chapter 35 other security devices twomey, business law and the regulatory environment (14th ed.)

Chapter 35Chapter 35

Other Security DevicesOther Security Devices

Chapter 35Chapter 35

Other Security DevicesOther Security Devices

Twomey, Business Law and the Regulatory Environment (14th Ed.)

(c) 2000 West Legal Studies Chapter 35 2

Guaranty and SuretyshipGuaranty and Suretyship [35-1][35-1]Guaranty and SuretyshipGuaranty and Suretyship [35-1][35-1]

Guarantor (unlessabsolute guarantor):

Secondarily liablefor debt orobligation of theprincipal. Creditormust first attemptto collect from theprincipal.

Principal Debtor:

The person who owesmoney or is underoriginal obligation to pay or perform.

Surety and Absolute Guarantor:

Liable for the debt or obligation of the principal debtor the moment principal is in default.


Suretyship and GuarantySuretyship and Guaranty [35-2][35-2]Suretyship and GuarantySuretyship and Guaranty [35-2][35-2]

CreditorCreditor

Debtor/Principal

SuretyAbsolute Guaranty

Creditor

Guaranty(Payment Only After All

Remedies Exhausted)

Debtor/Principal

Debtor/Principal


No Release of SuretyNo Release of SuretyNo Release of SuretyNo Release of Surety

1. Fraud by Debtor2. Misrepresentation by Debtor3. Changes in Loan Terms (e.g., extension of payment,

compensated surety)4. Release of Principal Debtor5. Bankruptcy of Principal Debtor6. Insolvency of Principal Debtor7. Death of Principal Debtor8. Incapacity of Principal Debtor9. Lack of Enforcement by Creditor10. Creditor’s Failure to Give Notice of Default11. Failure of Creditor to Resort to Collateral


Release of SuretyRelease of SuretyRelease of SuretyRelease 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


Letter of CreditLetter of CreditLetter of CreditLetter of CreditABC Bank2038 First AvenueCamden, NJ 08101

October 7 , 19 98

Letter #3133

For: John Hoskins14 Smith Lane_ _ _ , _ _

By order of: Jan KentKent Products, Inc.1503 Lee Blvd.Camden, NJ 08101

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

Issuer

Beneficiary;Drawer of Drafts

under the Letter of Credit

Customer of Issuer


Three Contracts Involved in Three Contracts Involved in Letter-of-Credit TransactionsLetter-of-Credit TransactionsThree Contracts Involved in Three Contracts Involved in Letter-of-Credit TransactionsLetter-of-Credit Transactions

Issuer

Custo

mer of I

ssuer

#1

Letter of Credit

#2

Customer of Issuer Letter of Credit

Beneficiary of

#3

(underlying agreement; often contract of sale)00(usuall

y a ban

k)


Chapter 35 SummaryChapter 35 SummaryChapter 35 SummaryChapter 35 Summary

Suretyship and guarantee undertakings have the common feature of a promise to answer for the debt or default of another. The terms are used interchangeably, but 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.


If the guarantor has made an absolute guarantee, then its status is the same as that of a surety, which means that both are liable for the debt in the event the debtor defaults regardless of what avenues of collection, if any, the creditor has pursued.

Chapter 35 SummaryChapter 35 Summary [2][2]Chapter 35 SummaryChapter 35 Summary [2][2]


The surety and guarantee relationships are based on contract. Sureties have a number of rights to protect them. They are exoneration, subrogation, indemnity, and contribution. In addition to those rights, sureties also have certain defenses. They include ordinary contract defenses as well as some defenses peculiar to the suretyship relationship, such as release of collateral, change in loan terms, substitution of debtor, and fraud by the creditor.



A letter of credit is an agreement that the issuer of the letter will pay drafts drawn on the issuer by the beneficiary of the letter. The issuer of the letter of credit is usually a bank. There are three contracts involved in letter-of-credit transactions: (1) the contract between the issuer and the customer of the issuer, (2) the letter of credit itself, and (3) the underlying agreement between the beneficiary and the customer of the issuer of the letter of credit.



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 to be drawn under the letter of credit. The letter of credit continues for any time it specifies.



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.


chapter 35 other security devices twomey, business law and the regulatory environment (14th ed.)

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