La Security Rights

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Art. 3182 Debtor’s general liability

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Whoever has bound himself personally, is obligated to fulfill his engagements out of all his property, movable and immovable, present and future.

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Art. 3183 Debtor’s property common pledge of creditors; exceptions to pro rata distribution

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The property of the debtor is the common pledge of his creditors, and the proceeds of its sale must be distributed among them ratable, unless there exist among the creditors some lawful cause of preference

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Art. 3138 Lawful causes of preference

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Lawful causes of preference are privilege and mortgages.

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Art. 3185 Privileges established only be law, stricti juris

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Privilege can be claimed only for those debts to which it is expressly granted in the code.

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Stricti juris

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This means “strict interpretation.” Where the issue is ambiguous, interpretation is in favor of the debtor. As a policy issue, you don’t want to hold a party liable as a surety unless it is clear they intended to enter into a suretyship agreement.

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Customarily, there are at least five elements to every secured credit transaction:

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• Debt
• Debtor
• Creditor
• Security Agreement
• Collateral (in the sense that property that is sues is a lawful cause of preference under art. 3183. The use of s surety does not involve collateral. Rather, it adds another person who must pay thereby multiplying the changes that the creditor will be paid.)

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Art. 3035 Definition of suretyship

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Suretyship is an accessory contract by which a person binds himself to a creditor to fulfill the obligation of another upon the failure of the latter to do so.

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purpose of suretyship

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The purpose of suretyship is to allow the creditor to seek payment from several persons, instead of one. This diminished the risks of nonperformance or insolvency of the debtor.

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who are the parties in a suretyship?

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There must be a creditor, debtor, and a surety.

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what kinds of contract is a suretyship?

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Suretyship is a nominate contract. Thus, there are special rules in the code governing suretyship.

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What is the nature of the obligation of a suretyship?

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The surety is not incurring a debt. He is promising to pay the debt of another. This means the surety will have some recourse against the debtor if he is called upon to pay.

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What is an accessorial obligation?

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The obligation of suretyship is accessorial. The agreement between the creditor and the debtor is the principal obligation. The principal obligation will govern the debt itself—specifying what is due and when it is due. The accessory obligation of suretyship cannot exist without the principal obligation.

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Art. 3037 Surety ostensibly bound as a principal with another; effect of knowledge of the creditor

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One who ostensibly binds himself as a principal obligor to satisfy the present or future obligations of another is nonetheless considered a surety if the principal cause of the contract with the creditor is to guarantee performance of such obligations.

A creditor in whose favor a surety and principal obligor are bound together as principal obligors in solido may presume they are equally concerned in the matter until he clearly knows of their true relationship.
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• Substance over form—The idea is to look through the form of the transaction to its substance.

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• Facts—Williard owned a portable sawmill that he wished to operate. Willard was unknown to Collier, the creditor. Collier extended credit at his general store to Williard so that Williard could purchase the materials he needed. The materials have been sold and delivered on credit but have not bee paid for. Collier tries to get Brown to pay the debt b/c induced Collier to extend credit by saying he would make sure the debt was paid.
• Issue—The issue is whether this is a surety agreement. The only evidence that Brown promised to pay is oral. Parol evidence cannot be introduced to prove the promise to pay the debt of another, but it can be introduced to prove the promise to pay your own debt.

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• Holding—The court treated Brown and Williard like co-debtors rather than people in a surety agreement. The important factor was that Brown had an economic benefit in Williard getting the materials he needed because Brown expected to profit from Williard’s work. Furthermore, Collier was induced to extend credit because of Brown and Brown occasionally paid on the account.
• Note—There was probably a moral factor considered in this case as well. None of Brown’s actions standing alone would have been sufficient to hold him liable as a co-debtor.

(collier v. brown)

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Art. 3038 Formal requirements of suretyship

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Suretyship must be express and in writing.
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• Express—What constitutes “express” depends on the facts of the case. This is where the stricti juris rule comes into play.
• In Writing—Comment (d) states that writing means either an act under private signature or an authentic act.
• Oral Principal Obligation—These requirements are true even if the principal obligation is oral, not express, etc.
• Justification—This requirement is justified because the surety is placed in a precarious position. Historically, suretyship was a gratuitous obligation

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Art. 3039 Suretyship requires no formal acceptance

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Suretyship is established upon receipt by the creditor of the writing evidencing the surety’s obligation. The creditor’s acceptance is presumed and no notice of acceptance is required.

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Art. 3040 Rules may be varied (suretyship)

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Suretyship may be qualified, conditioned, or limited in any lawful manner.

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Art. 1913 Principal and accessory contracts

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A contract is accessory when it is made to provide security for the performance of an obligation. Suretyship, mortgage, pledge, and other types of security agreements are examples of such a contract.

When the secured obligation arises from a contract, either between the same or other parties, that contract is the principal contract.

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Porte Fort as distinguished from suretyship

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A person may validly bind himself to assure a creditor that another will do an act for which the latter is under no legal duty to perform.
o Example: A promises B that C will perform at his concert. A can be liable to B if C fails to perform. But, C is under no legal duty to perform. Not suretyship.
o Example: A promises B that if B buys Blackacre, the adjoining landowner, C, will grant a servitude over his property so that B will have water access. This is not surety because C is under no legal duty to provide the servitude.

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Sipulation Pour Autrui distinguished from suretyship

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This is a third party beneficiary contract, which is an agreement between 2 parties stipulating a benefit for a 3rd party.
o Example—H and W divorce. H agrees to pay for his daughter to go to LSU for 4 years including her room, board, and allowance. In Louisiana, parents are not under any legal obligation to send their kids to college. Daughter goes to LSU and H refuses to pay. This is a third party beneficiary contract, not suretyship.

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Art. 3036 Obligations for which suretyship may be established

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Suretyship may be established for any lawful obligation, which, with respect to the suretyship, is the principal obligation.

The principal obligation may be subject to a term or condition, may be presently existing, or may arise in the future.

(This article removes any doubt that may have existed as to whether suretyship could secure a future debt.)

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Continuing Guarantee Agreements

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Such agreement is a suretyship contract to guarantee the debts of the principal debtor up to a stated limit, whether now existing or in the future.

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• Facts—Continental extended credit to Tucker Co. Rose and Tucker agreed jointly and severally (meaning in solido) for the purchase price of goods and merchandise, to the limit of $2,800. The company failed to pay the bill and Continental seeks payment from Tucker and Rose. Tucker and Rose contend they were only liable for the first loan of $2,800.
• Issue—Whether Tucker and Rose were liable under a continuing guarantee agreement?

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Yes. The court found them liable for a continuing guarantee agreement. The contract said it was for any liability up to $2,800, not for the first $2,800 of goods sold. Court thought is was perfectly apparent that this was a continuing guarantee agreement. (CONTINENTAL SUPPLY CO. V. TUCKER ROSE OIL CO.)

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Imputation of Payment of multiple debts

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• If two debts are owed to the same creditor, in the absence of contrary specification, the payment will be applied to the oldest debt, and to the interest rather than the principal.

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enforceability of Continuing Guarantee Agreements

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Like any surety agreement, it must be express and in writing. The writing requirement is not normally a problem. The express requirement is what leads to litigation.
o Express—The guarantee should include language like “whether due or to become due and whether now existing or hereafter existing.”

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upper limit of Continuing Guarantee Agreements

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The upper limit of the agreement does not have to be specified. In the absence of an upper limit, the sky is the limit in terms of liability. This is unique to suretyship law. Mortgage requires an upper limit because it goes to the essence of the contract.
o Mutual Mistake—If both parties intended an upper limit but failed to include one they might have an argument to put in an upper limit at a later date.

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• Line of Credit

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This is the right to borrow money without the obligation to borrow money. This is an important concept in practice. The bank might give you a line of credit for 100k. You can call anytime and have any amount up to 100k put in your account. This would be too cumbersome if you have to get a new surety agreement each time you called the bank. Thus, a continuing guarantee agreement is used.

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• Attorney’s Fees in a continuing gaurantee agreement

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must be specifically contracted for

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• Discussion

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—(No longer have this right unless you contract for it) The creditor has to go after all the debtor’s assets, exhausting all remedies, before going after the surety.

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• Division

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—(No longer have this right unless you contract for it) The creditor has to divide the debt between the co-debtors or co-sureties. You automatically waive this when you bind yourself in solido, but most contracts still state that you waive the right to division as well.

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APPLICABILITY OF COMMERCIAL LAWS

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Louisiana adopted article 3 (Commercial Laws) of the UCC with some modifications. Article 3 deals with commercial paper such as negotiable instruments, and is therefore relevant to the suretyship.
• Rule: Supplementary general principles of law are applicable unless displaced by the particular provisions of article 3.

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• Promissory Note

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A promissory note is a negotiable instrument where an agreement has been made to make payment upon demand. The parties are the maker and the endorser.
o Bad Note—If the promissory note is bad, the third party can go after either the endorser or the maker. However, the maker of the note will ultimately be responsible.

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• Maker

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A party may obligate himself as a maker by signing his name on the front of the instrument. The party agrees to be primarily responsible to pay the face value of the instrument according to its terms. Maker normally refers to one for whose benefit the instrument was issued—aka, the debtor. However, an accommodation party may also be bound in this capacity.

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• Endorser

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A party assuming the liability of endorser usually assumes the commitment by signing the back of the instrument. The party, by endorsing, agrees subject to certain conditions to pay the amount of the instrument according to its terms if the maker dishonors it. Generally, an endorser is a party who seeks to transfer his interest in the instrument, such as a party who signs the back of a check to cash it. An accommodation party who has no interest in the instrument may bind himself as an endorser.

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• Accommodation Party

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This is an obligor on the note who obligates himself in order to assist the party for whose benefit the negotiable instrument is issued. This party is not liable as between the parties, but is liable to 3rd parties. Accommodation party can be either a maker or an endorser. This party looks like a surety and the purpose is similar.
o Example—If two people sign the front of a promissory note, the parties can either be the maker or the endorser. A person who signs the front of the note as an endorser is called an accommodation maker. This person can be a surety (guaranteeing the validity of the note) despite looking like the maker (principal obligor). So, where a father signs his daughter’s promissory note so that she can get a new car he is really an accommodation party and his daughter is the maker. His principal cause was to provide the daughter with the credit necessary to buy the car. You must look to the intent of the parties to determine their roles.

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R.S. § 10:3-119 Other writings affecting instrument

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—(1) As between the obligor and his immediate obligee or any transferee the terms of an instrument may be modified or affected by any other written agreement executed as a part of the same transaction, except that a holder in due course is not affected by any limitation of his rights arising out of the separate written agreement if he had no notice of the limitation when he took the instrument.

(2) A separate agreement does not affect the negotiability of an instrument.

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R.S. § 10:3-414 Contract of endorser; order of liability

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(1) Unless the endorsement otherwise specifies, as by such words as “ without recourse,” every endorser engages that upon dishonor and any necessary notice of dishonor and protest he will pay the instrument according to its tenor at the time of his endorsement to the holder or to any subsequent endorser who takes it up, even though the endorser who takes it up was not obligated to do so.

(2) Unless they otherwise agree endorsers are liable to one another in the order in which they indorse, which is presumed to be the order in which their signatures appear on the instrument.
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• Note—This is merely a presumption. The successive liability idea may be rebutted by contrary evidence.

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• Facts—Bank is the creditor and Computer Analysis is the maker of the note. There is no surety agreement, but there is a promissory note with 3 endorsers. The 3 endorsers are the company’s primary shareholders. Marek, one of the endorsers, is not willing to pay his 1/3 virile share. He argues that the endorsers are liable in the order in which they signed and, thus, the other 2 must reimburse him because he was the last to sign on the note.
• Issue—Whether there is sufficient evidence to overcome the presumption of successive liability?

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• Holding—Yes, enough evidence was presented to overcome the presumption of successive liability. The substance of the transaction is that the 3 endorsers were co-sureties. The bank was unwilling to make the loan without 3 endorsers. Furthermore, each endorser had substantial pecuniary interest in the continued operation of the company.
• Note—In this case there was a surety agreement without a written contract. Thus, when you are dealing with negotiable instruments, it is possible to have a surety agreement that is neither written nor express.

(GULF NATIONAL BANK OF LAKE CHARLES V. COMPUTER ANALYSIS, INC.)

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• Facts—Bank lent money to Springlake. The company president signed the note and put his title of president after his name. The Bank tries to sue the president personally. The president argues he is not personally liable b/c he signed as an officer of the company.
• Issue—Whether the company president was personally liable?

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Yes. If the president had been signing in his capacity as president he would not be personally liable. However, there would have been no reason for him to sign as an officer of the company. The company had already incurred the debt and it would not make sense for the company to be the surety of its own debt. The word “president” merely showed the relationship to the company.
• Presumption—R.S. §10:3-403 creates a rebuttable presumption between the immediate parties that the representative who signs his name in a representative capacity but does not name the person represented is personally obligated on the instrument. That presumption was not rebutted in this case because it would not make sense for the company to be its own surety, the nature of the transaction, and the fact that the president listed the note as a personal liability on his finance statement.

(HOMER NATIONAL BANK V. SPRINGLAKE FARMS)

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Art. 3041 Kinds of suretyship

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There are three kinds of suretyship: commercial suretyship, legal suretyship, and ordinary suretyship.

A legal suretyship is one given pursuant to legislation, administrative act or regulation, or court order.

• Ordinary—This is the residual category. If it is not legal or commercial then it is ordinary. (Art. 3044—An ordinary suretyship is one that is neither a commercial suretyship not a legal suretyship. An ordinary suretyship must be strictly construed in favor of the surety.)

Art. 3042 Commercial suretyship—A commercial suretyship is one in which:

(1) The surety is engaged in a surety business;
(2) The principal obligor or the surety is a business corporation, partnership, or other business entity;
(3) The principal obligation arises out of a commercial transaction of the principal obligor; or
(4) The suretyship arises out of a commercial transaction of the surety.
• (1) If the surety is in the business of being a surety you do not even consider who the creditor and debtor are and what the nature of their transaction is.
• (2) If the debtor is a business the suretyship is automatically commercial.
• (3) If the transaction is commercial on the debtor’s side then it is commercial. This can be tricky. Buying a car for personal use is not a commercial transaction for the debtor.
• (4) This is where the surety profits on the transaction, like requiring the debtor to pay a fee before agreeing to become the surety.

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Art. 3062 Effect of modifications of principal obligation

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Modification or amendment of the principal obligation or the impairment of real security held for it, by the creditor, in any material manner and without the consent of the surety has different effects for ordinary and commercial suretyship.
o Ordinary suretyship is extinguished. This is in toto discharge.
o Commercial suretyship is extinguished only to the extent that the surety is prejudiced by the action of the creditor. This is por tanto discharge.

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Art. 3045 Liability of sureties to creditor; division and discussion abolished

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A surety, or each surety when there is more than one, is liable to the creditor in accordance with the provisions of this Chapter, for the full performance of the obligation of the principal obligor, without benefit of division or discussion, even in the absence of an express agreement of solidarity.

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Art. 3046 Defenses available to surety

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The surety may assert against the creditor any defense to the principal obligation that the principal obligor could assert except lack of capacity or discharge in bankruptcy of the principal obligor.

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• Facts—Federal Schools sold correspondence courses. Geis ordered one and Kuntz guaranteed the contracts. Geis did not pay, but is a minor. Kuntz raises the defense that Geis is a minor and lacked capacity.
• Issue—Whether Kuntz, as a surety, could raise the principal obligor’s lack of capacity as a defense?

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• Holding—No. Kuntz cannot raise a defense that is personal to Geis. Art. 3046 codified this case. (FEDERAL SCHOOLS, INC. V. KUNTZ)

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Art. 3047 Rights of the surety

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A surety has the right of subrogation, the right of reimbursement, and the right to require security from the principal obligor.

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• Reimbursement

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The right that the surety has to be repaid by the principal debtor to the full extent of the amount he, the surety, has expended on the principal debtor’s behalf.

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Art. 3048 Surety’s right of subrogation

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The legal fiction whereby one person stands in the shoes of another and can enforce his rights. Subrogation assists the surety in being reimbursed by letting him stand in the shoes of the creditor

The surety who pays the principal obligation is subrogated by operation of law to the rights of the creditor.

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• Facts—Carrollton Bank held a promissory note on which Comstock was the maker and Cleveland had endorsed. Bank got a judgment against the parties in solido and recovered the money through the sale of Cleveland’s property. Cleveland sues Comstock, who pleads prescription. Whether prescription has run depends on the action.
• Issue—Whether prescription has run?

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• Holding—No. This action is the right of a surety for reimbursement, not that of subrogation to the creditor’s rights. Prescription began to run from the time Cleveland paid—prescriptive period is 10 years.(CLEVELAND V. COMSTOCK)

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Art. 1825 Definition (subrogation)

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Subrogation is the substitution of one person to the rights of another. It may be conventional or legal.

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Art. 1826 Effects (subrogation)

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When subrogation results from a person’s performance of the obligation of another, that obligation subsists in favor of the person who performed it who may avail himself of the action and security of the original obligee against the obligor, but is extinguishes for the original obligee.

An original obligee who has been paid only in part may exercise his right for the balance of the debt in preference to the new obligee.

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Art. 1827 Conventional subrogation by the obligee

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An obligee who receives performance from a third person may subrogate that person to the rights of the obligee, even without the obligor’s consent. That subrogation is subject to the rules governing the assignment of rights.
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• Form—Valid between the parties without anything more. Requires notice to the obligor or his acceptance in an authentic act to be valid against 3rd parties.
• No writing requirement

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Art. 1828 Conventional subrogation by the obligor

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An obligor who pays a debt with money or other fungible things borrowed for that purpose may subrogate the lender to the rights of the obligee, even without the obligee’s consent.

The agreement for subrogation must be made in writing expressing that the purpose of the loan is to pay the debt.
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• Form—Must be express and in writing.

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Art. 1829 Subrogation by operation of law

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Subrogation takes place by operation of law:

(1) In favor of an obligee who pays another obligee whose right is preferred to his because of a privilege, pledge, mortgage, or security interest.

(2) In favor of a purchaser of movable or immovable property who uses the purchase money to pay creditors holing any privilege, pledge, mortgage, or security interest on the property;

(3) In favor of an obligor who pays a debt he owes with others of for others and who has recourse against those others as a result of the payment;

(4) In favor of an heir with benefit of inventory who pays dents of the estate with his own funds; and

(5) In other cases provided by law.

