CALIFORNIA COMMENTARY ON THE RESTATEMENT OF THE LA W THIRD, SURETYSHIP AND GUARANTY The UCC Committee of the Business Law Section of the State Bar of California INTRODUCTION The American Law Institute published the Restatement of the Law Third, Suretyship and Guaranty in 1996 (Restatement of Surety ship). The Restatement of Suretyship is the most modem study of the subject. Its text, supplemented by Comments, Illustrations, and Re porter's Notes, provides the best available analysis of law and policy in this field. While California law on the subject is formally codified, in fact this area of California law is primarily developed and embodied in judicial decisions. The statutory coverage, found in sections 2787 through 2856 of the Civil Code, was originally enacted in 1872. See Cal. Civ. Code 2787 2856 (West 1993 & Supp. 2000). It was based on the Field Code, itself based on the common law. See Cal. Civ. Code 2787 (West 1986); Bloom v. Bender, 48 Cal. 2d 793, 802, 313 P.2d 568, 573 (1957); see also Li i'. Yellow Cab Co., 13 Cal 3d 804, 814 15, 532 P.2d 1226, 1233 34, 119 Cal. Rptr. 858, 865 66 (1975). This was recognized in Mead v. Sanwa Bank Cali fornia, 61 Cal. App. 4th 561, 570, 71 Cal. Rptr. 2d 625, 630 (1998), the first California appellate case to refer (in footnote 2) to the Re statement of Suretyship ("In 1872, the Legislature codified the com * This Report has been a project of the Committee carried out over sev eral years. Because it reflects the collective work of many individuals, in cluding past as well as current members of the Committee, the Report is not signed by the current Committee membership or by individual contributors. Nonetheless, the Committee gratefully acknowledges the specific contributions of current Committee members Harry C. Sigman and Ellen H. Friedman and former Committee members George P. Haley and Gino Chilled.
CALIFORNIA COMM0ENTARY the Restatement of Restitution); Scholey v. Steele, 59 Cal. App. 2d 402, 405, 138 P.2d 733, 734 35 (1943) (adopting the Restatement oJ Torts). Modem California decisions have taken for granted the Re statements' role as leading and persuasive authority, citing and fol lowing the applicable Restatement section without stopping to ex plain why it is proper to look to the Restatement as a source of California law. See, e.g., Rosenthal i Great W. Fin. Sec. Coip., 14 Cal. 4th 394, 420 23, 926 P.2d 1061, 1075 78, 58 Cal. Rptr. 2d 875, 890 92 (1996) (Restatement Second of Contracts); Bily v. Arthur Young & Co., 3 Cal. 4th 370, 408 14, 834 P.2d 745, 768 73, 11 Cal. Rptr. 2d 51, 74 79 (1992) (Restatement Second of Torts); Garcia v. Superior Court, 50 Cal. 3d 728, 734 36, 789 P.2d 960, 963 65, 268 CaL Rptr. 779, 782 84 (1990) (Restatement Second of Torts); Bloom v. Bender, 48 CaL 2d 793, 798 800, 313 P.2d 568, 571 73 (1957) (Restatement of Security). California has also followed the Restatements in the field of suretyship law. See, e.g., Bloom v. Bender, 48 Cal. 2d 793, 313 P.2d 568 (1957). This is true even though many legal principles of sure tyship law are codified in the California Civil Code. With a few ex ceptions, such as section 2856 which concerns waiver of suretyship rights and defenses, the Civil Code sections on suretyship have sur vived essentially unchanged from their original enactment as part of the 1872 Civil Code. As the California Supreme Court has explained, the 1872 Civil Code was, in effect, the Restatement of its day, organizing and con cisely restating the case and statutory law of that time. See Liv. Yel low Cab Co., 13 Cal. 3d 804, 814 15, 532 P.2d 1226, 1232 34, 119 Cal. Rptr. 858, 865 66 (1975). In enacting this proto Restatement as the law of California, "it was not the intention of the Legislature to .. insulate the matters therein expressed from further judicial devel opment; rather it was the intention of the Legislature to announce and formulate existing common law principles and definitions for purposes of orderly and concise presentation and with a distinct view toward continuing judicial evolution." Id. at 814, 532 P.2d at 1233, 119 Cal. Rptr. at 865; see also L J Weinrot & Son, Inc. v. Jackson, 40 Cal. 3d 327, 332, 708 P.2d 682, 685, 220 Cal. Rptr. 103, 106 (1985). November 2000]
