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51 Cards in this Set
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- Back
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What is A surety |
A person who promises along with the debtor to pay the debtors obligation when it becomes due. A surety is directly liable on the obligation |
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What is a guarantor |
A person who promises to pay the obligation of a debtor only if the debtor defaults so a creditor must seek payment from the principal debtor before approaching the guarantor |
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What is a guarantor of collectibility |
A person who promises to pay the obligation of the debtor only if the creditor is unable to collect from the debtor after exhausting all legal remedies |
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What is a gratuitous or uncompensated surety |
A person who is not paid to make the promise to become liable on the debtors obligation. Gratuitous surety is a favorite of the law and is discharged from his undertaking if the creditor does anything that varies the risk that the surety already agreed to assume |
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What is a Compensated surety |
Surety who is paid to make the promise to become liable on the debtors obligation. Compensated surety is discharged only if the creditor varies his risk and the variation result in injury to the compensated surety. Some courts say that compensated sureties can only be discharged to the extent of their injury |
Do most common law contract rules apply to surety |
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Do contract law rules apply to suretyship |
Yes |
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Is a sureties promise enforceable without consideration consideration |
No, in a compensated surety situation the consideration that’s what’s giving in exchange for the sureties promise, and a gratuitous surety situation the only consideration given for the sureties promise is the creditors promise or performance to the debtor |
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When is the gratuitous sureties promise generally made |
It generally must be given before or at the same time the creditor performs or promises to perform in order to serve as consideration |
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Is there a situation where a sureties promise becomes unenforceable |
The sureties promise may be unenforceable if it is made after the creditor has performed or made an absolute promise to perform because there is no consideration to support the sureties promise due to the pre-existing duty rule |
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Under what conditions will a surety’s promises still be found enforceable after the performance of the creditor |
If the agreement between the principal & the creditor makes obtaining a surety a condition precedent to the creditors performance & the creditor performs in reliance on the surety’s promise or if the creditor gives additional consideration in exchange for the surety’s promise |
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Does a suretyship promise have to be in writing |
Generally yes in order to be enforceable |
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Is a promise that is not collateral to another persons promise to pay suretyship bound by the statute of frauds |
No if the promise is not collateral to another person’s promise to pay in words a third parties promise to pay it’s not a suretyship and it’s not bound by the statute of frauds of frauds |
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How is a gratuitous surety promise construed |
It is strictly construed against the creditor |
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How are compensated or commercial surety contracts interpreted |
Like any other contract and for commercial surety contracts ambiguous language will be strictly construed against the surety |
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May the circumstances be considered relevant in interpreting the terms of the contract between the principal and the obligee |
Yes this is kind of obvious and also very much so what |
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How is the contract construed when a surety signs as an apparent principal |
A surety who signs a writing as an apparent principal is entitled to the rights of a surety only against those persons who know she is signing as a surety |
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What are the sureties rights against the principal |
The surety has a right of indemnity or reimbursement by the principal. The giving of another non-negotiable note is not payment. Upon payment the statute of limitations on the sureties right to reimburse begins to run |
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What’s the rule of pain versus Packard |
Pain v. Packard, 13 Johns. 174. And see People v. Jansen, 7 id. 336. In Herrick v. Borst, 4 Hill (N. Y.), 650, it was held, that although the creditor neglected to prosecute the principal after a request by the surety, this will not discharge the surety, if the principal was then insolvent. And the surety, in order to establish a defence of this kind, must show clearly that at the time the request was made, the debt could have been collected of the principal. |
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Can a surety bring a suit in equity to compel the principal to perform an obligation when it fails do so. In other words sue for exoneration |
Yes by statute the surety by written notice may require the creditor to sue the principal first and if the creditor refuses or fails to act within 30 days of the notice the surety is discharged |
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What is subrogation |
Once the surety has fully paid the creditor the surety can enforce any rights the creditor had against the principal |
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What is exoneration |
It’s a suit in equity to compel other sureties to pay their pro rata share |
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What is contribution in surety |
A surety who pays the principals debt is entitled to a prorated share from the co-sureties who are liable on the same obligation and who are solvent and within the jurisdiction of the equity court. |
