O.C.G.A. § 11-3-605 (2019)

Annotations

Cross references. Discharge of surety by increase of risk, § 10-7-22.

JUDICIAL DECISIONS ANALYSIS GENERAL CONSIDERATION IMPAIRMENT OF COLLATERAL ADVANCE CONSENT TO IMPAIRMENT OF COLLATERAL EFFECT OF INSURANCE General Consideration Editor’s notes. - In light of the similarity of the statutory provisions, decisions under former Code Section 11-3-606 are included in the annotations for this Code section. The discharge under O.C.G.A. § 113-605 is only pro tanto and releases the surety only to the extent that the surety proves the impairment. To the extent that Melton v. J.M. Kenith Co., 182 Ga. App. 184, 355 S.E.2d 115 (1987), is contra, it is overruled. Bank S. v. Jones, 185 Ga. App. 125, 364 S.E.2d 281, 1987 Ga. App. LEXIS 2462 (1987) (decided under former Code Section 11-3-606). Availability of suretyship defenses. - The suretyship defenses provided in O.C.G.A. § 11-3-605 are not limited to parties who are “secondarily liable,” but are available to any party who is in the position of a surety, having a right of recourse either on the instrument or dehors it, including accommodation maker or acceptor known to the holder to be so. Bank S. v. Jones, 185 Ga. App. 125, 364 S.E.2d 281, 1987 Ga. App. LEXIS 2462 (1987) (decided under former Code Section 11-3-606). Not applicable to liability of debtor to guarantor. - This section and O.C.G.A. § 10-7-22 address liability of a guarantor to a creditor, not the liability for a debtor to his guarantor, and did not apply to the release of a guarantor’s principal from liability on a note. Fabian v. Dykes, 214 Ga. App. 792, 449 S.E.2d 305, 1994 Ga. App. LEXIS 1059 (1994) (decided under former Code Section 11-3-606). Discharge of nonconsenting parties. - Impairment of recourse or of collateral by holder may discharge any non-

consenting party to instrument. Griswold v. Whetsell, 157 Ga. App. 800, 278 S.E.2d 753, 1981 Ga. App. LEXIS 2015 (1981) (decided under former Code Section 11-3606). Provision authorizing release may operate as waiver. - Where guarantee agreement provided that bank was authorized to release collateral or substitute collateral without any notice to guarantors without affecting liability of undersigned, such release operates as a waiver of consenting parties’ right to claim their own discharge. Wilson v. Baxley State Bank, 155 Ga. App. 507, 271 S.E.2d 655, 1980 Ga. App. LEXIS 2639 (1980) (decided under former Code 1933, § 109A-3-606). Discharge by grant of extension by creditor. - Former Code 1933, § 109A3-606 did not expressly state that if creditor grants extension, surety is discharged, but draftsmen intended that result. A surety, then, can claim discharge under O.C.G.A. § 11-3-605 when, without consent and without an “express reservation of rights,” creditor and debtor enter into binding agreement to extend time for payment. Kellett v. Stanley, 153 Ga. App. 854, 267 S.E.2d 282, 1980 Ga. App. LEXIS 2008 (1980) (decided under former Code 1933, § 109A-3-606). Elements of showing failure to use proper diligence to collect. - Where contention is that holder of promissory notes as collateral security failed to use proper diligence to collect them, it is necessary to show both that failure to collect was due to negligence of holder of collateral, and that damage accrued to other party therefrom. Hurt v. Citizens Trust Co., 128 Ga. App. 224, 196 S.E.2d 349, 1973 Ga. App. LEXIS 1443 (1973); Mitch-

