Question
The Martin Corporation was a small family-owned corporation whose owners were also the directors and officers. The corporation's bankers insisted that if any further credit
The Martin Corporation was a small family-owned corporation whose owners were also the directors and officers. The corporation's bankers insisted that if any further credit were to be extended to the corporation the owners must guaranty payment by the corporation. This guaranty was agreed to by the owners in writing, and an additional $50,000 loan was granted to Martin Corporation. Which of the following best describes the legal significance of these events?
A. Since the owners each participated equally in the guaranty, each can be held liable by the bank, but only to the extent of his proportionate share in relation to the others.B. The guaranty by the owners need not have been in writing since it was primarily for their own benefit.
C. In the absence of specific provisions to the contrary, the owners are immediately liable on the debt in the event of the corporation's default.
D. Once the owners agreed to the undertaking they automatically assumed responsibility for all of the corporation's prior debts.
Explaination:
C is corrent. As sureties, the owners are immediately liable on the debts if the corporation defaults. No notice need be given them.
A is incorrect. The bank can hold any one of them fully liable for the entire debt and the others may be required to contribute their proportionate share to the one held liable.
B is incorrect. If the guaranty was primarily for the owners' benefit, the guaranty would not need to be in writing. But since the benefit only accrues to the owners indirectly (through the corporation), it is not considered to be primarily for their benefit.
D is incorrect. The owners only guarantied one loan and did not assume responsibility for other debts.
Question: Why the owner is a surety, not a guarantor.
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