Arizona Court of Appeals Division One Holds That The Failure to Have an Anomalous Endorsement Does not Create a Presumption That the Person Signing the Instrument is Not an Accommodation Party Under the U.C.C.

In August 2004, Susan Olson’s daughter purchased a vehicle from Cliff Findlay Automotive (“Seller”) for $24,662.68.   Ms. Olson agreed to act as her daughter’s co-signer for the vehicle.  Ms. Olson, however, signed the lines indicated for “buyers” or “owners” or “purchasers” on the forms provided by Seller and on the title.  Twenty-eight days later, Seller untimely filed its lien on the vehicle.  Shortly thereafter, the daughter filed for bankruptcy.  During the bankruptcy, Seller conceded that it had failed to timely perfect its lien on the vehicle.  Consequently, the lien was set aside as preferential.  The vehicle ultimately devolved to the estate and was sold for the benefit of the creditors.  As an unsecured creditor, Seller received only $5,357.92.  The following year, Seller filed suit against Ms. Olson for the full amount of the purchase price.  Both parties subsequently filed motions for summary judgment.  The trial court concluded that Ms. Olson was an accommodation party and that Seller failed in its duty to timely file its lien.  The court nevertheless concluded that Ms. Olson was liable for the full contract amount because there had been no showing of consequential damage.  The court granted Seller summary judgment and Ms. Olson appealed. 

On appeal, the Court of Appeals reversed and remanded for further consideration.  Under the U.C.C. an accommodation party is entitled to certain defenses set out in A.R.S. § 47-3605 (2005), including that the seller impaired the value of the collateral by failing to perfect the lien on the vehicle.  Pursuant to A.R.S. § 47-3419, “[a] person signing an instrument is presumed to be an accommodation party . . . if the signature is an anomalous endorsement or is accompanied by words indicating that the signer is acting as surety or guarantor with respect to the obligation of another party to the instrument.”  The converse, however, does not necessarily hold true.  According to the court, the failure to have an anomalous endorsement does not create a presumption that she is not an accommodation party.  Whether a person signing an instrument is an accommodation party is a question of fact.  In this case, because there was evidence in the record supporting both parties’ claims, the Court of Appeals remanded for a factual determination whether Ms. Olson is an accommodation party.

In the event the lower court determines that Ms. Olson is an accommodation party, the Court of Appeals also remanded to determine what damages Ms. Olson suffered as a result of Seller’s failure to timely record its lien.  Under Arizona law, “[i]f the obligation of a party to pay an instrument is secured by an interest in collateral and a person entitled to enforce the instrument impairs the value of the interest in collateral, the obligation of an indorser or accommodation party having a right of recourse against the obligor is discharged to the extent of the impairment.”  A.R.S. § 47-3605.  In this case, the Court of Appeals concluded that Seller’s failure to perfect its lien impaired the collateral in the vehicle.  By failing to timely perfect the lien, the Seller became an unsecured non-priority creditor in bankruptcy, thereby significantly reducing its recovery.  According to the Court, had Seller timely perfected its interest, Seller would have been able to recover at least $18,000 – the amount the trustee obtained for the vehicle.  The Court of Appeals, therefore, held that the trial court had incorrectly held that there had been no consequential damages.

Judge Thompson authored the opinion; Judges Hall and Winthrop concurred.