Suretyship

Question 1

Spotting Suretyship

Answer 1

One person owes a debt to another person and there is a third person who is somehow liable for that debt.

Question 2

Pure surety

Answer 2

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

Question 3

Guarantor surety

Answer 3

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

Question 4

Guarantor of Collectibility

Answer 4

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

All legal remedies must be exhausted.

Question 5

Commercial/Compensated Surety

Answer 5

Gets paid.

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

Question 6

Gratuitous Surety

Answer 6

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

Question 7

Surety Contracts and the Statute of Frauds

Answer 7

All kinds of suretyship contracts must be in writing to satisfy Statute of Frauds EXCEPT
where the surety has some financial interest to be gained from entering into the suretyship agreement.

Question 8

Rights of the surety against the creditor

Answer 8

1. Can compel the creditor to sue debtor.
2. Can compel the creditor to apply the value of any security the creditor holds to the debt (But in this case the surety has to show that the debtor is bankrupt or insolvent)
3. Can compel the creditor to apply any funds paid by he debtor to the creditor to the debt, PROVIDED the payment was specifically marked for the debt.

Question 9

Rights of surety against the debtor

Answer 9

1. Exoneration
2. Subrogation
3. Reimbursement

Question 10

Suit in exoneration

Answer 10

Surety can sue debtor to force debtor to pay creditor.

Question 11

Right of subrogation

Answer 11

Once the surety has paid the creditor the surety acquires any rights that the debtor had against the debtor.

Question 12

Change of contract effects on gratuitous surety

Answer 12

ANY change of ANY kind in the contract between debtor and creditor discharges the surety - even if the change lowers the debt

Question 13

Change of contract effects on compensated surety

Answer 13

Change in the underlying debt will only discharge surety if that change raises the risk to the surety. Even if the risk is raised, the surety is only discharged to the EXTENT of the prejudice.

Question 14

Effects of time extensions on gratuitous sureties.

Answer 14

ANY extension discharges surety.

Question 15

Effects of time extensions on compensated sureties.

Answer 15

1. Common Law Debt: Extension of time only discharges the surety if its legally binding and not just an extension for courtesy.
2. UCC debt - ANY extension of time discharges the surety.

Question 16

If the creditor releases the debtor from the debt, the surety is?

Answer 16

Discharged

Question 17

If the creditor gives debtor a covenant not to sue the surety is?

Answer 17

Not discharged

Question 18

Methods of discharge

Answer 18

1. Release of security by creditor.
2. Physical loss of the security by creditor.
3. Failure of creditor to perfect the security under the law.
4. Payment of debt.

Remember: Neither incapacity or bankruptcy of the debtor is any bar to enforcement of the suretyship agreement.