BUSINESS LAW

TEXT AND CASES

Fourteenth Edition

CLARKSON MILLER CROSS 

 


CHAPTER 29: CREDITORS’

RIGHTS AND REMEDIES
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§1: LAWS ASSISTING CREDITORS (1 OF
18)

 Liens: An encumbrance on (claim

against) property to satisfy a debt or
protect a claim for the payment of a
debt.
 Liens may arise under the common
law (usually by possession of the
property) or under statutory law. 
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LAWS ASSISTING CREDITORS (2 OF 18)
 Liens:
Mechanic’s Lien: A lien on real property to
ensure payment for work performed and
materials furnished in the repair or
improvement of real property.
 If the property owner fails to pay the
debt, the lienholder is entitled to
foreclose on the real estate and sell it.
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LAWS ASSISTING CREDITORS (3 OF 18)
 Liens:
Mechanic’s Lien:
 The sale proceeds are used to pay the
debt and the costs of the legal
proceedings.
 Any surplus is paid to the former owner.

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LAWS ASSISTING CREDITORS (4 OF 18)
 Liens:
 Artisan’s Liens: A lien on personal property
to ensure payment for services performed
to repair, improve, or enhance the value of
personal property. 

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LAWS ASSISTING CREDITORS (5 OF 18)
 Liens:
Artisan’s Liens:
 Lienholder Must Retain Possession:
The lien remains in existence as long as
the lienholder maintains possession. It
is terminated once possession is
voluntarily surrendered, unless the
surrender is only temporary.
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LAWS ASSISTING CREDITORS (6 OF 18)
 Liens:
Artisan’s Liens:
 Foreclosure on Personal Property:
Modern statutes permit the holder of
an artisan’s lien to foreclose and sell
the property subject to the lien to
satisfy the debt. 

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 LAWS ASSISTING CREDITORS (7 OF 18)
 Liens:
Artisan’s Liens:
 Foreclosure on Personal Property: The
lienholder is required to give notice to the
property owner before the foreclosure and
sale. The sale proceeds are used to pay
the debt and the costs of the legal
proceedings.
 Any surplus is paid to the former owner.
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LAWS ASSISTING CREDITORS (8 OF 18)
 Liens:
 Judicial Liens: A creditor can bring a legal
action against the debtor to collect a past-due
debt. If the action is successful, the court
awards the creditor a judgment against the
debtor.
 Frequently, the creditor is unable to collect the awarded amount.


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 LAWS ASSISTING CREDITORS (9 OF 18)
 Liens:
Judicial Liens: The creditor may request that
certain property of the debtor be seized to
satisfy the debt.
 A court’s order to seize the debtor’s
property is known as a writ of attachment
if it is issued before a judgment.
 If the order is issued after a judgment, it is
referred to as a writ of execution. 10
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LAWS ASSISTING CREDITORS (10 OF 18)
 Liens:
 Judicial Liens:
 Writ of Attachment: Due process clause of
the Fourteenth Amendment to the U.S.
Constitution requires that the debtor is given
notice and an opportunity to be heard.
 The creditor must have an enforceable right
to payment of the debt under law and must
follow certain procedures. 
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LAWS ASSISTING CREDITORS (11 OF 18)
 Liens:
 Judicial Liens:
 Writ of Attachment: The typical procedure
for attachment is as follows:
 When the court is satisfied that all the
requirements have been met, it issues a
writ of attachment. The writ directs the
sheriff or other officer to seize the debtor’s
nonexempt property. 
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LAWS ASSISTING CREDITORS (12 OF 18)
 Liens:
Judicial Liens:
 Writ of Execution: A writ of execution is an
order that directs the sheriff to seize (levy)
and sell any of the debtor’s nonexempt real
or personal property.
 The writ applies only to property that is
within the court’s geographic
jurisdiction.
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LAWS ASSISTING CREDITORS (13 OF 18)
 Liens:
Judicial Liens:
 Writ of Execution:
 The proceeds of the sale are used to pay
the judgment, accrued interest, and costs
of the sale. Any excess is paid to the
debtor. The debtor can pay the judgment
and redeem the nonexempt property at
any time before the sale takes place.
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LAWS ASSISTING CREDITORS (14 OF 18)
 Garnishment: An order that permits a creditor
to collect a debt by seizing property of the
debtor that is being held by a third party.
 Many types of property can be garnished
including wages, funds in a bank account, tax
refunds, pensions, and trust funds.
 The property must be exempt from
garnishment and in the possession of a third
party. 
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LAWS ASSISTING CREDITORS (15 OF 18)
 Garnishment:
 Procedures: Garnishment can be a
prejudgment remedy, requiring a hearing
before a court, but it is most often a
postjudgment remedy.
 State law governs garnishment actions, so the specific
procedures vary from state to state. 

