SECURITY CONTRACTS I. General Points II. Personal Securities III. Real Securities IV. Order of Priority

General Points A. Function of Security Ks 1. Provide reassurance to creditors 2. Creditors want to minimize risk of default B. How Can Creditor Back-Up Debtor’s Promise? 1. Add another debtor (personal security) 2. Obtain a right in property (real security)

Personal Securities – Intro A. Suretyship (Kefalet) 1. Contract between “surety” and creditor 2. Surety assumes responsibility for debtor’s obligation 3. Dependent upon validity of primary obligation K 4. Must be in writing to be valid B. Guarantee (Garanti) 1. Guarantor promises to compensate creditor in the event of debtor default 2. Unlike suretyship, a guarantee is enforceable even when the primary obligation K is not (it’s an independent K) 3. Need not be in writing

Suretyship (additional info) 1. Key Requirements A. Primary Obligation - If primary K is void (fraud, duress, illegality, incapacity), then suretyship is unenforceable B. Surety Capacity – Only full capacity persons allowed C. Form – Written; declare intent to create suretyship; ID the parties, the primary obligation, and maximum amount of surety liability

2. Types of Suretyship A. Ordinary B. Joint 3. Effects of Suretyship A. Surety can raise same defenses as primary debtor B. Can sometimes ask creditor to look to primary debtor 1st (check to see whether it’s ordinary or joint) C. Surety should notify primary debtor if surety pays debt

Guarantee (additional info) 1. Pure Guarantees A. Usually for business investors B. Guarantee against losses, or guarantee fixed % of profit 2. Collateral Guarantees A. Guarantor promises to pay the creditor if debtor defaults B. Bank guarantors often use “letters of guarantee” C. Guarantee is an independent K that does not rely on the validity of prior obligation K (between creditor/debtor) D. If guarantor pays for debtor default, he cannot recover $ from debtor unless they had a counter-guarantee K

(Creditor can seize asset & convert to cash) Real Securities (Creditor can seize asset & convert to cash) A. Real Security-Immovables: Mortgage (İpotek) 1. Validity of mortgage requires the existence of a valid debt 2. Liability = may lose property (no personal liability for owner) 3. Mortgage not effective unless recorded in Land Registry 4. If debtor fails to pay, creditor can demand sale of property B. Real Security-Movables: Pledge (Taşınır Rehni) 1. Pledgor must normally deliver pledged item to pledgee (actual or constructive delivery) – SEE EXCEPTION BELOW

c. Mandatory content– machinery, equipment, tools, trade name 2. Exception to delivery req’t - Commercial Enterprise Pledge a. Businesses often can’t comply with delivery requirement, so new law created a system of registration b. These pledges must be notarized & registered in the Commercial Register c. Mandatory content– machinery, equipment, tools, trade name 1) Attach list of items to K 2) Can sometimes exempt assets, like IP rights d. Effect of Pledge - Pledgor needs to protect value of pledged items - Protects pledgee if assets are sold, transferred without permission (creates tort claim -- pledgor liable for value) 3. Ships and Airplanes a. Although movables, security given via mortgage, not pledge

Order of Priority A. Most Creditors Prefer Real Securities 1. Don’t need to bother with surety, guarantor, lawsuits B. Real & Personal Securities on Same Debt 1. Creditor’s 1st recourse is usually real security 2. Surety/guarantor can also request creditor to look to the real security first