SECURED TRANSACTIONS
Lopucki & Warren Text
Rutgers Fall 2010- Barkasy
A. Who is an Unsecured Creditor?
1. Creditor is defined as follows: “Anyone owed a legal obligation that can be reduced to a money judgment is a creditor of the party owing the obligation.
2. Many debtor-creditor relationships are entered into voluntarily, as when a creditor has lent money to a debtor.
3. Unless a creditor contracts with the debtor for secured statues or is granted it by statute, the creditor is unsecured.
a. Unsecured creditors are general creditors or ordinary creditors that populate state collection proceedings.
b. If the unsecured creditor has already obtained a court judgment to establish liability, the creditor is a judgment creditor, but the mere grant of a judgment does not alter the creditor’s status.
B. How do Unsecured Creditor’s Compel Payment?
1. Not only does the law provide procedures for collection, it regulates or bars outright many alternatives such as:
a. self-help seizures, these constitute the tort of conversion
b. additionally a creditor that wrongfully takes property may be charged with larceny
c. also if collection is done in an unreasonable manner the creditor may incur liability
2. A creditor is entitled to coerce payment for debts only through the judicial process specified by the state
a. these are fundamentally the same in each state
b. differences in language make it hard to discern the structure.
c. Creates an interest in the debtor’s property
C. Limitations on Compelling Payment
1. While a judgment creditor has the right to obtain information about the judgment debtor’s assets through discovery, the process can be long
a. must find judgment debtor and force him to sit for examination
b. debtors keep assets in unpredictable forms
c. even if you find assets, they may not remain stationary
d. debtors can transfer title and stay one step ahead
e. creditor who has filed suit against the debtor to collect an unsecured debt may be eligible for a provisional remedy.
– an example is an attachment
– debtors can also be subject to sanction for lying or not answering questions
– few consider it worth it to pursue these dead beats though
f. Until the sheriff arrives to levy on a debtor’s assets he can continue to transact business and can lose them
– it is not fraudulent for a debtor to pay one of his creditors even if the effect is to leave nothing for the others, called a preference
g. Another thing that can impede collection are Exemption Statutes.
– Preserves debtors their means of obtaining livelihood and enjoyment of property.
– Protect people from involuntary security interests
– Or a Homestead Exemption with dollar amount limits
– Federal and state statutes protect debtor’s wages, 75% is usually exempt
– In short these statutes preclude creditors from taking the most valuable and easy-to-locate assets that dead beat turds have
D. Is the Law Serious About Collecting Debts?
1. Legal mechanisms are available for the enforcement of obligations that the law takes seriously, by ordering them to pay or imprisoning them.
a. alimony
b. child support
c. obligations to respect the property of others
d. obligations under a contract
2. Not included are the following:
a. judgments for personal injuries
b. wages of working people
c. breaches of most kinds of contracts
3. What is going on here is a reflection of the relative values society places on those rights
a. we hold criminal rights more dearly than monetary ones
b. while some civil creditors have rights superior to others
c. this gives us insight into the culture we live in.
ASSIGNMENT 2 SECURITY AND FORECLOSURE
A. The Nature of Security
1. The financial institutions that make loans insist on having a set collection of rights, these rights are known as a Lien.
2. A lien is defined by the Bankruptcy Code as:
a. a charge against or an interest in property to secure payment of a debt or performance of an obligation
b. a lien is the relationship between particular property and a particular debt, the relationship being if the debt is not paid, the creditor can compel the application of the value of the collateral to payment of the debt, this is called Foreclosure.
3. The most common form of lien is the Security Interest
a. this encompasses any lien created by contract
– real estate mortgages
– deeds of trust
– security interests in personal property created under Article 9 of the UCC
b. there are also two types of non-consensual liens:
(1)liens granted by statute such as mechanic’s liens (statutory liens) and
(2) liens obtained by unsecured creditors through judicial process (judicial liens)
4. What property will serve as collateral for a security interest?
a. it depends on the needs of the parties
b. virtually anything recognized as property can serve as collateral.
c. usefulness depends on:
(1) how much value the creditor extract from it
(2) how mush leverage the creditor can derive from the creditor’s ability to deprive the debtor if the property
5. The agreement that creates a security interest may impose obligations on the debtor that apply even in the absence of default
a. the security interest itself has effect only in the event of the debtor’s default.
· default may be failure to pay
· failure to comply with some other provision of the security agreement
b. Because a security interest rights are principally rights that take effect after default, a security interest can be described as a right in property that is contingent on nonpayment of a debt.
