Chapter 28 – Introduction to Credit and Secured
Transactions
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CHAPTER
28
INTRODUCTION TO CREDIT AND SECURED
TRANSACTIONS
I.
OBJECTIVES:
transactions and then to survey three topics: common law liens, sureties and guarantors, and
.
secured real estate transactions. After reading the chapter and attending class, the student should
be able
to:
2. Recall the definition of a surety, relate how the principal and surety relationship is
created,
owes to a
surety.
4. Compare and contrast mortgages, deeds
of trust,
and land contracts as mechanisms
for
holding a security interest in real property.
1
5. List the formalities necessary for the creation of a legally enforceable mortgage, and
explain
6. Describe
mechanic’s
and
materialmen’s
liens, and explain how they are obtained and
what
rights they give the
lienholder.
II. ANSWER TO
INTRODUCTORY PROBLEM
A. The first question following the hypothetical at the beginning of the chapter asks what legal
B. The second question asks whether the beneficiary of a surety agreement risks losing his
rights
against the surety if he grants the contractor additional time to complete the contract
without
surety’s
consent is
required.
C. The third question asks whether subcontractors and/or companies who provide material to
a
paid.
D. The fourth question asks whether an artisan who repairs equipment can obtain a lien on
the
they
perform.
Chapter 28 – Introduction to Credit and Secured
Transactions
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©
2016 by McGraw-Hill Education. This
is
proprietary material solely
for
authorized instructor use.
Not
authorized
for
sale
or
distribution in any
manner. This document may
not be
copied, scanned, duplicated, forwarded, distributed,
or
posted
on a
website,
in
whole
or
part.
E. The fifth question asks whether it would be ethical to declare a default in a land
contract
might well take the position that one should act toward the buyer as one would like to
be
III. SUGGESTIONS FOR LECTURE PREPARATION:
A.
Credit
1. Generally. Explain that often people and businesses buy merchandise on credit,
merely
reluctant sellers and lenders to make sales to credit purchasers and to
make loans
to
the interest rate he charges on the credit amount will be lower. Note,
therefore,
that
a. increases the volume of
sales,
c. reduces the cost of
credit.
2. Unsecured Credit. Develop the disadvantages of unsecured
credit.
3. Secured Credit. Point out that people may act as security for another’s debt or
that
the
debtor. The creditor has security for he can collect from the surety or guarantor if
the
a loan or the extension of credit. If the debtor defaults the creditor may obtain
satisfaction by seizing or selling the property. You might illustrate the operation of
a
Give the car to a student indicating there has been a purchase. The string indicates
your
4. Development of Security. Discuss the historical security devices. Briefly define
the
of
each device and the creditors’ attempts to create secret liens unfair to buyers and
other
covered in Chapter
29).
B. Suretyship and
Guaranty
1. Sureties and Guarantors. Distinguish between a surety of a debt and a guarantor of a
debt,
noting that a guaranty relation must be in writing to be enforceable. A good way to
explain
guarantor stands behind the principal debtor. A surety makes the same promise as
the
creditor to request payment from the principal debtor. A guarantor promises to pay if
the
principal debtor fails to
pay.
Chapter 28 – Introduction to Credit and Secured
Transactions
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©
2016 by McGraw-Hill Education. This
is
proprietary material solely
for
authorized instructor use.
Not
authorized
for
sale
or
distribution in any
manner. This document may
not be
copied, scanned, duplicated, forwarded, distributed,
or
posted
on a
website,
in
whole
or
part.
2. Creation of Relationship. Note that the relationship of principal and surety, or that
of
principal and guarantor, is created by
contract.
3. Defenses for a Surety. Explain that personal defenses of the principal debtor may not
be
by the surety. Explain the sensibility of this rule, because often the creditor requires
the
defenses.
It
should be pointed out that the personal defenses in suretyship law are
roughly
confused by this dual definition of personal
defenses.
4. Explain why a compensated surety is not released from liability as easily as an
5. Creditor’s Duties to Surety. Note that a surety will be released from liability to the
extent
subrogation, and that release of the principal debtor releases the
surety.
between a guarantor and a
surety-and
the practical import of those differences.
