Big Data Enterprises borrows $10,000 from Creditworthy Loans, Inc, but cannot repay the loan when it comes due. Creditworthy refuses to ex-tend the time for repayment unless Big Data can provide an acceptable surety. Dependable Capital, LLC, agrees to
act as a surety for the loan af-ter Big Data offers Dependable a stake in the company and shows Dependable financial statements, compiled with Creditworthy's assistance, that misrepresent Big Data's financial situation. Later, Big Data again defaults on repayment of the loan, and Creditworthy files a suit against Dependable to collect the amount of the debt. Is Dependable liable? Why or why not?
No, Dependable is not liable, because Big Data committed fraud in obtaining Dependable's agreement to serve as surety and Creditworthy knew about, and assisted in, the fraud.
A surety is released from an obligation to pay a debt that he or she agreed to pay if the creditor fraudulently induced the surety to guarantee the debt. The surety can assert the fraud as a defense.
In this problem, the debtor defrauded the surety, but the debtor did it with the help of the creditor. Thus, the creditor could not claim to be innocent of the fraud. Even if the creditor had only known about the fraud, and had not ac-tively partici-pated by supplying the financial statements that misrepre-sented the debtor's financial condition, the surety could still avoid liabil-ity because nondisclosure of a material fact is a form of fraud.
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