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Art. 1830 Effects of legal subrogation

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When subrogation takes place by operation of law, the new obligee may recover from the obligor only to the extent of the performance rendered to the original obligee. The new obligee may not recover more by invoking conventional subrogation.
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• Compare to Conventional Subrogation—The conventional subrogee is substituted to all of the rights of the original obligee. He is entitled to recover the full amount of the debt from the obligor, regardless of the amount actually paid by the subrogee to the original obligee. In contrast, a legal subrogee may not claim a greater advantage by availing himself of conventional subrogation.
o CLEVELAND V. COMSTOCK(above) Although surety was subrogated to the rights of the creditor, it did not take on its prescriptive period. Surety had an independent right of redemption, which had not yet prescribed. Subrogation may assist the surety, but it does limit the surety’s rights.
o SUCCESSION OF DINKGRAVE (below) The surety has a right of reimbursement only for the actual value, not face value, of the payment. The surety’s right to reimbursement does not entitled him to recover more than he actually paid to the creditor. This is because the surety is only doing what he has obligated himself to do. A stranger to the debt would be able to buy the debt from the creditor and recover the full amount from the debtor.

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Art. 3049 Surety’s right of reimbursement for payment of obligation

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A surety who pays the creditor is entitled to reimbursement from the principal obligor. He may not recover reimbursement until the principal obligation is due and exigible.

A surety for multiple solidary obligors may recover from any of them reimbursement of the whole amount he has paid the creditor.
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• Distinction—This is not the same situation as where one of the three debtors pays the entire amount. The debtor who pays can only claim reimbursement for a virile share from each of the other debtors.

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Art. 3050 Surety’s right of reimbursement for payment of obligation not owed

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A surety who in good faith pays the creditor when the principal obligation is extinguished, or when the principal obligor had the means of defeating it, is nevertheless entitled to reimbursement from the principal obligor if the surety made a reasonable effort to notify the principal obligor that the creditor was insisting on payment or if the principal obligor was apprised that the creditor was insisting on payment.

The surety’s rights against the creditor are not thereby excluded.

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Art. 3051 Payment by debtor without notice of payment by surety

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A surety may not recover from the principal obligor, by way of subrogation or reimbursement, the amount paid the creditor if the principal obligor also pays the creditor for want of being warned by the surety of the previous payment.

In these circumstances, the surety may recover from the creditor.

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Art. 3052 Limitation on right of surety to recover what he paid creditor

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A surety may not recover from the principal obligor more than he paid to secure a discharge, but he may recover by subrogation such attorney’s fees and interest as are owed with respect to the principal obligation.

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Art. 3053 Surety’s right to require security

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A surety, before making payment, may demand security from the principal obligor to guarantee his reimbursement when:

1. The surety is sued by the creditor;
2. The principal obligor is insolvent, unless the principal obligation is such that its performance does not require his solvency;
3. The principal obligor fails to perform an act promised in return for the suretyship; or
4. The principal obligation is due or would be due but for an extension of its term not consented to by the surety.

The principal obligor may refuse to give security if the principal obligation is extinguished or if he has a defense against it.
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• Note—Nathan says this is an illusory article. In order to get security you have to sue and get a judgment. Only then will you be able to get security. Even then, security is not guaranteed.

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Art. 3054 Failure to provide security

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If, within ten days after the delivery of a written demand for the security, the principal obligor fails to provide the required security or fails to secure the discharge of the surety, the surety has an action to require the principal obligor to deposit into the registry of the court funds sufficient to satisfy the surety’s obligation to the creditor as a pledge for the principal obligor’s duty to reimburse the surety.

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Art. 1864 Imputation by obligor

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An obligor who owes several debts to an obligee has the right to impute payment to the debt he intends to pay.

The obligor’s intent to pay a certain debt may be expressed at the time of payment or may be inferred from circumstances known to the obligee.

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Art. 1865 Imputation to debt not yet due

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An obligor may not, without the obligee’s consent, impute payment to a debt not yet due.

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art. 1866 Payment imputed to interest

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An obligor of a debt that bears interest may not, without the obligee’s consent, impute a payment to principal when interest is due.

A payment on principal and interest must be imputed first to interest.

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Art. 1867 Imputation by obligee

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An obligor who has accepted a receipt that imputes payment to one of his debts may no longer demand imputation to another debt, unless the obligee has acted in bad faith.

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Art. 1868 Imputation not made by the parties

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When the parties have made no imputation, payment must be imputed to the debt that is already due.

If several debts are due, payment must be imputed to the debt that bears interest.

If all, or none, of the debts that are due bear interest, payment must be imputed to the debt that is secured.

If several unsecured debts bear interest, payment must be imputed to the debt that, because of the rate of interest, is most burdensome to the obligor.

If several secured debts bear no interest, payment must be imputed to the debt that, because of the nature of the security, is most burdensome to the obligor.

If the obligor had the same interest in paying all debts, payment must be imputed to the debt that became due first.

If all debts are of the same nature and became due at the same time, payment must be proportionally imputed to all.

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what is the right of contribution?

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When a debt that is in default has been guaranteed by more than one surety, the issue arises as to how the sureties should divide its payment between themselves. When only one surety has been forced to satisfy the entire debt, he retains a right against his co-sureties, which among the solvent co-sureties, has the effect of apportioning the loss among them all. This is call the right of contribution.

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Art. 3055 Liability among co-sureties

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Co-sureties are those who are sureties for the same obligation of the same obligor. They are presumed to share the burden of the principal obligation in proportion to their number unless the parties agreed otherwise or contemplated that he who bound himself first would bear the entire burden of the obligation regardless of others who thereafter bind themselves independently of an in reliance upon the obligation of the former.

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Art. 3056 Right of contribution among co-sureties

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A surety who pays the creditors may proceed directly or by way of subrogation to recover from his co-sureties the share of the principal obligation each is to bear. If a co-surety becomes insolvent, his share is to be borne by those who would have borne it in his absence.

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Art. 3057 Limitation upon right of contribution

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A surety who pays the creditor more than his share may recover the excess from his co-sureties in proportion to the amount of the obligation each is to bear as to him. If a surety obtains the conventional discharge of other co-sureties by paying the creditor, any reduction in the amount owed by those released benefits them proportionately.

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CALCULATING THE OBLIGOR’S VIRILE SHARE

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In the absence of some other agreement, virile shares are presumed to be equal.
• Exceptions—Releasing sureties over time or having a surety become insolvent can affect the virile share calculation.
• Other Agreement or Contemplation—Where the partnership agreement provides for two partners to be 40% partners and the third to be a 20% partner, suretyship agreement relating to the partnership is often agreed to apportion liability the same way. However, there must be an agreement—as the case below shows the court does not just infer that apportionment.

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• Facts—Carner joined JHP. The articles of partnership gave him a 5% interest. JHP was formed to convert an apartment complex to retirement home. JHP assumed 30 promissory notes eventually held by Hibernia. JHP defaulted. Hibernia foreclosed. JHP filed bankruptcy in federal court and counterclaimed. Hibernia obtained summary judgment for the principal. Hibernia had the property seized and sold after reaching settlement agreements with some of the other partners. $2million deficiency still remained. Hibernia settled with everyone except Carner.
• Issue—What is the extent of Carner’s liability?
o District court held Carner liable for 1/8 of the debt because he was one of the 8 partners. Carner argues he should only be liable for 5%. Carner argued that the legislature had abandoned the per head apportionment of virile shares.

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• Holding—Court held Carner liable for 1/8. Does not matter whether the bank knew that Carner was only a 5% partner, he is liable for 1/8. It does not matter whether the lender has actual notice of a smaller partnership interest. If you want a smaller virile share you must contract for it.
• Note—Carner can now go after his co-sureties for contribution because they had an agreement among themselves limiting his interest to 5%.

(HIBERNIA NATIONAL BANK V. CARNER)

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Art. 1891 Release of real security

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Release of a real security given for performance of the obligation does not give rise to a presumption of remission of debt.

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Art. 1892 Remission granted to sureties

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Remission of debt granted to the principal obligor releases the sureties.

Remission of debt granted to the sureties does not release the principal obligor.

Remission of debt granted to one surety releases the other sureties only to the extent of the contribution the other sureties might have recovered from the surety to whom the remission was granted.

If the obligee grants a remission of debt to a surety in return for an advantage, that advantage will be imputed to the debt, unless the surety and the obligee agree otherwise.

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Three Unreconciled Cases—The following 3 cases are irreconcilable. New code articles were drafted to respond to the issues they presented.

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Case: LOUISIANA BANK AND TRUST CO. V. BOUTTE
• Facts—Four shareholders/ directors signed continuing guaranty agreements so that company could borrow money. Company defaults. Bank settles with 3 of the shareholders and releases the company. Bank continues suit against one director. That director argues that he could not be held liable once the principal obligation was extinguished because he was a surety.
• Holding—Court wrongly applied the law of solidary obligors and found the directors and the company were solidary obligors. Thus, the obligation memorialized in the continuing guaranty agreement was not an accessorial obligation.
• Wrong—Court was clearly wrong to hold that a continuing guaranty agreement was not a suretyship agreement.

Case: AIAVOLASITI V. VERSAILLES GARDENS LAND DEV.
• Facts—Versailles was a land development company. Stockholders had to personally guarantee the debts of the company. When the company defaulted,  (a stockholder) paid the debt and got it discharged.  now sues for reimbursement.
• Holding—The court thought the rules of suretyship applied so that  could get reimbursement from the principal debtor (who is now broke) or contribution from his co-sureties to the extent of their virile shares. This time the court did not include the company as a co-surety in calculating virile shares. This case appeared to resolve the problems created by BOUTTE.

Case: FIRST NATIONAL BANK OF CROWLEY V. GREEN GARDEN PROCESSING CO.
• Facts—The Bank granted a collateral mortgage to Green Garden. Green Garden was closely held so the bank required sureties. The three sureties were shareholders in the corporation. There were 3 continuing guaranty agreements for $86,350, which was the same amount as the mortgage. One surety was discharged in bankruptcy, which changed the virile shares of the other sureties. Another surety settled with the Bank for $33k. Bank then pursues its deficiency judgment against the remaining surety.
• Issue—The issue is the remaining surety’s liability. Is he liable for the amount of the continuing guaranty agreement, or should his liability be reduced in light of the settlement with the other solvent surety.
• Holding—The court did not apply the law of suretyship or the Boutte case. Rather, the court looked to the language of the contract and held the surety liable for $56k. The court thought the language of the contract allowed the creditor to release debtors without any notice or effect on the other debtors. The case does not make any sense, no one would have anticipated that result when drafting the contract. Moral of the story: be clear and unambiguous when drafting a contract.

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Art. 3058 Extinction of Suretyship

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The obligations of a surety are extinguished by the different manners in which conventional obligations are extinguished, subject to the following modifications.
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• Note—Suretyship can also be extinguished by any manner expressed in the contract. The contract will often limit the manner by requiring written termination.

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Art. 3059 Extinction of principal obligation

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The extinction of the principal obligation extinguishes the suretyship.

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Art. 3060 Prescription of the surety’s obligation, right of reimbursement, and contribution

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Prescription of the principal obligation extinguishes the obligation of the surety. A surety’s action for contribution from his co-sureties and his action for reimbursement from the principal obligor prescribe in ten years.

The interruption of prescription against a surety is effective against the principal obligor and other sureties only when such parties have mutually agreed to be bound together with the surety against whom prescription was interrupted.

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Art. 3061 Termination of suretyship

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A surety may terminate the suretyship by notice to the creditor. The termination does not affect the surety’s liability for obligations incurred by the principal obligor, or obligations the creditor is bound to permit the principal obligor to incur at the time the notice is received, nor may it prejudice the creditor of principal obligor who has changed his position in reliance on the suretyship.

Knowledge of the death of a surety has the same effect on a creditor as would a notice of termination received from the surety. A termination resulti8ng from notice of the surety’s death does not affect a universal successor of the surety who thereafter unequivocally confirms his willingness to continue to be bound thereby. The confirmation need not be in writing to be enforceable.
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• Prospective—Suretyship can only be terminated prospectively. Also, fixed obligations for advances cannot be terminated.
• Death of Surety—Death does not automatically terminate suretyship. Actual knowledge is required. Notice in the newspaper probably does not constitute constructive knowledge.

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• Facts—Nick, Anthony, and Joseph executed a continuing guaranty agreement for the company’s account to Bonura. Joseph moved to Baton Rogue 6 years later and claimed he gave notice of revocation/ termination at that time. Joseph gave written notice nearly 12 years after signing the original agreement. Bonura sues. prescription?

Back 79

• Prescription—Prescription had not run. Prescription on a contract is 10 years. There is no prescriptive period for surety b/c surety is an accessorial obligation. The company had a continuing guaranty agreement and had not been in default long enough for prescription to apply.
• Notice—Although a continuing guaranty agreement may be revoked either expressly or impliedly, the contract in this case called for written notice. Accordingly, verbal notice was meaningless

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Art. 3062 Effect of modification of principal obligation

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The modification of the principal obligation, or the impairment of real security held for it, by the creditor, in any material manner and without the consent of the surety, has the following effects.

An ordinary suretyship is extinguished.

A commercial suretyship is extinguished to the extent the surety is prejudiced by the action of the creditor, unless the principal obligation is one other than for the payment of money, and the surety should have contemplated that the creditor might take such action in the ordinary course of performance of the obligation. The creditor has the burden of proving that the surety has not been prejudiced or that the extent of the prejudice is less than the full amount of the surety’s obligation.

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THE SPECIAL CASE OF LEGAL AND JUDICIAL SURETIES

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Overview—There are times when the law requires an individual to furnish a bond to assure the performance of a particular obligation. Posting such a bond constitutes a form of suretyship.
• Government officials such as the Clerk of Court or Recorder of Mortgages are required to post bonds out of which judgments against them may be satisfied.
• Tutors of minor children and curators of interdicted persons may also be required to post bonds to protect their charges against the risk of loss occasioned by the negligent performance of their duties.
• These are all legal sureties.
• Testing the Surety—You can make the surety come to court, provide a financial statement, ask him about his liabilities and assets. If the court decides that he is not a good and solvent surety a new one must be found.

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what is a pledge?

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Overview—Historically, pledge was the first of the security devices and surety was the first of the contracts. The law of pledge has now been subsumed by the UCC. Today, pledge is called security interest, but the idea is the same. Under the UCC, a security interest can be possessory or non-possessory. The possessory security interest is the same thing as pledge.
• Essential Feature—Delivery of possession to the creditor is the essential feature of pledge. This is what distinguishes pledge from mortgage.

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Art. 3133 Pledge, definition

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The pledge is a contract by which one debtor gives something to his creditor as security for his debt.

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Art. 3134 Kinds of pledge

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There are two kinds of pledge:
The pawn.
The antichresis.

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Art. 3135 Pawn and antichresis distinguished

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A thing is said to be pawned when a movable thing is given as security; and the antichresis, when the security given consists in immovables.

• Comparison to mortgage—Immovable property cannot be pledged. Only mortgage accomplishes that. However, you can pledge the fruits of an immovable, this is antichresis.

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summarize the articles regarding pledge

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• Every lawful obligation my be secured by the auxiliary obligation of pledge. [3036]
• If the principal obligation be conditional, that of the pledge is confirmed or extinguished with it. [3037]
• If the obligation is null, so also is the pledge. [3038]
• The obligation of pledge annexed to an obligation which is purely natural, is rendered valid only when the latter is confirmed and becomes executory. [3039]
• Pledge may be given not only for an obligation consisting in money, but also for one having any other object; for example, a surety. Nothing prevents one person from giving a pledge to another for becoming his surety with a third. [3040]
o Example—A surety could pledge a watch to secure the debt of the debtor. The rules of pledge will govern between the creditor and the surety. The rules of suretyship will govern between the debtor and the surety.
• A person may give a pledge, not only for his own debt, but for that of another also. [3041]
• A debtor may give in pledge whatever belongs to him. But with regard to those things, in which he has an ownership which may be divested or which is subjected to incumbrance, he cannot confer on the creditor, by the pledge, any further right than he had himself. [3042]
• It is essential to the contract of pledge that the creditor be put in possession of the thing given to him in pledge, and consequently that actual delivery of it be made to him, unless he has possession of it already by some other right.
• But this delivery is only necessary with respect to corporeal things; as to incorporeal rights, such as credits, which are given in pledge, the delivery is merely fictitious and symbolical.

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• Facts—Fandison makes brooms and mops. Sambola is a traveling salesman. The two parties have a consignment sale agreement whereby Sambola will drive around selling the brooms and mops and then pay Fandison for the cost of the products, keeping any profits over cost for himself. When Sambola left to sell the goods he took Fandison’s tuck, leaving his own with his brother-in-law. Sambola claims to have been robbed of the proceeds. Fandison took Sambola’s truck claiming it was pledged to him. Sambola sues to get it back. Fandison reconvenes for the “stolen” money.
• Issue—Whether there was a contract of pledge of the truck?

Back 87

• Pledge?—Sambola argues there is no pledge.
o There is no written instrument.
 Court notes that a written instrument is not needed where there is no third party involved. Here, the agreement was between the pledgor and pledgee.
o Sambola argues there was no delivery of the thing pledged.
 Court said delivery was sufficient. Sambola delivered the truck to a 3rd party, his brother-in-law, from whom Fandison gained possession.
o No stated amount.
 The amount might not have been obvious, but it was stated. The value of the brooms and mops plus the return of Fandison’s truck was the stated amount.
o Robbery—Had there actually been a robbery the outcome would be different, but the court doubted there was an actual robbery.
• Requirements of Pledge—Delivery, writing when the pledge involves a 3rd party.

Front 88

-- was married 3 times.  owned earrings. H2 pledged them to get $400.  gave H2 money to get the earrings back. H2 then got more money and left the earrings as a pledge. H2 wrote requesting the earrings back, but by the time the letter was received interest was due. H2 responded that he could only pay the interest. Meanwhile,  was evasive about her knowledge of the pledge.

Was a writing required?

Back 88

Court said a writing was not required because the evidence showed that  was actually a party to the pledge. However, even if  was not a party, the letters sufficed to prove the pledge by some written instrument in which the amount of the debt and the species and nature of the thing given in pledge were stated.

