MORTGAGES

MORTGAGES

Prof. Clark Johnson – Fall 2002



1) SECURED TRANSACTIONS

a) WHAT IS A SECURED TRANSACTION?

i) A secured transaction is any transaction, which provides one or more avenues of collection in

addition to the underlying obligation of the debt.

ii) Examples:

(1) Exam Question: I borrow money from you and you don’t pay me back. You can sue me

as your only remedy. You have no other avenues for collection. Therefore this is not a

secured transaction. To avoid going to court, your only remedy is to get a security. You

say to A, ‚I’ll loan you the money and I’ll take you watch until you pay me back.‛ The

watch is the rest of the pledge. Delivery with the intent to secure. At common law, if A

doesn’t pay B, B comes the owner of the watch on the day the debt is due. Under Art. 9, B

has to sell the watch and anything goes to A and if it doesn’t cover the debt then B can sue

for the rest of the money. This is a secured transaction b/c there is more than one avenue

of collection.

b) TYPES OF SECURED TRANSACTIONS – HANDOUT A

i) Suretyship

(1) A surety is an obligation of another person (or from or out of another person’s asset) to

pay the debt of the principal obligor.

(2) A suretyship may be consensual or it can arise in equity.

(3) This is distinguished from the other types of secured transactions because it does not

necessarily involve as asset; however, it may involve an asset.

(a) HYPO: B secures A’s note with a mortgage on A’s land. This is not a suretyship.

(4) Test: ‚Who ought to pay?‛ The other party is the surety.

(5) There is a differential in the duty to pay.

(a) As between the two, the principal debtor has the greater duty to pay.

(6) Examples:

(a) Hypo: A goes to the bank and the bank won’t loan him a dime. However, if B co-

signs the note, the bank will loan A the money. B signs as a surety and A signs as the

maker. The money is loaned to A. Is this a secured transaction?

(i) This is a secured transaction b/c there is more than one avenue of collection. There

is a contract theory. It is not a mortgage b/c land is not involved. It is not an Art. 9

security contract because it does not involve personalty. It cannot be a statutory

lien because there is no lawsuit. Therefore, it must be a suretyship.

(b) Hypo: Rich lawyer wants to buy a piece of property at $5M, but they will want $15M.

SO the lawyer hires someone to go in as an undisclosed agent. You make your deal

with the agent and the agent signs the agreement to purchase and the closing is set.

The principal then backs. Is there a suretyship?

(i) Yes, principal is principal debtor and ought to pay. Agent is surety.

ii) Mortgage

(1) A mortgage is a power of sale of realty on a condition subsequent.

(a) Typically the condition subsequent is the failure to repay a debt when it comes due.

(2) This is present, conditional, but limited property interest in the asset to secure the

performance of some obligation.

(a) The obligation is typically repayment of a money obligation.

(3) It creates an interest in property known as a lien.

(4) It is property interest because.

(a) Upon a condition subsequent (default)

(b) The lien holder (creditor, mortgagee)

(c) May sell the security (the land that is subject to the mortgage or lien)

(d) To satisfy the debt (one avenue of collection)

iii) Article 9

(1) This is similar to mortgages, but the type of assets standing as security is personalty or all

assets other than land.

(2) The security is typically known as collateral.

(3) Other assets can include:

(a) Stock

(b) Fixtures

(c) Notes

(d) Goods

(e) Inventory

(f) Equipment

(4) Statutory Lien

(a) A statutory line is a lien arising solely by force of statute upon specified circumstances

or conditions, but does not include any lien provided by or dependent upon

agreement to give security.

(b) The creditor with a right to a statutory lien typically needs only to make a demand to

collect for the lien to come into effect or file a document of intent to claim a lien, or

retain possession of personalty delivered to the creditor for some purpose.

(c) The lien in effect arises by operation of law on a condition precedent under given facts

where the law says a lien should exist to protect certain creditors.

(d) The statutory lien is designed and intended to protect special or privileged classes of

creditors who are thought to fairly need special protection in assuring payments due

to them.

(e) The lien arises under conditions where the law says it should and does exist. No

consent or grant of lien is required.

(f) Examples of statutory liens

(i) Government tax liens

1. Government tax lien

a. If it the taxes are unpaid, the taxpayer’s real or personal property may be

liened by the gov’t merely by a demand to pay a determined amount of

tax, and the taxpayer’s assets can be seized and auctioned off at a public

sale to pay the taxes owed.

2. Mechanic’s Lien

a. Certain improvers of real property may file a claim of lien and have to

right to sell the real estate to pay for labor and materials if not paid by their

debtors.

3. Garagekeeper’s lien

a. Repairman’s right to keep possession of repaired personalty until it is paid

and takes priority over an earlier Art. 9 secured lien so long as the

repairman retains possession.

(5) Procedural Lien

(a) This is a lien on the judgment debtor’s assets in favor of his judgment creditor.

(b) When judgment has been entered in a civil case, and the party liable for the judgment

fails to pay it, the judgment creditor may claim or take a lien against the assets of the

party liable, and give notice that the property is subject to sale in satisfaction of the

judgment.

(c) The judgment creditor may enforce the lien by having the sheriff actually or

constructively seize the lawsuit for money.

(d) There are certain limitations on this‛

(i) Law of exemptions

1. Some assets are saved by statute, such as the family bible, shotgun, certain

clothing, a homestead exemption (value limits)

(ii) The debtor’s personal property ordinarily must be exhausted prior to selling his

real estate.

2) RECORDING ACT

a) MICHIGAN’S RECORDING ACT

i) Race Notice Statute

ii) Statute – MCLA 565.29

(1) Every conveyance of real estate within the state hereafter made, which shall not be

recorded as provided in this chapter, shall be void as against any subsequent purchaser in

good faith and for a valuable consideration, of the same real estate or any portion thereof,

whose conveyance is first duly recorded. The fact that such the first recorded conveyance

is in the form or contains the terms of a deed of quit-claim and release shall not affect the

question of good faith of such subsequent purchaser, or be of itself notice to him of any

recorded conveyance of the same real estate or any part thereof.

iii) Deeds recorded by a BFP cuts off prior latent interests and prior unrecorded claims.

iv) Prior recorded mortgages subordinate latent interests

(1) This becomes significant if each mortgage is worth the value of the property because they

both might not get paid.

(2) Recorded mortgages subordinate prior unrecorded interests.

v) In establishing the state of the title, be sure to mention everyone.

vi) Examples:

(1) HYPO  O deeds BA to both A and B. They meet on the street corner on their way to

record the deed. B records first. (They are both BFPs) What is the state of the title?

(a) Fee simple in B

(2) HYPO  O gives a mortgage to A, and then gives a mortgage to B. They meet on the

street corner prior to recording. B records first. What is the state of the title?

(a) Fee simple in O, subject to B’s first mortgage, subject to A’s second mortgage.

(3) HYPO  O mortgages to A and then gives a mortgage to B for life, then to C and his

heirs. What is the state of the title?

(a) O has fee simple. B has legal first mortgage and an equitable mortgage in A.

b) BFP

i) Must give value

(1) In the case of a mortgage, value is the amount of the loan or the value of the property,

which ever is less.

(2) If there is a mortgage then there is always value.

(3) If there is no mortgage, the there is no value.

ii) In good faith

(1) Example: B cannot have taken the deed in good faith if O had said ‚you better record this

quick because I gave a deed to A as well.‛

(2) If value is not given, then it is a fraudulent conveyance.

(a) HYPO  A owns BA and he suffered a big judgment. He goes to B and tells him to

take a mortgage on it. It makes it look like it has no value, so they try to hide the asset

by liening it economically to death. This is not good faith, even if the money was

loaned. It is fraud.

iii) Without Notice (inquiry notice)

(1) Understand the difference between notice and knowledge

(a) Notice is a function of record

(b) Knowledge is function of mind

(2) This really means without knowledge of a latent interest

(3) You have constructive notice of what you would have discovered had you inquired.

(a) Example: If you were to buy Johnson’s house without knowledge of a prior latent

interest, you have notice, b/c you are bound by anything that you would have found

had you looked.

(4) Elements for inquiry notice:

(a) Any circumstance

(b) That would cause the reasonably

(c) To inquire as to

(d) Those circumstances that seem to conflict with record title,

(e) And that he is charged with notice of,

(f) Everything he would have discovered had he asked,

(g) Beyond the words of the seller.

iv) Knowledge

(1) Function of the mind

(2) Possession or in the presence of information.

v) Being a BFP helps to keep you out of jail

(1) Makes you eligible for the recording acts

(2) You take ahead of mortgages free of deeds from unrecorded interests.

c) Is a mortgage a BFP?

i) Absolutely. They are taking something of value, the debt, they have done so presumably in

good faith and they have not knowledge of unrecorded interests.

d) BASIC PROPERTY PROBLEMS

i) What is the state of the title?

(1) A  B for life, then to C and his heirs.

(a) A has nothing

(b) B has a life estate

(c) C has a vested remainder in FSA

(2) A  B for life, then to C and his heirs, if C survives B.

