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Business Law Chapter 29 Homework Mechanic’s liens are fairly simple to understand

Page Count
9 pages
Word Count
6099 words
Book Title
Business Law: Text and Cases 14th Edition
Authors
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
1
Chapter 29
Creditors’ Rights and Remedies
INTRODUCTION
Historically, debtors and their families were punished for any inability to pay debts, including involuntary
servitude and imprisonment. Today, of course, the legal system helps and protects debtors and their families. This
chapter concerns various rights and remedies available through statutory and common law (other than UCC Article 9)
to assist debtors and creditors in resolving their disputes without a debtor’s having to resort to bankruptcy (discussed
in Chapter 30). For students, guaranty and suretyship is the most difficult subject in this chapter.
CHAPTER OUTLINE
I. Laws Assisting Creditors
A. LIENS
A lien creditor has priority over an unperfected secured party. Mechanic’s and artisan’s liens also have
priority over a perfected secured party unless a statute provides otherwise.
1. Mechanic’s Liens
Mechanic’s liens are fairly simple to understand (and may even be within the experience of some
students).
a. Real Property Secures the Debt
b. Governed by State Law
Generally, a lienholder must file written notice of the lien within 60 to 120 days from the last
date on which work was provided.
CASE SYNOPSIS
Case 29.1: Picerne Construction Corp. v. Villas
Picerne Construction Corp. contracted to build an apartment complex for Castellino Villas. During the
project, the city issued certificates of occupancy for different buildings in the complex on various dates, with
the last certificate issued on July 25. After that date, Picerne employees and subcontractors did substantial
work. Castellino did not rent any of the apartments until October. With the contract price unpaid past its date,
Picerne filed a mechanic’s lien on November 28 and later filed a suit in a California state court to foreclose on
the lien. At contention in the suit was the meaning of the term completion. The project owner argued that
completion should be interpreted to mean substantial completion, in which case the filing was too late.
..................................................................................................................................................
Notes and Questions
Generally, a mechanic’s lien statute is remedial in nature and is liberally construed. What does this
mean? The remedial purpose of a mechanic's lien law is to furnish security for a contractor's labor and
materials. Liberal construction requires only reasonablenot strictcompliance with statutory provisions.
Thus, when there is an error in the paperwork filed in the appropriate state office or with the court, if the
mistake was made in good faith, the lien is validated anyway. Common mistakes include a misstatement of
the amount due, a defect in the description of the property to which the lien is intended to apply, and an
erroneous date. Of course, if the misstatement is intentionally false or fraudulent, the lien is void.
2. Artisan’s Liens
An artisan’s lien usually takes priority over other creditors’ claims to the same property.
a. Lienholder Must Retain Possession
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 3
b. Foreclosure on Personal Property Possible
Notice must be given to the owner of the property before a foreclosure and sale.
ADDITIONAL BACKGROUND
Artisan’s Liens
Under an artisan’s lien, a creditor can recover payment from a debtor for labor and materials furnished in
the repair of personal property. The following excerpts from Oregon Revised Statutes (Or. Rev. St. §§87.152,
87.172, 87.182) provide an example of some of the details of a statutory artisan’s lien.
1989 OREGON REVISED STATUTES
TITLE 9. MORTGAGES AND LIENS
CHAPTER 87. STATUTORY LIENS
POSSESSORY CHATTEL LIENS
87.152. Possessory lien for labor or material expended on a chattel.
A person who makes, alters, repairs, transports, stores, pastures, cares for, provides services for, supplies
materials for or performs labor on a chattel at the request of the owner or lawful possessor of the chattel has a
lien on that chattel in the possession of the person for the reasonable or agreed charges for labor, materials
or services of the person, and the person may retain possession of the chattel until those charges are paid.
