Security Rights

Question 1

A security right is _____

Answer 1

a legal right against another person or against property designed to help a creditor collect on a debt.

Question 2

Security rights are “_____” rights

Answer 2

Accessory. The obligor’s personal liability to the creditor is the principal obligation, which lays the foundation for all security rights. Thus, if the principal obligation is unenforceable, so is the security right.

Question 3

Personal Security Rights

Answer 3

Security rights allowing a debt to be enforced against a person other than the obligor are called personal security and are governed by the law of suretyship.

Question 4

Real Security Rights

Answer 4

Security rights enforceable against property (belonging either to the obligor or to a third party) are called real security rights.

Question 5

3 Types of Real Security Rights

Answer 5

(1) In immovable property by agreement are called mortgages
(2) In immovable/movable property that arise by operation of law are called privileges
(3) In movable property by agreement are called security interests

Question 6

Suretyship (Guarantee)

Answer 6

Suretyship is a conventional obligation by which a third person, called the surety, binds himself to a creditor to fulfill the obligations of another (i.e., the principal obligor) upon the failure of the latter to do so.

Question 7

Suretyship - Accessory Right

Answer 7

• The creditor’s rights under a suretyship contract are always accessory to a principal obligation.
• If the principal obligation has been extinguished, the suretyship contract has lost its foundation and is unenforceable.

Question 8

Suretyship - Formal Requirements

Answer 8

(1) Writing - act under private signature - signed by the surety
(2) Express - Contract must be clear about surety’s promise to pay debts and on what obligations
(3) Ostensible - suretyship can be established by recharacterizing an apparent solidary liability of a co-obligor if it is clear that:
(i) the principal cause of the contract with the creditor is to guarantee performance of the obligation; and
(ii) the creditor clearly understands this intention.

Question 9

Creditor’s Rights - Suretyship

Answer 9

• Unless agreed otherwise, the creditor may enforce its rights and collect the principal obligor’s entire debt from the surety as soon as the debt is enforceable against the debtor.
• Unless agreed otherwise, the creditor may proceed directly against the surety after default.
• If more than one surety has agreed to guarantee the principal obligation(s), the co-sureties are presumed to be bound solidarily.

Question 10

3 Types of Suretyship Contracts

Answer 10

(1) Legal Suretyship - one that is required by a legal authority.
(2) Commercial Suretyship - (i) the surety is paid for giving promise to pay; (ii) the surety or the debtor is a business entity); or (3) the principal obligation arises out of a commercial transaction.
(3) Ordinary Suretyship - if neither legal nor commercial.

Question 11

Surety’s Defenses - Material Modification

Answer 11

If the creditor changes the terms of the principal obligation after the surety has guaranteed it, without their consent.
(1) For ordinary suretyships, they are extinguished;
(2) For commercial suretyships, they are extinguished to the extent that the modification or impairment actually injures surety.

Question 12

Surety’s Defenses - Defenses of Principal Obligor

Answer 12

A surety can assert any defenses that the debtor would have to payment to the creditor (e.g., vices of consent; illegality; violation of some consumer protection law). Except (i) lack of capacity or (ii) discharge in bankruptcy.

Question 13

Surety’s Defenses - Remission of Principal Obligor

Answer 13

A surety’s accessorial obligation is released if creditor remits (releases) the principal obligation/debt.

Question 14

Remission of Co-Surety

Answer 14

Releasing one co-surety remits that surety’s virile share.
Ex.: Four sureties (25% virile shares), creditor remits (releases) one surety for payment of 10% of debtor’s debt. Creditor may now collect from any other surety only 75% of debtor’s debt (and may collect from debtor 90%, unless creditor and surety agree otherwise).

Question 15

Waiver of Surety Defenses

Answer 15

Any and all of these 4 defenses can be “waived” by the surety. Contract may be “qualified, conditioned, or limited in any lawful manner.”

