Suretyships

Front 1

What are the seven rules of suretyship?

Back 1

1. Defenses available to debtor
2. Repayment right
3. Alteration discharge
4. Writing
5. Pro-rata contribution
6. Immediate and direct liability
7. Consideration

Front 2

When does a suretyship exist?

Back 2

When the 3d party has agreed to back up the debt of another under circumstances in which the original debtor is still liable on the debt.

Front 3

What must a promise to serve as a surety be supported by (and what is the exception)?

Back 3

Consideration, except when the surety signs a promissory note.

Front 4

Must suretyship promises be in writing? What is the exception?

Back 4

Yes. Except when the Main Purpose of the surety is primarily for the surety's economic benefit.

Front 5

Does a surety have immediate and direct liability on the principal debtor's debt?

Back 5

Yes, however, under the NC special statute, the surety can force the creditor to first go after the debtor or any collateral given for the debt.

Front 6

What are a paying surety's three rights?

Back 6

Reimbursement, Exoneration, and Subrogation.

Front 7

Can a surety obtain contribution from other co-sureties?

Back 7

Yes, a surety is entitled to pro-rata contribution from co-sureties unless there's an agreement to the contrary.

Front 8

What three defenses can a surety not assert against a creditor (which are available to the debtor)?

Back 8

Minor/infancy
incapacity
discharge from bankruptcy

Front 9

When will a surety be wholly or partially discharged from liability?

Back 9

By an alteration in the underlying contract or an impairment of the collateral that produces loss.

Front 10

What is reimbursement?

Back 10

surety's common law cause of action against the debtor to receive repayment of any amounts that the surety has paid to the creditor.

Front 11

What is exoneration?

Back 11

surety is entitled to an equitable order requiring the debtor to apply any assets that he has to pay the debts, and must get the order before the creditor obtains an order against the surety.

Front 12

What is subrogation?

Back 12

the surety who pays is subrogated to all rights that the creditor had against the debtor and 3d parties, including mortgages and security interests in the debtor's property

Front 13

What defenses are available to the debtor against the surety's right to reimbursement?

Back 13

1. surety paid after the SL ran on the underlying debt
2. underlying debt was part of an illegal transaction
3. underlying debt was based on fraud

Front 14

When does a paying surety's failure to raise a defense preclude that surety's right to receive contribution from co-sureties?

Back 14

1. a paying surety who wants contribution must raise any defense common to all sureties.
2. a paying surety is still entitled to contribution even if he failed to raise a defense that belongs to only the paying surety or only to a non-paying surety.

Front 15

What defenses are available to a surety?

Back 15

1 validity of the debtor's signature
2 discharge of the debtor*
3 extension of time granted by creditor to debtor*
4 modification of underlying contract*
5 impairment of the collateral
6. waiver

*different rule for CL and Art. 3

Front 16

At common law, when is a surety discharged for either an extension of time or a modification of the underlying agreement?

Back 16

when the surety is a gratuitous surety.

Front 17

Validity of the Debtor's Signatures

Back 17

A surety is not liable if there is a defect in any of the signatures

Front 18

Discharge of the Debtor

Back 18

Common law: discharge of the debtor discharges the surety

Art. 3: If there is a PN, the surety is still liable for the debt, but retains its cause of action against the principal debtor.

Front 19

Extension of time granted by the creditor to the debtor

Back 19

CL: gratuitous surety - discharged; compensated surety - discharged only to the extent of any loss resulting from the extension

Art. 3: If there is a PN, the surety is only discharged to the extent of any loss resulting from the extension

Front 20

How do NC courts treat time extensions?

Back 20

As beneficial for the surety because they give the debtor another opportunity to pay, unless the debtor was solvent at the time of the extension and becomes insolvent afterward

Front 21

Modification of the underlying contract

Back 21

Common law: gratuitous surety discharged by any modification; compensated surety discharged only to the extent of loss caused by the modification

Art. 3: If there is a PN, the surety is only discharged from the extent of the actual loss resulting from the modification

Front 22

What are some examples of modification?

Back 22

1. Creditor changes form of payment (e.g. cash to check),
2. Creditor extends warranty on goods sold in exchange for debtor's agreement to pay additional amount,
3) Parties agree to substitute a new machine for the one originally ordered

Front 23

Impairment of the Collateral

Back 23

CL & Art. 3: Surety is discharged to the extend of the impairment of the value of the collateral

Front 24

Waiver

Back 24

In NC, if the surety knows about a change to the K, but raises no objection, it is considered to have waived its rights to partial or full discharge

Front 25

What is the guarantor of collection exception?

Back 25

Guarantors are equal to sureties in NC, except that guarantors of collection are not liable until the creditor exhausts remedies against the principal debtor or shows the pursuit of such remedies would be futile

Front 26

When more than one party signs the writing without labels and one party is discharged from the debt, can the other party use parol evidence to prove that he is the surety?

Back 26

Yes, except when the contract has been assigned to a third party, or the creditor did not know of the suretyship relationship between the two parties

Front 27

When the creditor uses a suretyship arrangement to avoid the corporate limited liability rule, the main purpose exception to SF applies if:

Back 27

1. the shareholder is an officer or director of the corporation, and
2. the shareholder owns a large percentage of the shares of the corporation

Front 28

Is a writing required when a landowner tells a supplier it will act as a surety if the supplier continues selling supplies to a contractor?

Back 28

If the main purpose rule applies, no.

Front 29

Is an uninformed spouse bound by the debt of a guaranty agreement she unwittingly signed during marriage years after divorce?

Back 29

Yes, because she would also have been entitled to a windfall.

Front 30

When is additional consideration to the surety not required?

Back 30

1) when the creditor, debtor and surety all participate in the initial transaction.

Front 31

After a relationship between the debtor and creditor exists, what is required for the surety to be liable for the debt?

Back 31

1) Consideration given to the surety,
2) New consideration flowing to the debtor (e.g. extended repayment), or
3) Detrimental reliance by the creditor

Front 32

Is consideration required for direct promises?

Back 32

Yes (the main purpose rule does not apply to direct promises)

Front 33

When is the Statute of Frauds inapplicable?

Back 33

1) Where a third party makes a direct promise to pay the debt, or

2) Where the main purpose rule applies

Front 34

How does a surety take advantage of the NC statutory exception to immediate and direct liability?

Back 34

The surety must send a written request to the creditor by registered mail

Front 35

What must the creditor do upon receiving written, registered mail from the surety claiming the NC statutory exception?

Back 35

The creditor must commence action against the debtor or the collateral within 30 days of notice