Chapter 21 Notes

Question 1

1. Can the debt be satisfied through the possession and (usually) sale of the collateral?
2. Will the creditor have priority over any other creditors or buyers who may have rights in the sale collateral?

Answer 1

Two Main Concerns of the Creditor if the Debtor Defaults

Question 2

Failure to pay a debt when it is due.

Answer 2

Default

Question 3

1. Unless the creditor has possession of the collateral, there must be a written or authenticated security agreement that clearly describes the collateral subject to the security interest and is signed or authenticated by the debtor.
2. The secured party must give something of value to the debtor.
3. The debtor must have “rights” in the collateral.

Answer 3

Requirements to Create a Security Interest

Question 4

Under Article 9 of the UCC, any party who owes payment or performance of a secured obligation.

Answer 4

Debtor

Question 5

Once the requirements to create a security interest are met, the creditor’s rights are said to ____ to the collateral.

Answer 5

Attach

Question 6

In a secured transaction, the process by which a secured creditor’s interest “attaches” to the collateral and the creditor’s security interest bcomes enforceable. In the context of judicial liens, a court-ordered seizure of property before a judgement is secured for a past-due debt.

Answer 6

Attachment

Question 7

When the collateral is not in the possession of the secured party, the security agreement must be either written or authenticated. It must also describe the collateral.

Answer 7

Written or Authenticated Security Agreement

Question 8

To sign, execute, or adopt any symbol on an electronic record that verifies that the person signing has the intent to adopt or accept the record.

Answer 8

Authenticate

Question 9

The collateral must be reasonably identified:

• Pharses like “all the debtors assets” or “all the debtors personal property” would not consitute a sufficient description.

Answer 9

Decription of the Collateral

Question 10

Normally, the value given by a secured party is in the form of a direct loan or a committment to sell goods on credit.

Answer 10

Secured Party Must Give Value

Question 11

The debtor must have a current or a future ownership interest in or right to obtain possession of the collateral.

• Misconception: that the debtor must have title to the collateral to have rights in it, but this is not a requirement.

Answer 11

Debtors Must Have Rights in the Collateral

Question 12

The legal process by which secured parties protect themselves against the claims of third parties who may wish to have their debts satisified out of the same collateral. It is usually accomplished by filing a financing statement with the appropriate government official.

Answer 12

Perfection

Question 13

Whether a secured party’s security interest is perfected or unperfected can have serious consequences for the secured party.

• The creditor with a perfected security interest will prevail.
• In some circumstances a security interest becomes perfected even though no financing statement was made.

Answer 13

Perfecting a security interest.

Question 14

A financing statement gives public notice to third parties of the secured party’s security interest. The security agreement itself can also be filed to perfect the security interest.

• Financing statement must have names of the debtor and secured party, and must identify the collateral covered by the financing statement.
• Can be filed electronically
• Can be filed before a secruity agreement is made or a security interest attaches.

Answer 14

Perfection by Filing

Question 15

• Communication of the financing statement to the appropriate filing office
• Correct filing fee; or
• The acceptance of the financing statement by the filing officer

Answer 15

What Constitutes a Filing

Question 16

Filed by this so that the financing statements can be located by subsequent searches.

• Slight variations will not be considered misleading if a search of the filing office’s records, using a standard computer search engine routinely used by the office, would disclose the filings.

Answer 16

The Debtor’s Name

Question 17

1. Corporations
2. Trusts
3. Individuals and organizations
4. Trade names

Answer 17

Categories of Rules for Determining when the Debtor’s Name as it Appears on a Financing Statement is Sufficient:

Question 18

The debtor’s name on the financing statement must be “the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization.”

Answer 18

Corporations

Question 19

The financing statement must disclose this information and provide that trust’s name as specified in its official documents.

Answer 19

Trusts (or Trustee for Property Held in Trust)

Question 20

The financing statement must disclose “the individual or organizational name of the debtor.” If the organizational debtor does not have a group name, the names of the individuals in the group must be listed.

• Organization includes: unincorporated associations, such as clubs, churches, joint ventures, and general partnerships.

