978-1285770178 Lecture Note BL ComLaw 1e IM-Ch20 Part 2

whole or in part.

CHAPTER 20: CREDITORS’ RIGHTS AND REMEDIES 11

• Pure notice statutes provide that, regardless of who files first, a person who knows that someone

bought the property and who records his or her deed first can claim priority.

12 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

whole or in part.

2. Foreclosure Procedure

A lender must strictly comply with the terms of the state statute governing foreclosures.

CASE SYNOPSIS—

Case 20.2: McLean v. JPMorgan Chase Bank, N.A.

JPMorgan Chase Bank, N.A., filed a foreclosure action in a Florida state court against Robert McLean.

The mortgage attached to the complaint identified a different mortgagee and lender, however. Later, Chase

provided an assignment of McLean’s mortgage that was dated three days after the filing of the suit and a note

with an undated indorsement. From a judgment in Chase’s favor, McLean appealed.

A state intermediate appellate court reversed. A party seeking foreclosure must have standing to

foreclose when it files its complaint. In this case, the mortgage was assigned after Chase filed its complaint,

and the indorsement on the note was undated. To succeed, on remand Chase would have to prove that it

owned the note at the time of the complaint or file a new complaint.

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Notes and Questions

What might the lender have done to avoid an unfavorable result in this case? The lender should

have been more careful with the paperwork and its dates. The mortgage and its assignment should have

been more easily traceable and should have been verified before the complaint was filed. The indorsement on

the note should have been dated. Separate records proving the dates of the assignment and indorsement

might also have been kept. Otherwise, how would the lender know that it was filing a complaint against the

right defendant?

ANSWERS TO THE LEGAL REASONING

QUESTIONS AT THE END OF CASE 20.2

1. Why did the appellate court reverse the judgment of the lower court in this case? What did the

appellate court suggest that the lower court do? In the McLean case, JP Morgan Chase Bank, N.A., filed

a foreclosure action in a Florida state court against Robert McLean. But the mortgage attached to the

complaint identified a different mortgagee and lender. Later, Chase provided an assignment of McLean’s

mortgage that was dated three days after the filing of the suit and a note with an undated indorsement. From

a judgment in Chase’s favor, McLean appealed. A state intermediate appellate court reversed the lower

court’s judgment. A party seeking foreclosure must have standing to foreclose when it files its complaint. In

this case, the mortgage was assigned after Chase filed its complaint, and the indorsement on the note was

undated. That meant that Chase did not show it had standing at the time the complaint was filed. To establish

standing, on remand Chase would have to prove that it owned the note at the time of the complaint or file a

new complaint.

CHAPTER 20: CREDITORS’ RIGHTS AND REMEDIES 13

whole or in part.

The appellate court suggested that Chase would be entitled to summary judgment, if the bank could show

that it was the holder of the note on the date the complaint was filed. “By contrast, if the evidence shows that

the note was endorsed to Chase after the lawsuit was filed, then Chase had no standing at the time the

complaint was filed, in which case the trial court should dismiss the instant lawsuit and Chase must file a new

complaint.”

2. How might Chase establish its standing to foreclose at the time the complaint was filed? There are

several ways that Chase or any holder of a mortgage note might establish standing to foreclose. If there is an

indorsement of the note that shows its holder to be entitled to payment, the holder can establish standing by

showing that the indorsement occurred before the suit. For example, if the note reflects on its face that the

indorsement occurred before the filing of the complaint, this would establish standing. Or a holder might

provide correspondence or some other affidavit of ownership to prove its status as a holder of the note on the

date the suit was filed.

3. If Chase cannot prove that it owned the note at the time of its complaint, what will happen next?

Will Chase prevail? Why or why not? If Chase cannot prove that it owned the note as of May 11, 2009, the

trial court will dismiss the complaint. Chase would then file another complaint. If it attaches the indorsed note,

Chase will be entitled to enforce it at the time of the new complaint. Thus, Chase would have standing to

foreclose and would probably receive judgment against McLean.

4. Why do states require strict compliance with the provisions of their foreclosure laws, such as the

requirement in this case that the lender own the note at the time of the complaint? Exact compliance

with legal requirements prevents the court from being crowded with complaints in which parties are sued on

the wrong basis or for the wrong remedy. Exact compliance with legal requirements also protects innocent

parties from being haled into court by unscrupulous lenders and others.

ADDITIONAL CASES ADDRESSING THIS ISSUE —

Recent cases focusing on notice, service, and other requirements in foreclosure proceedings

include the following:

• Kersey v. PHH Mortgage Corp., 682 F.Supp.2d 588 (E.D.Va. 2010) (when a mortgagee was obligated to

have, or reasonably attempt to have, a face-to-face meeting with the mortgagor before it could commence

foreclosure, the mortgagee’s failure to comply gave rise to a cognizable breach of contract claim).

• ABN AMRO Mortgage Group, Inc., v. McGahan, 237 Ill.2d 526, 931 N.E.2d 1190 (2010) (a mortgagee

must name a personal representative for a deceased mortgagor in a foreclosure proceeding for the court to

acquire jurisdiction—there must be personal service because the mortgagor is a necessary party to the

action).

