Colorado § 4-3-605 - Discharge of indorsers and accommodation parties.

§ 4-3-605. Discharge of indorsers and accommodation parties.

(a) In this section, the term "indorser" includes a drawer having the obligation described in section 4-3-414 (d).

(b) Discharge, under section 4-3-604, of the obligation of a party to pay an instrument does not discharge the obligation of an indorser or accommodation party having a right of recourse against the discharged party.

(c) If a person entitled to enforce an instrument agrees, with or without consideration, to an extension of the due date of the obligation of a party to pay the instrument, the extension discharges an indorser or accommodation party having a right of recourse against the party whose obligation is extended to the extent the indorser or accommodation party proves that the extension caused loss to the indorser or accommodation party with respect to the right of recourse.

(d) If a person entitled to enforce an instrument agrees, with or without consideration, to a material modification of the obligation of a party other than an extension of the due date, the modification discharges the obligation of an indorser or accommodation party having a right of recourse against the person whose obligation is modified to the extent the modification causes loss to the indorser or accommodation party with respect to the right of recourse. The loss suffered by the indorser or accommodation party as a result of the modification is equal to the amount of the right of recourse unless the person enforcing the instrument proves that no loss was caused by the modification or that the loss caused by the modification was an amount less than the amount of the right of recourse.

(e) If the obligation of a party to pay an instrument is secured by an interest in collateral and a person entitled to enforce the instrument impairs the value of the interest in collateral, the obligation of an indorser or accommodation party having a right of recourse against the obligor is discharged to the extent of the impairment. The value of an interest in collateral is impaired to the extent (i) the value of the interest is reduced to an amount less than the amount of the right of recourse of the party asserting discharge, or (ii) the reduction in value of the interest causes an increase in the amount by which the amount of the right of recourse exceeds the value of the interest. The burden of proving impairment is on the party asserting discharge.

(f) If the obligation of a party is secured by an interest in collateral not provided by an accommodation party and a person entitled to enforce the instrument impairs the value of the interest in collateral, the obligation of any party who is jointly and severally liable with respect to the secured obligation is discharged to the extent the impairment causes the party asserting discharge to pay more than that party would have been obliged to pay, taking into account rights of contribution, if impairment had not occurred. If the party asserting discharge is an accommodation party not entitled to discharge under subsection (e) of this section, the party is deemed to have a right to contribution based on joint and several liability rather than a right to reimbursement. The burden of proving impairment is on the party asserting discharge.

(g) Under subsection (e) or (f) of this section, impairing value of an interest in collateral includes (i) failure to obtain or maintain perfection or recordation of the interest in collateral, (ii) release of collateral without substitution of collateral of equal value, (iii) failure to perform a duty to preserve the value of collateral owed, under article 9 or other law, to a debtor or surety or other person secondarily liable, or (iv) failure to comply with applicable law in disposing of collateral.

(h) An accommodation party is not discharged under subsection (c), (d), or (e) of this section unless the person entitled to enforce the instrument knows of the accommodation or has notice under section 4-3-419 (c) that the instrument was signed for accommodation.

(i) A party is not discharged under this section if (i) the party asserting discharge consents to the event or conduct that is the basis of the discharge, or (ii) the instrument or a separate agreement of the party provides for waiver of discharge under this section either specifically or by general language indicating that parties waive defenses based on suretyship or impairment of collateral.

Source: L. 94: Entire article R&RE, p. 878, § 1, effective January 1, 1995.

Editor's note: This section is similar to former § 4-3-606 as it existed prior to 1994.

ANNOTATION

Annotator's note. The following annotations include cases decided under former provisions similar to this section.

A verbal promise, without consideration, to release a joint maker and look to the principal maker alone does not release him from liability. Edmonston v. Ascough, 43 Colo. 55, 95 P. 313 (1908).

Nor does a request by such an accommodation maker that the holder of the note sue the principal maker discharge him from liability where the holder refuses and the principal maker becomes insolvent. Edmonston v. Ascough, 43 Colo. 55, 95 P. 313 (1908).

Also, an extension of time of payment of a promissory note must be by agreement of the parties and based upon a valid consideration. Am. Medical & Dental Ass'n v. Grant, 87 Colo. 183, 285 P. 1099 (1930).

A holder cannot arbitrarily extend time for payment. Stipulation in a promissory note that makers and indorsers agree to any extension of time of payment before, at, or after maturity does not mean that the holder can arbitrarily extend the time of payment. Am. Medical & Dental Ass'n v. Grant, 87 Colo. 183, 285 P. 1099 (1930).

As between the maker and payee of a note, an agreement to extend the time of payment until a copy of patent to land can be obtained is not invalid as an indefinite extension. Drake v. Pueblo Nat'l Bank, 44 Colo. 49, 96 P. 999 (1908).

