Basic Principles of Suretyship

Question 1

A suretyship arises when?

Answer 1

• in any circumstance when a creditor has a right to enforce a debtor’s obligation against a third person
• in any case in which G or the surety promises to answer for the debt or obligation of another party, the debtor.

Question 2

A suretyship always involves three parties:

Answer 2

1. a creditor (also called an obligee) (C),
2. a debtor (also called the principal or the principal obligor) (D), and
3. a guarantor or surety (also called a secondary obligor) (G or S) who is also liable on the obligation to the creditor.

Question 3

When default of a debtor occurs, what can a creditor do?

Answer 3

Go after the surety or debtor,
If goes after surety, Then surety can go after debtor

• Unless the guarantee expressly states that the creditor must pursue the debtor before the guarantor (guaranty of collection)

Question 4

The UCC Article 3, and not common law, governs the two surety relationships when two factors exist

Answer 4

1. there is a debt evidenced by a negotiable instrument
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2. surety signs the negotiable instrument (≠ a separate document)

Question 5

What law governs suretyship?

Answer 5

contract law

-unless it is a negotiable instrument

Question 6

Surety is also known as

Answer 6

guarantor; or,

secondary obligor

Question 7

What are the two types of surety?

Answer 7

1. uncompensated surety: voluntarily stands behind the debt or obligation of debtor
2. compensated surety

Question 8

What is the surety’s liaiblity to a contract?

Answer 8

They are jointly and severally liable with the debtor to the performance of the debtor’s obligation

Question 9

A guaranty is distinguished from suretyship in that

Answer 9

1. a surety binds itself to be jointly liable for the principal’s obligation
2. a guaranty is a collateral and separate contractual undertaking whereby the guarantor (G) to answer for the debt or obligation of the Debtor (D).

Question 10

A party identified by a suretyship contract as a “guarantor” is liable

Answer 10

ONLY upon Debtor’s default.

Question 11

A guarantor of collection requires both:

Answer 11

(a) Debtor’s default and

(b) Creditor’s attempt to collect from Debtor before attempting to collect from the guarantor

Question 12

Creditor may proceed directly against Guarantor upon Debtor’s default unless:

Answer 12

unless the contract unambiguously Guarantor as a “guarantor of collection”

Question 13

Creditor may recover from a Guarantor of Collection where

4

Answer 13

a) execution of judgment against Debtor has been returned unsatisfied
b) Debtor is insolvent or in an insolvency proceeding;
c) Debtor cannot be served with process; or,
d) it is otherwise apparent that payment cannot be obtained from Debtor.

Question 14

A person becomes an “accommodation party” when:

Answer 14

Surety, debtor, and creditor all sign the same negotiable instrument (not a separate contract contract of guaranty)

Question 15

If surety is an accommodating party, what is their status?

2

Answer 15

Either

1. Surety: jointly and severally liable
2. Guarantor of collection (if unambiguously stated): only liable after effort made against the debtor

Question 16

An indemnity is?

Answer 16

a two party relationship where one person (indemnitor) has an obligation to reimburse a loss suffered by another (indemnitee).

Question 17

How can a surety relationship be created?

Answer 17

only created by a contract signed by the surety

Question 18

Does a surety need the debtors consent to sign onto a contract?

Answer 18

No

Question 19

How can a suretyship by assumption occur?

Answer 19

can arise where a third party assumes the debt or obligation that a debtor owes to a creditor, without a novation taking place. The original debtor becomes a surety to the creditor and the third party becomes the debtor.