Prof. Sophie Smyth
I. Debt Basics and Unsecured Credit
a. Anyone who is owed a legal obligation that can be reduced to a money judgment is a creditor. Whoever owes that obligation is a debtor.
b. Unsecured Credit
i. Credit is unsecured UNLESS the creditor contracts for secured status or if statute grants secure status
ii. Compelling Payment from Unsecured Debtors
1. Most of the time, debtors pay voluntarily, but sometimes they try to avoid payment.
a. The first step is getting a judgment.
b. Next, creditor secures a writ of execution from the court, which is addressed to the sheriff and gives instructions on how and where to levy. This can be problematic because it puts a huge burden on creditor to investigate if the debtor has attachable assets and where they are. It’s expensive and time consuming for creditor, who might need to do discovery and search public records. Also, the stakes are high for creditor, because if he screws up, he could be liable for conversion or larceny.
c. Next, sheriff follows “reasonable instructions” from the creditor. According to Ellerbee, the sheriff has no duty to comply with additional requirements imposed by the creditor beyond the reasonable instructions for levying on the writ. For instance, if the creditor tells the sheriff to levy promptly (because the assets may be moved by debtor), the sheriff only has a duty to levy within the return period (usually 3 months). No valid levy allowed after the return date. Multiple levies allowed on each writ (Vitale), as long as it is within the return period. If the seizure is insufficient, creditor may apply for another writ.
d. Seized property is sold by sheriff at sheriff’s sale, and proceeds to go creditor to pay the balance, remainder to debtor
3. In Vitale, the issue was figuring out the sheriff’s expected duties. Sheriffs are entitled (and expected, if needed) to use physical force to levy executions, even if it is difficult or dangerous.
II. Creation of Security Interests (Attachment)
a. A security interest is any lien (a charge against or an interest in property to secure payment of a debt or performance of an obligation) created by contract between creditor & debtor. The security interest itself has effect only in the event of the debtor’s default. By definition, secured credit takes precedence over unsecured credit, so unsecured creditors pretty much get what is left after provisions have been made for secured creditors.
b. PERSONAL PROPERTY: When a security interest is enforceable, in the event of default, the secured party can foreclose on the collateral. 9-203(b) lists three formalities required for the creation of a security interest enforceable against a debtor, and only once all three have been met does the security interest attach to the collateral and become enforceable against the debtor.
1. Formality 1: Either the collateral must be in the possession of the secured creditor (i.e. pawn shops) OR the debtor must have “authenticated a security agreement (which must be signed by the debtor) which contains a description of the collateral”;
2. Formality 2: Value must have been given by secured creditor; AND
3. Formality 3: The debtor must have rights in the collateral (If the debtor owns a limited interest in property and grants a security interest in the property, the security interest will generally attach to only that limited interest).
ii. An authenticated record is usually just a fancy way of saying a signed writing, but allows for forms like email. Usually takes form of security agreement. Email and other records can count as authenticated documents. Alternatively, the sec’d creditor may just take possession of the goods pursuant to an oral agreement to create a security interest i.e. pawning. Besides pawn shops and the occasional field warehousing (where lenders take possession of collateral but still let debtors use it), authenticated records are much more common and practical than possession. Schwalb held that a pawn ticket describing the collateral and stating “You are giving a security interest in the following property…” in tiny print to be a security agreement.
iii. More than one document, read together, may satisfy 9-203(b)(3)(A). This is the composite documents rule. So long as the documents express some internal connection with one another, they may be read together for purposes of including the collateral described in the second document within the security agreement’s umbrella. However, this is controversial and far from a bright line rule. DeVincent held that a title + a promissory note together weren’t enough to evidence intent to form a security interest. Giaimo came to the opposite conclusion with similar facts.