LOYOLA OFLOS ANGELES LA WREVIEW [Vol. 34:231 The California Supreme Court buttressed this belief on earlier precedent: The Civil Code was not designed to embody the whole law of private and civil relations, rights, and duties; it is incom plete and partial; and except in those instances where its language clearly and unequivocally discloses an intention to depart from, alter, or abrogate the common law rule con cerning a particular subject matter, a section of the code purporting to embody such doctrine or rule will be con strued in the light of common law decisions on the same subject. In reEstate of Elizalde, 182 Cal. 427, 433, 188 P. 560, 562 (1920). The Restatement of Suretyship, like its predecessor, the Re statement of Security, and like the Restatements of other subjects, shows how "common law decisions on the same subject" have evolved and like its predecessors, gives California courts valuable guidance in construing the Civil Code in light of modem notions of suretyship law. Given the importance of certainty and predictability in commercial law and the importance of uniformity in a national economy, future judicial development of California suretyship law should be powerfully influenced by the Restatement of Suretyship. Therefore, the UCC Committee has prepared this Report as a service to the California bench and bar in order to provide a convenient comparison of the Restatement of Suretyship with current California law. STATUTORY CROSS REFERENCES January 25, 2000 The following table cross references those sections of the Cali fornia Civil Code dealing with suretyship to corresponding sections of the Restatement of Suretyship. Where there is no direct corre spondence between the Civil Code and the Restatement of Surety ship, the table attempts to identify sections or comments to sections of the Restatement of Suretyship that deal with analogous issues, whether or not the Civil Code and Restatement of Suretyship are in agreement on these issues.
CALIFORNA COMMENTARY TABLE CALIFORNIA L E RESTA T fENT TITLE CIVL CODE OFSURETSHIP 2787 Former distinctions 1(1), 2 15 Scope; Transactions Giving abolished; Surety or Rise to Suretyship Status; guarantor defined; Contract Creating the Sec Guaranties of col ondary Obligation; Inter lection; Continuing pretation of the Secondary guaranties Obligation Use of Par ticular Terms 2788 Surety without l(3)(d), 2(a), Scope; Transactions Giving knowledge or con 20 Rise to Suretyship Status; sent ofprincipal Contract Creating the Sec ondary Obligation; When Principal Obligor Is Charged with Notice of Secondary Obligation 2792 Consideration 9 Consideration 2793 Writing, signature 11(1) Statute of Frauds 2794 Original obligations 11(2) (3) Statute of Frauds not requiring a writing 2795 Acceptance of offer, 8 When Notification of Ac notice ceptancc of the Secondary Obligor's Offer is Neces sary for Creation of the Secondary Obligation 2799 Incomplete contract; 14 Interpretation of the Secon implied terms dary Obligation Generally 2800 Guaranty that obli 15(b) Interpretation of the Secon gation is good or dary Obligation Use of collectible Particular Terms 2801 Guaranty that obli 50, 15(b) Effect on Secondary Obli gation is good or gation of Obligec's Lack of collectible; recovery Action to Enforce Underly I ing Obligation; Interprcta November 20001
LOYOLA OFLOS ANGELES LA WREVIEW [Vol. 34:231 CALIFORNIA RESTATEMENT CII OE TITLE RTITLEEN CIVIL CODE OF SURETYSHIP tion of the Secondary Obli gation Use of Particular Terms 2802 Guaranty that obli 15(b)(3) Interpretation of the Secon gation is good or dary Obligation Use of collectible; surety's Particular Terms liability 2806 Conditional and un 1(3)(c) Scope; Transactions Giving conditional obliga Rise to Suretyship Status tions 2807 Surety for payment 1(2) Scope; Transactions Giving or performance; li Rise to Suretyship Status ability without de mand or notice 2808 Surety upon condi N/A No directly corresponding tional obligation; or analogous section in the notice of default Restatement ofSuretvship 2809 Surety's obligation I comment Scope; Transactions Giving commensurate with (k)(21) Rise to Suretyship Status principal obligation 2810 Surety's obligation; 19(b), 34 Suretyship Status De principal's personal fenses of Secondary Obligor disability Against Obligee; When De fenses of Principal Obligor May Be Raised by Secon dary Obligor as Defenses to Secondary Obligation 2811 Bonded principal; N/A No directly corresponding agreement with or analogous section in the surety, deposit of Restatement of Suretvship money, assets, with drawals 2814 Definition 16 Continuing Guaranty 2815 Revocation 16 Continuing Guaranty 2819 Change of original 37, 39(b)(ii), Impairment of Suretyship I obligation; suspen 39(c)(iii), 41, 48 Status; Release of Underly
