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Docket Number

No. 92SC103

Attorney(S)

Leeon E. Hayden; Jacobson Dudgeon, Ethan A. Jacobson, for Petitioner. Ducker, Dewey Seawell, P.C., Thomas C. Seawell; Parcel, Mauro, Hultin Spaanstra, P.C., Richard P. Barkley, for Respondents.

Judges

JUSTICE KIRSHBAUM delivered the Opinion of the Court.

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Smart Summary

Frank J. Haberl v. Eugene A. Bigelow and Alyce M. Bigelow — Colorado Supreme Court (Dec. 12, 1993)

Factual and Procedural Background

The case arises from a series of real estate and financing transactions relating to an apartment building originally secured by a promissory note and deed of trust executed by the Bigelows in October 1967. In January 1976 the Bigelows sold the property to Frank J. and Dorothy Haberl (the Haberls); the Haberls executed a note to the Bigelows (the Bigelow note) secured by a deed of trust that included a rider providing that, if the Haberls refinanced, the Bigelow deed of trust would be subordinated to any new deed of trust and that other loan terms would change.

The property changed hands and financing several times. In February 1984 American Properties Equities (APE) refinanced with a Midland note and deed of trust; the parties rearranged priorities such that the Midland deed of trust took first priority and the Bigelow deed of trust was subordinated. On November 16, 1984, the Bigelows and APE executed an assumption agreement: the Bigelows subordinated the Bigelow deed of trust to the Midland deed of trust, and APE assumed primary liability for repayment of the Bigelow note. The Haberls were not parties to that assumption agreement and did not sign a written consent to the subordination.

At trial the Bigelows conceded that the subordination impaired the collateral securing the Bigelow note. A critical evidentiary point was a telephone conversation between Haberl and APE partner Philip Hazouri in which Hazouri told Haberl that subordination by the Bigelows was crucial and that APE was having difficulty obtaining it; Haberl made no substantive response. The trial court concluded that Haberl's silence during that call constituted consent to the subordination and entered judgment against Haberl (and APE) on the Bigelow note. The court dismissed the claim against Dorothy Haberl for lack of consent.

The Colorado Court of Appeals affirmed the trial court's judgment. Haberl petitioned the Colorado Supreme Court for certiorari review on multiple questions (including whether a deed of trust is an interest in land for statute of frauds purposes, whether written consent was required to subordinate, whether Haberl could be bound by modifications he did not sign, and whether silence could constitute consent). The Supreme Court granted certiorari, reversed the court of appeals insofar as it affirmed the judgment against Haberl, and remanded with directions regarding reversal and further proceedings on attorney fees.

Legal Issues Presented

Does a deed of trust constitute an interest in land for purposes of the statutes of frauds, §§ 38-10-106, -108, 16A C.R.S. (1982)?
Is the grantor of a deed of trust required pursuant to the statutes of frauds to give written consent to an agreement to subordinate that deed of trust to another trust deed?
May the petitioner be held liable, consistent with § 4-3-401(1), 2 C.R.S. (1973) (now § 4-3-401(1), 2 C.R.S. (1992) as referenced in the opinion), to the terms of a promissory note as modified by an agreement that he did not sign?
Did the trial court and the court of appeals err in applying the doctrine of consent by silence?

Arguments of the Parties

Petitioner (Frank J. Haberl) — Main Arguments

Haberl contended he did not consent to the subordination of the Bigelow deed of trust; he argued the trial court erred in finding consent by silence.
He argued that he could not be held liable on the Bigelow note based on the November 16, 1984 assumption agreement because he did not sign that document.
Haberl asserted that, under section 4-3-606 of the Uniform Commercial Code, impairment of collateral without a surety's consent discharges the surety; thus, he claimed discharge because his risk was increased without consent.
He alternatively argued that any agreement affecting the Bigelow deed of trust (an interest in land) must be in writing under the statute of frauds, so his alleged oral consent or silence could not bind him.