(1975 c.648 § 3)
87.172. Time period before foreclosure allowed.
(1) Except as otherwise provided in this section, a person claiming a lien under ORS 87.152 to 87.162 must
(2) A person claiming a lien under ORS 87.152 for cost of care, materials and services bestowed on an
(3) A person claiming a lien under ORS 87.152 for the cost of removing, towing or storage of a vehicle that is
87.182. Effect of prior security interest on method of foreclosure.
(1) When a lien created by ORS 87.162 is subordinate to a prior duly perfected security interest in a chattel as
provided in ORS 87.146, the lien created by ORS 87.162 shall be foreclosed by suit as provided in ORS
chapter 88.
4 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
(2) Except as provided in subsection (1) of this section, liens created by ORS 87.152 to 87.162 may be fore-
closed by suit as provided in ORS chapter 88, or by sale of the chattel subject to the lien at public auction to
the highest bidder for cash.
(1975 c.648 § 9)
3. Judicial Liens
These liens help ensure that a judgment is collectible.
a. Writ of Attachment
Prejudgment attachment requires notice to the debtor and a hearing (under the Fourteenth
Amendment’s due process clause). The creditor must have an enforceable right to payment,
file an affidavit, and post a bond. The court issues a writ of attachment. The sheriff seizes the
debtor’s property, which can be sold to satisfy the judgment.
b. Writ of Execution
If a debtor does not or cannot pay an adverse judgment, the creditor can go back to court for a
ADDITIONAL BACKGROUND
Writs of Execution
If a creditor is successful in a suit against a debtor, the court awards the creditor a judgment against the
debtor (usually for the amount of the debt plus interest and costs incurred in obtaining the judgment). If the
debtor does not pay the judgment, the creditor can go back to court and obtain a writ of execution under
which some of the debtor’s property can be seized and sold. The following excerpts from Nevada Revised
Statutes (Nev. Rev. St. §§21.010, 21.020, 21.080, 21.110) provide an example of some of the details of a writ
of execution.
NEVADA REVISED STATUTES
TITLE 2. CIVIL PRACTICE.
CHAPTER 21. ENFORCEMENT OF JUDGMENTS.
21.010. Writ of execution: Limitations of time.
Except as otherwise provided in NRS 125B.050 for enforcement of a judgment for support of a child, the party
in whose favor judgment is given may, at any time before the judgment expires, obtain the issuance of a writ
of execution for its enforcement as prescribed in this chapter. The writ ceases to be effective when the
judgment expires.
21.020. Writ of execution: Issuance; contents.
The writ of execution must be issued in the name of the State of Nevada, sealed with the seal of the court,
and subscribed by the clerk, and must be directed to the sheriff; and must intelligibly refer to the judgment,
1. If it is against the property of the judgment debtor, it must require the sheriff to satisfy the judgment, with
interest, out of the personal property of the debtor, and, if sufficient personal property cannot be found, then
2. If it is against real or personal property in the hands of the personal representatives, heirs, devisees,
4. If it is issued on a judgment made payable in a specified kind of money or currency, as provided in NRS
17.120, the writ must also require the sheriff to satisfy it in the kind of money or currency in which the
judgment is made payable, and the sheriff shall refuse payment in any other kind of money or currency; and
5. If it is for the delivery of the possession of real or personal property, it must require the sheriff to deliver the
possession of the property, particularly describing it, to the person entitled thereto, and may at the same time
require the sheriff to satisfy any costs, damages, rents or profits, recovered by the same judgment out of the
21.080. Property liable to execution; property not affected by execution until levy; exemption of
spendthrift trusts.
1. All goods, chattels, moneys and other property, real and personal, of the judgment debtor, or any interest
therein of the judgment debtor not exempt by law, and all property and rights of property seized and held
2. This chapter does not authorize the seizure of, or other interference with, any money, thing in action, lands
or other property held in spendthrift trust for a judgment debtor, or held in such trust for any beneficiary,
21.110. Execution of writ by sheriff.
The sheriff shall, in the manner provided for writs of attachments in NRS 31.060, execute the writ against the
property of the judgment debtor by levying on a sufficient amount of property, if there is sufficient, collecting or
1. That the judgment debtor may indicate at the time of the levy such part.
2. That the property indicated be amply sufficient to satisfy such judgment and fees.
(CPA 1911, § 347; RL 1912, § 5289; CL 1929, § 8845; 1989, ch. 208, § 3, p. 463.)