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If the statute of limitations has run on a creditors claims against the principal & other cosureties does it affect the right of contribution |
No |
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If one surety receives security from the principal does he have to share it with the other coach sureties |
Yes |
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If a principal owes several debts to a creditor, does the creditor need to relieve the surety unless the principal instructs |
No |
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If there’s no direction on which debt to apply the surety payment can the creditor apply the payment to discharge any debt owed by the principal |
Yes |
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What are the defenses the personal defenses of the principle that are not available to a surety |
Infancy, lunacy, ultra vires , discharge in bankruptcy, statute of limitations as to the principal obligation. |
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What are the defenses that are generally available to the surety |
Fraud, duress, breach of contract by the creditor, Usery, forgery, payment of debt by the principal, release given by the creditor to the principal, subsequent acts by the creditor that prejudiced the surety, such as discharge of another surety, And adjudication by a competent court that the principal is not liable for the debt |
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Under which circumstances is a surety not liable for fraud or duress on the principal |
A surety is not liable if the principles promise is the result of fraud or duress of which the surety is not aware |
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Is a surety liable if the principal fraudulently induces someone to act as a surety |
The surety is still liable unless the creditor was party to the fraud |
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If the creditor fails to take some action and causes a loss of security is a surety still liable |
The surety is discharged to the extent of the value of the security lost |
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If the principal gives the Creditor collateral and the creditor releases all or part of the collateral, IS the surety discharged to the extent of the value of the collateral released |
Yes |
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If the creditor gives a binding extension of time to the principal what’s the effect on the surety |
The surety is discharged |
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If the creditor gives the principal an extension of time and reserves rights in the surety is the surety still discharged |
No |
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If the principal has defaulted on a contract with the creditor before inducing someone to act as a surety on the contract is the surety discharged from liability to the creditor if the creditor knew of the prior default and the surety did not know |
Yes under this condition the surety is discharged from liability because the surety was essentially tricked into the agreement |
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under what conditions are uncompensated sureties discharged |
Uncompensated sureties are discharged if there’s any modification of the contract. |
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Under what conditions are compensated sureties discharged from the contract after changes |
Compensated sureties or discharged only if there is a material change in the contract a minor deviation from the original contract does not affect the risk |
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When can the creditors Sue |
At maturity of the debt the creditor can sue either the principal or the surety. A judgment against the principal is generally considered prima facie evidence of the creditors claim for the amount of the judgment against the surety |
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What is the rule of surety in a construction contract |
Materialman’s and laborers can all recover from the surety if the principal contractor defaults |
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Are there any exceptions to the sureties basic liability |
Only where there is express language that limits the liability of a surety in that case the language will prevail at least in the construction bond context |
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Can a surety use fraud as a defense |
Yes the surety is not liable if the debt was fraudulently obtain |
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Can a surety use fraud as a defense |
Yes the surety is not liable if the debt was fraudulently obtain |
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Can a surety use duress as a defense |
Yes the surety was not liable if that was obtained under duress |
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Can a surety use infancy as a defense |
No the surety is liable even if the debtor was under 18 when the loan was made |
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Can a surety use insanity as a defense |
No a surety is liable even if the debtor was insane when the loan was made |
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Can a surety use bankruptcy as a defense |
No a surety is liable even if the debtor is bankrupt when the debt is due |
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Is the risk of a surety decreased if the contract is modified without the sureties consent |
Yes |
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Is the sureties risk reduced if there is an extension of time on the contract |
Yes the risk is reduced if the creditor gives a binding extension without the sureties consent consent |
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When a debtor defaults can the surety bring a suit in equity to compel the principal to pay |
Yes |
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Does the surety have a right of reimbursement after any payment made by the surety to the creditor |
Yes |
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Does a surety have a right of subrogation if the surety pays the entire amount due |
Yes the surety has the right to use creditors rights to recover |
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