Printable Format84-3-605. Discharge of endorsers and accommodation parties. (a) In this section, the term "endorser" includes a drawer having the obligation described in K.S.A. 84-3-415(d) [84-3-414(d)].
(b) Discharge, under K.S.A. 84-3-604, of the obligation of a party to pay an instrument does not discharge the obligation of an endorser 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 endorser or accommodation party having a right of recourse against the party whose obligation is extended to the extent the endorser or accommodation party proves that the extension caused loss to the endorser 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 endorser or accommodation party having a right of recourse against the person whose obligation is modified to the extent the modification causes loss to the endorser or accommodation party with respect to the right of recourse. The loss suffered by the endorser 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 endorser 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 (1) 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 (2) 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), 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), impairing value of an interest in collateral includes (1) failure to obtain or maintain perfection or recordation of the interest in collateral, (2) release of collateral without substitution of collateral of equal value, (3) 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 (4) failure to comply with applicable law in disposing of collateral.
(h) An accommodation party is not discharged under subsection (c), (d) or (e) unless the person entitled to enforce the instrument knows of the accommodation or has notice under K.S.A. 84-3-419(c) that the instrument was signed for accommodation.
(i) A party is not discharged under this section if (1) the party asserting discharge consents to the event or conduct that is the basis of the discharge, or (2) 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.
History: L. 1991, ch. 296, § 67; February 1, 1992.
KANSAS COMMENT, 1996
The section is identical to the 1995 Official Text except the lower case roman numerals have been replaced by arabic numbers. This section is derived from the former 84-3-606 with major modifications. Historical case and statutory references can be obtained from the 1965 and 1983 bound volume 7 of the Kansas Statutes Annotated.
This section should be read together with 84-3-419, especially as relating to accommodation parties. In addition, these provisions modify the common law of suretyship. Before there is a discharge, the creditor must know or be on notice that there is an accommodation status. See subsection (h) and 84-3-419(c). These provisions only apply to accommodation parties. Any of these provisions can be waived, and contrary agreements can be consented to under subsection (i).
Subsection (a) provides that drawers of trade acceptances (usually drafts drawn by a seller on the buyer) have the obligation of an indorser if the drawee has accepted the draft. Where the drawee-buyer accepts the drawer-seller's draft, the drawer is entitled to prompt notice of dishonor.
Subsection (b) changes prior law. Discharge by cancellation or renunciation does not discharge the obligations of other indorsers or accommodation parties with rights against the party discharged. It allows the person entitled to enforce the instrument to settle with the obligor without discharging intermediate parties. The intermediate parties can still sue the party discharged.
Subsection (c) lessens the penalty for granting extensions to obligors. Formerly, an extension would discharge those having rights against the obligor, the indorser or accommodation party. Under this provision, they have to prove the extension caused loss.
Subsection (d), as the former provision, provides that modifications will only cause a discharge to the extent they cause damages, which is presumed to be the amount of recourse which was lost, with the burden on the holder to show otherwise.
Subsection (e) deals with impairment of collateral, and the parties whose collateral is impaired are discharged to the extent of the impairment. They have to show the damage. Thus a creditor who fails to insure an automobile, or who fails to have its lien noted on the title on an automobile which the debtor/party accommodated is buying on credit, and where a parent has signed as an accommodation party, has impaired the collateral, if the parties agreed the car was to secure the loan. If the car is destroyed, or sold to a bona fide purchaser for value who takes free of the security interest, there is a discharge as to the value of the car, which the accommodation party must prove.
Revisor's Note:
Former section 84-3-605 was repealed by L. 1991, ch. 296, § 111 and the number reassigned to the current text.