Present: Carrico, C.J., Compton, Stephenson, Lacy, Keenan, and 

Koontz, JJ., and Cochran, Retired Justice 

HERMAN L. COURSON, 

ET AL. 

v. Record No. 951295 OPINION BY JUSTICE BARBARA MILANO KEENAN 

 March 1, 1996 

MARGARET N. SIMPSON, 

TRUSTEE, ET AL. 

FROM THE CIRCUIT COURT OF FAIRFAX COUNTY 

Rosemarie P. Annunziata, Judge 

 In this appeal, we consider whether a surety was discharged 

from its obligation by Code §§ 49-25 and -26,1

 after giving 

written notice to the creditor to institute suit against a debtor 

corporation which the surety concedes was insolvent. 

 In 1981, Springfield Associates, Inc. borrowed $28,460.50 

from a trust established by the estate of Robert C. Nicoll (the 

 

 1Code § 49-25 provides, in relevant part: 

 The surety . . . of any person bound by any contract 

may, if a right of action has accrued thereon, require 

the creditor . . . by notice in writing, to institute 

suit thereon . . . . Such written notice shall also 

notify the creditor . . . that failure to act will 

result in the loss of the surety . . . as security for 

the debt in accordance with § 49-26. 

 Code § 49-26 provides, in relevant part: 

 If such creditor . . . shall not, within thirty days 

after such requirement, institute suit against every 

party to such contract who is resident in this 

Commonwealth and not insolvent and prosecute the same 

with due diligence to judgment and by execution, he 

shall forfeit his right to demand of such surety . . . 

the money due by any such contract for the payment of 

money, or the damages sustained by any breach of the 

collateral condition or undertaking specified as 

aforesaid; but the conditions, rights and remedies 

against the principal debtor shall remain unimpaired 

thereby. 
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Nicoll trust). The loan was secured by a deed of trust on the 

personal residence of Eleanor E. and Herman L. Courson. Mr. 

Courson was vice president and one of the principal stockholders 

of Springfield Associates, Inc. However, neither he nor Mrs. 

Courson was a party to the original note establishing the debt. 

 The following words were typed above the original note, 

"secured by a deed of trust on Lot Three (3), West Hill 

Subdivision, Fairfax County, Virginia." No reference to the deed 

of trust was included in the body of the note. 

 In a 1984 letter, Springfield Associates, Inc., Carl H. 

Hellwig, president of Springfield Associates, Inc., and Herman L. 

Courson acknowledged to Robert F. Silver, one of the co-trustees 

of the Nicoll trust, that the corporation owed money to the 

Nicoll trust, and that the Courson deed of trust secured 

performance of the corporate note. Later, Springfield 

Associates, Inc. defaulted on the note. 

 In 1987, the Coursons attempted to obtain a release of the 

deed of trust on their residence. On January 19, 1987, they 

assigned to The George Mason Bank (the Bank) a sum sufficient to 

pay the note. The Coursons directed that the assignment would 

terminate only on fulfillment of one of three conditions: (1) 

entry of a court order on behalf of the Nicoll trust against 

Springfield Associates, Inc. and payment by the Bank from the 

proceeds of the assignment in discharge of the obligation; (2) 

foreclosure under the Coursons' deed of trust and payment by the 
- 3 - 

 

Bank from the assigned funds an amount necessary to discharge the 

lien of the deed of trust; or (3) entry of a court order 

declaring that the Coursons' obligation with respect to the note 

was discharged, and that the deed of trust was released. 

 Also on January 19, 1987, the Coursons sent a letter, by 

certified mail, to Margaret N. Simpson, whom they believed to be 

the sole surviving trustee of the Nicoll trust.2

 The letter 

informed Simpson that the Coursons had assigned a sum sufficient 

to discharge the full indebtedness on the note of Springfield 

Associates, Inc. The letter also stated that if Simpson did not 

institute suit for breach of the obligation of Springfield 

Associates, Inc., the Coursons' obligation under the deed of 

trust would be released, pursuant to Code §§ 49-25 and -26. 

