## Facts

- The Arenas borrowed $32,000 from First Federal in 1965 at 5.75% interest, secured by a mortgage permitting additional advances.
- In 1966, the Arenas obtained an additional advance; the parties executed modification/extension documents reflecting a higher balance and increasing interest to 6%, along with related loan documents.
- In 1969, the Arenas conveyed the mortgaged property to Richardson by warranty deed subject to First Federal’s two mortgages.
- On the same day and without the Arenas’ notice or consent, Richardson and First Federal executed a modification and extension agreement in which Richardson assumed both mortgages, the payment term was extended, and the interest rate was increased from 6% to 7.25%.
- Richardson later defaulted, and First Federal filed a foreclosure action seeking, among other relief, to hold the Arenas personally liable for any deficiency.
- The Arenas moved for summary judgment, asserting discharge from personal liability due to the unconsented, material modification of the debt.
- First Federal relied on a reservation-of-rights provision in the Arenas’ supplemental agreements, arguing it preserved recourse against the Arenas despite later modifications with Richardson.

## Issues

1. Whether, after a grantee assumes a mortgage, the original mortgagors are treated as sureties as to the lender for purposes of discharge.
2. Whether a lender’s unconsented agreement with the assuming grantee to increase the interest rate and extend repayment terms is a material alteration that discharges the original mortgagors from personal liability.
3. Whether a general reservation-of-rights clause in the original loan documents permits the lender to make such risk-increasing modifications without the original mortgagors’ consent while preserving their liability.

## Decision

- The Court of Appeals affirmed summary judgment for the Arenas.
- The court held that, following Richardson’s assumption of the mortgages, the Arenas occupied a surety-like position with respect to the indebtedness.
- The increase in interest rate (and related term extension) was a material modification that increased the Arenas’ risk and therefore discharged them absent consent.
- The reservation-of-rights language did not clearly authorize First Federal to impose a material, risk-increasing modification without the Arenas’ consent while still holding them personally liable.

## Legal Principles

- When a mortgagor conveys property and the grantee assumes the mortgage debt, the original mortgagor may be treated as a surety as to the lender.
- A nonconsenting surety is discharged by a material alteration of the principal obligation that increases the surety’s risk, including an interest-rate increase and materially extended payment terms.
- Contract language claimed to preserve recourse against a surety despite later modifications must be clear and explicit; a general reservation-of-rights clause is insufficient to authorize material, risk-increasing changes without consent.
- Ambiguities in creditor-drafted provisions affecting surety liability are construed against the drafter.

## Conclusion

The court held that the Arenas were discharged from personal liability because First Federal and Richardson materially modified the mortgage debt by increasing the interest rate and extending repayment without the Arenas’ knowledge or consent, and the general reservation-of-rights clause did not preserve liability for that enlarged obligation.


First Fed. Sav. & Loan Ass’n of Gary v. Arena, 406 N.E.2d 1279 (Ind. Ct. App. 1980)