Suretyship

Front 1

Define Surety

Back 1

A suretyship relationship involves 3 parties: a debtor, a creditor, and a third party who has agreed to be liable on the debt - the surety.

Front 2

Define Suretyship

Back 2

A suretyship exists when the third party has agreed to back up the debt of another under circumstances in which the original debtor is still liable for the debt.

Front 3

Words Creating Suretyship

Back 3

"If he doesn't pay that debt, I will"

Front 4

Daughter purchases car and father and daughter sign the promissory note. Effect?

Back 4

Suretyship is created

Front 5

Daughter purchases car and father ONLY signs the promisory note. Effect?

Back 5

Father is an ordinary debtor

Front 6

If father agrees to serve as surety on note for his daughter, does it matter how the parties' signatures appear on the note?

Back 6

No

Front 7

Exception to Suretyship and Statute of Frauds

Back 7

Main Purpose Rule

Front 8

Main Purpose Rule

Back 8

No writing is required if the surety's MAIN purpose is to benefit himself

Front 9

Does a surety have immediate and direct liability on the principal debtors debt? (Maj and NC)

Back 9

Maj - yes

NC - surety can force creditor to go after debtor and collateral first

Front 10

Rights of Surety (3)

Back 10

- reimbursement
- exoneration
- subrogation

Front 11

Defenses available to creditor, but not surety

Back 11

- incapacity
- infancy
- discharge in bankruptcy

Front 12

Seven Rules of Suretyship

D-R-A-W-P-I-C

Back 12

- defenses available to debtor
- repayment right
- alteration causing discharge
- writing (SoF)
- pro-rata contribution
- immediate and direct liability
- consideration

Front 13

Most important contracts issues for surety (3)

Back 13

- consideration to surety
- SoF
- misrepresentation to surety

Front 14

Is there a difference between a surety and promising to guaranty the debt of another?

Back 14

No

Front 15

Difference between Suretyship and Guarantor of Collection

Back 15

Guarantor of collection is not liable until the creditor first exhausts remedies against the principial debtor or shows that pursuit of such remedies would be futile --- strictly worded

Front 16

Article III issues regarding promissory note (4)

Back 16

- surety entitled to presentment and notice of dishonor
- no consideration is necessary to bind a surety who signs a negotiable instrument
- a modification of the underlying contract discharges the surety only if the surety suffers loss as a result of the modification
- a discharge of debtor does not discharge surety

Front 17

Preclusion of Parol Evidence for two signatures on an installment contract (2)

Back 17

- contract assigned to 3P
- creditor does not know of the relationship

Front 18

Three recurring situations where suretyship arises in business transactions

Back 18

- Corporate Limited Liability Rule
- Failing Contractor
- Uninformed Spouse

Front 19

Corporate limited liability rule

Back 19

a corporation borrows money and the bank or other creditor insists that all or some the shareholders sign on the debt

Front 20

Failing Contractor Situation

Back 20

Contractor falls behind on payment for materials, "if he doesn't pay I will" -- magic language (no writing needed)

Front 21

Uninformed Spouse Situation

Back 21

Wife signs contracts that husband puts in front of her. If they divorce, the wife is liable. Her consideration was a better life if the deals make money

Front 22

Davis owes Carr money from a prior loan. Debt comes due and Davis cannot pay. Tom, who is Davis' uncle says "Don't worry about that debt of Davis', Il'l pay." Liable

Back 22

No. SoF and no consideration

Front 23

Corporate Limited Liability Rule

Oral Promise From Shareholder (2)

Back 23

For shareholder to be liable:

- shareholder is officer or director
- owns a large % of shares

Front 24

What is the minimum writing necessary to meet the SoF for Suretyship.

Back 24

Merely his signature

Front 25

If consideration is needed because there is no promissor note - what acts as the consideration?

Back 25

creditor's promise to extend credit to the debtor

Front 26

A owes B money from prior loan. Before due date, A gets into financial trouble and B insists C agree to cover A's debt. Is A liable to C?

Back 26

No. lack of consideration

Front 27

A owes B money from prior loan. Before due date, A gets into financial trouble and B insists C agree to cover A's debt. What would have to happen for C to be liable (3) ?

Back 27

- new consideration to A
- new consideration to B
- detrimental reliance by B

Front 28

Surety in NC may require creditor to go after debtor and collateral first. What are the (3) elements?

Back 28

- surety's request must be in writing and sent in registered mail
- creditor must commence action against debtor within 30 days
- if the creditor fails to act, surety is NO automatically discharged --- rather surety is discharged ONLY as to the extent of any loss caused by delay

Front 29

A received $100K loan from B and defaults. C is surety and sends letter to B asking B to sell collateral. SIX weeks later B sells collateral and realizes $60K. Had B sold collateral after a reasonable time, it would be worth $90K.
Recovery from C?

Back 29

Banks delay caused a 30K lost. C can offset this:

40K - 30K = 10K liability for C

Front 30

Must a debtor expressly agree to repay surety?

Back 30

No

Front 31

Defenses of debtor against action of surey for reimbursement? (3)

Back 31

- SoL had run
- Debt was illegal
- Debt obtained by fraud

Front 32

Exoneration

Back 32

Surety is entitled to an equitable order requiring the debtor to apply any assets that he or she has to pay the principal debt

Front 33

Subrogation

Back 33

Surety who pays is subrogated to all rights that the credito had against the debtor and against third parties. This includes and mortgage or security interest that the creditor has in the debtor's property.

(Steps in Creditor's Shoes)

Front 34

Subrogation where debtor has given collateral to creditor (2)

Back 34

- surety can force creditor to go after collateral
- if surety pays, surety can foreclose

Front 35

When does a paying surety's failure to raise a defense preclude the surety's right to receive contribution?

Back 35

- fails to raise any defense which is common to all sureties

- surety can fail to raise his OWN singular defense or defense of non-paying surities

Front 36

Common cases where there is a defense available to multiple surities (3)

Back 36

- SoL
- illegality of contract
- creditor sold defective goods

Front 37

Validity of Debtor's Signature

Back 37

Any defect in signature releases surety

Front 38

Under Common Law does discharge of debtor discharge surety?

Back 38

Yes

Front 39

If a promissory note exists, and the creditor crosses out the debtor's name is the surety released?

Back 39

No

Front 40

Extension of time and ill effects on surety

Back 40

if the debtor is solvent at the time the note is due and later becomes insolvent, surety is discharged as to amount of loss

Front 41

Modification of Contract (3)

Back 41

- CL a surety who does not receive direct compensation is discharged by any modification

-CL a surety who is compensated is discharged only as to the extent of any loss

- if there is a promissory note, Art III provides that a modification of the underyling contract produces a discharge only to the extent of loss

Front 42

Is there a discharge of surety as to the extent of impairment of collateral?

Back 42

Yes

Front 43

If a surety knows of change in contract and raises no objection is the right to discharge waved?

Back 43

Yes