned their interest in the note to Jake Kirkland, who foreclosed on the property. After the foreclosure sale, there was a deficiency of $36,454.84, plus interest, expenses, and attorneys' fees. Kirkland sued Todd and the others for this amount. Discuss the liability of Todd and the others in this situation.

Answer 1

Rights of the guarantor
The trial court ruled in favor of the defendants on the ground, in part, that the changes Bear Park and the Brunsons made in the amounts of the payments constituted a material change in the terms of the note. Kirkland appealed. The court of appeals affirmed the decision of the trial court, holding that the guarantors were discharged by the material alteration in the terms of note. The appellate court explained that "[a]ny material alteration of the guarantor's obligation under the guaranty contract will discharge the guarantor, unless the guarantor has consented to such alteration." Whether an alteration in a guaranty contract is material depends on whether after the alteration it expresses the same contract: if the change enlarges or lessens liability, it vitiates the contract. thus, concluded the court, the liability of Todd and the others "as guarantors was discharged by a material alteration of the terms of the promissory note without their consent." When the first payment was not made, Bear Park and the Brunsons entered into a new agreement. "The altered terms of the note were material because the changes enlarged Defendants' liability to pay interest on the sum of $61,800 for a period of time well beyond January 7, 1986." Todd and the others "had a right to rely upon a demand for the pay-ments according to the terms of the original obligation. Instead, the creditor and debtor entered into a new agreement changing the terms of the original obligation. This material alteration was completed without the consent of Defendants, thereby extinguishing any guarantor liability of Defendants."