(a) C has contingent remainder

(b) A has a reversionary interest subject to divestment

(c) B as a life estate

(3) A  B for life, then to C and his heirs if C survives D

(a) D is a measuring life.

(b) C has a contingent remainder (life of another)

(c) A has a reversion subject to divestment.

(d) B has a life estate.

(4) A  B life, then to C and his heirs if C survives D, then to D and is heirs.

(a) A has no interest because the gift over to D eliminates his reversion.

(b) B has a vested life estate

(c) C and D have alternate contingent remainders

(5) O  A for life, then to B if B survives C

(a) A has a life estate

(b) B has a contingent remainder

(c) O has a reversion subject to divestment

(6) O  A for life, then to B for life

(a) O has a reversion

(b) A has a vested life estate

(c) B has a life estate

3) SURETYSHIP

a) BASICS

i) An obligation of another person to ‘pay the debt of the principal debtor.’

ii) Surety may either be another person or ‚form or out of another’s assets‛

iii) May be consensual or arise in equity

iv) Things to remember in analyzing suretyship problems:

(1) There must be at least three parties.

(a) If you see A and B with several mortgages, there can’t be a suretyship b/c they are the

only persons involved.

(2) You have to find there is a secured transaction first, then three parties interested in the

transaction, and then a differential in their obligation to pay.

(3) If there is suretyship, it always existed from they very start of the transaction. All you

need is a situation where someone who shouldn’t have to pay might end up having to

pay from the beginning.

b) BASIC PROBLEM

i) X and Y owe money to Z

(1) Is this a secured transaction?

(a) Yes b/c there is more than one avenue of collection. Therefore Z is a secured creditor.

(2) Is there a suretyship?

(a) Whoever originally got the loan, ought to pay.

(b) The principal is the one who ought to pay

(c) The surety is the one who must pay.

(3) Assume that X and Y borrowed the money jointly.

(a) Is there a secured transaction?

(i) Yes because there is more than one avenue of collection.

(b) Is there a suretyship?

(i) Look at the relative duties to determine who ought to pay.

1. They both ought to pay

(ii) How much ought they pay?

1. They should each pay 50%

c) ENTIRETIES PROPERTY

i) EXAM QUESTION: Why do banks who are secured require a spouse to co-sign?

(1) To expose the entireties assets.

d) DIFFERENT THEORIES OF SURETYSHIP

i) Partnerships

(1) HYPO  A, B, and C are partners. A decides to retire. The partnership has $9M is assets

and $6M in liabilities. When A retires should be paid his net worth in the firm of $1M. A

retires. Is there any suretyship?

(a) Yes there is a suretyship b/c as between those multiple receptacles to payment, B and

C ought to pay the partnership creditors.

(b) As between the retired partners and the continuing partners, the continuing partners

have a higher obligation to pay.

(2) Partners are personally and equally liable for all partnership obligations.

(3) You liability continues even after death, even though there is a finding that you have been

paid your fair share.

ii) Dower

(1) H, single man, owns BA free and clear. H marries W. Later, H decides to borrow $ and

he wants a loan. He uses BA for collateral. W has a dower interest in BA (1/3 life estate in

BA). The bank wants a subordination agreement from W, so that W can’t come in ahead

of Bank if they have to foreclose. W goes in to release her interest. Is there a suretyship?

(a) Yes

(b) The creditor is the bank and they have two avenues of collection.

(i) H on contract theory

(ii) Land on property theory

(c) H owns the land and if you give a mortgage there is no suretyship. But if W is

involved, then you have the husband and the dower interest.

(d) As between the husband and the dower interest, the husband ought to pay because he

got the money. W’s dower interest can be sacrificed to pay the loan.

(2) Construction Contracts

(a) There is a bi-lateral K for installment payments for bilateral performance. When the

arachitect signs that 20% of the building is completed, the owner pays 10% and owns

10% of the building. To facilitate the project, the general contractor goes to the bank

and borrows money. The bank loans the general the money to initiate the project on

his credit. The subcontractors are paid from the loan money. The owner will usually

ask for a performance bond or a payment bond. This is the often referred to as the

surety. The surety gets a fee for a premium to make a promise to the owner that is the

general doesn’t pay the subcontractor’s the surety will. The subcontractors have the

right to sell the project if they go unpaid.

(3) Know the following diagram:



Subcontractors



Installment Payments Loan $



General Contractors

Owner Bank

Bilateral performance Security interest in O’s contract







Performance payment Bond



e) SURETYSHIP EXAMPLES

i) Two law students decide to go to FL for spring break. The one as a BMW and the other

works in the bagel factory. The owner of the BMW is in the back seat, asleep, and the other

kid is driving. He is going 90mh and hits Grandma Moses. Her family brings a lawsuit

against the owner of the car. Is their any suretyship?

(1) Is there a secured transaction?

(a) There is a secured transaction b/c there is two avenues of collection.

(2) Is there one who ought to pay and the other should pay because they both would be

potentially liable to the estate?

(a) The owner is liable under the liability statute and the driver is liable on a negligence

theory.

(3) Between the two, is there any differential in the duty to pay?

(a) Yes, the driver should have the duty to pay because the owner is the most innocent of

the two.

(4) This is a classic suretyship example, where the driver is the principal and the owner is the

surety.

ii) EXAM QUESTION: A mortgages BA to B, who records. A then conveys BA to C by deed in

return for value. (Note, there is not a BFP or recording act issue here because C takes subject

to B’s mortgage since B recorded his mortgage.) Is there a suretyship?

(1) There are two avenues of collection because the bank can collect from A on a contract

theory and from the land on a property theory. There are three people involved, A, B,

and C.

(2) Since the bank has two avenues of collection, is there a differential in who ought to pay, as

between A and the land in the hands of C, the creditor?

(a) It depends on how much C paid A for the land. He could have paid the fair market

value or the equitable value.

(b) Typically you buy mortgaged property, you will pay the equitable value in

anticipation that you will pay off the mortgage.

(c) If C paid A the equitable value:

(i) The principal is the land (C is in the position of the principal b/c the land he holds

is subject to a lien that he ought to pay.)

(ii) If C pays A $50k and the fair market value is $100k

1. A is whole, but he is still liable on his K with B. Between A and C, C ought to

pay off the mortgage so that he is exactly where he belongs.

iii) EXAM QUESTION: C pays fair market value ($100,000) to A for property encumbered by a

$40,000 lien. Is there a suretyship?

(1) There are two avenues of collection b/c the bank can collect from A on a contracts theory

or from the land on a property theory.

(2) Since C paid the fair market value for BA, A ought to pay the lien.

(3) A is the principal and the land is the surety.

iv) HYPO  If O owns BA and mortgages it to A and A records. O then gives a mortgage to B

for BA and B records. B forecloses and sells to C. What is the state of the title?

(1) B’s mortgage is a second mortgage.

(2) FSA in O, subject to A’s first legal mortgage, subject to B’s equitable mortgage. (prior to

foreclosure sale)

(3) Once B forecloses, then C (purchaser at the foreclosure sale) has a fee simple absolute in

BA subject to A’s first mortgage.

(a) B is the junior lien, so the purchaser at the foreclosure sale takes subject to any senior

liens.

(4) If A didn’t record, and C is a BFP, then the state of the title after the foreclosure sale is FSA

in C. This is true even if B knew of A’s latent interest.

(a) A’s recourse would be to sue O on the note. He can also sue his attorney for the

amount of the debt that he couldn’t collect, and if he collects then there is no

malpractice case against the lawyer for a failure to record.

v) HYPO  A and B are partners. There is no suretyship b/c there are no debts. A month later

we contract for some supplies. There is now a suretyship. The creditor can collect from the

assets of the firm, A’s assets, or B’s assets. As between A and B, if the firm doesn’t have the

assets to pay, there is a suretyship because we only ought to pay ½ of the firm’s debt. We are

sureties to the extent of contribution.

vi) EXAM QUESTION: O holds BA in FSA. O gives a first mortgage to A who records and a

second mortgage to A who records. Suretyship?

(1) If there is a second mortgage to A, there can’t be a suretyship b/c only A and O are

involved.

vii) Can property be a surety? Principal?

(1) HYPO A is indebted to B and C secured that debt with a mortgage on his BA. Is there a

secured transction? Suretyship?

(a) Yes b/c there is more than one avenue for collection. A on a contract theory and BA

on a property theory.

(b) There is suretyship here b/c as between A and BA, A ought to pay. This is because he

got the benefit of the loan. A is the principal and C is in the position of the surety b/c

he owns the property that may be subject to foreclosure.

(2) HYPO  H owns BA and is a single man (no entities or dower). H gets married to W. At

that point in time, W has a dower interst in the land by operation of law at that moment.

By virtue of marriage, W gets a property interest in BA. H wants bank to loan him

money. The bank wants W to come in and subordinate her dower interest and the bank

loans H the money. Is there a secured transaction? Suretyship?