 Simpson did not file suit on the note. The Coursons then 

filed a bill of complaint for declaratory judgment, asking the 

trial court to declare that the deed of trust was released by 

 2When the trust was established, Silver and Simpson were cotrustees. Silver died in 1985. In August 1985, the Alexandria 

Circuit Court appointed Gordon P. Peyton as substitute trustee. 

This substitution, however, was not recorded in the fiduciary 

records in the Alexandria Circuit Court. In resolving the issues 

presented, we will assume, without deciding, that the January 19, 

1987, notice to Simpson constituted sufficient notice to Peyton 

and to the Nicoll trust. 
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operation of Code §§ 49-25 and -26. Simpson was served 

personally with the bill of complaint, but did not file an 

answer. In May 1987, a final decree was entered by default, 

releasing the deed of trust and extinguishing the Coursons' 

obligation as sureties. Thereafter, the Bank released the 

assigned funds back to the Coursons. 

 In July 1987, Gordon P. Peyton, one of the two co-trustees 

of the Nicoll trust, filed a motion to intervene, and Simpson 

filed a motion to set aside the May 1987 decree. The trial court 

granted both motions.3

 The Coursons filed an amended bill of complaint against 

Christopher A. Nicoll and Lynne Nicoll Fuller, the beneficiaries 

of the Nicoll trust (the beneficiaries), Simpson, and Peyton. 

Simpson and Peyton (the trustees) did not respond to the amended 

bill, but the beneficiaries did file an answer. 

 At trial, the uncontroverted evidence showed that 

Springfield Associates, Inc. was insolvent. Mr. Courson 

testified that, at the time he sent the demand letter to Simpson, 

he knew that Springfield Associates, Inc. had no assets. In 

addition, the evidence showed that the Coursons were not 

personally liable on the note of Springfield Associates, Inc. 

 The trial court denied the Coursons' request for declaratory 

judgment relief. The court held that, because the sole principal 

 3These rulings are not assigned as error in this appeal. 
- 5 - 

debtor on the note was insolvent, Code § 49-26 did not release 

the Coursons from their obligation under the deed of trust. In 

addition, the court held that Code § 49-26 did not require the 

trustees to institute suit against the Coursons as sureties after 

Simpson received the Coursons' demand, but only required the 

trustees to sue any solvent principal debtors. This appeal 

followed. 

 The issues before us are ones of first impression. The 

Coursons first contend that, although Springfield Associates, 

Inc. was insolvent, the corporation was "not insolvent for the 

purposes of this specific debt," because the Coursons had 

assigned sufficient funds to discharge the obligation of 

Springfield Associates, Inc. Second, the Coursons argue that 

Code § 49-26 required the trustees to sue every party to the 

transaction, including the surety, after receiving a demand 

notice from the surety under Code § 49-25. Therefore, according 

to the Coursons, since the trustees did not institute suit 

against them after receiving their January 19, 1987, letter, Code 

§ 49-26 extinguished the Coursons' liability as surety. We 

disagree with both contentions. 

 Initially, we note that a surety makes a direct promise to 

perform an obligation in the event the principal debtor fails to 

perform. As between the principal debtor and the surety, the 

ultimate liability rests on the principal debtor, but the 

creditor has a remedy against both. First Virginia Bank-Colonial 
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v. Baker, 225 Va. 72, 77, 301 S.E.2d 8, 11 (1983); see also

Restatement of Security § 82 (1941). 

 Code § 49-25 allows a surety to require a creditor to 

institute suit against the principal debtor if a right of action 

has accrued on the principal debtor's obligation. Code § 49-26 

provides that, if the creditor fails to institute such suit 

within thirty days of the written demand notice sent by the 

surety, the surety's obligation to the creditor is discharged. 

 However, the creditor's obligation to sue is not absolute. 

Code § 49-26 requires a creditor to bring suit against a 

principal debtor only if that debtor is "not insolvent." A 

debtor is insolvent, within the meaning of Code § 49-26, when it 

has insufficient property to pay all its debts. See Hudson v. 

Hudson, 249 Va. 335, 340, 455 S.E.2d 14, 17 (1995); McArthur v. 