ell v. Ringson, 169 Ga. App. 88, 311 S.E.2d 516, 1983 Ga. App. LEXIS 2989 (1983) (decided under former Code 1933, § 109A3-606). Release of coguarantor with limited liability. - Former Code Section 11-3-606 was inapplicable to appellees, coguarantors of note, where, although note in question was jointly guaranteed, each guarantor had specifically limited liability thereon to guarantor’s own interest; thus, there could be no injury to appellees by the release of a coguarantor. Holcombe v. Eng, 163 Ga. App. 343, 294 S.E.2d 568, 1982 Ga. App. LEXIS 2483 (1982) (decided under former Code 1933, § 109A-3-606). Impairment of Collateral Proving impairment. - Failure to collect on collateral, without more, not sufficient to show “impairment” thereof. Hurt v. Citizens Trust Co., 128 Ga. App. 224, 196 S.E.2d 349, 1973 Ga. App. LEXIS 1443 (1973) (decided under former Code 1933, § 109A-3-606). “Impairs” defined. - In subsection (1)(b) (now (e)) “impairs” means injured or allowed to deteriorate in value. Hurt v. Citizens Trust Co., 128 Ga. App. 224, 196 S.E.2d 349, 1973 Ga. App. LEXIS 1443 (1973) (decided under former Code 1933, § 109A-3-606). Burden of proof. - With the defense of impairment of collateral under paragraph (b) of subsection (1) (now (e)) of this section, the burden of proof is on the party claiming the defense, and that party must prove it by a preponderance of the evidence. Doyal v. Thornton, 205 Ga. App. 74, 421 S.E.2d 314, 1992 Ga. App. LEXIS 1072 (1992), cert. denied, No. S92C1405, 1992 Ga. LEXIS 749 (Ga. Sept. 11, 1992), cert. denied, No. S92C1392, 1992 Ga. LEXIS 750 (Ga. Sept. 11, 1992) (decided under former Code Section 11-3-606). Test for unjustifiable impairment of collateral not in the creditor’s possession is whether the creditor exercised reasonable care considering the circumstances of the case. The burden of proof is on the party claiming the defense, and that party must prove it by a preponderance of the evidence. Bank S. v. Jones, 185 Ga. App. 125, 364 S.E.2d 281, 1987 Ga. App. LEXIS

2462 (1987) (decided under former Code Section 11-3-606). Where a creditor transferred possession of some collateral to a codebtor, and express language of a guaranty agreement prevented the surety from subrogation until the creditor received full payment of all liabilities, the surety could not be discharged on the claim that rights to subrogation had been impaired. In re Broomfield, 35 B.R. 459, 1983 Bankr. LEXIS 5383 (Bankr. N.D. Ga. 1983) (decided under former Code Section 11-3-606). Impairment of collateral defense rejected. - Where a promissory note provided that the bank could “release any security . . . without affecting [defendants’] obligation to pay the loan,” it was apparent that defendants consented in advance to an impairment of collateral by the bank. Consequently, they were estopped to assert the defense of impairment of collateral. H & H Operations, Inc. v. West Ga. Nat’l Bank, 181 Ga. App. 766, 353 S.E.2d 633, 1987 Ga. App. LEXIS 1544 (1987) (decided under former Code Section 11-3-606). A commercial loan officer’s testimony that accommodated party had sold some business fixtures and brought the proceeds of the sale to the bank, which applied them toward her business loans, was insufficient to show an “impairment of collateral” within the meaning of subsection (1)(b) (now (e)). Richards v. First Union Nat’l Bank, 199 Ga. App. 636, 405 S.E.2d 705, 1991 Ga. App. LEXIS 635 (1991), cert. denied, No. S91C1145, 1991 Ga. LEXIS 725 (Ga. June 20, 1991) (decided under former Code Section 11-3606). Even if the obligors were accommodation parties who signed two promissory notes that went into default, a point they argued without factual support, the modification agreements signed by the other people did not release them from their obligations under the notes as the obligors did not show that the agreement to extend the due date of the instrument at issue caused loss to them with respect to the right of recourse or that the value of the collateral had been impaired. Reece v. Chestatee State Bank, 260 Ga. App. 136,

