- Suretyship involves a third party that agrees to pay the obligation of another

- Parties are Debtor and Surety

- Uncompensated Surety - a family member or friend who does not directly benefit from the transaction and only does it as an accommodation

- Compensated Surety - A person who is in the business of executing surety contracts and these professionals occur in different contexts; 1) construction bonds; 2) judicial bonds; 3) official bonds

Designed to pick up the liability of the surety if the principal defaults

- The key difference between a suretyship and a guaranty is whether the obligee can seek remedies against either party from the onset, or must go after one party first before attempting to go after the other

- Guaranty relationships has an exhaustion requirement

- For a suretyship, there is generally no exhaustion requirement

- “Guaranty of payment” does not require the principal’s insolvency, but the surety’s liability is conditioned on the failure of the creditor to collect on the principal

- The obligation of an indemnitor to make good on the loss or damage incurred by the indemitee

- This is used to distinguish between indemnity and suretyship – indemnification is typically two parties and in an agency relationship where suretyship is usually 3 parties

1.  Contract: A suretyship obligation may arise where: the surety entered into a relationship with either the debtor or the creditor by agreeing by contract to guarantee the obligation of the debtor

2. Pledge or Mortgage: A person who pledges or mortgages specific property that he owns as security for another’s debt is surety to the extent of the interest in that property

3. Assumption of Debt: A suretyship also arises where: a surety promises a debtor that it will assume and pay a debt owed to a creditor without a novation taking place

4. Accommodation Indorsement: An accommodation endorsement is a surety who is uncompensated and does not directly benefit from the underlying transaction, they are merely accommodating the transaction for another party

Similarities to Contracts

1. As with a contract, a surety requires capacity to contract and must not be subjected fraud, misrepresentation or duress

a. Capacity: The capacity to enter into the contractual relationship: also merits capacity to be a surety

b. As a separate rule under the Illinois Statute of Frauds, there is a requirement that a guarantee of a person to guarantee the debt of another must be in writing – this is independent of the writing of the actual borrowing of money and promise to pay between the debtor and creditor

1. The surety has rights and remedies derived from its suretyship status to ensure that the principal obligor: ultimately bear the cost of fulfilling the obligation to the creditor

2. If the principal is on notice of the existence of the surety: that surety is entitled to the present right to the principal’s performance, not merely a cause of action for the principal’s failure to perform

a. This provides the surety the positive remedy to: go into court and compel the principal obligor’s performance

b. This is otherwise known as the surety’s right of exoneration.

3. When the surety is required to pay the principal’s obligation to the creditor, the surety has rights to: recover from the principal obligor the amounts expended by subrogation, reimbursement, or restitution

1. The right of the surety to be substituted in the position or step into the shoes of the creditor to enforce the creditor’s rights of the obligor

(a) Important distinction: the surety is not subject to any defenses to which the creditor was not subject

i. One reason this is important is because there may be waiver of defense claims in promissory note

(b) Rule to avoid situations where the creditor and surety sue the principal obligor simultaneously: there is no partial subrogation on partial payment

1. If the surety pays the obligation on behalf of the debtor: the creditor is paid and the creditor is out of the question and there is a direct right of reimbursement that accrues by the surety

a. Even if the surety is denied the ability to seek subrogation, the surety will nonetheless have: rights against any collateral securing the obligation to the surety

b. The principal has no duty to reimburse the surety:

Where there is unjust enrichment of the debtor by the surety, then there will be independent restitution responsibility

1. Priority

a. The common law does not require that the creditor: proceed to judgment against the debtor before requiring payment from the surety

b. There is a rule in Illinois regarding situations where the surety believes that the principal obligor is likely to become:

i. Insolvent; or

ii. Leave the state without paying The relationship between multiple sureties may be:

a. Co-suretyship: the assumed relationship between multiple sureties is they share the right of surety law proportionate to the amount that either would have to pay or that they are obligated to pay under suretyship law

i. This means that co-sureties are granted the right to: seek contribution from the other surety to the extent that the first surety had to pay more than its own proportionate obligation

b. Subsuretyship: one surety is entitled to 100% of reimbursement from a primary surety for any payment made

Defenses of the principal obligor that the surety may raise:

(1) Fraud and duress of which the surety was unaware

(2) Illegality of enforcement

Defenses of the principal that the surety may not raise:

(1) Principal’s lack of capacity

(2) Principal’s discharge in bankruptcy

- Discharge of the obligation of the principal: discharges the surety

Examples:

1. Payment or performance by the principal

2. Release of the principal

3. Payment or performance by the surety

4. Discharge in bankruptcy

(a) Discharge of the underlying obligation in the principal obligor’s bankruptcy proceedings does not discharge the surety

- The surety may be discharged by acts of the creditor that increase risk to the surety when the creditor is aware of the existence of the surety

- Creditor may impair surety's status by:

1. Impairment of Collateral: surety discharged to extent impairment increases surety’s loss; failure to perfect

2.

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