Suretyship

Question 1

Pure Surety

Answer 1

Third person is directly liable to the creditor for the debt, and the creditor can sue the surety without even going to the debtor for payment.

Question 2

Guarantor

Answer 2

Liable only if the creditor first goes to the debtor and that person does not pay.

Question 3

Guarantor of collectibility

Answer 3

Liable only after the creditor sues the debtor and fails to collect.

Question 4

Compensated Surety

Answer 4

Is bound whether the promise to pay comes before or after the debt is entered into.

Question 5

Gratuitous Surety

Answer 5

Not bound when the debt comes before the promise of the surety.

The contract will be strictly construed against the creditor.

Question 6

Statute of Frauds

Answer 6

All suretyship contracts must be in writing and signed by the surety.

Exception: If the surety has some financial interest to be gained, and that is the main purpose, then oral agreement can be enforced in equity.

Question 7

Surety’s Rights Against the Creditor

Answer 7

1) Can compel the creditor to sue the debtor. Surety is released if that doesn’t happen.

2) Can compel the creditor to apply the value of any security the creditor holds to the debt.
- To force sale, must show that debtor is bankrupt or insolvent, and couldn’t reimburse surety

3) Can compel the creditor to apply any funds paid by the debtor to the creditor to the debt, PROVIDED THAT the payment was specifically marked for the debt.

Question 8

Surety’s Rights Against the Debtor

Answer 8

1) Exoneration: Can sue the debtor to force debtor to pay creditor.
2) Subrogation: Once the surety pays the creditor, the surety is subrogated to any rights that creditor had against debtor. Has rights to pledged security and any bankruptcy rights that the creditor might have had.
3) Reimbursement, or indemnification

Question 9

Surety’s Rights Against Other Sureties

Answer 9

1) Can compel contribution, each pays pro rata share.

2) Can sue to force others to pay (exoneration).

Question 10

Avoidance of payment by sureties

Answer 10

Any defense to any contract is good here: forgery, fraud, duress, impossibility, illegality, incapacity, etc.

1) If creditor releases the debtor from the debt, surety is discharged.
- Does not include a covenant not to sue

2) If the contract between the debtor and the creditor changes the surety’s risk
- Gratutitous –> discharges the surety
- Compensated –> discharges changes that prejudice

3) If the creditor extends the time debtor has to pay the debt
- Gratuitous –> discharges the surety
- Compensated –> Discharged if UCC; Discharged if legally binding but not UCC

Question 11

Security is harmed

Answer 11

Creditor has to take care of the security, and surety will be discharged to the extent that creditor does not take care