Rashi is a student at State University. In need of funds to pay for tuition and books, Rashi asks Tiempo Loans, Inc, for a short-term loan. The lender agrees to make a loan if Rashi will have someone who is financially responsible guarantee the loan

Question

payments. Umberto, a well-known businessperson and a friend of Rashi's family, calls Tiempo and agrees to pay the loan if Rashi cannot. Because of Umberto's reputation, the loan is made. Rashi is making the payments, but because of illness he is unable to work for one month. He asks Tiempo to extend the loan for three months. The lender agrees, raising the interest rate for the extended period. Umberto is not notified of the extension (and thus does not consent to it). One month later, Rashi drops out of school. All attempts to collect the remainder of the loan from Rashi fail. Can Tiempo assert a claim against Umberto on the debt?

Answer 1

Tiempo cannot hold Umberto liable for two reasons.
First, Umberto's agreement is a guar¬anty contract to answer for the debt of another. The contract with the lender pro¬vided that Umberto would pay if Rashi could not; therefore, Umberto was made a guarantor, with secondary liability. For a guaranty contract to be en¬forceable, it must be in writ¬ing under the Statute of Frauds, unless the "main purpose" rule applies. Because the contract was made over the phone and the guaranty was not for Umberto's primary benefit, the oral guaranty contract is unenforceable.
Second, guarantors have certain defenses against creditors that usually depend on certain actions being taken by the creditor. The extension agreement in this case is binding (the increased interest rate is the considera-tion), but it constitutes a material change in the original contract. Any binding, material change made in the terms of an original contract be¬tween a debtor and a creditor without the consent of the guarantor discharges the guaran¬tor entirely, or at least to the extent that the guarantor suffers a loss. In this problem, that occurred when the lender agreed to extend the term of the loan at a higher interest rate without notifying and obtaining the guarantor's consent. Thus, Umberto has a defense against Tiempo's claim that would prevail even if the guaranty contract had been in writing.