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• Facts - Plaintiffs are heirs of Mrs. Scott claiming the principal and interest on promissory notes executed by Dr. Corkern in favor of Mrs. Scott. Corkern pledged and/or assigned unto Mrs. Scott a certain life insurance policy with the designation of Mrs. Scott as beneficiary. They assert that the policy was pledged as security for the payment of all amounts. Corkern’s estate argues the pledge was released because it is in his safety deposit box.
• Issue – Was the pledge extinguished when Dr. Corkern came into possession of the policy?

Back 89

The possession of the pledgor does not justify the conclusion that the pledge was extinguished and, in the absence of any evidence showing the parties intended that the pledge be terminated or even that the pledgor considered it terminated, it will be presumed that the possession of the pledgor was precarious or as an agent. Here, if there was no pledge, the debt would have prescribed. If there was a pledge, prescription would have been interrupted.

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Retention of Collateral by Creditor

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Except in those cases where a trust receipt is used for a temporary relinquishment, the rule is that a pledged item must remain in the possession of the creditor. This requirement assures that the debtor cannot otherwise dispose of the collateral and the creditor’s rights will be protected. An additional and important benefit of the retention of the collateral by the creditor is that it enables him to take advantage of the jurisprudential rule that, as long as the creditor retains the pledged item, prescription on the underlying debt is interrupted indefinitely.
• Constant Acknowledgment—Holding the pledged item serves as a constant acknowledgement of the debt. The debtor is tacitly admitting that the debt has not yet been paid.

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Art. 2642 Delivery as between parties

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In the transfer of credits, rights or claims against a third person, the delivery takes place between the transferor and transferee by the giving of title.

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Art. 2643 Delivery as regards to third persons, notice to debtor

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The transferee is only possessed, as it regards third persons, after notice has been given to the debtor of the transfer having taken place.

The transferee may nevertheless become possessed by the acceptance of the transfer by the debtor in an authentic act. A partial transfer and assignment is effective as to the debtor without the necessity of giving notice thereof.

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Art. 2644 Payment by debtor prior to notice

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If, previous to notice having been given of the transfer to the debtor, either by the transferrer or by the transferee, the debtor should have made payment to the transferor, the debtor is discharged of the debt.

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Picard executed 3 promissory notes to Canal Assets. One note was secured by 3 other notes. The second note was secured by shares of stock. The third note had no specific pledge. Canal sues and the estate argues prescription. Estate’s argument is that the notes had prescribed by the time they were pledged and the stock had no value at the time of pledge. Result?

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Court said the value of the thing pledged is irrelevant, possession still prevents prescription of the principal debt. (SUCCESSION OF PICARD)

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ALLEN V. HULLS constant acknowledgement rule

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The constant acknowledgement rule applies even when a third party pledges a thing to secure the debt of another. In this case, the debtor knew of the third party pledge. However, it applied strictly, knowledge would not matter. Nathan thinks that is a bad result.

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Field Warehousing

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All the states developed the concept that you could segregate part of the inventory and be the trustee pro hac vice of the pledged inventory.
• Bill of Lading—Sometimes people pledge inventory that is not yet in the warehouse. Debtor can pledge the bill of lading to the creditor. This is a valid pledge because the bill of lading represents all the inventory that is on the carrier. When the inventory arrives, the bank must temporarily release the bill of lading so that the debtor can get the goods off the carrier. The debtor will then put the goods in a warehouse and the bill of lading becomes the warehouse receipt, which will be returned to the bank. The debtor will have to get the warehouse receipt from the bank when he wants to get the inventory out of the warehouse.
• Concept—The temporary release of the pledged item does not terminated the obligation. Common law created the idea of the trust receipt whereby the person who temporarily has the pledged item issues a document stating that he is the trustee pro hac vice. The only way to enforce this in Louisiana is through the criminal law.

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Art. 3163 Partial payment of debt secured by pledge of several things

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When several things have been pawned, the owner cannot retake one of these without satisfying the whole debt though he offers to pay a certain amount of it in proportion to the thing which he wishes to get.

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Art. 3164 Right of retention until payment of debt

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The creditor who is in possession of the pledge, can only be compelled to return it, when he has received the whole payment of the principal as well as the interest and costs.

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Art. 3165 Rights of pledges on default of debtor; procedure

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The creditor cannot, in case of failure of payment, dispose of the pledge; but when there have been pledges of stock, bonds or other property, for the payment of any debt or obligation, it shall be necessary before such stocks, bonds or other property so pledged shall be sold for the payment of the debt, for which such pledge was made, that the holder of such pledge be compelled to obtain a judgment in the ordinary course of law, and the same formalities in all respects shall be observed in the sale of property so pledged as in ordinary cases; but in all pledges of movable property, or rights, or credits, stocks, bonds or other movable property, it shall be unlawful for the pledger to authorize the sale or other disposition of the property pledged, in such manner as may be agreed upon by the parties without the intervention of courts of justice; provided, that all existing pledges shall remain in force an be subject to the provisions of this act.

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Art. 3166 Ownership of thing pledged

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Until the debtor be divested from his property (if it is the case), he remains the proprietor of the pledge, which is in the hands of the creditor only as a deposit to secure his privilege on it.

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Prohibited Forfeiture

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When a creditor appropriates a pledged item to himself on the default of the debtor, the act is called a prohibited forfeiture and has been against public policy for 1600 years.

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Alcolea pledged jewelry. Parties had a contract providing that Smith would become the owner of the property at the end of the year if he was not paid. Alcolea did not pay and Smith refused to give the property back. Result?

Back 102

Keeping the property was a prohibited forfeiture and illegal. Contracting in advance to forfeit the property is not enforceable. Cannot get around the rule on prohibited forfeiture through contract.

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Joseph borrowed money from brother Oscar and pledged 700 shares of the family candy company to secure the debt. Oscar wanted the stock so that he could control the company. Oscar refused to give Joseph an extension on the loan, had the stock “valued” and then held a private sale of the stock over the weekend in his lawyer’s office. He sold the stock to himself. Result?

Back 103

The court knew Oscar had not acted as a proper fiduciary and used the private sale as a cloak for a prohibited forfeiture.

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Dation en Paiment (Giving in Payment)

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At the end of the loan period, the debtor could ask the creditor to take the property in payment of the debt. This is a valid, permissible, and encouraged payment. The result is essentially the same as a prohibited forfeiture.

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Private Sale and Fiduciary Duty

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The creditor has the right to sell pledged property at a private sale, meaning there is no need to go through the courts. However, the pledgee is a fiduciary and has a duty to get the best possible price. The pledgee cannot sell for less than market value at a private sale.

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Right of Redemption

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The right of redemption is a contract of sale allowing you to buy the thing back at a later date for a certain price. A sale with a right of redemption is actually a sale based on a resolutory condition. People sometimes use this to disguise a prohibited forfeiture.

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• Facts— pledged his partnership interest, but it was limited to the property owned by the partnership. In other words,  pledged an in rem note. Result?

Back 107

Even though the note said it was negotiable, the court held it non-negotiable. Just because a notes says negotiable on its face does not mean that the note is actually negotiable. The note had language incorporating the partnership interest which automatically made it non-negotiable. In rem meant the note was secured by actual property, precluding personal liability. When the term in rem is used for a pledge or mortgage, the creditor’s recourse is limited because the creditor cannot proceed against the debtor personally.

Example of In Rem Pledge—W wants to help H get a loan. W has separate property. She can use an in rem pledge of stock and will only be liable to the extent of that asset. Her other assets will not be exposed to any liability.

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Art. 3176 Necessity for written instrument; rights acquired by creditor

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The antichresis shall be reduced to writing.

The creditor acquires by this contract the right of reaping the fruits or other revenues of the immovables to him given in pledge, on condition of deducting annually their proceeds from the interest, if any be due him, and afterwards from the principal of his debt.

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Art. 3177 Taxes, annual charges and repairs

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The creditor is bound, unless the contrary be agreed on, to pay the taxes, as well as the annual charges of the property which have been given to him in pledge.

He is likewise bound, under penalty of damages, to provide for the keeping and useful and necessary repairs of the pledged estate, saving himself the right of levying on their fruits and revenues all the expenses respecting such charges.

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Art. 3178 Reclamation of property by debtor; return by creditor

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The debtor can not, before the full payment of the debt, claim the enjoyment of the immovables which he has given in pledge.

But the creditor who whishes to free himself from the obligations mentioned in the preceding article, may always, unless he had announced his right, compel the debtor to retake the enjoyment of his immovable.

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Art. 3179 Ownership of property pledged: rights of creditor upon default of debtor

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The creditor does not become owner of the pledged immovable by failure of payment at the stated time; any clause to the contrary is null, and in this case it is only lawful for him to sue his debtor before the court in order to obtain a sentence against him, and to cause the objects which have been put in his hands in pledge to be seized and sold.

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Art. 3180 Agreement that fruits or revenues be compensated with interest

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When the parties have agreed that the fruits or revenues shall be compensated with the interest, either in whole or only to a certain amount, this covenant is performed as every other which is not prohibited by law.

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Art. 3181 Rights of third persons on immovable pledged not affected

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Every provision, which is contained in the present title with respect to the antichresis, can not prejudice the rights which third persons may have on the immovable, given in pledge by way of antichresis, such as a privilege or mortgage.

The creditor, who is in possession by way of antichresis can not have any right of preference on the other creditors; but if he has by any other title, some privilege or mortgage lawfully established or preserved thereon, he will come in his rank as any other creditor.

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• Facts—Harang sold property to Acosta in 1920 for $3750. Sale was a credit sale. Harang received a first mortgage on the property. In 1923, Acosta transferred the property back to Harang for $3750 stating that the purpose of the transfer was to secure a debt. Harang took possession and paid taxes as though he was the owner. In 1938, Harang discovered the land was rich in minerals. Gautreaux, Acosta’s heir, sued arguing that the contract was for antichresis.
• Issue—Whether the agreement was sale or antichresis. If antichresis, the title of the land did not transfer and Gautreaux wins.

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• Holding—The requirements of antichresis were met because the contract was written, recorded, the amount of debt stated, creditor took possession, and the act said the transfer of possession was to secure a debt. The court further held that the debt had been satisfied because Harang received the fruits of the immovable for 15 years, which was sufficient to satisfy the debt.
• Bad Decision—This case might have actually been a giving in payment that was called an antichresis in order to avoid a tax.

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What is a security interest/secured transaction?

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Involves credit transactions in moveable property. One party (debtor) buys something from another (creditor or secured party) but does not pay immediately. A security interest is a limited right in specific personal property (the collateral) of the debtor that allows the creditor to take the property if the debtor fails to fulfill the credit obligation. It is effective between the parties when certain steps are taken to attach the interest. Attachment generally does not provide the creditor with rights against third parties who might also have an interest in the same collateral. To gain rights over such third parties, the creditor must take additional steps to perfect the security interest. Perfection basically serves as a notice that the creditor has a security interest. Rules of priority determine whose rights are superior.

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Chapter 9 applies to what kinds of property?

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With some exceptions, it applies to personal property, standing timber that constitutes goods, and fixtures if the interest has been perfected before the goods become fixtures.

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Are sales of receivables covered by Ch 9? If so, what kind?

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Yes. Outright sales of accounts, chattel paper, payment intangibles, and promissory notes are also treated as security interests and are covered by Ch 9.

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What is a cosignment?

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The cosignor (manufacturer or wholesaler) delivers goods to a cosignee (retailer) for sale to the public. If goods are not sold, the cosignee may return them to the cosignor

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When must a cosignor comply with Ch. 9 to protect its interest in cosigned goods against creditors of the cosignee?

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o The consigned goods are worth $1000 or more
o The consignor did not use the goods for personal, family or household purposes; and
o The consignee is a person who:
o Deals in goods of that kind under a name other than the consignor’s
o Is not an auctioneer, and
o Is not generally known by her creditors to be substantially engaged in selling the goods of others (the goods are not being sold at a consignment store)

Front 120

What are two examples of transactions that parties attempt to characterize as legal arrangements other than security interests but may be governed by Ch 9 if they are intended in fact to have effect as security?

Back 120

A. Lease-purchase agreements: Whether the lease of goods is intended as security is determined on a case-by-case basis. However, a transaction will be deemed to create a security interest rather than a lease if the rental obligation is not terminable by the lessee and either:
• 1. The lease term is equal to or greater than the remaining economic life of the goods
• 2. The lessee is bound to purchase the goods at the end of the lease or to renew the lease for the remaining economic life of the goods; or
• 3. At the end of the lease, the lessee has an option to purchase the goods or to renew the lease for the remaining economic life of the goods for no or nominal consideration.


B. Retention of Title: if a seller and buyer of goods agree that the seller will retain title to the goods after they are delivered until the buyer has paid for them, the agreement will be treated as a security agreement

Front 121

What are 5 exceptions to Chapter 9, i.e. when does it not apply?

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• Transactions governed by other federal, state, or foreign laws;
• Most transactions involving interest in liens on land (except transactions involving fixtures;
• State statutory liens, other than agricultural liens, given for services or materials, such as mechanics’ liens, except with respect to priorities in the personal property covered by the liens;
• Assignments of claims for wages, salary, or other compensation of an employee to the extent such an assignment is governed by special statute; and
• Payments due under certain mineral rights

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what is a purchase money security interest and when does it arise?

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A PMSI is a special type of security interest in goods that has priority over all other security interests in the same goods if certain requirements are met.
• A PMSI arises when:
o (1) A creditor (who is also the seller) sells the goods to the debtor on credit, retaining a security interest in the goods for all or part of the purchase price; or
o (2) A creditor advances funds that are used by debtor to purchase the goods and the creditor and the seller are not the same person; or
• A PMSI exists if:
o (1) credit was advance or a loan was made for the purpose of enabling the debtor to acquire collateral, and
o (2) the credit or loan proceeds were actually used to acquire the collateral.
• Note to Creditors—The creditor needs to make sure the money actually goes towards the purchase of the collateral in order to obtain a PMSI. To ensure this occurs, creditors often make checks payable to the store or jointly to the store and the debtor.

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Can you have a PMSI in software?

Back 123

If a creditor acquires a security interest that qualifies as a PMSI in a computer, the PMSI extends to any software that is also covered by the creditor’s security interest if the software was purchased in a related transaction for use on the purchased computer.

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According to the dual status rule, a security interest does not lose its status as a PMSI if:

Back 124

• (1) The purchase money collateral also secures an obligation that is not a purchase money obligation.
o Example—A lender lends the debtor money to purchase a widget machine and takes a security interest in the machine, and 3 months later lends the debtor additional funds secured by the formerly purchased machine.
• (2) Nonpurchase money collateral also secures the purchase money obligation.
o Example—A loan is secured both by collateral to be purchased by the debtor using the loan proceeds and by collateral already owned by the debtor.
• (3) The purchase money obligation has been renewed, refinanced, consolidated, or restructured.
• The dual status rule only applies to NON-CONSUMER GOODS. The code requires that the courts determine the appropriate rules for consumer goods.

Front 125

What are "tangible" collateral or "goods"?

Back 125

(1) all things movable at the time the security interest attaches (including timber to be cut, unborn animals, and growing crops, but excluding money and intangibles

(2) fixtures (only if they were movable when a fixture filing covering them was made)

Front 126

What are the four types of tangible collateral?

Back 126

• 1. Consumer Goods—Goods that are bought primarily for personal, family, or household purposes
• 2. Farm Products—Crops, livestock, unmanufactured products of livestock, and supplies used or produced in farming operations are farm products if they are in the possession of or used by a farmer.
• 3. Inventory—Goods that are leased or that are held for sale or lease, goods that are furnished or to be furnished under a contract of service, supplies that are used in manufacturing, materials that are used up quickly or consumed in a business, and work in progress
• 4. Equipment—Goods that are not consumer goods, farm products, or inventory

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How do you determine which category to place a tangible good?

Back 127

Category depends on the primary use to which the debtor puts the collateral at the time the SI attaches. Category is not determined by the nature of the collateral itself.

An electric razor can be equipment if a man keeps it in his office for business purposes, a consumer good if kept at home, and inventory if he opens a store and puts it in stock to sell.

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List the 8 types of intangible or semi-tangible collateral

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• 1. Accounts—Any right to payment for goods, services, real property, use of a credit card, or lottery winnings that is not evidence by an instrument or chattel paper.
o Example—The money owed a doctor after she sees a patient.
o Does not include—deposit accounts or rights to funds that are advanced or sold.
• 2. Chattel Paper—Record evidencing both (1) the monetary obligation and (2) a security interest in or a lease of specific goods, excluding the charter of vessels.
o Record—A record is information that is stored in either a tangible medium or an intangible medium and retrievable in perceivable form.
 Electronic Chattel Paper—Stored in intangible medium
 Tangible Chattel Paper—Stored in tangible medium
• 3. Deposit Accounts—Accounts maintained with a bank such as a savings or passbook account.
o Louisiana—Unlike the other states, LA’s Chapter 9 covers both consumer and non-consumer deposit accounts as original collateral.
• 4. General Intangibles—Include any intangible not coming within the scope of other intangibles such as software, patent and TM rights. A general intangible in which the principal obligation of one of the parties is the payment of money is also called a payment intangible.
• 5. Documents—Pieces of paper that represent the right to receive goods. This includes bills of lading and warehouse receipts. Can be divided into negotiable and non-negotiable documents.
• 6. Instruments—Pieces of paper that represent the right to be paid money. These include promissory notes, checks, CDs and can also be divided into negotiable and non-negotiable instruments.
• 7. Investment Property—Includes items such as stocks, bonds, mutual funds, and brokerage accounts. Does not include a collateral mortgage note.
• 8. Tort Claims—Unlike the other states, Louisiana includes both consumer and commercial tort claims within its scope.

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What are proceeds?

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Include whatever is received upon the sale, lease, exchange, license, collection or other disposition of collateral or proceeds.
• Distinction—Proceeds differ from the other types of collateral in that they constitute collateral that has changed in form from a previous category.
• Categories—Divided into cash and non-cash. Money, checks, and deposit accounts are cash.

A. Proceeds Include Second Generation Proceeds—Proceeds can go through several transformations and still retain their character as proceeds.
• Example—Bank has SI in debtor’s car. Debtor trades it in for pick-up. Debtor then trades in truck for a boat. The boat is still a proceed of the original collateral.