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LAWS ASSISTING CREDITORS (16 OF 18)
 Garnishment:
Laws Limiting the Amount of Wages
Subject to Garnishment: Federal law
provides a minimal framework to protect
debtors from losing all their income to pay
judgment debts.
 State laws also provide dollar exemptions,
and these amounts are often larger than
those provided by federal law. 
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LAWS ASSISTING CREDITORS (17 OF 18)
 Garnishment:
 Laws Limiting the Amount of Wages Subject
to Garnishment:
 Under federal law, an employer cannot dismiss an employee
because his or her wages are being garnished.

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LAWS ASSISTING CREDITORS (18 OF 18)
 Creditors’ Composition Agreements:
 Creditors take less than owed on a liquidated
debt.
 These agreements are usually held to be
enforceable unless they are formed under
duress.

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 §2: MORTGAGES (1 OF 13)
 When individuals purchase real property, they
typically make a down payment and borrow
the remaining funds.
 The borrowed funds are secured by a
mortgage (a written instrument that gives the
creditor a lien on the debtor’s real property as
security for payment of a debt).
 The creditor is the mortgagee, and the debtor
is the mortgagor. 
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 MORTGAGES (2 OF 13)
 Fixed-Rate versus Adjustable-Rate Mortgages:
A fixed-rate mortgage has a fixed rate of
interest, so the payments remain the same
for the duration of the loan.
Lenders determine the interest rate for a
standard fixed-rate mortgage loan based on a
variety of factors including the borrower’s
credit history, credit score, income, and
debts.
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 MORTGAGES (3 OF 13)
 Fixed-Rate versus Adjustable-Rate Mortgages:
With an adjustable-rate mortgage (ARM), the
rate of interest paid by the borrower changes
periodically.
Typically, the initial interest rate for an ARM is
set at a low fixed rate for a specified period.
After that time, the interest rate adjusts
annually or by some other period. 
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 MORTGAGES (4 OF 13)
 Fixed-Rate versus Adjustable-Rate Mortgages:
The interest rate adjustment is calculated by
adding a certain number of percentage points
(called the margin) to an index rate (one of
various government interest rates).

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 MORTGAGES (5 OF 13)
 Mortgage Provisions: A mortgage involves a
transfer of real property and must be in writing
to comply with the Statute of Frauds.
Mortgages normally are lengthy and formal
documents containing many provisions,
including:
• The terms of the underlying loan.
• A prepayment penalty clause. 
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 MORTGAGES (6 OF 13)
 Mortgage Provisions:
Mortgages contain many provisions,
including:
• Provisions relating to the maintenance of
the property.
• A statement obligating the borrower to
maintain homeowner’s insurance on the
property. 
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 MORTGAGES (7 OF 13)
 Mortgage Provisions:
Mortgages contain many provisions,
including:
• A list of the non-loan financial
obligations to be borne by the borrower.
• Creditor protections. Private mortgage
insurance is required if the down
payment is less than 20%. 
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 MORTGAGES (8 OF 13)
 Mortgage Provisions:
Creditors record the mortgage with the
appropriate office in the county where the
property is located, so that their interest in
the property is officially on record.

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 MORTGAGES (9 OF 13)
 Mortgage Foreclosure: If the homeowner
defaults (fails to make the mortgage
payments), the lender has the right to
foreclose on the mortgaged property.
Foreclosure is the legal process by which
the lender repossesses and auctions off the
property that has secured the loan.
Foreclosure generally benefits neither
borrowers nor lenders.  28
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 MORTGAGES (10 OF 13)
 Mortgage Foreclosure:
Ways to Avoid Foreclosure:
• A forbearance is a postponement of part or
all the payments on a loan for a limited
time. This option works well when the
debtor can solve the problem by securing a
new job, selling the property, or finding
another acceptable solution. 
 SEE CASE 29.2 MCLEAN V. JP MORGAN CHASE
BANK NATIONAL ASS’N (2012).
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 MORTGAGES (11 OF 13)
 Mortgage Foreclosure:
 Ways to Avoid Foreclosure:
• A workout agreement is a contract that
describes the respective rights and
responsibilities of the borrower and the
lender as they try to resolve the default.
• The lender usually agrees to delay the
foreclosure, while the borrower provides
additional financial information that might be
used to modify the mortgage.  30
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 MORTGAGES (12 OF 13)
 Mortgage Foreclosure:
Ways to Avoid Foreclosure:
• A lender may agree to a short sale (a sale
of the property for less than the mortgage
loan balance).
• The borrower must usually show some
hardship such as the loss of a job or a
death in the household. 
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 MORTGAGES (13 OF 13)
 Mortgage Foreclosure:
Ways to Avoid Foreclosure:
• The lender often has approval rights in a
short sale, so the sale process may take
much longer than an ordinary real estate
transaction.