B. GARNISHMENT
Garnishment is a collection remedy directed at a debtor’s property or rights held by a third person
(typically, an employer or a bank).
1. Procedures
2. Laws Limiting the Amount of Wages Subject to Garnishment
Federal and state laws limit the amount that can be garnished from wages. State laws often
provide for larger exemptions, and state and federal statutes can be applied together to reduce the
amount that may be garnished.
8 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
UNITED STATES CODE ANNOTATED
TITLE 15. COMMERCE AND TRADE
CHAPTER 41CONSUMER CREDIT PROTECTION
SUBCHAPTER IIRESTRICTIONS ON GARNISHMENT
§ 1673. Restriction on garnishment
(a) Maximum allowable garnishment
Except as provided in subsection (b) of this section and in section 1675 of this title, the maximum part of the
aggregate disposable earnings of an individual for any workweek which is subjected to garnishment may not
exceed
(2) the amount by which his disposable earnings for that week exceed thirty times the Federal minimum
hourly wage prescribed by section 206(a)(1) of Title 29 in effect at the time the earnings are payable,
whichever is less. In the case of earnings for any pay period other than a week, the Secretary of Labor shall
by regulation prescribe a multiple of the Federal minimum hourly wage equivalent in effect to that set forth in
paragraph (2).
(b) Exceptions
(1) The restrictions of subsection (a) of this section do not apply in the case of
(A) any order for the support of any person issued by a court of competent jurisdiction or in accordance with
(2) The maximum part of the aggregate disposable earnings of an individual for any workweek which is
subject to garnishment to enforce any order for the support of any person shall not exceed
(A) where such individual is supporting his spouse or dependent child (other than a spouse or child with
respect to whose support such order is used), 50 per centum of such individual’s disposable earnings for that
week; and
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 9
shall be deemed to be 65 per centum, if and to the extent that such earnings are subject to garnishment to
enforce a support order with respect to a period which is prior to the twelve-week period which ends with the
beginning of such workweek.
(c) Execution or enforcement of garnishment order or process prohibited
HISTORICAL NOTES
HISTORICAL AND STATUTORY NOTES
References in Text. Chapter 13 of Title 11, referred to in subsec. (b)(1)(B), is § 1301 et seq. of Title 11,
Bankruptcy.
1978 Amendment. Subsec. (b)(1)(B). Pub.L. 95-598 substituted “court of the United States having juris-
diction over cases under chapter 13 of Title 11” for “court of bankruptcy under chapter XIII of the Bankruptcy
Act”.
1977 Amendment. Subsec. (b). Pub.L. 95-30, § 501(e)(1), (2), designated existing provisions as par. (1) and
existing pars. (1), (2), and (3) as subpars. (A), (B), and (C) thereof, substituted “for the support of any person
issued by a court of competent jurisdiction or in accordance with an administrative procedure, which is
established by State law, which affords substantial due process, and which is subject to judicial review” for “of
any court for the support of any person” in subpar. (A) as so redesignated, and added par. (2).
Effective Date of 1977 Amendment. Section 501(e)(5) of Pub.L. 95-30 provided that: “The amendments
made by this subsection [amending this section and section 1675 of this title] shall take effect on the first day
of the first calendar month which begins after the date of enactment of this Act [May 23, 1977].”
Effective Date. Section effective July 1, 1970, see § 504(c) of Pub.L. 90-321, set out as an Effective Date
note under § 1671 of this title.
C. CREDITORS COMPOSITION AGREEMENTS
A composition agreement discharges only those debts of creditors who agree.
10 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
II. Mortgages
An individual who buys real property typically borrows the funds from a financial institution to pay for it. A
mortgage is a written instrument that gives the creditor an interest in, or a line on, the property as security for
the payment.