Respondents (Eugene A. Bigelow and Alyce M. Bigelow) — Main Positions

The Bigelows (and the court of appeals as reflected in the underlying decision) maintained that Haberl consented to subordination—an inference the trial court drew from his silence during the telephone conversation with Hazouri—and thus Haberl was not entitled to protection under § 4-3-606.
The Bigelows conceded at trial that the collateral was impaired by the subordination but the trial court nonetheless concluded Haberl had consented by silence and entered judgment against him.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bigelow v. Nottingham, 833 P.2d 764 (Colo.App. 1991)	Prior court of appeals decision affirming the trial court's judgment against Haberl on issues including consent, statute of frauds, and effect of modifications not signed by Haberl.	Referenced as the decision under review; the Supreme Court reversed the court of appeals' affirmance insofar as it upheld judgment against Haberl.
Bank of Kimball v. Rostek, 423 P.2d 579 (Colo. 1967)	Promissory note is a negotiable instrument when it contains an unconditional promise to pay and a fixed date of payment.	Used to support the conclusion that the Bigelow note is a negotiable instrument and that Article 3 of the UCC governs transactions involving the note.
Capital Investors Co. v. Executors of Estate of Morrison, 484 F.2d 1157 (4th Cir. 1973)	Promissory notes secured by real estate mortgages remain negotiable instruments governed by UCC principles applicable to negotiable instruments.	Cited to reinforce that a promissory note secured by real estate does not lose its negotiable character and is governed by Article 3.
Payne v. Mundaca Inv. Corp., 562 N.E.2d 51 (Ind.App. 1990)	Promissory note remains negotiable even though collateralized by a mortgage.	Reinforces the court's view that the negotiable nature of the Bigelow note is not negated by its being secured by a deed of trust.
In re Cambridge Mortgage Corp., 92 B.R. 145 (Bankr. D.S.C. 1988)	Negotiable notes are governed by the UCC even when secured by an interest in real estate.	Supports the proposition that the Bigelow note is governed by Article 3 of the UCC.
Hughes v. Tyler, 485 So.2d 1026 (Miss. 1986)	Note remains negotiable even though secured by realty; impairment of collateral (or release of portion of collateral) can increase surety's risk.	Used among authorities to support characterization of the subordination as impairment and the legal effect of increasing surety's risk without consent.
Poynot v. J T Devs., Inc., 355 So.2d 1052 (La.App. 1978)	Authority supporting characterization of subordination transaction as impairment of collateral.	Footnoted as an example of authority that supports calling the subordination an impairment of collateral.
Nixon v. Bank One of Eastern Ohio, 599 N.E.2d 742 (Ohio App. 1991)	Definition of "collateral" for secured transactions purposes.	Noted in a footnote to explain terminology and relevance to whether collateral was impaired; used for conceptual clarification.
Wisconics Eng'g, Inc. v. Fisher, 466 N.E.2d 745 (Ind.App. 1984)	Examples of cases where subordination or other actions were treated as impairing collateral and affecting surety liability.	Cited as part of a group of authorities supporting the view that subordination can constitute impairment that discharges a surety.
Schmuckie v. Alvey, 758 S.W.2d 31 (Ky. 1988)	Holder's subordination of its lien to a third-party lender can constitute impairment of collateral and discharge an accommodation maker.	Cited in support of the principle that subordination may discharge a surety whose risk is increased without consent.
Ramsey v. First Nat'l Bank Trust Co., 683 S.W.2d 947 (Ky.App. 1984)	Agreement between creditor and third party, made without surety's consent, can relieve the surety where there is a known right of recourse.	Used as an example of jurisdictions concluding that impairment without consent discharges a surety.
Beneficial Fin. Co. of Norman v. Marshall, 551 P.2d 315 (Okla.App. 1976)	Unjustifiable impairment of collateral by a secured party includes acts making collateral unavailable to a surety and increasing risk.	Cited among authorities describing conduct that will be interpreted as impairment discharging sureties.
Farner v. Cole, 778 P.2d 688 (Colo. 1989)	Establishes that section 4-3-606 of the UCC governs the extent of a party's liability on a negotiable instrument.	Relied upon to state that the extent of Haberl's liability is governed by the discharge provisions of § 4-3-606.
National Union Fire Ins. Co. v. Denver Brick Pipe Co., 427 P.2d 861 (Colo. 1967)	When a principal contract or suretyship contract is materially altered without the surety's knowledge or consent, the surety is discharged.	Invoked to show Colorado precedent that material alteration without consent discharges a surety.
People v. Smith, 645 P.2d 864 (Colo.App. 1982)	Events that materially increase a surety's risk without consent terminate the surety's obligation.	Cited to support the rule that increased risk without consent discharges a surety.
Bank of Nova Scotia v. St. Croix Drive-In Theatre, Inc., 552 F. Supp. 1244 (D.V.I. 1982)	Mere silence by a surety in face of principal/creditor activity is ordinarily not acquiescence or consent to changes.	Used to support the principle that silence generally does not indicate consent where an alteration increases risk.
A/C Elec. Co. v. Aetna Ins. Co., 247 A.2d 708 (Md. 1968)	Same general principle: silence is not ordinarily regarded as acquiescence in changes increasing a surety's risk.	Cited as authority for the rule that silence alone does not establish consent to increasing risk.
Elfinwild Volunteer Fire Dep't v. International Fidelity Ins. Co., 530 F. Supp. 111 (W.D. Pa. 1982)	Affirming the principle that silence ordinarily does not constitute assent to changes that increase risk.	Listed as an accord to the other authorities rejecting consent-by-silence as a basis to bind sureties.
Brooks Towers Corp. v. Hunkin-Conkey Constr. Co., 454 F.2d 1203 (10th Cir. 1972)	Silence or inaction will be deemed acceptance only when the relationship justifies expectation of a reply or when the offeree has a duty to respond.	Cited to explain when silence may amount to acceptance and to limit the circumstances in which silence can be treated as consent.
Western Insulation Servs., Inc. v. Central Nat'l Ins. Co. of Omaha, 460 N.W.2d 355 (Minn.App. 1990)	Similar to Brooks Towers: silence as acceptance is exceptional and depends on the duty to respond or expectation of a reply.	Used to support the court's conclusion that silence did not constitute consent absent circumstances creating a duty to reply.
Lothrup v. Union Bank, 16 Colo. 257, 27 P. 696 (1891)	Illustrates an older application of the maxim "he who is silent appears to consent" where multiple opportunities to disavow existed and affirmative conduct indicated assent.	The court distinguished Lothrup: Lothrup had multiple opportunities to disavow and later indicated the instrument was "all right," whereas Haberl had a single brief conversation in which no terms were communicated and no affirmative conduct indicated consent.