Impairment of Collateral (Cont’d) 579 S.E.2d 11, 2003 Ga. App. LEXIS 160 (2003), cert. denied, No. S03C1021, 2003 Ga. LEXIS 561 (Ga. June 9, 2003) (decided under former Code Section 11-3606). Advance Consent to Impairment of Collateral Waiver of consentor’s right to claim discharge. - Consent to impairment of collateral may be given in advance and is commonly incorporated in the instrument. It requires no consideration, and operates as a waiver of the consenting party’s right to claim discharge personally. Reeves v. Hunnicutt, 119 Ga. App. 806, 168 S.E.2d 663, 1969 Ga. App. LEXIS 1259 (1969) (decided under former Code 1933, § 109A-3-606). Consideration not required. - Advance consent to impairment of collateral, which may be given by maker in the instrument, requires no consideration, and operates as a waiver of consenting party’s right to claim discharge personally. Liberty Nat’l Bank & Trust Co. v. Interstate Motel Developers, Inc., 346 F. Supp. 888, 1972 U.S. Dist. LEXIS 12501 (S.D. Ga. 1972) (decided under former Code 1933, § 109A-3-606). Prevention of discharge. - Where guarantors of note agreed that holder may surrender “all or part of the collateral” and maker loaned some of the equipment to another restaurant, guarantors are not discharged because of their advance consent to impairment of the security. Liberty Nat’l Bank & Trust Co. v. Interstate Motel Developers, Inc., 346 F. Supp. 888, 1972 U.S. Dist. LEXIS 12501 (S.D. Ga. 1972) (decided under former Code 1933, § 109A3-606). Provision in note permitting release of collateral. - Note providing that surrender or release of collateral will not release or otherwise affect liability of endorser, guarantor, surety, or other party, prevented maker from urging defense of unjustifiable impairment of collateral as ground for discharge. Liberty Nat’l Bank & Trust Co. v. Interstate Motel De-

velopers, Inc., 346 F. Supp. 888, 1972 U.S. Dist. LEXIS 12501 (S.D. Ga. 1972) (decided under former Code 1933, § 109A-3606). Contract provision allowing release or substitution of collateral without maker’s consent. - Where security agreement contains provision authorizing holder of instrument to release or substitute any collateral without borrower or maker’s consent, borrower cannot complain of discharge. McBurnett v. National City Bank, 142 Ga. App. 505, 236 S.E.2d 179, 1977 Ga. App. LEXIS 1676 (1977) (decided under former Code 1933, § 109A-3-606). Effect of Insurance Effect of payee’s filing suit under insurance procured by maker. - Where payee bank filed suit under policy of insurance procured by maker of note to recover insurance proceeds from damage to goods covered by note, guarantors of note are not discharged from their liability, since bank’s action will inure to their benefit after they have discharged their obligation as indemnitors and will not prejudice them to any extent. Liberty Nat’l Bank & Trust Co. v. Interstate Motel Developers, Inc., 346 F. Supp. 888, 1972 U.S. Dist. LEXIS 12501 (S.D. Ga. 1972) (decided under former Code 1933, § 109A3-606). Replacement of destroyed collateral by insurance company without obligor’s knowledge. - Obligor not discharged from obligation on note when original collateral, which burned, was replaced by obligor’s insurance company in cooperation with loan company without the obligor’s knowledge or consent. Hunter v. Community Loan & Inv. Corp., 127 Ga. App. 142, 193 S.E.2d 55, 1972 Ga. App. LEXIS 817 (1972) (decided under former Code 1933, § 109A-3-606). Maker’s failure to resort to insurance collateral does not release endorser. Liberty Nat’l Bank & Trust Co. v. Interstate Motel Developers, Inc., 346 F. Supp. 888, 1972 U.S. Dist. LEXIS 12501 (S.D. Ga. 1972) (decided under former Code 1933, § 109A-3-606).

RESEARCH REFERENCES Am. Jur. 2d. 11 Am. Jur. 2d, Bills and Notes, § 418 et seq. 38 Am. Jur. 2d, Guaranty, § 106. 68A Am. Jur. 2d, Secured Transactions, §§ 14, 534-537. C.J.S. 10 C.J.S., Bills and Notes, § 231 et seq. U.L.A. Uniform Commercial Code (U.L.A.) § 3605. ALR. Renewal note as discharging original obligation or indebtedness, 52 A.L.R. 1416. Amount due on principal obligation as limiting recovery on collateral paper of which plaintiff is holder in due course, but which is subject to defense between prior parties, 69 A.L.R. 898.

