when a creditor has a right to enforce a debtor's obligation against a third person
How many parties are involved in a suretyship?
What are the parties in a suretyship?
What is a creditor also known as?
What is a debtor also known as?
principal or principal obligor
What is the guarantor/surety also known as?
A suretyship exists in any case in which G or the surety does what?
promises to answer for the debt or obligation of another party, the debtor
Are most of the rules of suretyship equally applicable to both guarantors and sureties?
Unless the guarantee expressly states that the creditor must pursue the debtor before the guarantor, the debtor's default entitles the creditor to do what?
immediately pursue the guarantor
What law typically governs the relationship b/t a debtor and a creditor?
If the debt is a negotiable instrument, what law governs?
UCC Article 3
What law governs the separate relationship b/t the surety or guarantor and the 2 other parties?
What is the general rule regarding the governing law over suretyship relationships?
CL governs the suretyship relationships b/t the guarantor and the creditor and b/t the guarantor and the primary obligor
What 2 factors must be present for the UCC Article 3 to govern the 2 surety relationships?
(1) debt evidenced by negotiable instrument
(2) guarantor signs the negotiable instrument and NOT a separate K of guaranty
When is suretyship law invoked?
when the creditor has K recourse against another person or that person's property to satisfy the debtor's obligation
What are the 2 types of sureties?
What is the liability of a person identified as a surety?
jointly and severally liable with the debtor to perform the same obligation
What are some examples of surety relationships (bonds)?
(1) construction bonds
(2) judicial bonds
(3) official bonds
What is the liability of a person identified as a guarantor?
liable ONLY upon the debtor's default
A creditor may proceed directly against the guarantor upon the debtor's default except in what instance?
the K unambiguously identifies the guarantor as a guarantor of collection
What is required for creditor to go after a guarantor of collection?
(1) default by debtor
(2) creditor attempted to collect from the debtor before attempting to collect from the GoC
If there is a GoC when can the C proceed directly against the GoC w/o default?
(1) execution of judgment against debtor returned unsatisfied
(2) debtor is insolvent or in process of insolvency proceeding
(3) debtor unavailable to be served with process
(4) it is otherwise apparent that payment can't be obtained from the debtor
When does a person become an accommodation party?
by signing a negotiable instrument and NOT a separate K of guaranty
Unless the negotiable instrument unambiguously states that the surety is a GoC, how is the surety treated?
as a co-signor and surety
The UCC eliminates the regular guarantor status in favor of what 2 categories?
(1) jointly and severally liable surety on the note
What is indemnity?
a 2 party relationship where on person has an obligation to reimburse a loss suffered by another
A suretyship obligation is generally in what kind of nature?
Is there a suretyship agreement b/t a surety and creditor with or w/o the debtor's knowledge or consent?
Can a suretyship agreement be found b/t the debtor, surety, & creditor?
Can a suretyship agreement be found b/t a surety and debtor with a creditor as the intended beneficiary of the K?
Can a suretyship agreement be found b/t a debtor and 3P who assumes the debtor's duty to the creditor and becoming the principal obligor with the debtor becoming the surety?
Can a suretyship agreement be found b/t a debtor and 3P whereby the debtor transfers the property subject to SI or mortgage making the debtor the surety and the 3P the debtor?
A person who pledges or mortgages property as security for another's debt is what?
a surety to the extent of the interest in that property
Can a suretyship arise where a 3P assumes the debt or obligation that a debtor owes to a creditor even if there is no novation?
In the assumption of the debt what does the original debtor become?
In the assumption of a debt the third party becomes what?
What is the golden rule of interpreting suretyship agreements?
RTFB - Read the Fucking Bond
Who controls the terms of the offer regarding suretyship?
the person who offers to become a surety
What is the offer in a suretyship agreement?
promise by the surety to enter into a surety X with the creditor
What are the requirements of a surety offer?
must be accepted and supported by separate consideration with regards to the X
Generally, is the consideration supporting the underlying K b/t the debtor and creditor sufficient consideration to bind the surety to the X?
What is the capacity requirement of a surety?
surety must have capacity to K and not subjected to fraud, misrepresentation, or duress
If the surety is subjected to fraud, misrepresentation, or duress what is the result?
the K is voidable by the surety UNLESS the creditor in GF and w/o reason to know about it gives value or relies materially on the secondary obligation
Is a minor's suretyship K voidable?
According to the NC SoF no action may be brought upon any special promise to answer for the debt, default, or miscarriage of another person unless what?
the promise/agreement upon which the action is brought is in writing and signed by the party to be charged
Must the underlying K for the suretyship K be in writing under the SoF?