Court's Reasoning and Analysis

The court's analysis proceeded in sequential legal steps, applying legal principles to the record evidence:

Characterization of the instrument: The court concluded the Bigelow note is a negotiable instrument because it contained an unconditional promise to pay and a fixed date of payment (citing Bank of Kimball). Accordingly, transactions involving the note are governed by Article 3 of the Uniform Commercial Code (UCC).
Governing statutory provision: Because the note is a negotiable instrument, the extent of Haberl's liability is governed by the discharge provisions of section 4-3-606 of the UCC, which protects a party when the holder unjustifiably impairs collateral for the instrument without that party's consent.
Application of § 4-3-606(1)(b): The court observed authority from other jurisdictions that impairment of collateral—such as subordinating the holder's lien to a third-party lender—can increase a surety's risk and discharge the surety if done without consent. The court noted Colorado precedent recognizing that material alteration of a principal contract or suretyship without the surety's knowledge or consent discharges the surety.
Legal standard for consent by silence: The court analyzed whether consent could be implied from silence. It applied general contract-law principles (including Restatement (Second) of Contracts § 19) and a line of authorities holding that mere silence or inaction is ordinarily not acquiescence to a change that increases a surety's risk. Silence gives rise to an inference of consent only in particular circumstances—for example, when the relationship justifies an expectation of a reply or when an offeree is under a duty to respond.
Factual application to the record: The only evidence of alleged consent was Hazouri's testimony recounting a single telephone call during which Hazouri told Haberl that subordination by the Bigelows was crucial and that APE was having difficulty obtaining it; Hazouri reported that Haberl "had no objections" and "didn't say anything." The court emphasized that (a) Haberl was under no duty to respond to Hazouri's general statements, (b) the precise terms of the proposed subordination had not been agreed upon or communicated to Haberl at the time of the call, and (c) there was no evidence of further communications or a course of conduct by Haberl manifesting assent.
Distinguishing precedent: The court distinguished Lothrup v. Union Bank, where silence occurred in the context of repeated opportunities to disavow and later affirmative conduct indicating assent; those distinguishing facts were absent here.
Conclusion from law and fact: Applying § 4-3-606 and the standards for consent by silence to the facts of this record, the court concluded that Haberl did not knowingly consent to the subordination and therefore was discharged from obligations on the Bigelow note to the extent prescribed by § 4-3-606(1)(b).

Holding and Implications

Holding: The Colorado Supreme Court reversed the judgment of the court of appeals insofar as it affirmed the trial court's judgment against Frank J. Haberl, concluding that Haberl did not consent to the subordination and was discharged under § 4-3-606(1)(b).

Direct implications:

The trial court's judgment against Haberl is to be reversed. The Supreme Court remanded the case to the court of appeals with directions to enter a judgment reversing the trial court's judgment as to Haberl and to remand to the trial court for further proceedings with respect to attorney fees consistent with the Supreme Court's opinion and unaffected portions of the court of appeals' decision.
The court determined that Haberl was discharged from his obligations on the Bigelow note because the subordination increased his risk of repayment without his consent; accordingly the Bigelows cannot hold Haberl liable on that basis under the cited UCC provision.

Broader implications noted by the court:

The opinion emphasizes that silence alone ordinarily will not suffice to establish consent to a change that materially increases a surety's risk; the determination depends on the particular circumstances and requires evidence that the surety knew the terms of the proposed change and had reason to know that silence would be taken as assent.
The court did not need to resolve alternative statutory arguments (e.g., the statute of frauds or § 4-3-401(1)) because it concluded Haberl was discharged under § 4-3-606(1)(b).

Additional procedural note: JUSTICE ERICKSON dissented (with JUSTICE MULLARKEY joining the dissent), but the majority opinion, as summarized above, reverses the court of appeals as to Haberl.

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Frank J. Haberl, Petitioner, v. Eugene A. Bigelow and Alyce M. Bigelow, Respondents.

JUSTICE KIRSHBAUM delivered the Opinion of the Court.

