Thomas borrowed $100,000 from First Bank, which asked that he both put up collateral and provide a surety. Consequently Thomas provided the bank with a security interest in his antique car collection and asked Victor to act as a surety. Victor agreed to
do so and signed a surety agreement with the bank. Thomas made several payments on the loan and then asked First Bank for permission to sell three of his cars. First Bank agreed, but it never notified Victor of the sale of the collateral. Thomas then defaults on the loan. First Bank now wants Victor to pay the remainder of the loan. Must Victor pay? Explain.
Thomas, who is the principal debtor, and First Bank, which is the creditor, have entered into an agreement to release part of the security. Victor is discharged to the extent of the value of the three cars that were sold. This doctrine is an equitable doctrine that is designed to protect the surety's right of subrogation.
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