Chapter 36 other security devices
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Chapter 36: Other Security Devices. Suretyship vs. Guaranty. Suretyship and guaranty undertakings both promise to answer for the debt or default of another, but are not the same. A surety is equally liable for the debtor’s debt.

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Chapter 36: Other Security Devices

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Chapter 36 other security devices

Chapter 36: Other Security Devices


Suretyship vs guaranty

Suretyship vs. Guaranty

  • Suretyship and guaranty undertakings both promise to answer for the debt or default of another, but are not the same.

    • A surety is equally liable for the debtor’s debt.

    • A guarantor of collection is ordinarily only secondarily liable, which means that the guarantor does not pay until the creditor has exhausted all avenues of recovery.


Absolute guaranty

Absolute Guaranty

  • If the guarantor has made an absolute guaranty, then its status is the same as that of a surety.

  • Both are liable for the debt in the event the debtor defaults, regardless of what avenues of collection, if any, the creditor has pursued.


Suretyship and guaranty

Creditor

Creditor

Debtor/Principal

Absolute Guaranty

Debtor/Principal

Surety

Creditor

Debtor/Principal

Guaranty

Suretyship and Guaranty

Surety and Absolute Guaranty are both liable to the creditor immediately

upon the debtor’s default.

A (non-absolute) Guaranty is liable only after the creditor has exhausted all options for collecting from the debtor.


Rights and defenses of sureties

Rights and Defenses of Sureties

  • Sureties have a number of rights to protect them. They are:

    • Exoneration,

    • Subrogation,

    • Indemnity, and

    • Contribution.

  • Sureties also have certain defenses:

    • Ordinary contractdefenses

    • Some defenses peculiar to suretyship, such as release of collateral, change in loan terms, substitution of debtor, and fraud by the creditor.


No release of surety

1.Fraud by Debtor

2.Misrepresentation by Debtor

3.Changes in Loan Terms (e.g., extension of payment, compensated surety)

4.Release of principal Debtor

5.Bankruptcy of Principal Debtor

6.Insolvency of Principal Debtor

7.Death of Principal Debtor

8.Incapacity of Principal Debtor

9.Lack of Enforcement by Creditor

10.Creditor’s Failure to Give Notice of Default

11.Failure of Creditor to Resort to Collateral

No Release of Surety


Release of surety

1.Proper Performance by Debtor

2.Release, Surrender, or Destruction of Collateral (to extent of value of collateral)

3.Substitution of Debtor

4.Fraud/Misrepresentation by Creditor

5.Refusal by Creditor to Accept Payment from Debtor

6.Change in Loan Terms (uncompensated surety only)

7.Statute of Frauds

8.Statute of Limitations

Release of Surety


Letter of credit

ABC Bank

2038 First Avenue

Camden, NJ 08101

October 7 , 19 98

Issuer

Letter #3133

For:John Hoskins

14 Smith Lane

_ _ _ , _ _

By order of:Jan Kent

Kent Products, Inc.

1503 Lee Blvd.

Camden, NJ 08101

Beneficiary;Drawer of DraftsUnder the Letter of Credit

Customer of Issuer

ABC Bank has established in your favor an irrevocable letter of credit up to an amount of

$400,000 (four hundred thousand dollars) available by your drafts on or before [date]

accompanied by a bill of lading showing shipment of [identify goods] by you to [name and address of buyer] by [identify carrier], an invoice covering such shipment, and an insurance policy providing [state coverage] of the goods for the benefit of [name of insured].

____________________________

ABC Bank Manager

Letter of Credit


Letters of credit

Letters of Credit

  • A letter of credit is a three-party agreement that the issuer (usually a bank) will pay drafts drawn by the beneficiary of the letter.

  • The parties to a letter of credit are the issuer, the customer who makes the arrangement with the issuer, and the beneficiary, who will be the drawer of the drafts.

  • The letter of credit continues for any time it specifies.


Letters of credit cont d

Letters of Credit (cont’d)

  • The letter of credit must be in writing and signed by the issuer.

  • Consideration is not required to establish or modify a letter of credit.

  • If the conditions in the letter of credit have been complied with, the issuer is obligated to honor drafts drawn under the letter of credit.


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