Quiz 32: Nature of the Debtor-Creditor Relationship


Relevant terms Guarantor - is a person or entity that " guarantees " the debt of another. The guarantor is only responsible for the debt when the principle debtor (person owing the money) defaults, and the creditor (person who lent the money) had already sought action for money owed by the debtor. Discussion A guarantor of a debt is only responsible for the portion of the debt in default. Unlike a surety, the creditor must seek action against the principle debtor first. If the creditor recovered some amount of money from the principle debtor then the guarantor will only owe the unrecovered portion. Hence, the answer is d.

Refer to the case Comdata Network v First Interstate Bank of Fort Dodge Case Issue The creditor (plaintiff), is a beneficiary of the bank that issued a letter of credit to a payor. Payor of the letter of credit defaulted, the creditor wants to enforce the letter of credit terms and have bank pay (defendant) pay for the default. The issue is whether the bank can relieve itself to pay the creditor by claiming to have signed the letter of credit due to fraud of the payor. District court held for the creditor, bank appealed. The appeal affirmed, the case reached the State Supreme Court. Relevant Terms, Laws, and Cases Letter of Credit - is a contract where an issuer, such as a bank, provides payment to a creditor for a payor. This serves as a guarantee of payment to the creditor for a contract between creditor and payor. Opinion State Supreme Court affirmed the decision. The court argued that the letter of credit enforces payments to the beneficiary even in instances that the payor defrauded the bank into entering such contract. It is the purpose of a letter of credit such that it guarantees security to the creditor. Hence, the bank is liable for payment to creditor despite being defrauded by the payor.

Definitions Surety - is a person or entity who guarantees the debt of another the principle debtor ( person who owes money ). The creditor (person who lent the money ) may seek action against the surety without seeking action from the principle debtor. Reimbursement - if the surety paid the debt of the principle debtor than it may state a claim against the principle debtor for the amount it paid. Example: If S was the surety which paid $1,000 to the creditor for money owed by debtor D , then S may now seek D for the $1,000 S paid. Contribution - if there are two or more sureties, the surety who paid more than its proportion of the debt guaranteed may seek the other surety to pay it the extra he paid. E.g. if S and G were both sureties guaranteeing $1,000 each on the amount, but S paid $1,200 ($200 more) while G paid only $800, then S can seek G for the extra $200 paid. Exoneration - releases the surety from liability only if the surety had requested the creditor to seek payment from a principle debtor, but the creditor failed to do so. E.g. if S was surety informed the creditor C that debtor D is transferring his property listed as collateral for C to another person and may not pay the debt, then S is exonerated if C failed to prevent D from transferring these collateral items. Subrogation - If surety paid the debt of the principle debtor than it may state a claim against the principle debtor as a creditor of the debt. Example : If S was the surety which paid $1,000 to the creditor for money owed by debtor D , then S acquires the right of the creditor. Discussion In this case the surety P had not paid any amount to the creditor, thus it can't seek reimbursement or subrogation from principle debtor Q. Furthermore, even if there is a co-surety as P had not paid any amount to the creditor, P can't seek contribution from co-sureties. Meanwhile, if P had credible information that Q is able to pay the debts but is about to seek procedures to default on it (fleeing the country, transferring assets, etc) then P may be exonerated if P informs the creditor of this information. This would be the best scenario as P will no longer have to pay for the debt. Hence, the answer is c.

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