Answer 20

Individuals and Organizations

Question 21

When this name is not the legal name of the business, providing only this name in a financing statement is not sufficient for perfection.

• Must also include the owner-debtor’s name.
• If debtor’s name changes, the financing statement remains effective for collateral the debtor acquired before or within 4 months after the name change. (if not filed within 4 months, anything after that 4 months is unperfected).

Answer 21

Trade Names

Question 22

Both the security agreement and the financing statement must describe the collateral in which the secured party has a security interest.

• The description in the security agreement must be more precise than the description in the financing statement.
• UCC allows broad, general descriptions in the financing statement, as long as they are accurate.

Answer 22

Description of the Collateral

Question 23

Must describe the collateral because no security interest in goods can exist unless the parties agree on which goods are subject to the security interest.

Answer 23

Description- Security Agreement

Question 24

Must describe the collateral to provide public notice of the fact that certain goods of the debtor are subject to a security interest.

• Other parties can check the file when they wish to buy collateral or lend money.
• Land related security interests- a legal description of the reality is also required.

Answer 24

Description- Financing Statement

Question 25

A financing statement must be filed centrally in the appropriate state office, such as the office of the secretary of state, in the state where the debtor is located.

• Exception- When collateral consists of timber to be cut, fixtures, or items to be extracted- such as oil, coal, gas, and minerals. These are filed in the county where the collateral is located.
• Debtor’s location, not the location of collateral.

Answer 25

Where to File- Most States

Question 26

• Individual debtors- the state of the debtor’s principal residence.
• Organization tht is registered with the state (Corporation or LLC)- the state in which the organization is registered.
• All other entities- the state in which the business is located or, if the debtor has more than one office, the place from which the debtor manages its business operations and affairs.

Answer 26

Determining the Debtor’s Location

Question 27

Renders the security interest unperfected and reduces the secured party’s claim in bankruptcy to that of an unsecured creditor.

• i.e.- name is seriously misleading, collateral is not sufficiently described in financing statement

Answer 27

Consequences of an Improper Filing

Question 28

Two types of situations security interest can be perfected without filing a financing statement:

1. Occurs when the collateral is transferred into the possession of the secured party.
2. Occurs when the security interest can be perfected on attachment (without a filing and without having to possess the goods).

Answer 28

Perfection Without Filing

Question 29

Means that these security interests are automatically perfected at the time of the creation. Two common examples:

1. purchase-money security interest in consumer goods
2. An assignment of a beneficial interest in a decedent’s estate.

Answer 29

Perfected on Attachment

Question 30

Past more common means of obtaining financing: to pledge certain collateral as security for the debt and transfer the collateral into the creditor’s possession. When the debt was paid, the collateral was returned to the debtor.

• Stocks, bonds, negitiable instruments, and jewelry are commonly transferred into the creditor’s possession when they are used as collateral for loans.
• For most collateral, possession by the secured party is impractical because it denies the debtor the right to use or derive income from the property to pay off the debt.

Answer 30

Perfection by Possession

Question 31

A security device in which personal property is transferred into the possession of the creditor as security for the payment of a debt and retained by the creditor until the debt is paid.

Answer 31

Pledge

Question 32

A security interest that arises when a seller or lender extends credit for part or all of the purchase price of goods purchased by a buyer.

• Consumer goods
• Entity that extends the credit and obtains this can be either the seller or a financial institution that lends the buyer the funds with which the purchase the goods.

Answer 32

Perfection by Attachment- The Purchase-Money Security Interest in Consumer Goods

Question 33

Items bought primarily for family, personal, or household purposes.

Answer 33

Consumer Goods

Question 34

A PMSI in consumer goods is perfected automatically at the time of a credit sale- at the time the PMSI is created. The seller in this situation does not need to do anything more to perfect her or his interest.

Answer 34

Automatic Perfection

Question 35

1. Certain types of security interests that are subject to other federal or state laws may require additional steps to be perfected.
   
   • certificate-of-title statutes- establish certain perfection requirements for security interest
2. PMSIs in nonconsumer goods (business inventory or livestock) are not automatically perfected.