ENHANCING YOUR LECTURE
  REVERSE REDLINING IN THE MORTGAGE MARKET
 
In December 2011, Bank of America reached a settlement with the U.S. Department of Justice in which it
agreed to pay $335 million to compensate 200,000 borrowers who allegedly were discriminated against by
Countrywide Financial, a subsidiary that Bank of America had acquired in 2008 when Countrywide was
collapsing under its burden of bad loans. The Justice Department alleged that Countrywide had engaged in
reverse redlining.
FIRST, THERE WAS REDLINING
For decades, the mortgage lending industry was accused of redliningthat is, drawing a red line on a
map around poorer neighborhoods and refusing to offer mortgages to borrowers, often members of minority
groups, who wished to purchase homes in those areas. In 1977, Congress passed the Community
Reinvestment Act to require lenders to make mortgages more readily obtainable in redlined areas.
Nonetheless, in the mid-1990s African American and Hispanic applicants for mortgages were still being
rejected at a rate 1.6 times higher than white applicants with similar credit histories. Under the Clinton
administration (19932001), organizations in redlined areas increasingly pressured banks to make more
loans available. The lenders responded with reverse redlining.
THEN, REVERSE REDLINING BECAME POPULAR
Reverse redlining is the opposite of redlininginstead of denying mortgages to members of minority
groups, lenders targeted them. During the housing boom, lenders aggressively marketed their subprime
mortgages in poorer areas. Wells Fargo, for instance, enlisted pastors in churches in African American
communities to offer wealth-building seminars. The bank would make a donation to the church for every new
mortgage application it received.
Why were lenders suddenly so interested in these borrowers? The answer is that subprime mortgages
carry much higher interest rates than standard mortgages and are usually accompanied by higher up-front
fees. In many instances, the Justice Department asserted, mortgage companies pushed African American
and Hispanic borrowers into high-cost subprime mortgages even when they could qualify for standard
mortgages. (Subprime mortgages are higher risk loans given to borrowers with poor credit scores who cannot
qualify for standard mortgages.) Other borrowers were given mortgages that they would not be able to pay
the lender pocketed the fees and sold the worthless mortgages to investors. As a result of such practices,
minority groups have incurred a disproportionate percentage of foreclosures.
CRITICAL THINKING
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 11
To what extent do lending institutions have a moral duty to extend loans to lower income
individuals? Given that we live in a diverse society, all residents should be treated equally with respect to
mortgage lending practices. That said, if banks and other lending institutions overplay their hand, they may
harm lower-income individuals by causing them to take on more debt than they can afford.
ADDITIONAL BACKGROUND
The Sale of Real Estate
Transfers of ownership interests in real property are frequently accomplished by means of a sale. The
sale of real estate is similar to the sale of goods, because it involves a transfer of ownership, often with
specific warranties. In the sale of real estate, however, certain formalities such as the execution of a deed are
observed that are not required in the sale of goods.
Several steps are involved in any sale of real property. The first step is the formation of the land sales
contract. A title search (to verify that the seller has good title to the property and that no other claims to the
property exist) follows, along with, usually, negotiations to obtain financing for the purchase. The final step is
the closing.
Brokers. Buyers and sellers of real property frequently enlist the services of a real estate agent, or
broker. Real estate agents are information brokers. They provide buyers and sellers of real estate with infor-
mation and specialize in matching the wants of buyers with the property being offered for sale by sellers. The
broker is usually retained by the seller and acts as the seller’s agent in the sale of the property. As
Sales Contract. Generally, when someone decides to purchase real estate, he or she makes a written
offer to purchase the property and puts up earnest money to show that an earnest, or serious, offer is being
made. (If the offeror decides to withdraw the offer, the earnest money, or deposit binder money, will often be
forfeited to the seller.) The offer states in some detail the exact offering price for the property and lists any
other conditions that may be appropriate. The offer may be conditioned on the offeror’s ability to obtain fi-
nancing, for example. Within a specified time period, the seller of the property either accepts or rejects the of-
fer. If the offer is accepted, then a contract of sale is drawn up. The signing of the sales contract is usually
accompanied by a deposit, which may be 10 percent of the purchase price paid to the seller. The buyer can
then add to the existing earnest money to bring it up to the desired amount.