(a) Yes. Claim against H on contract theory and the land and W’s dower interest upon

default. There are three people involved.

(i) DOWER IS THE SURETY, NOT THE WIFE

(b) There is suretyship. The surety is putting up the surety’s interest in BA, W’s dower.

The dower is viewed as the surety and H is the principal. As between H and the

dower, the husband ought to pay.

(3) EXAM QUESTION: A mortgages BA to B in exchange to secure a loan of money. A gives

another mortgage to B in exchange for a loan of money. Is there any suretyship?

(a) No. There are only two parties involved and for a suretyship at least three people

must be involved.

f) RIGHTS OF CREDITORS

i) The creditor has the unequivocal right to collect from the principal or the surety in full. He

can go right to the surety and sue, while ignoring the principal debtor.

(1) Example: If the creditor has a co-signature on a note representing the loan of money

made to the principal debtor. He can sure the surety on the note or on the contract, same

as with the surety.

ii) In some cases, there is more than one surety.

(1) Example: H&H have a new widget C. H&H sign on behalf of the C and personally. The

bank has their wives sign. This is b/c of entireties law. The entireties claims are exempt

from the creditor is the mortgage is only signed by one spouse.

iii) The secured creditor’s right is to simply be able to proceed against whatever receptacle of

collection exists in the transaction upon default. The secured creditor may look first to

sureties, or its lien rights, or just the debtor.

g) RIGHTS OF SURETIES

i) Exoneration

(1) At maturity of the obligation, the surety may bring an equitable action to compel the

principal to pay the debt and thereby exonerate himself (the surety) from liability and

loss.

(2) It is a equitable proceeding.

(3) When the principal debtor defaults, the surety’s right to bring an action in exoneration

then matures.

(4) Rationale for Exoneration:

(a) The principal may be in financial difficulty, but is nevertheless presently collectible. If

the creditor allows time to pass, the principal debtor may become more or completely

uncollectable. As a result, the surety is give the right to exoneration immediately

upon default so he can get at the principal debtor’s assets fast.

(5) The surety does not have the right to compel the creditor to proceed against the principal

debtor.

(6) Exceptions:

(a) Collections Guaranteed

(i) When a surety’s promise to pay is a guarantee of collection only, that surety

cannot be sued unless full efforts of collection have been undertaken and

exhausted, without success, against the principal debtor.

(ii) Before the surety can be required to pay the debt, the creditor must first pursue the

principal debtor to an unsatisfied judgment or show such action would be useless

(the principal is insolvent or in bankruptcy)

(iii) They are by contract limiting the surety’s duty. As a matter of law he is saying this

to the creditor he secures. ‚Creditor, when you have exhausted your legal

remedies against the principal debtor, then you may come after me.‛ The question

becomes what is the exhaustion of the creditor’s remedies.

(b) Marshalling

(i) Basis for marshalling of remedies is that where the first creditor has a security on

two funds of a common debtor and the second creditor has security on only one

such funds, the second creditor has a right in equity to compel the first creditor to

restore to the other non-common fund, if it is necessary for satisfaction of both

creditors, and if it will not prejudice rights or interests of the first creditor entitled

to the double fund, do injustice to the debtor, or operate inequitably on another

person’s interests.

(ii) Example: Principal debtor is obligated to C1 and also obligated to C2. Debtor

owns two assets, both of which are real in nature, 2 parcels of BA. BA1 is his

home, and BA2 is his business. Both of these creditors have the services of the

surety. C1 also took a mortgage on the family home, but since it was a business

loan, he took a mortgage in the family business. When C2 came along, they didn’t

want to give a second mortgage on the home, but they gave a second mortgage on

the business. The principal debtor goes into default and the surety wonders if

they are going to have to pay. If C1 looks to the home, which he can and C2 looks

to the business, then I am all set and have no exposure. However, if C1 looks to

the business mortgage, then I am going have to pay b/c C2 can’t look to the house.

If C1 looks to the business mortgage, then I am going to have to pay because C2

can’t look to the house. If C1 looks to the business and ignores the home, I am

going to have to pay C2 and there won’t be any recourse against the debtor.



C2 Principal Debtor C1



BA 1 Mortgage



Mortgage BA 2 Mortgage







Surety

ii) Subrogation

(1) Subrogation is based on general principles of justice and does not spring from contract

although it may be confirmed or qualified by contract.

(2) If the surety is forced to pay the principal’s debt to the creditor, the surety is subrogated

to any rights the creditor had, such as rights to other collateral of the debtor, priority of

payment, or the right to preferred position in the principal’s bankruptcy proceeding.

(3) When the creditor is paid in full by the surety, the surety can proceed upon the creditor’s

right to sue the principal debtor. The surety succeeds to all of the creditor’s rights. But

the creditor must be paid in full in order to be eligible for subrogation.

(a) HYPO  The principal debtor has a mortgage secured by BA and surety signs. When

the surety pays the claim, he is subrogated to all the claims. As a result, when he pays

the debt, he gets the mortgage also, and he can bring suit against the principal debtor

on the debt or he can foreclose on BA. This is b/c the surety is subrogated to all the

creditor’s rights.

iii) Reimbursement

(1) Upon paying the principal’s debt to the creditor, the surety may sue the principal for

reimbursement.

(a) Even 1 is the loan.

(b) Event 2 is payment by the surety

(c) Event 3 is the suit against the principal debtor.

(2) The surety is seeking recovery of its own loss, and the surety can recover whatever he

lost.

(a) You can recover only what you paid.

(b) HYPO  The surety settles with the creditor for $900 and the loan was for $1000. The

surety can only collect $900 through reimbursement.

(3) If the SOL runs on a debt and the surety pays the debt, he can still seek reimbursement.

(a) This is because the COA arose when the surety paid the debt.

(b) It is the surety’s right and not the creditors.

(4) EXAM QUESTION: Sureties are not entitled to the benefit of the discount b/c his

obligation is to pay on time.

h) SURETY’S DEFENSES

i) Failure of the principal obligation

(1) Contract Defenses

(a) Defect in execution

(b) Fraud or duress

(c) Illegality

(d) Consideration

(e) Impossibility

(f) SOL

(g) Statute of Frauds

(h) Forgery

ii) Discharge of the principal obligation

(1) Release of the principal debtor by the creditor discharges the surety.

(a) Since the debt is discharged, the surety’s right of subrogation to the creditor’s

remedies has been destroyed.

iii) Alteration of the principal K or variation of the surety’s risk.

(1) This is the most important defense from a litigation standpoint.

(a) Example: Creditor and debtor agree to extend the period of repayment for six

months. In the interval, the debtor becomes bankrupt. If the debtor could have paid

at the time of prejudice, the surety is released. However, a compensated surety would

have to show prejudice and is discharged only the extend of prejudice.

iv) Reimbursement of costs

(1) If creditor sues surety and surety demands that principal debtor defends and debtor does

not and surety wins then surety is entitled to reimbursement of costs.

v) Examples

(1) HYPO  Creditor extends the time to pay by contract, which is a binding agreement, to

the principal debtor. The principal debtor may become more insolvent. By doing this, the

creditor has increased the surety’s risk.

(2) HYPO  Let’s say creditor took a mortgage from the principal debtor along with the

surety. He takes this mortgage and fails to record, and the property is subsequently lost

to a BFP who does record. The creditor has impaired the value of the collateral by not

perfecting it and the surety’s risk has increased.

vi) What if it turns out later that the principal debtor has a defense against the creditor after the

surety has paid the creditor?

(1) First of all, if a surety pays a debt for which the principal debtor is not liable, you can’t

recover from the principal debtor.

vii) Is there any obligation to give notice of defenses on the part of the principal?

(1) It depends on the functional difference of whether the surety is consensual or non-

consensual.

(2) You could make a better case where the surety is consensual that the debtor ought to

appraise the surety of the defense.

(3) If a nonconsensual surety, it seems that the burden of defenses is on the surety.

i) KINDS OF SURETIES

i) Consensual (debtor’s consent)

(1) A surety who engages at the request of the principal debtor.

(a) Example: Co-signor of note.

ii) Non-consensual (debtor doesn’t consent)

(1) A surety who finds himself w/o any agreement to serve, but becomes a surety based on

principles of equity.

(2) This is sometimes call a surety by operation of law.

(3) A true non-consensual surety is engaged by the creditor and not the debtor.

iii) Compensated

(1) A surety who is paid a premium for his risks.

(2) Sometimes called a professional surety

iv) Uncompensated

(1) Principal debtor has requested the surety’s services but has not paid a premium for the

risk undertaken by the surety.

(2) Also called a volunteer surety.

v) Examples

(1) HYPO  H wants to start a business and the bank says it is a good idea. They tell him to

go ahead and set up the C and come in with a resolution in hand and sign the note

personally. They also want H to sign the note personally and they want H to bring in his

wife so that she can sign the note personally. Is the suretyship? Type of surety?

(a) The C is the principal debtor and H and W are the sureties.

