Legal Definitions - equity of exoneration

Equity of Exoneration

The equity of exoneration is a legal right that allows a person who is only secondarily responsible for a debt to compel the person who is primarily responsible to pay that debt. It also grants the right to seek reimbursement if the secondarily liable person has already made a payment on behalf of the primary debtor.

This right applies when parties are "successively liable," meaning one party is expected to pay first (primary liability), and another party is only expected to pay if the first party fails (secondary liability). It differs from situations where parties are equally responsible for a debt.

• Example 1: Parent Co-signing a Student Loan

  Imagine a college student, Sarah, takes out a student loan, and her father, David, co-signs the loan. Sarah is the primarily liable party because the loan is for her education, and she is expected to make the payments. David is secondarily liable; he only has to pay if Sarah defaults.

  If Sarah falls behind on payments and the bank threatens to demand payment from David, David can invoke the equity of exoneration. This right allows him to legally compel Sarah to make the payments herself, preventing him from having to pay. If David has already paid some of Sarah's missed payments to protect his credit, he can use this right to demand reimbursement from Sarah for those payments.

• Example 2: Business Owner Guaranteeing a Company Lease

  Consider Mark, the owner of a new startup company, "InnovateTech LLC." To secure office space, Mark personally guarantees the lease agreement for InnovateTech LLC. The company, InnovateTech LLC, is the primarily liable party for the rent payments. Mark, as the personal guarantor, is secondarily liable; he only becomes responsible if InnovateTech LLC fails to pay.

  If InnovateTech LLC experiences financial difficulties and cannot pay its monthly rent, the landlord might turn to Mark for payment. Before or after paying, Mark can exercise his equity of exoneration. This allows him to demand that InnovateTech LLC (the company itself) use its assets to cover the rent, rather than him having to pay out of his personal funds. If Mark has already paid the rent to prevent eviction, he can seek reimbursement from InnovateTech LLC.