Colorado Court of Appeals, Div. II · 1970 · Contracts
ContractsGuarantyguarantor liabilitydischarge of guarantormaterial alterationconsentbankruptcy compromisecreditor-guarantor
Facts
In 1964, Jackson agreed to guarantee payment of notes to be executed by her husband in favor of the bank. Her husband later borrowed $39,000, and by June 1965 $21,075.15 remained due, which he then paid in full; the bank marked the notes "PAID" and returned them to him. After the husband filed bankruptcy and was discharged, the trustee demanded return of the $21,075.15 as a voidable preference. Without notifying Jackson, the bank negotiated a settlement with the trustee and agreed to pay $8,000, then sued Jackson as guarantor for that amount.
Issue
Does a creditor discharge a guarantor by entering, without the guarantor's notice or consent, into a compromise settlement with a bankruptcy trustee that materially affects the guarantor's liability? May the creditor then recover the settlement amount from the guarantor?
Rule
Where the creditor chooses to materially alter the principal obligation to the detriment of the guarantor, without the guarantor's consent, the alteration discharges the guarantor's liability.
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One of 10 multiple-choice questions for this case. Pick an answer to see why.
In Denver, Nora Ellison signed a guaranty covering loans that Front Range Valley Bank might extend to her brother, Caleb. Caleb later paid off the remaining balance on his notes, and the bank marked them satisfied. After Caleb entered bankruptcy, the trustee asserted the payoff was avoidable and demanded repayment; without telling Nora, the bank settled for $12,000 and then sued Nora for that amount.
Under the governing rule, is Nora liable on the guaranty for the $12,000 settlement payment?
Explanation. The majority rule is that a guarantor is discharged when the creditor materially alters the principal obligation to the guarantor's detriment without the guarantor's consent. A voluntary compromise with a bankruptcy trustee that the creditor later seeks to pass on to the guarantor substantially affects the guarantor's liability. The opinion did not make discharge depend on proving the trustee would have won, nor on the size of the discount, nor on bankruptcy-court approval.