Chase, 54 Va. (13 Gratt.) 683, 694 (1857). 

 The evidence showed that Springfield Associates, Inc. was an 

insolvent corporation when the Coursons sent the demand letter. 

As stated above, Mr. Courson's testimony established that 

Springfield Associates, Inc. had no assets when the demand letter 

was sent. 

 The Coursons have not cited, and we have not found, any 

authority to support their contention that a corporation 

simultaneously can be insolvent and yet "solvent for purposes of 

a specific debt." We find no merit in the Coursons' contention, 

because Code § 49-26 refers only to the solvency of the party to 
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the contract, not to any single debt on which that party is 

obligated. Thus, since the sole principal debtor on the note, 

Springfield Associates, Inc., was insolvent, Simpson was not 

required by Code § 49-26 to sue that debtor. 

 We next address the Coursons' contention that the January 

19, 1987, demand letter required the trustees to institute suit 

against the Coursons, as well as against Springfield Associates, 

Inc. The Coursons urge us to adopt the majority holding in 

Colonial American National Bank v. Kosnoski, 617 F.2d 1025, 1027 

(4th Cir. 1980), in which the Court of Appeals ruled that the 

term "every party" in Code § 49-26 includes the surety. We 

decline to do so. 

 A surety relationship is based on two separate contractual 

obligations. The first contract establishes the debt between the 

principal debtor and the creditor. The second contract, between 

the surety and the creditor, secures the principal debt. See

Bourne v. Board of Supervisors of Henrico County, 161 Va. 678, 

684, 172 S.E. 245, 247 (1934). In considering whether the 

Coursons are entitled to the remedy of discharge under Code 

§ 49-26, we must determine which contract is referenced in that 

statute. 

 Code § 49-26 requires a creditor, who receives a notice to 

institute suit pursuant to that section, to sue "every party to 

such contract who is resident in this Commonwealth and not 

insolvent." (Emphasis added.) The antecedent to the term "such 
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contract" is found in Code § 49-25, which states that "the surety

. . . of any person bound by any contract may, if a right of 

action has accrued thereon, require the creditor . . . to 

institute suit." (Emphasis added.) 

 This language in Code § 49-25 indicates that the contract on 

which the creditor must institute suit is the contract by which 

the principal debtor is bound, not the contract by which the 

surety is bound. Thus, Code § 49-26 obligates the creditor, on 

proper demand by the surety, to institute suit against any 

principal debtor who is not insolvent. This section does not 

obligate the creditor to bring suit against the surety in order 

to prevent the surety from obtaining a discharge under the 

statute.4

 Here, the contract which bound the principal debtor was the 

1981 note between Springfield Associates, Inc. and the Nicoll 

trust. Thus, the only contract on which the trustees would have 

been obligated to institute suit, pursuant to the Coursons' 

demand letter, was the note between Springfield Associates, Inc. 

and the Nicoll trust. As stated above, the insolvency of 

 

 4As Kosnoski addresses, the predecessor statute to Code § 

49-26, originally enacted in 1794, was amended in 1849 to include 

the phrase "every party." 617 F.2d at 1027. We believe that the 

intention of this amendment was to require the creditor to bring 

suit against every party to the principal debt. 
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Springfield Associates, Inc. eliminated this requirement. 

Further, since the Coursons were not personally liable on that 

note, the trustees had no obligation to sue them. 

 We disagree with the Coursons' contention that the trial 

court erred by failing to take the amended bill of complaint as 

confessed to the trustees. Although the trustees were sued in 

their representative capacity for the Nicoll trust, its 

beneficiaries had timely answered the amended bill of complaint. 

 The beneficiaries were entitled to assert every position that 

the trustees were entitled to assert. Thus, we find no error in 

the trial court's decision not to enter a default decree against 

the trustees. 

 We also find no merit in the Coursons' assertion that the 

1984 letter to Robert F. Silver made the Coursons a party to the 

original contract between the Nicoll trust and Springfield 

Associates, Inc. That letter merely acknowledged the existing 

obligation of Springfield Associates, Inc. to the Nicoll trust, 

and the existing obligation of the Coursons to the Nicoll trust. 

