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Secured Transactions
St. Johns University School of Law
Warner, G. Ray

Secured Transactions
Spring 2012
Professor Warner
 
 
 
 
       I.            Remedies of Unsecured Creditors
 
 
a.       How to become a debtor
                                                              i.      Debt- A monetary obligation that is legally enforceableCan arise voluntarily: Borrow loan, contract (becomes a debt when you default on your contract: expectation damages in $)
                                                            ii.      Can arise involuntarily:  Tort damages
 
b.      Status as a Creditor
                                                              i.      Creditor: anyone who is owed a legal obligation that can be reduced to a money judgment
                                                            ii.      Creditor-debtor (obligee-obligor) relationships may be voluntary or involuntary
                                                          iii.      Creditor is unsecured unless creditor contracts with debtor for secured status or is granted it by statute
1.      Creditor has right to demand payment from debtor
c.       Unsecured Creditor Rights
                                                              i.      Rights baseline à the rights of unsecured Creditor are the baseline; that is all creditors have the rights available to unsecured creditors.
1.      Secured Creditors have additions rights
 
d.      Prohibited Remedy for Unsecured Creditor: Self-Help Seizure
                                                              i.      No Self Help à Unsecured Creditor has legally enforceable right to be paid, but not to the property seized
                                                            ii.      Concerns:
1.      Violence
2.      Social Order
3.      Inter-creditor Disputes (“First Dibs”)
4.      Inertia (creditor wants to change the status quo)
5.      Procedural due process
                                                          iii.      Civil liability – May be liable for conversion
1.      Usually, a prohibited seizure of a debtor’s property will constitute the tort of conversion. Conversion is the wrongful exercise of dominion and control over another’s property in denial of or inconsistent with his rights. Level of damages for conversion liability is the value of the property seized (i.e., a “forced sale”).
2.      May also face punitive damages
                                                          iv.      Criminal Liability – Larceny. A creditor that wrongfully takes possession of property of the debtor may be charged with larceny, even if the value of the property taken is less than the amount owed.
 
 
e.       Remedy: Pressure/Leverage
                                                              i.      Examples: interest, penalty, credit reporting, threaten legal process, secured transaction
 
f.       Remedy:  Debt Collection process
                                                              i.      First
1.      File a complaint à The unsecured Creditor must sue the debtor and get a judgment
2.      The Judgment allows the creditor to get a writ of execution from the court to give to a sheriff to take property from the debtor
                                                            ii.      Judicial Order/Judgment
1.      Mere fact that creditor is owed $ does not give creditor any right, title, or interest to any of the assets of debtor
a.       Judicial mechanism is required to give creditor those rights
2.      Court order declaring that creditor is owed money
3.      Judgment creditor: court judgment established liability
4.      Money judgment can be enforced only in state where rendered
a.       creditor must establish judgment in destination state before invoking enforcement powers of that state
 
                                                          iii.      Mechanisms to Enforce the Order/ Judgment (Vitale v. Hotel California)
1.      First
a.       Discovery: necessary to determine what assets debtor has available, where they are, whether they are exempt, & whether they are able to be liquidated
b.      Disclosure of assets (may require body attachment, which is an arrest until the party is interviewed; may also require contempt proceeding)
                                                                                                                                      i.      Contempt proceeding may be problematic though because debtor can withdraw and hide assets
                                                                                                                                    ii.      2 Main Types of Fraudulent Transfers by Debtors
1.      Any transfer made w/ actual intent to hinder, delay, or defraud any creditor > bad intent (can be inferred from several acts)
2.      Any transfer made w/o receiving a reasonably equivalent value in exchange for the transfer if debtor was insolvent at time of transfer (debtor cannot make gifts or sell assets for less than reasonably equivalent value)
2.      After you find non exempt property you get a à Writ of execution/levy: Judgment creditor gives sheriff writ of execution & instructions, directing sheriff to levy (seize) property to fulfill the judgment
a.       May still encounter difficulties from lack of information, lack of cooperation, the debtor withdrawing property, & mistakes in collection
b.      If property seized turns out to belong to third party, judgment creditor may be liable to third party or face conversion claims (third party recovers value of property)
c.       Sheriff may insist on indemnity so he is not held accountable if something is wrongfully seized  
d.      Note: if the first levy does not satisfy the writ. The sheriff should not return the writ without showing another attempt would be fruitless.
                                                                                                                                      i.      Late nights is not an excuse – police officers as well as sheriffs are obliged to work during late hours
e.       Ellerbee v. County of LA
                                                                                                                                      i.      the mandatory duty is that the gov entity act in accordance with the written instructions but makes no reference to any duty to comply with deadlines or timing requests.
1.      “As soon as possible” or “promptly” do not create mandatory duty.
2.      The sheriffs contain complete discretion just has to be done before the writ's expiration.
                                                                                                                                    ii.      Risk: 
3.      After the sheriff collected some property
a.       Auction sale: property has to actually belong to the debtor or else the creditor will be liable
                                                                                                                                      i.      Property is sold and the proceeds goes to the creditor.
4.      Writ of garnishment: require third party to pay judgment creditor rather than debtor
5.      Imprisonment: court can order imprisonment but not for judgments related to personal injuries, wages of working people, or breaches of most contracts (usually reserved for most serious violations)
6.       
 