In Bigelow v. Nottingham, 833 P.2d 764 (Colo.App. 1991), the court of appeals affirmed the trial court's judgment in favor of the respondents, Eugene A. Bigelow and Alyce M. Bigelow (the Bigelows), against the petitioner, Frank J. Haberl (Haberl), on a promissory note executed by Haberl and his wife, Dorothy Haberl. In so doing, the court of appeals affirmed the trial court's conclusions that Haberl consented to the subordination of a deed of trust to real property executed in connection with the note; that the applicable statute of frauds did not render such consent invalid; and that the provisions of section 4-3-401(1), 2 C.R.S. (1992), did not operate to discharge Haberl from liability under the note even though the terms thereof were subsequently modified by an instrument he did not sign. Having granted Haberl's petition for certiorari to review these determinations, we reverse the judgment of the the court of appeals and remand the case to that court with directions.

In October 1967, the Bigelows executed a promissory note in the amount of $145,000 secured by a deed of trust in favor of Empire Savings Loan Association (Empire) in connection with the purchase of an apartment building located in Arapahoe County, Colorado. On January 6, 1976, the Bigelows sold the property to the Haberls. The Haberls took the property subject to the 1967 note and deed of trust and jointly executed a promissory note to the Bigelows in the amount of $112,018.91 together with a second deed of trust (the Bigelow deed of trust). The security instrument incorporated by reference a rider providing that if the Haberls refinanced their indebtedness, the Bigelow deed of trust would be subordinated to any new deed of trust, the Haberls would pay a higher annual interest rate on the balance of the Bigelow note, and the period of time within which the Haberls' periodic payments were to be made was extended.

In October 1980, the Haberls sold the property to Marathon Realty, Inc. (Marathon). In connection with this sale Marathon executed a note for $166,524 (the Haberl note) and a third deed of trust (the Haberl deed of trust), and the Haberls agreed that in the event the property were refinanced the Haberls would subordinate the Haberl note and deed of trust to any new security instrument. On October 9, 1983, the Haberls assigned the Haberl deed of trust to United Bank of Skyline.

In November 1983, the property was purchased by American Properties Equities, a Colorado general partnership whose general partners included David Nottingham, Philip Hazouri, James Giasafakis, and Richard Elliott (hereinafter referred to collectively as APE). In connection with this transaction APE assumed and agreed to pay the three existing notes.

In February 1984, APE refinanced the property. In connection with this transaction, APE executed a $400,000 promissory note and a fourth deed of trust in favor of Midland Federal Savings and Loan Association (the Midland note and deed of trust); the Bigelows were requested to subordinate the Bigelow deed of trust to the Midland deed of trust; the Haberls were requested to subordinate the Haberl deed of trust to the Midland deed of trust; and APE paid off the 1967 Empire note. As a result, the Empire deed of trust was released and the Bigelow deed of trust assumed first priority.

Midland/Western Federal Savings and Loan Association became the successor in interest to Midland Federal Savings and Loan Association as of June 30, 1984.

On February 29, 1984, the Haberls, through their assignee, the United Bank of Skyline, subordinated the Haberl deed of trust to the Midland deed of trust. On November 16, 1984, the Bigelows and APE executed an assumption agreement. The agreement provided that the Bigelows would subordinate the Bigelow deed of trust to the Midland deed of trust, APE would assume primary liability for repayment of the Bigelow note, and the interest rate and amount of monthly payments due on the Bigelow note would be increased according to the terms of the rider signed by the Haberls and the Bigelows in connection with the Haberls' purchase of the property. Accordingly, the Midland deed of trust assumed first priority, ahead of both the Haberl and Bigelow deeds of trust. APE subsequently sold the property to APE 1984-A Ltd., a limited partnership whose general partners included Philip Hazouri, David Nottingham, James Giasafakis, and Merlin Resources, Inc.

The Haberls became sureties for APE on the Bigelow note by virtue of the assumption agreement, which provides in pertinent part as follows: "[APE], jointly and severally, hereby assume[s] and agree[s] to pay the principal sum of the Bigelow Deed of Trust and the Bigelow Promissory Note . . . together with all other sums as provided in the Bigelow Deed of Trust and the Bigelow Promissory Note, as if the Bigelow Deed of Trust and the Bigelow Promissory Note had originally been executed by [APE], jointly and severally."

The Haberls were not parties to the November 16, 1984, assumption agreement and did not execute a written consent to the subordination of the Bigelow deed of trust to the Midland deed of trust. However, prior to November 16, 1984, Hazouri telephoned Haberl, informed Haberl that APE planned to pay off the Haberl note and that subordination of the Bigelow deed of trust to the Midland deed of trust was crucial, and informed Haberl that APE was having problems in obtaining the Bigelows' agreement to such subordination. Haberl did not object or otherwise respond to Hazouri's statements concerning the importance of the subordination of the Bigelow deed of trust.

