LA BAR EXAM CODE III: SECURITY RIGHTS (SURETYSHIP, MORTGAGES, & PRIVILEGES) Flashcards
I. What are security rights? What type of transaction do they generally involve? What is the relationship of a security right to a principal obligation?
A security right is a legal mechanism to help a creditor collect on an obligation, (generally a money debt arising from a loan) by giving the creditor extra rights, either against the person other than the obligor, or in property belonging to the obligor or a third person. If the obligor defaults (i.e., fails to pay the debt), the accompanying security right gives the creditor ready access to another source of value to compensate for the unfulfilled obligation.
The obligor’s personal liability to the creditor is the principal obligation, which lays the foundation for all security rights. Any security right associated with the principal obligation is an accessory right or obligation, so security rights are generally enforceable only if the principal obligation is enforceable.
What are the types of security rights? What is important to remember on the exam?
Security rights allowing a debt to be enforced against a person other than the obligor are called personal security and are governed by the law of suretyship.
Security rights enforceable against property (belonging either to the obligor or to a third party) are called real security rights, and they come in three varieties: (i) mortgages – security rights that generally arise by agreement on immovables, (ii) privileges – security rights that arise by operation of law on movables or immovables, and (ii) security interests (security rights that arise by agreement on movables).
There are three issues that appear repeatedly in Security Rights essay questions: (i) whether a security right was created (i.e., confected), (ii) whether the security right is enforceable (i.e., perfected) against third parties, and (iii) what remedies a secured creditor has if the obligor fails to fulfill the obligation (i.e., defaults).
II. What is suretyship, what is its nature and how is it created? What is important to remember on the exam?
Suretyship is a conventional obligation (i.e, a contract) by which a third person, called the surety or guarantor, binds herself to a creditor to fulfill the obligations of another (i.e., the principal obligor) on the failure of the latter to do so. If the obligor defaults on the debts identified in the contract, the surety agrees to stand in the obligors place and pay the creditor. If the principal obligation is extinguished, the surety ship contract is unenforceable.
A surety can agree to be responsible for any lawful obligation undertaken by the obligor, including past obligations and future obligations (“continuing guarantees”).
Suretyship arises only by contract, and the contract must meet two formal requirements: It must be in writing, and it must be express.
The suretyship must meet the same basic requirements as for other conventional obligations (an act under private signature); that is, the writing must be signed by the surety.
Generally, the law requires that the surety’s promise be unambiguous with respect to (i) the surety’s undertaking personal liability and (ii) the obligation(s) for which the surety is undertaking that liability. Parole evidence is not permitted to establish surety liability.
Consult outline for ostensible suretyship.
What are creditor’s rights and surety’s defenses? What is important to remember on the exam?
Unless expressly agreed otherwise in the suretyship contract, the creditor may enforce its security rights and collect the principal obligor’s entire debt from any surety as soon as the debt is enforceable against the debtor.
A surety can assert four basic types of defenses against the creditor in response to a demand for payment. The first two operate identically for all sureties, while the last two depend on the nature of the suretyship obligation.
All four defenses are commonly waived in commercial suretyship contracts. In some situations, suretyship defenses may not be waived (particularly in consumer transactions), but proceed on the premise that these defenses may generally be validly waived.
The four defenses are: (i) defenses of principal obligor, (ii) remission a.k.a release of principal or accessory obligation, (iii) modification of obligation, and (iv) impairment of collateral security. DRMI
D: A surety generally can avoid payment on a guarantee by asserting the principal obligor’s defenses to enforcement of the principal obligation, such as duress and other vices of consent. This is because a surety is accessory to the principal obligation. Exceptions: The surety may not assert two defenses that would be available to the principal obligor: (i) lack of capacity and (i) discharge in bankruptcy.
R: Release of the principal obligor automatically releases all sureties. Release of a co-surety generally releases that surety’s virile share of the guaranteed obligation (i.e., an equal portion of the debt based on the number of sureties).
Each surety is liable for 100% of the obligation. If there were four sureties and one is released, the other three are released from a corresponding virile share (so they each remain liable for 75% of the original obligation).
M: A change in the terms of the principal obligation after the surety has guaranteed it can provide a defense to the surety.
I: An obligation may be simultaneously secured by a suretyship and a real security right (e.g., a mortgage or a security interest in movables). If a surety pays an obligation, she obtains the creditor’s right to recover the amount paid from the real security right. The creditor is obligated to protect the real security right, and his failure to do so can provide a defense to the surety.
Creditors must take certain actions to perfect their real security rights against the claims of third parties, generally by filing paperwork in a central registry. If the creditor fails to properly perfect a mortgage or security interest, real security rights might be lost to third parties.
Effect of Modification or Impairment – An ordinary suretyship is totally extinguished by any material modification or impairment of collateral, whereas a commercial suretyship is extinguished only to the extent that the modification or impairment has actually injured the surety. The creditor has the burden of proving the extent to which any modification or impairment has not injured the surety.
What are a surety’s rights against a principal obligor and co-sureties?
