[Tux]

Does return of collateral by creditor back to debtor release the surety’s liability?

Becker says – “A noncompensated surety will be discharged from liability if the principal debtor and the creditor modify the terms of the contract in any way. A partial surrender of the debtor’s collateral is a modification that will release a noncompensated surety from liability”

Wiley says – “The return of the collateral to the principal debtor by the creditor will only reduce the surety’s obligation to the extent of the value of the collateral. (Surety) will not be completely released from liability by the return of the collateral to (debtor).”

Which is correct?

Maybe the distinction is whether surety is compensated vs. noncompensated.???

BUT, not all MCQ’s specify whether surety is compensated or not.

When in doubt, do we assume they are compensated, unless specifically stated that they are noncompensated??

FAR - 86 - 2/27/14
AUD - 75 - 5/29/14
BEC - 80 - 8/31/14
REG - 89 - 2/27/15
Praise Jesus! I'm done!!

Study resources:
Becker
Wiley test bank

[Anonymous]

@Tux, good question.

I would presume that if a problem is silent, surety generally refers to a compensated surety. A contract involving a noncompensated surety, however refers to a related party (debtor/surety) transaction.

I would just keep in mind the other buzz words for surety liability like “if it increases risk to a surety, the latter is completely relieved or released from his liability.”

[Tux]

Thanks, Amor D !

So, do you agree that the Wiley statement seems incorrect – since release of collateral by creditor DOES increase the surety's risk, therefore, they are completely released from liability?

Also, anyone else have feedback?

FAR - 86 - 2/27/14
AUD - 75 - 5/29/14
BEC - 80 - 8/31/14
REG - 89 - 2/27/15
Praise Jesus! I'm done!!

Study resources:
Becker
Wiley test bank

[TargetCPA]

Which of the following events will release a non-compensated surety from liability to the creditor?

A. The creditor failed to notify the surety of a partial surrender of the principal debtor’s collateral.

B. The creditor was adjudicated incompetent after the debt arose.

C. The principal debtor exerted duress to obtain the surety agreement.

D. The principal debtor was involuntarily petitioned into bankruptcy.

Answer (A) is correct.

The creditor’s impairment of collateral, for example, by returning it to the principal debtor or failing to maintain a perfected security interest in it, discharges the surety to the extent of the value of the lost collateral. The reason for permitting this defense is to protect a surety who assumed the obligation solely because the creditor held the security for the debt.

[Tux]

TargetCPA – Yes, that's the question in Becker that I'm referring to.

However, BOTH Wiley and CPAExcel give a different rule –

They both say that release of collateral by the creditor back to the debtor ONLY relieves the surety of liability for the amount of the collateral that was released.

It does NOT completely release them from liability of the suretyship.

I'm guessing that the discrepancy is due to compensated vs. noncompensated surety.

Do ya'll agree?

So, is this the rule…. ?

1 – NONcompensated surety – partial surrender of collateral by creditor FULLY releases surety

2 – Compensated surety – any surrender of collateral (partial or full) ONLY releases surety of liability for the value of the collateral that was released. NOT fully released from the liability of suretyship.

Can anyone verify?

FAR - 86 - 2/27/14
AUD - 75 - 5/29/14
BEC - 80 - 8/31/14
REG - 89 - 2/27/15
Praise Jesus! I'm done!!

Study resources:
Becker
Wiley test bank

[Tux]

Oops!

TargetCPA – I did not read your reply thoroughly before I responded. Sorry about that!

Here is the Becker explanation for the same question that you posted –

“A noncompensated surety will be discharged from liability if the principal debtor and the creditor modify the terms of the contract in any way. A partial surrender of the debtor's collateral is a modification that will release a noncompensated surety from liability”

So Becker is actually contributing the answer to be because of a modification in contract. They consider release of collateral to be a modification of contract.

The question says – “which event will release a surety from liability”

So that sounds like release of FULL liability, not release of the value of the collateral that was returned.

Hopefully, this is just a unique question, and others will be more straight-forward, so that I know which rule to follow.

Clear as mud!

FAR - 86 - 2/27/14
AUD - 75 - 5/29/14
BEC - 80 - 8/31/14
REG - 89 - 2/27/15
Praise Jesus! I'm done!!

Study resources:
Becker
Wiley test bank

[Author]

Replies