Hazouri's entire testimony at trial concerning his telephone conversation with Haberl and Haberl's purported consent to the subordination consists of the following testimony elicited on direct examination: "Q: Can you tell us a little more in your words, what did you say and what did [Haberl] say . . . ? "A: I told Mr. Haberl that we were having problems with Dr. Bigelow, obtaining his subordination, we felt that he should give it to us but he would not, and that we were faced with either a lawsuit or a — just forcing him to do it somehow. At that time when I talked to [Haberl], we had no indication that the subordination was forthcoming. "Q: Isn't it true that you told Mr. Haberl that it was crucial that that subordination be given? "A: Oh, yes. . . . . "Q: And when you told Mr. Haberl that this subordination by the Bigelows was crucial to concluding the refinancing, what did he say? "A: He had no objections. He didn't say anything. But it — I don't — I don't recall any real comment from him."

In November 1985, APE and APE 1984-A, Ltd., paid the Haberl note and the Haberl deed of trust was released. However, APE and APE 1984-A Ltd., ultimately defaulted on the Midland and Bigelow notes. A subsequent foreclosure of the Midland deed of trust resulted in a deficiency.

The Bigelows then instituted this civil action on the Bigelow note against the Haberls, APE, APE 1984-A, Ltd., and Merlin Resources, Inc. The Haberls asserted as a defense that they did not consent to the subordination of the Bigelow deed of trust and that the resultant impairment of collateral and increase in their risk of repayment relieved them of liability pursuant to section 4-3-606, Comment 3, 2 C.R.S. (1992), of Colorado's Commercial Code (hereinafter the Code).

The statute provides in pertinent part as follows: " Impairment of recourse or of collateral. (1) The holder discharges any party to the instrument to the extent that without such party's consent the holder: `(a) Without express reservation of rights releases or agrees not to sue any person against whom the party has, to the knowledge of the holder, a right of recourse or agrees to suspend the right to enforce against such person the instrument or collateral or otherwise discharges such person; except, that failure or delay in effecting any required presentment, protest, or notice of dishonor with respect to any such person does not discharge any party as to whom presentment, protest, or notice of dishonor is effective or unnecessary; or `(b) Unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse.' "(2) By express reservation of rights against a party with a right of recourse the holder preserves: `(a) All his rights against such party as of the time when the instrument was originally due; and `(b) The right of the party to pay the instrument as of that time; and `(c) All rights of such party to recourse against others.'" § 4-3-606, 2 C.R.S. (1992). "3. The words `to the knowledge of the holder' exclude the latent surety, as for example the accommodation maker where there is nothing on the instrument to show that he has signed for accommodation and the holder is ignorant of that fact. In such a case the holder is entitled to proceed according to what is shown by the face of the paper or what he otherwise knows, and does not discharge the surety when he acts in ignorance of the relation." Id. at Cmt. 3. The Haberls also filed cross-claims against the other defendants and obtained summary judgments on these cross-claims against APE for repayment of the Bigelow note. Prior to trial, the trial court entered summary judgment for the Bigelows on their claims against APE, APE 1984-A, Ltd., and Merlin Resources, Inc.

At the conclusion of a bench trial the trial court found, as the Bigelows conceded, that the "collateral" for the Bigelow note had been impaired by the subordination of the Bigelow deed of trust to the Midland deed of trust. The trial court also determined that the rider executed by the Haberls was personal to the Haberls and did not constitute general consent by the Haberls to any future subordination.

The trial court, the court of appeals, and the litigants describe the effect of the subordination of the Bigelow deed of trust to the Midland deed of trust as an impairment of collateral. Although there is authority to support this characterization of the transaction, see Poynot v. J T Devs., Inc., 355 So.2d 1052, 1054 (La.App. 1978), it is not clear from the record whether the "collateral" used by the parties in this case is intended to refer to the Bigelow deed of trust itself or to the real property underlying that deed of trust. Although the Code does not directly apply to transactions involving real property, it is noteworthy that for purposes of secured transactions subject to the Code, the term "collateral" means "property subject to a security interest." § 4-9-105(1)(c), 2 C.R.S. (1992). See also Nixon v. Bank One of Eastern Ohio, 599 N.E.2d 742, 744 (Ohio App. 1991). The record contains no evidence to suggest that the value of the real property underlying the Bigelow deed of trust was affected by the November 16, 1984, transactions. The Haberls argued at trial that the November 16, 1984, transactions substantially increased the likelihood that they would ultimately be required to satisfy that note. The Haberls are in essence arguing that their risk of repayment on the Bigelow note was increased when the Bigelows subordinated the Bigelow deed of trust to the Midland deed of trust. However characterized, the impact of the transaction is clear. Prior to November 16, 1984, the proceeds of any sale of the underlying property would be applied to the Bigelow note before being allocated to other interests. After the assumption agreement was executed, approximately $320,000 of the proceeds of any such sale would first be applied to the Midland note. The increase in risk here experienced by the Haberls is contemplated by the term "impairment of collateral" set forth in § 4-3-606. Wisconics Eng'g, Inc. v. Fisher, 466 N.E.2d 745 (Ind.App. 1984); Schmuckie v. Alvey, 758 S.W.2d 31 (Ky. 1988); Ramsey v. First Nat'l Bank Trust Co., 683 S.W.2d 947 (Ky.App. 1984); Hughes v. Tyler, 485 So.2d 1026 (Miss. 1986); Beneficial Fin. Co. of Norman v. Marshall, 551 P.2d 315 (Okla.App. 1976).