Question 16

Surety’s Right Against Debtor - Reimbursement

Answer 16

• If surety pays debtor’s “exigible” (due and owing) obligation, surety has a right to seek reimbursement from debtor.
• If surety pays an obligation that was not “exigible,” e.g., if the principal obligation has prescribed or been extinguished, surety generally cannot seek reimbursement from debtor. (Could still be able to get back from creditor via unjust enrichment)

Question 17

Surety’s Right Against Debtor - Subrogation

Answer 17

• Surety steps into creditor’s shoes, exercising all rights that creditor had against debtor.
• Surety is also subrogated to the creditor’s right to collect attorney’s fees and interest on unpaid amounts if the surety has to sue the principal obligor to collect.
• If the surety pays only a part of the principal obligation, the surety’s right to subrogation is subordinated to the creditor’s right to collect the unpaid remainder from the principal obligor or the value of real security rights.

Question 18

Rights Among Co-Sureties (Solidarily Liable)

Answer 18

• If one of multiple sureties pays the creditor, the paying surety can collect contribution of nonpaying sureties’ virile shares.
• If one of several co-sureties becomes insolvent and thus unable to contribute to another surety who pays the creditor, the insolvent surety’s share is reallocated to the others in equal shares unless modified by contract.

Question 19

Termination - Continuing Guarantees

Answer 19

When the surety agrees to pay general future indebtedness. The surety may terminate such a suretyship by notice to the creditor.

Question 20

Termination - Prospective Termination Only

Answer 20

Termination of a continuing guarantee applies only to obligations arising after notice of termination, not to obligations already incurred or that the creditor must allow the debtor to incur thereafter.

Question 21

Termination - Knowledge of Surety’s Death

Answer 21

If the creditor learns that the surety has died, that counts as notice of termination.

Question 22

Mortgages

Answer 22

• A real accessory right that allows mortgagee to have immovable property seized and sold to pay the secured debt in preference to other claims.
• A right in property, rather than against a person.
• Mortgage attaches only to immovable property and related rights (usufruct, servitude of right of use, lessee’s rights in leased property).

Question 23

Mortgagor vs. Mortgagee

Answer 23

• Mortgagor: the person whose property rights are affected by a mortgage
• Mortgagee: the creditor to whom the mortgagor grants security rights

Question 24

3 Types of Mortgages

Answer 24

(1) Conventional: special mortgage (extending only to specific identified property) and is created by contract with the debtor.
(2) Judicial: when a creditor on a money judgment files a certified copy of judgment in the mortgage records of a parish where debtor has/will have immovables.
(3) Legal: arises as a matter of law in certain limited circumstances (never tested).

Question 25

Special vs. General Mortgages

Answer 25

(1) Special: mortgages that confer rights in specifically identified immovable property (i.e., conventional mortgages)
(2) automatically confer rights in all of the mortgagor’s immovable property-related rights anywhere in a defined geographic region, whether presently existing or arising in the future (i.e., legal and judicial mortgages)

Question 26

Property Susceptible of Mortgage

Answer 26

• Not only may absolute ownership of particular parcels of immovable property be mortgaged, but also “lesser” property rights, such as usufruct, servitudes of right of use, and a lessee’s rights of quiet use and enjoyment.
• Also includes movable property that becomes affixed as component parts.
• One may grant a mortgage over property that one does not yet own, but the legal effects of such a mortgage will not commence until the property is so acquired. The property must still be described with the same specificity.

Question 27

Creation of Conventional Mortgages - 4 Requirements

Answer 27

(1) Written - must be in tangible form (email works)
(2) Signed by the mortgagor
(3) State the amount or maximum amount secured
(4) Precise description of the immovable property

Question 28

(2) Signed by the Mortgagor

Answer 28

• Only the mortgagor needs to sign: the mortgagee need not sign. If someone signs on the mortgagor’s behalf (i.e., a company), they must have authority.
• Authentic act is not required (red herrings)
• No “paraph” necessary – needed under old law, just mention that it is irrelevant

Question 29

(3) State the Amount or Maximum Amount Secured

Answer 29

• Stated amount + interest
• Fluctuating line of credit: a mortgage can state a maximum amount that can be outstanding under a fluctuating line of credit, but must state a dollar figure.

