Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 15

A Question of Ethics-Priorities. In 1995, Mark Denton cosigned on a $101,250 loan that First Interstate Bank (FIB) made to his friend Eric Anderson. Denton's business assets-a mini-warehouse operation-secured the loan, because Anderson had no assets to use as collateral. Anderson also obtained a $260,000 U.S. Small Business Administration (SBA) loan from FIB at the same time. The purpose of both loans was to buy logging equipment with which Anderson could start a business. In 1997, the logging business failed and FIB repossessed and sold the equipment and used the funds to pay off the SBA loan. FIB then asked Denton to pay the other loan's outstanding balance ($98,460) plus interest. When Denton refused, FIB initiated proceedings to obtain his business assets. Denton claimed that Anderson's equipment was the collateral for the loan [ Denton v. First Interstate Bank of Commerce, 333 Mont. 169, 142 P.3d 797 (2006)] (See Priorities.)
1. When the parties signed the loan, FIB's loan officer explained to them that if Anderson defaulted, the proceeds from the sale of the logging equipment would be applied to the SBA loan first. Is it fair to hold Denton liable for the unpaid balance of Anderson's loan? Why or why not?
2. Denton argued that the loan contract should not be enforceable because it was unconscionable and an adhesion contract. Is he correct? Explain.