· Or the right to enforce the debt against the property that serves as collateral is contingent upon the occurrence of a default
· Typical methods of enforcement lead to sale of the collateral and payment of as much of the debt as possible from the proceeds of the sale.
· Creditor can be guilty of conversion as well
6. The recognition of enhanced collection rights of secured creditors necessarily diminishes the effectiveness of the collection rights of general unsecured creditors.
a. the ease with which security interests can be granted almost assures that when the debtor is really in trouble, the unsecured creditor will only recover after the secured creditors get their shares.
b. Having security or lacking it is a key attribute of the relationship between debtors an creditors.
7. Why does the law permit a debtor to grant one creditor collection rights superior to those of another?
a. the principal reason is the tremendous complexity the law would have if security was banned
– debtors short of cash still would have been able to sell their property to get $$$, they still would have been able to buy it back later BUT . . . .
– Debtors would have been unable to grant a lesser right— a right in the buyer/secured creditor to keep the property contingent on the debtor’s nonpayment of a debt.
8. Basile v. Erhal Holding
a. Courts of equity will treat a deed, absolute in form, as a mortgage, when it is executed as a security for a loan for money
b. In this case the mortgage was not intended as an absolute conveyance or sale of property by the plaintiff, but rather was intended as security for the plaintiff’s $100,000 debt therefore the debtor still has the right of redemption.
c. Right of Redemption:
d. Pay mortgage in full to avoid foreclosure.
9. Intended as Security Doctrine
a. applies to personal property transactions as well as those involving real property.
b. UCC 9-102(1)(a) provides that A9 applies to “any transaction (regardless of form) which is intended to create a security interest in personal property
– Comment I elaborates. .” When it is found that a security interest as defined in UCC 1-201 (37), this article applies regardless of the form of transaction or the name by which the parties may have christened it.”
B. Foreclosure Precedent
1. Article 9
period in question
a. holder of enforceable right can terminate the D business or permit it to continue
b. control access to property
c. cut off cash flow that enable D to resist foreclosure
5. Whether courts will enforce such a provision for possession on default depends on the circumstances
6. Even if SC obtains the right to possession from such a provision, the jurisdiction may require that the SC follow procedures to obtain possession
B. The Right to Possession Pending Foreclosure—Real Property
1. The D’s Right to Possession During Foreclosure
a. General Rule: mortgagees never become entitled to possession of mortgaged real property in their capacity as mortgagees
b. Only the purchaser at the foreclosure sale is entitled to dispossess to D
2. Remedies to obtain possession vary:
a. Eviction or ejectment and obtain a court order
b. Write of possession or writ of assistance
c. Wither way the sheriff kicks them out
3. Appointment of a Receiver
a. While foreclosure is pending any interested party can apply to be a “receiver” to preserve the value of the collateral
b. The receiver will be an officer of the court with fiduciary obligations to all who have an interest in the property with rights to:
· collect rents and use the money to maintain the property
· retain excess rents until final judgment
· typically takes possession of the collateral during the foreclosure case and delivers possession directly to the purchaser
c. This cuts off D’s cash flow and while the mortgagee does not get the money directly, it benefits him
d. A foreclosing mortgagee does not always get a receiver, only if the mortgage provides for it
· still is an equitable remedy that is in the sound discretion of the court
e. As in the Stedman case from Assignment 2, judgment for the mortgagee is not necessarily the end
· D may appeal
· Then court will likely be more receptive to the demand for a receiver
4. Assignment of Rents
a. The mortgage is likely to include a provision by which D assigns rents to mortgagee as security
b. Since this is the equivalent of taking possession, some courts do not give these provisions force
C. The Right of Possession Pending Foreclosure
1. Governed by Article 9, it favors SC on the issue of possession pending foreclosure
a. UCC 9-503 gives SC right to possess on default, only if D resists are courts necessary
b. This is an action for replevin
2. The replevin action is a descendant of the “writ of replevin”
a. generally any party entitled to possession of tangible personal property is entitled to the writ
b. the writ directs the sheriff to take possession and give it to plaintiff
c. the most common users of this today are SC entitled to possession of collateral pursuant to UCC 9-503
3. Del’s Big Saver Foods Inc v. Carpenter Cook
a. UCC 9-503 provides that you may proceed without judicial process if this can be done without breach of peace or may proceed by action”
· “by action” has been interpreted to mean by the state’s replevin procedures
· Wisconsin replevin calls for an order issued by a judge or judicial officer and gives the debtor the right to be heard at a trial concerning this matter