The trial court dismissed the claim against Dorothy Haberl on the ground that she did not consent to the November 16, 1984, subordination of the Bigelow deed of trust to the Midland deed of trust. However, the trial court held that by failing to voice any objection to the proposed subordination during or after his telephone conversation with Hazouri, Haberl did consent to such subordination and was therefore not subject to the protection afforded by section 4-3-606, Comment 3. The trial court entered judgment against Haberl and APE, jointly and severally, on the Bigelow note in the amount of $135,560.53, plus attorney fees, costs, and interest from December 16, 1988. In an unsuccessful post-trial motion to amend judgment Haberl argued, inter alia, that he could not have consented to the subordination of the Bigelow deed of trust because any such consent was required to be in writing by the terms of section 36-10-106, 16A C.R.S. (1982) (hereinafter the statute of frauds).

Haberl appealed the trial court's judgment. He initially asserted that he could not be held liable to the Bigelows on the basis of the November 16, 1984, assumption agreement because he did not sign that document. The court of appeals rejected this argument on the ground that Haberl's liability was based on the Bigelow note, not the assumption agreement. The court of appeals also rejected Haberl's argument that he was relieved of liability on the Bigelow note by virtue of section 4-3-606, 2 C.R.S. (1992), of the Code because he did not consent to the subordination of the Bigelow deed of trust. Accordingly, the court of appeals affirmed the trial court's judgment against Haberl.

The Bigelows and APE also appealed the trial court's judgment. The court of appeals affirmed the judgment insofar as it held APE liable to the Bigelows and the Haberls and dismissed the Bigelows' claim against Dorothy Haberl.

Haberl petitioned this court for certiorari review of the court of appeals decision. We granted his petition with respect to the following issues:

"1. Does a deed of trust constitute an interest in land for purposes of the statutes of fraud, §§ 38-10-106, -108, 16A C.R.S. (1982)?

"2. Is the grantor of a deed of trust required pursuant to the statutes of fraud, §§ 38-10-106, -108, 16A C.R.S. (1982), to give written consent to an agreement to subordinate that deed of trust to another trust deed?

"3. May the petitioner be held liable, consistent with § 4-3-401(1), 2 C.R.S. (1973), to the terms of a promissory note as modified by an agreement that he did not sign?

"4. Did the trial court and the court of appeals err in applying the doctrine of consent by silence?"

Haberl asserts that the court of appeals and the trial court erred in concluding that he consented to the subordination of the Bigelow deed of trust to the Midland deed of trust. We agree.

The issue of whether Haberl's conduct during and after his telephone conversation with Hazouri constitutes consent by Haberl to the subordination of the Bigelow deed of trust to the Midland deed of trust presents a question of mixed law and fact. In applying the appropriate legal standard to the facts established by the record, we conclude that the trial court erred in concluding that Haberl's consent to the subordination of the Bigelow deed of trust could be implied.

The Bigelow note is a negotiable instrument, as it contains both an unconditional promise to pay and a fixed date of payment. Bank of Kimball v. Rostek, 161 Colo. 584, 423 P.2d 579 (1967). As such, transactions involving the note are governed by article 3 of the Code, §§ 4-3-101 to -805, 2 C.R.S. (1992). Capital Investors Co. v. Executors of Estate of Morrison, 484 F.2d 1157, 1160 (4th Cir. 1973) (promissory notes secured by a real estate mortgage are negotiable instruments governed by legal principles unique to such instruments); Payne v. Mundaca Inv. Corp., 562 N.E.2d 51, 55 (Ind.App. 1990) ("[a] promissory note is a negotiable instrument . . . . The note's character as a negotiable instrument is not stripped from it even though it is collateralized by a mortgage."); In re Cambridge Mortgage Corp., 92 B.R. 145, 149 (Bankr. D.S.C. 1988) ("[n]egotiable notes are governed by the Uniform Commercial Code . . . as adopted in South Carolina and other states. It makes no difference that the note is secured by an interest in real estate . . . ."); Hughes v. Tyler, 485 So.2d 1026, 1029 (Miss. 1986) ("while the U.C.C. does not apply to security interest in realty, the promissory note is not a security interest in realty. The note does not cease to be negotiable even though it is secured by a mortgage."); see 6A R. Anderson, Anderson on the Uniform Commercial Code § 3-606:7 at 353 (3d ed. 1993).

