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Secured Transactions
South Texas College of Law Houston
Musselman, James L.

 
Musselman_SecuredTransactions_Summer_2014
 
PART ONE: THE CREDITOR-DEBTOR RELATIONSHIP
Assignment 1: Remedies of Unsecured Creditors under State Law (p. 3-19)
a.       Unsecured Creditor. Anyone who is owed a legal obligation that can be reduced to a money judgment is a creditor of the party owing the obligation. Unless a creditor contracts w/ the debtor for secured status or is U/Cs are the general or ordinary creditors that populate state collection proceeding. 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 unsecured status.
·         All Cs have the rights available to U/Cs. S/Cs have additional rights (e.g., foreclosure; repo).
b. No Self-Help Seizure. An unsecured creditor is prohibited from self-help seizure of the D’s prop. Uy, a prohibited seizure of a D’s prop will constitute the conversion.
i.         Civil Liability: Conversion. Conversion is the wrongful exercise of dominion and control over another's property in denial of or inconsistent with his rights.
–          DAS for conversion liability = the value of the property seized (i.e., a “forced sale”).
ii.       Criminal Liability: Larceny. A creditor that wrongfully takes possession of prop of the debtor may be charged with larceny, even if the value of the property taken is less than the amount owed.
iii.      Must abide by state rules!
d. Debt Collection Process. Five steps:
(1)    Creditor (C) must sue the Debtor (D), and obtain a judgment (J).
(2)    C must execute by getting a writ of execution.
(3)    C must find D’s non-exempt property, THEN
(4)    C may have the sheriff levy (i.e., physically seize) the prop & auction it.  (when levies, creates a lien).
(5)    $$ from the foreclosure sale goes to C.
i.         Wrongful Collection Practices. If the C demands payment from the D in an unreasonable manner, she may incur liability for wrongful collection practices.
Exemption statutes – provide for certain prop to be exempt from execution. (thus, prevents a sheriff from seizing certain property under a writ of execution.)  All 50 states have exemption statutes. Purpose? To ensure that collection doesn’t leave a debtor destitute.§§ 8.15.18, 815.20(1), 990.01(14)
·         Most states recognize a homestead exemption, but impose a dollar limit ($75K). TX has a 10-acre urban homestead exemption (no dollar limit).  Fed statutes provide that a min of 75% of D’s earnings from personal services will generally be exempt in all states. Some states exempt a greater percentage. A few others (incl. TX) exempt ALL earnings. (TX has no exemption for bank accts) State & fed laws exempt most pensions & retirement accounts. TX has an unlimited exemption on retirement income. Personal PropTX has a $60K exemption on certain personal prop.
 
w  PROBLEMS: (p.19-21):
w  # 1.3. J lent $1k to L, so she could buy lawn furniture. L hasn't repaid J. The furniture is in L's backyard & is worth less than the amount owed. Can J go over and take the lawn furniture?
o   No; as a U/C, J can’t resort to self-helps seizure of L’s furniture. If J does take the furniture, he may be civilly liable for conversion (i.e., the value of the furniture) & possibly punitive DAS. He may also be criminally liable (trespass, larceny).
o   To recover the debt, J must employ the debt-collection process:
§  file a suit – (c/a here is a br/K claim b/c D didn’t pay), get a judgment saying D owes the $$, then enforce the J if uncooperative. 
w  # 1.1. B lent $10k to K, a day care center owner. The center has not missed a payment, but B is unsure whether it will survive (and pay her). The center sold the best of its computers and exercise equipment to move to an “upscale” location, losing 1/3 of its customers, increasing employee turnover and replacing the old manager with one who scares the children. What do you advise? She has no leverage unless K has defaulted on the loan. Missed payments? No…Have her bring in the K (or documentation) and look to see if it defines default, & if it includes –  
o   Insecurity clause – if the C feels insecure he will be repaid, that can constitute default (assuming C can show the D’s actions which are the reasons for insecurity). (see p. 260).
o   An acceleration clause would make all payments due immediately upon default. If K has defaulted, B would have to go through the process above.
 