Question 30

(4) Precise Description of the Immovable Property

Answer 30

• Must be a precise legal description (“metes and bounds”). It is not just a street address.
• Reference to Public Maps: reference to subdivision or plat maps on public file is permitted.
• An omnibus description (ex. all of my property in East Baton Rouge Parish) is NOT sufficient.
• Future property: No general transfer of future property, but specific description is permitted.

Question 31

Making Mortgages Effective Against Third Parties

Answer 31

• A mortgage is effective against 3Ps when the entire “act of mortgage” is filed in the mortgage records of the parish where the immovable property is located.
• First to file wins (some exceptions)

Question 32

Duration of Inscription and Reinscription

Answer 32

A filed mortgage is effective against third parties for a limited time:
- If the mortgage matures, it is said to have lapsed (when it reaches the end date of the term)
- For 10 years after date of mortgage (not filing date), unless mortgage describes 9+ year maturity date
- If mortgage (1) describes maturity date (due date) of any secured debt and (2) that date is 9 years or more after date of the mortgage (not filing date), it is effective for six years after maturity date of debt.

Question 33

Transfer of Secured Principal Obligation

Answer 33

• When the original creditor transfers the right to enforce an obligation secured by a mortgage to another party, the new creditor automatically acquires all rights under the mortgage. The mortgage always follows the principal obligation it secures.
• If only part of the obligations are transferred, the original and new creditors share the proceeds pro rata when the mortgage is enforced.

Question 34

Transfer of Mortgaged Property

Answer 34

• A buyer who files her act of sale in the conveyance records after a mortgagee properly filed takes the property subject to the mortgage. The new owner, who has not formally assumed liability on the principal obligation, is called a third possessor.

Question 35

Third Possessor Liability to Mortgagee for Damage

Answer 35

• Mortgage law requires third possessors to indemnify (reimburse) the mortgagee for any damage caused by their negligence or intentional misconduct.
• This protects the mortgagee’s interests after the third possessor realizes their predicament.

Question 36

Mortgagee Liability to Third Possessor for Improvement

Answer 36

• If a third possessor improves the mortgaged property and the mortgagee later forecloses, the third possessor can recover the cost of improvements from the foreclosure sale proceeds.
• Recovery is limited to the extent that these improvements increased the property’s value.
• This prevents the mortgagee from being unjustly enriched at the expense of the third possessor.

Question 37

Extinction/Termination of Mortgages

Answer 37

(1) Extinction/Destruction of Mortgaged Property: a mortgage cannot exist without the immovable property it secures. If the property is destroyed or if a lease (the collateral) is terminated, the mortgage is extinguished.
(2) Extinction of Principal Obligation: the mortgage is extinguished when the principal obligation is extinguished. Occurs through events like prescription or full performance of the obligation.
(3) Confusion: when the mortgagee becomes the owner of the collateral. The qualities of mortgagee and owner merge, extinguishing the mortgage.
(4) Termination: mortgage securing an ongoing line of credit can be terminated. It requires written notice from the mortgagor to the mortgagee once all debts are paid and no further obligations will be incurred. A mortgage can secure future obligations, remaining valid until a termination demand is made by the mortgagor.

Question 38

Pledge of Lessor’s Rights

Answer 38

• When a lessor pledges their rights to the rent from a lessee to a creditor as collateral for an obligation.

Question 39

Pledge - Creation and Effectiveness Rules

Answer 39

• A valid pledge agreement must be:
  (1) written agreement;
  (2) signed by pledgor (owner of the immovable);
  (3) stating amount secured/maximum secured amount; and
  (4) describing precisely the nature and situation of the immovable property
• Note: Pledge agreement may cover all or part of existing or future leases.

