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Suretyships
Bar review
30
Law
Graduate
07/07/2013

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Term
Surety/Guarantor:
Definition
3rd party co-signer.
Term
any suretyship relationship requires:
Definition
underlying loan + a loan contract
Term
main parties
Definition
creditor
debtor (principal debtor or obligor)
surety
Term
difference between surety and guaranty
Definition
surety is primarily liable for the debtor's debt, while guarantor is only secondarily liable for the debtor's debt.
Term
primary liability on the debt:
Definition
Creditor can immediately go after the surety if debtor doesn't pay.
Term
secondary liability on the debt:
Definition
Creditor cannot go after guarantor until debtor defaults. (Some states also require there to be a default judgment entered!)
Term
In IL, what's the distinction?
Definition
very little distinction; just a question of when you can send the bills.
Term
special guarantee of collectability:
Definition
shifts guarantor relationship from the background (the IL default), and even in IL, judgment can only be sought from the guarantor after a default judgment has been entered by teh courts.
Term
a suretyship creates:
Definition
an assurance that the third party will be primarily liable for the debts of the principal debtor
Term
a guaranty creates:
Definition
a guarantee that the third party will be secondarily liable for the debts of the principal debtor (only if they default).
Term
Debtor:
Definition
entity that owes the primary debt.
Term
surety:
Definition
party that agrees to be primarily liable for another's debts.
Term
guarantor:
Definition
party that agrees to be secondarily liable for another's debts (only if they default)
Term
difference between guaranty and surety in illinois is small because...
Definition
there are two approaches to guarantees: where they can be held liable as soon as the debtor stops paying, OR they can be held liable only when a default judgment is entered against them.

Most states choose the second option, but Illinois chooses the first option, resulting in nominal difference from a surety.
Term
In order for there to be a suretyship relationship, thre has to be...
Definition
consideration!

that's because we're in the realm on contract law.
underlying loan is generally enough for suretyship.
Term
independent surety
Definition
surety is compensated (insurance companies)
Term
gratuitous surety
Definition
surety is not compensated (grautuitous cosigning, like family members)
Term
ambiguous clauses in surety clauses are interpreted differently depending on whether it is compensated or not:
Definition
independent surety: contract is interpreted neutrally ("no finger on the scales")

gratuitous surety: contract is interpreted in favor of the surety. ambiguous clauses are resolved in favor of the surety and against the creditor.
Term
Statute of Frauds:
Definition
Generally, SoF applies to sureties~!!!

Exception: Main purpose exception: SoF does not apply if the main purpose of the surety acting as a surety is the surety's financial benefit, then the SoF is waived.

Ex:Builder runs out of money. Contractor working for Builder co-signs on Builder's loan, because without it, Contractor won't get paid.
Term
Surety can force a creditor to sue a director if one of the following things are true:
Definition
Either of the following....
the debtor is in danger of insolvency. OR...
the debtor is about to leave illinois.

AND

The debtor has in some way defaulted on the loan agreement.
Term
Cause of action for reimbursement or indemnification:
Definition
Surety has had to pay, and so they bring an action against the debtor.
Term
exoneration:
Definition
surety tries to force the debtor to pay so that the surety doesn't have to.
Term
subrogation:
Definition
surety is trying to get paid back from the debtor, and surety gets to step into the shoes fo the creditor.
Term
capacity required to perform as surety:
Definition
same as required for making a contract.
Term
Surety CoA's against debtor only have practical value if...
Definition
the debtor has assets (if they COULD pay, but aren't. that's not a very likely scenario though, is it).
Term
If one co-surety sues another co-surety...
Definition
they can only recover the amount that the co-surety is liable for!
Term
surety defenses:
Definition
primarily just contract defenses!!

Duress
Fraud
Forgery
Creditor fails to perform (no loan disbursed)
Creditor finds it impossible to perform.
Incapacity (only defense principal to surety himself! if surety is incompetent, can't be held liable).
If debtor performs.
If creditor releases debtor.
Term
WHat happens if debtor and creditor agree to change terms of contract?
Definition
Compensated surety: if debtor and creditor change terms of loan, then the compensated surety is still liable, but only up to the amount they originally agreed to.

uncompensated surety: changing the terms of the underlying loan releases the gratuitous surety from any obligation
Term
What happens if debtor and creditor agree to increase the payment schedule?
Definition
C/L: that let the surety off the hook.
UCC: surety's obligation is held at the same risk level as the original contract.
Term
What happens if creditor damages or releases some of the security?
Definition
The surety is released for the portion of that security interest.
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