KRS 355.3-605: Discharge of secondary obligors.

(1) 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 ind orsement 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 i s 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.

(2) 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 obli gor 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 ob ligor 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.

(3) 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

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 n ot 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 modifi cation had not occurred, or treat its obligation on

the instrument as having been modified correspondingly.

(4) If the obligation of a principal obligor is secured by an interest in collateral, another

party to the instrument is a secondary obligor with re spect 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 impa ired 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 v alue 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 wi th applicable law in

disposing of or otherwise enforcing the interest in collateral.

(5) 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.

(6) A secondary obligor is not discharged under this section if the secondary obl igor

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.

(7) A release or extension preserves a secondary obligor's recourse if the terms of the

release or extension provide that:

(a) 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.

(8) Except as o therwise 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.

(9) 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 ar e 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.