Rights, Duties and Liabilities of Debtors, Creditors, Sureties, and Guarantors Flashcards
What is the formula for determining cosurety liability when one cosurety is bankrupt?
The numerator is the cosurety’s pledge amount, and the denominator is the amount pledged by all cosureties less the amount of the cosurety that has gone bankrupt times the amount the debtor owes to the creditor.
(Max Liability of Co-surety / Total Max. Liability of All Co-sureties) × Amount Due upon Debtor’s Default
Describe a surety (or guaranty relationship)
The principal debtor owes money to a creditor and the surety or guarantor agrees to be backup for the debtor if the debtor does not pay; it is promise to pay the debt of another in the event that “other” defaults
Define “absolute guaranty.”
Promise by a surety or guarantor to pay no matter what happens or why debtor defaulted
Define “conditional guaranty.”
A surety or guarantor promises to pay only when certain conditions have been made, such as after the creditor has reduced the debtor’s obligation to a judgment or after the creditor has exhausted all collateral. (Also called a guarantor of collection.)
What is the creditor’s right in a surety relationship?
Upon default, the creditor can proceed against collateral or surety; it is the creditor’s choice.
Describe the right of contribution regarding sureties.
Cosureties have the right to collect from other sureties their pro rata share of the amount paid to the creditor.
What is the formula for the right of a cosurety to collect from another (i.e., the right of contribution)?
(Amount guaranteed by surety / Total agreed to be paid by all sureties) × Amount to be paid to the creditor (i.e., the amount owed by this surety to the creditor or to any surety who had to pay the full amount
Explain the requirements for creating a surety relationship.
It must be in writing; it can be gratuitous.
Describe the concept of reimbursement and indemnity of a surety.
Upon payment to the creditor, the surety has the right to seek reimbursement from the principal debtor.
What defenses are available to a surety?
Contracts defenses of the principal debtor, such as fraud, duress, failure of consideration, breach
What defenses are not available to a surety?
- Capacity of the principal debtor
- Bankruptcy of the principal debtor
- Statute of limitations running on the debtor’s obligation
What defenses are available to a surety through creditor actions?
- Release of the debtor when risk increases
- Refusal by the creditor to accept payment
- Material alteration of the agreement with the debtor
- Fraud and collusion with the debtor to get the guarantor to provide a guaranty
- Release of collateral to the debtor (but only released for the amount that is the value of the collateral)
Under what circumstances are compensated and uncompensated surety discharged from liability?
On material alterations, uncompensated surety is discharged; compensated surety is discharged only if modification increases the risk.
Indemnity Contract
One party promises to reimburse debtor for payment of debt or loss if it arises
Suretyship Contract
Relationship whereby one person agrees to answer for the debt or default of another
Surety
Promise to pay debt on default of principal debtor
Third-Party Beneficiary
Receives intended benefits of a contract
Cosurety
Jointly and severally liable to creditor
Statute of Frauds
Requires certain contracts to be in writing to be enforceable
Right of Contribution
Upon payment of more than his/her proportionate share, each cosurety may compel other cosureties to pay their share
Reimbursement
Upon payment of debt, surety may recover payment from debtor
Subrogation
Upon payment, surety obtains same rights against debtor that creditor had
Exoneration
Right of surety to require the debtor to pay before the surety pays