Discharge of accommodation maker or surety by extension of time or release of collateral security, under Negotiable Instruments Law, 108 A.L.R. 1088. Discharge of accommodation maker or surety by release of mortgage or other security given for note, 2 A.L.R.2d 260. Renewal note signed by one comaker as discharge of nonsigning comakers, 43 A.L.R.3d 246. Who is “party” discharged on negotiable instrument to extent of holder’s unjustifiable impairment of collateral, under UCC § 3-606(1)(b), 93 A.L.R.3d 1283. What constitutes unjustifiable impairment of collateral, discharging parties to negotiable instrument, under UCC § 3606(1)(b), 95 A.L.R.3d 962.

ARTICLE 4 BANK DEPOSITS AND COLLECTIONS Sec.

Part 1 General Provisions and Definitions Sec.

Short title. Applicability. Variation by agreement; measure of damages; action constituting ordinary care. Definitions and index of definitions. “Bank”; “depositary bank”; “payor bank”; “intermediary bank”; “collecting bank”; “presenting bank.” Payable through or payable at bank; collecting bank. Separate office of a bank. Time of receipt of items. Delays. Electronic presentment. Statute of limitations.

Part 3 Collection of Items: Payor Banks

Part 2

Collection of Items: Depositary and Collecting Banks

When bank gives value for purposes of holder in due course. Presentment by notice of item not payable by, through, or at a bank; liability of drawer or indorser. Medium and time of settlement by bank. Right of charge-back or refund; liability of collecting bank; return of item. Final payment of item by payor bank; when provisional debits and credits become final; when certain credits become available for withdrawal. Insolvency and preference.

Status of collecting bank as agent and provisional status of credits; applicability of article; item indorsed “pay any bank.” Responsibility for collection or return; when action timely. Effect of instructions. Methods of sending and presenting; sending directly to payor bank. Depositary bank holder of unindorsed item. Transfer between banks. Transfer warranties. Presentment warranties. Encoding and retention warranties. Security interest of collecting bank in items, accompanying documents, and proceeds.

Deferred posting; recovery of payment by return of items; time of dishonor; return of items by payor bank. Payor bank’s responsibility for late return of item. 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

When bank may charge customer’s account. Bank’s liability to customer for wrongful dishonor; time of determining insufficiency of account. Customer’s right to stop payment; burden of proof of loss. Bank not obliged to pay

Sec.

Sec. check more than six months old. Death or incompetence of customer. Customer’s duty to discover and report unauthorized signature or alteration. Payor bank’s right to subrogation on improper payment.

Part 5 Collection of Documentary Drafts

drafts; duty to send for presentment and to notify customer of dishonor. Presentment of “on arrival” drafts. Responsibility of presenting bank for documents and goods; report of reasons for dishonor; referee in case of need. Privilege of presenting bank to deal with goods; security interest for expenses.

Handling of documentary

Cross references. Liability of parties on checks or money orders tendered for payment of tax or license fee, § 48-2-32. Law reviews. For article, “The Revision of U.C.C. Articles Three and Four: A Process Which

Excluded Consumer Protection Requires Federal Action,” see 43 Mercer L. Rev. 827 (1992). For article, “Adopting Article IV: Can Consumers Afford to Rely on the Banks’ Good Faith?,” see 46 Mercer L. Rev. 581 (1994).

RESEARCH REFERENCES ALR. Fraud or other defense to check as available against paper issued by drawee bank in payment of check, 9 A.L.R. 963. Federal reserve banks and bank collections, 31 A.L.R. 1269; 61 A.L.R. 481. Preferences under Bank Collection Code, 99 A.L.R. 1255; 104 A.L.R. 1095. Parol evidence rule as applied to deposit

of funds in name of depositor and another, 33 A.L.R.2d 569. Construction and effect of UCC Art. 4, dealing with bank deposits and collections, 18 A.L.R.3d 1376; 97 A.L.R.3d 714; 22 A.L.R.4th 10; 29 A.L.R.4th 631; 88 A.L.R.4th 568; 88 A.L.R.4th 613; 88 A.L.R.4th 644.

PART 1 GENERAL PROVISIONS AND DEFINITIONS