Do Surety Bonds Last Forever?

  • 2 min read

So, there’s an intriguing legal case underway concerning a surety bond issued by a company involved in bankruptcy. The central question here is whether the contract for surety remains executory despite bankruptcy involving one of the parties—principal, obligee, or surety.

Executory Contracts and Bankruptcy
An executory contract contains crucial unfulfilled elements, and this case hinges on whether the surety bond in question has significant uncompleted components post-bankruptcy. The company filing bankruptcy had a surety bond where the debtor was supposed to pay premiums for the bonds. Despite the bankruptcy, the debtor sought permission to continue the bond program, highlighting its critical nature for their operations.

Bankruptcy Court Ruling and Ongoing Payments
The bankruptcy court approved the continuation of the bond program, allowing the debtor to keep making payments, which the bankrupt company diligently upheld. However, the bond company argued against it, claiming the bonds were non-assumable, non-assignable, and subject to revocation, even if premiums were being paid.

Implications for Contractual Reliance
This case underscores a crucial takeaway for companies reliant on bonds issued by third parties. Should the prevailing case law hold, continued premium payments might ensure protection despite bankruptcy. Nonetheless, it’s prudent to have backup collateral or contingency plans in place should the bond become invalidated due to unforeseen circumstances.

Safeguarding Against Financial Impact
For companies dependent on bonds for various aspects like performance, quality, warranty, or indemnification, a third-party bankruptcy potentially nullifying the bond could result in adverse financial consequences. Seeking legal counsel, understanding financial imperatives, and establishing a robust relationship with the bond issuer can mitigate such risks.

Legal Advice and Preparedness
Ultimately, if your business relies on a surety bond issued by a principal, it’s essential to understand the legal ramifications in the event of their bankruptcy. Seeking legal advice, ensuring financial safeguards, and aligning your business strategy to accommodate potential bond invalidation can safeguard your interests and mitigate the risks associated with third-party bankruptcy.

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