Question 40

Pledge - Effectiveness as to Third Parties

Answer 40

• A valid pledge agreement is effective against third persons when filed in mortgage records of the parish where the immovable property is located.
• Lessee notification: Binding on the lessee only after written notice.
• Ex.: Lessee must make rental payments to pledgee after receiving notice.

Question 41

Pledge - Special Rules

Answer 41

Prohibition of Pledge of Lease and Its Rents: any provision that prohibits the pledge of a lease and its rents, or that triggers the release or termination of such a pledge, is invalid. This rule ensures that the lessor’s ability to pledge their rights in a lease and its rents as security is not restricted by contractual terms.

Modification of Pledged Lease: modifications to a pledged lease can be effective against the pledgee (creditor) without the pledgee’s consent under certain conditions if:
(1) the modification was made in good faith; and
(2) if the rent being adjusted or modified has not been fully earned at the time notice is given to the lessee.

Question 42

Privileges

Answer 42

• A privilege is a real security device (related only to property) that arises by operation of the law.
• They reserve priority for the creditor, effective against other interested parties. The principal obligation is usually enforced through ordinary legal processes, with the privilege ensuring the creditor’s right to recover property after obtaining a judgment.

Question 43

2 Types of Privileges

Answer 43

(1) General: create rights in all of the identified obligor’s property
(2) Special: create rights only in the specific property identified in the law.
- As a general matter, special privileges are more valuable to the creditor and are more common in commercial society and on the bar examination.

Question 44

General Privileges

Answer 44

Ranked in descending order. All rank below any special privilege or security interest, but above a mortgage:
(1) Funeral Charges up to $500: secures burial costs up to $500, excluding other funeral expenses.
(2) Law Charges: secures a winning litigant’s right to collect court-ordered costs from the losing party.
(3) Expenses of the Last Sickness: secures medical charges incurred during the last sickness in the year preceding death.
(4) Wages of Servants and Salaries of Clerks: secures unpaid wages of live-in domestic servants for up to two years and unpaid salaries of clerks.
(5) Open Account Credit for Retail Provisions: extends to all of the obligor’s movable property for:
(i) Boarding houses/taverns supplying provisions on credit during the last year.
(ii) Retail suppliers (bakers, butchers, grocers) supplying provisions on credit during the last six months.
(6) Spouse or Children in Necessitous: provides a collective total of $1,000 from the decedent’s estate to a surviving spouse and/or minor children owning less than $1,000 of property.

Question 45

Selected Special Privileges - Repair People (Artisans/Mechanics)

Answer 45

• This is a privilege in a thing made/repaired to secure fees for repair service, parts, and labor.
• Possession or 120-Day Pursuit: the privilege exists while repairperson is in possession of the goods. If not in possession, privilege lasts for 120 days from the last day materials/labor were supplied.
• Ex.: A mechanic has a privilege over your car for 120 days from the last repair date, securing the payment for labor/parts.

Question 46

Selected Special Privileges - Lessor’s Privilege

Answer 46

• This is a privilege on all lessee’s movable property located on leased immovable property to secure rental price and lease obligations.
• Movable Property on Premises or 15-Day Pursuit:
  Privilege applies to movable property on the leased premises. Extends 15 days after lessee removes movable property without lessor’s consent, if still identifiable as lessee’s.

Question 47

Selected Special Privileges - Vendor’s Privilege

Answer 47

• This is a privilege on movable or immovable property sold to secure the purchase price.

Movables: must remain in buyer’s possession.
(i) Ex.: You buy a piece of equipment on credit. The vendor has a privilege over the equipment as long as it remains in your possession.