B. Insurance Payments and Claims for Damages are Proceeds—If the collateral is insured and money is received from the insurance company on account of loss or damage to the collateral, the money is a proceed of the collateral.

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What is attachment?

Back 130

The concept is interchangeable with the concept of enforceability. If the debtor does not meet his initial promise (usually repayment of a loan) the secured party may use the security interest to assert a legal right in the property. Attachment is the term used to describe when the parties have met the legal requirements to make this security interest enforceable.

Front 131

What are the three requirements for the attachment of a security interest?

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• 1. Parties must have an agreement that the security interest attaches.
• 2. Value must be given by the secured party.
• 3. The debtor must have rights in the collateral.

Front 132

What makes a valid agreement between the parties for purposes of attachment?

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The parties must intend to create a security interest (i.e. they must enter into a security agreement). The agreement must be provable with objective evidence. There are two approaches to evidence depending on whether the transaction is possessory or non possessory.

If possesory, the agreement is evidenced by the fact that the secured party (creditor) has possession of the property.

If non-possesory, it is evidenced by a written agreement.

Transactions involving special types of collateral (nonconsumer deposit accounts, electronic chattel paper, or investment property) may be evidenced by control. Control is thought of as the power to control the disposition of the property.

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What are the requirements for a Authenticated Security Agreement?

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The parties security agreement may be evidenced by a record, authenticated by the debtor, that describes the collateral. A record is authenticated if it is signed or marked electronically with the present intent to identify the authenticating person and adopt the agreement.
• Requirements for Security Agreement:
o 1. Intent to create a security interest
o 2. A description of the property
o 3. Authenticated (not the same as an authentic act)

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Do you need to authenticate a security interest in a life insurance policy?

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This is sui generis in Louisiana. If the security interest covers a life insurance policy and the policy’s beneficiary is not the insured or his estate, the beneficiary’s consent is not required if the beneficiary designation is revocable. Consent is required if the designation is irrevocable.
o Note—Many divorce lawyers negotiate to have one spouse buy insurance and name the children the beneficiaries. This is usually an irrevocable beneficiary designation.

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• The security agreement is effective according to its terms. This tells you that saying “I grant a security interest” is sufficient to create a security agreement, but in the commercial world parties will be careful to put more in the document. Therefore, the creditor can and will want to include many other provisions in the agreement, such as:

Back 135

o Debtor SSN or taxpayer ID
o Facts about the transaction
o Right of inspection
o Events of default
o Resolutions and warranties
o No name change
o Location and use of the collateral
o Limitation on transfer
o Remedies
o After-acquired property
o Confession of judgment
o Designation of a keeper

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Description of the collateral in the authenticated security agreement is sufficient if...

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it reasonably identifies the collateral.
Description may be specific (by serial number), by category, type, quantity, computational formula, or any other method in which the identity of the collateral is objectively determinable.
o Examples—
 Specific—Giving the VIN number for a car
 Category or Type—Security interest in all your inventory or equipment. Or a security interest in all your accounts, intangibles, etc.
o No super generic description—Although the description can be fairly generic, it cannot be super generic. “All the debtor’s assets” or “all the debtor’s personal property” is not sufficient. However, if you list all the different types of general property then you can get in the back door and have a security interest on all the debtor’s property.
 Financing Statements—These are different, they can be super-generic.
o Collateral that cannot be described by type alone—The following collateral cannot be described by type alone:
 Tort claims (other than as a form of proceeds)
 Consumer goods
 Consumer securities accounts

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What are the rights and duties of the secured party in possession?

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a. duty of reasonable care in storing and preserving the collateral

b. right to reimbursement for expenses - may charge the debtor for any reasonable expenses incurred in the preservation of the collateral, including cost of insurance

c. risk of loss - on the debtor to the extent of any insurance coverage deficinecy

d. accounting for profits - secured party may hold as additional security any increase in the value of or profits from the collateral except money. money received from collateral must be given to the debtor or applied against the secured obligations

e) right to repledge - the secured party may repledge the collateral but subject to and on terms that do not impair the debtor's right to redeem the collateral

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How are deposit accounts evidenced by control?

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The bank in which a deposit account is maintained automatically has control over the deposit account. If the secured party is not the bank, it may be obtained by either (1) putting the deposit account in the secured party's name or (2) agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that th ebank will comply with the secured party's orders regarding the deposit account without requiring the debtor's consent

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How is control evidenced with Electronic Chattel Paper?

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the secured party must have the AUTHORITATIVE copy of the record or records constituting the electronic chattel paper (computer file) that identifies the secured party as the assignee of record of the chattel paper.

Front 140

How is control over stocks and bonds evidenced?

Back 140

when the secured party has taken whatever steps are necessary to be able to have the investment property sold without further action from the owner.

Stocks and bonds - control if possession of stock or bond. If certificate is not in "bearer" form (meaning it says it is payable only to a specific person), the secured party must also have the specific person indorse the certificate over to him.

If stock or bond is not represented by a certificate, secured party must have the owner notify the issuer to either reregister the securities in the name of the secured party or agree to follow the secured party's instructions regarding the security without further consent by the owner

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how is control of securities accounts evidenced?

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if the owner of the account contacts the broker or mutual fund company (securities intermediary) and instructs the intermediary either that the secured party now has whatever right in the account or the intermediary is to apply with the secured party's orders without consent of owner.

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What are the rights and duties of the secured party in control?

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A secured party must account for the profits of the collateral, may repledge the collateral provided that the repledge does not impair the debtor's right of redemption.

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What are the duties of the secured party in control when there is no outstanding obligation?

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Within 10 days after demand from the debtor, the secured party must:

(1) if deposit account or securities intermediary by agreement, must send bank or intermediary an authenticated record releasing the bank or intermediary from its obligation to comply with secured party's orders

(2) if deposit account by secured party's name, must pay the balance of the account or transfer the balance in debtor's name

(3) if electronic chattel paper, must return authoritative copy or instruct custodian to do so if in possession of a custodian

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Value must be given by a secured party before a security agreement will be effective. What is value?

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Any consideration sufficient to support a simple contract. No requirement that consideration has been peformed as long as the secured party is under obligation to perform. A preexisting debt is considered to be value given (even though it does not constitute consideration) if the security interest is intended as security for the preexisting debt.

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What is "rights in the collateral"?

Back 145

ownership interest or right to obtain possession

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Do the 3 rules of attachment have to occur in a certain order?

Back 146

No, as long as all 3 coexist.

Front 147

A valid security agreement may create a security interest in property to be acquired in the future that will attach as soon as the debtor acquires an interest in the property. How is that interest created?

Back 147

by specifically including in the security agreement an after acquired property clause ("this security agreement is secured by debtor's equipment now owned or acquired in the future")

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An after-acquired property clause is ineffective as to

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consumer goods other than accessions when given as additional security, unless the debtor acquires rights in the goods within 10 days after the creditor gives value. In addition, an after-acquired property clause is ineffective as to tort claims and judgments.

Front 149

how can a secured party secure future advances in the present security agreement?

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IF the agreement contains a "future advance" clause, a new security agreement is not needed when a future loan is made.

ex. Bank loans Pizza Parlor $10,000 and takes as security interest in the equipment. The agreement provides that the equipment is to be collateral not only for this loan but for any future loans made by Bank to Pizza Parlor. When Bank makes another loan to Pizza Parlor, it will be secured by the equipment under this agreement.

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What are the 5 methods of perfection?

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1. filing
2. taking possession of the collateral
3. control
4. automatic perfection
5. temporary perfection

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When may a security interest be perfected?

Back 151

A party may complete all steps necessary for perfection before a security interest has attached, but it will not be enforceable against ANY party until it attaches.

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Why is the effect of perfection sometimes limited?

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A non-possessory security interest that has been perfected may nevertheless be subordinated to some times of adverse third-party claims such as ordinary course buyers of inventory or holders in due course of negotiable instruments.

Front 153

What kinds of security interests may be perfected by filing?

Back 153

all kinds of collateral except deposit accounts and money. but if they are proceeds of other collateral a filed security interest in the original collateral perfects them.

Front 154

There are 4 levels of creditors:

Back 154

o Unsecured
o Secured
o Perfected
o PMSI—This is a perfected secured creditor who can outrank even perfected creditors if they touch all the bases.

Front 155

What must be filed in order to perfect a security interest?

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Must give "notice." Don't need to file the security agreement - notice can be given by filing a financing statement which contains:

(1) name & address of debtor
(2) name and address of secured party
(3) indication of the collateral covered
and
(4) if the collateral relates to real property (minerals, timber, fixtures), must include a description of the real property

Front 156

What happens if there is a mistake as to the debtor's name on a financing statement?

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Can't be seriously misleading. If registered organization, it must match the name it was organized under. Can't use a trade name. BUT if the financing statement would be discovered in a filing office search under the correct name, the incorred name is not considered misleading.(Errors in the secured party's name don't matter because it is usually indexed under the debtor's name)

ex. Although leaving out "inc." in "World Travel, Inc." is seriously misleading, the safe harbor provision may make it effective because it would be discovered under World Travel.

Front 157

What happens if the creditor files a financing statement but then the debtor later changes his name?

Back 157

Creditor must refile using the debtor's new name within four months of the name change. after 4 months, the new name is considered seriously misleading.

Front 158

What happens if you forget to put the debtor's or secured party's mailing address on the financing statement?

Back 158

If it was accepted by the filing office, it will still be effective.

Front 159

How do you indicate collateral on a financing statement?

Back 159

A financing statement will sufficiently indicate the collateral if it identifies it specifically or identifies it by category, type, quantity, computational formula, or any other method by which the identity of the collateral is objectively determinable. Unlike the description in authenticated security agreements, the financing statement may indicate that it covers all personal property.
• Motor Vehicles—Have to be more specific b/c of the special registry laws. When the state has a certificate of title rule, the security interest has to be shown on the certificate of title. You don’t file a UCC-1, you file with the department of motor vehicles. There is an exception for dealers, who can grant a SI in their vehicles as inventory.

Front 160

What is the requirement for the description of real related property on the filing statement?

Back 160

Description must be sufficient to cause a mortgage to be effective against 3rd persons

Front 161

What must the debtor do in relation to the financing statement in order for it to be effective?

Back 161

Must authorize it in an authenticated record (cant be oral). May authorize after it is filed as long as they eventually authorize it. financing statement automatically authorizes if debtor authenticates financing statement or security agreement covering same collateral as the financing statement.

Front 162

Do you have to file a new financing statement for all after-acquired property in order to perfect the security interest?

Back 162

No, as long as the description in the financing statement is broad enough to cover the after acquired property.

Example: March 1st, P buys a printer from M on credit. P gives M a security interest in "all his equipment now owned or hereafter acquired." M files a financing statement describing the collateral as equipment. On March 21, P buys a new machine for cash. M's security interest extends to the new machine by virtute of the after-acquired property clause and the security interest is perfected because the description in the financing statement, "equipment" is broad enough to cover the new machine.

Front 163

What can be filed in lieu of a financing statement to perfect a security interest?

Back 163

An authenticated security agreement. It must contain all the elements required in a financing statement. A recorded real property mortgatge that lists fixtures and also contains the necessary elements of a financing statement is effective for perfecting a security interest in the fixtures.

Front 164

Can an authenticated financing statement be used as an authenticated security agreement?

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No, a security agreement must create the security interest and there must be "words of grant" which are typically not included in a financing statement. However, if it contains such words, it can serve both purposes.

Front 165

Where do you file a financing statement?

Back 165

Fling is generally done with the parish clerk of court. In Orleans Parish, filing is with the recorder of mortgages. The creditor may file in any parish without regard to location of the debtor or collateral.
• Catch—The catch to filing in any parish you want is that once you file there you must file every subsequent filing in the same parish.

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How long is an financing statement effective?

Back 166

5 years from the date of original filing

Exceptions: Utilities is until terminated; manufactured home or public finance transaction is effective for 30 years; titled motor vehicle not held as inventory is effective until termination statement is filed.

Front 167

After 5 years of filing a financing statement how do you renew it?

Back 167

file a continuation statement during the last six months of the effective period of prior filing in the same office. gives you 5 more years. The debtor need not authorize it, only the secured party.

Front 168

When does a financing statement need to be terminated?

Back 168

Generally, no obligation to termiante.

Exceptions:
(1) no outstanding obligation of debtor and no commitment on the creditor to make further advances

(2) if debtor did not authorize initial filing, creditor must, on demand of the debtor, within 20 days file a termination statement or provide one to debtor.

(3) with consumer goods, termination statement must be filed within one month after there is no obligation or commitment or within 20 days of demand by debtor


If no termination statement is filed, filing remains effective for whole 5 years even if the original obligation was satisfied.

Front 169

How are security interests in motor vehicles that are required to be titled perfected?

Back 169

by notation on the certificate of title issued by the state. filing under Ch9 is neither required nor effective.

Security interests created by LEASED motor vehicles or motor vehicles held in INVENTORY are perfected by filing under Ch 9.

Front 170

How do you perfect aircraft or railroad rolling stock?

Back 170

By filing with the appropriate federal agencies

Front 171

What kinds of collateral cannot be perfected by pledge (taking possession)?

Back 171

security interests in accounts, deposit accounts, NONnegotiable documents, electronic chattel paper, or general intangibles

Front 172

When does perfection by pledge take place?

Back 172

If secured party is taking actual possession, it is perfected from moment of possession and continues as long as possession is retained.

If collateral is in the hands of a bailee, the secured party is deemed to be in possession from the moment the bailee authenticates a record acknowledging that it is holding the collateral for the secured party's benefit

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When does perfection take place automatically?

Back 173

1. PMSI in consumer goods is perfected as soon as it attaches. Generally it attaches when debtor receives the goods. (PMSI in equipment or inventory)(never automatic perfection in motor vehicles when they are consumer goods)

2. Small-scale assignments of accounts or payment intangibles that do not alone, or in conjunction with other assignments to the same asignee, transfer a significant part of the outstanding accounts or payment intangibles of the assignor

3. sales of payment intangibles or promissory notes other than a collateral mortgage

4. investment property where debtor is a securities intermediary, where debtor purchased asset through a securities intermediary and has not paid the price, where one who deals in securities buys a certificated security from another such dealer under an agreement calling for delivery against payment

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How long are proceeds perfected?

Back 174

A security interest in proceeds from original collateral is automatically/continuously perfected for 20 days from the debtor’s receipt of the proceeds. This security interest becomes unperfected on the 21st day after the debtor’s receipt of the proceeds unless the statutory requirements are complied with. If you filed a UCC-1 in the first place you don’t need to do anything more to make it permanent.

Front 175

What is the perfection period for new value given under an authenticated security agreement as to instruments, negotiable documents, or certificated securities?

Back 175

20 day perfection period from time of attachment even though no filing statement or possession

Front 176

What is perfection period for delivery of collateral to debtor for disposition?

Back 176

If the creditor has a possessory security interest and makes the thing available to the debtor on a temporary basis, perfection continues for 20 days, after which time the creditor must reperfect by filing or taking possession

Front 177

What is perfection period for interstate shipments?

Back 177

When the collateral of the debtor moves from one state to another, and the location of the collateral or debtor determines which state’s laws govern perfection, a security interest in the collateral that was perfected in the original state will often remain temporarily perfected in the new state. LA gives you 4 months for movables going to a new jurisdiction.

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CONTINUATION OF PERFECTION OF SECURITY INTEREST IN PROCEEDS

Back 178

If a secured party has a perfected security interest in collateral and the debtor sells, exchanges, or otherwise disposes of the collateral, the secured party has a temporarily perfected security interest in whatever proceeds the debtor receives in exchange for the collateral. The security interest in proceeds will continue to be perfected beyond 20 days, if:
• 1. Same office rule. The security interest in the original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting the proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral.
• 2. Cash proceeds rule. The proceeds are identifiable cash proceeds.
• 3. Perfection. The security interest in the proceeds is perfected within the 20-day period (like filing a UCC 1).

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When do rules of priority apply?

Back 179

By default. Creditors may contractually subordinate their rights to other parties.

Front 180

Who gets priority between two unperfected security interests?

Back 180

The first to attach has priority, but this rule is unpractical because either could easily get priority by perfecting.

Front 181

Who gets priority between perfected secured parties?

Back 181

whichever party was either first to file or perfect, whichever is earlier, provided that there is no period thereafter when there is neither a filing nor perfection. Thus if both parties perfected by filing, the one who filed first has priority even if perfection was not complete upon filing.

Front 182

What is the priority rules for when security interests in a deposit account conflict?

Back 182

a security interest in a deposit account that is perfected by control has priority over a security interest in the deposit account that is perfected by another method

if more than one party has control, secured parties rank in priority according to timing of obtaining control

Front 183

What are the special priority rules for investment property?

Back 183

• Perfection by control—A security interest perfected by control has priority over a security interest perfected by any other method. Generally, if conflicting security interests each were perfected by control, they rank in priority according to time of obtaining control.
o Exception—Security interest in favor of intermediary. Unless the intermediary agrees otherwise, a security interest granted to a debtor’s own securities intermediary has priority over a security interest granted by the debtor to another secured party, even if that secured party has control.
• Other priority rules—Except as specified above, the first to file or perfect rule governs other priority questions.

Front 184

what is the priority of a PMSI?

Back 184

they enjoy a superpriority and are superior to prior perfected security interests in the same goods if certain conditions are met

Front 185

PMSI in Inventory priority rules

Back 185

PMSI in inventory has priority over a conflicting security interest in the inventory itself, proceeds that are chattel paper (or proceeds of that chattel paper), proceeds that are instruments, and any identifiable cash proceeds that are received on or before delivery to a buyer if:
• 1. The PMSI in the inventory is perfected at the time the debtor gets possession of the inventory (filing must take place before the inventory is delivered to the debtor); and
• 2. Any secured party who has filed her security interest in the same inventory received an authenticated notification of the PMSI before the debtor receives possession of the inventory, and the notification states that the purchase money party has or expects to take a PMSI in inventory of the debtor described by kind or type. The notification is effective for deliveries of the same type of collateral for 5 years.

Consignment—(Will be on exam) Under chapter 9, a consignor’s interest in the consigned goods is considered to be a PMSI in inventory. Therefore, a consignor can acquire PMSI superpriority in consigned goods if she complies with the above requirements for gaining superpriority in inventory.
• De Minimus—The goods must be worth at least $1000.
• No Consumer Goods—The consignment rule does not apply to consumer goods
• Requirements—Must perfect or file before delivery and give authenticated notice to 3rd parties with a conflicting interest.

