Bar Study- Suretyships & Liens

Front 1

Parties to Suretyship

Back 1

A. Three parties (at least): Creditor, Debtor, and Surety AS BACKUP
1. Surety Language: "If D does not pay, then I will"
2. Direct promise to pay is NOT a suretyship, it's a contract
3. Makes no difference how/where surety's signature is on Promissory Note if a suretyship is show to exist otherwise

Front 2

Seven Rules of Suretyships

Back 2

DRAW PIC

1. (C) Promise to serve as surety must be supported by consideration
EXCEPTION: Not required where surety signs on a promissory note (Article 3)
2. (W) Suretyship promises must be in writing (Statute of Frauds)
EXCEPTION: Main Purpose Rule- not required if S's main purpose is own economic beneft
3. (I) Surety has IMMEDIATE and DIRECT liability on principal debtor's debt
EXCEPTION: NC statute says that a surety who has taken the proper steps can force C to go after D and any Collateral first
4. (R) Surety has three ways to get repayment from debtor
1. Reimbursement
2. Exoneration
3. Subrogation
5. (P) Among Co-Sureties, Paying Surety is entitled to pro rata contribution from co-sureties, UNLESS agreement says otherwise
6. (D) Surety sued by C has same defenses as D
EXCEPT: (1) Infancy (2) Incapacity (3) Discharge in bankruptcy
7. (A) Surety is wholly or partially discharged by C's alteration of K or improper impairment of collateral that produces loss

Front 3

Contract Issues

Back 3

1- Consideration to support surety promise?
2- Statute of Frauds OR Main Purpose Rule?
3- Any misrepresentation by C to D or S?

Front 4

Scope of Liability

Back 4

For Surety: freedom of contract principles apply
For Guarantor: same as surety
EXCEPTION: When person signs as "guarantor of collection" they are not liable till Creditor exhausts remedies against Debtor- language must be unmistakable

Front 5

Promissory Notes

Back 5

NOT required
When used, Article 3 applies
-no consideration necessaryfor suretys on negotiable instruments
-modification of underlying K discharges surety ONLY if surety suffers loss as result
-discharge of debtor does not discharge Surety

Front 6

Unidentified Surety

Back 6

May use outside/oral evidence to show a suretyship (as opposed to promise to pay) UNLESS
1- K has been assigned to a third party
2. C did not know of suretyship at time of signing K

Front 7

Sureties in Business Transactions (3 scenarios)

Back 7

1. Used to avoid Corporate Limited Liability Rule: Bank makes corporate officers be suretys so there's "skin in the game"
2. Failing Contractor Scenario: Landowner acts as Surety for Contractor to ensure work is finished (often subject to Main Purpose Rule)
3. Uninformed Spouse: (ex/)spouse is liable as surety despite not knowing what she signed at husband's behest (and despite any private agreement between divorcing spouses)

Front 8

Consideration Required?

Back 8

Where D, C, & S all participate in initial agreement, NO CONSIDERATION ISSUE
-S's consideration is C's promise to extend credit to D

Front 9

Consideration where S signs on belatedly

Back 9

Consideration Required, must have:
1. New consideration to Surety
2. New consideration to Debtor (extension or modification)
3. Detrimental Reliance by Creditor (equitable estoppel)

Front 10

Writing Required?

Back 10

Statute of Frauds Requires a Writing, UNLESS:
1) In a Direct Promise to Pay (not actually a surety)
*don't forget: Consideration still required!
2) where Main Purpose Rule applies: surety's main purpose in making the suretyship was an economic benefit to himself
-ie Failing Contractor scenario; look at stated purpose
-Corporate Limited Liability Rule: to be liable on an oral promise to pay company's debt, shareholder must
1) be an officer or director AND
2) own a large portion of the corp.
*limitations to corp. LLC scenario don't apply if agreement is written