 Likewise, the Courson's deed of trust was not incorporated by 

reference into the note because the body of the note contained no 

reference to the deed of trust. 

 For these reasons, we will affirm the trial court's 

judgment. 

Affirmed. 

JUSTICE COCHRAN, with whom JUSTICE COMPTON and JUSTICE STEPHENSON 

join, dissenting. 
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 I take a different view of this appeal. 

 The majority assumes, without deciding, that the January 19, 

1987, notice from the Coursons to Margaret N. Simpson constituted 

sufficient notice to Gordon P. Peyton and to the Nicoll trust. I 

consider this initial question to be highly significant in the 

appeal. The Coursons presented evidence in the trial court 

sufficient to make a prima facie case that the required notice 

was given, and this evidence was not rebutted. Accordingly, I 

would hold, rather than assume, that there was sufficient notice 

to Simpson, Peyton, and the Nicoll trust. 

 What then were the trustees, Simpson and Peyton, and the 

beneficiaries of the Nicoll trust (Nicoll and Fuller) required to 

do under the provisions of Code § 49-26? According to the 

majority they were required to do nothing, because the principal 

debtor, Springfield Associates, Inc., was insolvent under the 

common definition of insolvency that its liabilities exceeded its 

assets. It is undeniable, however, that they could have 

instituted suit against the principal debtor, even if insolvent, 

and recovered the full amount of the obligation for which the 

Coursons were sureties. The Coursons had assigned to The George 

Mason Bank a sum sufficient to discharge the obligation in full, 

regardless of the financial status of the principal debtor. I 

would hold that under these circumstances, the debtor was not 

insolvent as to this obligation, and the Coursons were entitled 

to have suit instituted against Springfield Associates, Inc. 
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 Having eliminated the principal debtor as a target because 

of insolvency, the majority then concludes that there was no 

other party to the contract against whom suit must be instituted. 

 To reach this conclusion the majority holds that the sureties 

were not parties to the contract between the principal debtor and 

the creditor, but were parties to a second contract securing the 

indebtedness. I disagree with this unduly restrictive 

interpretation of Code § 49-26. As a remedial statute, Code 

§ 49-26 should be liberally construed for the benefit of 

sureties. Wright's Administrator v. Stockton, 32 Va. (5 Leigh) 

153, 159 (1834); see Univ. of Virginia v. Harris, 239 Va. 119, 

124, 387 S.E.2d 772, 775 (1990). 

 In Colonial American Nat'l Bank v. Kosnoski, 617 F.2d 1025 

(4th Cir. 1980), a majority of the panel (Judges Bryan and 

Winter, Judge Murnaghan dissenting) ruled that the words "every 

party" in Code § 49-26 include sureties. The opinion pointed out 

that the original 1794 statute was amended in 1849 to 

substantially its present form to require a creditor to institute 

suit against every party to the contract who is resident in 

Virginia and not insolvent. The opinion noted that the amendment 

would have been unnecessary if the General Assembly had intended 

that the guarantor could demand suit only against the principal. 

 I agree with this construction of Code § 49-26. 

 The note of Springfield Associates, Inc. dated September 30, 

1981, in the principal sum of $28,460.50 states that it was 
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secured by a deed of trust on property identified as that of the 

Coursons. This reference, in my view, incorporated the deed of 

trust into the contract between principal and creditor. See High 

Knob Assoc. v. Douglas, 249 Va. 478, 487-88, 457 S.E.2d 349, 354-

55 (1995). 

 Moreover, by letter dated May 9, 1984, Springfield 

Associates, Inc., and the Coursons reaffirmed the agreement, and 

the Coursons further verified that their residence remained as 

additional security "behind the corporate note." 

 Having concluded that the Coursons were parties to the 

contract in question, it follows that I would hold that they 

could and did demand that suit be instituted against them as 

sureties. No such suit was instituted and I would hold that the 

Coursons did what was required of them and are now entitled to 

relief under Code § 49-26. For these reasons, I would reverse 

the judgment of the trial court and enter final judgment in favor 

of the Coursons.