(b) They are compensated b/c the loan benefits the two sureties and they are compensated

equitably.

(2) HYPO  Instead of W co-signing the note they ask for H’s father, who is not in the

business at all, but is substantial. The note represents the loan to the C. Suretyship? Type

of surety?

(a) Obviously there is a suretyship.

(b) The father is probably uncompensated b/c he is not part of the C and as such you can’t

make the equitable argument as you could with the wife.

j) NEGOTIABLE INSTRUMENTS

i) If the instrument says ‚pay to the order of‛ or ‚pay to bearer‛ the note is in negotiable form.

ii) When you sign an undertaking that says ‚pay to the order of‛ you are saying ‚I promise to

pay you $30 on the due date or to whom you order me to pay without condition.‛

iii) A holder in due course is a BFP at common law.

iv) You waive all your defenses against your payee’s transferee.

v) When surety signs a note that is negotiable, he has to pay it no matter what defenses would

otherwise be available if it falls into the hands of a holder in due course.

vi) Always look for I or We to determine if the second signature is a surety or a co-maker.

vii) EXAM QUESTION: What is the legal significance of the word ‚I‛?

(1) It alerts the holder that the person who signed the second time is a surety.

(2) If ‚we‛ is used in the note, it is now a joint obligation in the holder’s hands. They are co-

makers and there are no suretyship defenses.

(3) If the second signor says ‚Clark Johnson, surety‛ and the note says ‚we‛ there is no

problem with suretyship.

k) TENDER

i) At CL, the principal debtor owes the creditor the full amount on the 30th. Principal debtor

tenders the money of the 30th and the creditor rejects the tender. The debt is discharged b/c

the principal debtor has fully performed.

ii) The same is true for a surety who tenders and the creditor rejects it.

(1) For this to apply, the surety must be uncompensated.

iii) Examples

(1) HYPO  Principal debtor goes to Creditor and asks for a release of the mortgage to

permit the sale of the property. Creditor agrees and the debtor sells but does not pay C.

Is the surety liable?

(a) The creditor has altered S’s risk.

(b) The non-compensated surety is discharged entirely.

(c) The compensated surety is discharged to the amount of harm.

(2) HYPO  C leases to A. A assigns the lease to B. B has trouble and requests C to get out

of the lease. He agrees to make an extra payment to C to facilitate this. C agrees.

(a) The assignment of the lease to B did not affect the agreement between A and C, under

the rule of Jus Terti (a tenant who believes that the title is in some person other than

his landlord is said to set up a jus terti.)

(b) Who is the surety? A

(c) Who is the principal? B

(3) HYPO  Principal debtor secures C with a mortgage, which is unrecorded, and a surety.

Principal debtor then conveys the property to X.

(a) What is the effect of failing to record?

(b) What is the effect on S?

(i) Creditor’s conduct in failing to record causes the lien to be at risk, thereby

increasing the surety’s risk.

(4) HYPO  Multiple sureties. One becomes bankrupt or flees.

(a) The remaining sureties pick up the absent surety’s obligations pro rata.

(b) Unless otherwise agreed with the creditor, each surety is individually liable for the

full amount of the principal’s debt.

(5) HYPO  Five sureties and the creditor releases S5. What is the effect on the remaining

sureties.

(a) The creditor cannot act to increase the risk of the sureties. Since the risk has increased:

(i) Non-compensated sureties are released.

(ii) Compensated sureties are released to the extent of prejudice.

l) CO-SURETIES

i) If one surety is discharged by the creditor, the law discharge the remaining non-compensated

sureties and discharges compensated sureties to the extent they are prejudiced.

(1) In MI, you must show financial harm.

ii) Examples:

(1) HYPO  You have straight co-suretyship and they are all liable to the creditor for the

whole amount, except that S1 was compensated and S2 was a volunteer. Is there any

suretyship between S1 and S2? YES

(a) As between the two the professional surety ought to be required to pay because S1

spreads the loss over the business that he does.

(2) HYPO  Two volunteer sureties and they sign on behalf of the LLC. As between them is

there any suretyship? (There is no issue of the type of sureties). S2 pays the full amount of

the debt.

(a) S2 can get the debt in full from the principal debtor or he can get ½ from s1 b/c as a

surety they are both equally liable.

(b) There is suretyship to the extent of the equitable contribution. You can sue, in equity,

your co-surety for a judgment in equitable contribution for ½ of your loss when the

principal debtor is uncollectable.

(3) HYPO  S1 and S2 are co-signors on the note. If this is a $1000 debt, what can the

creditor receive from the principal debtor? S1? S2?

(a) $1000 from the principal debtor

(b) $1000 from S1

(c) $1000 from S2

(4) HYPO  What are S2’s rights if he pays the full $1000 to the creditor?

(a) S2 can sue the principal debtor for reimbursement or subrogation.

(b) S2 can bring a suit for contribution against S1. There is a suretyship for contribution

between S1 and S2.

(5) HYPO  The creditor called up S1 to pay the obligation and S1shows up with $500 at the

creditor’s place. The creditor doesn’t like this. What are the rights S2 has against S1?

(a) He has none because there is nothing to recover, he has paid his fair share.

(6) HYPO  S1 agrees to act as a surety to 50% of the principal’s debtor and S2 agrees to act

as a surety for the remaining 50%. Is there any suretyship between S1 and S2?

(a) No, b/c they are each only liable fro the 50% of the obligation which is not more than

their fair share.

(7) HYPO  What if they are each liable for 60% of the unpaid balance?

(a) There is suretyship here b/c they can each get contribution for 10%; they can recover

down to what they are obligated to pay in the first place.

(8) HYPO  Principal debtor has a $10,000 debt and S1 and S2 each sing on for $5000 of the

debt. Is there any suretyship between the sureties?

(a) Maybe, depending on if the debtor has paid down the debt.

(b) Let’s say the debtor has an unpaid balance of %7500 at the time of the default. The

creditor can recover from on of them up to $5000.

(c) The cap works different that a percentage of the unpaid balance.

(d) Be able to make the following distinction.

(i) HYPO  Each surety has taken 50% of the debt. Is there any suretyship?

1. If it is 50% of the original debt, then there is no suretyship because C can only

collect 50% from each S1 and S2.

2. If the debt was paid down to $7500 and if S1 promised to pay 50% of the

original debt, then C can collect $5000 from S1. Therefore, a suretyship may

emerge for the residual contribution, which is beyond 50%.

3. If asked if there is any suretyship and the facts aren’t clear which debt you are

talking about, write ‚I can’t tell because there isn’t enough information to

answer the question b/c the term debt is not defined. If it is 50% of the original

debt, then there is no suretyship, but if it is 50% of the unpaid valance then

there is possibly a suretyship.‛

(ii) HYPO  What if it is 60%?

1. There will always be a suretyship in this situation b/c someone will end up

paying 10% more than they ought to pay.

(9) HYPO  Debtor has $100,000 obligation to creditor and it is secured by S1 and S2, along

with a mortgage on BA worth $90k. The sureties have signed on for 50%. S2 goes into

bankruptcy and lists this obligation as a debt or he dies insolvent or leaves the jurisdiction

(as a matter of law he is uncollectable). What should S1 do?

(a) S1 has to pay the 100%, have him equitably subrogated to the 90%. By paying more,

then you get the subrogated rights. You only lose 10% as opposed to 50%. Here it

will take 100% payment to get the 90% BA and the surety is only out 10%.

(b) If there is no security, then it is probably best to pay the lesser amount.

m) SECURITY INTERESTS

i) SOL and secured transactions

(1) HYPO  Creditor has a claim against both the principal and the surety on a condition

subsequent. The principal defaults. As between the creditor and the principal, the SOL

has been allowed to run.

(a) May the creditor collect from the debtor?

(i) No b/c it is barred by the Sol

(b) May the creditor collect from the surety?

(i) No b/c it is barred by the SOL.

(ii) Since the surety asserts the debtor’s defenses, it is the contract obligations which

the surety has engaged to answer.

(c) May the surety pay the time barred debt?

(i) Yes

(d) If the surety pays the debt barred by the SOL, may he seek exoneration from the

debtor?

(i) No the debtor is under no present duty to pay.

(e) Does the surety have a right of subrogation?

(i) No. If he stands in the creditor’s shoes he will be barred by the statute of

limitations as the debtor’s defense.

(f) Does the surety have a right to reimbursement?

(i) Yes. It is a new cause of action, which did not accrue until the surety paid the

creditor.

(2) HYPO  P owns BA and is obligated to C (unsecured) who is supported by S who holds

a mortgage on BA. Does the creditor have right to the mortgage?

(a) Yes under the theory of equitable subrogation.

(b) It is similar to straight subrogation where the creditor is secured.

(3) HYPO  Same as above, except the mortgage is given by X, a fourth party. Does the

creditor have a right to the mortgage?

(a) No. There is no subrogation. The creditor’s rights are derivative and therefore the

root of the security would have to lay with the debtor.

(4) HYPO  P borrows from C1. P needs more money and borrows from C1 again, secured

by a mortgage and S.

