Suretyship Flashcards
What is a suretyship?
When there are at least three people and at least two of them have obligations to pay or perform, by contract one person has accepted responsibility for another person’s non-payment or non-performance.
Who is the creditor (obligee)?
Person to whom an obligation is owed.
Who is the debtor (principal/obligor)?
Person who gets a benefit from creditor and owes payment or performance.
Who is a surety?
Person who by contract has an obligation that backs up another person’s (debtor’s) promise.
When the debtor defaults, who may the creditor sue?
Creditor must sue the debtor/guarantor first! Only then can creditor sue the surety.
What are the defenses that surety may assert when creditor sues on D’s debt?
1) Lack of consideration: this will not be a problem if the surety is established at the time the debt is incurred or if the surety is not a gratuitous surety.
2) Statute of Frauds: must have a writing unless the main purpose of the transaction is to benefit the surety.
When may the surety assert debtor’s defenses in order to avoid its own liability on the debt?
May assert transaction based defenses such as fraud, duress, or breach of K, but may not assert personal defenses such as infancy, insanity, bankruptcy or SOL.
When may the surety have a defense based on actions by the creditor that increase the surety’s risk?
1) Release or other loss of security through a creditor’s affirmative act may be asserted as a defense. BUT increasing surety’s risk through inaction (failure to perfect) is not grounds for a defense.
2) Modification of contract between creditor and debtor does not increase surety’s exposure.
What are the defenses that surety may assert because of payment by debtor?
Surety may not require that the creditor apply debtor’s payment to loan that the surety guaranteed.
How may the surety sue the debtor?
1) Right of exoneration: surety may sue in equity to compel the principal to pay.
2) Right of reimbursement: surety may sue after any payment to creditor to recover the sum paid from the debtor.
3) Right of subrogation: after the creditor has been paid in full, surety may sue for right to use creditor’s rights.
What are the surety’s rights agains co-sureties?
1) Exoneration: if surety A is sued, A can force the creditor to sue all other sureties on the debt in the same suit.
2) Contribution: where there are multiple sureties, each must contribute to pay the debt in accordance with any governing agreement. In absence of agreement, assume all contribute equally.
What are 3d parties rights against the surety in construction contracts?
Subcontractors who work for the debtor or materialmen who supply debtor can recover on the surety. They are like 3d party beneficiaries of the surety.