For a promise to be w/in the SoF, it must be ______ to an obligation of another party for whose default the surety undertakes to be responsible.
What is the main purpose or "leading object" rule?
if the main purpose of the surety promise is to serve the surety's own personal or pecuniary ends and the guarantee of the principal's debt is only incidental, his promise doesn't fall w/in the SoF and need not be in writing to be enforceable
SoF doesn't cover agreements b/t whom?
(1) debtor and surety
Certain rights are implied by the nature of the suretyship agreement, in addition to those created by the express terms of the K or by statute to what extent?
those implied rights are consistent with expressly created rights
How are ambiguities treated in the suretyship agreement?
will be construed against the drafting party and particularly so when the surety is an uncompensated one
A surety has suretyship status in what 3 circumstances?
(1) pursuant to K or bond, the creditor has recourse against the surety or its property with respect to the D's underlying obligation
(2) C is entitled to enforce either the underlying obligation of the D or the S's secondary obligation but NOT both
(3) as b/t the D and S, the D ought to perform the underlying obligation and bear the cost of performance
The surety's obligation is secondary to the D's obligation and is usually conditional on what?
some event(s) occurring before the surety must perform or pay
Is notice to the S of D's default generally required?
When must the C first notify the S of the D's default before going after the S?
(1) agreement requires notice to the S
(2) surety gave an unambiguous GoC
If the surety gave an unambiguous GoC and the C failed to give the S reasonable notice of its inability to collect from the D what is the result?
S will be discharged
When must the C first enforce its SI in any collateral before enforcing the obligation against the S?
(1) condition of S's duty under the terms of the secondary obligation is that the C tried and failed to obtain satisfaction of the underlying obligation; or
(2) C failure to enforce the SI will result in unusual hardship to the S and enforcing the SI won't materially prejudice or burden the C or other beneficiaries of the secondary obligation
If the surety's rights, remedies, and defenses against both the D and C aren't spelled out in the suretyship agreement, where do they come from?
implied from the nature of the suretyship agreement
The S's rights and remedies derived from its suretyship status are there to ensure what?
that the D rather than the S will ultimately bear the cost of fulfilling the obligation to the C
What is the S's most important right?
ability to collect from the D's payments made to the creditor on D's debt
If the D has notice of the S existence, what right does the S have?
to demand the D performance
What is the S right of exoneration?
right to take action against D to compel the D's payment to the C or performance of obligation owed to the C
By what means can a S recover his payments of the D's obligation from the D?
When is subrogation triggered?
upon the S full payment of any outstanding payment still owed to the C
When subrogation occurs, the S is treated as having done what?
stepped into the shoes of the C and may be placed in a priority position from the one it might otherwise have been in
Is there partial subrogation upon partial payment of the D's obligation?
Under subrogation the S acquires all of the C rights and remedies against whom?
(1) D on the underlying obligation
(2) any co-surety for the same underlying obligation
(3) any interest in property securing either the D's or another S obligation
(4) any other person whose conduct has made that person liable to the C for the default on the underlying obligation
When does the right to reimbursement exist?
upon a S partial payment of the D's obligation
Is the right to reimbursment recognized for accommodation parties?
What does the right to reimbursement include?
incidental expenses incurred
When does the D's duty to reimburse the S arise?
at the time for performance of the underlying obligation even if the S's performance occurred before that time
Does the D have a duty to reimburse the S if D is in bankruptcy?
not to the extent that bankruptcy relieves the D of the duty
Does the D have a duty to reimburse the S if the underlying obligation is K and the D lacked capacity to enter into that obligation?
Does the D have a duty to reimburse the S if the D had a defense to the underlying obligation that wasn't available to the S?
Does the D have a duty to reimburse the S if the creditor has released the D on the underlying obligation?
not to the extent that this also discharged the D's duty to reimburse the S
Does the D have a duty to reimburse the S if the S performs despite notice of a defense to its secondary obligation?
not unless the S performance was a reasonable business decision under the circumstances where the S had a business reason to do so
Does the D have a duty to reimburse the S if the S performs despite notice of a defense to the underlying obligation that was available to the S?
When is the S entitled to restitution?
where the S performs its secondary obligation but isn't entitled to reimbursement
When is the D unjustly enriched such that the S is entitled to restitution?
S performance has discharged the underlying obligation and save the D any costs that would have related to the D's performance
Does the CL require the C to proceed to judgment against the D before going after the S for payment?
Under NC law, when can the S require the C to go after the D first?
when the S believes that the D is likely to become insolvent or leave the state w/o discharging its K and a CoA has accrued
What happens if the S demands in writing that the C go after the D first and the C fails to prosecute the action to a final judgment and proceeds to enforce it against the S?
