CHAPTER 29
CREDITORS’ RIGHTS AND REMEDIES
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
ETHICS TODAY—CRITICAL THINKING
Is it fair that property or wage garnishments may “surprise” a judgment debtor? Of
1. How did the California legislature define the term “completion”? Was this definition
2 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
2. How did the owner of the project at the center of this case want the court to interpret
3. Ultimately, how did the court define “completion”? Why? In the Picerne case, the court
defined completion as “actual completion of the work of improvement.” The court quoted the
state mechanic’s lien statute, which provided for the filing of a lien “after [the contractor]
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completes his contract and before the expiration of 90 days after the completion of the work.” In
a different statute, the term completion was defined to mean the “actual completion of the work”
and the acceptance by the owner or its agent of the work was deemed to be equivalent to
completion.
The court applied this definition to the facts in the case to hold that the contractor had
CASE 29.2—CRITICAL THINKING
LEGAL ENVIRONMENT
If Chase cannot prove that it owned the note at the time of its complaint, what will happen
CASE 29.3—CRITICAL THINKING
E-COMMERCE
Do the principles applied to a written guaranty in this case also govern electronically
recorded agreements and contracts entered into online? Why or why not? Yes.
Electronically recorded agreements and contracts entered into online are governed by the
principles applied in this case to a written guaranty. The chief principle applied here is that a
court will enforce a fully negotiated and voluntarily signed agreement that sets out precisely and
unambiguously the rights and obligations of two sophisticated parties. There is nothing in the
language, reasoning, or application of this principle by the court that indicates this would not
equally apply to electronically recorded agreements and contracts entered into online.
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WHAT IF THE FACTS WERE DIFFERENT?
Suppose that O’Neill had alleged a history of performance with HSBC that would have
made his reliance on the complained-of representations reasonable. Could this have
changed the result? In the HSBC case, the court upheld a fully negotiated and voluntarily
signed guaranty agreement, determining that its provisions “put the kibosh” on the fraud claim of
the “primary obligor.” But if a creditor fraudulently induces a party to act as a guarantor on a
debt, the guarantor may successfully assert fraud as a defense. Thus if O’Neill had alleged a
history of performance with HSBC that would have made his reliance on the complained-of
fraud reasonable, and O’Neill could have proved the fraud, the result would likely have been
different.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Artisan’s lien
Under New Mexico law it is understood that materials for a plane would include parts provided in
repair services, but not fuel, oil and oxygen that are consumed in the use of the plane. Executive
Aviation had no right to seize the plane; it was not in its possession.
2A. Judicial liens
A writ of attachment is a court-ordered seizure and taking into custody of property prior to the
securing of a judgment for a past-due debt; a writ of execution is used after a judgment is
obtained and a court order to secure the property is received.
3A. Bank account
Executive can search for assets, such as funds, to satisfy the debt. It would ask the court of a
writ of attachment so it establishes a security interest in the funds, which can reduce the
likelihood they will be used for other purposes.
4A. Suretyship or guaranty
It is a guaranty because the promise by Fasco was in writing and made him secondarily liable in
case the principal, Air Ruidoso, defaulted.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
Because writs of attachment are a prejudgment remedy for nonpayment of a debt,
they are unfair and should be abolished. Normally, one is considered innocent until proven
guilty, but not with writs of attachment, for they occur prior to a trial and judgment. Therefore,
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laws should be passed removing them for the statute books. After a trial and judgment, then a
losing defendant’s property should be seize to satisfy an unpaid debt.
If writs of attachment were abolished, then debtors could quickly sell attachable property
and abscond with the resulting funds prior to a trial and judgment for nonpayment of a legally
binding debt. In the long run, there would be less credit extended to individuals and to
businesses because of this increased risk.
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. Jorge contracts with Larry of Midwest Roofing to fix Jorge’s roof. Jorge pays half
of the contract price in advance. Larry and Midwest complete the job, but Jorge refuses
to pay the rest of the price. What can Larry and Midwest do? Each of the parties can place
a mechanic’s lien on the debtor’s property. If the debtor does not pay what is owed, the property
can be sold to satisfy the debt. The only requirements are that the lien be filed within a specific
time from the time of the work, depending on the state statute and that notice of the foreclosure
and sale be given to the debtor in advance.
2A. Alyssa owes Don $5,000 and refuses to pay. Don obtains a garnishment order and
serves it on Alyssa’s employer. If the employer complies with the order and Alyssa stays
on the job, is one order enough to garnish all of Alyssa’s wages for each pay period until
29-1A. Liens
Three basic actions are available to Holiday:
(a) Attachment—a court-ordered seizure of nonexempt property prior
to Holiday’s reducing the debt to judgment. The grounds for granting the writ of
attachment are limited, but in most states (when submitted), the writ is granted upon
introduction of evidence that a debtor intends to remove the property from the jurisdiction
in which a judgment would be rendered. Holiday would have to post a bond and reduce
its claim to judgment; then it could sell the attached property to satisfy the debt, returning
any surplus to Kanahara.
