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30 Cards in this Set

  • Front
  • Back
Is a surety directly liable on the obligation?
Yes. The creditor need not go first to the debtor.
Is a guarantor directly liable on the obligation?
No. The creditor can go after the guarantor only if the debtor defaults.
What is a guarantor of collectibility?
A person who promises to pay the obligation of the debtor only if the creditor is unable to collect from the debtor after exhausting all legal remedies, including demand, suit, judgment and exhaustion of all supplementary proceedings.
How can a gratuitous surety get out of the obligation?
If the creditor does anything to vary the risk that the surety assumed.

Garatuitous sureties are "favorites of the law."
What is the other kind of surety?
A compensated surety.
Is a surety's promise enforceable?
Only if it is supported by consideration.
How can a gratuitous surety have consideration?
The only consideration is the creditor's promise to or performance for the debtor.

Thus, if the creditor performs BEFORE the gratuitous surety, there is no consideration, and the promise is unenforceable.
What is the exception to the above rule?
If the creditor gives additional consideration in exchange for the surety's promise.
Does the SOF apply to sureties?
Yes, IF it's collateral to another person's promise to pay.

Also, there is the main purpose exception.
How is a gratuitous surety construed?
Against the creditor.
When can a surety compel collection by the creditor?
1. The surety apprehends that the principal is likely to become insolvent or leave the state without paying, AND
2. A right of action has accrued on the contract.
How can a surety compel the creditor to act?
Must make a WRITTEN request to the creditor. If the creditor does not proceed with due diligence, the surety is fully discharged. If there are several sureties, only the ones who acted will be discharged.
What else can sureties force creditors to do?
Apply the value of security held to reduce the debt, if it can be shown that the principal won't pay and enforcing the security is not unreasonable.
What if the debtor has several debts to creditor, only one of which is guaranteed by surety?
Surety has no power to force creditor to credit payments to his debt, unless the principal explicitly directed it.
What is a suit for exoneration?
If the principal does not perform, surety may bring a suit in equity to compel him to pay the creditor.
May surety be subrogated against debtor?
Yes, if he paid debtor's debts. This includes being able to after security and any priority in bankruptcy that the creditor enjoyed.
If a creditor goes after one of several sureties, can surety bring the others in?
Yes, through a suit for exoneration.
Is a surety entitled to contribution from co-sureties?
Yes, for a pro rata share determined by the number of SOLVENT sureties.

If one surety pays more than her pro rata share (since she agreed to be a surety for a certain amount), she can get contribution to get back to pro rata.
What if one surety obtains security from the principal?
She has to share it with her co-sureties.
Is a surety entitled to contribution from a co-surety, even if the co-surety would have had a defense in an action by the creditor?
What if a surety had a defense but paid anyway? Can she get contribution?
No. She's a "volunteer" and not entitled to contribution.
What are defenses of a surety?
Forged signature; defrauded principal; duress upon principal; illegality of principal's obligation; nonperformance by creditor; impossibility; discharge of principal's obligation (release, covenant not to sue, failure to prevail in suit).
Does modification of creditor-debtor agreement let compensated surety off the hook?
ONLY if he can show that the parties made a material change, without his consent, that increased his risk.
If the creditor gives the debotr additional time to pay, does this release the gratuitous surety? The compensated surety?
Gratuitous surety: yes, it releases him.

Compensated surety: it's discharged to the extent of a resulting injury.
When is an agreement to extend time binding?
If it meets all the requirements for contract formation.
Anything special about the UCC and agreement to extend time for performance?
Agreements to extend time will discharge surety to the extent the surety can show a loss.
What happens if the creditor releases security?
The surety is discharged in the amount of the value of the security released. However, if the security is lost to the creditor's inaction (e.g., didn't perfect it), surety is not discharged unless the creditor promised to use diligence.
What if the creditor is negligent in enforcing the security?
The surety is discharged in the amount of decrease of the value.
What if the creditor refuses to take payment from the debtor?
The surety is discharged.
What are NOT defenses of a surety?
1. Fraud, misrepresentation, duress upon surety BY PRINCIPAL.
2. Incapacity of principal.
3. Bankruptcy of principal.