Business Law 4510 Chapter 21 Notes Creditors Rights and Bankruptcy I Laws Assisting Creditors a Liens 1 i Lien a claim against property to satisfy a debt or protect a claim for the payment of a debt Lien creditor has priority over unperfected secured party but not over a perfected one 1 ii Mechanic s Lien 1 Arises when a person contracts for labor services or materials to be furnished for the purpose of making improvements on real property attached to land but does not immediately pay for the improvements a Under statutory law creates relationship where the real estate is the security for debt Lienholder must file written notice of lien against property involved time restriction b If property owner fails to pay debt lienholder may foreclose on property to satisfy debt c iii Artisan s Lien 1 A security device created at common law through which a creditor can recover payment from a debtor for labor and materials furnished for the repair or improvement of personal property a c d Possessory the lienholder ordinarily must have retained possession of the property and have expressly or impliedly agreed to provide the services on a cash not credit basis b Remains in existence as long as lienholder maintains possession and terminated once possession is voluntarily surrendered unless temporary Lienholder must file written notice of lien against property involved If property owner fails to pay debt lienholder may foreclose on property to satisfy debt and any surplus money after debt is satisfied is paid to the former owner iv Judicial Lien 1 Reflect a creditor s efforts to collect on a debt before or after a judgment is entered by a court a When debt is past due creditor can bring legal action against debtor to collect debt b If creditor is successful court awards then a judgment against the debtor i Creditor usually unable to collect awarded amount from debtor 1 Creditor can request certain nonexempt property of the debtor to be seized to satisfy debt in order to ensure collectability a b If seized before judgment court s order is writ of attachment If seized after judgment court s order is writ of execution 2 Writ of Attachment a Attachment a court ordered seizure and taking into custody of property prior to the securing of a judgment for a past due debt b Prejudgment remedy creditor must comply with the specific state s statutory restrictions and requirements i Creditor must have an enforceable right to payment of the debt under law and must follow certain procedures or be held liable for damages ii Creditor must file an affidavit stating debtor is in default and indicating statutory grounds under which attachment is sought iii Creditor must post bond to cover court costs and value of property attached a Court order directing sheriff to seize and sell any of debtor s nonexempt real or personal property within the courts geographic jurisdiction i Arises after creditor wins and debtor cannot or will pay judgment ii Proceeds of sale used to pay debt surplus goes to debtor 3 Writ of Execution b Garnishment i Permits creditor to collect a debt by seizing property of debtor being held by a third party garnishee ii Garnishment Proceedings State law court orders a third party to turn over property owned by the debtor to pay debt 1 2 Can be prejudgment but usually post judgment Laws Limiting the Amount of Wages Subject to Garnishment iii 1 Limits placed on amount that can be taken from a debtor s weekly take home pay c Creditors Composition Agreements 2 i composition agreements when creditors contract with debtors for discharge of debtor s liquidated debts fixed on payment of a sum less than that owed d Mortgage Foreclosure i Mortgage a written instrument giving a creditor an interest in lien on the debtor s real property as security for the payment of debt ii Creditors can foreclose on property in case of debtor default 1 All proceeds go to debt and any surplus goes to debtor 2 If amount does not cover debt mortgagee creditor can seek to recover difference from mortgagor debtor by obtaining a deficiency judgment representing the difference between the mortgaged debt and the amount actually received from the proceeds of the foreclosure sale a Separate legal action pursued subsequent to foreclosure action iii Mortgage Lending Practices and High Risk Borrowers 1 Higher interest rates or adjustable rate mortgages ARMs iv 2008 Housing Reform Bill 1 Passed to help estimated 3 million homeowners who lost homes to foreclosure and to bailout two major mortgage giants Freddie Mac and Fannie Mae 2 Raised debt ceiling by 800 billion dollars e Suretyship and Guaranty i Created when a third party promises to pay a debt owed by another in the event the debtor does not pay Provide creditor right to seek payment from third party if primary debtor defaults on obligations 1 ii Surety iii Guaranty a a b d e 1 A contract of strict Suretyship is a promise made by a third person surety to be primarily responsible for the debtor s obligations express contract 1 The guarantor third person making the guaranty is secondarily liable a Can only be held liable after the principal debtor defaults 2 Must be in writing statute of frauds unless the main purpose exception applies If the main purpose of the guaranty agreement is to benefit the guarantor then the contract need not be in writing to be enforceable 3 Capital Color Printing Inc v Ahern Issue does the preprinted credit form that identified Quality Printing as the customer and included a guaranty and what appeared to be the signatures of Ahern and Heflin satisfy the requirements of the Statute of Frauds Yes the law does not require a specific format for these forms only that the roles of the primary and secondary debtors are identified iv Defenses of the Surety and the Guarantor allow of the following applied to both 1 Actions Releasing the Surety a Making any material modification in the terms of the original contract between the principal debtor and the creditor without first obtaining the consent of the surety will discharge a gratuitous surety one who receives no consideration in return for acting as a security completely b A surety who is compensated will be discharged to the extent that they suffer a loss c Naturally if the principal obligation is paid by the debtor or another person on behalf of the debtor the surety is discharged from the obligation If valid tender of payment is made and the creditor rejects it with knowledge of the surety s existence the