In 1995, Mark Denton cosigned a $101,250 loan that the First Interstate Bank (FIB) in Missoula, Montana, issued to Denton’s friend Eric Anderson. Denton’s business assets—a mini-warehouse operation—secured the loan. On his own, Anderson 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 business failed. As a consequence, FIB repossessed and sold the equipment and applied the proceeds to 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 filed a suit in a Montana state court against FIB, claiming, in part, that Anderson’s equipment was the collateral for the loan that FIB was attempting to collect from Denton.
(a) Denton’s assets served as the security for Anderson’s loan because Anderson had nothing to offer. When the loan was obtained, Dean Gillmore, 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. Under these circumstances, is it fair to hold Denton liable for the unpaid balance of Anderson’s loan? Why or why not?
(b) Denton argued that the loan contract was unconscionable and constituted a “contract of adhesion.” What makes a contract unconscionable? Did the transaction between the parties in this case qualify? What is a “contract of adhesion”? Was this deal unenforceable on that basis? Explain.