CALIFORNIA COMMENTARY CALIFORNIA TITLE RESTATFM TIENL CIVIL CODE OFSUrETYsMP sion or impairment ing Obligation; Modifica of remedies or rights tion of Underlying Obliga against principal tion; Waiver of Suretyship Defenses; Consent 2820 Suspension or im N/A No directly corresponding pairment of remedy, or analogous section in the Creditor's void Restatement ofSure4,ship promise 2821 Rescission of N/A No directly corresponding agreement altering or analogous section in the obligation or im Restatement ofSure.'yship pairing remedy 2822 Partial satisfaction 39(c) Release of Underlying Ob of obligation; effect ligation on obligation of surety 2823 Delay in proceeding 50 Effect on Secondary Obli by creditor gation of Obligee's Lack of Action to Enforce Underly ing Obligation 2824 Indemnified surety;, 41(b)(i) Modification of Underlying liability notwith Obligation standing modifica tion or release 2825 Discharge of princi 19(b), 34, 50 Suretyship Stas pal Defenses of Secondary Ob ligor Against Obligec; When Defenses of Principal Obliger May Be Raised by Secondary Obligor as De fenses to Secondary Obli gation; Effect on Secondary Obligation of Obligee's Lack of Action to Enforce Underlying Obligation 2832 Ostensible principal 15(d), 32(2) Interpretation of the Secon November 2000]
LOYOLA OFLOS ANGELES LA WREVIEW [Vol. 34:231 CALIFORNIA TITLERESTATEMENT CIVIL CODE OF SURETYSHIP may show suretyship (3) dary Obligation Use of Particular Terms; Effect of Suretyship Status on Duties of Secondary Obligor and Obligee; Undisclosed Suretyship Status and Change in Relationship of Parties 2837 Rules of interpreta 5, 14,49 Applicability of General tion Legal Principles; Interpre tation of the Secondary Ob ligation Generally, Burden of Persuasion With Respect to Impairment of Recourse 2838 Judgement against 68 Preclusive Effect on Princi surety, effect on re pal Obligor of Litigation lationship of parties Between Obligec and See ondary Obligor 2839 Exoneration by per 19(a), (d), 46 Suretyship Status De formance or offer of fenses of Secondary Obligor performance Against Obligee; Tender of Performance 2845 Requiring creditor to 50 51 Effect on Secondary Obli pursue certain reme gation of Obligee's Lack of dies; exoneration of Action to Enforce Underly surety by creditor's ing Obligation; When Obli neglect to proceed gee Must First Seek to Col lect by Applying Collateral for Underlying Obligation 2846 Compelling princi 18, 21 Suretyship Status Re pal to perform course of Secondary Obli gor Against Principal Obli gor; Principal Obligor's 1 Duty of Performance 2847 Reimbursement of 18, 22 23 Suretyship Status Re surety by principal course of Secondary Obli
CALIFORNIA COMMENTARY CALIFORNIA tA TE ME VT TITLE CLFRL. TITLE TFSRTLEHI CIVIL CODE OFSUR__ _S__IP gor Against Principal Obli gor, Duty of Principal Obli gor to Reimburse Secondary Obligor, Measure of Reim bursement to Which Secon dary Obligor is Entitled 2848 Enforcement of 18(2)(d), 27 Suretyship Status creditor's remedies 29, 31, 53(3), 55 Recourse of Secondary Ob against principal; ligor Against Principal Ob contribution by co ligor, When Secondary Ob sureties ligor Has a Right of Subrogation; Rights Ob tained Through Subroga tion; Secondary Obligor Succeeds to Priority Status of Obligee; Secondary Ob ligor's Right to Return Per formance; Obligee's Right of Set Off; Distinguishing Cosuretyship from Sub suretyship; Rights Between Secondary Obligors Co suretyship 2849 Surety entitled to 18(2)(d), 28(c), Suretyship Status Re benefits of securities 42, 55(2) course of Secondary Obli for performance gor Against Principal Obli gor, When Secondary Obligor Has a Right of Sub rogation; Rights Obtained Through Subrogation; Im pairment of Collateral; Rights Between Secondary Obligors Cosuretyship 2850 Property of principal 51 When Obligee Must First first applied to dis Seek to Collect by Applying charge of obligation Collateral for Underlying November 2000] 239