Immovables: must be recorded in mortgage records. Recording requirements:
(i) Act of credit sale must be recorded in mortgage records.
(ii) Recorded vendor’s privilege beats a prior mortgage if the act of credit sale is recorded within 7 days of execution (15 if recording in a different parish).
Ex.: You buy a house on credit. The vendor’s privilege on the house must be recorded in the mortgage records. It has priority over a prior mortgage if recorded within 7 days of the sale (15 if in a different parish).

Question 48

Ranking Privilege

Answer 48

Vicious circle:
(1) repairperson beats lessor;
(2) lessor beats vendor; but
(3) vendor beats repairperson

Question 49

Other Special Privileges

Answer 49

(1) Depositary’s and Depositor’s Privilege:
(i) Depositary - privilege in stored items to secure payment of expenses for holding/preserving them. Has top priority over other privileges or security interests.
(ii) Depositor - privilege on stored items to secure their return or proceeds from their sale against warehouse keeper’s creditors.

(2) Carrier’s Privilege: privilege in transported items to secure payment for transport charges. While in carrier’s possession, takes top priority. Extends for 180 days after delivery, subordinate to vendor’s privilege, prior perfected security interests, and bona fide purchasers.

(3) Attorney’s Privilege: privilege in money/property recovered through litigation to secure fees and expenses. Superior to all other privileges and Chapter 9 security interests. Contingency-fee contracts treated as first-priority special privilege.

(4) Trauma Care Providers: privilege on judgments, settlements, or insurance proceeds from treated traumatic injuries. Subordinate only to lawyer’s privilege. Requires written notice to injured person, insurance company, and liable party.

(5) Agriculture-Related (Crop) Privilege:
(i) Laborers, Lenders, and Overseers - privileges to secure wages, salaries, and loans for producing/financing crops. Farm laborers have top-priority superprivilege on unharvested crops and farm equipment.
(ii) Filing - agricultural laborers’ privileges in crops are automatically perfected. Other privileges must be perfected by filing in the central registry of agricultural liens.

Question 50

Private Works Act (PWA)

Answer 50

• Protects contractors and suppliers who provide labor and supplies on credit for the improvement (usually construction) of property.
• Protects claims for unpaid wages and material costs, and it extends to the entirety of the property, regardless of the particular contribution of the particular claimant.
• Serves primarily to protect subcontractors in the event that the general contractor fails to pass on the payments from the owner (though it also protects people with whom the owner has contracted directly).

Question 51

The PWA gives a claimant 2 things

Answer 51

(1) A claim against the owner of the immovable property over which work was done in favor of those individuals who are not in privity of contract with the owner
(2) A privilege over the immovable over which work was done

Question 52

Owners can avoid both personal liability to PWA claimants and the potential attachment of PWA privileges to their property by _____

Answer 52

(1) filing a notice of contract; and
(2) obtaining a surety bond.

Question 53

Notice of Contract

Answer 53

• A notice of contract must be filed in the mortgage records where the improved immovable is located.
• It must:
  (1) Be signed by the owner and the contractor and include their names and mailing addresses;
  (2) Contain a complete property description of the immovable ( same standards as for a mortgage;
  (3) Describe the work to be done;
  (4) Describe the contract price or method of contract price calculation, as well as when payment is due; and
  (5) Be filed before work begins.
  
  • Work begins on a project when either
    (i) materials worth at least $100 are delivered to the site; or
    (ii) other visible work is conducted on the site (but not clearing of the land, cutting and removal of trees, or any other kind of pre-construction “dirt work”).

Question 54

Surety Bond

Answer 54

To avoid PWA protections, an owner must also obtain a surety bond in an amount sufficient to cover potential claims, and attach evidence of the bond to the Notice of Contract.

Question 55

Establishing PWA Claims and Privileges

Answer 55

• Requirements: Rights under the Private Works Act (PWA) must both arise and be preserved.
• Arising: Claim and privilege arise when a claimant is owed money.
• Preserving: Claim and privilege must be preserved by filing a statement of claim and/or privilege within specific timeframes.