(a) May the surety proceed in exoneration?

(i) Yes, so long as P has consented to the relationship.

(b) May surety proceed in subrogation?

(i) No. C has not been paid in fully (only paid on secured note 2)

(c) May surety proceed in reimbursement?

(i) No.

(ii) S has the duty to see that the creditor is paid, and he cannot compete with the

creditor.

(iii) If the surety paid the second note and then sought reimbursement, the surety

would be competing with the creditor who is now seeking to collect on the first

note.

4) MORTGAGES

a) TERMINOLOGY

i) Mortgage

(1) A mortgage is an interest in land created by a written instrument providing security for

the performance of a duty or the payment of a debt.

ii) Title theory

(1) Legal title belongs to the mortgagor and possession belongs to the mortgagee until the

mortgage is satisfied.

iii) Redemption

(1) The realization of the right to have the title of property restored free and clear of the

mortgage.

iv) Equitabale Mortgage

(1) Lien securing payment or payment or performance of some obligation, recognized in

equity, but lacking the features of a legal mortgage.

v) Legal Mortgage

(1) Legal form and recorded

vi) Lien

(1) Present but limited conditional property interest in the asset of another to secure the

performance of some obligation.

vii) Trust Deed

(1) NE states typically have this.

(2) Legal title is place in trust, so as to secure payment.

(3) This is similar to a true mortgage.

viii) Reservation

(1) Occurs where granting clause of the deed operates to exclude a portion of that which

would otherwise pass to the grantee by the description in the deed, and reserves that

portion to the grantor.

ix) Sell and Convey

(1) Sell is a contract term.

(2) Convey is a property term.

x) Equity

(1) He seeks equity must be prepared to do equity

(2) He who comes in equity must come in with clean hands.

b) LIENS GENERALLY

i) A lien is a present property interest

(1) A mortgage is a lien on property

ii) If the debt is paid, the power of sale extinguishes as a matter of law.

(a) No debt, no lien.

iii) It is limited to the amount of the debt that it secures or the value of the real estate, which ever

is less.

iv) It is conditional on the payment or nonpayment of the debt. Upon default.

v) Estates in land

(1) FSA

(2) 999 year lease

(3) Life Estate

(4) Long term lease

(5) Finder

(a) Abandoned property

(b) Lost property

(6) Bailment

(a) Voluntary

(b) Involuntary

(7) Tenancy

(8) Fee Tail

(9) Condition Subsequent

c) MORTGAGES GENERALLY

i) A mortgage can be given to secure the performance of another.

(1) The value of the mortgage is whatever it costs for the substitute performance

(2) You have to create the debt by giving it to someone else.

ii) If the mortgage is given by someone other than the debtor, it is always a suretyship.

(1) There are three individuals involved, which is why it is a suretyship.

(2) The party giving the mortgage stands to lose something and he shouldn’t have to pay.

iii) Be aware that a mortgage is very much a conveyance and as such is entitled to the protection

of the recording act.

(1) A mortgagee is a purchaser.

(a) A purchaser is one who takes title by other than inheritance.

(b) Mortgagee receives the power of sale on a condition subsequent. They are a

purchaser. Therefore it is an interest in land that must be recorded to be perfected

against the rest of the world.

(c) Mortgagee is a lienor

(d) Mortgagor is a lienor

(e) Taker of land is the mortgagee.

(f) EXAM QUESTION: Is a mortgagee a purchaser?

(i) Yes b/c it is an interest in land that can become a FSA. Therefore, it is subject to

the recording acts.

(g) EXAM QUESTION: What do you have to be in order to get protection under the

recording acts?

(i) You must be a purchaser to get protection prospectively.

(ii) You must be a BFP to get protection retrospectively and prospectively.

iv) BFP Status

(1) BFP’s give value, in good faith and without knowledge of any unrecorded interest against

them.

(2) Examples:

(a) HYPO  If A mortgages to B, who doesn’t record and then conveys to C who is

innocent (BFP) and records. C cuts off B. The deed gave a fee simple in C.

(b) HYPO  If A mortgages to B who doesn’t record and then gives a mortgage to C,

who records. C’s mortgage takes priority over B’s mortgage. State of the title is a FSA

in A subject to C’s first mortgage, subject to B’s second mortgage.

d) LAND SECURITIES

i) Traditional instruments of security regarding real estate financing.

(1) Legal Mortgage

(a) May imply lien theory

(i) Mortgagor holds title

(b) Mortgage notes are not recordable

(2) Trust Deed (same as legal mortgage)

(a) May imply lien theory

(i) Mortgagee holds title

(ii) Mortgagor holds possession

(b) This is a carry over from CL.

(c) Found in east coast states such as MA.

(3) Reservation of a lien in a conveyance or a deed

(a) Not a complete conveyance

(b) Condition subsequent

(c) Transfer of security

(d) Not used very often, but was popular when the railroads were going through.

(e) Example: You are going to buy BA and you see the deed (you are B’s lawyer) ‚P,

prior owner, to A with reservation of the lien.‛ This tells you that someone is claiming

prior sale on that property.

(4) Land K

(a) The only thing distinguishing a land K from a mortgage is that the vendor is acting as

the mortgagee.

(b) The seller acts as the financial arm of the transaction.

(c) You can sure on the note or foreclose

(d) A land K is a device of security where the seller (the vendor) makes a promise to the

vendee to convey BA by warranty deed, marketable title upon performance of the

aforesaid obligations.

(e) The obligations are pretty much what you typically would expect.

(i) To make payments on time.

(ii) To maintain premises

(iii) Not commit waste

(f) EXAM QUESTION: Once the land K has been executed, the question becomes should

you record it?

(i) It depends.

(ii) If A executes on BA a K to sell BA to B. There is no obligation for the vendor to do

anything until there has been full performance. The question becomes on a

condition subsequent promise to convey the property, should the vendee record?

1. If the vendee takes possession, there is not reason for the vendee to record.

This is b/c he has given notice of his interest by virtue of his occupancy. This is

inquiry notice.

(iii) It is also an advantage to A not to record the land K b/c if the B doesn’t pay, the A

puts him out. There is no redemption periods, foreclosure, and forfeiture.

(g) EXAM QUESTION: What happens if the vendee records the land K?

(i) If he records, as part of the transactional events, and then the vendor goes out and

gives a mortgage, the bank may see that B has a land K on it and the mortgage is

subject to the rights of the land K vendee. If the bank takes a mortgage on the

vendor’s title, and they have to foreclose, and they have the foreclosure sale, the

purchaser takes subject to the vendee’s rights and the vendee can start paying the

purchaser and the purchaser has to deliver the deed.

(h) Inquiry notice is what you would have discovered had you asked.

(i) More questions:

(i) What if the mortgage is transactional event #1 and the land K is transactional event

#2?

(ii) What is the owner of real estate subject to an existing mortgage sells the property

on land K to a vendee?

1. It is clear that the vendee takes with notice of that recorded mortgage to the

property and clearly takes subject to it. If the mortgage is foreclosed, he loses

his right on the K b/c his rights are subordinate to the preexisting mortgage.

2. Equity says that a land K vendee who buys property subject to an existing

mortgage can, upon his vendors, default, make his vendor’s mortgage

payment and credited to any given installment on the land contract.

ii) Disguised Mortgages – (Attempts to avoid the law of Mortgages)

(1) Lease with option to purchase

(a) You make all legal payments and it is yours

(b) Financing land

(c) Not a land K

(2) Deed in Escrow

(a) The escrow agent has the instrument

(b) It avoids redemption

(3) Conveyance with the right to repurchase

(a) There is no forfeiture or redemption rights in the document

(b) Usually done to cover up a usury interest rate

(c) Example: I sell the farm for $200K and you go to Europe for a year, ‚If I return in one

year, I can repurchase the farm for $220K.‛

(i) Creates an equitable mortgage with equitable redemption rights which may be

cut-off only by foreclosure.

(4) Deed as (or intended) a mortgage (or security)

(a) Deed which conveys absolute title, as contrasted with mortgage deed which is

defeasible on the fulfillment of mortgage conditions.

(b) HYPO  A goes to B and wants to borrow some money. A says I own BA, and B says

I don’t want a mortgage. B says that he wants a deed, and when A pays him of, he

will deed it back. A gives B a deed and B records, and in exchange, B gives A a check.

What happens if the 15th of December A goes to B with a check, and B says what are

you talking about, I bought BA? A can demonstrate that the deed was intended as a

device of security and not as a sale through parole evidence.

iii) Equitable Mortgages

(1) Promise to give a mortgage

(a) Interest in land where the mortgagor promises to mortgage the land at a future date.

(b) It is not recordable but does give the right to file an affidavit of interest.

(c) It will support a suit to enforce the promise to mortgage and to foreclose it upon

default of the debt it secures.

(2) Common Law Vendor’s Lien

(a) Most fragile of all securities

(b) In CL, if you sold land on credit, the law implied a common law vendor’s lien.

