CHAPTER 66

GUARANTY AND SURETYSHIP

§§ 548-559. (Nego. Instru., Secs. 158-169.)

A. Guaranty and Suretyship Defined.

(Note: Contracts of Guaranty and Suretyship are contracts by which the person called the guarantor or surety undertakes to answer to a creditor or obligee for the debt or obligation of another. It is essentially a lending of credit.

Suretyship is a form of contract whereby the surety undertakes a primary liability of paying a debt or answering for the default of another when the debt is due or the default occurs.

Guaranty is a form of contract whereby the guarantor contracts to pay the debt of another if the other does not pay. Each is to pay the debt or perform the obligation of another, but one is an assumption of that debt or obligation in a primary sense; the other in a secondary sense. That is to say, in the one no diligence is required to collect of the principal debtor or obligor, while in the other such diligence is required, unless excused.

But there is what is called 'absolute guaranty' (as on a lease) where liability is instant upon default.)

B. The Validity of the Surety or Guarantors Offer.

(a) Fraud on Principal.

Case 562. Ettlinger v. National Surety Company, 221 N. Y. 467, 117 N. E. 945.

Facts: Ettlinger sues National Surety Company as surety on a bond. Defense; fraud practiced on the

obligor.

Point Involved: Whether surety can take advantage of fraud practiced on the surety's principal.

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ANDREWS, J.: A contract induced by fraud is not void. It is voidable at the option of the party defrauded. If he elects to avoid the contract he can do so only on condition of returning what he has received under it.

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"If the principal could abide by the contract and the surety repudiate it, the strange result would be produced that the principal would retain the fruits of the contract whilst the surety would avoid the obligation on the ground of its invalidity.

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Question 562: May a surety avoid his obligation by showing that the principal debtor or obligor was defrauded? Suppose such principal debtor or obligor repudiated, would the surety be bound then?

(b) Fraud on the Surety.

Case 563. Copper Process Co. v. Chicago Bonding & Ins. Co., 262 Federal Reporter, 266.

Facts: Copper Process Co. sues the Bonding Company on bonds given the Copper Process Co. to assure performance by Bird Coal & Iron Company of certain contracts for sale and delivery of pig iron. The Iron Company defaulted on the contracts and this suit followed. Defense by Surety Company that incorrect information had been given it in response to its question whether the Copper Process Co. had advanced money to the Bird Coal & Iron Co.

Point Involved: Fraud on surety by obligee as a defense to surety.

WOOLEY, CIRCUIT JUDGE: Holding "that the question by the Surety Company as to advances raised a duty on part of plaintiff to disclose fully all the facts upon which the surety was seeking information."

(c) Personal Incapacity of Principal.

Case 564. Goodell v. Bates, and others.

Facts: Goodell sues on a bond. The bond was a replevin bond signed by Adolphus and Fannie Putnam

as principals, and William R. Bates and Israel G. Bates, as sureties. Bates alone defended. Evidence was offered by way of defense that Fannie Putnam was a married woman and a minor when she signed the bond. The defendants asked for a ruling that the bond was for this reason insufficient. Ruling was refused by the trial court. On this and other points, Bates, the surety appealed.

Held: That Bates being sui juris could not avoid the bond because of the minority of the principal obligor.

Question 564: A surety signs a bond to cover a liability of a corporation which the corporation has no authority to incur. Can the surety defend on this ground? Maledon v. Leflore, 35 S. W. (Ark.) 1102.

(d) Incapacity of Surety.

(See Chapter 94 in Corporations, post.)

C. Remedies of Surety.

(a) Reimbursement from Principal Debtor.

(Note: A surety having paid the debt is entitled to re-imbursement. But he may recover only what he has paid. "The rule is certainly too well settled to be controverted, nor is it disputed, that the contract between the principal and the surety is for indemnity only; and therefore if the surety discharges an obligation for a less sum than its full amount, he can only claim against the principal the sum so paid."-Southall v. Farish, 7 S. E. (Va.) 534.)

(b) Contribution from Co-sureties.

Case 565. Washington v. Norwood, 128 Alabama Reports, 383, 30 S. W. 405.

Facts: Suit by Washington to set aside a transfer by Norwood to his son as a fraudulent conveyance made to defeat Washington's claim. Washington and the elder Norwood were co-sureties on an administrator's bond and the administrator being in default in paying the

heirs of the deceased estate which he was administering, Washington as surety on his bond paid the same and seeks contribution and brings this bill to enforce same by way of setting aside said alleged fraudulent conveyance.

"(1) An action to set aside a fraudulent conveyance of lands at the suit of an existing creditor of the grantor is a suit in equity for the recovery of lands and is governed by the statute of limitations.

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(2) A surety is an existing creditor entitled to protection against a fraudulent conveyance made by his co-surety at any time subsequent to the execution of the common obligation.

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"(3) Such an action can in no case be maintained until the cause of action accrues-until the demand becomes due and payable.

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"(4) The right of action for contribution at law or in equity accrues when one surety pays more than his share of the common liability.

Held: That although more than ten years had elapsed since the conveyance, the statute of limitations of ten years did not begin to run until the surety had paid more than his share. And this suit being within ten years of such payment could be maintained.

(Note: The right of a surety to contribution is of equitable origin and arises out of the general equitable principal of equalization of burdens. The right arises when the surety has borne more than his proportionate share. Originally a right enforcible in equity, it became recognized by courts of law, but the taking of jurisdiction by law courts has not deprived the courts of equity of jurisdiction. In the law courts the rule is that each surety is liable for his proportionate share, but in equity if any of the co-sureties are insolvent or absent from the jurisdiction, the solvent, available sureties must apportion the liability among themselves.)

(c) Subrogation.

(Note: When a guarantor or surety pays the obligation which the principal should have paid, he at once becomes entitled

to have for his benefit all the funds, securities, liens, remedies, equities and rights of every sort which the creditor or obligee had against the principal. That is, if A is principal debtor, B, guarantor, or surety, and C, the obligee or creditor, and B pays C, B for purposes of his security and re-imbursement becomes entitled to enforce against A all remedies which C had against A. Accordingly if C held any collateral, lien, judgment, mortgage, or security or remedy of any sort, B is entitled to the same. This is called the right of subrogation. This right to be subrogated does not arise out of any contract, but has its origin in equity. For instance, if A and B are respectively principal and surety on a note to C, secured by mortgage upon A's lands. B, the surety, upon paying the debt to C, is entitled to foreclose the mortgage.)

D. Discharge of Surety.

(a) By Discharge of Principal's Obligation.

(Note: The principal's obligation being discharged by the principal, the liability of the surety or guarantor thereby ceases. The right to release the principal debtor and save the rights against the surety is discussed hereafter.)

(b) By Alteration of Bond or Contract.

(Note: It is well-settled that any alteration in the surety's contract without his consent discharges him, even though the alteration is in his favor. Thus if he executes a bond for $1,000 and the sum $1,000 is subsequently altered to $500, he can successfully defend that he did not execute the five hundred dollar bond, and is therefore liable on the bond neither as it was nor as it is.)

(c) By Death of Principal.

(Note: This will discharge the surety or guarantor as to all liabilities not yet incurred, except in those cases in which the bond is given to be binding against defaults of heirs, personal representatives or assigns.)

(d) By Death of Surety.

(Note: In cases of commercial continuing guarantees, that is, covering indebtedness incurred over a period of time, the