Answer 35

Exceptions to the Rule of Automatic Perfection

Question 36

Generally divided into two classifications:

1. Tangible collateral
2. Intangible collateral

Answer 36

Perfection and the Classification of Collateral

Question 37

Collateral that can be seen, felt, and touched.

Answer 37

Tangible Collateral

Question 38

Collateral that consists of or generates rights.

Answer 38

Intangible Collateral

Question 39

A statement that, if filed within 6 months prior to the expiration date of the original financing statement, continues the perfection of the security interest for another five years.

• Financing statement is effective for 5 years from the date of filing (before filing for continuation)
• This can be continued indefinitely
• Anything filed otuside of this window is ineffective.

Answer 39

Effective Time Duration of Perfection- Continuation Statement

Question 40

• Proceeds
• After-Acquired Property
• Future Advances
• The floating-lien concept

Answer 40

Scope of Security Interest

Question 41

Under Article 9 of the UCC, whatever is recieved when collateral is sold or disposed of in some other way.

• A security interest in the collateral gives the secured party a security interest in this acquired from the sale of that collateral.
• Perfects automatically on the perfection of the secured party’s security interest in the original collateral, and it remains perfected 20 days after perfection period in their original security agreement.

Answer 41

Proceeds

Question 42

Property that is acquired by the debtor after the execution of a security agreement.

• Generally debtor will purchase new property to replace the inventory sold. The secured party wants this newly acquired inventory to be subject to the original security interest. This clause continues the secured party’s claim to any inventory acquired thereafter.

Answer 42

After-Acquired Property

Question 43

Often, a debtor will arrange with a bank to have a continuing line of credit under which the debtor can borrow funds intermediately. Advances against lines of credit can be subject to a properly perfected security interest in certain collateral.- may provide that future advances are also subject.

• Future advances do not have to be of the same type otherwise related to the original advance to benefit this type of cross-collateralization.
• Each advance is perfected as of the date of the original perfection.

Answer 43

Future Advances

Question 44

The use of an asset that is not the subject of a loan to collateralize that loan.

Answer 44

Cross-Collateralization

Question 45

A security interest in proceeds, after-acquired property, or collateral subject to future advances by the secured party (or all three). The security interest is retained even when the collateral changes in character, classification, or location.

• Inventory
• Shifting stock of goods

Answer 45

The Floating-Lien Concept

Question 46

Floating liens commonly arise in the financing of this. A creditor is not interested in specific pieces of this, which are constantly changing, so the lien “floats” from one item to another as this changes.

Answer 46

A Floating Lien in Inventory

Question 47

The lien can start with raw materials, follow them as they become finished goods and inventories, and continue as the goods are sold and are turned into accounts receivabe, chattel paper, or cash.

Answer 47

A Floating Lien in a Shifting Stock of Goods

Question 48

• General Rules of priority
• Exceptions to the general rules of priority
• Rights and duties of debtors and creditors

Answer 48

Priorities, Rights, and Duties

Question 49

The basic rule is that when more than one security interest has been perfected in the same collateral, the first security interest to be perfected (or filed) has priority over and security interests that are perfected later.

• When one perfects- that security interest has priority
• When none perfect- the first security interest that attaches has priority

Answer 49

General Rules of Priority

Question 50

1. Perfected security interest versus unsecured security interests
2. Conflicting perfected security interests
3. Conflicting unperfected security interests

Answer 50

Categories of UCC’s Rules of Priorities

Question 51

When two or more parties have claims to the same collateral, a perfected secured party’s interest has priority over the interests of most other parties. This includes priority to the proceeds from a sale of collateral resulting from a bankruptcy (giving the perfected secured party rights superior to that of a bankruptcy trustee).

Answer 51

Perfected Security Interest Versus Unperfected Security Interest

Question 52

When two or more secured parties have perfected security interests in the same collateral, the first to perfect (by filing or taking possession of the collateral) generally has priority.

Answer 52

Conflicting Perfected Security Interests

Question 53

When two conflicting security interests are unperfected, the first to attach (be created) has priority. This is sometimes called the “first-in-time” rule.