Front 186

priority rules for PMSI in Goods other than Inventory and Livestock

Back 186

A PMSI in goods other than inventory or livestock has priority over conflicting security interest in the same goods and their identifiable proceeds only if the interest is perfected before or within 20 days after the debtor receives possession of the goods. There is no requirement that the secured party notify other holders of security interests.
• Compared to inventory—PMSI in goods other than inventory is much easier to obtain. There is a larger timeframe and no notice requirement. This is why it is so important to know how to classify the goods.

Front 187

priority for PMSI in Software

Back 187

PMSI in software arises if there is a PMSI covering both the software and the computer in which software is going to be used. This PMSI in software and its identifiable proceeds has the same priority as the security interest in the computer. Therefore, if the computer is inventory, a PMSI in the software only has superpriority if the inventory requirements are met. Likewise, if the computer is something else, like equipment, a PMSI in the software only has superpriority if the rules for non-inventory goods are met.

Front 188

priority rules for conflicting PMSIs

Back 188

It is very rare that you would actually see this problem. But, sometimes 2 PMSI’s exist in the same collateral.
• Example—Bank gives debtor a loan to buy a stereo and obtains a PMSI in the stereo. Debtor finds out that the stereo costs more than the loan and buys from the seller on credit, thus giving the seller a PMSI as well.
• Rules—The rules of priority are as follows:
o 1. A secured party who has a PMSI in the collateral as a seller has priority over a secured party who has a PMSI in the same collateral as a lender.
o 2. Otherwise, the first secured party to file or perfect has priority.

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priority rules for chattel paper purchasers

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If a purchaser of chattel paper in goods faith gives new value and takes possession in the ordinary course of business (or takes control of electronic chattel paper), the purchaser will have priority over:
• 1. A security interest in chattel paper that arises merely as proceeds of inventory, as long as the chattel paper does not indicate that it has been assigned to anyone other than the purchaser; and
• 2. Any other security interest in the chattel paper, as long as the chattel paper purchaser acquired its interest without knowledge that its purchase violated the rights of the secured party. Any notation on the chattel paper stating that the chattel paper has been assigned to a secured party is sufficient to give the purchaser knowledge that the purchase violates the rights of the secured party.

a. Note on chattel paper purchasers—A chattel paper purchaser also has priority in the proceeds of the chattel paper if either:
• 1. She would have has priority under the general priority rules (first to file or perfect), or
• 2. The proceeds are the specific goods covered by the chattel paper or cash proceeds of the specific goods.

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priority rules for purchaser of instrument

Back 190

An instrument is chattel paper without a security interest. For example, a promissory note is an instrument. Essentially the same rule applies as chattel paper purchases, except there is no new value requirement and possession does not have to be taken in the ordinary course of business.
• Priority—A purchaser of an instrument has priority over a perfected security interest in the instrument if the purchaser:
o 1. Gives value (but does not have to be new value) and
o 2. Takes possession of the instrument
o 3. In good faith and
o 4. Without knowledge that the purchase violates the rights of the secured party.
 Any notation on the instrument stating that the instrument has been assigned to a secured party is sufficient to give the purchases knowledge that the purchase violates the rights of the secured party.
• Example—Bank secured debtor’s outstanding debt worth 10k by taking a security interest in all of debtor’s presently owned and after-acquired instruments. Bank then immediately files a financing statement covering debtor’s instruments. Subsequently, debtor sells its instruments to purchaser for 10k and gives purchaser possession of the instruments. As long as purchaser bought the instruments without knowledge that he violated the rights of Bank, purchaser has priority in the instruments.

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priority in proceeds - general rule

Back 191

A perfected security interest in proceeds will have the same date of priority as the perfected security interest in the original collateral, as long as the perfection of the security interest in the proceeds extends beyond the 20-day temporary perfection period. (Note—there are special rules for proceeds of collateral subject to PMSI’s, discussed above)
 Example—On Jan. 2, ABC Co. borrows 10k from Bank 1 and grants Bank one a SI in all of its present and after acquired inventory. Bank 1 perfects immediately by filing a financing statement. On March 1, Bank 2 lends ABC Co. 5k and takes a SI in ABC’s present and after-acquired accounts. Bank 2 perfects immediately by filing a financing statement. On July 1, ABC Co. sells an item of inventory on credit to a customer creating an account. Bank 1 has priority in the account because its priority in the account as a proceed of inventory dates back to Jan. 2.

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Special Rule for Certain Proceeds of Non-Filing Collateral

Back 192

A secured party has priority in the proceeds of non-filing collateral if:
 1. She has priority in the original collateral
 2. Her security interest in the proceeds is perfected, and
 3. The proceeds are cash proceeds or proceeds of the same type as the original collateral.
If the proceeds are proceeds of proceeds, all intervening proceeds must either be cash proceeds, proceeds of the same type as the original collateral, or accounts relating to the collateral.
 Example—Bank 1 loans debtor 1k and perfects a security interest in debtor’s investment property by filing. Later, Bank 2 loans debtor 1k and perfects a security interest in debtor’s certificated securities by obtaining control and by filing against investment property. Debtor then receives proceeds of the certificated securities consisting of stock dividends. Bank 2 has priority in the dividends b/c (1) it had priority in the original collateral through control (2) its security interest in the stock dividends was perfected by filing of the financing statement covering investment property, and (3) the proceeds are of the same type as the original collateral.

Front 193

 Filing Collateral

Back 193

Collateral in which a secured party would normally achieve priority by filing a financing statement.
o Examples: goods, accounts, tort claims, general intangibles, non-negotiable instruments.

Front 194

 Non-Filing Collateral

Back 194

Collateral in which a secured party would normally achieve priority by possession or control rather than filing.
o Examples: cash, chattel paper, nonconsumer deposit accounts, negotiable documents, instruments, and investment property.

Front 195

Exception: Filing Collateral as Proceeds of Non-Filing Collateral

Back 195

If a security interest in original collateral that is non-filing collateral is perfected by a method other than filing, and the proceeds of the original collateral are filing collateral, the first secured party to file a financing statement covering the proceeds has priority in the proceeds.

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priority rule for fixtures

Back 196

Fixtures are component parts., in a contest between a holder of a SI in a fixture and a holder of an interest in the real property to which the fixture is attached, the first party to file a fixture filing or records its real property interest prevails.
 Residences—In Louisiana, the fixtures security interest cannot apply to residences. Louisiana only allows this with commercial establishments.

A. Fixture Filing Required—To gain priority over a holder of an interest in real property, a party with a security interest in a fixture must perfect by making a fixture filing before the collateral becomes a fixture. In addition to the usual requirements for a financing statement, a fixture filing financing statement must contain a description of the real property to which the fixture is attached. The statement in LA is filed in the UCC records, not in the mortgage records.

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Exceptions to the general fixture priority rule

Back 197

 PMSI—A PMSI secured party who makes a fixture filing before the goods become fixtures will prevail over a real property interest in the same fixtures that was recorded prior to affixation.
o Exception: Construction Mortgages—The PMSI exception does not apply to a prior construction mortgage (mortgage securing an obligation incurred for construction of an improvement on land). A construction mortgage has priority over a PMSI in a fixture that was filed before the goods became fixtures if the construction mortgage was recorded before the goods became fixtures and if the goods became fixtures before completion of construction.
 No Fixture Filing Required—In some instances filing is not required. SI can be perfected in any manner authorized by Chapter 9,
o Readily Removable Collateral—A SI perfected in any manner authorized by Chapter 9 before affixation will prevail over real property interest if:
 1. The collateral is a readily movable office or factory machine;
 2. The collateral is readily movable equipment that is not primarily used or leased for use in the operation of real property
o Later-Acquired Liens—A SI in fixtures perfected in any manner authorized by Chapter 9 will prevail over a later acquired lien on the real property.
 Real Property Encumbrancer Consents—A SI in fixtures (perfected or unperfected) will prevail over a prior real property interest if the real property encumbrancer or owner, in an authenticated record, either consents to the SI or disclaims its interest.
 Debtor Has Right to Remove Fixtures—If the debtor has a right to remove the fixtures as against the real property owner, the attached security interest has priority.

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priority in accessions

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Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost. Usually, the general rules for priority (first to file or perfect, PMSI superpriority) apply to accessions.
 Exception—If the accession becomes a part of a whole that is subject to a security interest perfected by notation on a certificate of title, the security interest in the whole has priority over the SI in the accession.
o Example—New motor in an automobile

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Unperfected Secured Party v. Buyer

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General Rule—Buyer Prevails: A buyer of collateral (or a lessee of goods) takes free of a SI covering the collateral if she both gives value and receives delivery of the collateral without knowledge of the security interest before the security interest is perfected.
 Note—The delivery requirement does not apply to accounts, electronic chattel paper, general intangibles, or investment property other than a certificated security because there is nothing tangible to deliver.

b. Exceptions—
 Buyers of Receivables—Sales of certain receivables (accounts, chattel paper, payment intangibles, and promissory notes) are treated by Chapter9 as being creations of security interesting receivables being sold, and therefore, the purchaser is not considered a buyer as the term is used in this section. Rights between such purchasers of receivables and other holders of security interests in the same accounts are governed by the rules applicable between conflicting security interests.
 PMSI Grace Period—If a secured party attaches a PMSI in the debtor’s collateral before the buyer or lessee without knowledge pays value and receives delivery, the secured party will have priority over the buyer or lessee if she files within 20 days after the debtor receives the collateral.

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Perfected Secured Party v. Buyer

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Generally, a perfected security interest in goods is effective against subsequent buyers. However, there are some exceptions.

a. Secured Party Consents to the Sale—If the secured party consents, the transferee will take free of the secured party’s perfected security interest.

b. Buyer in the Ordinary Course of Business—A buyer who buys goods in the ordinary course of business from a seller who is engaged in the business of sell goods of the kind purchased generally takes free of a non-possessory perfected security interest in the inventory even if the buyer knows of it, unless the buyer also knows that the sale is in violation of the terms of the security agreement.
 Seller in business of selling goods of this kind—The only requirement is that the seller be in that business. Does not matter if buyer is in that business.
 Buyer takes free only of interest created by his seller—To qualify under BIOC rule, the security interest must have been created by the buyer’s seller, If the SI was created by someone else, the BIOC rule does not apply.
 Knowledge—Note that buyer may qualify even if he knows inventory is subject to SI, unless he knows the sale violates the agreement.

c. PMSI in Consumer Goods—PMSI’s in consumer goods are perfected automatically without filing. However, if the buyer resells them to another consumer, the second buyer takes free of the SI if he buys for value and before a financing statement covering the goods has been filed. Often call the garage sale rule.

d. Future Advances—Generally, if a creditor makes a future advance, the time of perfection of the future advances relates back to time of perfection of the original advance. However, a buyer not in the ordinary course of business can gain priority over a secured party who makes a future advance on collateral after the buyer purchases the collateral. Such a buyer has priority over a future advance made (1) after the secured party learned of the purchase, or (2) more than 45 days after the purchase.
 Exception: Mandatory Future Advances: If the secured party makes an advance after learning of the purchase or more than 45 days after the purchase, pursuant to a commitment to make the advances, the future advance has priority.

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Secured Party v. Holder In Due Course of the Like

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A holder in due course (HDC) of a negotiable instrument takes priority over any security interest in the negotiable instrument.

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Secured Party v. Transferee of Money or Deposit Account Funds

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If a debtor transfers money or deposit account funs to a person, that person takes free of any security interest in the money or funds, unless the transferee acts in collusion with the debtor in violating the rights of the secured party. If deposit account funds are in the form of a check, the holder of the check may also have priority as a holds in due course.

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Unperfected Secured Party v. Lien Creditor

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Lien creditor (person who has acquired a lien on the collateral through judicial attachment) prevails over the holder of a security interesting collateral if the lien creditor comes before the security interest is perfected.

a. Trustee in Bankruptcy—Lien creditor includes a trustee in bankruptcy, who is said to be a hypothetical lien creditor on all of the debtor’s property beginning on the date of the bankruptcy.

b. PMSI Grace Period Exception—A secured party who attaches a PMSI in the debtor’s collateral before a lien creditor acquires an interest in the collateral will have priority over the lien creditor if it files within 20 days after the debtor receives the collateral.

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Perfected Secured Party v. Lien Creditor

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a. General Rule—A prior perfected security interest in the collateral has priority over a lien creditor’s interest in the same collateral.
 Prior filed security interest may also have priority—If a secured party files a security interest, but does not attach (and therefore does not perfect) before a lien creditor’s interest arises, the party has priority over the lien creditor as long as the secured party:
o 1. Evidences its security agreement with an authenticated security agreement, possession, or control, and
o 2. Eventually attaches and perfects its security interest.

b. Exception—Lien has Priority Over Some Future Advances—A lien creditor’s interest can gain priority over certain future advances that would otherwise have priority under the above general rule. Under this exception, the lien creditor will have priority if the future advance was made more than 45 days after the lien arose, unless the future advance was made (1) without knowledge of the lien or (2) pursuant to a commitment made without knowledge of the lien.

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Holders of Possessory Liens Arising by Operation of Law

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By statute, most states grant people who supply goods or services a lien or privilege on goods in their possession to secure payment for the goods or services provided. Generally chapter 9 does not govern such liens except with regard to priority. Chapter 9 provides that such possessory liens have priority over any security interests in the collateral as long as the goods or services were provided in the ordinary course of business and the collateral remains in the lienholder’s possession, unless the lien is created by a statute that provides otherwise.

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PRIORITIES IN A NUTSHELL—Excluding investment property and deposit accounts, in which the party with control generally has priority, the ranking is as follows

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• Buyers in the ordinary course of business who do not know the sale violates the security interest.
• Holders in due course and the like of negotiable instruments
• Transferees of funds from deposit accounts
• Certain purchases of chattel paper or instrument who have possession or control
• Possessory lienholders
• PMSI’s (except a consumer purchaser from another consumer has priority over an automatically perfected PMSI in the consumer goods). Only a PMSI in consumer goods is perfected automatically. Others must be perfect by some other method, but there is a 20 day grace period for goods other than inventory and livestock.
• Perfected security interest and liens that have attached to collateral, including trustees in bankruptcy
• As between perfected security interests in the same collateral, the first to file or perfect has priority
• As between a perfected security interest and a lien, the lien has priority if it was created before there security interest was filed or perfected.
• Purchasers of collateral who buy for value and receive delivery.
• Unperfected security interests (rank in order according to order of attachment)
• The debtor

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DETERMINING WHEN DEFAULT HAS OCCURRED

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Chapter 9 does not specify when default occurs. The security agreement generally provides for default.

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RIGHT TO TAKE POSSESSION OF COLLATERAL

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a. No Self-Help in Louisiana—LA, unlike the other states, does not allow self help.
 Secured party’s right to take possession—After default a secured party can only take possession of the collateral:
o 1. After the debtor has abandoned it or if the debtor has surrendered the collateral to the secured party;
o 2. With the debtor’s consent given after or in contemplation of default
o 3. Pursuant to judicial process; or
o 4. In other cases expressly provided for by Louisiana law

b. Collection Rights of Secured Party—With non-goods collateral, such as accounts and instruments, upon default, the secured party is entitled to notify the account debtor in an authenticated record to make payment to her, rather than to the debtor who is in default. Upon notification, the account debtor must pay the secured party rather than the debtor in default, unless the account debtor seasonably requests proof from the creditor that the assignment of collection rights has been made.

c. Rights and Duties of Secured Party in Possession—A secured party with possession of collateral after default has the same rights and duties regarding the collateral that she had before default.

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RIGHT TO SELL COLLATERAL

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2. Sale—The secured party, after default, may sell, lease, license or otherwise dispose of collateral either in its condition when taken or after commercially reasonable preparation or processing. Disposition may be by either public or private sale and by one or more contracts.

a. Commercial Reasonableness—The general test for validity of the sale is commercial reasonableness of method, manner, time, place and terms. A sale is made in a commercially reasonable manner if it is done in the usual manner in a recognized market price in such a market at the time of sale.

b. Notice—Unless the collateral is perishable or threatens to decline rapidly in value or is of a kind ordinarily sold in a recognized market, reasonable notice that is authenticated by the secured party must be given to the debtor and any sureties on the debt. However, after default, the debtor or surety may, in an authenticated agreement, waive the right to notice of the sale.
 Timeliness of Notice—Notice must be sent within a reasonable time before the sale. What constitutes a reasonable time is a question of fact.
o Nonconsumer transaction: notice is deemed to be sent within a reasonable time if it is sent 10 days or more before the time of sale.
o Consumer transaction: notice is reasonable if it is sent 21 days or more before the time of sale.
 Contents of Notice—
o Collateral Other than Consumer Goods—If notice contains the following, it is per se sufficient. If notice lacks any of the information, sufficiency is a question of fact.
 Description of the debtor and the secured party
 Description of the collateral
 Method of sale (private or public)
 Statement that debtor is entitled to an accounting for the unpaid indebtedness and the charge for performing the accounting; and
 The time and place of public sale or the time after which a private sale will be made.
o Consumer Goods Collateral—IN a sale of consumer goods, notice must contain all of the information listed above to be sufficient. In addition, it must contain:
 A description of the recipient’s liability for a deficiency
 A telephone number from which the recipient can discover the cost of redeeming the collateral
 A telephone number or mailing address from which the recipient can get additional information concerning the sale.

c. Purchase by Secured Party—
 Public Sale—secured party may generally purchase the property
 Private Sale—secured party can purchase the collateral if it is of a type customarily sold in a recognized market or is of a type on which there are widely distributed price quotations or if the secured party, or a person related to the secured party, is obligated by statute to purchase or repurchase the collateral from the debtor.

d. Effects of Sale—Absent bad faith on the part of the purchaser, the purchaser of the collateral generally takes all the debtor’s rights in the collateral. The sale also discharges the security interest under which the sale is being made and all subordinate security interests and liens. However, the purchaser is still subject to superior security interests.

e. Proceeds—
 Upon sale, the proceeds go:
o 1. To the expenses of the retaking and sale;
o 2. Then to the satisfaction of the debt;
o 3. Then to the satisfaction of subordinate 3rd party security interest debts and interests of consignors;
o 4. Then any surplus goes to the debtor.
 Not enough proceeds—If the collateral does not bring enough to pay the expenses of sale and the debt, the secured party may recover any deficiency from the debtor.
 Debtor Entitled to Credit for Purchase Price—If the secured party, a person related to the secured party, or a surety on the debt purchases the collateral for an amount significantly below the expected price, the deficiency will be calculated according to what the amount would have been if a disinterested party had purchased the collateral.

