SURETYSHIP PROFESSOR KARA BRUCE UNIVERSITY OF TOLEDO COLLEGE OF LAW

Transcription

1 SURETYSHIP PROFESSOR KARA BRUCE UNIVERSITY OF TOLEDO COLLEGE OF LAW CHAPTER 1: INTRODUCTION TO SURETYSHIP A. Suretyship Defined the prmise f a persn t pay the debts (r satisfy the ) f anther. B. Picturing a Guaranty r Suretyship Relatinship Creditr (Obligee) Debtr (Principal Obligr) Surety r Guarantr (Secndary Obligr) A creditr r is wed a debt r perfrmance f an bligatin by the debtr. A debtr r wes the debt r perfrmance t the creditr. A surety r (cllectively, secndary bligr) prmises t satisfy the debtr's bligatin, but has the right t recver frm the debtr/principal bligr if the surety must pay. Example 1: A landwner hires a cnstructin cmpany t build a building. The landwner requests that the cntractr btain a perfrmance bnd frm a surety cmpany t ensure that the cnstructin bligatins will be perfrmed. The surety cmpany issues the bnd. The landwner is the bligee (because the landwner is wed perfrmance f cntracting services). The cntractr is the principal bligr. The surety cmpany is the surety r secndary bligr. C. Sureties and Guaranties Defined 1. Surety agrees t be liable fr the bligatin. Example 2: Huey has just graduated frm cllege, and wants t buy a new car. Because he has a limited credit histry, Dealer will nly sell the car if Huey gets a surety. Huey's uncle, Scrge McDuck, signs an agreement t be Huey's surety. Dealer can request nrmal payments frm Scrge, even if Huey has the ability t pay r has been paying.

2 2. Guarantr agrees t be liable fr the bligatin and is liable n default. Example 3: Dewey has pened a restaurant and needs a bank lan t finance his peratins. Bank is willing t lan Dewey the mney if he has a guarantr. Uncle Scrge signs a guaranty agreement that hlds Scrge persnally liable nly in the event f a default. If Dewey defaults n the lan (and nt befre), Scrge will be liable. After default, Bank can prceed against Scrge befre prceeding against Dewey. Guaranty f cllectability Mre limited than a traditinal guaranty (i.e., a guaranty f ) Requires the creditr t exhaust against the debtr befre the guarantr is liable. Example 4: Same facts as abve, except Uncle Scrge signs a guaranty f cllectability. Befre Bank can enfrce Scrge's bligatin as guarantr, Bank must first diligently assert its legal rights against Dewey (e.g., by suing Dewey t recver the amunts due). 3. Accmmdatin Party a secndary bligr wh signs a. Accmmdatin parties are subject t detailed rules under Article 3 f the UCC. (See yur Cmmercial Paper utline fr mre details.) D. Creating and Interpreting the Suretyship Relatinship Suretyship is a matter f cntract. 1. Cnsideratin Generally, the cnsideratin given fr the debtr's bligatin will be sufficient fr the surety. cnsideratin is nt necessary. Sureties wh d nt receive separate cmpensatin are called " sureties." Example 5: Bank has agreed t lend Dewey mney t start a restaurant, prvided he btains a surety. Uncle Scrge agrees t act as surety. Cnsideratin is present, because Scrge's prmise is designed induce Bank t lend mney t Dewey, and Bank, as the lender, agrees t lend mney t Dewey, in part, based n Scrge's agreement t serve as surety. Example 6: Assume instead that [Bank] has already leant the mney t Dewey. Scrge then signs an agreement binding himself t act as Dewey's surety. Unless the prmise t lend was based n the cnditin f suretyship, r unless Scrge receives separate cnsideratin, Scrge's secndary bligatin is unenfrceable fr lack f cnsideratin Themis Bar Review, LLC IL Suretyship