• First National Bank of Chicago v. Silver, 73 A.D.3d 162, 899 N.Y.S.2d 256 (2 Dept. 2010) (a summary

judgment in a foreclosure action in the mortgagee’s favor must be reversed and the complaint dismissed

when the mortgagee did not deliver statutory-specific notice to the homeowner, together with the summons

and complaint, as required by state law).

• Rabinowitz v. Deutsche Bank, 28 Misc.2d 611, 903 N.Y.S.2d 869 (N.Y.Sup. 2010) (a mortgagee gave

adequate notice of a foreclosure sale when notice of a first auction was published for four successive weeks

14 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

whole or in part.

and—after the successful bidder refused to sign a memorandum of sale and decided not to buy the

property—the mortgagee published notice of a postponement of sale and scheduled a second auction).

3. Redemption Rights

• In all states, a borrower can exercise an equitable right of redemption to buy the property after

default by paying the amount of the debt, plus interest and costs, before the foreclosure sale.

• In some sates, a borrower can exercise a statutory right of redemption to buy the property

A. SURETYSHIP

A surety is primarily liable: the creditor can hold the surety responsible for payment of the debt when the

debt is due, without first exhausting all remedies against the debtor. A surety agreement does not have

to be in writing to be enforceable (but it usually is).

2. Writing or Record Required

The contract between guarantor and creditor must be in writing to be enforceable unless the “main

purpose” exception applies. A guaranty can cover a single transaction or a series of transactions.

CASE SYNOPSIS—

Case 20.3: Wilson Court Limited Partnership v. Tony Maroni’s, Inc.

Tony Maroni’s, Inc., leased space owned by Wilson Court L.P. Tony Riviera, Tony Maroni’s president,

signed the lease and a guaranty. On the signature line of the guaranty, Riviera wrote “President” after his

name. The guaranty did not specifically identify who was bound, referring only to “the undersigned” or

“Guarantor.” Riviera also signed the lease in a representative capacity, but the lease clearly indicated that

only Tony Maroni’s was bound by it terms. When Tony Maroni’s defaulted on the lease, Wilson filed a suit in a

Washington state court against Tony Maroni’s, Riviera, and others. Riviera asserted in part that he was not

personally liable on the guaranty because he signed only in his capacity as a corporate officer. The court

issued a summary judgment in favor of Wilson. Riviera appealed.

The Washington Supreme Court affirmed. Riviera was personally liable. The “combination of

circumstances” made the guaranty “ambiguous,” said the court. This ambiguity was created by Riviera, so it

was construed against him. “[T]he language of the Guaranty itself compels the view Riviera is personally

liable,” because it referred to three parties, including the “Guarantor.” “If Riviera signed the Guaranty only in

his representative capacity, Tony Maroni’s would be both Tenant and Guarantor, rendering the Guaranty

CHAPTER 20: CREDITORS’ RIGHTS AND REMEDIES 15

provisions absurd.” Also, “the very nature of a guaranty is such that Riviera created personal liability by his

signature.”

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Notes and Questions

Are there any circumstances in which a collateral document signed by a corporate officer to

secure a corporate debt might not create personal liability? Explain. Under normal circumstances, a

written collateral undertaking given to secure a corporate debt would be rendered meaningless if the primary

debtor were found to be the sole party liable. If the guarantor’s signature were obtained by fraud, or if the

document was not clearly a guaranty, however, a court might hold that the corporation was the sole liable

party.

ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?”

QUESTION IN CASE 20.3

Suppose that the parties had carefully read the contract before they signed it. If they had been

sure that the agreement stated what they intended and if everything discussed was in writing, how

might the outcome of this case have been different? Most likely, the dispute would have been avoided, or

the court would have ruled differently. The court pointed out that “the issue in this case could have been

easily avoided by careful attention to the language of the Guaranty and communication between the parties. If

Riviera did not intend personal liability, he should have said so. Wilson could have pressed Riviera to sign

only in his individual capacity or modified its Guaranty to clearly specify Riviera as the Guarantor.”

ANSWER TO “THE ECONOMIC DIMENSION”

QUESTION IN CASE 20.3

Why would a landlord, a lender, or any creditor require a guaranty? A guaranty represents an

assurance or at least a promise of payment from a third party in the event of default by a principal debtor on a

debt. In the Wilson case, the principal debtor was a corporation. The guaranty was signed by the firm’s

founder and president. When the corporation defaulted on its lease, the guarantor argued that he had signed

the document only as a representative of the firm. But a court ruled that the guarantor was personally liable—

to hold otherwise would have had the “absurd” result of making the corporation the guarantor of its own lease.

ADDITIONAL CASES ADDRESSING THIS ISSUE —

Other cases involving sureties or guarantors include the following:

• Mercantile Bank, N.A. v. Loy, 77 S.W.3d 93 (Mo.App. S.D. 2002) (under the express terms of the parties’

contract, the guarantors assumed primary liability for the debts of a now-bankrupt corporation, and thus, the

whole or in part.

creditor bank’s failure to perfect its security interest in the corporation’s vehicles, equipment, and other assets,

did not constitute a lack of good faith and fair dealing).

