SURETYSHIP PRACTICE PROBLEMS

(FIRST SET)
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Practice Problems
1. Patrick, desiring to borrow some money from Teche State Bank (“TSB”) to
finance his law school education at the Southern University Law Center,
signed a promissory note for $20,000 to the order of TSB with annual interest
of 10%. Because Patrick had no collateral and a relatively low credit score, he
got his uncle Frank to come to the bank with him. Uncle Frank assured the
TSB loan officer, an old friend of his, that Frank would “stand behind Pat on
the loan.” Relying on this assertion, the TSB loan officer disbursed the
$20,000 loan proceeds to Patrick, which Patrick ultimately used to pay his
living expenses, tuition, and fees for the first few weeks at SULC.
Patrick is currently in default on the promissory note. TSB retains you
and asks if it can sue Frank immediately as a surety on Patrick’s obligation or
if it must sue Patrick first and prove that it cannot collect from Patrick. What
do you tell TSB (keeping in mind that TSB needs the answer to the relevant
questions it has NOT asked just as much as the answers to the questions it
HAS asked)?
2. You are the junior attorney at the closing of the sale of a very expensive piece
of equipment to Shaw Construction, Inc. At the last moment, Iberville Bank,
suddenly announces that it is unwilling to make the loan secured only by a
security interest in the equipment—Shaw must come up with more security.
Frantically, the senior attorney whom you work for asks you to get Shaw’s
President and CEO, Buddy Shaw, on the phone and have him send by email
the following message: “I, Buddy Shaw, hereby personally and
unconditionally guarantee repayment of the $5.5 million loan extended by
Iberville Bank to Shaw Construction, Inc., in accordance with the Loan
Agreement of same date as this message. Buddy Shaw.”
If Buddy complies, and you print out the email and deliver it to Iberville
Bank in the closing room, will this email message solve Shaw’s problem and
give Iberville Bank the security it seeks?
3. Which of the following written statements constitutes an adequately “express”
assumption of a suretyship obligation:
a) Susan writes to Aisha requesting that Aisha provide financial
assistance to Danielle, assuring Aisha that Danielle is honest and asserting that
“if you make this loan to Danielle, you are sure to be repaid.”
b) Susan writes to Aisha requesting that Aisha give a loan to Danielle,
assuring Aisha that Danielle will repay the loan and adding that “this letter
will be your guarantee.”
 c) First Loan Co. & Trust writes to Construction Lumber Co.
encouraging CLC to sell lumber to Emerald Lumberjack Co. on credit,
assuring CLC that “FLC&T is financing ELC, we are behind ELC, and we
feel totally confident that your credit sale to ELC will be safe.”
d) Southern Holdings Enterprises writes to Comprehensive Lending
Enterprises as follows: “This will confirm our understanding with you that
[we] will take such steps as are necessary to assure payment to you by [the
debtor] of amounts due.”
4. Amanda, Bernice, Clarice, and Darlene are the four members of “Hell’s
Belles, LLC,” a business that specializes in heavy industrial demolition. The
Operating Agreement and Articles of Organization of Hell’s Belles set up a
corporate-style “manager managed” LLC structure, with Amanda and
Bernice acting as sole managers. First Bank lent $200,000 to Hell’s Belles,
secured by a security interest in the LLC’s equipment, a mortgage on the
LLC’s immovable property, and a “Continuing Guarantee Agreement”
pursuant to which Amanda, Bernice, Clarice, and Darlene all agreed to
guarantee all of the LLC’s indebtedness to First Bank. One year later, Hell’s
Belles is already in default on its $200,000 obligation.
A. If Amanda pays $50,000 to First Bank per the Continuing Guarantee
Agreement, what right, if any, does Amanda have against Hell’s Belles? If
Amanda sues to assert whatever rights it might have against the LLC, can it
collect attorney’s fees in its suit (assuming the loan agreement between First
Bank and Hell’s Belles provided for such fees, as all such agreements do)?
B. Would your answer change if it turned out that Hell’s Belles had a
defense to payment (say, vice of consent or prescription) that would have
prevented First Bank from collecting on the debt?
C. If Bank sues Hell’s Bells for the remaining $150,000, A sues Hell’s
Belles for whatever right A can assert, and the LLC has only enough assets to
pay Bank, who wins as between Bank and A? Does it matter when the suits
were filed? When the judgments on those suits are entered?
D. If A is unable to collect anything from Hell’s Belles, can A collect
anything from B, C, or D?
E. If Bank is unable to collect anything from Hell’s Belles, can Bank
collect all or part of the $200,000 loan from B, C, and/or D?
F. If B pays everything Bank can collect from her, what right does B
have to collect from A, C, and/or D?
G. How, if at all, would your answer to part “F” change if C were
insolvent?
H. How, if at all, would your analysis in part “F” change if A, B, C, and
D had executed a “Letter Agreement” among themselves, in which they agreed
to allocate liability on the Continuing Guarantee Agreement unequally, as
follows: A—90%, B—8%, C and D—1% each?
 SURETYSHIP PRACTICE PROBLEMS
(SECOND SET)
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Practice Problems

Scott applied for a home improvement loan from First Bank ("Bank"). Joy,
Grace, Hope, and Charity, eager to help Scott obtain the loan, met with an official of
Bank and verbally agreed to guarantee payment of Scott's indebtedness. Bank
prepared and submitted to them a written agreement dated January 5, 2000,
containing the following provisions: “Joy, Grace, Hope, and Charity do hereby
agree that they are solidarily obligated to pay any and all indebtedness owed First
Bank by Scott, up to the amount of $60,000.00 plus interest.” Whereas Joy, Grace
and Hope showed up at the closing, Charity, who was ill, did not. And so, alone
among the four, Charity ended up never signing the written agreement.

Joy became insolvent in 2001 and was granted a discharge in bankruptcy

later that year. It is now early 2002 and Scott's loan is in default. The outstanding
amount owed by Scott to the Bank is $60,000. Bank notifies Scott, Grace, Hope and
Charity that Bank intends to file a lawsuit to collect the loan. Thereafter, Bank and
Grace sign a written agreement in which Bank, in consideration of Grace's payment
to it of $10,000, releases Grace from all liability for payment of Scott's loan
indebtedness.

Bank consults with you about collection of Scott's loan. The outstanding loan
amount, after Bank's application of the $10,000 received from Grace, is $50,000.
Bank instructs you not to name Scott in the lawsuit because it believes that Scott is
insolvent and not worth pursuing.

1. Advise Bank fully as to the effect and purpose of the January 5, 2000 written
agreement, the subsequent agreement between Grace and Bank, and the liability, if
any, of Grace, Hope and Charity to Bank.

2. Suppose that the written agreement had included the following additional
provision: “First Bank may release any one or more of the undersigned guarantors
and such release shall not affect or diminish the liability of the remaining
guarantors.” Would your answer now be different? If so, how and why?