Security Rights

Question 1

What is a security right?

Answer 1

Legal mechanism to help a creditor collect on an obligation (generally a money debt arising from a loan) by
giving the creditor extra rights, either against a person other than the obligor, or in property belonging to the obligor or a third
person.

Give the creditor greater security that the credit obligation will be fulfilled because if the obligor
“defaults” (i.e., fails to pay the debt), the accompanying security right gives the creditor ready access to another source of
value to compensate for the unfulfilled obligation.

Question 2

Security rights are accessory to principal obligations.

Answer 2

1. Obligor’s personal liability to the creditor is the principal obligation.
2. Any security right associated with the principal obligation is an accessory right or obligation.
3. Security rights depend their existence on the enforceability of the principal obligation.
4. Generally, if the principal obligation is not enforceable against the obligor, no accessory security rights securing the obligation are enforceable.

Question 3

What are three issues in security rights?

Answer 3

1. How are they confected.
2. How are they perfected against third parties.
3. What remedies are available.

Question 4

What is suretyship?

Answer 4

Conventional obligation (i.e., a
contract) by which a third person, called the surety or guarantor, binds herself to a creditor to fulfill the obligations of
another (i.e., the principal obligor) upon the failure of the latter to do so.

If the obligor defaults on the debts
identified in the contract, the surety agrees to stand in the obligor’s place and pay the creditor.

Suretyship is accessorial to a principal obligation.

Any principal obligation may be secured.

Question 5

What are the requirements for suretyship?

Answer 5

Must be in writing and express.

Question 6

What does express mean?

Answer 6

Surety’s promise must be unambiguous with respect to (i) the surety’s
undertaking personal liability and (ii) the obligation(s) for which the surety is undertaking that liability.

No parol evidence.

Continuing guarantees when a surety agrees to be “any and all obligations of whatever nature or source arising in the past, present,
or future” from the obligor to the creditor.

Question 7

What is ostensible suretyship?

Answer 7

Party apparently acting as co-obligor in such situations will instead be treated
as a surety (with the extra rights and defenses of sureties) if two conditions are met:

(i) the principal cause of the
contract with the creditor is simply to guarantee the performance of such obligation (rather than enjoying the
direct benefits of the obligation; e.g., use of a car), and

(ii) the creditor clearly knows this.