• Mule-Hide Products Co. v. White, 2002 UT App 1,40 P.3d 1155 (2002) (a manufacturer of construction

materials was entitled to collect, for goods shipped and received, from a proprietor of a construction materials

distributorship for material obtained using distributor’s purchasing order).

C. ACTIONS THAT RELEASE THE SURETY AND THE GUARANTOR

1. Material Modification

3. Payment or Tender of Payment

If the debt is paid, or tender of payment is made and rejected, the surety is discharged.

D. DEFENSES OF THE SURETY AND THE GUARANTOR

principal’s debtor’s.

2. Statute of Limitations

A statute of limitations is a defense to payment for the principal debtor, but not for a surety or

guarantor.

1. The Right of Subrogation

Any right the creditor had against the debtor becomes the right of the surety—creditor rights in

bankruptcy, rights to collateral possessed by the creditor, and rights to judgments secured by the

creditor.

whole or in part.

3. The Right of Contribution

Each state allows a homestead exemption, which permits a debtor to retain all or part of the family home

free from the claims of unsecured creditors or trustees in bankruptcy.

1. The General Rule

The purpose of the exemption is to ensure that a debtor will retain some form of shelter.

B. EXEMPTED PERSONAL PROPERTY

Personal property that is most often exempt (up to at least a specified dollar amount) includes—

• Household furniture.

• Clothing and certain personal possessions.

TEACHING SUGGESTIONS

1. It is important that students tie together the material on debtors and creditors. You might ask them (or

explain to them) what the law attempts to do in this area and why—that the legal system attempts to provide a

framework for the orderly collection of debts and that without that framework few could afford to provide

credit.

2. To distinguish for students among the various creditors’ remedies discussed in this chapter, use a

timeline representing litigation on a debt and place each remedy at the point on the line when it might be

used.

3. It may help students to understand how this material fits into the general scheme of creditors’ rights and

remedies by briefly defining and classifying liens, and noting the priority of a lien creditor. For example, a lien

is a claim against a debtor’s property that must be satisfied before the property (or its proceeds) is available to

satisfy other creditors’ claims. Consensual liens—those based on the parties’ agreement—include perfected

security interests, in the case of personal property, and mortgages, in the case of real estate. A lien may also

arise under a statute or the common law or through a judicial proceeding. Statutory liens include mechanic’s

liens. Liens created at common law include artisan’s liens and innkeeper’s liens. Judicial liens include those

that represent a creditor’s efforts to collect on a debt before a judgment (for example, through prejudgment

attachment) or after it (for example, through a writ of execution). A lien creditor has priority only to the extent

of the value of his or her collateral. Generally, a lien creditor has priority over an unperfected security interest

whole or in part.

but not over a perfected security interest. Mechanic’s and artisan’s liens, however, have priority over per–

fected security interests unless a statute provides otherwise.

4. Sometimes, students confuse prejudgment attachment with the concept of attachment in the context of a

secured transaction. For that reason, it can be important to explain the difference. Prejudgment attachment

occurs at the time of or immediately after commencement of a suit but before entry of a final judgment.

Attachment in the context of a secured transaction occurs when all of the requirements for an enforceable

security interest are satisfied and before the interest is perfected.

5. Obtain copies of a mortgage contract and ask students to discuss whether the apportionment of rights

and duties between borrower and lender is fair and appropriate. Ask them for suggestions as to how these

contracts could be improved and whether the borrower or lender should be better protected. The same

activity could be repeated with a real estate sales contract.

6. Show students a set of the documents used in a local real estate closing. Discuss what each of the

documents is and what its legal importance and effects are.

7. It could be explained that there are four types of statutory foreclosure—

• Strict foreclosure is allowed in a few states in which, after a period following default, the mortgagee

acquires absolute title to the property.

• Entry, or writ of entry, is allowed in a few states in which, on default, the mortgagee obtains a writ

entitling him or her to possession, and after a period, the mortgagee receives absolute title.

• Power of sale is permitted in most states, according to which a sale can follow guidelines stated in

the mortgage agreement instead of statutory guidelines.

• Foreclosure sale (discussed more fully in the text) is the most common method.

Cyberlaw Link

How might the availability of personal financial information on the Internet affect the debt and

credit arrangements outlined in this chapter?

If a mortgage can be negotiated and agreed to online, rather than by taking papers to a creditor’s

or third party’s office, what effect might this have in disputes over compliance with the terms of the

agreement?

DISCUSSION QUESTIONS

1. How does a mechanic’s lien work? A creditor (a roofer, a painter) can file a mechanic’s lien on real

property when he or she contracted to do labor, services, or materials to improve the property but is not paid as

promised. Generally, the creditor must file written notice of the lien within 60 to 120 days from the last date on which

work was provided (state law determines the procedure). Failure to pay the debt entitles the creditor to foreclose on

the property (after notice to the owner) and sell it to satisfy the debt.