Defenses of Surety Against the Creditor

Question 1

What personal defenses of the principal are not available to a surety?

Answer 1

Infancy, lunacy, discharge in bankruptcy, statute of limitations as to the principal’s obligations, etc.

Question 2

What defenses are generally available to sureties against creditors?

Answer 2

1) Fraud;
2) Duress
3) Breach of K by the creditor;
4) Usury;
5: Forgery;
6) Payment of the debt by the principal;
7) Release given by the creditor to the principal;
8) Discharge of another surety (prejudicial);
9) Adjudication that the principal is not liable on the debt.

Question 3

What result if the principal’s promise is tainted by fraud or duress

Answer 3

The surety is NOT liable provided that she was unaware of the fraud/duress

Question 4

What result if the principal fraudulently induces someone to act as a surety?

Answer 4

The surety is STILL liable to the creditor UNLESS the creditor was a party to the fraud.

Question 5

What result if the creditor fails to take some action and thus causes a loss of security?

What result if the principal gives the creditor collateral and the creditor releases all or part of the collateral?

Answer 5

The surety is discharged to the extent of the value of the security lost.

The surety is discharged to the extent of the value of the collateral released.

Question 6

What result if the creditor gives a BINDING extension of time to the principal?

What if the coeditor reserves rights against the surety when giving that extension?

Answer 6

The surety is discharged

The surety is NOT discharged.

Question 7

What result if the principal has defaulted on a contract with the creditor before inducing someone to act as surety on the contract?

Answer 7

The surety is discharged from liability to the creditor IF (1) the creditor knew of the prior default; and (2) the surety did not know of it.

Question 8

What happens if there is change in the contract (gratuitous v. compensated sureties)?

Answer 8

Gratuitous: discharged

Compensated: discharged only if there is a material change in the contract. A minor deviation from the original contract that does not affect the risk of the compensated surety may not discharge the surety.