Also known as: collateral obligations · secondary obligation
Written by attorneys · grounded in primary & secondary sources — see below
A secondary liability incurred when one party becomes bound to answer for the debt or performance owed by another. The obligation is accessory to a primary duty and arises only upon the principal's default or nonperformance.
Metro Parts sold vehicle components to Horizon Motors on credit and later assigned the receivable and security interest to Apex Bank. In the assignment agreement Metro Parts agreed that if Horizon defaulted Apex could look to Metro Parts for payment and Metro Parts could then pursue Horizon or repossess the vehicles. Because Metro Parts undertook this secondary liability to answer for Horizon's debt, the arrangement created a collateral obligation enforceable by Apex.
MetroBuild borrowed construction funds from Harbor Bank and assigned its right to payment under the stadium contract as collateral. Rivera Steel signed a separate guaranty promising to pay Harbor Bank only if MetroBuild defaulted. Rivera's promise constituted a collateral obligation because it was secondary to MetroBuild's primary duty and gave Rivera a right of recourse against the debtor or collateral once Rivera performed.
Select any source to read its text and confirm it supports the definition.
A collateral obligation is secondary and arises only if the primary debtor defaults. The secondary obligor remains accountable to the secured party but retains a right of recourse against the debtor or collateral after paying.
Supporting sources
No. Promises that are collateral to the conveyance, such as agreements to perform post-closing repairs or improvements, remain enforceable after delivery of the deed because they do not concern the quality of title.
Supporting sources
A promise is collateral when it is conditioned on the principal debtor's default and the promisor is not the primary party benefiting from the underlying transaction. Such promises require a signed writing unless an exception such as the main-purpose rule applies.
Supporting sources
The definition of account expressly includes a right to payment for a secondary obligation incurred or to be incurred. This captures rights arising from a party's agreement to answer for another's monetary duty.
Supporting sources