If the surety is forced to pay the guaranteed obligation to the creditor, the surety has two primary rights against the principal obligor: reimbursement and subrogation.
R: Because the surety has paid the principal obligor’s debt, the surety has the right to seek reimbursement for that payment from the principal obligor, so long as the debt was exigible (i.e., actually due and owing).
S: When a surety pays a creditor on the principal obligor’s debt, the surety purchases the right to step into the creditor’s shoes with respect to the principal obligor’s debt. In other words, the surety is subrogated to all of the rights, including other security rights, that the creditor could have asserted against the principal obligor.
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Like other solidary co-obligors, co-sureties have a right to collect contribution from their co-sureties to the extent that any one surety has paid more than her virile share of the obligation. If one of several co-sureties becomes insolvent and thus unable to contribute to another surety who pays the creditor, the insolvent surety’s share is reallocated to the others in equal shares unless modified by contract.
How are suretyships terminated?
Suretyship can cover specific and identified obligations or broadly defined obligations that might arise in the future. For suretyship covering specific obligations, extinction or unenforceability of the principal obligation renders the suretyship either extinct or unenforceable. But in a continuing guarantee, covering unspecified and perhaps unknown obligations arising in the future, the surety is not bound to guarantee every obligation that arises for the remainder of the principal obligor’s existence. Such guarantees can be terminated by providing notice to the creditor of the surety’s desire to terminate his responsibility for future obligations.
If the creditor receives notice of the death of the surety, that operates as notice that the surety’s estate will no longer be liable for obligations arising in the future.
III. What are mortgages? Who are the parties? What are the categories? What are the two types?
A mortgage gives the creditor a contingent right in immovable property. If the principal obligor defaults on the secured obligation, the creditor-mortgagee can have the immovable property seized and sold, with part or all of the proceeds to be distributed to the creditor in satisfaction of the secured obligation. Like all other security rights, mortgages are accessory to and dependent for their existence on a principal obligation.
Parties –
The person whose property rights are affected by a mortgage is called the mortgagor, and the creditor to whom the mortgagor grants security rights is called the mortgagee. The obligor on the secured obligation and the mortgagor are usually the same person. However, if a third party grants security rights in her immovable property to secure the obligor’s performance, the mortgagor is not personally liable on the principal obligation. He risks only losing the mortgaged property, not incurring any personal liability if the value of the property does not satisfy the obligation.
Mortgages fall into one of three categories, depending on the method of their creation and their scope: conventional, judicial, and legal.
Conventional mortgages are created by contract -generally called an “act of mortgage”-in which the mortgagor grants security rights in her specifically identified immovable property.
A judicial mortgage arises when a party who has obtained a judgment for the payment of money files a certified copy of the judgment in the mortgage records of any parish where the judgment debtor’s immovable property is located. A judicial mortgage automatically encumbers all of the judgment debtor’s present and future rights in immovable property located in the parish, though the effect of a judicial mortgage must be reestablished every 10 years.
A legal mortgage arises as a matter of law in certain limited circumstances.
Mortgages that confer rights in specifically identified immovable property (i.e., conventional mortgages) are called “special” mortgages. “General” mortgages, in contrast, automatically confer rights in all of the mortgagor’s immovable property-related rights anywhere in a defined geographic region, whether presently existing or arising in the future (i.e., legal and judicial mortgages).
What property is susceptible of mortgage?
Not only may absolute ownership of particular parcels of immovable property be mort-gaged, but also “lesser” property rights, such as usufruct, servitudes of right of use, and a lessee’s rights of quiet use and enjoyment. If movables become affixed to mortgaged immovable property so as to become component parts (i.e., fixtures) of the immovable property, a mortgage on the property automatically extends to component parts affixed to the property later.
What are the formalities for creation of conventional mortgages?
No special words are necessary to create a conventional mortgage, but it must meet the following four requirements: (i) writing, (ii) signed by mortgagor, (iii) value and describe secured obligation, (iv) describe immovable property. WSVD
W: To provide evidence of the transfer of such valuable rights, a mortgage must be evidenced by a writing that simply fulfills the basic form requirements of the law of conventional obligations (i.e., an act under private signature).
A simple act under private signature meets the basic requirements for a valid mortgage, but it can be enforced only through “ordinary” process. To be able to enforce the mortgage through the quicker and more convenient procedure of “executory” process, the mortgage should be in authentic form (i.e., signed by the mortgagor as well as by a notary and two witnesses in each other’s presence).
S: The writing need only be signed by the person transferring rights in immovable property (i.e., the mortgagor).
V: The mortgage must state the amount of the secured obligation.
This rule is easy to recognize in most mortgages, which simply state the amount borrowed plus a rate of accruing interest. But bar examiners like to ask about fluctuating lines of credit, which rise and fall as the borrower takes and then repays loans over time. When faced with a fluctuating line of credit, look for a specific maximum amount. If no maximum is stated, the mortgage is invalid.
D: A conventional mortgage must describe precisely the immovable property affected.