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Retention of Collateral in Full or Partial Satisfaction of Debt

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a. General Rule—After default, the foreclosing secured party may keep the collateral to fully or partially satisfy the debt if:
 The debtor consents to the strict foreclosure by either:
o Agreeing to the strict foreclosure in an authenticated record after default, or
o In the case of a full strict foreclosure, failing to make an authenticated objection within 20 days after the secured party sent notice.
 Cannot consent to partial strict foreclosure in this way.
 The secured party sends an authenticated notice of intent to keep the collateral in satisfaction of the debt to:
o The debtor
o Any other secured party for whom the foreclosing party has received notice of a claim to the collateral
o Any other secured party who has perfected a security interest in the collateral by filing a financing statement or making a notation on a certificate of title; and
o None of the notified parties objects within 20 days after the notice is sent.
 Note—These requirements cannot be waived, even after default.

b. Exception—Consumer Goods 60% Rule—In consumer goods cases where the debtor has paid at least 60% of the cash price in the case of a PMSI or 60% of the loan in other cases, the secured party must sell the collateral or execute upon the security interest by instituting judicial proceedings within 90 days after repossession, unless, after default, she gets an authenticated agreement from the debtor waiving this right or extending the time in which the collateral may be sold. If the debtor has paid less than 60%, the general rules above apply.

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Right to Redeem Collateral

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Until the collateral has been sold or accepted as payment of the debt, a debtor, surety, or any other secured party or lien holder, may, after default, redeem the collateral by paying all the obligations secured by the collateral plus the reasonable expenses incurred by the secured party in relation to the retaking, including reasonable attorney’s fees. If collateral has been seized in a judicial proceeding, a redemption may occur at any time before the judicial sale. In such a case, a debtor, surety, or other secured party or lienholder shall also tender the costs of the proceeding.

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Secured Party’s Liability for Failure to Comply with Chapter 9 Default Rules

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a. Damages for Noncompliance Generally—A person is liable for actual damages in the amount of any loss caused by a failure to comply with Chapter 9. Punitive damages cannot be recovered.

b. Where Deficiency is at Issue—A secured party need not prove compliance with Chapter 9 unless the debtor or a secondary obligor pleads such noncompliance.

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OTHER RIGHTS OF SECURED PARTY ON DEFAULT

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1. Alternative Foreclosure Action in Louisiana—Via Executory Process--
a. Requirements for Foreclosure via Executory Process—
 Requirements:
o Written security agreement with a confession of judgment
o Instrument evidencing the secured obligation
 Deficiency Judgment Act—does not apply unless the collateral is consumer goods and the consumer has not waived the right of appraisal.
 Burden of Proof—Creditor is presumed to have met all the requirements and all the documents are presumed to be authentic

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WHICH STATE’S LAW GOVERN’S PERFECTION

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1. General Rule—Law of State Where Debtor is Located Governs Perfection

a. Location of debtor—If the debtor is a:
 Individual—located in the state of principal residence.
 Registered Organization—located in the state under whose laws it is organized.
 Unregistered Organization—(general partnership) located at its place of business if it only has one place of business or at its chief executive office if it has more than one place of business.

2. Exceptions—

a. Possessory Security Interests and Security Interests in Fixtures and Timber—The perfection of possessory security interests, as well as security interests in fixtures and timber, is to be governed by the law of the state in which the collateral is located.

b. Collateral Mortgage Notes—Louisiana law governs perfection.

c. Goods Covered by Certificate of Title—Law of the state issuing the most recent certificate of title.

d. Deposit Accounts—Unless the debtor’s agreement with the bank provides otherwise, the local law of the bank’s jurisdiction governs perfection.

e. Investment Property—
 Certificated Security—Law of the state where the certificated security is located governs.
 Uncertificated Security—Unless the debtor’s agreement with the issuer provides otherwise, the law of the state where the issuer was organized governs perfection.
 Securities Account—Unless the debtor’s agreement with the securities intermediary provides otherwise, the law of the state where the securities intermediary’s chief executive office is located governs perfection.
 Exception—Perfection by Filing or Automatic Perfection: If a security interest in investment property is perfected by filing, or if it is automatically perfected by a securities intermediary, the law of the state where the debtor is located governs perfection.

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MOVEMENT OF DEBTOR OR COLLATERAL FROM ONE STATE TO ANOTHER

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1. General Rule—If the perfection of a security interest is governed by the law of the state in which the debtor is located, and the debtor moves from one state to another, the security interest will remain perfected without any further action until four months after the debtor moves or until perfection in the first state lapses, whichever comes earlier. If the collateral is transferred to a new debtor located in a different state, the security interest will remain perfected without any further action until one year after the sale of the collateral or until perfection in the first state lapses, whichever occurs earlier.

2. Exceptions—

a. Security Interest Perfected by Possession—If a perfected security interest is a possessory security interest, and the collateral is moved from one state to another, the security interest will remain perfected without any further action as long as the security interest is also perfected by possession under the laws of the new state.

b. Certificates of Title Property—If a vehicle is moved from one state to another, and is covered by a certificate of title issued by the new state, a security interest in the vehicle that was properly perfected in the originals state lasts as long as it would have if the vehicle has not been covered by the new certificate of title.
 Exception: Purchasers for Value—If a vehicle subject to a perfected security interest in one state is moved to a new state and is covered by a certificate of title issued by the new state, the security interest in the original state is perfected as a purchaser for value of the vehicle only until the earlier of:
o 1. The time when the security interest would have become unperfected in the original state if the vehicle had not been covered by the new certificate of title (same rule as the general rule); or
o 2. Four months after the vehicle is covered by the new certificate of title.
 Exception: Clean Certificate of Title Issued in New Sate—If the certificate of title issued in the new state does not note the secured party’s interest in the vehicle, the following parties have priority over the secured party:
o 1. A buyer of the vehicle who is not in the business of selling vehicles who purchases for value and receives delivery of the vehicle without knowledge of the security interest
o 2. A secured party who perfects a security interest in the vehicle without knowledge of the other security interest after the clean certificate of title is issued in the new state.

c. Deposit Accounts, Uncertificated Securities, and Securities Accounts—If the bank, issues, or securities intermediary moves to a new state, perfection of an interest in the deposit account, uncertificated security, or securities account continues until the earlier of:
 The time when the security interest would have become unperfected in the original state if the bank, issuer, or securities intermediary had not moved to the new state; or
 Four months after the move to a new state

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What is a mortgage?

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Mortgage is a real right, ordinarily on immovables, always accessory and generally indivisible.

Mortgage is a non-possessory real right, accessorial in character, giving the mortgagee the right to have the property over which it rests seized and sold to satisfy the second debt.

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Art. 3286 Property susceptible of mortgage

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The only things susceptible of mortgage are:
(1) A corporeal immovable with its component parts.
(2) A usufruct of a corporeal movable.
(3) A servitude of right of use.
(4) The lessee’s rights in a lease of an immovable.
(5) Property made susceptible of conventional mortgage by special law.
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 Component parts—Defined by art. 466.
 Servitude of right of use—Note that other types of servitudes are not susceptible of mortgage.

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FORM OF MORTGAGE

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Contract of mortgage must be in writing, but no special words are required.
 Must describe the property it covers
 State the amount or maximum amount of the debtor’s obligations
 Be signed by mortgagor.
 Need not be signed by mortgagee whose acceptance is presumed and may be tacit.

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Can you contract to have a general mortgage?

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General conventional mortgages are not permitted absent express statutory authorization.

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MORTGAGES SECURING THE OBLIGATIONS OF THIRD PERSONS

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Mortgage may be given to secure the debts of a 3rd person. Mortgager may raise any defense to the enforcement of the mortgage that is available to the obligor of the secured obligation, except obligor’s lack of capacity or discharge in bankruptcy.

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THE IN REM MORTGAGE

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Limits the creditor’s recourse for the satisfaction of a debt secured by mortgage to the property over which the mortgage has been granted. This is expressly authorized by the code.

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Art. 3279 Rights created by mortgage

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Mortgage gives the mortgagee, upon failure of the obligor to perform the obligation that the mortgage secures, the right to cause the property to be seized and sold in the manner provided by law and to have the proceeds applied toward the satisfaction of the obligation in preference to other claims

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Art. 3280 Mortgage is an indivisible real right

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Mortgage is an indivisible real right that burdens the entirety of the mortgaged property and that follows the property into whatever hands the property may pass.

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Art. 3282 Accessory nature

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Mortgage is accessory to the obligation that it secures. Consequently, except as provided by the law, the mortgagee may enforce the mortgage only to the extent that he may enforce any obligation it secures

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Art. 3287 Conventional mortgage

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A conventional mortgage may be established only by a written contract. No special words are necessary to establish a conventional mortgage.
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When is a mortgage "established"?

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Although not defined in the code, Nathan believes this term is the counterpart of the UCC definition of attachment.

Thus, the requirements are:
(1) the mortgage is not established until the debtor/mortgagor has "rights" in the collateral (owns the property being mortgaged)
(2) a mortgage is an accessorial obligation that can only be enforced when there is a debt that it secures (value)
(3) must be a signed written act of mortgage indicating the intent to create a mortgage over his property

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Art. 3288 Requirements of contract of mortgage

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A contract of mortgage must state precisely the nature and situation of each of the immovables or other property over which it is granted, state the amount of the obligation, or the maximum amount of the obligations that may be outstanding at any time and from time to time that the mortgage secures, and be signed by the mortgagor.

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Art. 3289 Acceptance

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A contract of mortgage need not be signed by the mortgagee, whose consent is presumed and whose acceptance may be tacit.

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Art. 3290 Power to mortgage

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A conventional mortgage may be established only by a person having the power to alienate the property mortgaged.

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La. Civ. Code Art. 3293 - Obligations for which mortgage may be established

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A conventional mortgage may be established to secure performance of any lawful obligation, even one for the performance of an act. The obligation may have a term and be subject to a condition

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3294 - mortgage securing obligation that is not for the payment of money

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a mortgage that secures an obligation other than one for the payment of money secures the claim of the mortgagee for the damages he may suffer from a breach of the obligation up to the amount stated in the mortgage

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3295 - mortgage securing another's obligation

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a person may establish a mortgage over his property to secure the obligations of another. in such a case, the mortgagor may assert againts the mortgagee any defense to the obligation which the mortgage secures that the obligor could assert except lack of capacity or discharge in bankruptcy of the obligor

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3296 - right of mortgagor to raise defenses

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neither the mortgagor nor a third person may claim that the mortgage is extinguished or is unenforceable because the obligation the mortgage seures is extinguished or is uneforceable unless the obligor may assert against the mortgagee the extinction or unenforceability of the obligation that the mortgage secures

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3297 - restrictions upon recourse of mortgage

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the mortgagee's recourse for the satisfaction of an obligation secured by a mortgage may be limited in whole or in part to the property over which the mortgage is established

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What is executory process?

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Executory proceedings in this state are actions “in rem by the holder of a mortgage or privilege evidenced by an authentic act importing a confession of judgment to effect the seizure and sale of the encumbered property.”

 Use of executory proceedings—Executory proceedings are those which are used to effect the seizure and sale of property, without a previous citation and judgment, to enforce a mortgage or privilege thereon evidenced by an authentic act importing a confession of judgment, and in other cases allowed by law.
 Confession of judgment—Obligor acknowledges in the act of mortgage the obligation and confesses judgment thereon if the obligation is not paid at maturity.

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Art. 3325 Paraph of notes or written obligations secured by a mortgage, privilege, or other encumbrance

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—(A) Except as provided in paragraph B, a note or other written obligation which is secured by an act or mortgage, or an act evidencing a privilege or other encumbrance, need not be paraphed for identification with such mortgage, privilege or other encumbrance, and need not recite that it is secured by such mortgage, privilege, or other encumbrance.

(B) A notary before whom is passed an act or mortgage…shall paraph the obligation for identification with his act if the obligation is presented to him for that purpose. The paraph shall state the date of the act and shall be signed by the notary. The notary shall also mention in his act that he has paraphed the obligation. Failure to do so shall render the paraph ineffective. The paraph is prima facie evidence that the paraphed obligation is the one described in the act.

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Art. 3341 Limits on the effect of recordation

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The recordation of an instrument:

(1) Does not create a presumption that the instrument is valid or genuine.
(2) Does not create a presumption as to the capacity or status of the parties.
(3) Has no effect unless the law expressly provides for its recordation.
(4) Is effective only with respect to immovables located in the parish where the instrument is recorded.

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Art. 3344. Refusal for failure of original signature or proper certification; effect of recordation; necessity of proof of signature recordation of a duplicate

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A. The recorder shall refuse to record:

(1) An instrument that does not bear the original signature of a party.

(2) A judgment, administrative decree, or other act of a governmental agency that is not properly certified in a manner provided by law.

B. Recordation does not dispense with the necessity of proving that the signatures are genuine unless they are authenticated in the manner provided by law.

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Art. 3345. Recordation of a duplicate

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The recordation of a duplicate of an instrument, as defined in Code of Evidence Article 1001(5), that does not bear the original signature of a party, shall nonetheless have the same effect as recordation of the original instrument. Recordation does not dispense with proving that the recorded instrument is a duplicate.

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Art. 3346. Place of recordation; duty of the recorder

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A. An instrument creating, establishing, or relating to a mortgage or privilege over an immovable is recorded in the mortgage records of the parish in which the immovable is located. All other instruments are recorded in the conveyance records of that parish.

B. The recorder shall maintain in the manner prescribed by law all instruments that are recorded with him.

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Art. 3347. Effect of recordation arises upon filing

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The effect of recordation arises when an instrument is filed with the recorder and is unaffected by subsequent errors or omissions of the recorder. An instrument is filed with a recorder when he accepts it for recordation in his office.

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Art. 3348. Time of filing; determination

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Upon acceptance of an instrument the recorder shall immediately write upon or stamp it with the date and time it is filed and the registry number assigned to it.

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Art. 3349. Failure to endorse; effect

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If the recorder upon acceptance of an instrument fails to endorse an instrument with the date and time of filing or if it bears the same date and time of filing as another instrument, it is presumed that the instrument was filed with respect to other instruments in the order indicated by their registry numbers and that the filing of the instrument occurred immediately before an instrument bearing the next consecutive registry number.

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Art. 3350. Presumption as to time of filing

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When the date and time of filing cannot be determined under Articles 3348 and 3349, it is presumed that the instrument was filed at the first determinable date and time that it appears in the records of the recorder.

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Art. 3351. Ancient documents; presumptions

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An instrument that has been recorded for at least ten years is presumed to have been signed by all persons whose purported signatures are affixed thereto, and, if a judgment, that it was rendered by a court of competent jurisdiction.

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Art. 3352. Recorded acts; required information

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A. An instrument shall contain the following information when appropriate for its type and nature:

(1) The full name, domicile, and permanent mailing address of the parties.

(2) The marital status of all of the parties who are individuals, including the full name of the present spouse or a declaration that the party is unmarried.

(3) A declaration as to whether there has been a change in the marital status of any party who is a transferor of the immovable or interest or right since he acquired it, and if so, when and in what manner the change occurred.

(4) The municipal number or postal address of the property, if it has one.

(5) The last four digits of the social security number or the taxpayer identification number of the mortgagor, whichever is applicable.

(6) The notary's identification number or the attorney's bar roll number and the typed, printed, or stamped name of the notary and witnesses if the instrument is an authentic act of, or an authenticated act by, a notary.

B. The recorder shall not refuse to record an instrument because it does not contain the information required by this Article. The omission of that information does not impair the validity of an instrument or the effect given to its recordation.

C. The recorder shall only display the last four digits of the social security numbers listed on instruments that his office makes available for viewing on the Internet.

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Art. 3353. Effect of indefinite or incomplete name

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A recorded instrument is effective with respect to a third person if the name of a party is not so indefinite, incomplete, or erroneous as to be misleading and the instrument as a whole reasonably alerts a person examining the records that the instrument may be that of the party.

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Art. 3355. Mortgage or privilege affecting property in several parishes

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An act of mortgage, instrument evidencing a privilege, or other instrument that affects property located in more than one parish may be executed in multiple originals for recordation in each of the several parishes. An original that is filed with a recorder need only describe property that is within the parish in which it is filed.

A certified copy of an instrument that is recorded in the records of a parish need only describe property that is within the parish in which it is filed.

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Art. 3359. Duration of recordation of judicial mortgage

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The effect of recordation of a judgment creating a judicial mortgage ceases ten years after the date of the judgment.

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Art. 3361. Effect of amendment

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If before the effect of recordation ceases an instrument is recorded that amends a recorded mortgage or privilege to describe or modify the maturity of a particular obligation that it secures, then the time of cessation of the effect of the recordation is determined by reference to the maturity of the obligation last becoming due described in the mortgage or privilege as amended.

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Art. 3363. Method of reinscription exclusive

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The method of reinscription provided in this Chapter is exclusive. Neither an amendment of an instrument creating a mortgage or evidencing a privilege nor an acknowledgment of the existence of a mortgage or privilege by the mortgagor or the obligor constitutes a reinscription of the instrument.

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Art. 3364. Effect of timely recordation of notice of reinscription

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A notice of reinscription that is recorded before the effect of recordation ceases continues that effect for ten years from the date the notice is recorded.

 Compare to UCC 1—A UCC 1 can only be refilled within the last 6 months. That is not true for reinscription, which may occur at any time. Also, UCC-1 refiling is effective from the date the first UCC 1 would have expired. Reinscription is only effective from the date of recordation.

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Art. 3365. Effect of request recorded after cessation of effect of recordation

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A. A notice of reinscription that is recorded after the effect of recordation of the instrument sought to be reinscribed has ceased, again produces the effects of recordation, but only from the time the notice of reinscription is recorded. The effect of recordation pursuant to this Paragraph shall continue for ten years from the date on which the notice of reinscription is recorded, and the instrument may be reinscribed thereafter from time to time as provided by Article 3362.

