Commercial Law (Mgmt 348) Professor Charles H. Smith Creditors’ Rights and Remedies (Chapter 28) Spring 2009 Professor Charles H. Smith Creditors’ Rights and Remedies (Chapter 28) Spring 2009

Introduction to Creditors’ Rights and Remedies What should a creditor do if a debt is unpaid (other than or in addition to suing the debtor)? Many legal procedures – both judicial and non-judicial – pertain to debt collection. What should a creditor do if a debt is unpaid (other than or in addition to suing the debtor)? Many legal procedures – both judicial and non-judicial – pertain to debt collection.

Introduction to Liens A lien is a claim against a debtor’s property that must be paid before that property or its proceeds can be available to satisfy other creditors’ claims. Three basic types of liens –Mechanic’s lien. –Artisan’s lien. –Judicial lien. A lien is a claim against a debtor’s property that must be paid before that property or its proceeds can be available to satisfy other creditors’ claims. Three basic types of liens –Mechanic’s lien. –Artisan’s lien. –Judicial lien.

Introduction to Liens cont. A lien is a legitimate way of protecting a claim based on a debt; in other words, the lien can preserve the creditor’s right to be paid. However, liens can also serve as leverage in settlement negotiations and can force the debtor to quickly satisfy the claim in a way that is favorable to the creditor. Therefore, ability to obtain lien can encourage quick and favorable payment/settlement; inability to obtain lien may discourage creditor from further pursuing the claim. A lien is a legitimate way of protecting a claim based on a debt; in other words, the lien can preserve the creditor’s right to be paid. However, liens can also serve as leverage in settlement negotiations and can force the debtor to quickly satisfy the claim in a way that is favorable to the creditor. Therefore, ability to obtain lien can encourage quick and favorable payment/settlement; inability to obtain lien may discourage creditor from further pursuing the claim.

Mechanic’s Lien Scenario – contractor provides labor, services or materials for purpose of making improvements to real property but property owner does not pay as agreed. If this happens, contractor can place mechanic’s lien on the real property; if debt still not paid, then property can be sold to satisfy the debt. Various procedures apply, such as notice of the sale and “waiting period” between recording of lien and sale of property. Can force quick and favorable resolution of debt since lien can impede sale or refinance of the property. Scenario – contractor provides labor, services or materials for purpose of making improvements to real property but property owner does not pay as agreed. If this happens, contractor can place mechanic’s lien on the real property; if debt still not paid, then property can be sold to satisfy the debt. Various procedures apply, such as notice of the sale and “waiting period” between recording of lien and sale of property. Can force quick and favorable resolution of debt since lien can impede sale or refinance of the property.

Artisan’s Lien Scenario – contract between provider of labor and materials regarding personal property and the property owner, who does not pay as agreed. Provider can maintain possession of the property until payment made so property owner can be forced to pay provider in order to regain possession; lien exists only as long as provider has possession. See Civil Code §§ (possessory lien for services, repairs, etc.) and §§ (jeweler’s lien). Scenario – contract between provider of labor and materials regarding personal property and the property owner, who does not pay as agreed. Provider can maintain possession of the property until payment made so property owner can be forced to pay provider in order to regain possession; lien exists only as long as provider has possession. See Civil Code §§ (possessory lien for services, repairs, etc.) and §§ (jeweler’s lien).

Judicial Lien – Writ of Attachment Scenario – debtor owes money to creditor due to business- related claim. After filing lawsuit, creditor can apply for writ of attachment which will permit sheriff to seize debtor’s personal property pending judgment in favor of creditor; then, property can be sold to satisfy judgment for creditor against debtor. Due process applies, including notice to debtor and opportunity for debtor to be heard before writ of attachment issues. Can force quick and favorable resolution since (1) debtor’s property seized and (2) preliminary decision that creditor’s claim has “probable validity.” (C.C.P. § (a)(2).) Scenario – debtor owes money to creditor due to business- related claim. After filing lawsuit, creditor can apply for writ of attachment which will permit sheriff to seize debtor’s personal property pending judgment in favor of creditor; then, property can be sold to satisfy judgment for creditor against debtor. Due process applies, including notice to debtor and opportunity for debtor to be heard before writ of attachment issues. Can force quick and favorable resolution since (1) debtor’s property seized and (2) preliminary decision that creditor’s claim has “probable validity.” (C.C.P. § (a)(2).)

Limits on Attachments C.C.P. § places several limits on attachments, including –Claim must be for “fixed or readily ascertainable amount” of money based on contract. –Claim cannot be secured by interest in real property. –If defendant is a person, claim must “arise[] out of... a trade, business, or profession” and cannot be “primarily for personal, family, or household purposes.” C.C.P. § places several limits on attachments, including –Claim must be for “fixed or readily ascertainable amount” of money based on contract. –Claim cannot be secured by interest in real property. –If defendant is a person, claim must “arise[] out of... a trade, business, or profession” and cannot be “primarily for personal, family, or household purposes.”

