SECURED TRANSACTIONS OUTLINE
PART I: THE CREDITOR-DEBTOR RELATIONSHIP:
-this section concerns the relationship between a secured creditor and the debtor and particularly how the rights of the secured differ from the unsecured. It also examines the procedures a party must go through to become secured.
-A creditor is anyone owed a legal obligation that can be reduced to a money judgment is a creditor of the party owing the obligation. They can be either secured or unsecured.
Examples of creditors: Lenders Sellers Buyers Tort victims Employees
-Creditors can also be either voluntary, like a lender through a contract, or involuntary like a tort victim.
Unsecured Creditors:
-Unsecured creditors are creditors that are not “secured.”
-Unless a creditor acquires a security interest through contract with the debtor or is granted such an interest by a statute, the creditor will be unsecured.
-To enforce their rights Unsecured creditors must reduce their claims to judgments, i.e., establish liability. If an unsecured creditor wins their case they will have a judgment entered against the debtor but this does not order the defendant to pay. This is enforced by other procedures…
Execution:
-Execution is the process of enforcing a judgment. It is the seizure and sale of the debtor’s property to satisfy the judgment.
Four steps:
1. Issuance of the writ of execution
-pursuant to CPLR 5232
2. Levy on the debtor’s property
-A levy is the seizure of property owned by the debtor to satisfy a judgment. The sheriff will follow the creditor’s instructions for levy and will take physical possession of the property. If the creditor gives the wrong instructions they may be liable for wrongful execution.
-The creditor must go through the discovery process of finding the debtor and interviewing him to find his property in order to levy upon. This inherently creates problems because the debtor could lie.
-Vitale v. Hotel California is an example of what can go wrong in attempting to levy upon a debtor’s property. The sheriff may refuse to levy as directed by creditor. The sheriff may seize the wrong property. Debtor may not disclose the existence of assets. Debtor may remove assets before the sheriff could levy upon them.
Exemptions-certain property is exempt from levy. CPLR 5205 defines the exemptions in New York. Usually necessities and often limited to a certain dollar amount.
3. Sale of property
4. Application of proceeds to the debt
Self Help:
-Unsecured creditors are not entitled to self help. They must use the legal process; failure to do so constitutes conversion.
In a Self Help Tale a creditor is owed money. He attempts to use self help by defrauding his debtor of inventory but the inventory does not satisfy the debt owed to him by the debtor so he takes the debtor to court. The court rules that the creditor cannot use self help and orders the creditor to pay the debtor.
Protections for Unsecured Creditors:
Prejudgment Attachment-As previously mentioned it may be difficult for a creditor to find the debtor’s property to levy on. To protect them the court allows Prejudgment attachment. In prejudgment attachment the sheriff seizes the property as on execution prior to receiving a judgment. The creditor must show extraordinary circumstances for a prejudgment attachment order to be granted.
Set-Off-Unsecured creditors can also set off their debt owing to their debtors.
Fraudulent Transfers and the Uniform Fraudulent Transfer Act-The act will cancel certain transactions entered in to the debtor prior to a judgment. This will prevent a
debtor from tr
e law will see through the terms used in the transaction if the transaction was intended to create a security interest.
1. Conditional Sale:
A Conditional Sale is an example of a disguised transaction. Seller who sells a good on credit will seek to retain title to the goods until the buyer has finished paying for the goods. This creates a security interest. The buyer owes a debt. The seller has an interest in property that is contingent until the creditor has finished paying.
2. Lease:
A Lease can also be disguised as a security interest. In a true lease the lessor will take back the property after the expiration of the lease. In a disguised lease the lessor will lease the property to the lessee for the remaining economic life of the property. So basically the lessor owes a debt to the lessee who has a contingent interest in the property.
Bright Line Test:
-Under the Bright line test (1-203(b)) A transaction called a lease creates a security interest if:
The lessee does not have a right to terminate the lease before its expiration date; and one of the following:
• Lease term ≥ RELG
• Lessee bound to renew lease for RELG or become owner
• Lessee has option to renew lease for RELG or become owner for no additional consideration or for nominal additional consideration
-Under 1-203(a) whether a transaction is a lease or security interest is determined by the facts of each case. The statute
