Business Law II BA 304-01: N/A
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Chapter 32 - Nature of the Debtor-Creditor Relationship - Review

<< Back to Chapter 32 - Nature of the Debtor-Creditor Relationship

1) Suretyship and guaranty transactions have the common feature of a promise to answer for the debt or default of another.

2) A surety primarily is liable; ordinarily, a guarantor is only secondarily liable.

3) An absolute guaranty creates the same obligation as a suretyship.

4) Under an indemnity contract, one person pays another consideration in return for a promise to pay a specified sum of money in the event that a specified loss is suffered.

5) In most states, the statute of frauds requires that contracts of guaranty be in writing to be enforceable.

6) In the absence of a special statute, no writing is required for contracts of suretyship or indemnity. 7) Sound business practice dictates the use of written contracts for both surety-ships and indemnities.

8) In a guaranty contract, the obligor is called a guarantor.

9) A guaranty of payment creates an absolute guaranty.

10) Concerning suretyship and guaranty each involves answering for the debt or default of another.

11) If a guaranty contract is entered into subsequent to the original transaction new consideration must be given for the promise of the guarantor.

12) Pasquale and Paul were sureties on the debt of Rose. Each had a $100,000 responsibility. Upon Rose's default, Pasquale paid $50,000 to the creditor. Pasquale may recover $25,000 from Paul under the concept of contribution.

13) When a surety pays a debt that it is obligated to pay, it automatically acquires the claim and the rights of the creditor through subrogation.

14) A surety that has made payment of a claim for which it was liable as a surety is entitled to indemity from the principal.

15) If there are two or more sureties and one pays more than its proportionate share of the debt, such surety has the right against the cosureties known as contribution.

16) The surety may raise any defense that a party to an ordinary contract may raise.

17) Fraud practiced by the debtor of which the creditor was unaware is not a defense to a surety.

18) Reimbursement is not a suretyship defense.

19) A letter of credit is an advance arrangement for financing. The issuer of a letter of credit is usually a bank. A letter of credit must be in writing and must be signed by the issuer.

20) An agreement under which one party agrees to pay drafts drawn by a creditor is called a letter of credit. The use of letters of credit arose in international trade.

21) If an issuer requests its correspondent bank where the beneficiary is located to notify the beneficiary of the issuance of a letter of credit, the correspondent bank is called an advising bank.

22) If a debtor is about to leave the state, the surety may call on the creditor to take action against the debtor.

23) Under common law, the creditor was not required to disclose to the surety that fact that the principal was insolvent.

24) A growing trend in modern law requires the creditor to inform the surety of matters material to the risk.

25) The creditor’s failure to give the surety notice of default is not a defense.

26) A surety is discharge when the principal debtor performs their obligation under the original debt instrument.

27) A surety may be discharged if the creditor substitutes a different debtor.

28) Typically, there are three parties to a letter of credit.

29) A letter of credit usually sets a maximum money amount.

30) The issuer of a letter of credit is obligated to honor drafts drawn under the letter if the conditions specified in the letter have been met, has no duty to verify that the papers are properly supported by facts, and has no duty to verify that the underlying transaction has been performed.

31) If the issuer of a letter of credit dishonors a draft without justification, it is liable to its customer for breach of contract.

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