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22 Cards in this Set

  • Front
  • Back
what happens when one person owes a debt to another person and there is a 3rd person who going to be liable for the debt.

who is the 3rd person called.
3rd person is called surety.

and k is called a surety k.
what are the 3 ways a surety k can arise.
1. k states that it is a surety k.
creditor can sue 3rd person w/o suing the debtor 1st.

2. guarantor grantee k.
only liable to the creditor/ must first sue the debtor 1st and that person does not pay.

3. grantor of collectibility.
liable only to creditor.
1st sues the debtor and fails to collect/ all legal remedies must be exhausted.
what is the diff. btwn commercial surety and gratuitous surety.
Commercial get paid. = like insurance comp.

grantuitious = get nothing.
what happens here:

the friend who does you a favor by singing your note for a car is a__________

the bonding company who signs guarantee performance by a contractor is a
1. gratutous surety.

2. compensated surety.
what is the rule for a compensated surety bond.

and

what of the gratuitous surety bond.
a compensated surety is bound by whether the promise to pay come BEFORE or AFTER the debt is entered into.

a gratuitous surety is not bond when the debt comes before the promise of the surety.
Hypo:

Ralph bought a car from swifty motors and promises to pay swifty 500 a month for one yr. the next month swifty became nervous about ralph's ability to pay and asked if ralph to get someone to sign on the note as a surety. Ralph convinced his best friend, Dupe, to sign on the note as a surety.

what happens to dupe
DUpe signed after Ralph entered into the debt, so there was no consideration for the promise.
hypo:

Jane was building a house and hire contractor, throw it up contractor, to construct the house. A month after jane signed the k with throw it up and paid them the first installment of the k price she began to worry that throw it up might not be able to perform on the k. She asked the contractors to get a surety. Throw it up hired Rock solid bonding comp. to sign on as surety and paid them the requested fee.

Is rock solid bonding liable on the debt even though the surety promise came after the debt was entered into.
1. yes because Rock Solid bonding is compensated surety.
who is liable when surety k is gratuitous.
then k will be strictly construed against the creditors
who is liable when the surety k is compensated.
then the surety contract is compensated then the k is constructed just like any other k.
what is SOF for surety k.
surety k of all kinds are subjected to SOF meaning the k must be in writing and signed by the surety.
what is the exception to the surety k.
1. if the surety have some financial interest

and

2. main purpose behind entering promise
then those facts will take agreement out from
under SOF and the oral agreement can be enforced.
what is the right to surety.
Surety can have rights against all others in k right against the creditor.

right against the debtor and rights against any other sureties.
what are the 3 rights against the creditor
1. creditor can sue debtor and if that does not happen the surety is released.

2. surety can compel the creditor to value the value of any securities the creditor to hold the debt.

--but---

for the surety to force the creditor to sell the security and apply the proceeds to any debt the surety has to show that debtor is

a. bankrupt
or
b. insolvent and could not reimburse the surety.

3. Surety can compel the creditor to apply any funds paid by the debtor to the creditor to the debt, provided that the payment was specifically marked for the debt.
what are the 3 rights agains the debtor
1. right to exoneration
( surety can sue the debtor to force the debtor to pay creditor) = suit in exoneration.

2. the right to subrogation ( once the surety pay the creditor the surety is surrogated to any rights that creditor had against debtor.)
surety has right to pledge security and any bankruptcy rights creditor might have had.

3. the right to reimbursement also called the right of indemnification.
what is the right to against other sureties.
1. sureties are jointly and severally liable.

2. if one surety winds up paying all the debt that surety can = compel contribution from others.
( each pay a pro rata share)

3. if a surety wants to avoid paying more than the pro rata share in the 1st place = then surety can sue to force the others to pay.
= exoneration = suit forced to compel payment.
what is the changing the surety rules in the contract.
sureties can change the rules in the suretyship k such as

1. can decide k how much each surety will be liable for

2. can agree on the priority of liability, that is, which surety would get hit first.
what is the rule for avoidance of payment by sureties on the surety k.
all defense that would apply to any k are good here; forgery, fraud, duress, impossibility, illegality, incapacity and all the rest.
what happens if creditor releases debtor.
1. if creditor releases the debtor from the debt = the surety is discharged.

but

if creditor gives debtor a covenant no to sue = surety is not discharged.

2. even if creditor releases the debtor the surety is not released if the surety is holding security that covers the debt.
what happens if the k is between debtor and creditor changes the surety risk.
effects depends on whether the surety is gratuitous or compensated.

a. gratuitous = any changes of any kind k discharges the surety, even if the changes lower the debt.

b. if surety is compensated = any change in underlying debt will also discharge the surety even if the change prejudices the surety, that is raises the risk to the surety.

= even if prejudice the compensated surety is discharged only to extent of prejudice = not discharged totally.
what if the creditor extends the time

what are 2 situations.
debtor has to pay debt but the effect depends on the whether surety is gratuitous or compensated.

a. surety is compensated in 2 situation

a1. if gratuitous then = then any extension = discharge.

a2. if the debt is a matter NOT covered by UCC then ext ion of time will discharged only if extension is legally binding

one and not just an extension by courtesy.

IF the debt is under the UCC then any extension of time discharges the surety.
what happens if the security held is lost by the creditors, damage or destroyed.
creditor has to take care of the security, and surety will be discharged to the extent that creditor does not take care.

1. release of security by creditor

2. physical loss of the security creditor

3. failure of creditor to perfect the security under the law.
what is the final rule.
neither the incapacity or bankruptcy of the debtor is any defense to enforcement of the suretyship agreement.