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Fraud in Application Does Not Relieve Surety of Liability
Description Appeals court held that when a surety has been induced to offer surety bonds by a principal debtor who used fraud against the surety, the creditor is still owed payment from the surety so long as the creditor was innocent of any wrongdoing.
Topic Negotiable Instruments/Commercial Paper
Key Words Surety; Bonds; Fraud
C A S E   S U M M A R Y
Facts Two livestock dealers applied to American to serve as a surety by issuing bonds for them to meet the Packers and Stockyard Act requirements that every livestock dealer must maintain a reasonable bond to secure the performance of its obligations to protect farmers and ranchers in case they sold their livestock to insolvent or defaulting purchasers. American relied upon the information provided in the applications and issued the bonds. When the dealers then defaulted in payment owed to hog sellers, the sellers made claims against the surety bonds for the purchase money they were due. American then discovered that the signatures on the bond applications were forged and refused to pay. When the hog sellers sued; the district court held for American, concluding that the bonds were void. The sellers appealed.
Decision Reversed. Federal law and Georgia law are the same on this point. Since the fraud was committed solely by the principals, the livestock dealers, American is not relieved of liability on the bonds. "It is well established under the common law of suretyship that 'fraud or misrepresentation practiced by the principal alone on the surety, without any knowledge or participation on the part of the creditor or obligee, in inducing the surety to enter into the suretyship contract will not affect the liability of the surety.'" The hog sellers are due payment from American.
Citation American Manufacturing Mutual Insurance Co. v. Tison Hog Market, Inc., 182 F.3d 1284 (11th Cir., 1999)

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