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

Secured Transactions
Fall 2017—Professor Musselman
 
Assignment 1: Remedies of Unsecured Creditors Under State Law
 
 
 
 
Creditor: Anyone owed a legal obligation that can be reduced to a money judgment. Unless a creditor contracts with the debtor for secured status or is granted it by statute, the creditor will be unsecured.
 
Methods of Compelling Payment
Levy under writ of execution (see Vitale)
Writ of garnishment on third party when third party is in possession of debtor’s property or owes money to debtor
 
Limitations on Compelling Payment
No self-help repossession
A prohibited seizure of debtor’s property may constitute the tort of conversion
No “fishing expeditions” by showing up at debtor’s place of business
Exemption statutes may prevent creditors from reaching assets
Property exemptions
Homestead exemptions
 
Secured Transaction
Personal property financing, debtor creditor relationship. Involves secured debt
Secured debt is when there is property to be used as collateral when secures the debt
 
Security Interest
Interest in property that you convey for a secured debt.
Locate the Property à Identify what property you’re trying to create an interest in
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Problem Set 1
P1.1. A year ago, the local Fun Furniture Outlet was having a liquidation sale. Lisa Charney wanted to buy some redwood lawn furniture but didn’t have the cash. Her friend and neighbor, Jeffrey Reed, lent $1,000 to Lisa. Jeff and Lisa were good friends, and Lisa said she would pay him back in a couple of months. When she did not, Jeff’s reminders became increasingly acrimonious. Now Lisa and Jeff haven’t spoken for two months, and she still hasn’t paid anything.
 
Jeff came in today, showed you Lisa’s signed IOU for the loan, and asked if he could just go over and take the lawn furniture Lisa had purchased with his money. The furniture is out in the backyard, and he says it looks really nice. Jeff is sure it is worth less than the amount Lisa owes him, but he says he’d be satisfied if he got it. What do you tell him?
Jeff cannot use self-help remedies if he is an unsecured debtor
Jeff has no property interest/right in any of Lisa’s property (including the lawn furniture)
If he goes out and uses self-help he may be liable for conversion.
What can Jeff do?
He could sue on the debt, get a judgment (i.e., state judicial process)
Then get a writ of execution, to see if can find personal property that the debtor owns
If found, get sheriff to seize the pp, sell it, giving the proceeds to Jeff (writ of execution)
Perhaps, garnish someone’s wages
If the property is exempt property, you cannot take the property
Texas has no $ limit on homestead exemption
 
 
P1.2. The following debt collection story appeared in David Morgolick’s New York Times column, “At the Bar”:
Lobster-Con. Stephen King punks guy for lobster
Probably going to get sued for conversion, prosecuted for criminal fraud
 
P1.3. Karen is a successful dentist. Karen loaned money to day care center. $10k loan to owner payable under certain terms. Center has never missed a payment.  With rumors that the day care center isn’t doing very well, Dentist wants to collect early or take over the business and put in the old manager. What to do?
If she wants to take over, she needs loan agreement which details these rights, which she doesn’t have
She’ll have to wait until he misses payments and then begin the judicial process
Banks will put in things like insecurity clauses, which allows the Bank to exercise in good faith the acceleration of payments or a de facto default. On this happens, she can go to court.
 
Additional problems arise when you note that the loan was made to a person, but for the purposes of a business corporation which probably owns all the assets
Collection from the person is far more difficult than collection from the corporation
Can file a motion requiring debtor to come down on the stand and give testimony about what he owns
 
P1.4. Six months have passed since the preceding problem. The day care center has folded
Must discover what the debtor actual owns
 
P1.5. Assume now that Knopf is living in Wisconsin. During his deposition, Knopf testifies that he owns the following property, all free and clear of any liens or security interests:
Must look to see what property is exempt in the state
Cars are exempt up to $1200, and if he wants to use his consumer goods exemption of $5000
 
 
 
§ 9-109(a)(1): Article 9 applies to a transaction, regardless of its form, that creates a security interest in personal property
 
Comment 2 to § 9-109:
When a security interest is created, Art. 9 applies regardless of the form of the transaction or the name that the parties have given to it
Assignment 2: Security and Foreclosure
 
 
 
 
“If it walks like a SI, talks like a SI, . . . .”
Usefulness of property as collateral depends on—
How much value the creditor can extract from it after default
How much leverage the creditor can derive from the creditor’s ability to deprive the debtor of the pp
§ 1-201(b)(35): “Security Interest”
Interest in personal property or fixtures which secures payment or performance of an obligation
“SI” includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Article 9
“SI” does not include the special property interest of a buyer of goods on identification of those goods to a contract for sale under § 2-505, the right of a seller or lessor of goods under Article 2 or 2A to retain or acquire possession of the goods is not a “SI”, but a seller or lessor may also acquire a “security interest” by complying with Article 9
Whether a transaction in the form of a lease creates a “SI” is determined pursuant to § 1-203
§ 1-203: Lease Distinguished from Security I

to termination by the lessee, which meets the 1st requirement of § 1-203
The $10 purchase price at the end of the lease would constitute nominal consideration
Therefore, Bonnie’s lease transaction constitutes a security transaction, and she must comply with Article 9
 
 
 
Assignment 3: Repossession of Collateral
 
 
A S/P may use self-help repossession:
§ 9-609: After default, a S/P may take possession of the collateral or render it unusable if they proceed without breach of the peace
The duty to refrain from breach of the peace is a non-delegable duty, making S/P liable for acts of independent contractors (e.g., repo men)
S/P’s use of law enforcement officer may be presumptive breach of the peace
Duty to not breach the peace cannot be waived by the debtor (see § 9-602(6))
 
You can almost never enter a residential home to repossess collateral à Breach of the peace
Cts are split about non-residential buildings
Night-time is the most effective time to repo
Cts split on whether trickery/stories/fraud constitute BOP
Floating Liens à Loans that are continually being made and repaid
 
§ 9-603: Agreement on Standards Concerning Rights and Duties
(a) Parties may determine by agreement the standards measuring the fulfillment of the rights of a debtor or obligor and duties of a S/P under a rule stated in § 9-602 if the standards are not manifestly unreasonable
(b) Does not apply to the duty to refrain from breaching the peace
§ 9-406(a): Discharge of Account Debtor; Effect of notification
An account debtor on an account, chattel paper, or a payment intangible may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee
After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor
§ 9-607(a): Collection and Enforcement by a Security Party
If so agreed, and in any event after default, a secured party:
(1) May notify an account debtor or other person obligated on collateral to make payment or otherwise render performance to or for the benefit of the secured party;
(3) May enforce the obligations of an account debtor