Brie is a student at Collegiate University. In need of funds to pay for tuition and books, Brie asks Dependable Bank for a short-term loan. The bank agrees to make a loan if Brie will have someone who is financially responsible guarantee the loan payments. Esperanza, a well-known businessperson and a friend of Brie's family, calls the bank and agrees to pay the loan if Brie cannot. Because of Esperanza's reputation, the loan is made. Brie is making the payments, but because of illness she is unable to work for one month. She asks Dependable extend the loan for three months. The bank agrees, raising the interest rate for the extended period. Esperanza is not notified of the extension (and thus does not consent to it). One month later, Brie drops out of school. All attempts to collect the

Question

remainder of the loan from Brie fail. Can Dependable assert a claim against Esperanza on the debt?

What will be an ideal response?

Answer 1

Dependable cannot hold Esperanza liable for two reasons. First, Esperanza's agreement is a guaranty contract to answer for the debt of another. The contract with the bank provided that she would pay if Brie could not; therefore, Esperanza was made a guarantor, with secondary liability. For a guaranty contract to be enforceable, it must be in writing 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 Esperanza'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 consideration), but it constitutes a material change in the original contract. Any binding, material change made in the terms of an original contract between a debtor and a creditor without the consent of the guarantor discharges the guarantor entirely, or at least to the extent that the guarantor suffers a loss. In this problem, that occurred when the bank agreed to extend the term of the loan at a higher interest rate without notifying and obtaining the guarantor's consent. Thus, Esperanza has a defense against Dependable's claim that would prevail even if the guaranty contract had been in writing.