The extent of Haberl's liability on the Bigelow note is thus governed by the discharge provisions of section 4-3-606, 2 C.R.S. (1992). See Farner v. Cole, 778 P.2d 688, 692 (Colo. 1989). Section 4-3-606(1)(b) of the Code describes the circumstances in which a party is discharged from liability on a note as follows:

" Impairment of recourse or of collateral.

(1) The holder discharges any party to the instrument to the extent that without such party's consent the holder:

. . . .

"(b) Unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse."

§ 4-3-606(1)(b), 2 C.R.S. (1992). Several courts in other jurisdictions interpreting Uniform Commercial Code provisions similar to section 4-3-606 have concluded that this language protects a surety whose risk of payment under the terms of a negotiable instrument has been increased without the surety's consent. See Ramsey v. First Nat'l Bank Trust Co., 683 S.W.2d 947 (Ky.App. 1984) (agreement between creditor and third party relieves surety of obligation against whom there is a known right of recourse made without a surety's consent or by careless handling of the collateral by the creditor). See also Schmuckie v. Alvey, 758 S.W.2d 31 (Ky. 1988) (holder's subordination of its lien to the interest of a third party lender constitutes impairment of the collateral and an accommodation maker will be discharged from liability on the note); Hughes v. Tyler, 485 So.2d 1026 (Miss. 1986) (value of real estate, which served as collateral for a promissory note, was impaired when the holder-secured party released a portion of the collateral property without the consent of the primary party to the note, thus increasing the debt percentage of the loan and decreasing the margin of security); Beneficial Fin. Co. of Norman v. Marshall, 551 P.2d 315 (Okla.App. 1976) (unjustifiable impairment of collateral by a secured party will be interpreted to include unreasonable acts which make the collateral unavailable to a surety and thus increase his or her risk). This court has recognized that when a principal contract or a contract of suretyship is materially altered without the surety's knowledge or consent, the surety is discharged from liability. National Union Fire Ins. Co. v. Denver Brick Pipe Co., 162 Colo. 519, 531, 427 P.2d 861, 867 (1967). See People v. Smith, 645 P.2d 864, 865 (Colo.App. 1982) (a surety takes calculated risks in assuming suretyship role, and events that materially increase that risk without the surety's consent terminate the surety's obligation). It is thus clear that Haberl was relieved of his obligations as a surety for APE's promise to pay the Bigelow note if he did not consent to the subordination of the Bigelow deed of trust.

Whether a party's consent to an increased risk can be implied from silence depends on the circumstances of the particular case. An increase in the risk assumed by a surety in effect alters the terms of the initial suretyship agreement. Mere silence by a surety in the face of activity by the principal and the creditor is not ordinarily regarded as acquiescence in or consent to any changes in the original arrangements. Bank of Nova Scotia v. St. Croix Drive-In Theatre, Inc., 552 F. Supp. 1244, 1250 (D.V.I. 1982); A/C Elec. Co. v. Aetna Ins. Co., 247 A.2d 708, 711 (Md. 1968). Accord Elfinwild Volunteer Fire Dep't v. International Fidelity Ins. Co., 530 F. Supp. 111, 113 (W.D. Pa. 1982). Such change should not be presumed in the absence of evidence that the surety not only knew of the extent of the additional risk to be assumed but also had no objection to assuming such additional risk.

The general rule is that mere knowledge of the impairment should not be deemed to be consent where the party's silence does not clearly indicate his lack of objection to the impairment. William D. Hawkland Larry Lawrence, Uniform Commercial Code Series § 3-606:12 (1984). See also 72 C.J.S. Principal and Surety § 103 (1987) (silence alone ordinarily does not indicate surety's consent to any variation or change in the contract or obligation of the principal).

Many authorities have examined the issue of assent by silence in the context of contract law. The Restatement (Second) of Contracts, section 19, contains the following observations regarding conduct as a manifestation of assent:

"(1) The manifestation of assent may be made wholly or partly by written or spoken words or by other acts or by failure to act.

"(2) The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents.

"(3) The conduct of a party may manifest assent even though he does not in fact assent. In such cases a resulting contract may be voidable because of fraud, duress, mistake, or other invalidating cause."

Restatement (Second) of Contracts § 19(1)-(3) (1979). See also id. at § 69 cmt. a. ("Acceptance by silence is exceptional" and "[t]he mere receipt of an unsolicited offer does not impair the offeree's freedom of action or inaction or impose on him any duty to speak"). Typically, silence or inaction will be deemed acceptance of an offer only when the relationship between the parties is such that an offeror is justified in expecting a reply or the offeree is under a duty to respond. Brooks Towers Corp. v. Hunkin-Conkey Constr. Co., 454 F.2d 1203, 1207 (10th Cir. 1972); Western Insulation Servs., Inc. v. Central Nat'l Ins. Co. of Omaha, 460 N.W.2d 355, 358 (Minn.App. 1990). While in some circumstances assent may be implied from a course of conduct between the contracting parties, a person receiving a proposal to change an agreement to which that person is a party is not obliged to answer the proposal. 17A C.J.S. Contracts, § 375 at 427-28 (1963).