                                                          iv.      Problems/Barriers to Collection:
1.      Sheriff problems
a.       Ellerbee v. County of LA
                                                                                                                                      i.      the mandatory duty is that the gov entity act in accordance with the written instructions but makes no reference to any duty to comply with deadlines or timing requests.
1.      “As soon as possible” or “promptly” do not create mandatory duty.
2.      The sheriffs contain complete discretion just has to be done before the writ's expiration.
                                                                                                                                    ii.      Risk: Assets may disappear in the interim between judgment and point of collection.  Assets may be transferred (If I transfer my assets away only to keep them away from my creditor this is known as a fraudulent transfer.)  Other creditors may have already levied assets (first in time, first in right).  Another creditor may have a superior interest over you.
                                                                                                                                  iii.      Lack of Knowledge: We do not know what type of assets a debtor has.
2.      Expensive, time consuming, risky, may not be effective
a.       May be able to include provision in contract that debtor will cover fees in event of default
3.      Priority (“First Dibs”)
a.       Other creditors may also be trying to attain the same assets
b.      Not fraudulent for debtor to pay one of its creditors as long as debtor does not make payment for purpose of defrauding other creditors
4.      Exemptions
a.       Certain assets are exempt from reach of creditors
b.      Aim to prevent debtor from being left destitute (societal judgment)
c.       NY Exemptions:
                                                                                                                                      i.      Wedding ring (any value)
                                                                                                                                    ii.      Homes up to $150,000 (over & above the mortgage) in metro area
                                                                                                                                  iii.      Pension plan
                                                                                                                                  iv.      $4,000 value of car (over mortgage)
                        

2.      Note: Article 9-109(a)(1) codifies “Intended as security” doctrine
a.       Provides that Article 9 applies to “any transaction regardless of form, that creates a security interest in personal property.
3.      Note: “Intended as Security” doctrine has implications for several other kinds of transactions
a.       Conditional Sales
b.      Leases intended as Security Interests
c.       Sales of Accounts
d.      Asset Securitization
                                                            ii.      Non-possessory Interest: modern idea that one party has title but the other party is able to use property while they are paying it off
                                                          iii.      Article 9 does not adopt lien theory or title theory
                                                          iv.      Foreclosure
1.      What happens at a foreclosure
a.       Foreclosure is a process that operates on the ownership of the collateral. It transfers ownership from the debtor to the purchaser at the foreclosure sale and forecloses the right of redemption.
2.      Right to redemption (equity of redemption): debtor redeems collateral by repaying the loan (plus interest) & providing any other compensation
a.       Only exists when collateral is worth more than the debt (ie., if your Car is worth more than your loan, you have equity in your Car)
3.      Foreclosure action: forecloses equity of redemption (judicial determination); allows creditor to transfer good title free from equity of redemption of debtor
4.      Deed in lieu of foreclosure: debtor can agree to transfer property, immediately extinguishing the mortgage & underlying mortgage debt
5.      [Note: Article 9 provides non-judicial procedure for personal property foreclosure but permits judicial foreclosure methods if secured parties prefer] a.       Non Judicial Foreclosure methods
                                                                                                                                      i.      9-610(a) – It provides after default, the secured party may sell, lease, license, or otherwise dispose of any of the collateral  in its present condition or following any commercially reasonable preparation or processing.
1.      (b) [Commercially reasonable disposition.] Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. If commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms.
                                                                                                                                    ii.      9 -623 – That sale or disposition itself forecloses the debtor’s right to redeem the property
                                                                                                                                  iii.      9-617(a) – It extinguishes the creditor’s security interest in the collateral and transfers to the purchaser all of the debtor’s right in the collateral
b.      Judicial Foreclosure
                                                                                                                                      i.      9 – 601(a) – if the creditor so chooses, it may foreclose by any available judicial procedure.
                                                                                                                                    ii.      Procedures for the secured creditor can sue for such order are available under state law
                                                                                                                                  iii.      Secured Creditor  holding a security interest typically files a civil action against the debtor
1.      In the complaint the secured creditor details the loan and the nature of default and requests that the equity of redemption be “foreclosed”