Smartt Software Company borrows $10,000 from Term ‘N All Loans, Inc, but cannot repay the loan when it comes due. Term ‘N All refuses to ex-tend the time for repayment unless Smartt can provide an acceptable surety. Uno Venture Corporation agrees to
act as a surety for the loan af-ter Smartt offers the firm a discount on software and shows Uno financial statements, compiled with Term ‘N All's assistance, that misrepresent Smartt's financial situation. Later, after Uno uses the discount to buy software, Smartt again defaults on repayment of the loan, and Term ‘N All files a suit against Uno to collect the amount of the debt. Is Uno liable? Why or why not?
Uno is not liable, because Smartt committed fraud in obtaining Uno Venture Corporation's agreement to serve as surety and Term ‘N All 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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