Assignment 2: Security and Foreclosure (p. 22-36)
·         If a secured debt is not paid when due, the C can compel the application of the value of the ₡ to payment of the debt. – -> foreclosure.
·         Intended as Security Doctrine. Since A9 procedure is technical, time-consuming and expensive, Cs may enter into Ks that don't create a s/i in form, but do create one in effect (thus, ₮s “intended as security”).
o   § 9-109(a)(1) – applies to any transaction, regardless of its form, that creates a s/i in property by K. (i.e., A9 will apply to any ₮ in which the parties are intending to create a s/i (in any kind of prop).)
¬  REMEMBER: ANY TIME YOU SEE A TRANSACTION THAT IN SUBSTANCE IS A SALE OF PROPERTY ON CREDIT (CREATES A SECURITY INTEREST), ARTICLE 9 WILL APPLY!!!!
·         Conditional Sales. (p.29) Owners who intend to sell goods on credit sometimes seek to retain title to the goods until the buyer has finished paying for the goods. But, “The retention or reservation of title by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a s/i.” §2-401(1). 
§  Leases Intended as S/Is. If the term of the lease extends for the entire remaining economic life of the collateral, the economic effect of the lease on the parties (taxes aside) may be identical to the economic effect of a sale with a security interest back for the purchase price. The lease will be a “true” lease if the contract transfers only part of the anticipated economic life of the property.  If it’s a true lease –> NOT covered by A9.
·         If substance of transaction is rlly for purposes of securing interest –> then A9 applies.
§  When 1-203(b) applies (see #2.2), it will be a secured transaction, not a lease.
 
w  PROBLEMS (ass 2):
w  # 2.1 (a). Same facts as Problem 1.5, except B and K agreed to list a car, house, equipment and bank account as security. Which items can B reach through foreclosure of her security interest?
o   Since B has a security interest in all the listed property, upon default, B has the right to repossess and foreclose on all the listed property. (If you’re a S/C, the exemption statutes do not apply!)
o   “Waiver” is the voluntary relinquishment of a known right.
§  B’s security interest is NOT void as a waiver of exemptions.
w  #  2.2. Instead of selling cars (at $180.77 monthly), B plans to lease them (at $180.77.) with an option to buy at the end of the lease period for $10. The lease provides that on default, B has the right to terminate the lease and the option to buy. B retains ownership of the car and will simply repossess it if the lessee defaults. Advise B.
o   “intended as security doctrine” applies; When the debtors default, she must follow the rules in Art. 9.
o   § 9-109(a): A9 applies to a ₮, regardless of its form, that creates a s/i in personal property by K.
§  “S/I”= an interest in personal prop which secures pmt or performance of an oblig. § 1-201(b)(35).
§  Whether a ₮ in the form of a lease creates a “s/i” is determined pursuant to § 1-203 –
·         § 1-203(b)(4): a lease creates a security interest if the lease pmts are not subject to termination by the lessee & the lessee has an option to become the owner of the goods for nominal additional consideration upon compliance w/ the lease agmt.
o   Must look at the SUBSTANCE of the transaction to determine if true lease.
o   Here, the lessee doesn’t have the rt to terminate & has an option to buy for $10 (nominal consideration)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assignment 3: Repossession of Collateral (p. 40-51)
***Unless otherwise agreed, §9-609 gives a S/P the right to take possession immediately on default!***
 
 
¬  UCC § 9-609. S/P’S RIGHT TO TAKE POSSESSION AFTER DEFAULT.
(a) After default, a S/P:
(1) may take possession of the ₡; &
(2) w/o removal, may render equip unusable & dispose of ₡ on a D's premises under §9-610.
(b) A S/P may proceed under (a):
(1) pursuant to judicial process (writ of replevin); or
(2) w/o judicial process, if it proceeds w/o breach of the peace.
(c) If so agreed, & in any event after default, S/P may require D to assemble the ₡ & make it
available to S/P at a place to be designated by S/P which is reasonably convenient to both parties.
 
•        S/P’s Right to Take Possession After Default.
o   “… pursuant to Judicial Process” –
§  How? File an action for replevin. à A C can obtain a court order-a writ of replevin, directing the sheriff to take possession of the prop from the D & give it to the S/P.  The C completes the foreclosure by selling the ₡ in a commercially reasonable manner (see § 9-610).
o   “… without Judicial Process, IF it proceeds without breach of the peace” –
§  Less hassle this way! — But, if a breach of peace occurs, the S/P is responsible for DAS. à Courts generally hold that the duty to refrain from breach of the peace during repossession is nondelegable, making the secured creditor liable for the consequences of illegal repossessions by their independent contractors.
o   Rendering Equipment Unusable.
§  §9-609(a)(2) gives the C the option to leave “equipment” temporarily in the possession of the D but render it unusable.;   When this § is applied, uy the ₡ is a large piece of equipment, such as a factory machine, for which removal to a warehouse would be slow & costly. The C might remove key parts from the machine so that it cannot be used pending sale.
o   Trespass.A C ordinarily will not be s/t liability for trespass if he repossesses w/o a breach of the peace.
˜  But, the C can never enter the D's residence (incl. attached garages) to repossess property. (So, if you’re a debtor, just keep it in your home, so the C has to go get a replevin order.)
·         Courts are universal on this rule (b/c too much potential for violence). Esp in TX
•        Security Agreements
o   § 9-201(a): Except as otherwise provided in the U.C.C., a S/A is effective according to its terms between the parties, against purchasers of the ₡, & against Cs.
o   Cannot waive breach of peace requirement.
§  Parties to a S/A can’t waive a self-help repossessor’s duty not to breach the peace. § 9-602(6).
§  BUT… Parties may agree to standards measuring the fulfillment of the rights of a D or duties of a S/P if they're not manifestly unreasonable. § 9­-603(a). (But…Subsection (a) doesn't apply to the duty under 9-609 to refrain from breaching the peace.) § 9-603(b).
•        A “Breach of the Peace” = a public offense done by violence, or one causing or likely to cause an immediate disturbance of public order.”R of Torts § 116
¬  Rule of Thumb: If there i

