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Definition and Types
- Suretyship K = K where one (surety) assumes the debt of another (debtor)
- Actors: Debtor, Creditor, and Surety
Compensated and Gratuitous Sureties
- Sureties can be compensated (commercial) or gratuitous.
- Commercial and current gratuitous (surety and debtor sign at the same time) sureties are enforceable because there’s consideration that induced the creditor to make the loan.
- Non-current gratuitous sureties are not enforceable unless it is a negotiable instrument
Types of Surety Liability
- Surety liability can be primary obligation (S signs on front and is just as liable as debtor), guarantor of payment (S signs on back as an insurer: secondary
- liability where S pays if debtor defaults), or guarantor of collectability (S writes that he guarantees collection only: C must sue D and not be able to collect. S is a guarantor of last resort).
Statute of Frauds
Unless the suretyship’s main purpose is to benefit S, it must be in writing to satisfy SoF regardless of the amount.
Arising by operation of law (constructive suretyship)
A constructive suretyship arises by operationof law when a TP contracts with debtor to pay C, and there is no novation (where TP replaces D in the contract).
Rights of Surety
- Surety’s rights against creditor: S has no right to notice of D’s default.
- S can’t force C to use collateral before suing S.
- S can’t force C to apply D’s payment to the loan S guaranteed.
- In Va, S has the right to force C to join D in suit against S, but not for the multistate
Rights Agains Debtor
Surety’s rights against debtor: S has the right to compel D to pay. If S makes some payment, he has the right to reimbursement or indemnification. If S pays the entire debt, he has the right to subrogation, and he has creditors’ rights against D.
Rights Against Co-sureties
- Exoneration: right to compel payment of fair share
- Contribution: triggered by co-surety paying more than its share
- Subrogation: triggered by co-surety paying obligation in full
Rights Against Debtor vs. Co-Surety
- Exoneration ---------------------- Exoneration
- Reimbursement/Indemnification --- Contribution
- Subrogation ---------------------- Subrogation
Defenses of Surety
Other than fraud/duress, S cannot benefit from D’s defenses. If C defrauded D, S is off the hook. But S cannot use other defenses that D was insane, a minor, or bankrupt because the whole point of suretyship is to guard C from these possibilities
Variation of Risk
- S can use variation of risk defenses: modification of contract, extension of time, release of co-surety, release of collateral, and impairment of collateral totally discharge a gratuitous surety, and compensated sureties are discharged to the extent they accrue losses due to variation in risk
- Answer turns on whether surety is gratuitous or not; gratuitous = discharged; compensated = discharged pro tanto (bound except to extent it suffers a loss due to the variation of risk)