Suretyship

Effect of co-obligor's failure to perform

A co-secondary obligor's failure to perform does not relieve a secondary obligor from its own obligations.

Interpretation Of Surety Agreement

A compensated secondary obligor is only afforded equal footing with the creditor in any dispute. An uncompensated secondary obligor is entitled to the benfit of any ambiguity in the contract langauge agaisnt the creditor.

Creditor

A creditor or obligee is the party to whom an obligation, typically a debt is owed.

Debtor

A debtor or principal obligor is a party that owes the obligation to the creditor

Effect of debtor's bankruptcy

A debtor's bankruptcy is not a defense for the secondary obligor against a creditor, even though it discharges the rights of both the creditor and the secondary obligor against the debtor himself.

Effect of debtor's incompetency or incapacity on secondary obligor

A debtor's incompetency or incapacity is not a defense of the secondary obligor against liability under the suretyship or guaranty.

Guarantor

A guarantor is a person who guarantees performance of an obligation or payment of a debt in the event that the debtor defaults.

Statute of Frauds

A promise to pay the debt of another must be in writing under the statute of frauds, UNLESS the MAIN PURPOSE of the suretyship or guaranty is the secondary obligor's own financial gain or buisness advantage.

When is Secondary Obligor's Obligation Voidable

A secondary obligor's obligation is VOIDABLE and can be discharged in the event of FRAUD, DURESS, FORGERY, FAILURE OF PERFORMANCE, IMPOSSIBILITY OF PERFORMANCE, ILLEGALITY, PAYMENT OR PERFORMANCE, RELEASE, INCAPACITY

Surety

A surety is a person who agrees to be primarily liable for the obligation of another.

Guaranty Formation

A valid guaranty relationship is formed when a third person promises to pay the debt of another only upon default by the debtor.

Suretyship Formation

A valid suretyship relationship is formed when a third person promises to pay the debt of another at the time it is due.

Exoneration

EXONERATION: The secondary obligor may bring suit for exoneration compeling the debtor to perform for the creditor.

Consideration in Surety Guaranty

Generally, the requirement of consideration for a suretyship or guaranty is the same as for contracts. However, the consideration supporting the underlying obligation will typically also suppor the secondary obligation. A surety or guranty does not fail for lack of consideration I the seconary obligation is formed aftr the debtor contracts with the creditor, provided that the secondary obligation was part of the exchange for which the creditor bargained.

Compel Collection From Principal Debtor

IN ILLINOIS, a secondary obligor can demand that a creditor compel collection from the principal debtor if (1) request is in writing (2) principal debtor is liely to become insolvent and (3) a right of action has accrued on the contract. If creditor does not comply the secondary obligor is discharged.

Can secondary obligor compel creditor to apply security?

IN ILLINOIS, a secondary obligor may compel a credtor to apply any secureity held to the debt for which it is liable.

When is a guaranty triggered in Illinois?

IN ILLINOIS, the weight of authority holds that the guarantor's secondary liability is triggered by the debtor's default regardless of whether the creditor makes any attempt to recover from the debtor. However, a guarntor may expressly promise to pay the debt of another only after the debtor defaults and the creditor exhausts all legal remedies.

Indemnification

INDEMINIFICATION: The secondary oblior may demand reibursement or indemnification from the debtor.

Creditor Fails to Accept Payment

If the creditor fails to accept a valid tender of payment, the secondary obligor's obligations are discharged.

More than one Secondary Obligor

In Illinois, the rights of two or more secondary obligors on the same debt obligation by a common debtor to a creditor can be held jointly and severally. Exoneration, Subrogation, Contribution

Creditor fails to enforce claim against estate

In general, if the creditor does not, within six months, enforce a claim against the estate of the debtor, the secondary obligor is discharged in the amount that it would have been liable had the claim been promptly presented. However, the creditor can proceed against the secondary obligor within six months.

Subrogation

SUBROGATION: When secondary obligor pays the debtor's debt to the creditor, the secondary obligor steps into the creditor's shoes and may enforce any right the creditor ma have against the debtor.

Debtor defenses

The debtor possesses all available contract defenses against the creditor, regardless of the creation of a suretyship or guaranty, including (i) fraud, (ii) duress, (iii) incompetency, (iv) incapacity, (v) illegality, (vi) impossibility, and (vii) non-performance of the creditor.

Modification - Compensated

The obligation of a compensated secondary obligor is discharged by a modification of contract between the debtor and creditor when the modification materially increased the secondary obligor's risk of loss or caused the secondary obligor a loss.

Modification - Uncompensated

The obligation of an uncompensated secondary obligor is completely discharged if the debtor and creditor modify the terms of the contract, in any manner, without the secondary obligor's consent.

Effect of fraud by principal on innocent creditor

the principal has induced the secondary obligor into the agreement by fraud, duress, or misrepresentation, the secondary obligor does not have a defense against an innocent creditor.