Front 11

NC Rule: Procedural Protections for Sureties

Back 11

Special NC Rule allows Surety to force creditor to go after Debtor and Collateral before Surety
1. Surety must request it in WRITING and by REGISTERED MAIL
2. Creditor must commence action against COLL w/in 30 days after notice
3. Creditor fails to act w/in 30 days, surety not automatically discharged
-ONLY to extent of loss caused by delay

Front 12

Common Law Rights of Sureties

Back 12

Reimbursement: need not be explicit
DEFENSES: Surety should not have paid (SoL had run, fraud, defect, illegality, etc.)
Exoneration: equitable order that D applyany assets he has to debt
1. Must get order BEFORE C gets judgment against S
2. Rarely used b/c D usually has no assets
Subrogation: S who pays is subrogated to all rights C has against D & third parties, including mortgages or security interests in D's property

Front 13

Rights Among Co-sureties

Back 13

-Paying surety gets pro rata contrib, unless K otherwise
-Paying Surety must raise any defense COMMON TO ALL sureties
-SoL, Illegality, Defect/Breach

Front 14

Defenses Available to Sureties (list of all)

Back 14

1. Any defense available to D EXCEPT Infancy, Incapacity, or Discharge in Bankruptcy
2. Validity of D's signatures
3. Discharge of D:
4. Extension of time granted from C to D
5. Modification of underlying K
6. Impairment of Collateral
7. Waivers

Front 15

Defense: Validity of Signature

Back 15

Validity of D's signatures: in NC, S is not liable if there is a defect in ANY of the signature

Front 16

Defense: Discharge of Debt

Back 16

Discharge of D:
If no PN: CL applies, discharge of D = discharge of S
If PN: A3 applies, discharge of D by C does NOT discharge S
S still iable, but retains cause of action against D

Front 17

Defense: Extension of Time

Back 17

Extension of time granted from C to D
1. Gratuitous Surety- discharged if C grants D an extension of time
2. Compensated Surety- discharged only to extent of any loss if there is an extension
3. If PN, A3 says extension only creates discharge to extent of loss if there is an extension. Direct compensation irrelevant.
*Loss usually does NOT result from extension of time, usually beneficial; exception is when D is solvent at time of extension & then becomes insolvent

Front 18

Defense: Mod of Underlying K

Back 18

Modification of underlying K
Examples of Mods
1. Creditor agrees to change form of payment
2. Creditor agrees to extend warranty on goods in exchange for D paying extra
3. C agrees to let D get rid of reserve account
Rules:
1. CL: A gratuitous surety is discharged by ANY modification (even one favorable to S)
2. CL: A compensated surety is discharged only to extent of loss caused by mod
3. IF PN: A3 says mod produces discharge only to extent of loss (regardless of compensation)

Front 19

Defense: Impairment of Collateral

Back 19

Impairment of Collateral
1. CL and A3 are same- discharge of surety to extent of impairment of COLL

Front 20

Defense: Waiver

Back 20

Waivers
-Even where S has right to partial or full discharge, NC Courts often find this right has been waived
-if S knows of change in K and raises no objection

Front 21

Personal Property Liens (Generally)

Back 21

-liens are possessory; ended by voluntarily relinquishing property
-in NC payment w/ bad check negates voluntariness

Front 22

Relative Priority

Back 22

generally personal property liens have priority over preexisting A9 interests (exception to first in time, first in right)
EXCEPTIONS: Landlord's lien, Innkeeper's lien

Front 23

General Service and Storage Lien (GSSL)

Back 23

1) Work must be performed pursuant to a K
2) Work must be performed in ordinary course of lienholder's business
*True Owner must be one who brought goods in
-Thief cannot subject goods to GSSL
-Non-owner in lawful possession can subject goods to GSSL, BUT only up to $100
-applies to subcontractors as well
*Lien cannot exceed reasonable value of services, regardless of K price

Front 24

Motor Vehicle Lien

Back 24

1) Work must be performed pursuant to a K
2) Work must be performed in ordinary course of lienholder's business
*No $100 limit for mere "lawful possessor"
*Boats are NOT motor vehicles