Simple reference to a municipal address is generally insufficient, and “legal descriptions” of property (referring to certain “quarters” of “sections,” and
“ranges” and/or plat maps on public file) are generally used.
How is a mortgage recorded or perfected?
If a mortgage complies with the four formalities described above, it is valid against the mortgagor, but more is required to make the mortgage effective as to third parties.
The mortgagor might subject the immovable property to more than one creditor’s mortgage rights, or the mortgagor might attempt to sell the property to a third party. To be effective against such parties, the mortgage must be filed for record in the proper public office to provide record notice to potential competing interest holders.
What is the rule to know about a mortgage’s initial recording?
Under the public records doctrine, a document establishing rights in immovable property is effective against third parties only when it is filed for registry in the proper records of the parish in which the immovable property is located. If two or more people claim rights in the same immovable property (e.g., as secured creditors or recent buyers), whoever properly filed first takes first precedence as to the value of the property.
What happens to a mortgage if lapsed? If reinscripted? What is important to know for the exam about these two subtopics?
The mortgage records are self-purging, and mortgages eventually lapse, becoming ineffective against third parties. The assumption is that the obligation probably has been satisfied by that point, so the mortgage has been extinguished. Thus, to be effective against third parties, (i) a mortgage must have been filed properly initially, and (ii) its effectiveness on the mortgage records must not have lapsed.
Effective Date - Lapse: Any mortgage is effective on the public records for at least 10 years after the date on the act of mortgage.
A mortgage is effective for longer if (i) the mortgage describes the maturity date (i.e., the due date) of the secured debt, either by a specific due date or in terms of a certain number of monthly payments; and (il) the maturity date is nine years or longer after the date of the act of mort-gage. If the mortgage document meets these two requirements, the mortgage is effective on the records for six years after the maturity date of the debt described in the mortgage.
If a mortgage is amended and refiled, the effective period of the mortgage is recalculated according to the new terms.
The lapse time period is measured according to the date of the mortgage, not the date of filing. A mortgage may be executed and dated long before the mortgagee decides to file it in the mortgage records.
Re: Reinscription –
To maintain the effectiveness of a recorded mortgage, the mortgagee must sign and file a notice of reinscription before lapse. This notice is generally nothing more than a letter that (i) states the name of the mortgagor, (i) states the recordation number or other information about the original filed mortgage, and (ill) declares the mortgage reinscribed. Such a notice extends the effectiveness of the mortgage for 10 more years from the date of filing of the notice.
Because a judicial mortgage is created when the judgment creditor of a money judgment files a certified copy of the judgment in the mortgage records, all judicial mortgages are effective against third parties for 10 years from the date of the judgment.
*A money judgment prescribes 10 years after the date on which it was rendered, so at about the same time that a judicial mortgage must be reinscribed, the money judgment must also be “revived” in a separate proceeding. Failure of the judgment creditor to take either action can impair or destroy the creditor-mortgagee’s security rights.
How are mortgage rights transferred?
If the original creditor-mortgagee transfers to another party the right to enforce an obligation secured by a mortgage, the new creditor automatically acquires all of the original creditor’s rights under the mortgage as well.
A buyer who files her act of sale in the conveyance records after a mortgagee properly filed a mortgage in the mortgage records takes the property subject to the mortgage. The new owner, who has not formally assumed liability on the principal obligation but whose property is subject to the creditor’s mortgage rights, is called a third possessor. If the original mortgagor defaults on the mortgage, the mortgage may foreclose against a third possessor.
How are mortgages extinct?
After a mortgage ceases to affect third parties, the recorder can be directed to cancel the filed mortgage on the records if the mortgage is not timely reinscribed or if the mortgagee or mortgagor requests cancellation.
A mortgage may become extinct in four ways: (i) extinction/destruction of mortgaged property, (ii) extinction of principal obligation, (iii) confusion, and (iv) termination. ED, EP, C, T
E/D: A mortgage cannot exist separate from the immovable property. If the collateral property is destroyed, the mortgage is extinguished.
E/P: If the principal obligation is extinguished (e.g., through prescription or full perfor-mance), the mortgage is consequently extinguished, as well.
C: If the mortgagee becomes the owner of the collateral, the qualities of mortgagee and owner become “confused” in one person, and the lesser interest-the mort-gage- is extinguished.
T: If the mortgage secures an ongoing, fluctuating line of credit or other variable debt, it can be terminated by written notice from the mortgagor to the mortgagee when all outstanding indebtedness has been paid and neither mortgagor nor mortgagee is bound to allow any more obligations to be incurred that might be secured by the mortgage.
What are multiple indebtedness mortgages?
A basic conventional mortgage can secure fluctuating future advances, so long as the mortgage states the maximum amount of secured debt that can be outstanding at any given time. This kind of conventional mortgage is called a multiple indebtedness mortgage (“MIM”). The priority date of a MIM is the day on which the mortgage is filed, without regard to the date on which value has been given. The mortgage remains valid against the mortgagor even if the borrower repays all outstanding loans. It remains effective against third parties so long as it is properly reinscribed.
