This section is from the book "American Commercial Law Series ", by Alfred W. Bays. Also available from Amazon: American commercial law series.
An indebtedness exists where a person is under a present legal obligation to pay at a present or future time to another person a sum of money. The first person we call a debtor; the second, a creditor.
We are concerned in this and the next chapter with the legal rights in general of debtors and creditors. A person is "in debt" when he owes money, whether or not he is able to pay. One may have various sorts of legal obligations which in course of time either through performance or breach may develop into debts or obligations to pay money. Until one is under a present legal obligation to pay money, either at the present or some future time, he is not a debtor. Thus suppose that A contracts to build a house for B, for which B agrees to pay $5000. Neither in common nor technical parlance do we regard A as B's debtor or B as A's debtor. They are simply parties to an executory contract. A's obligation is to perform work; B's is to pay money if that work is done. A may break his contract and a judgment for damages be had against him. A is now B's debtor because now he owes B money.
218. Being one of two added chapters on the general subject of Debtor and Creditor. In these two chapters, subjects are not discussed which more logically are elsewhere in this series unless obviously necessary to be noticed here for purposes of continuity, etc.
So B becomes A's debtor if A instead of breaking his contract, performs it. B then owes A, $5000.
While a debt is a present obligation to pay money, that obligation may be either to pay now or at a future time.
We have already indicated that one is a debtor if he owes money whether due or yet to fall due. It is enough that the money be owing. Thus when A builds B's house, B owes A $5000. But the terms of the contract may call for payment one year after the house is done. During that year B is A's debtor. Or, again, A applies to the bank for a sixty day loan. During this sixty days A is the bank's debtor. And so our National Bankruptcy Law speaks of debts owing but not due. There must be a sum of money which is owing and due or bound to become due. If that is true we have what we call a debt.
A debt is liquidated when its amount is certain and not open to bona fide dispute. Otherwise it is called unliquidated.
If one may be said to owe money, yet it is impossible for either side to state the amount thereof correctly, and that amount cannot be arrived at by mere computation or calculation, but must be arrived at by an agreement between the parties, or the finding of a court, or the verdict of a jury, it is unliquidated. If it is a certain sum owing which cannot in good faith be disputed, then the indebtedness is spoken of as being liquidated.
Indebtedness may grow out of the commission of a tort or the breach of contract. In such case it is unliquidated, until it has been rendered definite by agreement or judgment.
Indebtedness arises usually out of a contract which then or through its operation creates an indebtedness. But indebtedness arises also out of breach of contract or the commission of a tort. For practical purposes, we must usually eliminate these classes of indebtedness; certainly those growing out of tort, until they have been reduced to judgment or some agreement has been entered into reducing them to certainty. Thus suppose that a person is injured through a defective sidewalk; he may or may not sue the city. If he does so it is often problematical whether he will recover, and it is certainly problematical what the amount of the verdict will be. But when a judgment is secured against the city, then we must place this liability among its indebtedness just as much as an indebtedness upon one of its bonds. The same is to an extent true in regard to the unliquidated liability for breach of contract. Thus the A house contracts to deliver goods to the B house. It fails to do so whereby the B house loses a profit. Yet the B house may never sue.
Indebtedness is said to be secured when some property of the debtor has been appropriated by agreement to the debt so that the debtor's right to such property becomes subject to the payment of the debt.
A secured indebtedness is one in which the debtor and creditor have by agreement either at the inception of the debt or some time thereafter, appropriated to it certain property, so that if the debtor fails, the creditor may realize his debt out of the property. In order to accomplish this result, there must be such an appropriation of the property to the debt that the debtor cannot sell it or encumber it, except subject to this debt, or affect its value as security by his bankruptcy. There must be more than a mere agreement between debtor and creditor in respect to certain property; there must be also the added element of notice to third persons. This notice may be accomplished in two well-known ways, either by taking possession or by recording.
There are three principal sorts of secured indebtedness: pledges;219 chattel mortgages;220 and real estate mortgages.221
These three forms of secured indebtedness we will notice more at length. We may here make a few general remarks concerning secured indebtedness.
