355.3-605 Discharge of secondary obligors.
(1)
(2)
(3)
If a person entitled to enforce an instrument releases the obligation of a principal
obligor in whole or in part, and another party to the instrument is a secondary
obligor with respect to the obligation of that principal obligor, the following rules
apply:
(a) Any obligations of the principal obligor to the secondary obligor with respect
to any previous payment by the secondary obligor are not affected. Unless the
terms of the release preserve the secondary obligor’s recourse, the principal
obligor is discharged, to the extent of the release, from any other duties to the
secondary obligor under this article;
(b) Unless the terms of the release provide that the person entitled to enforce the
instrument retains the right to enforce the instrument against the secondary
obligor, the secondary obligor is discharged to the same extent as the principal
obligor from any unperformed portion of its obligation on the instrument. If
the instrument is a check and the obligation of the secondary obligor is based
on an indorsement of the check, the secondary obligor is discharged without
regard to the language or circumstances of the discharge or other release; and
(c) If the secondary obligor is not discharged under paragraph (b) of this
subsection, the secondary obligor is discharged to the extent of the value of
the consideration for the release, and to the extent that the release would
otherwise cause the secondary obligor a loss.
If a person entitled to enforce an instrument grants a principal obligor an extension
of the time at which one (1) or more payments are due on the instrument and
another party to the instrument is a secondary obligor with respect to the obligation
of that principal obligor, the following rules apply:
(a) Any obligations of the principal obligor to the secondary obligor with respect
to any previous payment by the secondary obligor are not affected. Unless the
terms of the extension preserve the secondary obligor’s recourse, the
extension correspondingly extends the time for performance of any other
duties owed to the secondary obligor by the principal obligor under this
article;
(b) The secondary obligor is discharged to the extent that the extension would
otherwise cause the secondary obligor a loss; and
(c) To the extent that the secondary obligor is not discharged under paragraph (b)
of this subsection, the secondary obligor may perform its obligations to a
person entitled to enforce the instrument as if the time for payment had not
been extended or, unless the terms of the extension provide that the person
entitled to enforce the instrument retains the right to enforce the instrument
against the secondary obligor as if the time for payment had not been
extended, treat the time for performance of its obligations as having been
extended correspondingly.
If a person entitled to enforce an instrument agrees, with or without consideration,
to a modification of the obligation of a principal obligor other than a complete or
(4)
(5)
(6)
(7)
partial release or an extension of the due date and another party to the instrument is
a secondary obligor with respect to the obligation of that principal obligor, the
following rules apply:
(a) Any obligations of the principal obligor to the secondary obligor with respect
to any previous payment by the secondary obligor are not affected. The
modification correspondingly modifies any other duties owed to the secondary
obligor by the principal obligor under this article;
(b) The secondary obligor is discharged from any unperformed portion of its
obligation to the extent that the modification would otherwise cause the
secondary obligor a loss; and
(c) To the extent that the secondary obligor is not discharged under paragraph (b)
of this subsection, the secondary obligor may satisfy its obligation on the
instrument as if the modification had not occurred, or treat its obligation on
the instrument as having been modified correspondingly.
If the obligation of a principal obligor is secured by an interest in collateral, another
party to the instrument is a secondary obligor with respect to that obligation, and a
person entitled to enforce the instrument impairs the value of the interest in
collateral, the obligation of the secondary obligor is discharged to the extent of the
impairment. The value of an interest in collateral is impaired to the extent the value
of the interest is reduced to an amount less than the amount of the recourse of the
secondary obligor, or the reduction in value of the interest causes an increase in the
amount by which the amount of the recourse exceeds the value of the interest. For
purposes of this subsection, impairing the value of an interest in collateral includes
failure to obtain or maintain perfection or recordation of the interest in collateral,
release of collateral without substitution of collateral of equal value or equivalent
reduction of the underlying obligation, failure to perform a duty to preserve the
value of collateral owed, under Article 9 of this chapter or other law, to a debtor or
other person secondarily liable, and failure to comply with applicable law in
disposing of or otherwise enforcing the interest in collateral.
A secondary obligor is not discharged under subsections (1)(c), (2), (3), or (4) of
this section unless the person entitled to enforce the instrument knows that the
person is a secondary obligor or has notice under KRS 355.3-419(3) that the
instrument was signed for accommodation.
A secondary obligor is not discharged under this section if the secondary obligor
consents to the event or conduct that is the basis of the discharge, or the instrument
or a separate agreement of the party provides for waiver of discharge under this
section specifically or by general language indicating that parties waive defenses
based on suretyship or impairment of collateral. Unless the circumstances indicate
otherwise, consent by the principal obligor to an act that would lead to a discharge
under this section constitutes consent to that act by the secondary obligor if the
secondary obligor controls the principal obligor or deals with the person entitled to
enforce the instrument on behalf of the principal obligor.
A release or extension preserves a secondary obligor’s recourse if the terms of the
release or extension provide that:
(a)
(8)
(9)
The person entitled to enforce the instrument retains the right to enforce the
instrument against the secondary obligor; and
(b) The recourse of the secondary obligor continues as if the release or extension
had not been granted.
Except as otherwise provided in subsection (9) of this section, a secondary obligor
asserting discharge under this section has the burden of persuasion both with respect
to the occurrence of the acts alleged to harm the secondary obligor and loss or
prejudice caused by those acts.
If the secondary obligor demonstrates prejudice caused by an impairment of its
recourse, and the circumstances of the case indicate that the amount of a loss is not
reasonably susceptible of calculation or requires proof of facts that are not
ascertainable, it is presumed that the act impairing recourse caused a loss or
impairment equal to the liability of the secondary obligor on the instrument. In that
event, the burden of persuasion as to any lesser amount of the loss is on the person
entitled to enforce the instrument.
Effective: July 12, 2006
History: Repealed and reenacted 2006 Ky. Acts ch. 242, sec. 44, effective July 12,
2006. -- Repealed and reenacted 1996 Ky. Acts ch. 130, sec. 68, effective January 1,
1997. -- Created 1958 Ky. Acts ch. 77, sec. 3-605, effective July 1, 1960.
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