Attachment Application Attachment application must be under oath and include the following statements under C.C.P. § (a)-(e) –Attachment sought to secure recovery on claim on which attachment may be issued. –Amount to be secured by the attachment. –Attachment not being sought for purpose other than recovery on claim on which attachment is based. –Claim not discharged or stayed under bankruptcy law. –Description of property to be attached; vague description OK for businesses, but description “shall be reasonably adequate to permit the defendant to identify the specific property sought to be attached.” Attachment application must be under oath and include the following statements under C.C.P. § (a)-(e) –Attachment sought to secure recovery on claim on which attachment may be issued. –Amount to be secured by the attachment. –Attachment not being sought for purpose other than recovery on claim on which attachment is based. –Claim not discharged or stayed under bankruptcy law. –Description of property to be attached; vague description OK for businesses, but description “shall be reasonably adequate to permit the defendant to identify the specific property sought to be attached.”

Judicial Lien – Writ of Execution Scenario – judgment has been entered but judgment debtor has not paid the judgment. Judgment creditor obtains writ of execution in order to be able to have judgment debtor’s property seized by sheriff; property can include money from bank accounts or personal property such as vehicles, jewelry or other valuables. Can result in quick and favorable payment of money owed according to judgment if judgment debtor does not want certain property seized. Scenario – judgment has been entered but judgment debtor has not paid the judgment. Judgment creditor obtains writ of execution in order to be able to have judgment debtor’s property seized by sheriff; property can include money from bank accounts or personal property such as vehicles, jewelry or other valuables. Can result in quick and favorable payment of money owed according to judgment if judgment debtor does not want certain property seized.

Garnishment of Wages Scenario – judgment has been entered but judgment debtor has not paid the judgment. Judgment creditor obtains garnishment order to serve on judgment debtor’s employer, who must then pay certain percentage of judgment debtor’s wages to judgment creditor. Can result in quick and favorable payment of money owed according to judgment if judgment debtor does not want (1) involuntary payroll deductions and (2) employer to know about the adverse judgment. Scenario – judgment has been entered but judgment debtor has not paid the judgment. Judgment creditor obtains garnishment order to serve on judgment debtor’s employer, who must then pay certain percentage of judgment debtor’s wages to judgment creditor. Can result in quick and favorable payment of money owed according to judgment if judgment debtor does not want (1) involuntary payroll deductions and (2) employer to know about the adverse judgment.

Suretyship and Guaranty Scenario – lender may want to require someone in addition to the borrower to be responsible for repaying a loan; examples include –Person with bad credit wants to obtain loan; person with good credit co-signs so borrower can qualify for loan or obtain loan with better terms. –Corporation wants to obtain loan; lender requires personal guaranty of corporate shareholder(s) or officer(s). Scenario – lender may want to require someone in addition to the borrower to be responsible for repaying a loan; examples include –Person with bad credit wants to obtain loan; person with good credit co-signs so borrower can qualify for loan or obtain loan with better terms. –Corporation wants to obtain loan; lender requires personal guaranty of corporate shareholder(s) or officer(s).

Suretyship and Guaranty cont. Suretyship – promise made by 3 rd party to loan to be primarily responsible to repay loan; creditor can take steps to collect from surety without making any attempt to collect from debtor. Guaranty – promise made by 3 rd party to loan to be secondarily responsible to repay loan; creditor can take steps to collect from guarantor only after debtor’s default or at least only after attempting to collect from debtor. But, most documents entitled “guaranty” specify that creditor does not have to make any attempt to collect from debtor before attempting to collect from the “guarantor.” Suretyship – promise made by 3 rd party to loan to be primarily responsible to repay loan; creditor can take steps to collect from surety without making any attempt to collect from debtor. Guaranty – promise made by 3 rd party to loan to be secondarily responsible to repay loan; creditor can take steps to collect from guarantor only after debtor’s default or at least only after attempting to collect from debtor. But, most documents entitled “guaranty” specify that creditor does not have to make any attempt to collect from debtor before attempting to collect from the “guarantor.”

Protection for Debtors Generally, any property owned by the debtor can be the subject of lien obtained by the creditor. But, various statutes afford exemptions as to certain types of property, such as –Real property – homestead exemption of $50, ,000 (C.C.P. § ). –Personal property – $2,300 exemption for vehicles (C.C.P. § (a)). Generally, any property owned by the debtor can be the subject of lien obtained by the creditor. But, various statutes afford exemptions as to certain types of property, such as –Real property – homestead exemption of $50, ,000 (C.C.P. § ). –Personal property – $2,300 exemption for vehicles (C.C.P. § (a)).

Creditors’ Rights and Remedies – Case Studies Case Problem 28-1 (page 583) – artisan’s lien. Case Problem 28-9 (pages ) – attachment. Indiana Surgical Specialists v. Griffin, 667 N.E.2d 260 (Ind. App. 2007) (pages ); Case Problem 28-6 (page 584) – garnishment. Case Problem 28-4 (page 584) – homestead exemption. JSV, Inc. v. Hene Meat Co., Inc., 794 N.E.2d 555 (Ind. App. 2003) (page 580) – guaranty. Case Problem 28-1 (page 583) – artisan’s lien. Case Problem 28-9 (pages ) – attachment. Indiana Surgical Specialists v. Griffin, 667 N.E.2d 260 (Ind. App. 2007) (pages ); Case Problem 28-6 (page 584) – garnishment. Case Problem 28-4 (page 584) – homestead exemption. JSV, Inc. v. Hene Meat Co., Inc., 794 N.E.2d 555 (Ind. App. 2003) (page 580) – guaranty.