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

Secured Transactions Review for Final
Musselman / Spring 2009

I. State Law Remedies for Unsecured Creditors
A. No rights in collateral to just take back (They can file conversion, trespass and theft against you) Must…
1. Obtain Writ Of Execution for Non-exempt property
2. Have Sheriff Levy (seize)
3. Sheriff’s Sale / Auction
B. If you have an unsecured contract add default provisions so if obligor goes into default you can accelerate payments.
C. Judgments
1. Against individual – can only levy on personal assets
1. watch out for exempted property
2. Conduct discovery to find out nonexempt property
2. Against business – can levy on business property
D. Exemptions on property only apply to unsecured creditors, if a secured creditor you can levy on exempt property because you have an interest in the property.
E. Watch for creditors who try to avoid creating a security interest by lease
1. A lease create a security interest if
1. The lease is not subject to termination by the lessee and
a. Term of lease is equal to life of goods
b. Lessee must renew lease or buy the goods
c. Lessee can renew the lease or buy the good for a nominal fee, or
d. Lessee has option to own for nominal fee
2. If any residual value goes back to the lessor, it is not a lease!
II. Remedies Available to Secured Creditor When Debtor Defaults
A. Repossession:
Secured party may take possession of the collateral, or render it unusable, with our without judicial process (replevin action) as long as it is done without a breach of the peace.
1. Breach of peace = wrongful repossession action (Tort)
2. A breach if break a lock and do not resecure the area to protect expensive equipment
3. A breach will occur if any confrontation is imminent.
1. Must withdraw but may come back later
2. Standard: If there is a reasonable likelihood a breach will occur
4. May trespass on anyone’s property to repossess but may NOT enter anyone’s residence.
5. May ask a guard if you can enter, says yes you are ok, says no you must leave
6. Presence of a Sherriff at repossession is a breach unless the sheriff has a writ from a replevin action.
7. Must be a default in contract before you can repossess. Ex: Missed payments. But make sure missed payments are not for a valid reason. If valid, no default has occurred and cannot repossess.
B. Method of Repossession
1. May contract method of repossession but may not include anything that would be found to be a breach of the peace
2. Method may not be manifestly unreasonable
3. Contract may provide you must assemble collateral for creditor to repossess all in one location.
1. Do not have to abide – can resist and threaten breach of peace if they try to take property.
2. A felony in Texas for debtor to hide the property
C. Intangible Collateral Incapable of Being Repossessed
1. Accounts (Receivables)
1. Debtor may try to kite invoices
a. SP should audit accounts and provide in contract they will withdraw if fraud is found
b. SP could require debtor’s customers to pay directly to SP. (Through lock box if debtor is concerned about customers finding out)
i. SP must give notice to debtor’s customers to pay SP. Once they have notice, if still pay to debtor and not SP still liable to SP.
ii. SP is subject to any rights debtor’s customers have against the debtor. Ex: Breach of warranty claims.
D. Deficiency Judgments
1. Non-Consumer Transactions Only!
2. If debtor calls into question SP’s compliance with Article 9, SP must prove they were compliant in order to obtain a deficiency judgment.
1. Must prove gave notice, reasonable sale, etc.
2. SP shall send notice of disposal to debtor and if a non-consumer good to any other SP that has an interest in the collateral 10 days prior to notice.
3. No notice is required if collateral is perishable, declines speedily in value, or sold on a recognized market.
4. Notice must provide description of debtor, SP, collateral and method of disposition.
5. Time period for notice is a question of fact – 10 days is reasonable.
6. Debtor cannot waive rules that deal with disposition of collateral including notice unless by agreement after default. Waiver may not be part of original SA.
7. Disposal of collateral must be by a commercially reasonable manner.
a. Court may impose a duty on SP to prepare and process the collateral for sell. Ex: Replace missing parts debtor stripped from collateral.
8. To dispose of collateral, the SP may sell, lease or license the collateral.
a. Do not have to sell, may keep in full or partial satisfaction of debt.
b. If for partial satisfacti

i. Is SP under or over secured? If value of collateral drops, may ask court for adequate protection. Court may order:
1. Debtor make monthly payment to SP or
2. Debtor provide an additional lien
ii. May need adequate protection if insurance is unavailable. Even if equity cushion, collateral may be damaged or lost.
iii. Majority Rule: Adequate protection starts from the filing of the creditors adequate protection motion.
c.. Unsecured creditors are limited to filing a proof of claim.
d. Relief from stay is good for 30 days unless the court orders the stay continued.
3. Calculation of Claim against a Debtor in Bankruptcy
a. Unsecured Creditors
i. Pre-petition debt (plus any costs you may have contracted for in bringing a bankruptcy claim ex: attorneys fees) +
ii. pre-petition interest provided by contract.
iii. Example: 340K debt at 12% per annum (same as 1% per month) and 6 months interest accrued prior to petition.
340K x 1% = $3,400 x 6 = $20,400 + 340K = $360,400.
b. Secured Creditors
i. Pre-petition debt (plus any costs you may have contracted for in bringing a bankruptcy claim ex: attorneys fees) +
ii. pre-petition interest provided by contract.
Example: 340K debt at 12% per annum (same as 1% per month) and 6 months interest accrued prior to petition
340K x 1% = $3,400 x 6 = $20,400 + 340K = $360,400.
iii. If Oversecured – Plus Pendancy Interest
Ex: Same as above but petition filed 3 months ago.
$360,400 x 1% mo. (12% a year) = $3,604 x 3 = $10,812 + $360,400 = $371,212
iv. If Undersecured, no pendency interest and claim freezes at value of collateral.
A. Must bifurcate your claim
1. Secured claim = Value of collateral
2. Unsecured claim = difference between debt and collateral. (Want plan confirmed as early as possible can start getting till interest.)
c. Confirmation of Plan: