REG 15 - Debtor-Creditor Relationships Flashcards
Mane Bank lent Eller $120,000 and received securities valued at $30,000 as collateral. At Mane’s request, Salem and Rey agreed to act as uncompensated co-securities on the loan. The agreement provided that Salem’s and Rey’s maximum liability would be $120,000 each. Mane released Rey without Salem’s consent. Eller later defaulted when the collateral held by Mane was worthless and the loan balance was $90,000.
Salem’s maximum liability is
$45,000
Salem is 50% liable on the debt. Before the release, Salem could have been forced to pay 100% to Mane and would then have had to recover by right of contribution half of that amount from Rey. In that case, Salem could get 50% from Rey, because Rey held 50% of the total maximum liability ($120,000/$240,000). However, when Mane released Rey, Mane destroyed Salem’s right to seek a contribution from Rey. Therefore, Salem is now only directly liable for only the percentage share of the original maximum liability ($120,000/$240,000 = 50%). Since the total debt is $90,000, Salem will have to pay 50% of $90,000, $45,000.
Camp orally guaranteed payment of a loan Camp’s cousin Wilcox had obtained from Camp’s friend Main. The loan was to be repaid in 10 monthly payments. After making 6 payments, Wilcox defaulted on the loan and Main demanded that Camp honor the guarantee. Regarding Camp’s liability to Main, Camp is
A. Liable under the oral surety agreement because the loan would be paid within one year.
B. Liable under the oral surety agreement because Camp benefited by maintaining a personal relationship with Main.
C. Not liable under the oral surety agreement because Camp’s surety agreement must be in writing to be enforceable.
D. Not liable under the oral surety agreement because of failure of consideration.
C. If a guaranty is made by an express contract with the creditor, to be enforceable against the guarantor the guaranty contract must be in writing and signed by the guarantor. The only exception is the “main purpose” or “leading object” doctrine where the guarantor will benefit financially or economically. Thus, Camp cannot be held liable on the oral guaranty under the Statute of Frauds.
Sorus and Ace have agreed, in writing, to act as guarantors of collection on a debt owed by Pepper to Towns, Inc. The debt is evidenced by a promissory note.
If Pepper defaults, Towns will be entitled to recover from Sorus and Ace unless
A. Sorus and Ace are in the process of exercising their rights against Pepper.
B. Sorus and Ace prove that Pepper was insolvent at the time the note was signed.
C. Pepper dies before the note is due.
D. Towns has not attempted to enforce the promissory note against Pepper.
D. A guarantor on a guaranty of collection is conditionally responsible for a debt only if collection against the primary debtor fails.
T/F: The principal debtor is a minor who can legally disaffirm his or her liability to a creditor on the debt. If the minor is in default, the guarantor has the equitable right to petition the court for exoneration.
False.
When the principal debtor is a minor and legally disaffirms his or her liability to the creditor on the debt, the guarantor is held liable and no defenses against the principal debtor are useable.
Which of the following acts will always result in the total release of a compensated surety?
A. The creditor changes the manner of the principal debtor’s payment.
B. The creditor extends the principal debtor’s time to pay.
C. The principal debtor’s obligation is partially released.
D. The principal debtor’s performance is tendered.
D. Tender of full performance will totally release the surety, as in such a case there is no longer a debt to be repaid by anyone.
Which of the following rights does a surety have?
I. Right to compel the creditor to collect from the principal debtor
II. Right to compel the creditor to proceed against the principal debtor’s collateral
Neither. A surety is primarily liable on a debt upon debtor’s default. If the creditor wishes to collect from the surety, the creditor may do so. The surety may not compel the creditor to take either of these actions.
T/F: The principal debtor is a minor and the minor has legally disaffirmed his or her liability to the creditor on the debt. Since the principal debtor has a legal defense, this defense is also available to the surety, and the creditor cannot hold the surety liable for the principal debtor’s default.
False.
The surety cannot escape her surety liability by claiming the principal debtor was a minor as a defense.
T/F: A creditor’s surrender back to a principal debtor of the principal debtor’s collateral taken as security for a guaranteed loan without the guarantor’s consent is an automatic complete discharge of the guarantor’s liability.
False.
Failure of the creditor to first resort to the collateral in order to satisfy the debt does not result in a discharge of the surety because it is the creditor’s choice as to proceed against the surety, the collateral, or through litigation against the principal debtor.
T/F: A guarantor who fully pays the principal debtor’s debt obligation to a creditor upon the principal debtor’s default acquires any rights the creditor had against the principal debtor. This is called the right of subrogation and assists the guarantor’s right of reimbursement against the principal debtor.
True
T/F: Evans is a gratuitous guarantor on a loan made to her daughter by West Bank. The loan is due in one month. Without Evans’ consent, her daughter and West Bank agree to extend the loan period for one month without interest or other fees charged. After the one month, the daughter goes into default. Can Evans be held liable on her surety contract?
True.
One month is not a material modification to the loan and therefore Evans can still be held reliable.
T/F: Gary is the surety for a loan made by West Bank to Peter. Peter, upon placing collateral with West Bank to secure the loan, requests a release from the loan. West Bank grants the release. The value of the collateral depreciates in value, and Peter is in default. West Bank’s release of Peter without Gary’s consent is a release of Gary from his surety liability, but West Bank can still proceed against Peter’s collateral in its possession.
True
