274 MODULE 28 DEBTOR-CREDITOR RELATIONSHIPS
Answers (b) and (c) are incorrect because insolvency of the
debtor and death of the debtor are not valid defenses of the
guarantor against the creditor.
D. Surety's and Guarantor's Rights and Remedies
13. (d) The surety is primarily liable on the debt of the
principal debtor. Therefore, the creditor can seek payment
directly from the surety as soon as the debt is due. For this
reason, the surety cannot require the creditor to collect from
the debtor nor can s/he compel the creditor to proceed
against any collateral the principal debtor may have.
14. (d) Upon payment, the surety obtains the right of
SUbrogation which is the ability to use the same rights the
creditor had. Also, the surety may resort to the right of ex-
oneration by requiring the debtor to pay when s/he is able if
the creditor has not demanded immediate payment directly
from the surety. If the surety has paid the debtor's obliga-
tion, the surety may attempt reimbursement from the debtor.
E. Surety's and Guarantor's Defenses
15. (c) The surety may use his/her own defenses of in-
capacity of the surety or bankruptcy of the surety to limit
his/her own liability. Although the surety may use most
defenses that the debtor has to limit his/her (surety's) liabil-
ity, the surety may not use the personal defenses of the
debtor. These include the debtor's bankruptcy and the
debtor's incapacity.
16. (b) A modification by the principal debtor and
creditor in the terms and conditions of their original contract
without the surety's consent will automatically release the
surety if the surety's risk of loss is thereby materially in-
creased. Note that a noncompensated surety is discharged
even if the creditor does not change the surety's risk. How-
ever, a compensated surety is discharged only if the modifi-
cation causes a material increase in risk. Answers (c)
and (d) are incorrect because a surety may not exercise the
principal debtor's personal defenses (i.e., insolvency and
insanity). Answer (a) is incorrect because althqugh a release
of the principal debtor without the surety's consent will usu-
ally discharge the surety, there is no discharge if the creditor
expressly reserves rights against the surety.
17. (d) Personal defenses that the debtor has such as
bankruptcy or death of the debtor cannot be used by the
surety to avoid payment of the debtor's obligation to the
creditor. Answer (a) is incorrect because the surety may
generally exercise the defenses on the contract that the
debtor has against the creditor. Answer (b) is incorrect be-
cause the surety may take advantage of his/her own personal
defenses such as fraud by the creditor against the surety.
Answer (c) is incorrect because the surety generally may
exercise the defenses on the contract that would be available
to the debtor such as the running of the statute of limitations.
18. (d) A compensated surety will be released from an
obligation to the creditor upon tender of performance by
either the principal debtor or the surety. A compensated
surety will also be completely released if modifications are
made to the principal debtor's contract which materially
increase risk to the surety. However, if the risk is not mate-
rially increased, the surety is not completely released but
rather his/her obligation is reduced by the amount of loss
due to modification. The surety also is not released if the
modifications are beneficial to the surety. Answers (a)
, and (b) are incorrect because these modifications will not
necessarily result in a material increase in the surety's risk or
could even be beneficial to the surety. Answer (c) is incor-
rect because partial release of the principal debtor's obliga-
tion will result in partial release o~ the surety.
19. (a) Normally, fraud by the debtor on the surety to
induce himlher to act as a surety will not release the surety.
However, when the creditor is aware of the debtor's fraudu-
lent misrepresentation, then the surety can avoid liability.
Answer (b) is incorrect because the above principle is true
whether the surety is compensated or not. Answer (c) is
incorrect because the risk of bankruptcy is one of the reasons
that the creditor desires a surety. Answer (d) is incorrect
because fraudulent misrepresentations do not make a con-
tract void but can make it voidable.
20. (c) Once the debt is paid by someone, both the prin-
cipal debtor and the cosigner are released from obligations
to pay the loan. Answer (a) is incorrect because the creditor
may proceed against the cosigner without needing to pro-
ceed against the principal debtor. Answer (b) is incorrect
because the possibility that the principal debtor may qualify
for bankruptcy is one of the reasons that the creditor may
desire a cosigner. Answer (d) is incorrect because even if
the main debtor is adjudicated mentally incompetent, tlus
c~n allow the main debtor !o escape liability but not the eo-
signer.
F. Cosureties
21. (c) A suretyship relationship exists whe~ one party
agrees to answer for the obligations of another. Cosureties
exist when there is more than one surety guaranteeing the
same obligation of the principal debtor. Both sureties and
cosureties are entitled to reimbursement from the debtor if
the surety pays the obligation. Sureties and cosureties both
have the right of subrogation in that upon making payment,
the surety has the same rights against the principal debtor
that the creditor had. Both are also entitled to exoneration.
Sureties and cosureties both may require the debtor to pay
the obligation for which they have given promise if the
debtor is able to do so. The right of contribution, however,
. exists only among cosureties. If a cosurety pays more than
his/her proportionate share of the total liability, he/she is
entitled to be compensated by the other cosureties for the
excess amount paid.
22. (b) The right of contribution arises when one co-
surety, in performance of the principal debtor' s obligation,
pays more than his/her proportionate share of the totalli-
ability. The right of contribution allows the performing
cosurety to receive reimbursement from the other cosureties
for their pro rata shares of the liability. The pro rata shares
of the cosureties are determined as follows:
Surety's Remaining Surety's
pro rata share liability liability
Queen (210,0001420,000) x 210,000 105,000
Ash (84,000/420,000) x 210,000 42,000
Kane (126,000/420,000) x 210,000 63,000
Thus, Queen.is entitled to receive $42,000 from Ash and
$63,000 from Kane.
23. (c) A surety relationship is present when one party •
agrees to answer for the obligation of another. When there
is more than one surety guaranteeing the same obligation of
the principal debtor, the sureties become cosureties jointly