B. Reinscription pursuant to Paragraph A of this Article does not require that the mortgage or evidence of privilege be again recorded, even if the original recordation is cancelled.

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Art. 3366. Cancellation upon written request; form and content

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A. The recorder of mortgages shall cancel, in whole or in part and in the manner prescribed by law, the recordation of a mortgage or privilege upon receipt of a written request for cancellation in a form prescribed by law and that:

(1) Identifies the mortgage or privilege by reference to the place in the records where it is recorded; and

(2) Is signed by the person requesting the cancellation.

B. The effect of recordation of the instrument ceases upon cancellation by the recorder pursuant to the provisions of this Article.

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Are indexes subject to the public records doctrine?

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An act which is actually recorded, but which could never be found from the indices because it is not indexed properly, is nevertheless effective against third persons

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§5385. Satisfaction of mortgage; production of promissory note or release for cancellation; liability

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A. When the obligation secured by a mortgage has been fully satisfied, the mortgagee, the servicing agent, or any holder of the note shall, within thirty days of receipt of written demand by the person providing full satisfaction, produce the satisfied promissory note or an instrument of release in a form sufficient to bring about the cancellation of the inscription of the recorded mortgage to the person providing full satisfaction. However, if the note is held by a federal agency or instrumentality, or a federally sponsored or supported lender, or any nonoriginating secondary mortgage market lender domiciled outside the state of Louisiana, the holder of the note shall, within sixty days after receipt of notice of the satisfaction from the servicing agent, produce the satisfied promissory note or an instrument of release to the servicing agent.

B. If the mortgagee, the servicing agent, or any holder of the note fails to produce the satisfied promissory note or an instrument of release in a form sufficient to bring about cancellation of the mortgage within thirty days after receipt of written demand by the person providing full payment of the balance of the note, the mortgagee and the servicing agent or the mortgagee and any holder of the note shall be liable in solido to the person providing full satisfaction for all damages and costs resulting therefrom, including reasonable attorney fees. However, if the note is held by a federal agency or instrumentality, or a federally sponsored or supported lender, or any nonoriginating secondary mortgage market lender domiciled outside the state of Louisiana, the servicing agency shall, within thirty days of receipt of the satisfied promissory note or an instrument of release from the holder of the note, produce the note or instrument to the person providing full satisfaction.

C. For purposes of this Section, "person" shall include the mortgagor acting in his own behalf, or a notary public or any person, firm, or corporation acting in place of or on behalf of the mortgagor.

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Art. 3366. Cancellation upon written request; form and content

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A. When the obligation secured by a mortgage has been fully satisfied, the mortgagee, the servicing agent, or any holder of the note shall, within thirty days of receipt of written demand by the person providing full satisfaction, produce the satisfied promissory note or an instrument of release in a form sufficient to bring about the cancellation of the inscription of the recorded mortgage to the person providing full satisfaction. However, if the note is held by a federal agency or instrumentality, or a federally sponsored or supported lender, or any nonoriginating secondary mortgage market lender domiciled outside the state of Louisiana, the holder of the note shall, within sixty days after receipt of notice of the satisfaction from the servicing agent, produce the satisfied promissory note or an instrument of release to the servicing agent.

B. If the mortgagee, the servicing agent, or any holder of the note fails to produce the satisfied promissory note or an instrument of release in a form sufficient to bring about cancellation of the mortgage within thirty days after receipt of written demand by the person providing full payment of the balance of the note, the mortgagee and the servicing agent or the mortgagee and any holder of the note shall be liable in solido to the person providing full satisfaction for all damages and costs resulting therefrom, including reasonable attorney fees. However, if the note is held by a federal agency or instrumentality, or a federally sponsored or supported lender, or any nonoriginating secondary mortgage market lender domiciled outside the state of Louisiana, the servicing agency shall, within thirty days of receipt of the satisfied promissory note or an instrument of release from the holder of the note, produce the note or instrument to the person providing full satisfaction.

C. For purposes of this Section, "person" shall include the mortgagor acting in his own behalf, or a notary public or any person, firm, or corporation acting in place of or on behalf of the mortgagor.

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Exception to the public records doctrine

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Cancellation of a mortgage through fraud, error, or mistake, without the consent or knowledge of the mortgagee, does not deprive the mortgagee of his security even as against third parties who deal with the property in good faith reliance on the public records

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Art. 3292. Mortgage of future property permitted in certain cases

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A special mortgage given over property the mortgagor does not own is established when the property is acquired by the mortgagor. A general conventional mortgage is permitted only when expressly provided by law.

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Collier granted a mortgage on property he owned. The act of mortgage also included 2 tracts of land that he did not then own. After execution of the act of mortgage, Collier acquired the 2 tracts. The mortgagee now wants to seize the 2 tracts. Result?

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 Issue—Conflicting code articles. One article prohibited mortgage of future property, the other said mortgage was effective to after acquired property.
 Holding—Court considered the fact that there was good faith on part of mortgagee and that the after-acquired property was specifically described in the act of mortgage.

Amonett v. Amiss.

Kilbourne subsequently expressed this rule "If article 3308 prohibiting the mortgaging of future property and article 3304 allowing the mortgaging of property which the mortgagor is not yet owner, are read together, they mean that future indefinite property cannot be mortgaged but that future definite property may.

A mortgage that describes property in sufficient detail to inform third parties who examine the public records what property is affected would be valid, assuming all other requirements of law were met, so long as the mortgagor did acquire ownership of the property. But a mortgage that described the property as "all of the property I ever after acquire" would clearly be invalid.

***the validity of the mortgage may not be affected by the mortgagor's "good faith" as long as he or she eventually comes to own the property

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Art. 3280 Mortgage is an indivisible real right

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Mortgage is an indivisible real right that burdens the entirety of the mortgaged property and that follows the property into whatever hands the property may pass.

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5 co-owners mortgaged the entire property. The note made them jointly liable, meaning each was only liable for 1/5 of the debt. One co-owner paid off his share and argued the debt should be cancelled as to his 1/5 of the land. Result?

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The mortgage is indivisible. The entire debt must be paid before the mortgage can be cancelled. He could have paid off the entire mortgage, and then be subrogated to the rights of the creditor, foreclosed, and controlled all the land.

Jefferson v. Stringfellow

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IMPLIED OBLIGATION NOT TO COMPETE WITH TRANSFEREE

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There is a jurisprudential rule that the transferor of an obligation implicitly agreed not to compete with his transferee as to the proceeds of any subsequent judicial sale of the mortgaged property if the transferor retained other obligations secured by the same mortgage. There was deemed to be an implicit subrogation agreement. However, there is also a civil code article on this. The jurisprudential rule may still be around—so you should always expressly stipulate whether or not there is subrogation.

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Art. 3313 Transfer does not imply subrogation

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A transferor of part of an obligation secured by a mortgage does not subrogate his rights to those of the transferee with respect to the portion of the mortgaged obligation he retains.

Front 265

A, owner of land, promises to sell land to B. Before executing the sale, B negotiates to sell the land to C for a higher price. Instead of making 2 transfers, A sells the land directly to C in exchange for a series 18 promisory notes representing the debt. He keeps 13 of the notes and gives B 5 of them to represent the profit. B subsequently exchanges those promissory notes for a car. A argues that these 5 notes should subordinated to his 13. Is he correct?

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The holders of several promissory notes of the same series secured by the same mortgage or lien are on equal footing and are entitled to share equally or ratably in a distribution of proceeds of a sale of the property, if, in a foreclosure of the mortgage or lien, the proceeds be not sufficient to pay all of the notes.

Where a mortgagee transfers to different persons portions of the mortgage debt, they will be entitled to payment pro rata out of the property mortgaged; no preference results from any difference in the date of transfers.

Therefore, a person who acquires from the original mortgagee a mortgage note belonging to a series of notes secured by the same mortgage or lien has no right to assume that his note will be paid in preference to the remaining notes.

Leonard v. Brooks

*pro rata rule used regardless of maturity date

*acceleration clause does not alter the result

*also, parties may agree to invoke pro rata rule where it would not normally apply

Front 266

What is the pro tanto rule and when does it govern?

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This rule confers priority upon the notes of a transferee vis a vis those of his transferor in those situations in which some relationship requires one party to act in good faith by refraining from competing with his transferee for a share of the insufficient assets. This is susceptible of variance by agreement.

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What are the 3 rules that control priorities of notes secured by a mortgage where the mortgage proceeds are insufficient to satisfy all the notes?

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(1) If there is an agreement regarding priorities among note holders, the agreement governs

(2) Absent an agreement, if note holders occupy a transfer relationship obliging one of them, a transferor in good faith, not to interfere with his transferee's collection, the transferor must defer to his competitor's prior right to satisfaction from the limited mortgage funds.

(3) If there is no agreement concerning priority and no obligation barring participation by note holders inter se, the holders of the note share the proceeds ratably

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R.S. 9:5391 Additions, accessions, and natural increases subject to mortgage

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A mortgage of immovable property without further action attaches to present and future component parts thereof and accessions thereto, without further description and without the necessity of subsequently amending the mortgage agreement.

Front 269

Defendant granted a mortgage on his farm to the Federal Land Bank. He then granted a mineral lease on the farm. The bank wanted to foreclose when they began to drill for natural gas. What is the result?

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The court held that granting the lease to explore did not constitute waste, but when you actually extract the minerals from the ground, they are prematurely removed, and this is committing waste.

By giving the mortgage, the mortgagors granted to the mortgagee a right, over not only the surface of the land, but over all its constituent elements, including the gas in place and unsevered.

FEDERAL LAND BANK V. MULHERN

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Art. 721 Servitude on mortgaged property

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A predial servitude may be established on mortgaged property. If the servitude diminishes the value of the estate to the substantial detriment of the mortgagee, he may demand immediate payment of the debt.

If there is a sale for the enforcement of the mortgage the property is sold free of all servitudes established after the mortgage. In such a case, the acquirer of the servitude has an action for the restitution of its value against the owner who established it.

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Mortgagor owned a motel, which had a swimming pool. After a small child drowned in it, the pool was filled in. Did the mortgagor commit waste?

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The court held that this did NOT constitute waste. Applying Mulhern literally, this would be waste. The court finds that there would not be substantial waste. They take a practical approach. Filling in the pool did not reduce the profits.

EAST V. CHUCK MILLER REALTY INC.—

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§5382. Right of mortgage holder to recover for disposal or conversion of property

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The holder of a conventional mortgage shall have the same rights, privileges, and actions as the mortgagor land owner to recover against any person who, without the written consent of the mortgagee, buys, sells, cuts, removes, holds, disposes of, changes the form of, or otherwise converts to the use of himself or another, any trees, buildings, or other immovables covered by the mortgage.

Recovery by the mortgagee may not be for more than the unpaid portion of the secured indebtedness, plus interest, advances, court costs, and attorney's fees, provided such recovery may be had severally or jointly with the mortgagor land owner.

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Art. 3298 Mortgage may secure future obligations

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(A) A mortgage may secure obligations that may arise in the future.
(B) As to all obligations, present and future, secured by the mortgage, notwithstanding the nature of such obligations or the date they arise, the mortgage has effect between the parties from the time the mortgage is established and as to third persons from the time the contract of mortgage is filed for registry.
(C) A promissory note or other evidence of indebtedness secured by a mortgage need not be paraphed for identification with the mortgage and need not recite that it is secured by the mrotgage.
(D) The mortgage may be terminated by the mortgagor or his successor upon reasonable notice to the mortgagee when an obligation does not exist and neither the mortgagor not the mortgagee is bound to the other or to a third person to permit an obligation secured by the mortgage to be incurred. Parties may contract with reference to what constitutes reasonable notice.
(E) The mortgage continues until it is terminated by the mortgagor or his successor in the manner provided in paragraph D, or until the mortgage is extinguished in some other lawful manner.

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Art. 3298 Mortgage may secure future obligations

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(A) A mortgage may secure obligations that may arise in the future.
(B) As to all obligations, present and future, secured by the mortgage, notwithstanding the nature of such obligations or the date they arise, the mortgage has effect between the parties from the time the mortgage is established and as to third persons from the time the contract of mortgage is filed for registry.
(C) A promissory note or other evidence of indebtedness secured by a mortgage need not be paraphed for identification with the mortgage and need not recite that it is secured by the mrotgage.
(D) The mortgage may be terminated by the mortgagor or his successor upon reasonable notice to the mortgagee when an obligation does not exist and neither the mortgagor not the mortgagee is bound to the other or to a third person to permit an obligation secured by the mortgage to be incurred. Parties may contract with reference to what constitutes reasonable notice.
(E) The mortgage continues until it is terminated by the mortgagor or his successor in the manner provided in paragraph D, or until the mortgage is extinguished in some other lawful manner.

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A was surety for B. In return for acting as a surety, A was granted a mortgage on B’s house. The mortgage was for past and future endorsement of notes. The mortgage specified that the amount of future debt was 30k, but there was no specific amount for pre-existing debt.
 Issue—Is there a valid mortgage? Argument that the mortgage is null b/c no preexisting debt specified.

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Mortgage not valid. This was a technical ruling, Nathan would have found the other way.

Linton v. Purdon

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Can a mortgage be given to secure debts having no legal existence at the date of the mortgage? If so, is it essential, as regards to third persons, that the applicability of the mortgages to future debts should be expressed on its face or may it be created, in the form of security, for an obligation described as actually exisiting?

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A mortgage to secure future advances does not need to state on its face that it secures future advances. As a practical matter, you should always say what you mean and state that the mortgage secures future advances.

PICKERSGILL V. BROWN

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Foy signed Note 1 to First National in 1963, secured by a mortgage. In 1966 he signed Note 2 to First national and endorsed on the back saying it was secured by the original mortgage. In 1968, Foy granted a second mortgage on his property.
 Issue—Did the second mortgage prime Note 2?

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Court held that Note 2 was not secured by the mortgage because they did not intend for the mortgage to secure future advances at the time the mortgage was signed.
 Rule—Parties must intend for the mortgage to secure future advances at the time they execute the mortgage.

THRIFT FUNDS CANAL V. FOY

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How does a collateral mortgage differ from the ordinary mortgage and the mortgage to secure future advances?

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The collateral mortgage is not designed directly to secure an existing debt, like the ordinary mortgage, nor necessarily to secure future advances to be made, like the mortgage to secure future advances, but instead to create a mortgage note that can be pledged as collateral security for either a pre-existing debt, or for a debt created contemporaneously with the mortgage, or for a future debt or debts, or even for a series of debts.

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What is the first step in the creation and granting of a collateral mortgage?

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The mortgagor must execute an act of mortgage, acknowledging an indebtedness in the act of mortgage, and stating that he intends to use the mortgage note to raise funds. The mortgage is drawn in favor of any future holder or holdres of the mortgage note.

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After executing the act of mortgage, what is the next step in creating and granting a collateral mortgage?

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In conjunction with the act of mortgage, the mortgagor executes a promissory note that is generally payable to "bearer" although it may be payable to his own order and endorsed by him. The notary may then paraph the NV note which makes it inextricably bound with and identified with the act of mortgage so that the note thereby incorporates all the terms and conditions of the mortgage and certifies that it is genuine.

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After executing the NV note, what is the next step in creating and granting a collateral mortgage?

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The collateral mortgage note, or NV note, is not the indebtedness, it is merely the security that will be pledged as collateral for the true debt. Consequently, the next step is for the mortgagor to also become a pledgor: He pledges the NV and act of mortgage itself to the creditor to secure a debt. This debt is evidenced by a hand note that contains appropriate provisions to be secured by pledge.

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What happens when the terms in the hand note do not match the terms in the NV note?

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If the term is provided for in the hand note, but not NV note, the creditor is entitled to recover but is not secured as to that item. IF the term is provided for in the NV note but not in the hand note, the creditor is not only unsecured, but not entitled to recover that particular item because it is not part of the debt.

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When does a collateral mortgage obtain ranking?

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From the time of "issuance." Issuance is when the NV note is pledged to secure a debt.

Also, unlike the ordinary conventional mortgage, when the debt is paid and the hand note is marked "paid" and both HN and NV are returned to the mortgagor-pledgor, the collateral mortgage is NOT extinguished but it does lose its original ranking and becomes dormant.

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What if the mortgagor-pledgor desires to borrow money and use the security of the collateral mortgage again?

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He can execute another hand note and secure it by pledge of NV note exactly as he did the first time. The difference is that second and subsequent pledges of NV notes are called reissuance and the collateral mortgage obtains a new rank: the date of reissuance.

The procedure of pledging one note to secure another note illustrates that the collateral mortgage is an exception to the rule that mortgage is an accessory obligaiton.

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How does a mortgagee of a collateral mortgage prevent the NV note from prescribing? What happens if he lets it prescribe?

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It used to be customary practice to have the mortgagor sign a written acknowledgment on the NV note within five years after execution of the note and thereafter to repeat the procedure within five year periods to prevent prescription from running.

If he failed to do so, the NV would prescribe and while the hand note would remain a valid obligation, it would no longer be secured by a mortgage and would simply reflect an unsecured debt.

As of 1970 legislature enacted 9:5807 which provides that partial payment on the hand note will interrupt prescription on the NV note if (1) the NV note is held by the creditor to whom the partial payment is made (2) creditor must prove the NV note was in fact pledged to secure the hand note upon which payment was made and (3) that creditor is holder of both notes.

** it is unclear whether this legsilation applies to pledged notes of third parties. to be careful, have them acknowledge every 5 years

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what are the 4 steps in creating a collateral mortgage?

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 Step 1: Act of Mortgage—Mortgagor executes an act of mortgage, acknowledging an indebtedness in the act, and stating that he intends to use the mortgage note to raise funds. Mortgage is drawn in favor of any future holder or holders of the “mortgage note.”
o Recordation—Act must be recorded to affect 3rd parties. But, ranking is not based on filing for collateral mortgage.
 Step 2: Ne Varietur Note (aka Collateral Mortgage Note)—In conjunction with the act of mortgage, the mortgagor executes a promissory note that is generally payable to “Bearer” (or to himself and endorsed by him). The promissory note is paraphed ne varietur by the notary for identification with the act of collateral mortgage. Paraphing binds the note with the act of mortgage and thereby incorporates all the terms and conditions of the mortgage.
o Collateral—The NV note is merely collateral. It is not a debt. Therefore, the NV note can be pledged over and over again.
 Step 3: Acceptance—A nominal holder, usually a secretary, appears and accepts the NV note for all future holders.
 Step 4: Pledge of the NV Note—The NV note is not the indebtedness, it is merely the security that will be pledged as collateral for the true debt. The next step, then, is for the mortgagor to pledge the NV note and the act of mortgage itself to the creditor to secure a debt. This debt is evidenced by a hand note that contains appropriate provisions to be secured by the pledge.
o Ranking—Based on the date of pledge.
o Payments—

Front 287

What interrupts prescription of the NV in a collateral mortgage?

