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Secured Transactions
UMKC School of Law
Hoffman, Paul M.

SECURED TRANSACTIONS
SPRING 2004

Overview

Revised Article 9 – Appendix Q

Unsecured creditor – no security interest
-A security interest gives the lender the right to repossess the item from those that default on a loan. It is a property right. The lender can exercise their property right on the default buyer.

Secured creditor – they have the right (or security interest) to repossess. They have collateral on your item (i.e. car or boat). There is a specific collateral – a piece of property that they have a right in.

You can self-repossess / self-help under Article 9 as long as you don’t breach the peace.

Unperfected security interest vs. Perfected security interest
-Secured creditor – relationship between debtor/creditor. If debtor does not pay you have a right to the property.
-Perfected security interest – the rules about perfection determine which creditors are first in line. It is the relationship between creditors – who has the right of priority with respect to certain collateral.

§ 9-101 – Scope of Article 9
Uniform implementation date is July 1, 2001 for Article 9. Comment 1 – this article supersedes former UCC Article 9. Article 9 talks about personal property and fixtures (i.e. books, inventory, equipment, trademarks, deposit accounts, etc.). Fixtures are goods that are permanently affixed to the land.
§ 9-102(41) – Fixtures: Goods that have become so related to particular real property that an interest in them arises under real property law.
Personal property usually involves movement.
§ 9-109 general scope
This is a voluntary transaction where someone grants a security interest to a lender.

§ 1-201(37) – Security interest: An interest in personal property or fixtures which secures payment or performance of an obligation.

Steps in security interest:

Whether something is within the scope of Art. 9? The scope is covered in § 9-109.
Has the security interest attached? Attached is the process by which you create a security agreement. You have to attach your security interest to a specific piece of collateral. Attachment is between the debtor and the creditor.
Is the security interest perfected? This is between creditors to give you priority. You file a notice that shows all other creditors and they know they will be 2nd in line.
Who has priority? There are a series of priority rules when the security is attached to the same piece of collateral. Basically, this comes down to who files first.

CREDITORS’ REMEDIES UNDER STATE LAW (Assignments 1-5)

Assignment 1: Remedies of Unsecured Creditors Under State Law

It is hard to get paid when you are an unsecured creditor.
Unsecured = BAD
Secured = GOOD
If you don’t have a security interest in any piece of collateral you sue for a judgment. Then you get a writ – give this to the sheriff to levy.
You often have to go through a lot to get paid. Also, it is hard to find assets to satisfy the judgment.
The law is never self-executing. This case shows how the lawyers have to work to make the law work.

Unsecured – No security interest in any property. No property right to go after any piece of property as collateral. You can’t repossess – you have to get a writ. If you do, you could be held civilly liable for conversion and criminally liable for larceny.

Art. 9 is not the only way to get a lien.
Lien (p. 24): A charge against or an interest in property to secure payment of a debt or performance of an obligation.
Art. 9 security interest is a type of lien. This is a broader category.

Vitale v. Hotel California, Inc. (p. 6)
They got a judgment and then a writ of execution to give to the sheriff to take possession. The sheriff takes possession and then the sheriff has a sheriff’s sale. At one point they took the furniture and equipment but could not sell it because it belonged to the landlord.
Amercement: We sue the sheriff for not executing the writ.
The court said that you could have successive levies under one writ and that this was reasonable. The plaintiff must prepare the writ, have it entered by the court clerk and see that it is delivered to the sheriff with instructions as to levying. If necessary, the plaintiff should conduct discovery to locate and identify property to be levied upon.
The judge instructed that the sheriffs are part of the enforcement of laws – a physical extension of the power of the court. The hope of using physical force is that the benefit to society will more than compensate for the loss of individual freedom.

Overall Lesson: Being unsecured is risky and bad. Even if you get a judgment, it is hard to collect on it. You don’t know where the assets are; there might be problems with executing the writ; there might be problems with them transferring the assets; etc. If you get a judgment, until you collect this is merely “ink stains of paper”

Assignment 2: Security and Foreclosure

Security Interest
Collateral that secures the repayment of the debt. This uses real property concepts-this is easier to understand.

Process of creating a security interest vs. process of getting around a security interest-this usually does not work.

Foreclosure Procedure:
Foreclosure is a process that operates on the ownership of collateral. It transfers ownership from the debtor to purchaser at the foreclosure and cuts off the debtor’s right to redeem the collateral. This change in ownership is typically accompanied by a transfer of possession, but it does not have to be.
Foreclosure does not always coincide with creditor’s gaining possession of the collateral. Even when debtor defaults and creditor gains possession of collateral, debtor still has a recognized equitable right to redeem the collateral. — Foreclosure operates on ownership, not possession.

Rights of Creditor upon default: 9-601(a) – authorizes secured party to take any one of the avenues on the handout. However, not until strict foreclosure or public or private sale can secured party cut off the debtor’s right to redeem.