Answer 53

Conflicting Unprofected Security Interests

Question 54

• In some instances, a PMSI, properly perfected, will prevail over another security interest in after-acquired collateral, even though the other was perfected first.
• Buyers in the ordinary course of business
• Buyers of the collateral

Answer 54

Exceptions to the General Priority Rules

Question 55

A person who in good faith, and without knowledge that the sale violates the rights of another in goods, buys goods in the ordinary course from a person in the business of selling goods of that kind.

• Takes the goods free from any security interest created by the seller even if the security interest is perfected and the buyer knows of its existence. If buyers could not obtain goods free and clear of any security interest the merchant has created, the free flow of good in the marketplace would be hindered.

Answer 55

Buyers in the Ordinary Course of Business

Question 56

The UCC recognizes that there are certain types of buyers whose interests in purchased goods could conflict with those of a perfected secured party on the debtor’s default.

• Include buyers in the ordinary course of business, buyers of farm products, chattel paper, instruments, documents, or securities.
• UCC sets down special rules of priority for these types of buyers.

Answer 56

Buyers of the Collateral

Question 57

The security agreement itself determines most of the rights and duties of the debtor and the secured party. The UCC impoes some rights and duties that are applicable unless the security agreement states otherwise.

• Information requests
• Release, assignment, and amendment
• Confirmation or accounting request by debtor
• Termination statement

Answer 57

Rights and Duties of Debtors and Creditors

Question 58

At the time of filing, a security party can furnish a copy of the financing statement and request that the filing officer not the file number, date, and hour of the original filing on the copy. Filing officer must send to every person designated by the secured party.

• Filing officer must also give information to a person who is contemplating obtaining a security interest from a prospective debtor.
• If requested, filing officer must issue a certificate that provides information on possible perfected financing statements with respect to the named debtor.

Answer 58

Information Requests

Question 59

• Secured party can release all or part of any collateral described in the financing statement (terminating the security interest in that collateral). The release is recorded by filing a uniform amendment form.
• Secured party can assign all or part of the security interest to a third party (assignee). The asignee becomes the secured party of record if the assignment is filed by the use of a uniform amdenment form.
• If debtor and security party agree, they can amend the filing- to add or substitute new collateral- by filing a uniform amendment form that indicates the file number of the initial financing statement. This does not extend the time period of perfection, but if new collateral is added, the perfection date for the new collateral begins on the date the amendment is filed (for priority purposes).

Answer 59

Release, Assignment, and Amendment

Question 60

The debtor may believe that the amount of the unpaid debt or the list of collateral subject to the security interest is inaccurate. The debtor has the right to request a confirmation of the ubpaid debt or list of collateral.

• Debtor is entitled to one request without charge every 6 months.
• Secured party must comply with the debtor’s confirmation request by authenticating and sending the debtor an accounting within 14 days after the request is received.
  
  • otherwise the secured party is held liable for any loss suffered by the debtor, plus $500.

Answer 60

Confirmation or Accounting Request by Debtor

Question 61

When the debtor has fully paid the debt, if the secured party perfected the security interest by filing, the debtor is entitled to have this filed. This demonstrates to the public that the filed perfected security interest has been terminated.

• When consumer goods are involved- the secured party must file this (or a release) within one month of the final payment or within 20 days of receiving the debtor’s demand, whichever is earlier.
• Not consumer goods- the secured party is not required to file or to send this unless the debtor demands one.

Answer 61

Termination Statement

Question 62

• What constitutes a default
• Basic remedies
• Disposition of Collateral

Answer 62

Default

Question 63

This is not always clear. Article 9 does not define this term. Parties are encouraged to practice- and by the UCC- to include in their security agreements the standards under which their rights and duties will be measured.

• The parties can stipulate the conditions that will constitute a default.
• Terms may not run counter to the UCC’s provisions regarding good faith and unconscionability.
• Any breach of terms can constitute deafult.
• Occurs most commonly when the debtor fails to meet the scheduled payments or becomes bankrupt.

