M - 5 - Suretyship Flashcards
What is a surety and who are the parties involved?
A surety is someone who also signs on the loan on behalf of the debtor. They agree to be liable for the debt of another.
Three parties are
Creditor (lender)
Principle debtor (borrower)
Surety
What is the difference between a surety and a Guarantor?
A surety is someone that is directly liable for the contract.
A guarantor - this is someone who is liable to the creditor, only if the debtor does not perform his or her duty.
When can the creditor go after the guarantor?
If and only if, the creditor has used all their options in going after the debtor first, this involves:
Demand
Suit
Judgment, and
exhaustion of all supplementary proceedings.
Do you need writing for a surtey contract to be enforceable?
Yes, S in MYLEGS
What a debtor defaults in a surety situation, how will the creditor get it’s money?
Unlike a guarantor, in a surety, the creditor has three options and they can go after any of these in any order.
Demand payment from surety
Demand payment from debtor
Immediately go after collateral if there is any.
For a surety, what is exoneration?
This is principle debtor won’t pay the creditor, but they are capable of doing so. If this happens, then the surety can bring a suit for exoneration, and compel the principle to pay. This is before they any payment is made to the creditor.
For a surety, what is subrogation?
After the surety pays the principle debtor’s obligation, the surety can enforce any rights that the creditor had on the principle debtor.
For example, let’s say that the surety pays off the loan for the principle debtor, but there was collateral on the loan. The surety, can acquire that building, sell it, and get there money back that they lost.
Also, whatever order that creditor had in bankruptcy, the surety would have that as well.
For a surety, what is reimbursement?
The surety is entitled to reimbursement from the principle debtor for any amount the surety paid on behalf of the debtor.
What are cosureties? Who can the creditor go after?
Cosureties are two or more sureties that are all liable for the loan, in case the debtor defaults.
The creditor can go after all the sureties, a group of sureties, or even just one surety. Each surety is liable for whatever amount they promise to guarantee.
What is exoneration against cosureties?
A surety can bring a suit against the other cosurties, before the payment is made to the creditor. This basically the surety wants the other cosurties to pay their portion of the debt, so it doesn’t all fall on them.
What is contribution against cosureties?
This is when the creditor finds one surety, and that surety pays the creditor the loan amount. After payment, that surety wants the other cosureties to pay their fair share. They bring a suit in court, so the other cosureties pay their share of the debt. This is after the payment was made.
If the contract does not specify what amount of the loan each surety is responsible for, how do you know which surety is responsible for the portion of the loan?
So each surety is 100% liable (unless specified in writing) to the creditor for the full amount of the loan, this is implied. So if there are three sureties, the creditor can say you each pay me a thirds, or they can go after one, and say you pay me the full 100%.
If they do go after one, and they pau the full amount of the loan, that surety can go after the other cosurities, and demand their pro rata share of the loan. For example, if there were three surteies, and one paid the full loan, they surety that paid, can demand the other two to pay their pro rata, which would be one third of the loan. So three sureties, so one third each.
Can you get money from insolvent sureties?
No, you can only get money from solvent sureties.
Provide an example of how the cosurties would pay if the debtor stops making payments.
Lets say C loans D 9,000 and X, Y, Z agree to be cosurteis.
On the contract, each surety says that the max liablity they have are as seen below:
X - 6,000
Y - 3,000
Z - 9,000
After D makes a few payments, the have a balance of 6,000 left and they default. C goes after surety Z and makes them pay the full 6,000 amount. Z does, but now they want contribution from the other cosurties. Here is how the math is broken out.
X - (6,000/18,000) * 6,000 = 2,000 they need to pay Z
Y - (3,000/18,000) * 6,000 - 1,000 they need to pay Z
If this was pro rata, they would each pay Z a third if they were solvent. If X was insolvent, then Y would owe 1,500.
Y - (3,000/12,000) * 6,000 = 1,500
What are some of the defenses where the surety would not need to pay the creditor?
Defrauded the principle - Creditor was a bad guy, contract was entered by fraud.
Duress Upon Principle - Creditor put a gun the principle’s head and said sign this loan.
Illegality of the Principal’s Obligation - Gambling debts or illegal’s transactions. Those would not be a valid contract.
Discharge of the principle’s obligation - Creditor releases the principle and wants payments from surety, obligation is paid already, or debtor tenders performance and creditor refuses to accept it.
Surety’s Incapacity or Bankruptcy - Was a minor or bankrupt.
Lack of Consideration - Some consideration needs to be given, does not mean payment (Gratuitous Surety). If a surety promise made the debtor want to get in the agreement that is consideration. If the debtor got into an agreement, and then the surety promises something, that is not consideration. Or if the surety is paid that is consideration.
Variations of the Surety’s Risk - Any variations of the contract that changes the gratuitous surety’s risk, will discharge them. Now if you are a compensated surety, then you will still have some risk but less.
