7.1 Suretyship, Guarantors, and Debtor-Creditor Rights

7.1 Suretyship, Guarantors, and Debtor-Creditor Rights

REG Blueprint Area II, Group C tests the rights, duties, and liabilities of debtors, creditors, and guarantors. Bankruptcy types and discharge live in 9.1 Bankruptcy Types and Discharge. This section is the state-law relationship: who promised to pay, what defenses that person has, and what a creditor can do without filing a bankruptcy petition.

Surety versus guarantor

A surety promises the creditor that the principal debtor's obligation will be performed. Traditionally a surety is primarily liable — the creditor may proceed against the surety as soon as the debt is due, without first suing the debtor. A guarantor is secondarily liable — the creditor must look to the debtor first. A guarantor of collection is the strictest form: the creditor must exhaust remedies against the principal (and often show the debt is uncollectible) before charging the guarantor.

REG usually treats sureties and guarantors together as persons who answer for the debt of another. Draw the distinction when it changes the answer: (1) whether the creditor had to pursue the debtor first, and (2) whether the statute of frauds suretyship provision applies. A promise to answer for the debt of another generally must be in a writing signed by the party to be charged — the S in MYLEGS, covered with formation in 6.1 Contract Formation. An original promise (the promisor is buying for themselves) is not a suretyship promise. The main-purpose (leading-object) exception takes the promise out of the statute when the promisor's primary object is to secure a personal economic benefit, not merely to accommodate the debtor. "I'll pay Supplier if you keep shipping steel to my subsidiary, because I need that steel in my own plant" can be an original, enforceable oral promise. "I'll cover my nephew's loan if he defaults" is suretyship and needs a writing.

Formation and consideration

The surety's contract is with the creditor. The principal's contract is the underlying debt.

• Compensated surety. A bonding company or other surety paid a premium. The fee is consideration. A compensated surety can bind itself after the principal debt already exists, because the premium (or the creditor's forbearance bargained for the bond) is new value.
• Gratuitous surety. No fee. The promise must be made before or at the same time the creditor extends credit. If the loan is already outstanding and an unpaid friend later says "I'll guarantee it," there is no consideration unless the creditor gives something new: additional funds, an extension of time, or a binding forbearance.

A writing that satisfies the statute of frauds does not supply missing consideration. Signature plus contemporaneous credit, or signature plus a premium, is the exam pattern.

Defenses of the surety

The surety may use real defenses that go to the existence of the debt or to the surety's own assent, and suretyship defenses created by the creditor's later conduct. The surety generally may not use the principal's personal defenses.

That last pair is the highest-yield trap on REG. Bankruptcy and infancy are why the creditor insisted on a surety.

Rights of the surety

Four labels, two timelines:

Before the surety pays — exoneration. The surety may obtain a decree compelling the principal to perform (pay the creditor) so the surety is not called. Exoneration is not a suit for money the surety has already laid out.

After the surety pays:

1. Subrogation. The surety steps into the creditor's shoes and takes the creditor's rights: the claim, any security interest, any priority, any judgment. Subrogation is how a paying surety gets the bank's Article 9 collateral — the next section, 7.2 UCC Article 9.
2. Reimbursement (indemnification). The surety has a personal claim against the principal for the amount properly paid.
3. Contribution. Among cosureties, each is liable for a pro rata share based on their maximum potential liability (unless they agreed otherwise). A surety who pays more than that share recovers the excess from the others. If a cosurety is insolvent, the remaining sureties absorb that share in the same proportions.

Exoneration, subrogation, reimbursement, and contribution are rights against the principal and cosureties, not defenses against the creditor. The creditor who has a solvent surety may collect the full debt from that surety and leave the sureties to sort contribution among themselves.

Worked scenario: two cosureties, one pays the full debt

Facts. Lender is owed $90,000 by Builder. Aunt and BondCo are cosureties on the same debt. Aunt's instrument caps her liability at $90,000; BondCo's bond caps at $90,000. They did not agree to unequal shares. Builder defaults. Aunt pays Lender $90,000. BondCo pays nothing. Builder still holds $20,000 of unencumbered equipment.

Analysis.

1. Aunt, having paid, is subrogated to Lender's rights, including any security and the claim against Builder, and has reimbursement against Builder for $90,000.
2. Contribution: equal maximums, so each owes half. Aunt recovers $45,000 from BondCo. BondCo then has reimbursement against Builder for that $45,000. Aunt does not keep both a full $90,000 from Builder and $45,000 from BondCo; contribution and reimbursement are accounted so there is no double recovery.
3. If BondCo's cap had been $30,000 and Aunt's $90,000, the denominator is $120,000. BondCo's share of the $90,000 paid would be (30/120) times $90,000, or $22,500, not $45,000. Always use maximum liability, not "they both signed."
4. If Lender had released BondCo without Aunt's consent, Aunt would be discharged to the extent of BondCo's contribution share ($45,000 on the equal-cap facts) and would remain liable for $45,000.
5. Builder's later bankruptcy would not have been Aunt's defense had she not paid. Discharge of the principal in a federal case is a chapter 9 issue, not a suretyship defense against the creditor.

Creditor remedies (teaching level)

An unsecured creditor has a personal claim and, without a judgment or a consensual lien, no interest in particular property. State-law collection tools:

• Attachment. A court-ordered seizure of the debtor's property to secure a claim. Prejudgment attachment is extraordinary: the creditor typically must show a risk of concealment or flight and often post a bond. Postjudgment levy and execution are the ordinary way a winning creditor reaches assets.
• Garnishment. Reaches property of the debtor in a third party's hands — wages, a bank account, an account receivable. Prejudgment garnishment is similarly constrained; postjudgment garnishment is routine after judgment.
• Execution / levy. Postjudgment seizure and sale of the debtor's nonexempt property.

REG will not ask you to plead a state attachment statute. It will ask whether the creditor already has a judgment, whether the target is in a third party's hands (garnishment) or the debtor's (attachment/execution), and whether a secured creditor is instead using Article 9 repossession (7.2) rather than a judicial writ.

Composition versus assignment for the benefit of creditors

These are state-law alternatives to bankruptcy. Do not import the Bankruptcy Code's chapter structure, trustee avoiding powers, or priority waterfall here.

A composition is a contract (each participating creditor's agreement to take less is consideration for the others). An ABC is a transfer of property. Neither one is a Chapter 7, 11, or 13 case. If the item names a petition, an automatic stay, or a discharge in a federal court, go to 9.1.

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