Sureties and Accommodation Parties

1. Sureties andAccommodation Parties

2. The Situation • No, not him! • Instead, you wantto borrow moneyor obtain goods/services on credit,i.e., you need tobecome a debtor.

3. 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

4. Why would someone be a surety? • Love and affection. • Friendship. • Compensation. • Stupidity (not understanding consequences of what doing)

5. Suretyship Arrangement Principal Debtor Creditor 1. underlying contract 3. Reimbursement2. Surety Contract Surety Problem 131, p. 426

6. Remedial Rights of Sureties • 1. Reimbursement If surety pays, surety obtains reimbursement from principal.

7. Remedial Rights of Sureties • 2. Exoneration Surety’s ability to compel principal to perform at maturity.

8. 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).

9. 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)

10. 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.

11. Accommodation

12. Liability of Accommodation Party • Liable in capacity in which accommodation party signs, such as: • 1. Maker • 2. Indorser (name outside chain of title)

13. Liability of Accommodation Party • Statute of Frauds irrelevant • State law requirements for other surety contracts do not apply.

14. Liability of Accommodation Party • Consideration not needed. • The accommodated party need not receive consideration. It is sufficient that the contract goes through.

15. Liability of Accommodation Party • Entitled to reimbursement from accommodated party. • No liability to accommodated party.

16. 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

17. 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.

18. 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

19. Problems • Problem 132, p. 429 • Problem 133, p. 430

20. Floor v. Melvin • “guarantee [payee] against loss by reason of nonpayment of this note” • Is this payment or collection guaranty?

21. Problem 134, p. 433 Margaret ONB Maker Payee Accommodation Party Holder Portia Indorser (anomalous – not in chain of title) Accommodated Party

22. Refused Tender of Payment • Why would a holder refuse a tender of payment?

23. Refused Tender of Payment • 1. Effect on person making tender • On principal = none • On future interest = discharged

24. Refused Tender of Payment • 1. Effect on person with right of recourse against person making tender • Discharged for amount of tender

25. Problem 135, p. 434 Saul Stout Maker Payee Accommodated Party Indorser Cather Accommodation Maker Goodwin Holder tender (b) tender (a), (c)

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

27. 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

28. Strictissimi Juris • 1. Impairment of Collateral -- § 3-605(d) Chemical Bank v. Pic Motors Pic Bank Borrower Lender Siegel Guarantor • Not UCC case has guaranty not on note. • Lender not keep watchful eye on collateral. • Guarantor had consented so too bad collateral impaired.

29. 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).

30. 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.

31. 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.

32. 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.

33. 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.

34. Strictissimi Juris • Problem 138 – p. 441 [skim only, but note subquestion (d)] Point Yeoman Maker National Accommodated Party Bank Shadbolt Accommodation Maker

35. 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?

36. 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

37. New Notes for Old • Problem 140 – p. 445 Marty Payee Maker Dogfish Sam Hammerhead Surety HDC