[animalwithin]

Ivor borrowed $420,000 from Lear Bank. At Lear’s request, Ivor entered into an agreement with Ash, Kane, and Queen for them to act as co-sureties on the loan. The agreement between Ivor and the co-sureties provided that the maximum liability of each co-surety was: Ash, $84,000; Kane, $126,000; and Queen, $210,000. After making several payments, Ivor defaulted on the loan. The balance was $280,000. If Queen pays $210,000 and Ivor subsequently pays $70,000, what amounts may Queen recover from Ash and Kane?

The right of contribution arises when one co-surety, in performance of the principal debtor’s obligation, pays more than his or her proportionate share of the total liability. The right of contribution allows the performing co-surety to receive reimbursement from the other co-sureties for their pro rata shares of the liability. Queen paid his or her maximum liability of $210,000, or 50% of the debt; then Ivor paid $70,000, reducing the balance from $280,000 to $210,000. Ash’s maximum liability of $84,000 represents 20% of the original $420,000 debt, so Queen may collect 20% of the remainder,or $42,000, from Ash. Kane’s maximum liability of $126,000 represents 30% (of $420,000), so Queen may collect $63,000 ($210,000 x 30%) from Kane.

I understand the % but the question says the balance was $280,000. If Queen paid $210,000 and Ivor paid $70,000 then the balance is zero. If we go back to the original amount and apply the $210+$70, then we’re left with a loan balance of $140,000. Where are they getting $280,000?

[water]

Basically you want to use $210k, which is the amount that was paid by one co-surety. That co-surety has the right to seek reimbursement from the other co-sureties, in the original proportions of the agreement:

Ash: 84K/420K = 20%
Kane: 126K/420k = 30%
Queen: 210/420K = 50%

Ash's maximum liability of $84,000 represents 20% of the original $420,000 debt, so Queen may collect 20% of the remainder ($210,000) or $42,000, from Ash. $42,000 = $210,000 x 20%

Kane's maximum liability of $126,000 represents 30% (of $420,000), so Queen may collect $63,000 ($210,000 x 30%) from Kane.

So Queen ended up getting 105k back from the other co-sureties, so that she would only be guaranteeing 50% of the 210K she had to pay earlier.

[animalwithin]

Hmmm, interesting. And we're using the $210k because that was what Queen paid and the question is asking what amount specifically that Queen can recover?

[Sam]

Yup that's right. You'd always take the amount that was paid by one surety, and that surety can then ensure that it ends up allocated among the other co-sureties, according to the agreement

[animalwithin]

Thank you both!

[Author]

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