(c) Equitable Mortgage

(d) Unrecordable

(e) An equitable security which arises from the fact that a vendee has received from his

vendor property for which he has not paid the fill consideration, and such lien exists

independently of any express agreement.

e) HEIRARCHY OF TITLES

i) Examples

(1) HYPO  If A gives a mortgage to B (note) and if a default occurs, B goes to foreclosure

sale and C becomes the purchaser. C becomes the fee holder subject to the previous

interests.

(a) The bank takes the money and applies it to the debt at which point the lien is

extinguished. It has been exercised. If the foreclosure sale doesn’t bring enough

money, then the bank can sue on the note. They exercise their two avenues of

collection.

(2) HYPO  A and B own BA as joint tenants. B goes to the bank and borrows money. B

says I am a joint tenant in BA. The bank says fine, we will take a mortgage on your joint

tenancy in BA. They execute the note and the bank takes a mortgage. B dies. What is the

status of the life of this mortgage?

(a) It is extinguished. Mortgage has no interest.

(b) This is because lines are always derivative. The lien can be no greater than the rights

of the owner who gave the mortgage.

(c) RULE: In any joint ownership situation, nothing passes to the survivor. There is no

movement of title, all that happens is that the deceased joint tenant’s title extinguishes.

Therefore, A has a fee simple.

(3) HYPO  What is A and B are husband and wife. Assume that we are in an entireties

state. Husband and wife own BA jointly, assets by the entireties. Wife goes to C bank

and gets loan and executes a mote and gives a mortgage on her interest in BA. What is

the status of the life of this mortgage?

(a) Nothing. The bank has nothing. The bank has a K claim against W. The bank has not

mortgaged on anything b/c she acted alone. Husband and wife must act in concert in

order to convey or mortgage.

(b) There are a few states that say that the bank gets to hold this lien and wait to see what

happens. If the husband dies first, then she gets a FSA and then the mortgage can take

effect and the bank can foreclose.

f) SHELTER RULE

i) HYPO  A mortgages BA to M, who doesn’t record. A then conveys BA to B for value and

qualifies as a BFP who records. B then conveys by deed to C. C takes with notice of M or

doesn’t give value (a gift). Therefore, C is not a BFP, but he does record.

(1) B’s position is based on his status as a BFP who relied on the recording act. B cuts off M’s

unrecorded mortgage interest. B didn’t have notice of M b/c M didn’t record, B acted in

good faith with A and he gave fair value. B’s position is defined as FS title holder defined

by his status as a BFP and his reliance on the recording act.

(2) C is sheltered by B’s title. C is not a BFP. It doesn’t mean that doesn’t take free of M b/c B

shut out M forever when B recorded his interest in BA. C gets BA as B held it.

g) NOTICE OF LIS PENDENS AND AFFIDAVITS OF INTEREST

i) Notice of Lis Pendens

(1) Binds a purchaser or encumbrancer of property to the results of any pending lawsuit

which may affect the title to, nay lien on, or possession of the property.

(2) In order to file a notice of lis pendens, a lawsuit is a prerequisite. It only has to be in good

faith. There is no slander of title. A notice of lis pendens says that the following property

is subject to litigation and for further information call atty. X. It doesn’t give you a whole

lot, but you can’t file it without filing a lawsuit first.

(3) Typically is good for three years and is self-canceling.

ii) Affidavit of Interest

(1) Someone in occupancy other than your prospective grantor.

(2) Standard of the reasonable man – duty to do something to find out what is going on.

(3) Bound by what he would have discovered had he inquired in the situation where it

would be prudent to do so.

(4) Must be executed with the degree of dignity necessary for recordation.

(5) Under oath.

(6) MCL § 565.451a

(7) HYPO  You have give a deed to a friend who has given you money, with the

understanding that one year later you will pay the loan off and get the deed back. Now

you hear that the guy is about the sell the land. You have the case with a deed intended

as a security. You immediately generate an affidavit of interest. You execute this

statement of interest and you client says that on such a date, I borrowed money and

executed a deed in his favor and that on a certain date when the loan is repaid, the deed is

executed back to me. Then you take it down to the register of deeds and record it. You

have a redemption right pursuant to a deed intended as a mortgage. Now you have give

notice to the World of your redemption right. Now is B sells BA to C, he takes subject to

the affidavit of interest.

(8) This typically extinguishes in a short period of time, 90 days.

(9) HYPO  A borrows some money from B and tells B that his attorney will record the

mortgage on Monday. He has a latent equity. Now B hears that A is agreeing to sell BA

to C. This would be an instance where you should file an affidavit of interest.

h) BANKRUPTCY

i) Bankruptcy Petitions

(1) Petitions in bankruptcy can be filed either voluntarily or involuntarily.

(2) These have the same effect

(3) Instantly the assets of the debtor become the property of the state

ii) Bankruptcy estate is comprised of everything the debtor owns.

iii) The bankrupt estate is given the status of a BFP.

(1) If property interests are good against a BFP, then they are good against the trustee in

bankruptcy.

(2) HYPO  A owns BA and he is declared bankrupt. Now, BA becomes party of the estate.

BA has a mortgage against it. Is the mortgage good against the bankruptcy estate? If it is

recorded, then it is. However, if it is not then the mortgage is lost to a BFP.

(3) HYPO  O owns BA and mortgages it to M, who doesn’t record. O then files for

bankruptcy. What happens to M’s interest? M is shut out from his interest in BA b/c he

didn’t record and the trustee in bankruptcy is treated as a BFP.

iv) Bankruptcy discharges K rights, but no property rights.

(1) The trustee can’t take your property w/o just compensation.

(2) Property rights that will withstand an attack by a BFP will survive bankruptcy and any K

rights are discharged.

v) Who gets the goods?

(1) If perfected, then the bank.

(2) If not perfected, then the trustee.

vi) Preference

(1) Preferences can only exist in the bankruptcy setting.

(2) HYPO  I have two creditors and own each $10. One is my brother-in-law and the other

is my physician. I only have $10 to my name. I give the $10 to my brother-in-law. This is

not a preference or a fraud.

(a) It is never a fraud to pay a bill.

(b) The physician will go unpaid in toto.

(c) If, for some reason, I end up in bankruptcy in the next year, my election of which

creditors I will pay becomes a preference.

(3) HYPO  If you take a mortgage on behalf of your creditor client form a distressed debtor,

it may not be the thing to do b/c if they file bankruptcy the your client is all out together

b/c it becomes a preference. The best way to protect against this is to have a surety sign.

(4) HYPO  A goes to the bank for a loan. C says forget about it, but if B signs as a surety,

you can have the money. A and B sign the note. B is a surety. A goes bankrupt. B still

has an obligation to pay the bank b/c bankruptcy is a personal defense. Also, the point of

suretyship is to protect the bank from loss in situations where the principal debtor is

uncollectable b/c of circumstances such as bankruptcy.

(5) Preferences only relate to antecedent obligations.

vii) Future Advances

(1) HYPO  I own you $100K, but it is to be loan in $10K installments for 10 months. You

secure it with BA. You only have to make a record of the future obligation in the

mortgage. This is knows has an obligatory future loan.

(2) Mortgages containing obligatory clauses take priority over recorded intervening interests.

They have record notice of the obligation to make future advances.

(3) Voluntary future advances

(a) If the mortgage doesn’t say, then it doesn’t give notice of any future advances.

(b) The question becomes who takes priority over the $10K loan today, which is recorded,

when the mortgage has a future advance clause but it is not obligatory?

(i) The answer is based on property law: One should not have to look himself up.

(c) If someone finds a mortgage and they see that it covers future advances, it tells them

that there may have been or will be some future advances and the party’s are the only

ones who know they are contemplating this. To preserve your priority, go to the

lender and tell them that you are loaning money to the debtor and this lien takes

priority over any future advances that you make. (This is called notice in fact).

(4) EXAM QUESTION: Intervening liens take priority over voluntary future advances if

notice of intent is given to the first mortgagee. Why? You didn’t have to look yourself

up.

i) REDEMPTION

i) High-water mark of mortgages.

ii) Redemption has its roots in the early English common law where people who owned the land

were in a different class than people who didn’t. If you lost your land, you could redeem it

for up to a year and a day. This period was given so that you could maintain your position in

society.

iii) Today, we view redemption as a vehicle where the former owner is able to save some equity.

We tie it to the right that a debt owner should get some of his equity.

iv) Two forms of redemption

(1) Equitable Right to Redeem

(a) This is the equitable right one has to pay off a debt which land secures up to the time

of the foreclosure sale.

(b) HYPO  If I sell you my mortgage, the equity redemption is what is left in the hands

of the owner. It is merely a lien, so it is archaic to say that I ma reserving my

redemption rights.

(c) You can’t stop someone from exercising their equitable right to redeem.

(2) Statutory Right to Redeem

(a) When the foreclosure sale occurs, the statutory right to redeem is triggered, and the

equitable right to redeem is instantaneously extinguished.

