Surety/Guarantor
Both pledge their own credit towards someone else's debt & have the same rights and liabilities.
Surety = primarily liable
Guarantor = secondarily liable
Creation of Surety/Guaranty
Contractually created. Basic rules of contract law.
Defenses of Surety/Guaranty
Have access to any valid defenses that the principal has as long as they go to the merits of the contract. These might be:
1. Lack or failure of consideration
2. Inducement of the contract by fraud or duress
3. Breach of contract by another party
Surety/Guaranty cannot use as a defense:
1. Lack of capacity
2. Minority
3. Insanity
4. Bankruptcy
Creditor's duties to Surety/Guaranty:
- Must disclose any material facts about risk involved in surety
- Cannot surrender the security without consent of the surety.
Security Interests in Real Property
Three basic contract devices for using real estate as a security:
1. Mortgage
2. Deed of trust
3. Land contract
Mortgage
Not the obligation, the note is.
- Requires writing that:
1. describes property
2. names the secured party & terms and conditions
- Should give notice to the world of the mortgagee's interest by recording the mortgage.
Rights and Liabilities of Mortgage
- Owner may sell the interest in the property w/o consent of mortgagee BUT sale DOESN'T affect the mortgagee's interest in the property or their claim against the mortgagor.
- Purchaser of mortgaged property may buy subject to the mortgage and assume the
Mechanics Lien
- Silent Liens for repairs or enhancements to real estate.
- Work must have been completed, or materials furnished that went into the real estate.
- Trumps all other liens and doesn't require filing or notice.
Security Interests Under the Code
An interest in personal property or fixtures obtained by a creditor to secure payment or performance of an obligation.
Ex: Person borrows money from bank to buy new car, bank takes security interest in, or puts a lien on, the car until loan is repaid.
Two Step Process to Obtaining Security Interest
1. Attachment
2. Perfection
Attachment:
Security interest not legally enforceable against a debtor until it's attached to one or more particular items of the debtor's property.
Requires 3 things:
1. Agreement-> debtor grants creditor security interest in particular property in which debtor has
Perfection
Creditor gets protection against other creditors/purchasers of the collateral by perfecting her security interest.
Three ways of perfecting:
1. Filing public notice
(name of debtor) (name of secured party) (description of collateral)
2. By creditor's taki
Negotiable Instruments: Two types
1. Promises to pay
2. Orders to pay
Promissory Note
Two party instrument where MAKER makes an unconditional promise in writing to pay another person (payee) a fixed amount of money
Needs "order words" or else not negotiable
Draft = Check
Form of commercial paper that involves an order to pay money.
Three parties to check:
1. Drawer - signs check
2. Drawee - usually bank
3. Payee - receives money (paid to the order of)
Cashier's check
Bank written on itself
Teller's Check
One bank drawing on another bank
Requirements for Negotiability
1. Be in writing
2. Signed by issuer
3. Contain unconditional promise or order to pay
4. Be payable to bearer or order
5. Be payable on demand or at a definite time
6. No conditional instructions
7. Need to know how much
8. Need to know when
Negotiation
Transfer of possession of a negotiable instrument by a person (other than issuer) to another person who becomes its holder.
Holder
One who is in possession of an instrument that is:
1. Payable to bearer or 2. made payable to an identified person (payee)
Blank Indorsement
Now bearer paper if no specificity to whom indorsement is made to.
Restrictive Indorsement
One that specifies the purpose of the indorsement
1. For deposit only
2. Indorsements for collection
3. Indorsement indicating the indorsement is for the benefit of someone other than the person to whom it is payable.
Ex: "Pay to Arthur Attorney in Trust
Holder in Due Course
Takes a negotiable instrument free of all:
PERSONAL DEFENSES
CLAIMS TO THE INSTRUMENT
CLAIMS IN RECOUPMENT
Subject only to REAL DEFENSES
To Be HDIC
Person must be holder of negotiable instrument and take it for:
- Value
- In good faith
- Be in possession
- Without notice of defects (forgery/alterations)
- Without notice of overdue/dishonored
- Without notice of unauthorized signature
- Without notice
Shelter Rule
If anyone in a chain of holders can quilify as an HDIC then everyone who became a holder after the HDIC gains the benefits of HDIC status.
Ex: If there are 7 holders, of which the 4th holder qualifies as HDIC status, then holders 5-7 also gain HDIC status
Real defenses
Relates to the defected instrument itself.
Only defenses that can be brought against HDIC
1. Minority or Infancy
2. Incapacity
3. Duress
4. Illegality
5. Fraud in the essence
6. Discharge in bankruptcy
Other defenses that would hold up against HDIC:
Forge
Personal Defenses
(Someone who fools you)
NOT good against HDIC's but good against holders:
1. Lack of consideration
2. Breach of contract
3. Fraud in the inducement
4. incapacity to the extent that state law makes the obligation voidable rather than void
5. Duress " "
6.
Contractual Liability
Signer becomes contractually liable on the note
Primary Liability- maker of note (drawer of the check)
Secondary Liability- like a guarantor on a contract. Required to pay if person primarily liable defaults on obligation.
Obligation of a Maker
Primarily liable
Obligation to pay amount of note @ specified time.
Obligation of a Drawee or Acceptor
Acceptor of a draft is obligated to pay the draft according to the terms @ the time of its acceptance.
Acceptors obligations extend to:
1. Person entitled to enforce the draft
2. The drawer
3. An indorser who paid the instrument pursuant to her indorser's
Obligation of a Drawer
Obligation is that if the drawee dishonors an unaccepted check or draft, the drawer will pay it according to its terms at the time he issued it.
* If bank certifies or accepts a check then drawer's obligation is discharged.
Obligations of an Indorser
- Secondarily liable
- Only way to be held liable is to add "without recourse" when endorsing it or if he endorsed it when incomplete.
- Liable in chronological order
* Obligation discharged if:
1. bank accepts or certifies a draft
2. if notice of dishono
Presentment of Note
The party to whom the holder presents the note for payment may:
1. Require the exhibition of the instrument
2. Ask for reasonable identification of the person making presentment
3. Ask for evidence of his authority to make it if he is making it on behalf
Transfer Warranties
Person who transfers a negotiable instrument to someone else and for consideration makes 5 warranties to his immediate transferor:
1. Transferor is a person entitled to enforce the instrument
2. All signatures on the instrument are authentic or authorized
Presentment Warranties
Warranties made when check or draft is presented to drawee for payment.
* NOT warranting the drawer's signature.
1. The warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain p
Impostor Rule
In the event of a draft made out to an impostor of a person, any indorsement substantially similar to that of the named payee is effective in favor of any person that takes in good faith and for value.
Fictitious Payee Rule
Any indorsement in the name of a fictitious payee is effective as the payee's indorsement in favor of any person that takes in good faith and value.