Answer 63

What Constitutes A Default

Question 64

These rights and remedies are cumulative.

• Repossession of the collateral- the self help remedy
• Judicial remedies

Answer 64

Basic Remedies

Question 65

On the debtor’s default, the secured party can take peaceful possession of the collateral without the use of judicial process. On taking possession, the secured party can either retain the collateral for satisfaction of the debt or resell the goods and apply the proceeds toward the debt.

• UCC does not define peaceful possession
• General Rule is tha the collateral has been taken peacefully if the secured party can take possession without committing:
  
  1. Tresspass onto land
  2. assault and/or battery
  3. Breaking and entering

Answer 65

Repossession of the Collateral- The Self Help Remedy

Question 66

A secured party can relinquish the security interest and use any judicial remedy available, such as obtaining a judgement on the underlying debt, followed by execution and levy.

• Execution and levy are rarely undertaken unless the collateral is no longer in existence or has substantially declined in value and the debtor has other assets available that may be legally seized to satisfy the debt.

Answer 66

Judicial Remedies

Question 67

The implementation of a court’s decree or judgement.

Answer 67

Execution

Question 68

The legal process of obtaining funds through the seizure and sale of nonexempt property, usually done after a writ of execution has been issed.

Answer 68

Levy

Question 69

Once default has occured and the secured party has obtained possession of the collateral, the secured party can:

1. Retain the collateral in full or partial satisfaction of the debt (subject to limitations).
2. Sell, lease, license, or otherwise dispose of the collateral in any commercially reasonable manner and apply the proceeds toward satisfication of the debt. Any sale is always subject to procedures established by state law.

Answer 69

Disposition of Collateral

Question 70

Parties are sometimes better off if they do not sell the collateral. The right to retain collateral is subject to these conditions:

1. Notice to debtor
2. Notice to other secured parties
3. Waiting period for objections

Answer 70

Retention of Collateral by Secured Party

Question 71

The secured party must notify the debtor of its proposal to retain the collateral. Notice is required unless the debtor has signed a statement renouncing or modifying her or his rights after default.

Answer 71

Notice to Debtor

Question 72

If the collateral is consumer goods, the secured party does not need to give any other notice. In all other situations, the secured party must also send notice to any other secured party (or lienholder) from whom the secured party has received notice of a claim of interest in the collateral in question.

Answer 72

Notice to Other Secured Parties

Question 73

If, within twenty days after the notice is sent, the secured party receives an objection from the debtor or another party who was notified, the secured party must sell or otherwise dispose of the collateral. If not objection is received, the secured party may retain the collateral in full or partial satisfaction of the debtor’s obligation.

Answer 73

Waiting Period for Objections

Question 74

When the collateral is consumer goods and the debtor has paid 60% or more of the purchase price on a PMSI or of the loan amount on a non-PMSI, the secured party must sell or otherwise dispose of the repossed collateral within 90 days.

• Failure to comply- opens the secured party to an action for conversation or other liability.
• Secured party will not be liable, if the consumer-debtor signed a written statement after default renouncing or modifying the right to demand the sale of the goods.

Answer 74

Consumer Goods

Question 75

A secured party who does not choose to retain the collateral or who is required to sell it must follow the disposition procedures prescribed in the UCC.

• Secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing.
• Notice requirement
• Commercially reasonable manner

Answer 75

Disposition Procedures

Question 76

The secured party must notify the debtor and other specified parties in writing ahead of time about the sale or disposition of the collateral.

• Not required if the collateral is perishable, will decline rapidly in value, or is a type customarily sold on a recognized market.
• Debtor may waive the right to recieve notice, but only after default.

Answer 76

Notice Requirement

Question 77

Every aspect of the disposition’s method, manner, time, and place must be this.

• If collateral is not diposed in this manner, the price paid for the collateral at the sale may be negatively affected. A court can reduce the amount of any deficiency that the debtor owes to the secured party.

Answer 77

Commercially Reasonable Manner

Question 78

1. Reasonable expenses incurred by the secured party in repossessing, storing, and reselling the collateral are paid first.
2. The balance of the debt owned to the secured party is then paid.
3. Other lienholders who have made written or authenticated demands.
4. Unless the collateral consists of accounts, payment intangibles, promissory notes, or chattel paper, any surplus goes to the debtor.