(b) Statutory period of redemption runs along with the sale. You remain in possession.

This gives you some breathing room, but the statutory period is relatively short.

v) There is no tolling of the redemption period.

vi) Redemption is exercised by a tender of bid exercise and costs - BIC (bid, interest, and cost of

sale)

vii) Who can redeem?

(1) The owner

(2) The owner’s collateral

(a) Joint tenants

(b) Tenants in common

(c) Partners

(d) Possibly shareholders

(3) Successor’s in interest

(a) This is a qualified redemption right.

(b) HYPO  M2 is a junior interest. If M2 sees O, who is uncollectable, he is going to go

redeem the property.

viii) If there is a redemption and a junior encumbrance, the recorded interests remain. They

are not foreclosed until the expiration of the SOL for redemption.

ix) You can’t alter the right of redemption, except in a subsequent writing for consideration.

j) FORECLOSURE SALE

i) Typically the mortgagee bids the mortgage amount at the foreclosure sale.

(1) Redemption is designed to offset the harshness of foreclosure.

(2) Once the sale takes place, the mortgagee ceases to exist after he exercises his power as a

mortgagee by having the foreclosure sale.

(3) Even if the mortgagee purchases at the foreclosure sale, he is viewed as a purchaser

subject to the redemption.

ii) Foreclose down, redeem up.

iii) Anyone whose interest is junior to the interest under foreclosure can lose their interest as a

result of foreclosure.

iv) Examples

(1) HYPO  O suffers a default on M2’s mortgage of BA. BA has mortgages held by M1, M2,

M3 and M4 subject to it. M2 conducts a foreclosure sale and no matter who bids at the

sale, they become P1. If nothing else happens, then time marches on, meaning all possible

redemption periods have expired. State of the title is FS in P1 subject to M1’s mortgage.

(a) M1 is unaffected by P1.

(b) O got foreclosed out, so neither O nor his collateral’s or successors in interest have an

interest in BA.

(c) A junior lien to a senior lien, is no lien at all.

(2) HYPO  BA is worth $100K and M1, M2, M3 and M$ each have a $10K mortgage on the

property. Someone will redeem in this case. M2 conducts a foreclosure sale and O

redeems. What is the state of the title in BA? FS in O subject to M1, M3 and M4’s

mortgage.

(3) HYPO  O tells his creditors that he is not going to redeem. M2 conducts the foreclosure

sale. M4 is provided the same redemption period as O, so he redeems and nothing more

happens. State of the title? Fee simple in M4 subject to M1’s mortgage. This is b/c he

holds as P1 (M2) held, he steps into the purchaser’s shoes.

(4) HYPO  M4 forecloses. Nothing more happens. State of the title is a FS in M4 subject to

M1, M2 and M3 b/c foreclosures under a junior lienor do not affect the senior interests.

Why?

(a) We want the owner to have the benefit of redemption rights to save his equity and if

he can’t do it himself, then he will find a successor to offset the harshness of the

remedy of foreclosure.

(b) This process wrings out the property as much as possible to make sure that every lien

is covered, so the process either protects the owner or subjects the property to a wring

out.

k) WAIVER OF REDEMPTION OR FORECLOSURE

i) You can’t waive your interest in the instrument creating the security.

(1) This is called a clog or a fetter.

ii) Examples:

(1) HYPO  O gives M a deed, in exchange for a loan. M records and to the world it looks

like she is the owner of BA is FSA. M sells BA to a BFP who cuts off O’s interest. Value

was given. O can redeem the value of the price received by the equitable mortgagee. O

has lost the land to a BFP.

(2) HYPO  The owner has a mortgage with M1. He can’t pay and asks if you will consider

taking a deed. It looks like he is conveying his right of redemption, which he is. He is

doing it subsequent to the interest creating the security. This is okay but will subject to

close judicial scrutiny for fairness.

(3) HYPO  BA is worth $100K. The mortgage is for $50K. R can’t pay and goes to M and

says, ‚I can’t pay, I am sorry.‛ M says ‚give me a deed and we will call it even.‛ R

executes a deed to M (deed in lieu of foreclosure). What results?

(a) This is another mortgage. It doesn’t pas the scrutiny test b/c you paid $50K for a

$100K parcel of land. It just has the effect of extending the SOL for another year.

(4) HYPO  Instead of exchanging the deed, M pays you $45K in exchange for the deed.

This will pass the test.

l) MORTGAGES AND NEGOTIABLE INSTRUMENTS

i) Holders in due course take free of defenses that remote parties have against their transferee.

ii) The mortgage takes on the negotiable character of the note that it secures. Mortgages are

NOT negotiable.

iii) If the mortgage secures a non-negotiable note, then the holder will take subject to the

mortgagor’s defenses.

iv) Examples:

(1) HYPO  O owns BA. O takes a mortgage and gives a note. Only the mortgage gets

recorded. So not matter who looks where they will be able to determine that there is a

note somewhere. The problem is if there is a negotiable instrument.

(2) HYPO  If A issues a negotiable note to B, it doesn’t matter if A was ever loaned the

money. The note tells B that I will pay you or whoever you order me to pay. All the other

person has to establish is that they are a holder in due course.

m) AFTER ACQUIRED PROPERTY CLAUSE

i) An AAPC is where the mortgage contains a clause that it shall secure the following real estate

to with and nay other real estate acquired by the debtor herein.

(1) This clause means that if the debtor acquires real estate in his name, the searcher is

obligated to look in the record for any future acquired property.

(2) It is only good against future property acquired in the same jurisdiction.

ii) Examples:

(1) HYPO  You are in county 1, the debtor borrows form M, mortgagee, X dollars and

executes a mortgage to secure, which contains an AAPC, and is promptly recorded. D

then purchases land, cash money, in County 2, and promptly records his deed. Is the land

in county 2 subject to any claims by the mortgagee? D now conveys BA in county 2 to P.

What is the state of the title to parcel 2?

(a) Question 2 must be answered in two ways:

(i) P is a BFP

(ii) P had knowledge of M’s AAPC

(2) HYPO  Mortgagor borrows money from mortgagee and the mortgage contains an

AAPC in county 1. Now the mortgagor goes to see S, who owns BA in county 1 and

wants to buy it form him. S says it will be $100K. Mortgagor says, ‚I’ll pay you $10K and

give you a mortgage on BA.‛ S agrees and records the mortgage. Whose lien is first on

parcel 2? The mortgagee who first recorded or the second mortgage recorded by S?

(a) Seller’s don’t have to look themselves up. Equity will place S’s mortgage first b/c

otherwise mortgagor can never be a buyer. This clause is subordinated to a

subsequently recorded interest, but this was purchase money mortgage. It is the

purchase money exception to the AAPC.

(3) HYPO  O executes a mortgage and mortgagee takes a note and it is recorded containing

an AAPC. Now the debtor goes and buys BA with case and records his deed. Now, O

goes to Bank 2 and borrows some money. Bank 2 takes a mortgage on BA and they

record. What is the state of the title?

(a) O has FSA subject to Bank 1’s first mortgage and Bank 2’s second mortgage.

n) APPLICATIONS OF THE EQUITABLE MORTGAGES

i) Lease with an option to purchase

(1) The determination is based upon the economics of the transaction.

(a) HYPO  BA is worth $10K and you lease it to B for 10 years with payments of $1000

per month. At the end of the 10 year period, the lessee can buy it for an additional

$10,000. By looking at the economics of this and see that it is the very same thing as if

he gave a mortgage and signed a note or executed a land K. This essentially becomes

an installment note payment. The court would declare this an equitable mortgage.

(2) This is the high water mark of this course.

(3) EXAM ESSAY:

(a) The economics of this lease with option to purchase are substantially similar as to

what it costs to purchase it over a time period. The ‚mortgagor‛ knew right up front

that they would pay the extra $10,000 to buy it. It is essentially the same terms they

would have agreed upon if this were a fair market value purchase.

(b) If the facts went on that you could buy it for $400K and the property is worth $500K.

This is a true lease with the option to purchase. You haven’t built any equity. This

would not be an equitable mortgage and there would be no right to redemption if you

default in the middle.

ii) Deed in Escrow

(1) The problem with the deed in escrow is that deeds are put in escrow all of the time. There

is nothing wrong with this. It is legitimate and doesn’t hint at a mortgage or equitable

mortgage.

(2) How do you spot the deed in escrow as being legitimate or clandestine mortgage?

(a) Examine the surrounding economic circumstances.

(b) HYPO  I sell my house to you, but I can’t be here to foreclose b/c I will be in DC. So,

I sing the papers and give the deed to the escrow agent. This is a legitimate use of an

escrow agent.

iii) Sale with the right to repurchase

(1) This happens b/c of usurious interest rates.

(a) Max. interest rate is 5%, unless in writing, then it is 7%

(b) Banks are not regulated

(c) Land Ks – 11%

(d) Corporate debtors can pay any rate of interest they want

(e) Criminal usury is charging interest greater than 25%

(f) Penalties

(i) Civil Usury – you lose the right to recover on the interest

(ii) Criminal Usury – the debt is a nullity.

