ADV BIS LAW MODULE 1

surety

Person who is liable for the payment of another’s debt or performance of another’s duty

Accommodation surety

Person who acts are surety without compensation (favor to friend)

Compensated surety

Person who is paid for serving as a surety (bonding company)

Guarantor

Person who makes a separate promise to be liable for debt of a principal on the happening of a certain event

All Accounts Guarantor

all-encompassing guarantee; assures the lender that any money that is at any time owed by the debtor to the lender will be paid by the guarantor

Creditor must inform Surety:

Changes to the contract

Changes in risk to the Surety

Creditor must disclose any material facts about principal’s risk

Failure to inform Surety will release Surety from liability

Surety’s rights:

Right to reimbursement: Surety can recover costs from principal

Right of subrogation: Surety acquires creditor’s rights against principal

Artisan and Mechanics Liens (protecting laborers)

Lien: property interest for the payment or discharge of a debt

Usually statutory; may vary from state to state

possessory lien

give artisan or mechanic the right to keep possession of the debtor’s property until the reasonable charges for the service have been paid

Artisan and Mechanics Lien Elements:

1. Possession by the provider of services

2. Debt created by the improvement or provision of services concerning the goods

foreclosure

authorized method for selling property subject to lien to pay amount owed to creditor

real property

land and things firmly attached to or embedded in land; immovable or attached to something immovable

personal property

movable or intangible property of value capable of being owned, exclusive of real property

judicial foreclosure

mortgagee files lawsuit for foreclosure sale

right to redemption

pay full amount of loan to redeem property

strict foreclosure

no deficiency or judgement

deed of trust

• Trustee holds legal title to property until debt is paid

• Trustee may sell property, usually at a public sale

• Easier for security to be liquidated in case of default

• Similar protections for homeowner, e.g., redemption rights

land contracts

• Contract between Purchaser and Seller

• Seller keeps title to property until full price of land is paid off

Real Property Liens

State law permits persons who contract to provide labor or materials to improve real estate may file a lien on the real property until they are paid

Attachment

• A security interest attaches to collateral when it becomes enforceable against the debtor

• 1. Creditor must give value to debtor

• 2. Debtor must have rights in the collateral

• 3. Debtor signs an agreement to grant security interest in collateral, or Creditor has possession of collateral to secure debt

security agreement

• In writing (unless creditor has possession of collateral)

• Signed by debtor

• Reasonably describe the collateral

• Spells out terms of the arrangement between creditor and debtor

  • Terms of repayment

  • What constitutes default

  • Provisions for protecting collateral

perfection

Creditor perfects the security interest to protect her interest against other creditors and third persons

• Filing public notice of the security interest

• Taking possession of the collateral

• Automatic perfection (certain limited transactions)

Public Filing

File a Financing Statement, called a UCC-1, in a public office

Perfection by possession or control

Change of possession of collateral from Debtor to Creditor or his agent perfects the security interest

E.g., field warehousing: Creditor warehouses inventory, and Debtor must make payment to take inventory out of warehouse

automatic perfection

Purchase money security interest (PMSI) in consumer goods: Creditor sells goods to consumer on credit (or loans money to enable consumer to buy goods)

Does not apply to: goods with titles like cars or goods to become fixtures or good faith consumer sale to buyer like facebook marketplace

priority

General rule is “first to file wins”: the first security interest to be perfected (filed) has priority over any later perfected security interest

first exception to the priority general rule

PMSI in Noninventory Collateral (Purchased money security interest) (house mortgage with interest in the house)

PMSI is perfected at the time debtor takes possession or within 20 days afterward

second exception to the priority general rule

• . PMSI in Inventory

  • PMSI is perfected when debtor receives possession of inventory

third exception to the priority general rule

•  Buyer in the Ordinary Course of Business

  • BIOC* takes purchase free from SI—even if perfected, and even if BIOC knows of its existence

    • *Not a person buying farm products from farming operation

fourth exception to the priority general rule

Artisan’s and Mechanic’s Liens have priority over perfected security interests if the artisan or mechanic has possession of the goods

fifth exception to the priority general rule

• Bona Fide Purchaser’s claim prevails over retailers if:

  • BFP has no knowledge of SI;

  • BFP gives value; and

  • BFP buys for personal, family, or household use

sixth exception to the priority general rule

Exception: Perfected SI in fixtures has priority if:

1. Debtor is in possession of real property (or interest of record)

2. Creditor has a PMSI

3. Mortgagee’s/Owner’s interest arose before goods became fixtures

4. Fixture’s SI is perfected by a “fixtures filing” either before goods became fixtures or within 20 days after

default

• Not defined by the UCC

• Parties usually define default in the Security Agreement

• UCC requires that parties act in “good faith”

upon default, creditor has options

1. Sue debtor on the contract

2. Repossess collateral and use strict foreclosure to keep collateral in satisfaction of remaining debt

3. Repossess and foreclose on collateral and then either sue for deficiency or return surplus to debtor

right to possession

• General rule is that repossession must be peaceable & may not disturb the peace. If repo cannot be done peaceably, the creditor must seek court order. (UCC 9-609)

sale of the collateral

Sale must be commercially reasonable (9-610[b])

Notice to the debtor of private sale, or time and place of public sale. Debtor may object (9-613)

is the collateral a consumer good?

• If Consumer has paid 60%+, creditor must sell collateral

• If the debtor has paid <60%, or not a Consumer good, then the creditor may propose to keep the collateral in satisfaction of the debt. Debtor has 20 days to request sale

distribution of proceeds of sale

1. Expenses of repossession, storage, and sale of collateral (including attorney’s fees) to creditor – if provided for in agreement

2. Debt being foreclosed to creditor

3. Other security interests or liens on the collateral to other junior creditors

4. Debtor entitled to any surplus

If proceeds are insufficient, creditor is entitled to deficiency judgment

bankruptcy code

• Federal law that provides organized procedure under federal court supervision for dealing with insolvent debtors

insolvency

• sum of debtor’s debts exceed fair value of debtor’s property

Straight/Liquidations

• Debtor’s property is liquidated and distributed by a trustee to creditors in an orderly fashion

order of declaring bankruptcy

petition → automatic stay → order of relief → debtor files information → meeting of creditors and election of trustee → trustee takes possession of debtor’s property

bankruptcy estate

All of debtor’s legal and equitable interest in property

Profits, royalties, rents, revenues, and proceeds

Bequest by inheritance, settlements, and insurance proceeds

exemptions

• Exempt property – property Debtor can keep

• Non-exempt property – sold for the benefit of creditors

• Choice of Federal or State exemptions (if permitted by state law)

  • Federal exemptions - 12

  • Kansas exemptions - no monetary limit for a lot of assets

preferential payments

Trustee may recover payments made by Debtor made within 90 days of filing bankruptcy petition that enables creditor receiving payment to obtain a greater percentage of a preexisting debt than other similar creditors

fraudulent transfers

• Proof of claim: any creditor that wants to participate in the distribution of assets from bankruptcy estate must file within 90 days of the first meeting of creditors

first paid

secured claims: Secured Creditors have first claim to Debtor’s property that is subject to a security interest

second paid

priority claims including:

• Domestic support obligations

• Expenses and fees incurred in administering the bankruptcy estate

• Employees’ wages earned w/in 180 days before petition filed

• Taxes owed

last paid: unsecured claims

• Creditors without collateral to secure debt

• Secured creditors to extent debt was not satisfied by collateral held

discharge

• Bankrupt person who has acted honestly and fulfilled duties in bankruptcy is entitled to discharge of all dischargeable debts and a fresh start

Bars to discharge

• Falsifying, concealing, destroying records

• Making false statements, presenting false claims, withholding info

• Transferring, removing, or concealing property

• Failing to obey court orders or answer the court

insolvency

sum of debtor’s debts exceed fair value of debtor’s property

proof of claim

any creditor that wants to participate in the distribution of assets from bankruptcy estate must file within 90 days of the first meeting of creditors

preferential payments

Trustee may recover payments made by Debtor made within 90 days of filing bankruptcy petition that enables creditor receiving payment to obtain a greater percentage of a preexisting debt than other similar creditors

Not payments made in the ordinary course of business, like paying utility bills

fraudulent transfers

Trustee may void payments made by Debtor with the intent to hinder, delay, or defraud creditors

E.g., transfers of property for less than reasonable value within a year before filing bankruptcy petition

first paid: secured claims

Secured Creditors have first claim to Debtor’s property that is subject to a security interest

If collateral is subject to multiple security interests, use rules of priority

After secured creditors proceed directly against collateral, Debtor’s Estate is liquidated and distributed

second paid: priority claims

10 classes of priority claims include

• Domestic support obligations

• Expenses and fees incurred in administering the bankruptcy estate

• Employees’ wages earned w/in 180 days before petition filed

• Taxes owed

last paid: unsecured claims

• Creditors without collateral to secure debt

• Secured creditors to extent debt was not satisfied by collateral held

nondischargeable debts

• IRS

• Student loans

• Alimony and child support