1. Copyright © 2004 by Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany BUSINESS LAW E-Commerce and Digital Law International Law and Ethics 5 th Edition by Henry R. Cheeseman Slides developed by Les Wiletzky Wiletzky and Associates, Puyallup, WA Chapter 26 Credit and Suretyship Chapter 26 Credit and Suretyship

2. 26 - 2Copyright © 2004 by Prentice-Hall. All rights reserved. Introduction  The United States is a credit economy.  Businesses and individuals use credit to purchase many goods and services.  Debtor – The borrower in a credit transaction.  Creditor – The lender in a credit transaction.

3. 26 - 3Copyright © 2004 by Prentice-Hall. All rights reserved. Unsecured Credit  Credit that does not require any security (collateral) to protect the payment of the debt.  The creditor relies on the debtor’s promise to repay the principal (plus an interest) when it is due.  The creditor may bring legal action if the debtor fails to make the payments.

4. 26 - 4Copyright © 2004 by Prentice-Hall. All rights reserved. Secured Credit  Credit that requires security (collateral) that secures payment of the loan.  Security interests may be taken in real, personal, intangible, and other property.  The collateral may be repossessed to recover the outstanding amount if the debtor fails to make payment.

5. 26 - 5Copyright © 2004 by Prentice-Hall. All rights reserved. Security Interests in Personal Property  Personal Property – consists of tangible property (e.g., automobiles, furniture, and jewelry) as well as intangible property (e.g., securities, patents, and copyrights).  The law provides for various types of security interests and liens in personal property by sellers of goods and providers of service. e.g., Artisan’s and Mechanic’s Lien e.g., Artisan’s and Mechanic’s Lien

6. 26 - 6Copyright © 2004 by Prentice-Hall. All rights reserved. Security Interests in Real Property  Mortgages  Notes and Deeds of Trust  Recording Statutes  Foreclosure  Mortgages  Notes and Deeds of Trust  Recording Statutes  Foreclosure  Deficiency Judgment  Right of Redemption  Land Sales Contracts  Deficiency Judgment  Right of Redemption  Land Sales Contracts

7. 26 - 7Copyright © 2004 by Prentice-Hall. All rights reserved. Mortgage  A collateral arrangement where a property owner borrows money from a creditor who uses a deed as collateral for repayment of the loan.  Mortgagor – The owner-debtor in a mortgage transaction.  Mortgagee – The creditor in a mortgage transaction.

8. 26 - 8Copyright © 2004 by Prentice-Hall. All rights reserved. Parties to a Mortgage Loan of Funds Security Interest in Real Property Owner-Debtor Mortgagor (Borrower) Creditor Mortgagee (Lender)

9. 26 - 9Copyright © 2004 by Prentice-Hall. All rights reserved. Notes and Deeds of Trust  Note – An instrument that evidences the borrower’s debt to the lender.  Deed of Trust – An instrument that gives the creditor a security interest in the debtor’s property that is pledged as collateral.

10. 26 - 10Copyright © 2004 by Prentice-Hall. All rights reserved. Parties to a Note and Deed of Trust Loan of Funds Security Interest in Real Property Owner-Debtor Trustor (Borrower) Creditor Beneficiary (Lender) Trustee Legal Title If default, can perfect rights

11. 26 - 11Copyright © 2004 by Prentice-Hall. All rights reserved. Recording Statute  A statute that requires the mortgage or deed of trust to be recorded in the county recorder’s office of the county in which the real property is located.  This record gives potential lenders or purchasers of real property the ability to determine whether there are any existing liens (mortgages) on the property.

12. 26 - 12Copyright © 2004 by Prentice-Hall. All rights reserved. Foreclosure  Legal procedure by which a secured creditor causes the judicial sale of the secured real estate to pay a defaulted loan.  All states permit foreclosure sales.  Most states permit foreclosure by power of sale.

13. 26 - 13Copyright © 2004 by Prentice-Hall. All rights reserved. Deficiency Judgment  Some states permit the mortgagee to bring a separate legal action to recover a deficiency from the mortgagor.  If the mortgagee is successful, the court will award a deficiency judgment the court will award a deficiency judgment entitles the mortgagee to recover the amount of the judgment from the mortgagor’s property entitles the mortgagee to recover the amount of the judgment from the mortgagor’s property

14. 26 - 14Copyright © 2004 by Prentice-Hall. All rights reserved. Right of Redemption  A right that says the mortgagor has the right to redeem real property after default and before foreclosure.  Requires the mortgagor to pay the full amount of the debt incurred by the mortgagee because of the mortgagor’s default.

15. 26 - 15Copyright © 2004 by Prentice-Hall. All rights reserved. Land Sales Contract  Arrangement where the owner of real property agrees to sell the property to a purchaser, who agrees to pay the purchase price to the owner- seller over an agreed-upon period of time.  Often used to sell undeveloped property and farms.  If the purchaser defaults, the seller may declare a forfeiture and retake possession of the property.

16. 26 - 16Copyright © 2004 by Prentice-Hall. All rights reserved. Lender Liability  Lenders, in certain circumstances, have liability exposure in making loans to borrowers.  A lender is liable to a borrower if the lender breaches the loan agreement or engages in fraud.  Liability may also be imposed on lenders by federal and state statutes.

17. 26 - 17Copyright © 2004 by Prentice-Hall. All rights reserved. Material Person’s Lien  A contractor’s and laborer’s lien that makes the real property to which improvements are being made become security for the payment of the services and materials for those improvements.

18. 26 - 18Copyright © 2004 by Prentice-Hall. All rights reserved. Surety Arrangement  An arrangement where a third party promises to be primarily liable with the borrower for the payment of the borrower’s debt.  Surety – The third person who agrees to be liable in a surety arrangement.

19. 26 - 19Copyright © 2004 by Prentice-Hall. All rights reserved. Guaranty Arrangement  An arrangement where a third party promises to be secondarily liable for the payment of another’s debt.  Guarantor – The third person who agrees to be liable in a guaranty arrangement.

20. 26 - 20Copyright © 2004 by Prentice-Hall. All rights reserved. Summary: Liability of Sureties and Guarantors Compared Type of Arrangement PartyLiability Surety Contract Surety Primarily liable. The surety is a co-debtor who is liable to pay the debt when it is due. Guaranty Contract Guarantor Secondarily liable. The guarantor is liable to pay the debt if the debtor defaults and does not pay the debt when it is due.

21. 26 - 21Copyright © 2004 by Prentice-Hall. All rights reserved. Collection Remedies  When a debt is past due, the creditor may bring a legal action against the debtor.  If the creditor is successful, the court will award a judgment against the debtor.  The judgment will state that the debtor owes the creditor a specific sum of money: Principal and interest past due on the debt, Principal and interest past due on the debt, Other costs resulting from the debtor’s default, and Other costs resulting from the debtor’s default, and Court costs Court costs

22. 26 - 22Copyright © 2004 by Prentice-Hall. All rights reserved. Collection Remedies (continued) The most common collection remedies are:  Attachment  Execution  Garnishment