Jaffe v. Kolok, No. S1130-03 CnC (Katz, J., Aug. 10, 2004)

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STATE OF VERMONT
Chittenden County, ss.:



JAFFE

v.

KOLOK



                                 ENTRY

        This action poses the question of who qualifies as an
accommodation party under 9A V.S.A. § 3–419 when a party does not
clearly identify himself as such. Parties are co-makers of a note for a
$250,000 loan taken out primarily for the benefit of their jointly owned
business venture, Marble Island Resort and Community. Plaintiffs Jaffe
and Kaminsky own 40% of the business and defendant Kolok owns 60%
and is its manager. From the beginning, plaintiffs alone have made all of
the required payments on the note. They seek contribution from Kolok for
past and future payments. 9A V.S.A. § 3–116 (joint and several liability
among co-makers). They also claim that Kolok orally agreed to be
responsible for 60% of the loan. Kolok disavows the existence of such an
agreement and argues that he is an accommodation party to the note and is
therefore not liable to them. 9A V.S.A. § 419(a), (e).

        An accommodation party is a surety to a note, “one who signs the
instrument in any capacity for the purpose of lending his name to another
party to it.” Fed. Fin. Co. v. Landers, 169 Vt. 570, 571 (1999) (citations
omitted). Thus, an accommodation party is not primarily responsible for a
note and never jointly liable to a co-maker for contribution. 9A V.S.A. § 3-
419 cmt.1. Whether a party is an accommodation party is a matter of
intent. Catania v. Catania, 601 A.2d 543, 545–46 (Conn. 1992). This is a
question of fact. Id. But, Kolok, as the party asserting this defense, carries
the burden of proof that he, plaintiffs, and the bank intended for him to be
an accommodation party rather than just a co-maker. Id.

       When accommodation party status cannot be proved by a written,
express acknowledgment, courts will look to the facts and circumstances of
the underlying transaction. See generally Who Is Accommodation Party
under [Former] Uniform Commercial Code § 3–415, 90 A.L.R.3d 342
(1979 & 2003 Supp.). In particular, courts have looked to see if an
indorsement was outside the chain of title, see, e.g., King v Finnell, 603
P2d 754 (Okla 1979), or whether the party signed with words of guarantee,
9A V.S.A. § 3–419(c). Courts have also found accommodation status when
the party’s signature was required or requested by another in order to obtain
the loan. See, e.g., Holcomb State Bank v Adamson, 438 NE2d 635 (Ill.
1982). This fact is often coupled with a proof that the proceeds were for
the sole benefit of another party to the exclusion of the accommodating
party. See, e.g., Kaufman v Fairchild, 810 P.2d 1145 (Idaho App. 1991)
(party had accommodation status when it received only an indirect,
increaed sales benefit from loan and co-signer received actual proceeds);
Fairfield County Trust Co. v Steinbrecher, 255 A2d 144 (Conn. 1968)
(payee would not have made loan without party as an accommodation); see
also 4 Hawkland UCC Series § 3–415:3 (2002). Either together or alone,
they are combined and used as parol evidence to prove that the parties
intended the defendant to be an accommodation party. See 90 A.L.R.3d
342, at § 6.

       Here, Kolok relies solely on an affidavit stating his personal
understanding of the agreement but offers no other evidence that would
show the other parties’ intent or understanding. Instead, he argues that he
should be considered an accommodation party because he received no
benefit from the loan. To prove this, he latches on to Comment 1 of § 3–
419, which states:

       [I]f X cosigns a note of Corporation that is given for a loan to
       Corporation, X is an accommodation party if no part of the loan
       was paid to X or for X’s direct benefit. This is true even though X
       may receive indirect benefit from the loan because X is employed
       by Corporation or is a stockholder of Corporation, or even if X is
       the sole stockholder so long as Corporation and X are recognized
       as separate entities.

Id. This problematic example, however, raises the key question in this
case—What is a direct benefit? Professors White & Summer note that a
shareholder with a controlling stake who co-signs a loan that benefits the
corporation is not an accommodation party because he receives the direct
benefit of the loan through the corporation. J. White & R. Summers,
Hanbook of the Law Under the Uniform Commercial Code § 13–13, at 511
(2d ed. 1980) (citing MacArthur v. Cannon, 229 A.2d 372 (Conn. 1967)).
This interpretation has been cited by other jurisdictions facing the same
problem. See, e.g., Lasky v. Berger, 536 P.2d 1157, 1158–60 (Colo. App.
1975); 4 Hawkland UCC Series § 3–415:3, at n. 8 (2002) (citing to
collected UCC cases); see also 90 A.L.R.3d 342, at § 3 (“[C]ourts have
held makers to be accommodation parties for comakers . . . in cases where
the proceeds . . . were applied solely for the benefit of the comaker, but not
in cases where the maker . . . received the proceeds of the instrument or
derived benefits from the application of the proceeds . . . .”).

       Here, defendant did not personally receive the money from the loan,
but the bulk of it went into the business he was attempting to save, which
needed the additional funds. We cannot conclude that such a benefit was
merely indirect to Kolok. Furthermore, without any other clear proof of
manifested intent or notice to other parties, Kolok cannot be an
accommodation party. 9A V.S.A. § 3–419; 4 Hawkland UCC Series § 3–
415:3 (noting that such a conclusion without proof of express intent would
requires strong evidence).

        Kolok’s affidavit does raise a factual question as to whether he is
liable for his share of the loan or the 60% alleged by Jaffe and Kaminsky.
As such, the issue of his liability is not ripe for summary judgment and will
require factual findings. Likewise, Kolok’s claim for setoff.

      Based on the foregoing, plaintiffs’ motion for summary judgment is
denied. The clerk will set this matter for conference.

       Dated at Burlington, Vermont________________, 2004.