“enter any premises . . . w/o liability for trespass”).
§  Can’t waive the br/peace rule OR the entering a D’s home rule!
w  # 3.3. S (debtor) received a letter from ITT (creditor) declaring the loan in default and directing him (per the security agreement) to assemble the collateral and make it available to ITT for repossession. What can S do to resist repossession? What if they bring the sheriff with them?
o   S (the D) should physically confront the repossessors before they are able to take the equipment (not after!) –  b/c repossessors must retreat if physically confronted by the D and told to leave the premises in a manner that threatens potential violence (so, the book suggests D carry a gun & make it visible).  Otherwise, they’ll commit a breach of the peace (Morris v. First Ntl Bank case p.46)
§  If ITT is repossessing by judicial process, the sheriff can take the collateral.
§  BUT – If ITT brings a sheriff to assist in self-help repossession (so, w/o a writ of replevin), it is a per se breach/peace. (ß this is the majority view)
o   B should not hide the property
¬  (NOTE: You almost need a writ of replevin (automatically) if D is a store & repo of all the prop inside would be impractical (ususally is). In this situation, you should go the replevin route, bring a cop with you to help, and you can then successfully take back the whole store.)
w  # 3.5. Deare Distributors sells farming equip to retail farming supply stores. Firstbank (FB) & Deare have a working arrangement under which FB lends an amount equal to 60% of Deare's accounts receivable (A/R). When Deare makes a sale to the supply store, it sends a copy of the invoice to FB. FB deposits an amt equal to 60% of the invoice to Deare's bank account. When the supply store pays the invoice, Deare is required to apply 60% of the proceeds to repay the loan immediately. Deare requested that FB's interest in the accounts not be made known to the account debtors “b/c it might make them nervous.” What are the risks of this arrangement?
o   Risks for F include the following:
§  (1) D will collect on the accounts and not pay,
§  (2) D will make up invoices,
§  (3) D will sell to insolvent customers (D may be selling to broke companies about to go under) (4) D will sell defective equipment, or that
§  (5) D will engage in “kiting”. (i.e. paying off loans from old invoices with new cash flow).
o   Note: under this arrangement, Deare is a “debtor” under § 9-102(a)(28), F is a “secured party” under § 9-102(a)(72), and D's retail customers are “account debtors” under § 9­-102(a)(3). The A/R from the retail customers are “accounts” under § 9-102(a)(2)
w  # 3.6. (same facts as above) D defaulted & 2 mo.s ago F notified the account debtors to pay F directly.
o   a. H, one of D's account debtors, claims that it paid D in full last month and refuses to pay F. Can F collect from H? Yes!
§  § 9-607(a): after default, S/P may notify an acct D to make pmt to the secured party. (acct D here = retailers who are obligated to pay invoices on the accts)
·         (even if agreed not to, if default, can still send notice regardless.)
§  § 9-406(a): after notifications, an account debtor can only discharge its obligation by paying the assignee (D – the bank), not the assignor (Deare). (Have to pay the LENDER!)
o   b. Another account debtor, W, has refused to pay anything, claiming that although they received $42k in equipment, they have untended warranty claims amounting to $19k. What can F collect from W?
§  Ifs W's claims are valid, F can only collect $23k ($42k – $19k)
§  § 9-404(a)(1): unless otherwise agreed, an assignee's (F) rights are subject to all terms of the agreement btn the account debtor (W) and the assignor (D) and any defense/claim in recoupment arising from the transaction that gave rise to the K.
·         9-404: The AssE steps into shoes of the AssR (Deane).
w  # 3.9. Z sold a car to E and arranged financing w/ a separate financing company. E made the first two payments, then missed the next three. E complained about the quality of the car, the representations the salesperson made to her, and the financing Z obtained for her. What's your advice?
o   Has E defaulted? Default is defined in the security agreement. (MUST MAKE SURE DEFAULT FIRST!)
o   If E hasn't defaulted (i.e. if her valid warranty claims justify her from not making pmts) and Z repossesses the car, E could potentially bring a wrongful repossession