S will be discharged
Will collateral supplied by the D to secure the principal obligation also secure the D's duty to the S?
yes unless otherwise agreed
If a C sues a D, a judgment in favor of the D bars what?
C from asserting a claim against the S to enforce the secondary obligation to the extent of the judgment
When will a judgment in favor of the D not bar the creditor then going after S?
D won based on a defense not available to the S
What does a judgment in favor of the C create?
a rebuttable presumtion of D's liability to C in a subsequent action against the S to enforce the secondary obligation
If there is a judgment in favor of the C, the S may still litigate issues of fact in an attempt to do what?
rebut the presumption favoring the creditor
If the judgment in favor of the C was obtained by default or confession of judgment then that judgment is only evidence of what?
the debt and not entitled to presumption in favor of C
If a C sues the S first, a judgment in favor of the S does what?
has a preclusive effect in any subsequent action brought by C against D - D is off the hook
What is a co-suretyship?
where more than one surety have agreed to share any loss resulting from the D's default on a proportionate basis
In the absence of an express agreement, multiple sureties are generally presumed to be what?
co-sureties and J&S liable for the principal obligation but only in proportion to their original obligation
What are the S's direct defenses?
those relating to the formation of the suretyship K such as fraud on the S by the D or C
When may a S raise derivative defenses?
to enforce the creditor's underlying obligation against the D
Is the S obligated to assure the C of a performance to which the C isn't entitled under its C with the D?
To the extent that the D could raise a defense to the underlying obligation, the S may generally do so even if what?
the D chooses not to assert that defense
What are the D's defenses that may be raised by the S in an enforcement action by a C?
(1) fraud or duress even if the S was unaware of it
(2) illegality or impossiblity of K
(3) nonperformance by C
(4) expiration of SoL on the underlying obligation
What D's defenses may the S not raise?
(1) D lack of capacity
(2) D's discharge in bankruptcy
What defenses may the accommodation party assert against the C or other person entitled to enforce the instrument?
any defense/claim in recoupment that the accommodation party could assert against such person
What acts cause discharge of the principal?
(1) payment/performance of the obligation by the principal
(3) tender of performance by S
(4) discharge in bankruptcy
(5) renunciation of rights
What is the effect of payment or performance of the obligation by the principal?
discharges both the D and S
What is the effect of the C's release of the D?
discharges the C to the extent of the release
When is the S not discharged by the C's release of the D?
(1) terms of the release reserve the S's recourse against the principal
(2) language or circumstances of the release otherwise show the C intent to retain its claim against the S
(3) S consented to the release or waived S defenses
What is the effect if the S tender of performance is unreasonably refused by the C?
discharges the S to the extent the refusal of the tender causes the S a loss
When does the S suffer a loss from refusal of tender?
(1) secondary obligation is interest bearing
(2) ability of D to perform the underlying obligation or reimburse the S diminishes
What is discharged in bankruptcy?
the D's obligation but NOT the S obligation
What is renunciation of rights?
Under Art. 3, a person entitled to enforce an instrument may dischage the obligation of a party to pay the instrument by agreeing not to sue or otherwise renouncing rights against the party in a signed writing
What acts/conduct of the C may discharge to the S?
those that increase the risk to the S to the extent of the increased risk if the C was aware of the S's existence
How may the C act to increase the S risk of loss?
(1) increasing the S potential cost of performance
(2) make a default of the D more likely
How may the C impair S's status?
(1) release of D
(2) impairment of collateral
(3) extension of time
(4) other modifications of the principal K
(5) delay in enforcement
The C release of the D releases the S unless what?
there is a reservation of rights
What happens if the C impairs the value of an SI in the collateral securing the underlying obligation?
the S is discharged to the extent the impairment would cause the S a loss or increase the amount of the S's loss
Impairing the value of a SI in collateral includes such acts as what?
(1) C failed to obtain/maintain perfection or recordation of SI
(2) releasing it w/o substitution or equal collateral or equivalent reduction of obligation
(3) failing to perform duties to preserve collateral
(4) failing to comply with applicable law in disposal of the collateral
What happens if the C grants the D an extension of time for performance w/o the S consent?
the S is discharged as to duties not yet performed to the extent that the extension would otherwise cause the S a loss
Under the modern view if the D and C agree to a modification the S is discharged from any unperformed duties if the modificaiton does what?
imposes a risk on the S that is fundamentally different from those previously imposed
an uncompensated S may be discharged by any change in duties
What is the effect of a dealy in enforcement by C?
may discharge the S to the extent that the C failure to act with reasonable promptness causes the C's inability to collect from the principal
Any of the S defenses can be raised in what 2 instances?