Though such does not apply to a surety. A surety is primarily liable, and one primarily liable thereunder is not released from liability by an extension of the time of payment to the principal maker without the surety's consent. Only the person who can be released by a binding agreement extending time is one "secondarily" liable and as a surety is not "secondarily", but "primarily", liable, he is not released by such extension. Hall v. Farmers' Bank, 74 Colo. 165, 220 P. 237 (1923).

Where the holder of a note obtains control of property which a surety on the note is entitled to have applied to the payment of the note, thereby preventing the surety from being subrogated to the holder's rights in such property, the surety is released from liability. Crosby v. Woodbury, 37 Colo. 1, 89 P. 34 (1906).

Instructions merely stating section must include interpretation. Where instruction on impairment of recourse or of collateral is correct statement of law relative to defendant's defense, it is error not to include interpretation of this highly technical statute in instructions to aid jury in applying statute to facts of case. Pueblo Bank & Trust Co. v. McMartin, 31 Colo. App. 546, 506 P.2d 759 (1972).

Subsection (2) (under former law) does not require notification and consent as a prerequisite to an express reservation of rights. Although plaintiff discharged defendants in assumption agreement, it expressly reserved its rights against them. Therefore the defendants remained liable on their obligation to plaintiff. Matthews v. Saleen, 812 P.2d 1186 (Colo. App. 1991).

Failure to object to an increase in risk, the terms of which were never explained, cannot be deemed a consent to impairment of collateral. Haberl v. Bigelow, 855 P.2d 1368 (Colo. 1993).

Under former § 4-3-606, a prior, express consent provision in an instrument waives either a surety or a co-maker's right to claim a discharge of obligations based upon later modifications to the obligation. Crown Life Ins. Co. v. Haag Ltd. P'ship, 929 P.2d 42 (Colo. App. 1996).

Applied in Moss v. McDonald, 772 P.2d 626 (Colo. App. 1988); Resolution Trust Corp. v. Teem P'ship, 835 F. Supp. 563 (D. Colo. 1993).

ARTICLE 4

Bank Deposits and Collections

PART 1

GENERAL PROVISIONS AND DEFINITIONS

4-4-101. Short title.

4-4-102. Applicability.

4-4-103. Variation by agreement - measure of damages - action constituting ordinary care.

4-4-104. Definitions and index of definitions.

4-4-105. "Bank" - "depositary bank" - "intermediary bank" - "collecting bank" - "payor bank" - "presenting bank".

4-4-106. Payable through or payable at bank - collecting bank.

4-4-107. Separate office of bank.

4-4-108. Time of receipt of items.

4-4-109. Delays.

4-4-110. Electronic presentment.

4-4-111. Statute of limitations.

PART 2

COLLECTION OF ITEMS - DEPOSITARY AND COLLECTING BANKS

4-4-201. Status of collecting banks as agent and provisional status of credits - applicability of article - item indorsed "pay any bank".

4-4-202. Responsibility for collection or return - when action timely.

4-4-203. Effect of instructions.

4-4-204. Methods of sending and presenting - sending directly to payor bank.

4-4-205. Depositary bank holder of unindorsed item.

4-4-206. Transfer between banks.

4-4-207. Transfer warranties.

4-4-208. Presentment warranties.

4-4-209. Encoding and retention warranties.

4-4-210. Security interest of collecting bank in items, accompanying documents, and proceeds.

4-4-211. When bank gives value for purposes of holder in due course.

4-4-212. Presentment by notice of item not payable by, through, or at a bank - liability of drawer or indorser.

4-4-213. Medium and time of settlement by bank.

4-4-214. Right of charge-back or refund - liability of collecting bank - return of item.

4-4-215. Final payment of item by payor bank - when provisional debits and credits become final - when certain credits become available for withdrawal.

4-4-216. Insolvency and preference.

PART 3

COLLECTION OF ITEMS - PAYOR BANKS

4-4-301. Deferred posting - recovery of payment by return of items - time of dishonor - return of items by payor bank.

4-4-302. Payor bank's responsibility for late return of item.

4-4-303. When items subject to notice, stop-payment order, legal process, or setoff - order in which items may be charged or certified.

PART 4

RELATIONSHIP BETWEEN PAYOR BANK AND ITS CUSTOMER

4-4-401. When bank may charge customer's account.

4-4-402. Bank's liability to customer for wrongful dishonor - time of determining insufficiency of account.

4-4-403. Customer's right to stop payment - burden of proof of loss.

4-4-404. Bank not obligated to pay check more than six months old.

4-4-405. Death or incompetence of customer.

4-4-406. Customer's duty to discover and report unauthorized signature or alteration.

4-4-407. Payor bank's right to subrogation on improper payment.

PART 5

COLLECTION OF DOCUMENTARY DRAFTS

4-4-501. Handling of documentary drafts - duty to send for presentment and to notify customer of dishonor.

4-4-502. Presentment of "on arrival" drafts.

4-4-503. Responsibility of presenting bank for documents and goods - report of reason for dishonor - referee in case of need.

4-4-504. Privilege of presenting bank to deal with goods - security interest for expenses.

PART 1

GENERAL PROVISIONS AND DEFINITIONS