Deck 37: Security Devices

Question 1

What is the difference between a guaranty and suretyship in those states that retain a distinction between them?

Answer 1

The contract of suretyship or guaranty is an agreement where a party promises for being responsible for obligation, default, or debt of another person.
Suretyship is different from guaranty in many states on the as surety has coextensive liability with the principal debtor. Guaranty on the other hand has secondary obligation towards the principal debtor. Due to its secondary nature of obligation, the agreement of guaranty might not be execute at similar time or in the same financial instrument like the principal obligation.

Question 2

In order to secure $1.5 million in loans from Fifth Third Bank (Fifth), Odle, McGuire Shook (OMS) signed a security agreement giving Fifth a security interest in all its assets, including any deposit accounts it had with Fifth. Fifth perfected its security interest by filing a financing statement with the secretary of state. OMS defaulted on its loans but continued to conduct business, and Fifth honored checks that OMS drew on its account with Fifth. OMS also defaulted on a lease with People's National Bank (PNB), so PNB sued and obtained a judgment for over $60,000. To collect its judgment, PNB tried to attach any funds of OMS in accounts at Fifth. Fifth alleged that since it had perfected its security interest in OMS's accounts before PNB got a judgment against OMS, Fifth's security interest had priority over PNB's judgment lien. Did it?

Answer 2

Security Interest:
Under UCC 9-203 , the three requirements of a security interest are:
1. The creditor's possession of the collateral or a written security agreement,
2. the creditor's giving something of value to the debtor, and
3. the debtor's rights in the collateral.
Perfected Interest:
In order for a bank to have perfected its interest under UCC 9-301, 9-310(a), and 9-313(a) , it should have filed a financing statement with the appropriate government office if the collateral is business equipment.
Perfection is necessary for the bank to protect its interest from the claims of third parties. Once a security interest attaches, a transfer of possession of the collateral to the secured party can perfect the party's security interest without a filing UCC 9-310(b)(6); 9-313.
Legal Reasoning:
In Fifth Third Bank (Fifth) v. People's National Bank (PNB) , No. 49A02-0908-CV-753 (2010), the trial court found in favor of PNB with respect to the debtor priority.
The appellate court reversed and remanded with instructions because Fifth's security interest was automatically perfected by its control over the account and according to Indiana Law.
Therefore, Fifth's security interest HAD PRIORITY OVER PNB'S judgment.

Question 3

What remedy does a guarantor damaged by the failure to receive notice of default of the principal have?

Answer 3

A guarantor refers to the party which agrees to be liable for another party's obligation.
When a guarantor faces damages due to failure of receiving the notice then he can offset the damaged amount against the creditor's claim.

Question 4

In December, Lil' River Grill Inc. (LRG) entered into a five-year lease with Lawrenceville Properties. One part of the lease said its term lasted from the previous April. Another part, initialed by both parties, said it began the following May to June, and Lil' River had an option to terminate if not put in possession by then. It required the parties, after Lil' River gained possession, to execute a recordable document reciting the exact commencement date. Timothy Brown signed an unconditional guarantee of Lil' River's obligations under the lease. Four months after taking possession, Lil' River assigned the lease to LRG Group, and Brown signed as the "Personal Guarantor" of the assignor's obligations. The assignment stated that Lawrenceville and LRG could change or modify the lease in any way. The parties signed an amendment to the lease with new requirements by the lessee. Brown signed the amendment, which stated he would continue to guarantee the lease personally. Almost three years later, LRG defaulted on the lease. Lawrenceville sued Brown. He argued that the changes to the lease invalidated his guaranty. Did they?

Question 5

When does the right of contribution arise?

Question 6

Valley Bank and Trust Company provided financing to an automobile dealership to purchase cars. Valley had a security interest in the dealership's motor vehicle inventory and its proceeds. Valley perfected this interest by filing a financing statement with the secretary of state. Holyoke Community Federal Credit Union provided funding for three vehicles to customers of the dealership and filed security agreements to perfect its security interest in the vehicles. Valley discovered that the dealership sold those vehicles without remitting the proceeds to it. A lawsuit between Valley and Holyoke ensued. Whose security interest was superior?

Question 7

Why would a surety want to exercise the right of exoneration?