Question 56

Arising PWA Claims and Privileges

Answer 56

General Rule: A claim or privilege arises as soon as the claimant is owed money.
Exceptions:
(1) General Contractors: for projects over $100,000, must file a notice of contract.
(2) Lessors of Movables (no privity with owner): must notify the contractor (and owner if notice of contract filed) about leasing movables. No time limit, but notice given after 30 days limits the claim to rents due after notice.
(3) Material-men (sellers of movables): must notify owner and contractor of nonpayment within 75 days of the month the movables were delivered if a notice of contract has been filed.

Question 57

Preserving PWA Claims and Privileges

Answer 57

Filing Statement of Claim and/or Privilege - Requirements:
(i) Signed by the claimant.
(ii) Identify the improved immovable.
(iii) Describe the claimed amount.
(iv) Identify who failed to pay.
(v) Describe the work done.
Filing Timeframes:
- General Rule: Within 60 days after the earlier of (i) notice of termination or (ii) substantial completion/abandonment. Exceptions:
(i) 30 days if no privity with owner and timely notice of contract filed.
(ii) 60 days for general contractors.
(iii) 70 days for certain residential projects if conditions met.:
- Substantial Completion: last work done/materials delivered or owner accepts/improves property with minor issues remaining.
- Abandonment: Owner terminates work or shows objective discontinuance of the project.

Question 58

PWA - Effects as to Third Persons

Answer 58

General Rule - PWA privileges are effective against third persons the earlier of:
(i) When the notice of contract is properly and timely filed; or
(ii) When work begins.

Exceptions – No Work Affidavit:
- The filing of a “No Work Affidavit” creates an irrebuttable presumption that work has not begun as of a stipulated date and time. Requirements:
(i) Signed by an engineer, surveyor, or architect.
(ii) Declares that work has not begun as of a certain date and time.
(iii) Contains a complete property description.
(iv) Filed in mortgage records no later than four business days before or after the filing of a mortgage or privilege.
(v) Based on an inspection no later than four business days before or after the filing of a mortgage or privilege.

Question 59

Priority of PWA Privileges

Answer 59

PWA privileges rank by category, not by time. They share pro rata within a category:
(1) Local government privileges (e.g., property tax liens).
(2) Privileges of laborers.
(3) Mortgages and vendors’ privileges that became effective as to third persons before the PWA privileges became effective as to third persons.
(4) Privileges of subcontractors (e.g., plumbers, electricians, etc.), materialmen, and lessors.
(5) Privileges of the general contractor, privileges of any architects, surveyors, or engineers hired by the owner (collectively, “professional consultants”), and privileges of any architects, surveyors, or engineers hired by a professional consultant.
(6) Mortgages and vendors’ privileges that became effective against third persons after the PWA privileges became effective as to third persons.

Question 60

Cancellation of PWA Claims and Privileges

Answer 60

Ineffective Claims and Privileges:
- Owner can demand removal and initiate summary proceedings to cancel ineffective claims or privileges.

Effective Claims and Privileges:
- Without Proper Notice/Bond - Options for Interested Parties:
(i) Pay the claims of the claimants.
(ii) Deposit a surety bond equal to 125% of the amount of all filed PWA claims with the clerk of court and invoke a concursus proceeding against the surety bond.
- With Proper Notice/Bond:
(i) Any interested party can file suit against the PWA claimants and invoke a concursus proceeding against the surety bond.

Question 61

Enforcement of PWA Privileges

Answer 61

Filing suit: a claimant must file a lawsuit against the owner of the immovable under ordinary process to enforce a PWA privilege.

Prescription: there is a one-year prescription period for PWA claims, starting from the filing of the statement of claim and/or privilege.

Maintenance: to maintain a PWA privilege, a notice of lis pendens must be filed in the mortgage records within one year of filing the statement of claim and/or privilege.