Suretyship and Mortgages

Question 1

Guarantor

Answer 1

A guarantor is a person who promises to pay a debtor’s obligation if the debtor defaults, and whom the creditor may approach for payment only after seeking payment from the debtor.

Question 2

Accommodation party

Answer 2

One who guarantees a debtor’s performance on a promissory note is an accommodation party. An accommodation party incurs liability on the instrument in the capacity in which he signs.

Question 3

Failure to perfect and accommodation parties.

Answer 3

Impairing the value of the collateral that secures an instrument discharges an accommodation party to the extent of the impairment. Failure to perfect a security interest in collateral impairs its value, because perfection maximizes the creditor’s rights in the collateral and puts others on notice of the security interest.

Question 4

Guarantor of collection

Answer 4

A guarantor of collection becomes liable on the instrument only if:

• execution of a judgment against the debtor has been returned unsatisfied;
• the debtor is insolvent; or
• it otherwise appears that it is useless to proceed against the debtor.

Question 5

Subrogation

Answer 5

Under a surety’s right to subrogation, the surety may step into the shoes of the creditor. Therefore, all of the remedies that the creditor could have used against the principal, the surety can use if he has paid the debt in full.

Question 6

Consideration in surety contracts

Answer 6

Virginia law indicates that consideration is not required in order to obtain a guaranty of a loan.

Question 7

Alteration in instrument

Answer 7

Virginia law states that an “alteration” is an unauthorized change in an instrument that purports to modify the obligation of a party, or an unauthorized addition of words or numbers relating to the obligation of a party. In addition, an alteration that is fraudulently made discharges a party whose obligation is affected by the alteration. No other alteration discharges a party and the instrument may be enforced according to its original terms.

If not material, correcting a typographical error, not an “alteration.”

Question 8

Enforcement of incomplete instrument

Answer 8

Under Article 3 of the UCC, an incomplete instrument may be enforced according to its incomplete terms or as augmented by authorized completion.

Question 9

What happens when a surety makes a promise by signing a negotiable instrument?

Answer 9

He becomes an accommodation party under Article 3

Question 10

What is a surety?

Answer 10

A person who agrees to be primarily liable for the obligation of another

Question 11

What is a guarantor?

Answer 11

A person who agrees to be secondarily liable for the obligation of another. His obligation arises only when the debtor defaults

Question 12

What is a guarantor of collection?

Answer 12

Before creditor can seek recovery from the guarantor of collection, he must exhaust his legal remedies against the principal debtor (sue him, obtain judgment, and try to satisfy that judgment)

Question 13

Contract interpretation of a surety/guaranty agreement

Answer 13

1) Compensated guarantor/surety: usual rules of contract interpretation 2) Gratuitous guarantor/surety: promise will be construed in favor of the surety

Question 14

Is a suretyship contract subject to the SOF?

Answer 14

Yes, subject to the main purpose exception

Question 15

Main purpose exception to SOF requirement

Answer 15

No writing is necessary if the main purpose of the surety’s promise is to benefit the surety

Question 16

Rght to compel collection

Answer 16

If the creditor’s claim has accrued, the surety has the right to demand in writing that he proceed first against principal debtor. If he does not file suit against debtor within 30 days, the surety is discharged

Question 17

Can the creditor choose whether to apply debtor’s payment to the guaranteed or unguaranteed portion of the debt?

Answer 17

Yes, unless: 1) Debtor and surety agree that payment is to be applied against the guaranteed portion 2) Creditor is aware of this agreement

Question 18

Right of reimbursement

Answer 18

Debtor must reimburse the surety for all expenses incurred by the surety and all payments made to the creditor by the surety

Question 19

Right of exoneration

Answer 19

Right to bring suit against debtor to compel the debtor to perform

Question 20

Right of subrogation

Answer 20

When surety pays the debtor’s obligation to the creditor, the surety is subrogated to the rights of the credtior against the debtor (steps into his shoes)

Question 21

Right of exoneration against co-surety

Answer 21

A surety can compel his co-surety to pay her fair share of the debtor’s obligation. If the surety is sued by the creditor, he can compel the joinder of the co-surety provided she resides in Virginia.

Question 22

Right of contribution from co-surety

Answer 22

If a surety pays the full amount of the debtor’s obligation, he has a right of contribution from the co-surety

Question 23

What defenses can a surety assert against the creditor?

Answer 23

In addition to whatever defenses he has, whatever defenses the debtor has or could have asserted

Question 24

What defenses can a surety not assert against the creditor?

Answer 24

1) Debtor’s incompetency or incapacity 2) Debtor’s discharge in bankruptcy 3) Co-surety’s failure to perform 4) Fraud, duress, or misrepresentation, unless creditor participated in it

Question 25

What happens when the debtor and creditor modify their contract?

Answer 25

1) Compensated surety: Discharged only if modification was material 2) Gratuitous surety: Discharged

Question 26

What happens if the creditor extends the time in which debtor has to pay?

Answer 26

If that extension is binding, it will discharge the surety

Question 27

What happens when the creditor does anything that impairs its interest in the debtor’s collateral?

Answer 27

The surety will be discharged to the extent of the value of the impairment