Question

Burns borrowed $240,000 from Dollar Bank as additional working capital for his business. Dollar required that the loan be collateralized to the extent of 20% and that an acceptable surety for the entire amount be obtained. Surety Co. agreed to act as surety on the loan, and Burns pledged $48,000 of negotiable bearer bonds. Burns defaulted. Which of the following statements is true?
A. Dollar must first liquidate the collateral before it can proceed against Surety.
B. Surety is liable in full immediately upon default by Burns but will be entitled to the collateral upon satisfaction of the debt.
C. Dollar must first proceed against Burns and obtain a judgment before it can proceed against the collateral.
D. Surety may proceed against Burns for the full amount of the loan even if Surety settles with Dollar for a lower amount.

Answer 1

Answer:

B- Surety is liable in full immediately upon default by Burns but will be entitled to the collateral upon satisfaction of the debt.

Explanation:

A surety comes to play when a party lacks certainty about whether or not another party in a contract will be able to fulfill all stated requirements. The other party could be required to provide a guarantor, who will be involved in the contract of suretyship. The essence of this is to reduce possible risks for the lending party.  

This surety bond involving 3 parties, allows the lending party, file a claim against the bond to recover losses incurred, if the borrower fails to adhere to the terms previously stated.

Answer 2

Answer:

Answer is B. Surety is liable in full immediately upon default by Burns but will be entitled to the collateral upon satisfaction of the debt.

Explanation:

Burns borrowed $240,000 from Dollar Bank as additional working capital for his business. Dollar required that the loan be collateralized to the extent of 20% and that an acceptable surety for the entire amount be obtained. Surety Co. agreed to act as surety on the loan, and Burns pledged $48,000 of negotiable bearer bonds. Burns defaulted. The following statement is true:

Surety is liable in full immediately upon default by Burns but will be entitled to the collateral upon satisfaction of the debt.