Question 8

As president of Leroy Arts and Products Inc., Wioletta Plociennik signed a two-year building lease with O'Brien Brothers' Partnership, LLP. It contained no provision for extension or renewal and stated, "This lease contains the entire agreement between the parties." It stated the commencement date and that it ended two years later. Plociennik also signed a separate document that was a personal guaranty to pay O'Brien "the monthly terms as agreed to in an executed lease dated [the lease's date] between [Leroy] (Lessee) and O'Brien Brothers Partnership (Lessor), the terms and conditions as set forth in said lease." Two years later, they executed a two-year lease agreement that increased the space rented and set new rent and common area maintenance payments. Two years after that, they signed a third two-year lease of the same space but with increased rent. After Leroy began missing rent payments, Plociennik said she was no longer obligated on the guaranty, so O'Brien sued her. Did the guaranty cover the third lease?

Question 9

Under what circumstances will the creditor's extension of the time of the debt discharge a surety or guarantor?

Question 10

To buy a car, Rubena Session signed a forty-eight-month retail installment sales contract to National Auto Sales Inc., with Shameka Grandberry as cosigner. National assigned the contract to Jefferson Loan Co. Inc. Sessions defaulted after two payments. Jefferson repossessed the car. Although it sold the credit life and credit disability insurance required by the forty-eight-month contract, Jefferson failed to save the unearned premiums by cancelling the policies even though the contract provided an assignment of "unearned premiums" to its holder. Jefferson sent a notice to Session and Grandberry at Session's address, stating that it had repossessed the car. It said, "[]o redeem your vehicle, you will have to pay the entire amount owed... You may purchase your vehicle back... before it is sold. Information on the sale date will be supplied to you upon request." Jefferson returned the car to National, which was to make the remaining payments. When the last payment was made, Jefferson would assign the title to National, which could then resell the car. National made only five payments. Although Jefferson knew that National had stopped making payments, it never attempted to retrieve the car. National fraudulently obtained a duplicate motor vehicle title, sold the car, and kept the money. Jefferson learned that the car had been unlawfully sold by National five years later, when it received copies of the car's title documents from Grandberry during litigation. Jefferson eventually sued Session unsuccessfully, so four years after Grandberry cosigned the contract, it sued her. The complaint did not state that Jefferson had repossessed the car. Grandberry alleged Jefferson had not disposed of the car in a commercially reasonable manner. Had it?

Question 11

How long must collateral be held for the benefit of a surety?

Question 12

How may a buyer (debtor) who wants to determine the amount owed get such a determination from the seller (creditor)?

Question 13

How is a security interest perfected in: a. inventory and equipment, b. fixtures, and c. consumer goods?

Question 14

Farm Credit Services of America, PCA (Farm Credit) made a loan to Bryan Stec which was secured by Stec's corn crop. Farm Credit filed the appropriate statement with the applicable authority to perfect its interest. Stec had a contract to deliver the corn to Cargill, Inc. (Cargill). Stec delivered a portion of the crop to Cargill, but then filed for bankruptcy. Farm Credit, as secured creditor, sold Stec's remain-ing crop, but not for enough to repay the loan plus costs. Farm Credit sued Cargill for return of the corn. Did Farm Credit have the right to repossess the corn?

Question 15

When a seller repossesses collateral after a default, what may the seller do with it?

Question 16

What is the difference between a paid surety and an accommodation surety?

Question 17

Brown's Roofing, Inc. (Brown) entered into surety bond agreements with International Fidelity Insurance Company (IFIC) to guarantee Brown's contributions to trust funds operated by the Local Union No. 30 of the United Union of Roofers, Waterproofers and Allied Workers (Union), pursuant to a collective bargaining agreement (CBA) between Brown and Union. The bond agreements provided that the Union was to notify IFIC within one year of Brown's default in payment. IFIC would then pay the amounts due under the CBA. Brown became delinquent on its payments, and the Union sued Brown for payment. After a few months, Brown and the Union entered into a settlement agreement, whereby Brown was required to pay the then-amount of the delinquency under the CBA. IFIC received no notice from the Union of any of the proceedings. Approximately one year later, Brown failed to make payments under the settlement agreement. This time, more than a year after the Union sued Brown, the Union notified IFIC that it was making a claim on the surety bond. Was IFIC still liable for payment under the terms of the surety bond?