In the instant case, the only evidence presented at trial regarding Haberl's alleged consent to the subordination by the Bigelows of the Bigelow note and deed of trust to the Midland note and deed of trust was his telephone conversation with Philip Hazouri of APE. In that conversation, Hazouri communicated to Haberl that APE was having difficulty securing a subordination agreement from the Bigelows and that such a subordination was crucial to the refinancing arrangement between APE and the Midland Federal Savings and Loan Association. According to Hazouri, Haberl did not say anything or make "any real comment" during this conversation.

This evidence falls far short of establishing that Haberl knowingly consented to the increase in his risk for purposes of section 4-3-606(1)(b) of the Code. Haberl was under no duty to respond to Hazouri's general statements. More importantly, at the time of the critical conversation the terms and conditions of the subordination agreement had not been agreed upon and, consequently, were never communicated to Haberl. His failure to object to an increase in risk that was never explained to him cannot be deemed consent, and the record contains no evidence of a course of conduct by Haberl or any communications between Haberl and APE, Hazouri or the Bigelows to support the conclusion that Haberl had knowledge of the terms of the proposed subordination agreement and consented thereto.

The court of appeals relied on our decision of Lothrup v. Union Bank, 16 Colo. 257, 27 P. 696 (1891), in concluding that Haberl's silence indicated his consent to the subordination of the Bigelow deed of trust to the Midland deed of trust. That case is distinguishable. In Lothrup the trial court concluded that the defendant authorized the placing of his signature on a promissory note and rejected the defendant's claim that the signature was forged. Although bank officials showed the executed note to Lothrup, he did not indicate that the signature was not his. When the bank mailed Lothrup a notice concerning the note and its maturity date, Lothrup never responded, and when a bank officer telephoned Lothrup concerning the validity of the promissory note, Lothrup stated affirmatively that the note was "all right."

In affirming the trial court's determination that Lothrup had signed the note, we observed that "[h]e who is silent appears to consent." Lothrup, 16 Colo. at 261, 27 P. at 698. However, we emphasized Lothrup's several opportunities to disavow the signature and we also cautioned that the above maxim "undoubtedly has many exceptions and qualifications, and is always to be considered with more or less caution according to the circumstances of the case." Id. at 261, 27 P. at 698.

Here, the issue of the proposed subordination was presented to Haberl during the course of one brief telephone conversation during which Hazouri requested Haberl's assistance. Hazouri neither asked Haberl to agree to the subordination nor solicited Haberl's comments concerning the proposal. Furthermore, unlike the defendant in Lothrup, Haberl did not subsequently engage in conduct or with affirmative statements that indicated consent to the transaction that increased his risk.

We conclude that the trial court erred in determining that Haberl consented to the subordination of the Bigelow deed of trust to the Midland deed of trust. In our view, Haberl was discharged from his obligations on the Bigelow note pursuant to section 4-3-606(1)(b), 2 C.R.S. (1992), when as a result of the conduct of the Bigelows and APE, Haberl became in effect a surety on the APE note and his risk of repayment was increased. We thus conclude that the court of appeals erred in affirming the trial court's judgment on this issue.

III

Haberl contends here, as he did at trial, that, pursuant to the provisions of section 4-3-401(1), 2 C.R.S. (1992), he cannot be held liable to the Bigelows on the basis of the Bigelow note because the terms of the underlying security instrument were substantially modified by the November 16, 1984, assumption agreement executed by APE and the Bigelows, but not by Haberl.

Haberl also argues that his oral communication with Hazouri in November of 1984 cannot be deemed an agreement to the impairment of the collateral for purposes of section 4-3-606, Comment 3, 2 C.R.S. (1992), because the Bigelow deed of trust constitutes an interest in land for purposes of the statute of frauds and any agreement affecting that interest must also be in writing. Because we have concluded that Haberl is not liable to the Bigelows on the Bigelow note because his risk of repayment was increased without his consent, we need not address Haberl's alternative arguments.

For the foregoing reasons, the judgment of the court of appeals is reversed insofar as it affirms the trial court's judgment against Haberl. Because the court of appeals directed the trial court to consider questions pertaining to awards of attorney fees against Haberl and others, we remand the case to the court of appeals with directions to enter a judgment reversing the trial court's judgment against Haberl and remanding the case to the trial court for further proceedings with respect to the attorney fees consistent with this opinion and those portions of the court of appeals opinion not affected by our decision here.

JUSTICE ERICKSON dissents, and JUSTICE MULLARKEY joins in the dissent.

HABERL v. BIGELOW