3 Sureties can be cmpensated by direct cnsideratin, such as a direct payment f mney. These sureties (ften insurers) are called " sureties" and are treated a bit differently frm gratuitus sureties. 2. Capacity if yu have the legal capacity t cntract, yu can becme a surety. 3. Statute f Frauds The Statute f Frauds applies t suretyship relatinships. Thus, the prmise t pay the debt f anther must generally be in and by the surety. Main purpse exceptin if the surety's main purpse fr serving as a surety r guarantr is his wn direct financial gain r business advantage, the agreement des nt have t be in writing. Example 7: Scrge rally guarantees payment f Luie's law schl expenses, believing that Luie will cme t wrk fr Scrge's business when he graduates. This agreement is likely unenfrceable under the Statute f Frauds. The main purpse exceptin is likely nt satisfied because Scrge's purpse is t remte. Example 8: Owen is a landwner wh is building cmmercial real estate. Sally is Owen's general cntractr. Owen has taken ut a lan but needs additinal financing. Bank agrees t allw fr additinal financing if Owen can get a surety. Sally realizes that Owen will nt be able t pay her if he des nt get the financing. Sally rally agrees t serve as a surety. Because Sally agrees t act as surety fr her wn financial gain, the main purpse exceptin t the Statute f Frauds is likely satisfied. 4. Cntract Interpretatin Gratuitus sureties are f the law; any ambiguity in the cntract language will be cnstrued t their benefit. Cmpensated sureties get fting with ther creditrs. CHAPTER 2: RIGHTS AND DEFENSES OF THE SECONDARY OBLIGOR A. Framewrk fr Appraching Suretyship Issues Step 1: Is there a surety/secndary bligr? What is her bligatin? [Chapter 1] Step 2: Can the surety/secndary bligr avid her bligatin t pay (in full r in part)? [Chapter 2] Step 3: If the surety/secndary bligr must pay, what next? (reimbursement, cntributin) [Chapter 2] IL Suretyship 2016 Themis Bar Review, LLC 3

4 B. The Surety's Rights Against the Creditr/Obligee Befre the surety perfrms, the surety can smetimes demand that the creditr seek payment directly frm the. The requirements are (mnemnic: WIReD): The demand must be in writing; The principal debtr is likely t becme inslvent r remve himself frm the state; and A right f actin has n the cntract (i.e., the bligatin is due). If the creditr des nt sue the principal debtr within a reasnable time, the secndary bligr is. Befre the surety perfrms, the surety can als demand that the creditr prceed against any r ther security held fr the debt. The requirements are (mnemnic: Cffee Rasters Unite!): The surety will nt be reimbursed by the principal debtr; and Requiring the creditr t enfrce is nt unreasnable. C. The Surety's Rights Against the Debtr/Principal (mnemnic: Exercise Regularly, Students!) Exneratin befre the surety perfrms, the surety may bring suit against the principal debtr t cmpel the principal t perfrm. Reimbursement after the surety perfrms, the surety may demand reimbursement frm the principal fr any amunt (including ) that the surety paid t the creditr. Subrgatin after the surety perfrms, the surety steps int the creditr's shes and may enfrce any that the creditr may have against the principal. Example 9: Scrge is a surety fr Huey's car lan. Dealer has als taken an Article 9 security interest in the car t secure repayment f the price. Befre Scrge pays, he has the right t exneratin and can file suit t cmpel [Huey] t perfrm. After Scrge pays the debt, Scrge has the right t seek reimbursement frm Huey. Scrge is als subrgated t Dealer's security interest in the car, and can enfrce Dealer's interest by repssessing and selling the car pursuant t Article 9 f the UCC. D. Surety's Rights against C-Secndary Obligrs (mnemnic: Eat Ckies, Students!) In general, tw r mre secndary bligrs n the same debt hld liability. Exneratin befre the surety perfrms, a surety can exercise exneratin rights t cmpel the c-sureties t pay their shares f the debt. Cntributin after the surety perfrms, she can receive cntributin frm ther c-sureties Themis Bar Review, LLC IL Suretyship

