Secured Transactions
Johnson
Fall 2013
Creditor-Debtor Relationship:
· Creditors’ Remedies under State Law
o 1: Remedies of Unsecured Creditors under State Law
o 2: Security and Foreclosure
o 3: Repossession of Collateral
o 4: Judicial Sale and Deficiency
o 5: Article 9 Sale and deficiency
· Creditors’ Remedies in Bankruptcy
o 6: Bankruptcy and the Automatic Stay
o 7: Treatment of Secured Creditors in bankruptcy
· Creation of Security Interests:
o 8: Formalities for Attachment
o 9: What Collateral and Obligations are Covered?
o 10: Proceeds, Products, and Other Value-Tracing Concepts
· Default: The Gateway to Remedies:
o 13: Default, Acceleration, and Cure under State Law
o 14: Default, Acceleration, and Cure under Bankruptcy Law
· The Prototypical Secured Transaction
o 15: Prototypical Secured Transaction
Creditor-Third Party Relationship:
· Perfection
o 16: The Personal Property Filing Systems
o 17: Article 9 Financing Statements: The Debtor’s Name
o 18: Article 9 Financing Statements: Other Information
Steps:
· Look at the statute
· Look at the official comments
· Look at the cross-references sections
o See definitions – not always the same as common
· Look at caselaw
Structure:
· 11 multiple choice (spend ~45 minutes; 40% of total grade)
· 2 Essay Questions (spend ~75 minutes; 60% of total grade)
Creditors’ Remedies under State Law
· 1: Remedies of Unsecured Creditors under State Law
o Steps to determine remedy:
§ K formed?
§ Terms?
§ Breach?
· Any excuses for breach?
§ Measure of damages (material breach?)
§ How to recover
o Cases:
§ Vitale v. Hotel California, Inc.:
· Sheriff was supposed to levy after judgment for Vitale. Said it was futile.
· When sheriff was found not to have levied, he owed Vitale. Sheriff may then take action to recover from Fast Lane
· This is unusual.
§ Ellerbee:
· More common outcome: Plaintiff couldn’t recover from sheriff
o Problems:
§ Unsecured Creditor Rights Before Default:
§ Benning gives unsecured loan to Knopf’s childcare center after doing due diligence. Has heard reports that center not doing well, but Knopf is not yet in breach. Does Benning have any rights yet?
· Breach has not yet occurred: Benning is simply worried that she will not be paid back.
· However, not much to do about it. Knopf is not obligated to change anything and has all the leverage at this point.
§ Unsecured Creditor Rights After Default
§ 6 months later, Benning has default judgment against Knopf for more than $60k. When will Benning be paid? What do you need to know? What are possible sources of info? If Knopf doesn’t pay, how will Benning collect? Should she levy the equipment?
· Default judgment = asset. It is a right to collect that we can sell.
· Knopf might be willing to do what is necessary to satisfy the debt (i.e. payment plan)
· Discover what assets are, what liens are on assets, and whether we can get our hands on assets:
o Drawbacks:
§ Adversarial relationship may or may not be undermined
§ Expensive/time
§ Might find out not much out there
· Initial Digging:
o Try public records, credit reporting agency, etc.
· Levy equipment:
o Run risk of converting others’ property: might find out the hard way that it wasn’t his equipment and face a conversion claim.
o Dangerous!
§ Self-help for Unsecured Creditors not allowed.
§ Lisa wanted to buy furniture but didn’t have money. Jeff loaned her $1,000 and Lisa promised to buy it back (signed an I.O.U. for the loan). Lisa won’t pay. Jeff wants to know if he can just take the lawn furniture, which is worth less than the value of the loan. What advice do you give?
· Don’t take it: conversion/theft.
o Debtor owes payment, not property
o Self-help not allowed for unsecured creditor!
· Jeff probably only has the right to get a judgment and go through procedure.
o IOU akin to promissory note
o Will have to prove k and breach; then becomes judgment creditor
o After becoming judgment creditor, can go after money
§ Less risk of conversion than in daycare case
o Judgment will be expensive!
o *Statutes prohibit creditors from seizing some kinds of property.
§ Statutory Limitations on Recovery:
§ Property that can be taken under statute:
§ Assume now that Ted Knopf is living in Wisconsin (subject to Wisconsin statute setting up exemptions). During his deposition, Knopf testifies that he owns only the following property, all free and clear of any liens or security interests:
· A four-year old Toyota ($15,000):
o Combine auto exemption with personal property exemption: this totals $16,000 potentially available to Ted to protect this property
§ Toyota will probably qualify as a consumer good – entire value of the Toyota will be within the two exemptions.
o *Debtor has the burden of proving that the property falls within the exclusion
· A house that he recently inherited from his mother, estimated to be worth about $275,000 and is subject to a mortgage in the amount of $225,000:
o We have to know if he lives there: Wisconsin Statute § 815.20 Homestead Exception:
§ 40 Acre limit and to the amount of $75,000 equity:
· That $75,000 number is higher than his $50,000 equity in the home
· The rights of mortgage holder are significantly different
· The equipment from the day care center (resale value of $25,000)
o There is an exemption for business and farm property. This could qualify as business property.
o BUT Ted will have some issues:
§ Exemption is only up to $15,000 and the property is worth $25,000.
· This property is only partially exempt
§ He closed the business: this equipment must be “used in the business of
erest”
o “Waiver”: Voluntary relinquishment of a known right:
§ Security interest is a waiver of exemptions.
§ Security Interest as Waiver of Exemption?
§ Is Karen’s security interest void as a waiver of exemptions under Wis Stat. § 815.18(6)(a): (Waiver is voluntary relinquishment of a known right):
· A debtor waives his or her exemption rights by failing to follow the procedure set forth in statute
· Contractual waiver of exemption rights by any debtor before judgment on the claim is void.
o Does this make the security interest void?
§ Not necessarily:
· Maybe when parties take the extra step of entering into security agreement, that makes it at least marginally more possible that the buyer knew of the risk:
o Allows debtor to get better financing; facilitates exchange = balance of interest
§ Lease vs. Sell
§ Bonnie Breshnev runs a used car lot in a low-income neighborhood. Has to repossess a lot of cars and wants to lease the cars instead (lease-to-own). What advice to you give Bonnie about this plan:
· 1-203: Governs Leases:
§ (b) “A transaction in the form of a lease creates a security interest if the consideration is an obligation for the term of the lease not subject to termination by the lessee and the lease is for the remaining economic life of the goods”
· Original term
· Required renewal or purchase
· Renewal term for no/nominal additional consideration
· Option to buy for no/nominal additional consideration
o Courts look at the individual transactions on a case-by-case basis (1-203(a))
o Certain types of transactions will automatically be treated as a sale disguised as a lease.
o Conditions include:
§ Lessee doesn’t have a right to terminate the contract
§ One of the 4 conditions described in 1-203b is satisfied:
· Here, ability to become the owner of the good at the end of the lease for no consideration or for nominal consideration
o *Missouri has not yet adopted the revised version.
· This is very similar to the sale à basically, a lease disguised as a sale. (Substance over form)
o Further, INTENT DOESN’T MATTER: court must instead conclude that, as a matter of law, it is a lease or isn’t
· How could Bonnie make it look more like a lease?
o Lower monthly payments and make the final purchase price something other than nominal consideration
o Could give lessee the right to terminate
