Who Owes the Debt? North Carolina Guaranties and Suretyship

Confusion often exists as to the differences between the multiple types of guaranty agreements and suretyship agreements in North Carolina.  Although subtle differences can dictate when the liability of a party may be triggered, they do share some initial similarities.  Broadly speaking, both types of guaranty agreements and surety agreements are comprised of 3 parties: the Creditor, the Principal Debtor, and the Guarantor/Surety.  In those common scenarios, the Guarantor or Surety is potentially liable to the Creditor for the debt owed by the Principal Debtor to the Creditor.

In drawing the distinction between a guaranty and a surety agreement, one must first examine the types of guaranties in North Carolina.  Generally speaking, there are two types of guaranty agreements: Guaranty of Payment and Guaranty of Collection.  In each case, the Guarantor is potentially liable for the debt of the Principal Debtor and, to the extent the Guarantor pays the underlying debt, is entitled to reimbursement from the Principal Debtor.  However, there is a significant difference between a Guarantor of Payment and a Guarantor of Collection.  Namely, a Creditor may pursue the Guarantor of Collection for payment of the debt only after the Creditor exhausts his remedies against the Principal Debtor or if the Principal Debtor is no longer available to pursue.  A Guarantor of Payment, however, may be pursued directly without the Creditor first having pursued the Principal Debtor.  From a Creditor’s standpoint, a Guarantor of Payment is thus preferred to a Guarantor of Collection.  As such, it is important that the guaranty agreement clearly state that the guaranty is one for “payment” and not one for “collection”.

A Surety, much like a Guarantor of Payment, may be directly liable to the Creditor without the Creditor first having exhausted its efforts against the Principal Debtor.  As such, a Surety and Guarantor of Payment (as opposed to a Guarantor of Collection) are remarkably similar.  The difference being that, in North Carolina, any words of guaranty in a negotiable instrument (i.e. a Promissory Note) operate to waive presentment and notice of dishonor.  The implicit waiver of presentment and notice of dishonor is not found within the suretyship context.  Thus, a Guarantor of Payment and a Surety are treated the same, as both being directly liable to the Creditor, but the method of “calling in the debt” may be different.  The liability of a Guarantor of Collection, on the other hand, is not triggered until the Creditor has exhausted its remedies against the Principal Debtor.

The North Carolina Statute of Frauds requires that agreements where one party is answering for the debt of other, such as a guaranty or surety agreement, be in writing.  Said differently: oral guaranty agreements or surety agreements in North Carolina will not be enforced by the Courts.  Moreover, North Carolina requires that Guarantor’s signature on the agreement be separate and distinct from the Principal Debtor’s signature even where the Guarantor is the same individual who executed the underlying contract on behalf of the Principal Debtor.  This is often seen in the following commercial context: Company A wishes to receive materials from Supplier Z on credit.  In order for Supplier Z to extend credit to Company A, Company A must sign the purchase agreement and Company A’s President must sign a personal guaranty.  Even though Company A’s President is executing the purchase agreement on Company A’s behalf, he must also sign separately, as guarantor, in order to establish an effective guaranty.  In other words, the President must sign twice: once on behalf of Company A and once in his individual capacity.  A single signature, regardless of the contractual language, would be insufficient to bind both Company A and the President.  Thus, Supplier Z would be left to pursue Company A without recourse against President.

Guaranty and Suretyship Agreements are invaluable tools for Creditors.  However, be advised that the nuances of these types of agreements can dramatically effect the recourse available to the Creditor.  If you have additional questions relating to Guaranty Agreement or Suretyship, please contact our office.

– Cody R. Loughridge