(2) HYPO  A want to borrow $10,000 form B. B says I’ll buy BA for $10,000 and you give

me a deed. In 12 months, you come back to me with $12,000 and I will reconvey the deed

back to you. This is a mortgage and the debtor has the right to redeem

iv) Land K

(1) Form

(a) This is a self-contained instrument

(b) Includes

(i) Purchase terms

(ii) Installments

(iii) Interest to be charged (11%)

(iv) Interest to be charged while in default (11%)

(v) Additional Terms (Provision L)

1. Terms of default

a. Such as left unpaid judgment for 30 days

b. Vendor is to pay all taxes and add the cost to the unpaid balance of the K

c. Vendor is to provide all appropriate insurance, and add the cost to the

unpaid balance of the K

d. NOTE: If Johnson puts facts in a land K question, then it goes under

Provision L if it doesn’t go elsewhere on the form

(2) When you reserve the title, in the case of a land K, it is a reservation of a title security

device where the collateral is the land.

(a) You get the property back, enjoy and improvements and keep the foreclosure money,

if the vendee defaults.

(b) However, you can’t get a judgment for the deficiency b/c you are getting the property

back.

(3) Typically the vendor will pay the property taxes and insurance to protect against a tax

lien being placed on the property.

(a) HYPO  You buy real estate from a property tax foreclosure sale and the redemption

period has expired. What is the state of the title?

(i) FSA in the purchaser

(4) Land K is an equitable mortgage, which must be foreclosed to cut off the period of

redemption.

(a) HYPO  A K to sell BA to B, and they execute a land K. B defaults and vacates the

premises. A re-enters and contracts to sell to C. What is the state of the title?

(i) FS in A subject to B’s redemption period of 15 years. By taking the land back and

saying ‚no problem, thanks for vacating‛ you now have a piece of property that B

and his heir’s can come for in for up to 15 years and redeem.

v) Non-BFP’s

(1) A non-BFP who records his deed. To hear these words, they have certain legal

significance. Anyone who records is protected by the recording act. A non-BFP who

records is protected against any subsequent claims of BA described in the property.

(2) A non-BFP who records is not protected if he conveys the property to a BFP or a

mortgagee. He is protected from subsequent instruments.

(3) You can make a gift mortgage, but you can’t sue on the debt b/c there will probably be a

defense. However, you can collect on the mortgage. You will be protected prospectively

if you record.

(4) HYPO  If I am a non-BFP mortgagee who records, I am just as subject to that mortgage

as you are b/c I am standing in your shoes.

vi) Deeds in Lieu

(1) HYPO  You say to the guy, give me a deed and they will convey back to me any interest

you have in BA. This is just an equitable mortgage.

(2) If you buy the right to redeem later, it will be subject to close scrutiny for fairness.

(3) You can’t waive your redemption rights in the same instrument.

vii) Problems with Deeds

(1) § 565.8

(a) If a deed lacks one or more witnesses and the deed has been of record for a period of

10 years or more, the record of the deed shall be effectual for all purposes.

(b) If it is not effectual for the first 10 years that it has been recorded, it is not constructive

notice.

(c) HYPO  9 years have passed with the deed lacking one or more witnesses and B buys

BA, but he doesn’t look. This is not constructive notice.

(2) Land Ks are not a devise to escape a due on sale clause (title)

(a) Almost every mortgage today has a provision that says if the property is sold, the

balance of the mortgage becomes due on the sale.

(b) HYPO  You want to sell the property buy don’t want to pay off the mortgage, so

you K to sell to P. This will trigger the due on sale clause.

(c) Circularity Problem

(i) HYPO  O owns BA and he mortgages it to A who does not record. O then

mortgages the same BA to B. B records with knowledge of A. O mortgages the

same property to C, who is a BFP and records. Whose lien is first?

1. B takes subject to A b/c B has knowledge of A, which means that he is not a

BFP.

2. C can’t beat B b/c B recorded.

3. C has priority over A b/c C is a BFP and didn’t record.

4. Answer

a. Courts subordinate A b/c A was the one who caused this to take motion.

But for that unrecorded interest this would never have happened.

b. B gets prioritized in a setting where had there not been a third mortgage it

would not have happened.

o) MORTGAGES FOR ANTECEDENT DEBTS

i) Two issues in property law

(1) Value vs. Consideration

(2) Knowledge vs. Notice

ii) Example:

(1) HYPO  A is owed X dollars by B and B can’t pay, so he says I do own BA and I know

the debt is past due. I’ll give you a mortgage of 5 years. A takes the mortgage and

records the antecedent debt. A has no knowledge that there is M out there who didn’t

record the mortgage. A, in taking the mortgage, had no knowledge of M. What is the

state of the title?

(a) FS in B subject to A’s legal mortgage first and M’s second equitable mortgage.

(2) There is no such term as antecedent value. Value is value.

p) STATUTES OF LIMITATIONS

i) Ks

(1) Default provision is 6 years.

(2) Governed by MCL § 600.5807

(3) HYPO  O owns BA and mortgages it to M. That mortgage will be supporting a note, in

exchange for the loan of money. The note is a K right, subject to a six-year SOL.

ii) Real Property

(1) The SOL is 5 years

(2) MCL § 600.5801

iii) Foreclosure of mortgages

(1) SOL is 15 years

(2) MCL § 600.5803

(3) This is true regardless of whether the mortgage is a real or equitable mortgage.

(4) Even though the statute has run on the underlying debt you can still foreclose the

mortgage.

iv) If the SOL is not raised in your first responsive pleading, it is waived.

(1) A motion to dismiss is a first responsive pleading.

(2) SOL is an affirmative defense.

v) Laches

(1) SOL runs parallel on equitable actions as it does legal actions

(2) The statute on equitable laches can be shortened by laches.

(3) Look in the statute for things that will extend or toll the SOL.

(4) HYPO  K promise to convey BA. The vendor can sue in law for the money or in equity

for specific performance. How long do you have to bring your action for specific

performance?

(a) 6 years. Same with the suit in law. The right to sue comes from the K, so you look at

the K SOL. In the case of equitable actions it may be shortened.

q) FORECLOSURE

i) MCL §§ 600.3100, 600.3200 govern foreclosure.

ii) If you do a private foreclosure sale and the property doesn’t bring in the debt, that is the end

of the road b/c you have elected your remedy.

iii) Redemption periods are set forth in MCL §§ 600.3140 & 600.3240

iv) Proceeds are in MCL § 600.3135

(1) HYPO  O owns BA and mortgages BA to M1 and also gives a mortgage to M2. M2 goes

to sale and P purchases at that sale. The property generates more money than the debt

under which the foreclosure sale is held. The question becomes what do you do with this

surplus. MCL § 600.3135 says that unless somebody does something, the surplus is paid

back to the debtor b/c P1 buys the property subject to M1.

(2) Unless someone wishes to intervene under the statute and seek a marshalling order or a

distribution and have it applied to or paid off to the senior lien, then the surplus is paid

back to the debtor.

(3) If there is a sale under the senior lien and it generates a surplus, all things being equal, the

money would go to the debtor and the junior interest would be cut-off. Courts let the

junior lien intervene and get a distribution of anything extra. The rationale is that they

can do this anyway through redemption so we are just skipping a step.

v) Conditions of default put into the mortgage

(1) Examples include equitable waste

(2) HYPO  O owns BA and mortgages it to A. He mortgages the same parcel to B. Is there

any suretyship?

(a) If you don’t do something to record your lien, then you will lose it to another lender.

(b) Knowledge is irrelevant for Art. 9 secured transactions when the second holder of a

lien records when the first lien holder did not.

(c) In mortgages we save something for now so that it will make sense to compare it with

personal property.

(i) With personal property, one cannot claim to be a buyer when they come in with

loan money

(ii) Art. 9 ends the redemption rights binding for sale or ends the K right.

5) ARTICLE 9

a) ARTICLE 9 SPLITS THE GRANT OF THE SECURITY AND NOTICE TO THE WORLD IN TWO

SEPARATE INSTRUMENTS. HOWEVER, IN MORTGAGES YOU RECORD THE VERY THING

THAT CREATES THE MORTGAGE

i) Article 9 is a security instrument, regardless of the form.

ii) Security agreement that creates a security interest that sets up the secured transaction.

iii) The financing statement becomes notice to the world.

(1) You find out who the debtor is.

(2) Who the secured party is.

(3) Generally what collateral is involved?

iv) You can file your financing statement and set up your priority

(1) Priority is established when you file your financing statement.

(2) You can file the financing statement before you have anything else.

(3) Consumer’s file with the county clerk in the residence of the debtor.

(4) Businesses file with the Sec. of State.

v) When writing the exam, if you get an Article 9 security question, it will be a surprise hidden

security.

(1) An option to purchase for a nominal amount at the end of the term is not necessarily

necessary for a disguised lease to be a purchase.

(2) With an account you must file anything that is truly intangible.