REG - Debtor - Creditor Relationship

Question 1

What happens under a typical suretyship agreement?

Answer 1

The creditor is permitted to but not required to proceed first against the principal debtor.
The surety promises to perform upon default of the principal debtor.

Question 2

What happens when a collateral is sold for more/less than amount?

Answer 2

When less - it is still owing and the surety is obligated to pay the balance.
More - the excess over the agreed amount must go to the principal debtor.

Question 3

What happens when one cosurety is discharged/released by a creditor? Example, company has 2 cosurety for 100% of the loan each and one is released.

Answer 3

Results in a reduction of liability of the remaining cosurety, released to the extent of the released cosurety’s pro rata share of debt liability, unless there is a reservation of rights by the creditor against the remaining cosurety.
As both had max liability, releasing one leaves the other with half of the balance.
No impact on the principal debtor.

Question 4

What is a debt collector prevented from performing?

Answer 4

Once a debtor is represented by an attorney, the debt collector should communicate with the attorney and not the debtor.
The collector can still use reasonable methods to locate the debtor, to attempt to collect the debt (ex: commencing lawsuit)

Question 5

What is a third party beneficiary contract?

Answer 5

Involves an agreement between two parties in which the third party beneficiary receives benefits under the contract without being one of the primary parties to it. No surety in this case.

Question 6

What are some examples that involve a suretyship relationship?

Answer 6

A cosigner on a loan is a surety and is obligated to pay if primary debtor defaults
Accommodation endorser on a note guarantees pmt of the note
An ordinary endorser on a negotiable instrument agrees to pay if the instrument is not paid.

Question 7

When does the guaranty have to be and not be in writing?

Answer 7

The guaranty must be in writing to be enforceable.
If the guaranty was primarily for the owner’s benefit, the guaranty would not need to be in writing. If it is indirectly benefit, ex: through corporation controlled by owner, it is not considered to be primarily for their benefit.

Question 8

What defenses can the surety exercise?

Answer 8

Defenses when fraud committed against the debtor by the seller, and fraud committed against the surety by the seller. If there was fraud committed against the surety by the debtor, it will not release the surety if the creditor extended credit in good faith. If the creditor had knowledge of the debtor’s fraudulent representations, then the surety may avoid liability - as it increases surety’s risk
Note that the surety cannot exercise personal defenses of the debtor, such as bankruptcy or insanity.

Question 9

When is the surety released? What about for holdover clauses?

Answer 9

When the creditor refuses to accept the principal debtor’s tender of pmt, the surety is released. It does not discharge the debtor but will stop running interest.

The surety is released by material modifications if the surety’s risk of loss is materially increased and which they did not agree to. For example, the extension of time for payment which increases surety’s risk and made without their consent.
If the holdover clause is in the contract which the surety agreed to, they are held liable for the term of the clause.

Question 10

What happens in a case where there is collateral and surety?

Answer 10

The creditor may proceed against the collateral or surety as soon as the obligation is due.
Note collateral owner is not a cosurety.
The surety promises to perform upon default of the principal debtor. The surety is subrogated to the creditor’s rights in the collateral.
If the collateral is returned, the surety’s obligation is reduced by that amount.

Question 11

What is a writ of garnishment?

Answer 11

Allows a creditor to collect money from a debtor’s wages. Garnishment is a statutory proceeding in which money or property belonging to the debtor but under the control of a third party is applied to pmt of the amount owed to the creditor.

Question 12

What is order of receivership?

Answer 12

Involves appointing a receiver to an insolvent entity or individual to arrange for the sale and distribution of its assets to creditors.

Question 13

What is a mechanic’s lien?

Answer 13

Is a claim created by state statutes to secure priority of pmt for work performed and materials furnished in building or repairing a structure.

Question 14

What are official bonds?

Answer 14

A party is guaranteeing that a public official will discharge duties in compliance with laws and regulations.
This is a secondary obligation.

Question 15

What happens when there are multiple cosuretys and one of them defaults and is discharged of obligation. If one cosurety pays all, what amount is recovered from the others? Ex: Surety A, B, C cosurety for 180, 60, 120 respective. B defaults and A pays all debt of 90.

Answer 15

The cosurety who pays more than his proportionate share has the right of contribution which entitles the performing cosurety to reimbursement from the others for their pro rata share. They cannot recover anything from the cosurety that has been discharged. Calculated as $amount agreed to by A / total amount of risk assumed by remaining cosureties X remaining obligation
120 / (120+180) X 90 = 36 –> from C

Question 16

What is exoneration?

Answer 16

A cosurety is entitled to the right of exoneration meaning that a cosurety may sue the debtor to compel pmt of the obligation to the creditor if the debtor has sufficient assets and is wrongfully withholding pmt. The only time that a surety is denied the right of exoneration is when the creditor demands prompt pmt from the surety upon the debtor’s default.

Question 17

What is subrogation?

Answer 17

A cosurety is entitled to the right of subrogation, meaning that the cosurety succeeds to the rights of the creditor upon satisfying the obligation of the debtor (steps into the creditor’s shoes).
The surety is entitled to the same priority as the creditor would have in a bankruptcy proceeding. The surety acquires the identical claims or rights the creditor possessed against the principal debtor , permitting the surety to asset rights he otherwise could not assert.

Question 18

What are the rights of a surety/cosurety?

Answer 18

Contribution (cosurety only) - can demand pro rata contribution by his fellow sureties if he pays the fill amount
Subrogation - after pmt, surety to extent he paid, succeeds to the creditor’s rights against the debtor, including the right to any security interests the creditor might have in debtor’s property
Exoneration - before pmt, surety files a suit in equity to compel debtor to pay creditor.
Reimbursement (indemnification) - right to recover the amount paid from the principal debtor

Question 19

What happens if the creditor releases the principal debtor’s obligation without the surety’s consent but with the creditor’s reservation of his rights against the surety?

Answer 19

Even though it will usually discharge the surety, there is no discharge if the creditor expressly reserves his rights against the surety.

Question 20

What happens if the creditor does not accept the debtor’s tender?

Answer 20

The tender of performance by debtor releases surety from his obligation. However, such tender does not release the debtor if the contractual duty consists of the obligation to pay money. If the contractual duty consisted of anything but the obligation to pay money, then the tender of such performance would have also released the debtor.

Question 21

What is a composition of creditors?

Answer 21

Occurs when creditors make an agreement with each other to accept less than the full debts as full satisfaction of those debts. Once the debtor performs under this agreement, the debts are discharged, so this generally causes a release of the debtor from its debts.

Question 22

What is an assignment for the benefit of creditors?

Answer 22

An assignment for the benefit of creditors does not generally cause the release of the debtor from its debts.
In this case the creditors do not have to agree to the assignment. The debtor assigns its assets to a trustee who sells the assets for cash. The cash is then paid out to creditors who agree to accept a stipulated amount to release their claims. The assignment itself, however, does not cause the claims to be released because at that point the creditors have not agreed to do so.