(b) Writ of execution, upon reducing the debt to judgment. The writ is an order
issued by the clerk directing the sheriff or other officer of the court to seize (levy)
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29-2A. Liens
Kandahari’s has basically two remedies in this situation. The best remedy would be to file a
mechanic’s lien on the home of Nabil. When a person furnishes labor and materials to improve
the realty of the owner and does not receive payment, that person can file a mechanic’s lien
against the property. The filing must take place within a statutory period (usually 60 to 120
days), measured in most states from the last day the materials or labor were furnished. Failure
by Nabil to pay the debt after the filing allows lienholder Kandahari’s to foreclose on the real
estate to satisfy the debt. Notice of foreclosure must be given to Nabil. From the proceeds of
29–3A. Foreclosure on mortgages and liens
The purpose of the Mechanics’ Lien Act is to protect those who, in good faith, furnish material or
labor for construction of buildings. However, following a judicial foreclosure, the priority of claims
between a mortgagee and a mechanic’s lien claimant depends on the date the mortgage was
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29–4A. Guaranty
No, Martinez’s argument that the bank could not enforce his guaranty while other funds were
available to satisfy K&V's debt—for example, that the debt might be paid out of the proceeds of
a sale of corporate assets—is not an effective defense to the guaranty in the Community case.
The guaranty contract terms determine the extent and time of the guarantor’s liability. Thus, a
defense such as Martinez asserted might be defeated by the language of the guaranty—for
example, it might state or indicate that payment is “unconditionally guaranteed” or that the
creditor “is not required to seek payment of the principal’s debt from any other source to enforce
29–5A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Liens
Among the liens discussed in this chapter, a mechanic’s lien would likely be most effective to
Jirak in its attempt to collect the unpaid cost of its work for the Balks. A creditor can place a
mechanic’s lien on the real property of a debtor who has contracted for improvements to the
property and has not paid the price. When a creditor obtains a mechanic’s lien, the debtor’s real
estate becomes security for the debt. If the debtor does not pay, the creditor can foreclose on
the property and sell it to collect the amount due.
In this problem, the Balks contracted with Jirak for the remodel of their farmhouse. Due to
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3. There is no evidence that the discharge in the Groggs’ bankruptcy included
Grand Harbour’s judgment.
Grand Harbour might also assert that under the circumstances only the bankruptcy trustee (a
party who has authority over a debtor’s assets during a bankruptcy proceeding) could avoid the
transfer of the funds from the banks.
In any case, with garnishment, a creditor can obtain a debtor’s funds or other property in
the possession of a third party. A proceeding for garnishment of property, other than personal
earnings, may be commenced. After a creditor obtains a judgment on a debt, he or she can
29-7A. A QUESTION OF ETHICS—Guaranty
(a) Both at trial and on appeal, the triers of fact were not convinced of Li’s arguments.
Li held out Zhang as her manager and as a person authorized to bind the tenant to the lease.
(b) The reviewing court did agree with Li that there was no proof that she signed the
guarantee agreement. In other words, her allegation that, because there was no evidence that
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29-8A. SPECIAL CASE ANALYSIS—Liens
Case No. 29.1
Picerne Construction Corp. v. Castellino Villas
California Court of Appeal, Third District, 2016
244 Cal.App.4th 1201, 199 Cal.Rptr.3d 257
(a) Issue: What statutory term was the focus of the dispute in this case? Why? The
statutory term at the center of the dispute in the Picerne case can be found in California Civil
Code Section 3115, which covered mechanic’s liens when Picerne, the plaintiff and contractor in
this case, filed its lien against Castellino, the defendant and property owner. That statute
provided, “Each original contractor, in order to enforce a lien, must record his claim of lien after
he completes his contract and before the expiration of 90 days after the completion of the work
of improvement.”
In a related statute, the term completion was defined as “actual completion of the work.”
This provision also deemed the acceptance by the owner or his agent of the work to be
equivalent to completion.
Picerne had contracted to build an apartment complex for Castellino Villas in a city in
California. During the project, the city had issued certificates of occupancy for the different
buildings on various dates, with the last certificate issuing on July 25. Later, Picerne employees
and subcontractors had done substantial work. Castellino had not rented any of the apartments
until October.
With the contract price unpaid past its date, Picerne had filed a mechanic’s lien on
November 28. Later, Picerne had filed a suit in a California state court to foreclose on the lien. In
the suit, the parties had disputed the meaning of the term “completion” as it appeared in the
state lien statute and applied to the circumstances of their case. Their different interpretations of
the meaning of the term affected a determination of whether Picerne’s filing of its liens had been
timely. (b) Rule of Law: Under the state statute that applied in this case, what must a party
show to enforce a lien? To enforce a lien under the state statute that applied in this case, a party
must show that it is an original contractor, that it had a contract for a work of improvement
owned by the party against whom enforcement of the lien is sought, that the lien has been
recorded, and that its filing occurred with ninety days after the completion of the work.
Picerne contracted to build an apartment complex for Castellino Villas in a California city.
The city issued certificates of occupancy for different buildings within the complex on various
dates, releasing the last certificate on July 25. Beyond that date, Picerne employees and
subcontractors did substantial work on the project, and Castellino did not rent any of the
apartments until October. On November 28, with the contract unpaid, Picerne filed a mechanic’s
lien and later a suit to foreclose on the lien.
At contention in the suit was the meaning of the term completion. None of the other
elements of the lienor’s case was disputed.
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ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
29-9A. Attachment
(a) The purpose of attachment is to secure certain property for the payment of a
judgment in the plaintiff’s favor, pending that result. An attachment is not an adjudication of the
merits of the action brought by the plaintiff. It is only concerned with whether and to what extent