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A payment by a debtor of interest or principal of an obligation shall constitute an acknowledgement of all other obligations including promissory notes of such debtor or his codebtors in solido to secure the obligation as to which payment is made. In all cases the party claiming an interruption of prescription of such pledged obligation including a promissory note as a result of such acknowledgment shall have the burden or proving all of the elements necessary to establish the same.

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What are key differences between the collateral mortgage and the MTSFA?

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On its face, the collateral mortgage indicates it will be used to secure future advances to be made in the future but does not indicate specific advances. Thus, it cannot be considered a mortgage to secure future advances of the specific kind.

Therefore, ALL collateral mortgages may secure future obligations, but not all mortgages to secure future obligations are collateral mortgages.

 MTSFA is effective between the parties when established and effective against 3rd persons when filed. This is an important distinction from collateral mortgage b/c no one knows from the public records when a collateral mortgage ranks or if it has lost its rank due to reissue.
 MTSFA does not require a note in connection with it and there is no need to paraph a note. This is another distinction from collateral mortgage.
 Identification of mortgagee—Nathan thinks this mortgage requires the mortgagee to be identified on the face of the mortgage. The collateral mortgage can be made to a future holder.

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What was the holding in ODOM V. CHEROKEE HOMES regarding reissuance?

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Reissuance: When the debt is paid, the collateral mortgage is not extinguished as it would be with a regular mortgage. Instead, it becomes dormant until the NV note is pledged to secure another debt. When the collateral mortgage becomes dormant, it loses its original rank. Upon the re-pledge of the NV note there is a reissuance and the rank is from this date.
 Holding—Court held that the money advanced to release the first mortgagee was not a sale of the NV note (because you cannot sell what you do not own—and a pledgee does not own the NV note). What really happened when the money was advanced is that the debt was extinguished, the collateral mortgage dormant, and then a reissuance occurred. Ranking, then, is from the reissuing date.
 Note—The intentions of the parties is irrelevant. If you don’t follow the rules you do not get priority.
 Purchase Hand Notes—For the parties to have accomplished what they wanted, the hand notes, not the NV notes, should have been purchased. That would have subrogated the purchaser to the rights of the original owner of the hand notes. All accessorial obligations (like NV note) would have passed with the purchase.

Front 290

The hand note was for more than the mortgage and only $200 have been paid on the note. The question is how much can be recovered from the proceeds of the sale?

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Recovery is limited to the amount secured by the mortgage, plus interest. The interest provided for in the collateral mortgage means that the value of the collateral continually increases over time. CENTRAL PROGRESSIVE BANK V. DOERNER

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What is the test for determining if subsequent loans relate back to the original collateral mortgage

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 1. Initial pledge must be properly perfected.
o Creditor must have actual possession of the thing pledged for the pledge to be perfected.
 2. Each succeeding note was specifically secured by the pledge of the instrument.
 3. At the time of the original pledge, there was a mutual intent to secure future advances.
o This is why most people have a written act of pledge, even though written act is not necessary to perfect a pledge. The writing is useful in proving the intent of the parties.
 4. The pledged instrument was continuously in the possession of the pledgee.
 5. The parties were in good faith.
NEW ORLEANS SILVERSMITHS, INC. V. TOUPS

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 Facts—Mrs. Alford granted a collateral mortgage on her separate property to secure a loan for her husband. The first hand note was paid off. H signs a new hand note without W.
 Issue—Whether collateral mortgage secured any note other than the first hand note?

Back 292

No. The bank's retention of the collateral mortgage note after extinguishment of the ancillary debt (or hand note) without either an outset pledge to secure future obligations or subsequent pledge by the obligor on the collater note (Mrs. Alford, that is) gives the bank no security interest in the collateral mortgage note. If this were not the case, any party, even with the bank's full knowledge of the circumstances and acquiescense therein, could pledge, without any interest therein, the collateral mortgage of another to secure his own obligation wihtout the consent of the obligor on the collateral mortgage note, simply because the obligee bank has possession of and has not returned a collateral mortgage note pledged on an earlier extinguished obligation. This cannot be.

FIRST GUAR. BANK V. ALFORD

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Is the maker of a collateral mortgage note pledged to secure the debt of a third party personally liable for the underlying indebtedness (on the hand note)?

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Recovery against such makers is limited to the value of the mortgaged property. To reach the contrary result would be to find that the makers executed a pledge and a personal guaranty of payment of the underlying indebtedness. Principles of suretyship will not allow such a finding.

Commercial National Bank v. Succession of Rogers

Front 294

Lake Corp. planned to develop a subdivision and executed a collateral mortgage on the land. The hand note was pledged to the Bank. Lake pre-sold some of the units, but then changed its plans. In an attempt to prevent prescription, Bank had Lake Corp. pledge the pre-sold contracts to secure the NV note, not the hand note, in order to try and prevent prescription of the NV note. By the time of suit Lake no longer owned the property and there had been no payments on the hand note. Result?

Back 294

Court held it had prescribed. The contracts that secured the note had all been revoked b/c of the change in plans and therefore had no value. Although, the thing of value pledged does not have to be much value (can be expired note), this case is different. The revoked contracts do not even give rise to a natural obligation.

KAPLAN V. UNIVERSITY LAKE CORP.

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TEXAS BANK V. BOZORG
 Facts—Case is similar to Odom. Assigned the NV note but not the hand note. Does the loan relate back for ranking purposes?

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 The court held that the intent to assign the rights of a collateral mortgage is enough for the loan to relate back for ranking, even if it is not done correctly.
 Nathan—Thinks Odom should have applied.

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R.S. 9:5550 Definitions (collateral mortgage and vendor's priviledge)

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(1) Collateral mortgage—a mortgage that is given to secure a written obligation, such as a collateral mortgage note (NV note), negotiable or nonnegotiable instrument, or other written evidence of debt, that is issued, pledged, or otherwise used as security for another obligation. A collateral mortgage or collateral chattel mortgage may provide on its face that the mortgage is granted in favor of the designated mortgagee and any future holder or holders of the collateral mortgage note.
(2) Vendor’s privilege—shall mean a vendor’s lien or vendor’s privilege on immovable property that secures a written obligation, such as a collateral mortgage note, negotiable or nonnegotiable instrument, or other written evidence of debt.

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§5551. Effective date of a collateral mortgage

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A. A collateral mortgage becomes effective as to third parties, subject to the requirements of registry of the collateral mortgage, when a security interest is perfected in the obligation secured by the collateral mortgage in accordance with the provisions of Chapter 9 of the Louisiana Commercial Laws, R.S. 10:9-101 et seq.

B. A collateral mortgage takes its rank and priority from the time it becomes effective as to third parties. Once it becomes effective, as long as the effects of recordation continues in accordance with Articles 3328 through 3334 of the Civil Code, a collateral mortgage remains effective as to third parties (notwithstanding any intermediate period when the security interest in the secured obligation becomes unperfected) as long as the secured party or his agent or his successor retains possession of the collateral mortgage note or other written obligation, or the obligation secured by the mortgage otherwise remains enforceable according to its terms, by the secured party or his successor.

C. As long as the effects of registry of the collateral mortgage continue, in accordance with Articles 3328 through 3334 of the Civil Code, if there is a termination, remission, or release of possession of the written obligation, a collateral mortgage takes its rank and priority from the time a new security interest is perfected in the written obligation, regardless of whether the secured party is the original secured party, his successor, or a new or different secured party.

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§5552. Defenses to enforcement of a collateral mortgage

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A. If the obligor of the written obligation that the collateral mortgage secures does not raise the following defenses or claim the extinction of the collateral mortgage, then the mortgagor may not raise as a defense to the enforcement or claim the extinction of the collateral mortgage for any cause, other than forged signatures, based on the invalidity or unenforceability of the written obligation, or the extinction of the written obligation.

B. If neither the obligor of the written obligation that the collateral mortgage secures nor the mortgagor raises the following defenses or claims the extinction of the collateral mortgage, then, as long as the effects of registry continue in accordance with Article 3369 of the Civil Code, third persons may not raise as a defense to the enforcement or claim the extinction of the collateral mortgage for any cause, other than forged signatures, based on the invalidity or unenforceability of the written obligation, or the extinction of the written obligation.

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§5554. No requirement of registry of transfer, assignment, pledge, or security interest in or of the written obligation, collateral mortgage, or vendor's privilege

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There is no requirement that there be registry of:

(1) Any evidence of pledge of the written obligation secured by a collateral mortgage or a vendor's privilege.

(2) Any transfer or assignment of the written obligation secured by a collateral mortgage or a vendor's privilege, or of the collateral mortgage or vendor's privilege.

(3) Any security interest in a collateral mortgage or vendor's privilege or written obligation secured by either.

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§5555. Executory process in the case of notes or other obligations not paraphed for identification with the mortgage

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A. In accordance with Code of Civil Procedure Article 2636(8), there is no requirement that a note or other written obligation secured by a mortgage be paraphed for identification with the mortgage in order for the mortgagee to have the right to foreclose under the mortgage utilizing Louisiana executory process procedures. For purposes of executory process, the existence, amount, terms, and maturity of the note or other written obligation not evidenced by an instrument paraphed for identification with the act of mortgage or privilege may be proved by affidavit or verified petition.

B. The affidavit or verified petition may be based upon personal knowledge or upon information and belief derived from the records kept in the ordinary course of business of the mortgagee, the creditor whose claim is secured by the privilege, or any other person. The affidavit or verified petition need not particularize or specifically identify the records or date upon which such knowledge, information or belief is based.

C. The affidavit shall be deemed to provide authentic evidence of the existence, amount, terms, and maturity of the obligation for executory process purposes.

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§5169. Cancellation of mortgages and privileges not securing paraphed obligations

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A. If a mortgage or privilege does not secure a note or other written obligation that is paraphed for identification with it, the request for cancellation shall have attached to it an act executed before a notary public or duly acknowledged before a notary public with or without witnesses or any act that is otherwise self-proving under the provisions of Code of Evidence Article 902(1), (2), (3), or (8), signed by the obligee of record of the mortgage or privilege that acknowledges the satisfaction or extinction of the secured obligation, releases or acknowledges the extinction of the mortgage or privilege, or directs the recorder to cancel its recordation.

B. A request for cancellation by an assignee must also provide the name of the mortgagor or obligor of the privilege as it appears in the recorded instrument and registry number or other appropriate recordation information of the instrument.

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§5170. Cancellation of mortgages and privileges securing paraphed obligations

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A. If a mortgage or privilege secures a note or other written obligation paraphed for identification with it, there shall be attached to the request for cancellation:

(1) The paraphed obligation duly marked "paid" or "cancelled"; or

(2) An authentic act describing the paraphed obligation with sufficient particularity to reasonably identify it as the one paraphed for identification with the act of mortgage or privilege and containing:

(a) The appearer's declaration that he is the holder and owner of the paraphed obligation and that he releases or acknowledges extinction of the mortgage or privilege or directs the recorder to cancel its recordation; and

(b) A declaration by the notary that the appearer presented him with the paraphed obligation and that he paraphed it for identification with his act.

B. When a person requests cancellation and the original paraphed obligation is attached to the request or is presented to the recorder with it, the recorder shall, upon that person's request, make a duplicate of the original paraphed obligation, attach it to the request for cancellation, and note upon it that it is a duplicate of the paraphed obligation that was presented. The recorder shall then paraph the original obligation for identification with the request for cancellation and return it to the person presenting the request.

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§5557. Obligation to grant release of mortgage

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A. The provisions of this Section shall apply only to mortgages recorded prior to January 1, 2012.

B. Upon extinction of the mortgage, the mortgagor or his successor may request the mortgagee to provide a written act of release directing the recorder to erase the mortgage from his records. The mortgagee shall deliver the act of release to the mortgagor within sixty days of receiving the request. If the mortgagee fails to deliver the act timely and in a form susceptible of recordation, the mortgagor may, by summary proceedings instituted against the mortgagee in the parish where the mortgaged property is located, obtain a judgment ordering the mortgage to be erased from the records and for the costs, reasonable attorneys fees, and any damages he has suffered from the mortgagee's default.

C. This Section does not apply to a mortgage insofar as it secures payment of a note or other instrument paraphed for identification with the act of mortgage by the notary before whom it is executed.

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How do you create an in rem mortgage?

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Need to stipulate in the mortgage that there is no personal liability beyond the value of property.

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Art. 3326. Effect of mortgage filed after death of mortgagor

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A judgment or a conventional mortgage filed for recordation more than twenty days after the mortgagor dies gives no preference to the mortgagee over the other creditors of the estate of the deceased if the estate is insufficient to satisfy all the creditors.

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2 tracts of land were mortgaged. Federal Land Bank has first mortgage on both tracts. Gladney has second mortgage on the large tract. At foreclosure sale, second mortgagee bids on the large tract and then refuses to pay. Then there is a second sale at which second mortgagee argues the 2 tracts should be sold independently of each other. He wants the small tract to be sold first b/c the proceeds of that would reduce Federal’s mortgage and thereby increase his equity in the land. Result?

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 Holding—First mortgagee has the right to foreclose however it sees fit. They can do it in globo, in seriatim (in series) and if in seriatim, in any order it sees fit.
 Note—Sometimes the court will consider the equity of the situation and consider it an abuse of right to divide up the property where the whole is worth more than the parts.

FEDERAL LAND BANK V. RESTER (Subrogation)

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The rights and obligations established or created by the following written instruments are without effect as to a third person unless the instrument is registered by recording it in the appropriate mortgage or conveyance records pursuant to the provisions of this Title:

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(1) An instrument that transfers an immovable or establishes a real right in or over an immovable.

(2) The lease of an immovable.

(3) An option or right of first refusal, or a contract to buy, sell, or lease an immovable or to establish a real right in or over an immovable.

(4) An instrument that modifies, terminates, or transfers the rights created or evidenced by the instruments described in Subparagraphs (1) through (3) of this Article.

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Art. 3339. Matters not of record

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A matter of capacity or authority, the occurrence of a suspensive or a resolutory condition, the exercise of an option or right of first refusal, a tacit acceptance, a termination of rights that depends upon the occurrence of a condition, and a similar matter pertaining to rights and obligations evidenced by a recorded instrument are effective as to a third person although not evidenced of record.

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Art. 3357 Duration; general rule (recordation of mortgage)

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Except as otherwise provided by law, the effect of recordation of an instrument creating a mortgage or evidencing a privilege ceases ten years after the date of the instrument.
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 General Rule—This is just the general rule. Exception in 3358.
 Date of instrument—Note that the date of the instrument, not the date of filing, is the operative date.

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Art. 3358 Duration of recordation of certain mortgages and vendor’s privileges—If an instrument creating a mortgage or evidencing a vendor’s privilege describes the maturity of any obligation secured by the mortgage or privilege and if any part of the described obligation matures nine or more years after the date of the instrument....

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, the effect of recordation ceases six years after the latest maturity date described in the document.
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 Note Payable on Demand—Duration is 10 years b/c the maturity date is essentially the date of execution.
 MTSFA—Shows no maturity date on its face, so the duration is 10 years.

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Art. 3362 Method of resinscription

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A person may reinscribe a recorded instrument creating a mortgage or evidencing a vendor’s privilege by recording a signed written notice of resinscription. The notice shall state the name of the mortgagor or obligor as it appears in the recorded instrument and registry number or other appropriate recordation information of the instrument or of a prior notice of resinscription, and shall declare that the instrument is reinscribed.
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 No limit—There is no limit to the number of times you can reinscribe

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Art. 3319 Methods of extinction—A mortgage is extinguished:

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(1) By the extinction or destruction of the thing mortgaged.
(2) By confusion as a result of the obligee’s acquiring ownership of the thing mortgaged.
(3) By prescription of all the obligations that the mortgage secured.
(4) By discharge through execution or other judicial proceeding in accordance with the law.
(5) By consent of the mortgagee.
(6) By termination of the mortgage in the manner provided in Art. 3298 (D).
(7) When all the obligations, present and future, for which the mortgage is established have been incurred and extinguished.

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 Facts—Continental had collateral mortgage with Hibernia. Arranged a giving in payment instead of paying. The parties executed the giving in payment, waited 48 hours before filing, turned out Coulon filed civil judgment against Continental just before they filed.
 Issue—Hibernia claims priority b/c of the 2 prior collateral mortgages

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 Holding—Hibernia has no priority. When Hibernia became the owner, it could not also be a creditor b/c that would be confusion. The judicial mortgage still applies. Hibernia also argued error as to cause b/c they only agreed to the giving in payment if the land was free from encumbrances. However, agreement was valid between parties when executed—at which time there were no encumbrances. Hibernia took that risk.

HIBERNIA NATIONAL BANK V. CONTINENTAL

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Could a judgment of alimony create a judicial mortgage by filing?

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Judgment of alimony is not a judicial mortgage. It is an obligation. If you fail to pay alimony, your former spouse can sue and get a judgment making the past due alimony executory—which could then lead to a judicial mortgage

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The following considerations are also important for judicial mortgages:

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 Where to file—File wherever the debtor may now own or acquire property. Not a bad idea to file in all the parishes.
 Prescription—10 years from when the judgment becomes final. When the judgment is close to prescribing, you may revive the judgment by filing an ex parte motion citing the judgment.
o Paying money does not interrupt prescription—If the debtor makes payments on the judgment, that does not interrupt prescription. Still need to revive the judgment to ensure continued payment.
 Reinscription—Important to reinscribe the judgment. All that is required is writing a letter to the recording office telling them about the ex parte motion and judgment extending the initial judgment.
 Out of State Judgments—Need to have a Louisiana court recognize the judgment under full faith and credit and then file.
 Affidavit of distinction—If the judgment is against someone with a common name, people with the same name can file an affidavit of distinction to have the judicial mortgage released against their property.

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Art. 3304. Judgment; suspensive appeal

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A judicial mortgage is not affected or suspended by a suspensive appeal or stay of execution of the judgment.