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§3: SURETYSHIP AND GUARANTY (1 OF
10)
 When a third person promises to pay a debt
owed by another in the event that the debtor
does not pay, either a suretyship or a guaranty
relationship is created. The third person’s
creditworthiness becomes the security for the
debt owed.
 Suretyship and guaranty provide creditors with
the right to seek payment from the third party if
the primary debtor (or principal) defaults on her
or his obligations.  33
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 SURETYSHIP AND GUARANTY (2 OF 10)
 Suretyship: An express promise by a
third party (the surety) to a creditor to
be primarily responsible for the debtor’s
obligation to the creditor.
 The creditor can demand payment from the
surety from the moment the debt is due. 

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 SURETYSHIP AND GUARANTY (3 OF 10)
 Guaranty: With a suretyship arrangement, the
surety is primarily liable for the debtor’s
obligation. With a guaranty arrangement, the
guarantor is secondarily liable.
 The guarantor can be required to pay the
obligation only after the principal debtor
defaults, and usually only after the creditor has
attempted to collect from the debtor. 
 SEE CASE 29.3 HSBC REALTY CREDIT CORP. (USA) V.
O’NEILL (2014).
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SURETYSHIP AND GUARANTY (4 OF 10)

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SURETYSHIP AND GUARANTY (5 OF 10)
 Actions That Release the Surety and
the Guarantor: The same actions will
release either a surety or a guarantor
from an obligation:
 Material modification.
 Surrender of property.
 Payment or tender of payment.

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SURETYSHIP AND GUARANTY (6 OF 10)
 Defenses of the Surety and the
Guarantor: A few exceptions do exist
that apply to both sureties and
guarantors.
 Incapacity and bankruptcy.
 Statute of limitations.
 Fraud.

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 SURETYSHIP AND GUARANTY (7 OF 10)
 Rights of the Surety and the
Guarantor: When the surety or
guarantor pays the debt owed to the
creditor, he or she acquires certain
rights.
 The Right of Subrogation: The surety or
guarantor has the legal right of subrogation.
Any right that the creditor had against the
debtor now becomes the right of the surety. 39
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SURETYSHIP AND GUARANTY (8 OF 10)
 Rights of the Surety and the
Guarantor:
 The Right of Reimbursement: The surety or
guarantor has a right of reimbursement from
the debtor.
 Such reimbursements can include expenses incurred as well as the
actual amount of the debt paid to
the creditor. 

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 SURETYSHIP AND GUARANTY (9 OF 10)
 Rights of the Surety and the Guarantor:
The Right of Contribution: Two or more
sureties are called co-sureties.
 When a co-surety pays more than her or
his proportionate share on a debtor’s
default, she/he has a right of contribution.
 The co-surety is entitled to recover from
the other co-sureties the amount paid
above the surety’s obligation.  41
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SURETYSHIP AND GUARANTY (10 OF 10)
 Rights of the Surety and the Guarantor:
The Right of Contribution:
 Generally, a co-surety’s liability either is
determined by agreement or, in the
absence of agreement, is set at the
maximum liability under the suretyship
contract.

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§4: PROTECTION FOR DEBTORS (1 OF 5)
 Consumer protection statutes protect
debtors’ rights and bankruptcy laws are
designed specifically to assist debtors in
need of help.
 In most states, certain types of real and

personal property are also exempt from

execution or attachment. 

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 PROTECTION FOR DEBTORS (2 OF 5)
 Exempted Real Property: A homestead
exemption ensures that the debtor will
retain some form of shelter.
The General Rule: Each state permits
the 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. 
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 PROTECTION FOR DEBTORS (3 OF 5)
 Exempted Real Property:
Limitations: In a few states, statutes
allow the homestead exemption only
if the judgment debtor has a family.
• The homestead exemption can
sometimes operate to cancel out a
portion of a lien on a debtor’s real
property. 
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 PROTECTION FOR DEBTORS (4 OF 5)
 Exempted Personal Property: Personal
property that is most often exempt from
satisfaction of judgment debts includes the
following:
Household furniture up to a specified
dollar amount.
Clothing and certain personal possessions
such as family pictures or a Bible. 
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 PROTECTION FOR DEBTORS (5 OF 5)
 Exempted Personal Property:
A vehicle (or vehicles) for transportation (up
to a specified dollar amount).
Certain classified animals, usually livestock
but including pets.
Equipment that the debtor uses in a
business or trade up to a specified dollar
amount.
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