Psychology Chapter 39 Homework App P 477 The Court Reminded The

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CHAPTER 39

SECURITY DEVICES

Answers to Learning Objectives

1. A contract of guaranty or suretyship is founded on another contract. It is a contract to ensure or

guarantee that someone else will perform the first contract.

2. Contracts of guaranty and suretyship are discharged by extension of time, alteration of the terms of

the contract, and loss or return of collateral by the creditor.

Lesson Outline

1. A contract of guaranty or suretyship is an agreement whereby one party promises to be responsible

for the debt, default, or obligation of another.

2. In recent years, bonding companies have taken over most of the business of guaranteeing an

employer against losses due to the dishonesty of employees. The bonding company’s obligation

arises from its written contract with the employer.

6. The rights of the guarantor and the surety are as follows:

a. Indemnity. A guarantor or surety who pays the debt or obligation of the principal is entitled to

be reimbursed by the principal for the amount paid.

b. Subrogation. The guarantor or surety who pays the debt of the principal is entitled to all

property, liens, or securities that were held by the creditor to secure the payment of the debt.

c. Contribution. One of two or more guarantors or sureties who have paid more than a

proportionate share of the debt are entitled to recover from the other guarantors or sureties the

amount in excess of a pro rata share of the loss.

d. Exoneration. A surety for the benefit of another has a right to insist the debt be paid when due.

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9. A security agreement is a written agreement between the seller (creditor) and buyer (debtor) that the

creditor has a security interest in the collateral. The security agreement describes the collateral and

is signed by the buyer.

10. The rights of the seller under a security agreement may be transferred.

11. The buyer has the right to transfer the collateral and to require a determination of the amount owed.

Comments on Cases

(p. 471) The court stated that a surety contract created a primary obligation, but here the obligation was

secondary so the contract was one of guaranty not surety. Alerus Financial, N.A. v. Marcil

Group Inc., 806 N.W.2d 160 (N.D.)

(p. 476) The agreement between Meade and Thacker was actually a security agreement, whereby Meade

attempted to claim a security interest in the goods and to enforce that interest against

Richardson. Since the agreement was oral it was not a valid security agreement. Meade v.

Richardson Fuel, Inc., 166 S.W.3d 55 (Ky. App.)

(p. 477) The court reminded the parties that the filing of a financing statement is not required in order to

perfect a purchase-money security interest in consumer goods. In re Palmer, 365 B.R. 816

(S.D.Ohio)

Answers to Questions

(Page 479)

1. In those states that retain a distinction between a guaranty and suretyship, the surety has direct and

primary responsibility for the debt or obligation just like the principal debtor while a guarantor’s

comes into effect only in the event the principal defaults.

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2. All the essential elements of a contract must be present in both contracts of guaranty and contracts

of suretyship; however, a contract of guaranty must be in writing while contracts of suretyship may

normally be oral.

6. The creditor’s extension of the time of the debt discharges a surety or guarantor when it is done

without the consent of the surety or guarantor and for a consideration.

7. For the benefit of a surety, collateral must be held until the debtor pays the debt in full.

8. A buyer (debtor) who wants to determine the amount owed may sign a statement indicating the

amount of unpaid indebtedness believed to be owed as of a specified date and send it to the seller

with the request that the statement be approved or corrected and returned.

(Page 480)

1. Yes. The court held that as a secured creditor with a prior perfected security interest in the

accounts, Fifth had superior rights to PNB who was simply an unsecured judgment creditor. Fifth

Third Bank v. Peoples Nat. Bank, 929 N.E.2d 210 (Ind. Ct. App.)

2. No. Without clear language in the guaranty or the original lease that extended Plociennik’s liability

to subsequent extensions or renewals, the court held the guaranty and lease agreement applied only

to the original lease term. It added that it could not turn the guaranty of a single lease transaction

into a continuing guaranty applicable to any future extensions of the term of the lease. O’Brien

Brothers’ Partnership, LLP v. Plociennik, 940 A.2d 692 (Vt.)

v. Lawrenceville Properties, LLC, 710 S.E.2d 682 (Ga. Ct. App.)

5. Holyoke’s security interest was superior. The court stated buyers purchased the cars in the ordinary

course of business from the dealership so as to take free of Valley’s security interest in the

dealership’s inventory. Upon the authorized sale of a vehicle from the inventory, Valley was left

with a security interest only in the proceeds. Valley Bank and Trust Company v. Holyoke

Community Federal Credit Union, 121 P.3d 358 (Co. App.)

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6. Yes. The evidence did not show a default by LSR. The agreement to substitute Luis for LSR was

then a subsequent contract that discharged Union from its bond. The claim was not allowed. In re

Liquidation of Union Indemnity Ins. Co., 749 N.Y.S.2d 250 (N.Y.A.D.)