**Handout 1/23
What are the rights of a secured party on default?

Article 9 Secured Creditor

Default

Sue for Judgment
9-601(a)(1)

Self-Help
Repossession
9-609

Replevin
9-601(a)(1)
9-609(b)(1)

Foreclosure
9-601(a)(1)

Notify Acct.
Debtor
9-607(a)(1)

Execution
& Levy:
Sheriff in
Possession

Possession by
Secured Party
9-207

Judgment:
Debtor has Possession

Payment *
Acct: No Possession

Sheriff’s *
Sale

Strict *
Foreclosure
9-620, 621

Public or *
Private Sale
(non-judicial)
9-610-614, 624

Judicial *
Sale

Possession to
Purchaser

Proceeds to
Secured Party

Deficiency:
9-615 (d)(2)

Surplus:
9-615 (d)(1)

Accts., CP, pay. intang., All Other: Accts., CP, pay. intang., All Other:
prom. note: Debtor Liable prom. note: Debtor
Debtor not liable unless otherwise Debtor not Entitled Entitled to
9-615(e)(2) agreed 9-615(e)(1) Surplus

* 9-623: Debtor has the right to redeem until:
(c)(1) Collateral is collected under 9-607 (e.g. accounts receivable);
(2) disposition or K for disposition under 9-610; or
(3) accepted collateral in full or partial satisfaction of debt under 9-622.

Terms:
Lien: A charge against or interest in property to secure payment of a debt or performance of an obligation.
There is a specific piece of collateral that secures repayment of a debt.
Voluntary liens: Liens created by contract with respect to personal property.
Involuntary liens: (a) Statutory liens – i.e. mechanics liens – you don’t pay for car work.
(b) Judicial lien – judge creates a lien on a particular piece of property
We are more concerned with the voluntary mechanisms.

Debord/Creech example
Equitable right to

ff-duty
Without a police officer, you are more likely police officer. This was different because
to argue and object. There is a false it was at 2 a.m. in a stealth manner at night
suggestion of authority here when you use to avoid confrontation. The sheriff was off
a police officer. It suggests that there has duty and there was no knowledge to
been some judicial process authorizing this plaintiff that this was the sheriff. This
action. It is a constructive breach when you does not suggest that the authority of the
use a police officer. You can’t protect your state was behind this action.

rights from being violated.

These deal with § 9-609(3)

Breach Not a Breach
Morris: During the 1st repossession attempt Williams: A wrecker came and took the
they were kicked off. During the 2nd attempt, car. The lady chased after them. They
they came back with two men and ignored the stopped and have her her things out of the
debtor’s sons protests. They were at the car. The objection here was when they
debtor’s residence. The objection here was were driving away. They could have just
during the repossession. kept going – the potential for violence is
diminished. The objection was after the
repossession.

Wade: They got out with no
confrontation, even though she
threatened them after their 1st attempt.
the court held despite the potential for
violence and her threats that no breach of
the peace occurred. Apparently, prior
objections don’t carry over to subsequent
attempts. It has to be an immediate
threat.

Rainwater: This involved commercial
property. The employee did object but
they let her into the office anyway. The
debtor consented to enter the property,
but later objected to the repossession.
the court said all that was needed was
consent to her presence in the office,
which had been given.

They pretty much only have to object to them taking it.
However, the practice of repossession is different. Repo Joe is not just going to say OK they objected and walk away. Reality is different from the law. Debtors do not have money to pay debts so how will they pay a lawyer for a breach of peace action.

Some cases look at to what extent you can alter the property.

Breach Not a Breach
Laurel Coal: You can’t just alter the Global Casting: In this case, there was no
property. They cut the chain on the fence potential for further damage to occur
which left plaintiff’s equipment unsecured because they changed the locks. There
inside. The court cited a case that explained were no other assets that were left
that it was a breach to break a window to vulnerable. Also, they had a provision in
unlock the door. They put other property the security agreement that allowed for
at risk and the court considered this to be them to do this.
unnecessary. If they had locked the fence
back up, then there may have been a
different result.

There is a greater protection for a debtor’s residence then there is for a commercial setting.
What if there was property belonging to a third party?

Breach Not a Breach
Salisbury: Young Salisbury had cars K.B. Oil: They were repossessing a
at his father’s ranch. This wan an entry rig from a truck dealer. This was
onto the property of a 3rd party. This commercial property. There was no
was both residential and commercial opposition. There was a fraudulent
property. It was a rural area – more of misrepresentation. There was
an expectation of privacy. You don’t advanced warning even though it was
expect to see someone cutting through fraudulent. The court said that this did
your field so there is more of a potential not support a potential for immediate
for violence. Also, there was no advanced violence.
warning to the 3rd party involved here.

Breakdown:
With respect to residential property, there is a greater protection and it is more likely that there will be a breach of the peace.
Objecting in any way