Question

Jack Davis borrowed $360,000 from First Bank. First Bank required three sureties for the loan. The following parties agreed to act as a surety for Davis in the following amounts: Ames—$300,000, Barclay—$180,000, and Charles—$240,000. After paying $60,000, Davis has defaulted on the loan. Charles’s debts have been discharged in bankruptcy. Ames paid First Bank the $300,000 that was due. How much must Barclay pay to Ames?

Group of answer choices

Barclay does not owe Ames anything because First Bank can choose whichever surety it wants and collect the full amount, which releases Barclay.

Barclay owes Ames $112,500.

Barclay owes his full pledge of $180,000 because of the bankruptcy of Charles.

Barclay owes $66,667 to Ames.

Answer 1

Correct Answer : Option 2 : Barclay owes Ames $112,500.

Explanation : Balance loan amount = $ 360,000 - $ 60,000 = $ 300,000. Generally, all the sureties are liable to the lender (First bank) in proportion of their ensured amounts, in case the borrower (Davis) defaults on repayment. However, since one of the surety namely Charles has gone bankrupt, nothing is recoverable from him. Hence, the liability of $ 300,000 rests on the other two Sureties i.e. Ames and Barclay.

Ames has paid to the First Bank the entire due balance of $ 300,000. However, he is legally entitled to recover from the solvent surety the proportion of dues payable by him on the basis of their ensured amount ratio i.e. 180,000 / (300,000 + 180,000). Hence,  Barclay's Share = 300,000 * 180,000 / 480,000 = $ 112,500.

Hence, Barclay owes Ames $112,500.