Front 25

Rights of Purchasers at Foreclosure

Back 25

Purchaser at a lien foreclosure gets all rights of lienholder conducting sale
-takes priority over previous A9 interest IF lienholder's claim had priority

Front 26

Key Rules for Real Property Liens

Back 26

1. Owner, Tenant, or Buyers w/ property under K can subject prop to lien
2. Lien begins "upon first visible commencement of work/furnishing of goods at site"
-no filing requirement
-engineers & architects do not have to have worked at site, just have begun work
-for contracted work done in bits over a long period, entire lien dates back to first point in time, but lien covers ALL work included in the contract
3. Lien can defeat later perfected mortgage (even w/out knowledge)
4. SoL is SHORT: file within 120 days of completion of work, commence suit within 180
Clock starts running on last day of "bona fide furnishing of goods or services"
-cannot restart clock by doing a touch up/follow up visit
5. Subs can get liens; first tier subs treated much better than second and third tier

Front 27

Owner/Tenant Issues

Back 27

-Tenants or Buyers under K can subject property to liens even without consent or knowledge of owner
-Lien against one unit in a shopping center is a lien against all (even if subjected by a tenant)
-Liens are only for value of work done (regardless of K price)

Front 28

Who can claim liens?

Back 28

Key is improvement of property
EXCEPTIONS: carpet installers if carpet is removable, real estate appraiser

Front 29

Subcontractor Liens: Rule

Back 29

RULE: If sub is not paid, has a "lien upon funds" of the party who hired them
-second tier subs are subrogated to rights of first tier subs

Front 30

Subcontractor Liens: Procedure

Back 30

Procedure:
Send letter to person owing money stating that it is owed & include a brief description of the work done
If OWNER is owing party & ignores notice,
1) Owner becomes personally liable for amount owed to sub
2) Sub can get a lien on owner's land
For other parties who ignore notice, they become personally liable
Defeating Sub's claim: prior party has already paid out money it owes

Front 31

When can first tier subcontractors get liens?

Back 31

1. improper payment lien: when owner ignore notice
2. subrogation lien: first tier is subrogated to rights of GC against landowner
a. first tier sub has not been paid
b. owner has also not paid GC
*GC can defeat this if he has waived rights to lien in K

Front 32

When can second tier subcontractors get liens?

Back 32

1. improper payment lien: possible, but very rare
2. no subrogation lien if GC sends second tier sub notice that GC has paid out to first sub

Front 33

Tax Liens (held by state/local gov.)

Back 33

Key Questions
1. Priority of tax lien re: preexisting recorded mortgage interest
2. If innocent purchaser buys property w/ tax lien, does buyer take free?
Answer: Gov't always wins

No filing requirement; tax becomes dur when property is listed for taxes

Chain of title: reflects tax liens

Front 34

If two gov't entities have liens?

Back 34

Two gov't entities have liens (ex. city and county) they take pro rata according to proportion of total tax owed to each

Front 35

Judgment Liens

Back 35

-only money judgments are eligible
-attach to real property (not personal property)
-last for 10 years, renewable indefinitely in 10 year intervals
-must be docketed (condition subsequent to judgment)
-Doctrine of Instantaneous Seisin applies

Front 36

Doctrine of Instantaneous Seisin

Back 36

operates to subordinate a prior judgment lien to seller or third party financer's purchase money mortgage

Front 37

Judgment Liens: After Acquired Property

Back 37

two judgment liens share pro rata in after acquired property, regardless of timing
*does not apply to realization of preexisting interests (remainders, etc.) which apply first in time rule

Front 38

Attachment Liens

Back 38

-not available in most NC litigation
Rule: PL must show risk that EITHER
1) DE will be unavailable at time of judgment
-most common use is for a nonresident with property in the state
-use civ pro rules to determine this, so a nonresident leaves the state for an indefinite period of time and/or has no intent to return
2) DE's assets will be un available, having been "secreted away"
-look for personal transfers of cash, etc.