In
this
was unconscionable and unenforceable against the
wife.
Examples: Problem Cases #1 and
#2.
6. Subrogation and Contribution. Explain the concepts of the right to subrogation and
right
to contribution and how they
work.
Example: Problem case #3.
7. Ethics in Action: What is the Ethical Thing To Do? (page 785). A key question to ask
in
know. While it may not be incumbent on you to protect her, you might consider whether
the preferable thing is to provide her with the information and then let her make a
more
than
you are legally required to do since you stand to benefit from another person’s
acting
prepare
d
to go forward in light of that
information.
C. Liens on Personal
Property
between the debtor and the creditor. Instead one is created automatically once
the elements
improvement or provisions of services concerning the property. You
might
give several examples
of possessory liens:
b. A repair shop repairs a stereo.
Chapter 28 – Introduction to Credit and Secured
Transactions
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©
2016 by McGraw-Hill Education. This
is
proprietary material solely
for
authorized instructor use.
Not
authorized
for
sale
or
distribution in any
manner. This document may
not be
copied, scanned, duplicated, forwarded, distributed,
or
posted
on a
website,
in
whole
or
part.
Additional Example for Discussion: Problem Case
#4.
2. Characteristics of Liens. Note that surrender of possession extinguishes the lien,
unless
the debtor recovered the goods wrongfully. For
example,
mechanic’s garage, because the mechanic had earlier refused to allow the owner
to
take the car without paying the repair
bill.
payment on the check, although he has no legal grounds to refuse payment to
the
camera repair
shop.
rep[air services had actually been authorized by the owner of a vehicle, the
artisan
was not entitled to an artisan’s lien for the value of the work performed and had
to
Points for discussion: What lessons should the artisan learn from this
case?
3. Foreclosure. Note that the creditor is not the owner of the goods and cannot become
the
owner of them. Foreclosure is required for the creditor to be able to satisfy his
claim
against the
goods.
D. Security Interests in Real
Property
1. Begin by explaining that a security interest in real property can arise by the agreement
of
the debtor and creditor (e.g., a mortgage) or it may arise by operating of law (e.g.,
a
agree to create a security interest in the real
property.
2. Historical Development of Mortgages. Briefly review the historical evolution of
the
purchaser of a home. Usually the consumer purchaser (mortgagor) has title to
the
state and discuss
it.
3. Form, Execution and Recording. The need for a writing should be stressed, and
the
mortgage binds the assignees of the mortgages.
Rights and Liabilities. Note that the owner of property subject to a mortgage can sell
his
who “assumes a
mortgage.“
Chapter 28 – Introduction to Credit and Secured
Transactions
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©
2016 by McGraw-Hill Education. This
is
proprietary material solely
for
authorized instructor use.
Not
authorized
for
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or
distribution in any
manner. This document may
not be
copied, scanned, duplicated, forwarded, distributed,
or
posted
on a
website,
in
whole
or
part.
court applied third party creditor beneficiary theory to make the purchasers liable to
the
original holder of the deed of trust. This problem case presents a good opportunity
to
or
land contract, and a purchaser’s taking property subject to these security
interests.
is assumed. Use of examples will clarify this
distinction:
a. Wayne buys on contract a house from Jennifer, and assumes her mortgage with First
b.
Wayne buys a house from Jennifer. He takes it subject to Jennifer’s mortgage
with
while not a party to the mortgage, may prevent foreclosure by paying
Jennifer’s
obligation to First Ban1c.
5. Foreclosure. Explain the operation of the three common methods of
foreclosure—strict
your
state.
Example: Problem Case
#5.
interest in real property must be able to demonstrate a clear line of title showing that
they
Points for Discussion: Use this case to discuss the problems inherent in securitization
of
Example: Problem Case
#6.
6. Right of Redemption. You may wish to explore the trend in mortgage law
providing
procedural protection, as is the right of redemption. These procedures should be
explained
clearly.