Deposits toward the purchase price normally are held in a special account, called an escrow account,
12 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
until all of the conditions of sale have been met and the closing takes place, at which time the money is trans-
ferred to the seller. The escrow agent, which may be a title company, bank, or special escrow company, acts
as a neutral party in the sales transaction and facilitates the sale by allowing the buyer and seller to close the
transaction without having to exchange documents and funds. An escrow agent is an agent of all of the par-
ties involved in the sales transaction. When a conflict between the parties results in conflicting duties on the
part of the agent, normally the agent will have a court resolve the conflict.
Sometimes, an arrangement is made in which a potential buyer is given the right to purchase property in
the future, within a specified period of time and for a specific price. This is called an option contract. To be
enforceable, the contract must be in writing, and consideration must be given to the seller. Essentially,
payment to the seller compensates the seller for taking the property off the market until the end of the time
specified in the option contract. Potential buyers may also obtain a right of first refusal. Frequently, those
who lease property with the intention of possibly buying it in the future will have such a clause added to the
lease contract. This right means that the lessee, or tenant, has first priority if the seller decides to sell the
property. In other words, if the seller receives an offer from a third party, the seller cannot accept the offer
until the tenant indicates that he or she does not intend to purchase the property.
Financing. Unless a buyer pays cash for the property, the buyer must obtain financing for the purchase
with a mortgage loan. A mortgage loan is a loan made by a banking institution or trust company for which the
property is given as security. In some states, the mortgagor (the borrower) holds title to the property; in
others, the mortgagee (the lender) holds title until the loan is completely repaid. In several states, a trustee
a third partyholds title on behalf of the lender. The trustee then deeds the property back to the borrower
when the loan is repaid. If the payments are not made, the trustee can deed the property to the lender or
dispose of it by auction, depending on state law.
There are numerous ways of financing the purchase of real property, some of which are quite creative.
Frequently, financing is obtained through a conventional long-term mortgage loan in which the payment
schedule extends over a period of twenty-five to thirty years. Traditionally, the interest rate for long-term
loans was fixedthat is, the interest rate did not change over the period of the loan. Today, long-term loans
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 13
mortgage normally involves paying a fee to the lender in the form of points. A point is a charge of 1 percent
on the amount of a loan. Therefore, if the lender’s fee is two points and the amount of the loan is $80,000,
the fee amounts to $1,600. This charge may be assessed against the buyer, the seller, or both.
If the mortgage terms allow for prepayment privileges, then the borrower can prepay the mortgage before
the maturity date without penalty. Prepayment privileges may be especially important if market interest rates
fall below the interest rate of the mortgage loanin which case the loan could be refinanced to the advantage
of the borrower.
Warranty of Habitability. The common law rule of caveat emptor (“let the buyer beware”) held that the
seller of a home made no warranties with respect to its soundness or fitness unless such a warranty was
specifically included in the deed or contract of sale. Although caveat emptor is still the rule of law in a minority
of states, there is currently a strong trend against it and in favor of an implied warranty of habitability. Under
this new approach, the courts hold that the seller of a new house warrants that it will be fit for human
habitation regardless of whether any such warranty is included in the deed or contract of sale. This warranty
is similar to the UCC’s implied warranty of merchantability for sales of personal property. In recent years,
some states, such as Virginia, have passed legislation creating such warranties for newly constructed resi-
dences. Under an implied warranty of habitability, the seller warrants that the house is in reasonable working
order and is of reasonably sound construction. To recover damages for breach of the implied warranty of
habitability, the purchaser is only required to prove that the home he or she purchased was somehow defec-
tive and to prove the damages caused by the defect. Under the warranty of habitability theory, the seller of a
new home may be in effect a guarantor of the home’s fitness.
A. FIXED-RATE MORTGAGES VERSUS ADJUSTABLE-RATE MORTGAGES

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