Suretyship & Liens

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The key concept of Suretyship relationship

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A suretyship exists when the third party uses the following language "if she doesn't pay that debt I will" but there is no suretyship, if the third party makes his or her promise as follows "don't worry, I'll pay that debt"

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The seven rules of Suretyship

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1) A promise to serve as surety must be supported by consideration. Exception: where surety signs a promissory note.

2) Suretyship promises must be in writing. no writing is required if suretys main purpose is to benefit himself.

3) A surety has immediate and direct liability on the prinipal debtor's debt.

4) If the surety is faced with the prospect of paying the underlying debt the law will jealously protect the surety's right to receive repayment from the debtor. The paying sureties has three rights: reimbursement, exoneration, and subrogation.

5) A paying surety is entitled to pro rata contribution from co-sureties, unless they have an agreement to the contrary. must look at agreement.

6) In general, a surety who is sued by the creditor can assert against the creditor any defense that is available to the debtor. Three exceptions: (1) infancy (2) incapacity (3) bankruptcy.

7) A surety will be wholly or partially discharged by the creditors alteration of the underlying contract or any improper impairment of the collateral that produces loss. DRAW PIC ( Defenses available to debtor repayment right alteration discharge; writing prorata contribution imeediate and direcy liability; consideration.)

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The essence of suretyship is _____________

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Contract; Most important issues being (1) consideration (2) statute of frauds (3) misrepresentation by creditor; freedom of contract; surety and gauranty agreement are the same in NC; guarantee of collection if signed the person is not liable until the creditor first exhausts remedies against the principal debtor or shows that pursuit of such remedies would be futile; promissory note is not required.

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typical consideration in a suretyship agreement.

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Creditor promises to extend creditor to debtor when they otherwise would not .Issues of consideration arise when the surety signs on to the debt belatedly- after the relationship between debtor and creditor is already in existence.

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No writing required

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(1) direct promise to pay by third party and

(2) main purpose rule

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The main purpose rule

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No writing is required when the suretys main purpose in making the suretyship promise is to produce an economic benefit for himself or herself. The MPR applies where suretyship is being used to avoid the Corporate limited liability rule, as where a shareholder orally agrees to be liable on an oral promise to back up the corporations debt, it must be shown that (1) shareholder must be officer or director and (2) shareholder owns large percentage of shares.

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Procedural protections for sureties

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Special NC rule, At common law a surety has immediate and direct liability on the pricipal debtors debt. Once the debt comes due, the creditor can demand payment from the surety. The creditor does not have to first seek payment from the principal debtor and the creditor does not have to first foreclose on any collateral that has been given for the debt. The surety has the right to insist that the creditor first proceed against the debtor or against any collateral that has been given for the principal debt, the under NC law, the surety can avoid payment. Request must be in writing, sent by registered mail, creditor must commence action against the debtor or collater w/i 30 days after noitce, if the creditor fails to act, the surety is not automatically discharged, only to the extent of loss caused by delay.

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Subrogation

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The surety who pays is subrogated to all rights that the creditor had against the debtor and against third parties. This includes any mortgage or security interest that the creditor has in the debtors property. Surety can force creditor to go after collateral. If surety pays debt, surety can foreclose.

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Rights among co-sureties

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A paying surety who wants contribution must raise any defense that is common to all sureties but the paying surety is still entitled to contribution even if he or she failed to raise a defense that belongs either to paying surety. Common cases where there is a defense available to all of the sureties. Common cases where there is a defense available to all of the sureties (1) SOL ran on the debt (2) underlying contract is illegal contract (3) creditor is seller who sold goods to the debtor.

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Promissory note

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If there is a promissory note then art. 3 applies. Under art. 3 a discharge of the principal debtor by the creditor does not discharge the surety. Under Art. 3, the surety is still liable, but the surety retains its cause of action against the principal debtor. If there is no promissory note, the common law applies and at common law a discharge of the debtor discharges the surety.

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Impairment of Collateral

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Common law and Art. 3 rules are the same: there is a discharge of the surety to the extent of the impairment of the value of the collateral.

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General characteristics- personal property liens

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In general, by statute of NC, a person who provides storage or repair services for another party's personal property is entitled to a lien on that property to secure the payment of the charges for the storage or services. The lien is possessory. Once possession is voluntarily relinquished the lien is lost. In general, the personal property liens have priority over pre-existing art 9 security interests. Landlord lines and innkeeper liens are subordinate to a prior art 9 security interests.

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General service and storage lien

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the work must be performed pursuant to a contract and the work must be performed in the ordinary course of lienors business. The GSSL is of little value unless it is the true owner who brought the goods in for repair or storage. A thief cannot subject goods to a GSSL. Someone who is not an owner but has lawful possession can subject the goods to a lien buy the max amount is 100

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Details of the motor vehicle Lien

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As with GSSL, the work must be performed pursuant to contract and in the ordinary course of lienors business. There is no $100 limit on the amount of the lien when a mere lawful popssor subjects the motor vehicle lien.

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The rights of the purchaser at a personal property lien foreclosure sale

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The purchaser at a lien foreclosure sale gets all of the rights of the lien holder conudcting the sale. The purchaser will take priority over a preexisting art. 9 security interest if the lienholders claim has priority over the preexisitng art 9 security interest.

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Real property lien

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(1) Owners of real property, tenants, and buyers who have property under contract can subject property to a lien. Lien begins at the first furnishing of goods or services at work site. The lien must be filed within 120 days after the completion of work and suit for enforcement must be brought within 180 days of the completion.

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When can a sub get a lien upon the landowner's real estate?

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First tier subs have two potential claims of a lien on the real estate. One if the improper payment lien. The other is the subrogation lien. The subrogation lien arises because by statute, the first tie sub is subrogated to all rights that the general contractor has against the landowner. For a subrogation lien to come into play its must be true (1) that the first tier sub had not been paid and (2) also that the landowner has not paid the general contractor. The first tier sub is subrogated to the general contractor's right to assert a lien on real estate. Second tier subs can rarely claim a lien on the real estate itself. They can claim the improper payment lien, but it seldom arises because its consequences are so severe and thus prior parties typically are careful to avoid it.

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Tax Liens

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Judgement Liens

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Judgement liens are a remnant of the early common law. Increasingly the law finds itself trying to adapt an 18th centure concept to 21st century property and businsess structures.

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Attachement liens

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Attachment liens are not aviable in most litigation in NC. Special circumstnacces must be present before this lien is granted by a court.