Answer 78

Distribution of Proceeds From the Disposition

Question 79

The secured party must make a value determination and apply this value in a commercially reasonable manner.

Answer 79

Noncash Proceeds

Question 80

A judgement against a debtor for the amount of a debt remaining unpaid after the collateral has been repossessed and sold.

• Debtor who have defaulted rarely have the cash to pay and deficiency
• If the underlying transaction was a sale of accounts, chattel paper, or promissory note, the debtor is not liable for any deficiency.
  
  • Debtor is normally entitled to any surplus from the disposition of these types of collateral.

Answer 80

Deficiency Judgement

Question 81

May occur at any time before the secured party disposes of the collateral, enters into a contract for its disposition, or discharge the debtor’s obligation by retaining the collateral.

• Exercised by tendering performance of all obligations secured by the collateral and by paying the expenses reasonably incurred by the secured party in retaking and maintaining the collateral.

Answer 81

Redemption Rights

Question 82

• Liens
• Garnishment
• Creditors’ Composition Agreements
• Suretyship and guaranty

Answer 82

Other Laws Assisting Creditors

Question 83

An encumbrance on (claim against) property to satisfy a debt or protect a claim for the payment of a debt.

• Common (artisan) or statutory law (mechanics)
• Judicial liens- arise when a creditor attempts to collect on a debt before or after a judgement is entered by a court.
• Before perfection- lienholder has priority
• After perfection- perfected security interest has priority. Exceptions: artisan and mechanics liens

Answer 83

Liens

Question 84

A nonpossessory, filed lien on an owner’s real estate for labor, services, or materials furnished for making improvements on the realty.

Answer 84

Mechanic’s Lien

Question 85

A possessory lien held by a party who has made improvements and added value to the personal property of another party as security for payment for services performed.

• On a cash and not credit basis
• Remains in existence as long a the lien holder maintains possession of the property, and the lien is terminated once the possession is voluntarily surrendered, unless the surrender is only temporary.

Answer 85

Artisan’s Lien

Question 86

The court awards a creditor a judgement against the debtor (usually for the amount of the debt plus any interest and legal costs incurred).

• To ensure judgement is collectible, the creditor can request that certain nonexempt property of the debtor to be seized to satisfy the debt.
  
  • Writ of attachment- before judgement
  • Writ of execution- after judgement

Answer 86

Judicial Liens

Question 87

A court order to seize a debtor’s nonexempt property prior to a court’s final determination of a creditor’s rights to the property.

• A prejudgement remedy- at the time a lawsuit is filed or immediately afterward.
• Typical procedures:
  
  1. Creditor files with the court an affidavit stating the debtor has failed to pay and indicating statutory grounds uner which attachment is sought.
  2. The creditor must post a bond to cover at least the court costs, the value of the property attached, and the value of the loss of use of that property suffered by the debtor.
  3. Court issues writ of attachment

Answer 87

Writ of Attachment

Question 88

A court order directing the sheriff to seize (levy) and sell a debtor’s nonexempt real or personal property to satisfy a court’s judgement in the creditor’s favor.

Answer 88

Writ fo Execution

Question 89

A legal process whereby a creditor collects a debt by seizing property of the debtor that is in the hands of a third party.

• As a result of this, the debtor’s employer may be ordered by the court to turn over a portion of the debtor’s wages to pay the debt.

Answer 89

Garnishment

Question 90

• Can be a prejudgement remedy, requring a hearing before a court, but is most often a postjudgement remedy.
• Governed by state law; procedure varies.
• Some states- the creditor needs to obtain only one order of garnishment, which will then apply continuously to the debtor’s wages until the entire debt is paid.
• Other states- The judgement creditor must go back to court for a separate order of garnishment for each pay period.

