SURETYSHIP RULES! Flashcards
Suretyship Arrangement
A suretyship exists when a third party has agreed to back up the debt of another under circumstances in which the original debtor is still liable.
Guarantor Agreement v. Suretyship Agreement
Where a person signs as a guarantor of collection, he is not liable until the creditor exhausts his remedies against principal debtor or shows that they are unavailable.
Surety on Promissory Note
A surety need not receive consideration if signing on a negotiable instrument; however, a modification of the contract discharges the surety only if the surety suffers a loss from modification; debtor discharge does NOT discharge the surety.
Unidentified Surety & Parol Evidence
Generally, a party can use parol evidence to show he is a surety if the contract does not identify him as such.
Consideration
Where all 3 parties participate in the initial agreement that gives rise to the suretyship, the consideration received by the surety is the creditor’s promise to extend credit to the debtor that it would not otherwise have done so but for the surety.
Statute of Frauds
Unless a surety makes a direct undertaking, surety promises must be in writing to comply with the SOF.
Main Purpose Rule
Under the main purpose rule, no writing is required when the surety’s main purpose is to produce an economic benefit for himself (failing contractor situation).
Main Purpose Rule – Corporate Liability
In order for a shareholder to be a surety without writing, he must (1) be an officer or director, and (2) own a large percentage of the corporations shares.
Force Creditor to First go After Debtor
By statute in NC, the surety has a right to force the creditor to first proceed against the debtor or any collateral if the surety requests it in writing sent by registered mail. Creditor must then go after debtor/collateral within 30 days after receiving such notice. If creditor fails to do so, the surety is discharged to the extent of loss by delay.
Rights of Surety to Recover from Debtor
A surety is entitled to reimbursement from debtor, exoneration requiring debtor to apply assets he has to the debt before creditor gets judgment, or he can subrogate to all rights creditor had against debtor.
Rights of Co-Sureties
A paying surety is entitled to pro rata contribution from co-sureties unless otherwise agreed. However, a paying surety must raise any defense that is common to all sureties.
Surety Defenses against Creditor
Generally, a surety can assert any defense available to the debtor. Surety not liable if defect in signatures.
Discharge of the Debtor
The creditor’s discharge of debtor discharges the surety unless the surety was created by negotiable instrument.
Waivers
A surety may be found to have waived his rights if he knows of and makes no timely objection to modifications.
Extension of Time Modification
A gratuitous surety is discharged by extension of time. A compensated surety is discharged only to extent of any loss caused by extension. Article 3 surety is discharged only to extent of actual loss caused by extension.