1. White & Summers test: (1) Language embodied in the writing objectively indicates the parties intended to create or provide for a security agreement? (2) Did parties actually intend to create a security interest? Parol evidence is admissible to inform the latter, but not the former, inquiry.
iv. Value is defined very broadly, so the second prong is very easy to meet. 1-204: a person gives value for rights if the person acquires them: (1) in return for a binding commitment to extend credit or for the extension of immediately available credit, whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection; (2) as security for, or in total or partial satisfaction of, a preexisting claim; (3) by accepting delivery under a preexisting contract for purchase; or (4) in return for any consideration sufficient to support a simple contract.
c. REAL PROPERTY: Varies from state to state. Most require that the mortgage be in writing and signed by the debtor in the presence of one or more witnesses.
a. Foreclosure operates on ownership, not possession.
b. If the debt is not paid when due, the creditor can compel the application of the value of the collateral to payment of the debt. This is called foreclosure. Foreclosure is the legal mechanism that shuts off the equity of redemption. It became a process of sale because the creditor wants the market value of the collateral. The valuation of the collateral isn’t always absolute though (i.e a property with family pets buried in the back yard may be worth more than the property’s market value, at least to the property’s owner). The collateral is monetized (liquidized) through the process of sale. The lender gets his balance, and the debtor gets the remainder.
i. What is equity of redemption? When a debtor fails to make payment, the debtor may have an opportunity to pay the debt to prevent losing the collateral. This exists out of fairness. It’s messed up if you miss one payment and automatically end up losing the collateral. For the lack of $10, the borrower shouldn’t be able to lose $100, which would cause a windfall for the lender. If there is a security interest, there is an equity of redemption, and that equity is ended by foreclosure, which occurs through the process of sale.
ii. In a security agreement, parties may agree to events of default, which states everyone’s rights upon default, such as a cure period
c. Transactions as Security Doctrine and “Hidden” Securities
i. Foreclosure sucks for all parties involved. It is expensive and time consuming, so avoiding it is best suited for everyone. Unfortunately, the “transactions intended as security” doctrine prevents contracting around foreclosure AFTER the event of default.
ii. The intended as security doctrine appl
d party (i.e. a bank or title company). The borrower agrees that in the event of default, the trustee can sell the property and pay the loan from the proceeds of sale. The law sees this as a security interest instead of an actual trust because it intended to create a security. This is different than a deed in lieu of foreclosure because the creditor must still foreclose to collect, but the foreclosure process is expedited and does not require a lawsuit. The tort of wrongful sale exists for debtors to use when needed.
iii. Foreclosing personal property is simpler than the process for real property. Section 9 provides that after default, the secured party may sell, lease, license, or otherwise dispose of any or all of the collateral (9-610(a)), and that sale/disposition forecloses the debtor’s right of redemption (9-617(a)). Judicial procedures are also available if the creditor so chooses (9-601(a)).
IV. Repossession of Collateral
a. The period of time from the debtor’s default until the equity of redemption is foreclosed may last a long time. Who possesses the collateral in the meantime is important for five reasons:
i. Party in possession will capture the use value of the collateral (i.e. if it is a house, the debtor can live in it if he still possesses it, or if the creditor possesses it, he can rent it out)
ii. Only the party in possession may have access to the property to evaluate it before sale
iii. The creditor’s gain of possession may interrupt the debtor’s use (i.e. if the collateral is inventory and equipment of a business, a shift of possession may make continued operations impossible).
iv. By determining who is physically in a position to maintain or destroy the collateral, possession may determine whether and how it is preserved.
v. Possession, or the right to obtain it, provides bargaining leverage
b. The security agreement typically says who will possess in the case of default, but even if the creditor has the right to possess, the creditor still must follow certain procedures.
c. Self-Help – Personal Property: Unless otherwise agreed, 9-609 gives the secured party the right to take possession immediately on default as long as the collateral is tangible, personal property. The secured party need not involve courts or public officials if the secured party can get possession without a breach of the peace.
i. Breach of Peace factors: (1) potential for immediate violence & (2) nature of the premises intruded upon. Reasonableness requirement. Salisbury: entry onto the premises of a third party not privy to the loan agreement + privacy expectations of rural residents = possible breach of peace. Trespass is not necessarily a breach of peace. It is only one factor to consider. “A trespass breaches the peace only if certain types of premises are invaded, or immediate violence is likely.” However, confrontation or violence is not necessary for breach of peace either. The possibility of violence is enough. In Chapa, the evidence clearly showed that the repossessor actively attempted to avoid confrontation, so no BoP.