7. Deed of Trust. Explain the relative interests/rights/roles of the three parties to a deed of
8. Land Contracts. Give special attention to the land contract, which is a major
financing
device. Note that the land contract historically was more nearly a rental device than
a
buyers, the law has moved away from allowing strict foreclosure in all circumstances
and
moved toward requiring foreclosure and sale. Under strict foreclosure upon default
the
the property. Under foreclosure and sale upon default the seller is entitled to
receive
from the proceeds of the sale only the unpaid portion of the
debt.
Additional Example: Problem Case
#7.
Chapter 28 – Introduction to Credit and Secured
Transactions
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© 2013
by McGraw-Hill Education. This
is
proprietary material solely
for
authorized instructor use. Not authorized for
sale or
distribution
in
any
mam1er. This document may
not be
copied, scanned, duplicated, forwarded, distributed,
or
posted
on a
website,
in
whole
or
part.
9. Ethics in Action: What is the Right Thing to Do? (page 792): This problem raises
the
question of whether there are circumstances that should cause you to do less than
exercise
want
to be—or would expect to be treated—in this
situation.
E. Mechanic’s and Materialman’s
Liens
1. Introduction. Note that these liens are created by operation of law and
arise
automatically to protect the valid interests of contractors, subcontractors, and
2. Rights of Subcontractors and Materialmen. Distinguish general contractors from
subcontractors. Explain the difference between the Pennsylvania and New
York
approaches to these
liens.
3. Basis for Mechanic’s or Materialman’s
Lien/Requirements
for Obtaining a Lien.
Examine
properly filed mechanic’s lien binds the assignees of the debtor’s
property.
Examples: Problem Cases #7 and
8.
Mutual Savings Association v. Res/Com Properties, L.L.C. (page 794). Where
one
subcontractor performed some on site work, including staking of boundary corners, and
related back and were entitled to priority based on the time of the first
lien.
Points for Discussion: Ask whether they think the result in this case is fair to the
bank?
Why or why not? What should have put the bank on notice of possible
materialmen‘s
earliest filed unsatisfied
lien?
4. Priorities and Foreclosure. Explain how mechanics and materialman’s liens relate
to
process used in foreclosing on such a line, focusing particularly on the process used
in
your
state.
concerning liens when he contracts for work on his property and makes payments for
that
work.
a. Fred paints Jane’s house without asking her whether he may. No
lien.
c. Mary delivers maple flooring to Sam’s house. Sam had contracted with Alex
to
install maple floors. Alex contracted with Mary to supply the flooring.
Lien.
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© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any
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part.
)
N.
RECOMMENDED
REFERENCES:
A. Restatement
of the
Law
of Security
(1
81
with 1996 Supp., American Law Institute
also covers
the
law of suretyship and guaranty and the pre-Code law of
pledges.
is another of the West hornbooks that comprehensively cover the law in an easily
accessible
form. Although quite old, it is the best single source on suretyship
law.
exposition of the law of real estate finance including illustrations that may be useful for
class
discussion and
exams.
E. D. Barlow Burke, et. al, Real Estate Transactions: Examples & Explanations
(
4
111
edition)
(2006).
V. ANSWERS TO PROBLEMS AND PROBLEM
CASES:
him a defense to being required to perform his obligation as surety. Camp v. First
Financial
Federal Savings and Loan Association, 772 S.W.2d 602 (Ark. Sup. Ct.
1989).
recourse against the party accommodated after she paid off the loan. Babcock v.
Horne,_
UCC Rep.2d 846 (Sup. Ct., N.Y.
2012).
carrier. A number of cases hold that the towing of vehicles did not give rise to a common
law
lien, but the cases could be distinguished because they involve the towing of a vehicle without
the
storage charges because it was not a warehouseman in the business of storing goods, but
rather
had stored the truck and trailer simply to be able to enforce its towing lien. Navistar
Financial
1987).
Accordingly, City Mortgage could enforce that promise directly against the Behs. City_Mortgage
Investment Club v. Beh, 334 A.2d 183 (Ct. App. D.C.
1973).
28-8
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or
part.
It
is
statutory foreclosure provisions. Pope v. Parker, 271 Pac. 1118 (Col. Sup. Ct.
1982).
7. Yes. The court said that Miller was within her rights under the land contract even though only
a
Iowa
1979).
App. Ga.
1975).