14 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
• Fixed-rate mortgage—a standard mortgage with a fixed rate of interest. Payments are the same for
its duration. The interest rate may be based on the borrower’s credit history, credit score, income,
and debts.
B. MORTGAGE PROVISIONS
Terms may include—
• Loan terms—the amount, the interest rate, the period of repayment, and others.
• Prepyemnt penalty clause.
ADDITIONAL BACKGROUND—
Recording Statutes
Recording statutes are in force in every jurisdiction. Their purpose is to provide prospective buyers with a
way to check whether there has been an earlier transaction. Hence, recording a deed gives constructive
notice to the world that a certain person is now the owner of a particular parcel of real estate.
There are three basic types of recording statutes—
• Race statutes provide that the first purchaser to record a deed has superior rights to the property,
regardless of whether he or she knew that someone else had already bought it but had failed to
record the deed.
bought the property and who records his or her deed first can claim priority.
C. MORTGAGE FORECLOSURE
If a borrower defaults, or fails to pay a loan, the lender can foreclose on the mortgaged property. The
1. Ways to Avoid Foreclosure
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 15
• Forbearance is the postponement of part or all of the payments of a loan in danger of
foreclosure. This may be based on a borrower’s securing a new job, selling the property, or
some other factor.
2. Foreclosure Procedure
A lender must strictly comply with the terms of the state statute governing foreclosures.
CASE SYNOPSIS—
Case 29.2: McLean v. JP Morgan Chase Bank N.A.
JP Morgan 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.
……………………….…………………………..………………………………..…………………………………………
Notes and Questions
What might the lender have done to avoid an unfavorable result in this case? The lender should
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
16 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
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
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
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Foreclosure Procedure
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).
and complaint, as required by state law).
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 17
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.
III. Suretyship and Guaranty
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).
B. GUARANTY
CASE SYNOPSIS—
Case 29.3: HSBC Realty Credit Corp. (USA) v. O’Neill
To buy and develop a piece of property in Delaware, Brandywine Partners, LLC, borrowed $15.9 million
from HSBC Realty Credit Corp. (USA). As part of the deal, Brian O’Neill, principal for Brandywine, signed a
guaranty that designated him the “primary obligor” for $8.1 million of the loan. Brandywine defaulted, and
HSBC filed a suit in a federal district court against O’Neill to recover on the guaranty. From a judgment in
HSBC’s favor, O’Neill appealed.
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Notes and Questions
18 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
In the HSBC case, the court enforced a guaranty that set out precisely the rights and obligations
of the parties over one party’s claim of fraud. Does this result provide undue protection against fraud
Suppose that O’Neill had alleged a history of performance with HSBC that would have made his
reliance on the complained-of fraud reasonable. Could this have changed the result? In the HSBC
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
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
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Suretyship and Guaranty
Cases involving sureties or guarantors include the following.
did not constitute a lack of good faith and fair dealing).
• 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
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 19
C. ACTIONS THAT RELEASE THE SURETY AND THE GUARANTOR
• Material modification—Any material change in the contract between principal and creditor without
prior consent of the surety (or guarantor) may discharge the surety, even if the change does not
affect the risk.
D. DEFENSES OF THE SURETY AND THE GUARANTOR
A surety can assert his or her own defenses or use any defenses available to the principal (except
personal defenses). This is the most important concept in suretyship, because most defenses available
to a surety are those of the principal.
• Incapacity and bankruptcy—As a defense, a surety or guarantor can assert his or her incapacity or
bankruptcy, but not the principal debtor’s.
E. RIGHTS OF THE SURETY AND THE GUARANTOR
1. The Right of Subrogation
2. The Right of Reimbursement
3. The Right of Contribution
IV. Protection for Debtors
A. EXEMPTED REAL PROPERTY
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.
2. Limitations
• A few states allow the homestead exemption only if the judgment debtor has a family.
20 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
• The homestead exemption can cancel out a portion of a lien on a debtor’s real property.
B. EXEMPTED PERSONAL PROPERTY
Personal property that is most often exempt (up to at least a specified dollar amount) includes—
• Household furniture.
TEACHING SUGGESTIONS
1. It is important that students tie together the material on debtors and creditors. You might ask them (or
2. To distinguish for students among the various creditors’ remedies discussed in this chapter, use a
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
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
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
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 21
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
• Power of sale is permitted in most states, according to which a sale can follow guidelines stated in
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?
If the filing of documents under recording statutes is done online, rather than by taking papers to
a government office, what effects might this have in contests over title to property?
