Assignment 5 - Protections for Guarantors

Question 1

What are the major rights Guarantors have against the principal

Answer 1

Performance
Reimbursement
Subrogation

Question 2

The right of _______ allows the guarantor to sue the principal to force the principal to perform the guaranteed obligation

Answer 2

Performance - Restatement of Suretyship §21

Question 3

Reimbursement

Answer 3

Recover any sums paid on the guaranty. Restatement of Suretyship §22. Also UCC § 3-419(e).

Question 4

Subrogation

Answer 4

Allows the guarantor to step into the shoes of the lender and assert against the principal all of the rights that the creditor could have asserted against the principal. §27

Question 5

Chemical Bank v. Metlzer

Answer 5

If a single mortgage guarantees multiple debts then subrogation requires that the guarantor pay off all of the debts owed before receiving the benefit of subrogation.

If two mortgages apply to the same property and secure two separate debts, only one of which has a guarantee, the guarantor receives the full benefit of subrogation to the appropriate mortgage irrespective of payment to the lendee on the second mortgage.

Question 6

Stahl v. Simon

Answer 6

Guarantor waived the right to indemnification.

Insider has waived the right to indemnification, so they are not creditors and therefore not subject to the bankruptcy rule on voiding payments. Splits from circuits that follow Telesphere.

** Key is that there is no provision in the loan for the G to be able to buy the loan or anything indicating that G did buy the loan.

Question 7

Telesphere

Answer 7

Jurisdictions that follow this approach see the waiver of indemnification as a sham. They see all Deprizio waivers as a sham and the guarantor is a creditor no matter what.

Question 8

What is a Deprizio waiver

Answer 8

When guarantor waives rights of indemnification.

Question 9

Deprizio holds?

Answer 9

Guarantor has a contingent claim against the borrower as soon as a guaranty is signed. Harms unsuspecting lenders.

Congress enacted 550 (c) which makes repayment come from guarantor and makes Deprizio waivers irrelevant.

Question 10

Suretyship defenses

Answer 10

Mistake: Restatement of Suretyship §42(1), (2)(a); UCC §3-605(d)
Extension: Restatement of Suretyship §40(b); UCC 3-605(c)
Modification: Restatement of Suretyship §41(b); UCC 3-605(c)
Release of liability: Restatement of Suretyship §39; UCC 3-605(a)

Question 11

Mistake

Answer 11

“Defense to a suit on his guaranty to the extent that the mistake harmed him.”

“The harm would be the amount the lender would’ve recovered had the mistake not been made, reduced by the amount that was recovered.”

Question 12

Extension

Answer 12

This could result in a circumstance where debtor was solvent at the time the loan was due but then became insolvent.

Here the guarantor would have to prove that the extension decreased the lenders ability to recover to receive a discharge on his guaranty

Question 13

Modification

Answer 13

Ex: Reinstating a loan with increased interest rate.

G would argue:
1. the lender would’ve been paid in full if they exercised their rights against the creditor; or

2. the outstanding balance would’ve been smaller if they didn’t raise interest rates.

Question 14

Release

Answer 14

Look at the intent of the creditor. The law justifies the lender’s right to pursue the guarantor by preserving G’s right to pursue the principal.

Question 15

Waiver of Suretyship

Answer 15

Under Restatement of Suretyship §48(1); UCC 3-605(f) a guarantor can waive their suretysip defenses.

This is common when the guarantor has a close relationship with the principal and allows for the lender to grant the principal flexibility without sacrificing the guaranty from the surety.

Question 16

Data Sales v. Diamond

Answer 16

Surety defenses can be waived by implication.

Even though a specific surety defense is not listed in example list of waivable defenses under Restatement of Suretyship § 48, that is not sufficient reason “to overcome the general principle that the parties to commercial transactions may generally structure their agreements as they see fit.”

Question 17

Trimec v. Zale Corporation

Answer 17

Airport Concession stands. Borrower defaults (while solvent). Guarantor then files for bankruptcy.

a “stay is appropriate where there is such identity between the debtor and the third-party defendant that the debtor is be said to be the real party defendant and that the judgement against the third-party defendant will in effect be a judgement or finding against the debtor.” [Note that the lender could fix this problem by waiving their right against the guarantor, but may not if the guarantor is likely to emerge from bankruptcy with significant assets].

Question 18

Suretyship Defenses Notes to Remember

Answer 18

Subrogation only applies when the guaranteed debt is paid off.
Subrogation is usually contracted out.

Courts now read the guaranty with the intentions of the parties.