In the first place, the creditor is not confined to his security. He may sue and have judgment. Thus one owning a note secured by real estate mortgage could either foreclose or sue on the note.
Again, the creditor is not limited to the worth of the security. If it fails to bring the amount of the debt he still has his right to sue for the balance. In the same way if it brings more than the debt he must return the balance after reimbursing himself for his necessary expenses.
Again, the security has no existence as such apart from the debt. When the debt fails the right to the security fails.
For another thing, future attempted sales, encum219. See SEC. 109, in this chapter.
220. See SEC. 107, in this chapter.
221. See Subject of Property in this series.
brances, etc., cannot affect the creditor provided he has taken the proper possession of the property or had the transaction duly recorded.
Again, bankruptcy cannot affect the creditor's right to his security. Perhaps the chief purpose of taking security is to guard against the possible insolvency or bankruptcy of the debtor.
An unsecured debt is one in which the creditor has not taken the precaution of requiring the protection described. The great majority of mercantile accounts are unsecured. It is not practicable in such cases to take security. In the sale of a $5000 printing press, a security may be required - probably a mortgage of the press itself; so, in the sale of a soda water fountain, chairs for a hall, or any equipment. But in open accounts between merchants in the regular way of trade, the buyer's general reputation is relied upon. Upon his standing in the community depends his ability to get credit.
A general creditor is one who has not made use of any process of the law whereby he may seize the property of his debtor in satisfaction of his debt. If one secures a judgment, brings attachment proceedings or takes out execution upon judgment he is known as a judgment, attachment or execution creditor.
The term "general creditor" is variously employed. It is most frequently used to indicate that the creditor has no judgment or lien or other legal process. But it is used at times to distinguish creditors who have no security from those who have security. It is also used to distinguish creditors from those who have priority.
After a debt arises it may of course be collected by legal process provided there are assets out of which its amount may be made. If suit is brought and is successfully prosecuted it culminates in a judgment. The holder of the judgment is a judgment creditor. He now has a much higher grade of evidence than he ever had before, first, because it represents a trial, and therefore stands as an expression of the law upon the merits of his case, and secondly, because it is the basis for legal process. Appeal from the trial court to reverse the judgment may be taken provided it is taken within a certain time. Except upon such an appeal the judgment cannot be questioned, for the time for discussing the merits of the case has gone by with the trial.
A judgment usually gives a certain lien upon the judgment debtor's property. The extent and duration of that lien depends upon local statutes. As an example a judgment of the Circuit Court of the State of Illinois constitutes a lien upon the real estate of the debtor for one year. If execution is taken out the lien is extended.
A judgment in itself, though it may give a lien, will not otherwise result in bringing about a collection except it is voluntarily paid by the debtor. The creditor must now go about to enforce his judgment. He sues out the writ of execution upon his judgment. He is then known as an execution creditor. This gives him larger rights and more extensive liens. The sheriff may proceed by virtue of such execution to seize the property of the debtor. This is called a levy.
An attaching creditor is one who before judgment sues out the writ of attachment whereby, pending judgment, he holds the goods of the debtor.
A lien is a "hold" which a creditor has upon the property of his debtor.
One is said to have a lien when he has upon all, or certain items of the debtor's property a charge, so that he may take or hold that property for his debt or subject to the payment of his debt. Liens are usually good against purchasers from the debtor, or future encumbrances and subsequent lienholders, but there may be liens which are merely good between the parties, and which because of lack of record, or change of possession would not be good against third parties. Liens may be classified as follows:
1. Those arising by common law independent of contract (and statutory liens in the nature of common law liens). (Liens of bailees generally.)
2. Those arising out of contract (pledges, mortgage liens, etc.).
3. Statutory liens.
(a) Those existing independent of judicial proceedings (mechanic's liens, etc.).
(b) Those arising out of judicial proceedings (judgments liens, execution liens, attachment liens.).
A creditor has no lien from the mere fact that he is a creditor. He must have take none by contract, or be the type of creditor to whom the general law gives a lien, or have acquired the lien that arises out of legal process.