5 Example 10: Huey, Dewey, and Luie agreed t act as c-sureties n Daisy's $10,000 car lan. Daisy defaults, making n payments, and Luie pays $10,000 t the creditr. Huey and Dewey will we Luie cntributin f $3, each. Subrgatin after the surety perfrms, the surety is subrgated t the creditr's rights and, stepping int the shes f the creditr, may seek payment frm c-sureties (including enfrcing any ) t recver their pr-rata shares. E. The Surety's Defenses 1. Raising Defenses f the Principal/Debtr Sureties may raise mst f the defenses f the principal, n the thery that the surety is nt liable unless the principal is liable; sme cmmn defenses include: Fraud n the principal debtr by the creditr Duress f the principal debtr by the creditr f the principal debtr's signature Failure f perfrmance by the creditr Impssibility f perfrmance by the principal debtr f the subject matter f the debt Payment r perfrmance by the principal debtr Release f the debt by the creditr Exceptins there are sme defenses f the principal, namely thse f a nature, that the surety may nt advance: Incmpetency, incapacity, r minrity f the principal debtr Discharge f the principal debtr in bankruptcy 2. Raising the Surety's Own Defenses Sureties may have their wn cntract-based defenses (e.g., minrity, incapacity, r incmpetency). Exceptin if the surety has been induced t enter the suretyship agreement by fraud, duress, r, the surety cannt assert these defenses against an inncent creditr. 3. Discharge thrugh Alteratin f Risk Sureties als have special defenses that will discharge their bligatin as sureties in many situatins. If the principal debtr and the creditr make changes t the cntract withut the f the surety, and thse changes affect the surety's bligatin, the surety will frequently be discharged. Gratuitus sureties are mre easily discharged than cmpensated sureties. IL Suretyship 2016 Themis Bar Review, LLC 5

6 If the surety is an party, different rules apply. See yur Cmmercial Paper utline ("Discharge f Indrsers and Accmmdatin Parties") fr details. These rights can be. a. Cntract mdificatin: If the principal debtr and creditr make a material mdificatin f the riginal cntract withut the cnsent f the surety, then: Gratuitus sureties are discharged by any mdificatins that ccur withut the surety's cnsent. Cmpensated sureties are discharged nly when the mdificatin increases their risk f lss r actually causes a lss. b. Extensin f payment: If the principal debtr and creditr enter int a binding agreement t extend the time f payment, the surety will be discharged. Example 11: Scrge is an uncmpensated surety fr Huey's car lan. Huey is having truble making payments n the lan, and Huey and Dealer wrk ut a deal where Huey will nt have t pay anything n the lan fr six mnths, in exchange fr a 1% increase in the interest rate. The extensin f payment and mdificatin f the cntract will discharge Scrge. c. Impairment f cllateral: If the creditr des anything that impairs the value f the cllateral held t ensure the principal's perfrmance withut the surety's cnsent, the secndary bligr will be discharged r the bligatin reduced t the extent f the impairment. Example 12: Scrge is a surety fr Huey's car lan. Dealer has als taken an Article 9 security interest in the car t secure repayment f the price. Dealer, hwever, fails t perfect its security interest in the car. By failing t perfect its security interest, Dealer has impaired the cllateral. Scrge will be discharged t the extent f the [impairment]. 4. Failure t cllect payment: If the creditr fails t accept a valid f payment by the debtr, the surety's bligatins are discharged. 5. Estate Claims: If the creditr des nt, within mnths, enfrce a claim against the estate f the debtr, the secndary bligr is discharged t the extent its liability wuld have been reduced if the claim had been prperly pursued. Example 13: Luie has passed away. Scrge is Luie's surety fr $10,000. If Luie's estate culd have paid $6,000 f Luie's debt, but the bank did nt make a claim n the estate fr six mnths, then Scrge is released as t $6,000. He remains liable fr the $4,000 that the estate wuld nt have paid. [END OF HANDOUT] Themis Bar Review, LLC IL Suretyship