Answer 90

Procedures for Garnishment

Question 91

• Federal law- provdies a framework to protect debtors from suffering unduly when paying judgement debts by setting limits on how much can be garnished per pay period. Any employer cannot dismiss an employee because his or her wages are being garnished.
• State laws- provide dollar exemptions, and these amounts are often larger than those provided by federal law.

Answer 91

Limitations of Garnishment

Question 92

A contract between a debtor and his or her creditors in which the creditors agree to discharge the debts on the debtor’s payment of a sum less than the amount actually owed.

Answer 92

Creditor’s Composition Agreements

Question 93

A third person’s income and assets become the security for the debt owed.

• Provide creditors with the right to seek payment from the third party if the primary debtor defaults on her or his obligations.
• Writing or record required
• Actions that release the surety and guarantor
• Defenses of the surety and guarantor
• Rights of the surety and guarantor

Answer 93

Suretyship and Guaranty

Question 94

A promise made by a third party to be responsible for a debtor’s obligation.

• An express conttract between a surety and the creditor.
• Surety is primarily liable of the debt of the principal.
• Creditor need not exhaust all legal remedies against the principal debtor before holding the surety responsible for payment.
• Creditor can demand payment from the surety the moment the debt is due.

Answer 94

Suretyship

Question 95

A third party who promises to be responsible for a debtor’s obligation under a suretyship arrangement.

Answer 95

Surety

Question 96

The guarantor is secondarily liable. Guarantor can be required to pay the obligation only after the principal debtor defaults, and default usually takes place only after the creditor has made an attempt to collect from the debtor.

Answer 96

Guaranty

Question 97

A third party who promises to be responsible for a debtor’s obligation under a guaranty arrangement.

Answer 97

Guarantor

Question 98

Under the Statute of Frauds, a guaranty contract betwen the guarantor and the creditor normally must be in writing or electronically recorded to be enforceable. Under common law, a suretyship agreement did not need to be in writing to be enforceable, and oral surety agreements were sufficient. Today, some states requiring a writing or record.

• Required unless the main purpose of the guaranty is to benefit the guarantor.

Answer 98

Writing or Record Required

Question 99

1. Material modification
2. Surrender of property
3. Payment or tender of payment.

Answer 99

Actions that Release the Surety and Guarantor

Question 100

Doing this without the surety’s consent will discharge the surety’s obligation.- Amount of discharge depends on whether he or she was compensated and the amunt of loss suffered as a result of the modification.

Answer 100

Material Modification

Question 101

If a creditor surrenders the collateral to the debtor or impairs the collateral without the surety’s consent, these acts can reduce the obligation of the surety. If the creditor’s actions reduce the value of the property used as collateral, the surety is released to the extent of any loss suffered.

Answer 101

Surrender of Property

Question 102

Any payment of the principal obligation by the debtor or by another person on the debtor’s behalf will discharge the surety from the obligation. Even if the creditor refused to accept payment of the principal debt when it was tendered, the obligation of the surety can be discharged (if the creditor knew of the suretyship).

Answer 102

Payment or Tender of Payment

Question 103

• Incapacity or bankruptcy of surety
• Creditor fraudlently induced the surety to guarantee the debt of the debtor
• Failure to inform of material facts (voidable)
• Exceptions: incapacity or bankruptcy of principal, cannot use statute of limitations.

Answer 103

Defenses of the Surety and Guarantor

Question 104

• Right of subrogation
• Right of reimbursement
• Right of contribution

Answer 104

Rights of Surety and Guarantor

Question 105

The right of a party to stand in the place of another, giving the subsituted party the same legal rights that the party originally had.

Answer 105

Right of Subrogation

Question 106

The right of a party to be repaid for costs, expenses, or losses incurred on behalf of another.

Answer 106

Right of Reimbursement

Question 107

When one co-surety pays more than his or her proportionate share on a debtor’s default, he or she is entitled to recover from the other co-sureties the amount paid above his or her obligation.

• Liability of co-surety is determined by agreement or is specified in the suretyship contract itself.

Answer 107

Right of Contribution

Question 108

A joint surety; a party who assumes liability jointly with another surety for the payment of a debtor’s obligation under a suretyship arrangement.

Answer 108

Co-Surety