No, not him! Instead, you want to borrow money or obtain goods/ services on credit, i.e., you need...

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Sureties and Accommodation Parties

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Transcript of No, not him! Instead, you want to borrow money or obtain goods/ services on credit, i.e., you need...

Page 1: No, not him! Instead, you want to borrow money or obtain goods/ services on credit, i.e., you need to become a debtor.

Sureties andAccommodation

Parties

Page 2: No, not him! Instead, you want to borrow money or obtain goods/ services on credit, i.e., you need to become a debtor.

The Situation

No, not him!

Instead, you wantto borrow moneyor obtain goods/services on credit,i.e., you need tobecome a debtor.

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Choices available to potential creditor

1. Refuse to grant credit

2. Be happy with promise to pay▪ Promissory note▪ Open account (account receivable)

3. Obtain collateral▪ Real property = mortgage (foreclosure)▪ Personal property = security interest (Article 9)

(repossession)

4. Require surety▪ Promises to pay or perform if debtor doesn’t

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Why would someone be a surety?

Love and affection.

Friendship.

Compensation.

Stupidity (not understanding consequences of what doing)

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Suretyship Arrangement

Principal Debtor Creditor 1. underlying contract

3. Reimbursement2. Surety Contract

Surety

Problem 131, p. 426

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Remedial Rights of Sureties

1. Reimbursement

If surety pays, surety obtains reimbursement from principal.

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Remedial Rights of Sureties

2. Exoneration

Surety’s ability to compel principal to perform at maturity.

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Remedial Rights of Sureties

3. Subrogation

If surety pays creditor, surety obtains whatever rights creditor had (e.g., a security interest in collateral or priority claim in bankruptcy).

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Remedial Rights of Sureties

4. Contribution

Sub-sureties – presumption – recover all from prior surety (for UCC purposes, presumed if in chain of title)

Co-sureties – need express agreement – recover only proportional or agreed share (for UCC purposes, presumed if not in chain of title)

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Remedial Rights of Sureties 5. Strictissimi Juris

Change to underlying agreement discharges surety.

If creditor releases principal or gives binding extension of time, the surety is discharged unless: surety consents, or creditor “reserves rights” against

surety.

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Accommodation

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Liability of Accommodation Party

Liable in capacity in which accommodation party signs, such as:

1. Maker

2. Indorser (name outside chain of title)

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Liability of Accommodation Party

Statute of Frauds irrelevant

State law requirements for other surety contracts do not apply.

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Liability of Accommodation Party

Consideration not needed.

The accommodated party need not receive consideration. It is sufficient that the contract goes through.

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Liability of Accommodation Party

Entitled to reimbursement from accommodated party.

No liability to accommodated party.

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Demonstrating Accommodation Status

1. Anomalous indorsement

An indorsement by a non-holder (i.e., a person outside the chain of title) is notice of accommodation.

2. Express language

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Type of Accommodation

1. Presumed to be a guaranty of payment.

Accommodation party required to pay; no requirement holder first try to recover from accommodated party.

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Type of Accommodation

2. Express limitation to collection only.

Can include express “guaranty of collection only” language so accommodation party liable only if:▪ Execution against accommodated returned

unsatisfied▪ Accommodated party insolvent (bankrupt)▪ Accommodated party cannot be served

with process▪ Apparent that accommodated party cannot

pay

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Problems

Problem 132, p. 429

Problem 133, p. 430

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Floor v. Melvin

“guarantee [payee] against loss by reason of nonpayment of this note”

Is this payment or collection guaranty?

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Problem 134, p. 433

Margaret ONBMaker PayeeAccommodation Party Holder

PortiaIndorser (anomalous –

not in chain of title)

Accommodated Party

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Refused Tender of Payment

Why would a holder refuse a tender of payment?

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Refused Tender of Payment

1. Effect on person making tender

On principal = none

On future interest = discharged

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Refused Tender of Payment

1. Effect on person with right of recourse against person making tender

Discharged for amount of tender

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Problem 135, p. 434

Saul StoutMaker PayeeAccommodated PartyIndorser

CatherAccommodation MakerGoodwin

Holdertender (b)

tender (a), (c)

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Strictissimi Juris

Basic Idea – Certain changes to the contract between accommodated party and holder may discharge the accommodation party.

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Strictissimi Juris

1. Impairment of Collateral -- § 3-605(d) Impairment discharges

accommodation party to extent of impairment.▪ Not perfect interest in collateral▪ If in possession of collateral, not

preserve its value▪ Not follow rules regarding repossession

and resale▪ Release collateral without getting

substitute collateral Problem 136, p. 435

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Strictissimi Juris

1. Impairment of Collateral -- § 3-605(d)

Chemical Bank v. Pic MotorsPic BankBorrower Lender

SiegelGuarantor

• Not UCC case has guaranty not on note.

• Lender not keep watchful eye on collateral.

• Guarantor had consented so too bad collateral impaired.

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Strictissimi Juris

2. Modifications not covered by special rules -- § 3-605(c)

Accommodation party discharged only if modification causes loss (e.g., any increased liability caused by the modification).

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Strictissimi Juris

3. Extension of time to pay -- § 3-605(b)

Accommodation party discharged only if extension causes loss (e.g., increased liability).

Accommodation party’s obligation also extended, unless

Party granting extension retained right to enforce against accommodation party under original time frame.

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Special defenses of surety previously covered

1. Reimbursement from accommodated party.

2. Discharge if had right of reimbursement against person whose tender of payment refused.

3. Collateral impaired.

4. General modification caused loss.

5. Extension of time to pay caused loss.

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Strictissimi Juris

4. Release -- § 3-605(a)

If release does not preserve rights against accommodation party, accommodation party discharged.

Accommodation party discharged if loss. If check indorser is the accommodation

party, accommodation party discharged. If obligor gave consideration for the

release (e.g., partial payment), the accommodation party is discharged to that extent.

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Strictissimi Juris

4. Situations where no discharge -- § 3-605(f)

Accommodation party consents. Accommodation party has waived

right to use suretyship defenses.

Note: Parties often include waivers in original instrument and get consent to keep accommodation party liable.

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Strictissimi Juris

Problem 138 – p. 441 [skim only, but note subquestion (d)]

Point YeomanMaker NationalAccommodated Party Bank

ShadboltAccommodation Maker

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New Notes for Old

Fact Pattern

Note One becomes due and the maker who is unable to pay gives the holder Note Two payable at a later date. Holder retains Note One as security.

This is considered an extension of time to pay.

What is impact on liability of indorsers and accommodation parties?

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New Notes for Old

Problem 139 – p. 445

Note #1▪ Maker = Rex Lear▪ Accommodation Maker = Cordelia▪ Payee = Kent▪ Due 6/8

Note #2▪ Maker = Rex Lear (with more collateral)▪ Payee = Kent (keeping Note #1 as security)▪ Due 9/25

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New Notes for Old

Problem 140 – p. 445

Marty PayeeMaker Dogfish

SamHammerheadSurety HDC


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