II-3 Debtor-Creditor Relationships

Question 1

What’s the difference between surety (guarantor) and guarantor of collection (guarantor of payment)?

Answer 1

Surety: someone who is responsible when the debtor defaults.
G: same but can wait until the creditor exhausts all methods of collecting the money or remedies.

Question 2

When one of cosureties is bankrupt, how much others must pay if the original debtor defaults.
Ex: Total debt: $90. Surety A:$20, B:$30, C:$40. A is bankrupt.

Answer 2

B pays the debt amount x 30/(90-20). C pays debt amount x 40/(90-20).

Question 3

What are rights of creditor?

Answer 3

Proceed directly against surety unless guarantor of collection.
Proceed against debtor.
Against collateral.
Against one surety or all sureties.

Question 4

What is subrogation?

Answer 4

Rights of surety after they pay: will inherit the rights of debtor or creditor.

Question 5

What is exoneration?

Answer 5

Rights of surety to force principal debtor to pay.

Question 6

What is contribution?

Answer 6

Rights from cosureties - math part - percentage of surety obligation.

Question 7

What is reimbursement?

Answer 7

Rights of surety to collect from principal debtor.

Question 8

What is indemnity contract?

Answer 8

One party promises to reimburse debtor for payment of debt of loss if it arise.

Question 9

What are causes that will NOT release surety?

Answer 9

• Fraud of debtor.
• Misrepresentation by debtor.
• Changes in loan terms unless it alters risk of surety (fundamental change).
• Release of principal debtor.
• Bankruptcy of principal debtor.
• Insolvency of principal debtor.
• Death of principal debtor.
• Incapacity of principal debtor.
• Lack of enforcement by creditor.
• Creditor’s failure to give notice of default.
• Failure of creditor to resort to collateral.

Question 10

What are causes that will release surety?

Answer 10

• Proper performance by debtor.
• Release, surrender, or destruction of collateral (to extent of value of collateral).
• Substitution of debtor.
• Fraud/misrepresentation by creditor.
• Refusal by creditor to accept pmt from debtor.
• Change in loan terms (uncompensated surety and must be material) that increases risk (collateral release, extending too long).
• Statute of frauds.
• Statute of limitations.

Question 11

Collateral: Who is secured party

Answer 11

Creditor.

Question 12

Collateral: What is security interest?

Answer 12

The interest in the collateral (personal property, fixtures etc.), that secures payment or performance of an obligation

Question 13

Collateral: What is security agreement?

Answer 13

An agreement that creates or provides for a security interest

Question 14

What are requirements of security agreement?

Answer 14

• Must be in writing/record (exception is possession; electronic record is sufficient).
• Signed (authenticated) by debtor.
• Description of collateral - “reasonably identify” or possession or control (if a substitute for a security agreement).

Question 15

Does interest in collateral mean that the debtor has it in his possession or has its title?

Answer 15

No.

Question 16

When does the debtor have interest in collateral (security interest attach - enforceable)?

Answer 16

• Goods are identified (shipped, marked, designated for the debtor) - debtor has rights in collateral.
• Must have underlying debt - creditor has given value.
• Enter a security agreement or have collateral in possession or control.

Question 17

What is perfection?

Answer 17

A means by which a secured party gains priority to a debtor’s collateral over other third parties who also claim to have an interest in the same collateral.

Question 18

What are 4 methods of perfection?

Answer 18

Filing, possession, automatic, temporary.

Question 19

Where does all filing is done? Examples of items? Exception?

Answer 19

A central filing designated in the state where the debtor is located.

Example: tangible property, consumer goods, equip, inventory, farm products.
Patents, copyrights, trademarks, royalties.
Proceeds, negotiate instruments, accounts, deposit accounts, commercial tort claims (not death or personal injury tort claims), health care receivables.

Real property must be filled locally - fixtures.

Question 20

How long does the perfection last? How can it be renewed? When it is by possession? Requirement?

Answer 20

5 yrs.
Renew anytime within last 6 months.
Perfection continues as long as possession continues.
Must use care with collateral.

Question 21

Examples of perfection by possession?

Answer 21

Negotiable instruments.
Field warehousing.
Control of accounts.

Question 22

What is the best way of perfection?

Answer 22

By possession.

Question 23

What is temporary perfection rule?

Answer 23

4-month rule: Creditor has 4 months to file in the new state when the collateral moves.
ex: Car loan agreement usually has a clause that if the debtor does not notify the creditor when moving, the debt can become due - because the creditor can lose perfection if they don’t file in the new state.

21-day rule: for negotiable instruments.

20-day rule: priorities (old 10 days).

Question 24

What situations does automatic perfection is given?

Answer 24

• PMSI (Purchase Money Security Interest) in consumer goods (NOT in inventory or equipment).
• Proceeds (must be identified).

Question 25

General rule: Who has a priority: secured party vs secured party?

Answer 25

Pro-rata share in collateral proceeds or first to attach.

Question 26

General rule: who has a priority: unsecured party vs secured party?

Answer 26

Secured party.

Question 27

General rule: who has a priority: perfected secured party vs secured party?

Answer 27

Perfected secured party.

Question 28

General rule: who has a priority: perfected secured party vs perfected secured party?

Answer 28

Party who is first to perfect.

Question 29

General rule: who has a priority: perfected secured party vs lienor (party who has lien)?

Answer 29

Party who filed (financing stmt or lien) first.

Question 30

Exception: who has a priority: PMSI in fixtures vs perfected secured party?

Answer 30

PMSI creditor if perfected before annexation (fixture is installed) or within 20 days of annexation. PMSI will have a priority even if the creditor for mortgage had it perfected way before.

Question 31

Exception: who has a priority: PMSI in equip vs perfected secured party?

Answer 31

PMSI if perfected within 20days after delivery.

Question 32

Exception: who has a priority: PMSI in inventory vs perfected secured party?

Answer 32

PMSI if perfected before delivery and if perfected secured party given notice before delivery.

Question 33

Exception: who has a priority: PMSI in consumer goods vs buyer?

Answer 33

Buyer unless perfection is by filing before purchase by creditor.

Question 34

Exception: who has a priority: perfected secured party vs buyer? When the buyer knew about the existing perfection in ordinary course? Not in ordinary course? If nonperfected secured party vs buyer without knowledge?

Answer 34

Buyers in ordinary course win even with knowledge.
Not in ordinary course: perfected secured party.
Without knowledge: buyer.

Question 35

Consumer goods: What must be filed in order to have the collateral released after all the pmts are made?

Answer 35

Termination stmt must be filed by the creditor within 30 days after the final pmt or 20 days of demand by consumer.

Question 36

Article 9: what are creditor’s remedies if the debtor defaults?

Answer 36

Suit or repossession.

Question 37

What is repossession without court proceeding called? What is the requirement in doing do?

Answer 37

Self-help.

Can not violate civil or criminal laws when repossessing (breach of peace issues)

Question 38

Article 9: When creditor repossess the collateral, when is he required to sell the item (consumer goods)?

Answer 38

If the debtor has paid 60% of cash price of collateral (original price, not the total price including interest and so on). Consumer can demand sale within 90 days.

Question 39

Article 9-Sale: What are requirements?

Answer 39

Notice to debtor.
Notice to other secured parties.
It can be public or private.
Reasonable price/practices.
All security interests will be terminated after sale.

Question 40

Article 9-Sale: How will the proceeds be distributed?

Answer 40

1. Expenses.
2. First priority - second, and etc.
3. Debtor if there is any left.