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Chapter 35 Other Security Devices Twomey, Business Law and the Regulatory Environment (14th Ed.)

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Presentation on theme: "Chapter 35 Other Security Devices Twomey, Business Law and the Regulatory Environment (14th Ed.)"— Presentation transcript:

1 Chapter 35 Other Security Devices Twomey, Business Law and the Regulatory Environment (14th Ed.)

2 (c) 2000 West Legal Studies Chapter 352 Guaranty and Suretyship [35-1] Guarantor (unless absolute guarantor): Secondarily liable for debt or obligation of the principal. Creditor must first attempt to collect from the principal. Principal Debtor: The person who owes money or is under original obligation to pay or perform. Surety and Absolute Guarantor: Liable for the debt or obligation of the principal debtor the moment principal is in default.

3 (c) 2000 West Legal Studies Chapter 353 Suretyship and Guaranty [35-2] Creditor Debtor/Principal Surety Absolute Guaranty Creditor Guaranty (Payment Only After All Remedies Exhausted) Debtor/Principal

4 (c) 2000 West Legal Studies Chapter 354 No Release of Surety 1.Fraud by Debtor 2.Misrepresentation by Debtor 3.Changes in Loan Terms (e.g., extension of payment, compensated surety) 4.Release of Principal Debtor 5.Bankruptcy of Principal Debtor 6.Insolvency of Principal Debtor 7.Death of Principal Debtor 8.Incapacity of Principal Debtor 9.Lack of Enforcement by Creditor 10.Creditor’s Failure to Give Notice of Default 11.Failure of Creditor to Resort to Collateral

5 (c) 2000 West Legal Studies Chapter 355 Release of Surety 1.Proper Performance by Debtor 2.Release, Surrender, or Destruction of Collateral (to extent of value of collateral) 3.Substitution of Debtor 4.Fraud/Misrepresentation by Creditor 5.Refusal by Creditor to Accept Payment from Debtor 6.Change in Loan Terms (uncompensated surety only) 7.Statute of Frauds 8.Statute of Limitations

6 (c) 2000 West Legal Studies Chapter 356 Letter of Credit ABC Bank 2038 First Avenue Camden, NJ October 7, Letter #3133 For:John Hoskins 14 Smith Lane _ _ _, _ _ By order of:Jan Kent Kent Products, Inc Lee Blvd. Camden, NJ ABC Bank has established in your favor an irrevocable letter of credit up to an amount of $400,000 (four hundred thousand dollars) available by your drafts on or before [date] accompanied by a bill of lading showing shipment of [identify goods] by you to [name and address of buyer] by [identify carrier], an invoice covering such shipment, and an insurance policy providing [state coverage] of the goods for the benefit of [name of insured]. ____________________________ ABC Bank Manager Issuer Beneficiary; Drawer of Drafts under the Letter of Credit Customer of Issuer

7 (c) 2000 West Legal Studies Chapter 357 Three Contracts Involved in Letter-of-Credit Transactions Issuer Customer of Issuer #1 Letter of Credit #2 Customer of Issuer Letter of Credit Beneficiary of #3 (underlying agreement; often contract of sale)00 (usually a bank)

8 (c) 2000 West Legal Studies Chapter 358 Chapter 35 Summary Suretyship and guarantee undertakings have the common feature of a promise to answer for the debt or default of another. The terms are used interchangeably, but a guarantor of collection is ordinarily only secondarily liable, which means that the guarantor does not pay until the creditor has exhausted all avenues of recovery.

9 (c) 2000 West Legal Studies Chapter 359 If the guarantor has made an absolute guarantee, then its status is the same as that of a surety, which means that both are liable for the debt in the event the debtor defaults regardless of what avenues of collection, if any, the creditor has pursued. Chapter 35 Summary [2]

10 (c) 2000 West Legal Studies Chapter 3510 The surety and guarantee relationships are based on contract. Sureties have a number of rights to protect them. They are exoneration, subrogation, indemnity, and contribution. In addition to those rights, sureties also have certain defenses. They include ordinary contract defenses as well as some defenses peculiar to the suretyship relationship, such as release of collateral, change in loan terms, substitution of debtor, and fraud by the creditor. Chapter 35 Summary [3]

11 (c) 2000 West Legal Studies Chapter 3511 A letter of credit is an agreement that the issuer of the letter will pay drafts drawn on the issuer by the beneficiary of the letter. The issuer of the letter of credit is usually a bank. There are three contracts involved in letter-of-credit transactions: (1) the contract between the issuer and the customer of the issuer, (2) the letter of credit itself, and (3) the underlying agreement between the beneficiary and the customer of the issuer of the letter of credit. Chapter 35 Summary [4]

12 (c) 2000 West Legal Studies Chapter 3512 The parties to a letter of credit are the issuer, the customer who makes the arrangement with the issuer, and the beneficiary, who will be the drawer of the drafts to be drawn under the letter of credit. The letter of credit continues for any time it specifies. Chapter 35 Summary [5]

13 (c) 2000 West Legal Studies Chapter 3513 The letter of credit must be in writing and signed by the issuer. Consideration is not required to establish or modify a letter of credit. If the conditions in the letter of credit have been complied with, the issuer is obligated to honor drafts drawn under the letter of credit. Chapter 35 Summary [6]


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