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Louisiana State University
Business Law
BLAW 3202

Chapter 10Security DevicesProperty goods or services are transferred without receipt of immediate and full payment creditordebtor relationship arisesThere is a riskIf debtor fails to pay creditors legal recourse is to file a suit against the debtorJudgment proof debtor does not have the ability to pay the debt regardless of what steps the creditor take with respect to the collectionIn cases where debtor chooses to voluntarily not pay the debt 2 remedies1Creditor can garnish debtors wages2Have nonexempt property of the debtor seized and sold to satisfy the debtGarnishment requires employer to deduct a portion of the debtors wages and to turn this amount over to the creditorAmount garnished usually limited toof takehome payGarnishment would continue until debt is paid or until the debtor no longer worked for that particular employerIf debtor quit or fired creditor can take steps to learn the identity of debtors new employerCreditor can seize the debtors nonexempt assetsSecurity devices are a means of reducing not eliminating creditors risk that they will not be paidPurpose to make the creditor more secure with respect to the payment of the debtLA 2 major classifications1Personal an agreement in which one or more persons other than debtors agree to pay the debt if debtor fails to suretyship2Real provides creditor with priority or preference with respect to claims over certain property mortgages privileges security interestSecurity device may be unenforceable even though debt is validIf debt is not valid security device is meaninglessSuretyshipAccessory contract by which a person binds himself to a creditor to fulfill the obligation of another upon the failure of the latter to do soMust be express and in writingThree kinds1CommercialaThe surety is engaged in a surety businessbPrincipal obligor or surety is a business corporation partnership or other business entitycPrincipal obligation arises out of a commercial transaction of the principal obligor ordSuretyship arises out of a commercial transaction of surety2LegalaOne given pursuant to legislation administrative act or regulation or court order3OrdinaryaOne that is neither a commercial suretyship nor a legal suretyshipbMust be strictly construed in favor of suretySurety has right of subrogation right of reimbursement and right to require security from the principal obligorSurety who pays the principal obligation is subrogated by operation of law to the rights of the creditorSurety someone who accepts responsibility for someone elses defaultReal Security DeviceProvides creditor with a priority claim on rights or property which are subject to the security deviceRight to seize and sell property of the debtor pursuant to a judgment can be exercised by the creditor without the benefit of a security deviceSecurity device will generally expedite the seizure and sale processMost important aspect of a security device is right is give to a creditor with respect to competing creditorsCreditor with a security device has a priority over other creditors on the asset which is subject to the security deviceSecured creditor will be paid from the sale proceeds of the property subject to security device before other unsecured creditorsDetermination has to be made as to the ranking of the creditorsRanking of creditors is generally determined by law and the date of recordation of the security deviceProperty of the debtor is the common pledge of his creditorsProceeds of its sale must be distributed among them unless lawful causes of preferenceLawful causes of preference are privilege and mortgagesMortgagesMortgage on moveable chattel mortgagesInstead of placing a chattel mortgage on a moveable a creditor will now utilize a security interestConventional mortgage on real estateConventional mortgage is created by contractDebt is represented by a promissory noteIf debtor defaults on the loan the lender can obtain a judgment against the debtorJudgment lender could seize property owned by the debtor and have the property sold to satisfy the debtIf other creditors are also pursuing the property of the debtor the lender would only receive a prorata share of the sale proceedsTo avoid sharing sale proceeds lender will require the debtor to execute a mortgage on the propertyMortgage allows lender to expedite the seizure and sale procedureReal protection or security provided by mortgage is the preferential claimMortgage is not effective against third parties unless and until it is recorded in the mortgage records in the parish where the property is located
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