DISCUSSION QUESTIONS
1. How does a mechanic’s lien work? A creditor (a roofer, a painter) can file a mechanic’s lien on real
2. How does an artisan’s lien work? Through an artisan’s lien, a creditor (a jeweler with whom a customer
leaves jewelry to be repaired, for instance) can recover payment for labor and materials furnished to repair personal
22 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
3. How does attachment work? The creditor files with the court an affidavit stating that the debtor is in default
and providing the grounds under which attachment is sought. The creditor posts a bond to cover court costs, the
4. How does a writ of execution work? The court enters a judgment against the debtor (normally for the
amount of the debt plus interest and costs). If the debtor does not or cannot pay, a creditor goes back to court and
5. How does garnishment work? A garnishment order is ordinarily served on, for example, an employer so
that part of an employee’s paycheck will be paid to a creditor. Federal and state laws limit the amount that can be
6. What are the differences between contracts of suretyship and guaranty contracts? Contracts of surety-
ship and guaranty contracts involve third parties’ promises to be responsible for principals’ obligations. Under a
contract of suretyship, the third party—the surety—is primarily liable. When a debt is due, the creditor can hold the
7. What types of property are exempt from attachment or levy of execution? Each state provides a home-
stead exemption, which permits a debtor to retain the family home, either in its entirety or up to a specified dollar
amount, free from the claims of unsecured creditors or trustees in bankruptcy. (Some states allow the exemption only
8. What is the usual method of mortgage foreclosure? The usual method of foreclosure is a judicial sale at
which the mortgaged real estate is sold. If the sale proceeds cover the mortgage debt and foreclosure costs, the
9. How might a notice of default and foreclosure actually benefit a debtor? A debtor benefits most from
having a debt forgiven and paying a debt is the most common method to accomplish this end. If a notice of default
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 23
10. Should the federal government regulate the advertising of real property and mortgages on the
Internet to protect consumers from potential fraud? If so, what kind of regulations would be appropriate, and
how might they be enforced? Yes, because the possibility that real estate buyers and sellers might otherwise be
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Have students research local cases concerning the creditors’ remedies discussed in this chapter. Specific
2. Ask students to find and read their state’s garnishment statutes to identify dollar exemptions and local
3. Have students find and read their state’s exemption statutes to determine what property is exempt from levy
4. Ask each student to draft a mortgage document providing for a certain type of loan.
5. Have students research local cases concerning the mortgages, foreclosures, and laws discussed in this
chapter. In some communities, there is an abundance of such cases. Local newspapers and local courthouses are
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 6: While federal and state laws generally limit the amount of money that can be garnished from
an employee’s paycheck, a few states, including Texas, do not permit garnishment of wages at all, except under a
child-support order. The following is Article 16, Section 28 of the Texas state constitution—the provision that prohibits
most garnishments—as it appears in Vernon’s Texas Statutes and Codes Annotated.
24 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
VERNON’S TEXAS STATUTES AND CODES ANNOTATED
CONSTITUTION OF THE STATE OF TEXAS 1876
ARTICLE XVI. GENERAL PROVISIONS
§ 28. Garnishment of wages
Sec. 28. No current wages for personal service shall ever be subject to garnishment, except for the en–
forcement of court-ordered child support payments.
1991 Pocket Part Credit(s)
Amended Nov. 8, 1983.
HISTORICAL NOTES
Amendment adopted in 1983 was proposed by H.J.R. No. 1, Acts 1983, 68th Leg., p. 6693.
Footnote 7: Federal law provides a minimal framework to protect debtors from losing all their income to
the payment of debts through garnishment. Under the Consumer Credit Protection Act, for example, a debtor can
retain a certain amount of income. The following is 15 U.S.C.A. Section 1673—that is, Section 1673 of Title 15 of the
United States Code (which sets out that specific restriction) as it appears in United States Code Annotated.
UNITED STATES CODE ANNOTATED
TITLE 15. COMMERCE AND TRADE
CHAPTER 41—CONSUMER CREDIT PROTECTION
SUBCHAPTER II—RESTRICTIONS 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
(1) 25 per centum of his disposable earnings for that week, or
(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
(b) Exceptions
(1) The restrictions of subsection (a) of this section do not apply in the case of
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 25
(B) any order of any court of the United States having jurisdiction over cases under chapter 13 of Title 11.
(C) any debt due for any State or Federal tax.
(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—
(B) where such individual is not supporting such a spouse or dependent child described in clause (A), 60 per
centum of such individual’s disposable earnings for that week;
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.
(A) where such individual is supporting his spouse or dependent child (other than a spouse or child with
(c) Execution or enforcement of garnishment order or process prohibited
No court of the United States or any State, and no State (or officer or agency thereof), may make, execute, or
enforce any order or process in violation of this section.
(Pub.L. 90-321, Title III, § 303, May 29, 1968, 82 Stat. 163; Pub.L. 95-30, Title V, § 501(e)(1)-(3), May 23,
1977, 91 Stat. 161, 162; Pub.L. 95-598, Title III, § 312(a), Nov. 6, 1978, 92 Stat. 2676.)
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”.
Subsec. (c). Pub.L. 95-30, § 501(e)(3), inserted “, and no State (or officer or agency thereof),” following “or
26 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
Effective Date of 1978 Amendment. Amendment by Pub.L. 95-598 effective Oct. 1, 1979, see § 402(a) of
Pub.L. 95-598, set out as an Effective Date note preceding § 101 of Title 11, Bankruptcy.
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].”