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Secured Transactions
UMKC School of Law
Hoffman, Paul M.

CHAPTER 1:
CREDITORS’ REMEDIES UNDER STATE LAW

Assignment 1: Remedies of Unsecured Creditors Under State Law

A. WHO IS AN UNSECURED CREDITOR

1. Debtor-Creditor Relationship
(a) Ex: Lender (C) & Borrower (D)
(b) anyone owed a legal obligation that can be reduced to
a money judgment is a creditor of the party owing the
obligation
(c) Debtor-Creditor Relationship may be:
(i) voluntary
(ii) involuntary
(d) Unsecured Creditors
(i) general/ordinary creditors
(ii) use state collection proceedings
(iii) judgment creditor: unsecured creditor
who obtained a court judgment to establish
liability
(iv) remedies: minimum collection rights
(e) Secured Creditors
(i) secured status may be:
(a) contracted for
(b) granted by statute

B How do Unsecured Creditors Compel Payment?
(a) Prohibited Remedies:
(i) Self-help seizure
(a) self-help constitutes the tort of
conversion
(b) larceny
(c) wrongful collection practices

(b) Vitale v. Hotel California, Inc.
(i) amercement case
(ii) obtained money judgment followed by
a writ of execution (Π is responsible for specifically
identifying property to be obtained from a writ of
execution)
(iii) the amercement has given rise to a new debtor-
creditor relationship
(iv) Illustrates coercion through the remedy of levy
under a writ of execution
(v) garnishment is another remedy

C. LIMITATIONS ON COMPELLING PAYMENT

(a) Exemption Statues
(i) designed to ensure debtor does not become a ward
of the state
(ii) Wisconsin Statutes Annotated p. 15

(b) Exemptions:
(i) provisions for burial
(ii) business and farm property
(iii) consumer goods
(iv) motor vehicles
(v) Net income
(vi) depository accounts
(vii) homestead exemption

Assignment 2: Security and Foreclosure

A. THE NATURE OF SECURITY

(a) Lien
(i) most effective set of collection rights
(ii) “a charge against or an interest in property to secure payment
of a debt or performance of an obligation” 11 USC §101
(iii) Lien is a relationship between collateral and a particular
debt or obligation
(iv) Foreclosure: 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
(v) Most common form of a lien:
(a) Security Interest
(i) any lien created by contract between debtor and
creditor
(ii) See security interest, security agreement and lien
under 11 USC §101
(iii) a right in property that is contingent on
nonpayment of a debt
(vi) Nonconsensual Liens
(i) Statutory Liens: liens granted by statute
(ii) Judicial Liens: liens obtained by unsecured creditors
through the judicial process

(b) Collateral
(i) anything recognized as property
(a) usefulness of property as collateral depends on:
(i) how much value the creditor can extract
(ii) how much leverage that can be derived from
the ability to deprive the debtor of property

(c) Enhanced collection rights for secured creditors
(i) causes unsecured creditors to get only what is left after
provisions have been made for secured creditors
(ii) why be an unsecured creditor?
(a) compensated by receiving a higher rate of interest
(b) involuntary chosen role
(c) lack of sophistication

(d) Basile v. Erhal Holding Corp.
(i) Π mortgaged property to Δ together with a “deed in lieu
of foreclosure”
(ii) Π defaulted on mortgage payments and Δ recorded the deed,
claiming that Π waived the right of redemption
(iii) Court held that a deed conveying real property will be
considered to be a mortgage when the instrument is executed
as security for a debt
(iv) treat a deed, absolute in form, as a mortgage, when it is
executed as a security for a loan of money
(v) established doctrine that an equity of redemption is
inseparably connected with a mortgage, so long as the instrument
is one of security, the borrower has in a court of equity the right to
redeem the property upon payment of the loan
(vi) Δ’s sole remedy is to institute an action for foreclosure
(vii) Π will have right to redeem the property at any time prior to
the actual sale of the premises by tendering to Δ the principal and
interest due on the mortgage

(e) Intended as Security Doctrine
(i) applies to personal property transactions as well as those
involving real property
(ii) UCC §9-109(a)(1): Article 9 applies to any transaction
regardless of its form, that creates a security interest in personal
property
(a) Comment 2: when a security interest is created, this
Article applies regardless of the form of the transaction
Or the name the parties have given to it.

B. FORECLOSURE PROCEDURE

(i) Article 9 provides uniform procedure for personal property
foreclosure
(ii) Foreclosure operates on ownership, not possession. It transfers
ownership from the debtor to the purchaser at the foreclosure sale
and cuts off the debtor’s right to redeem the collateral.
(iii) transfer of possession can occur before, during and after foreclosure

(1) JUDICIAL FORECLOSURE

(i) Judicial: accomplished by the entry of a court order
(ii) Creditor holding a mortgage or a security interest files
a civil action against the debtor
(iii) Court will enter a final judgment of foreclosure
(a) set a date for the foreclosure sale
(b) method of sale is specified by statute
(i) in a particular place
(ii) on a particular day
(iii) sale must be advertised beforehand
(iv) Sale is conducted by sheriff or clerk
(v) Foreclosure sale must be confirmed by the court
(a) following the sale the parties have a period of time
in which they can object to the manner in which it was
actually conducted
(vi) sheriff or clerk disburses the sale proceeds
(a) if the amount is greater than the debt, the
“surplus” is distributed to junior lien holders and then
to the debtor
(b) if less the foreclosing creditor can request a judgment
for deficiency
(vii) debtor will remain in possession of the mortgaged premises
until the sale has been confirmed by the court. Then the purchaser
is entitled to possession.
(a) if debtor will not surrender the premises the purchaser is
entitled to a writ of assistance or a writ of possession

(viii) Deed in Lieu of Foreclosure:
(a) if there are no other liens or interests in the collateral,
the debtor can simply transfer the property to the creditor
(b) this deed does not clog the equity of redemption” if it
immediately extinguishes the mortgage and the underlying
mortgage debt.
(c) some creditors may persuade debtors to surrender the
property by paying the debtors an additional sum of money
by purchasing the debtor’s equity of redemption

(2) Power of Sale Foreclosure

(i) security agreement will be in the traditional form of a
mortgage or a deed of trust
(ii) collateral will be held in trust by the creditor or a 3rd party
such as 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 the sale
(iii) foreclosure is still necessary, but the process does not
include filing a lawsuit
(iv) the trustee conveys title to the purchaser at auction. The
sale forecloses the debtor’s right to redeem

(3) UCC Foreclosure by Sale
(i) foreclosing a security interest in personal property
(ii) after default, the secured party may sell, lease, license, or
otherwise dispose of any or all of the collateral UCC 9-610(a)
(iii) sale or disposition itself forecloses the debtor’s right to
redeem the property UCC 9-623
(iv) it extinguishes the creditor’s security interest in the collateral
and transfers to the purchaser all the debtor’s rights in the
collateral. UCC 9-617(a)
(v) If a creditor so chooses, it may foreclose by any available
judicial procedure UCC 9-601(a)

Assignment 3: Repossession of Collateral

A. THE IMPORTANCE OF POSSESSION PENDING
FORECLOSURE

(i) Reasons why the secured creditor wants possession:
(a) a debtor has little incentive to preserve and maintain
the property
(b) use of the collateral between the time the right to
foreclosure accrues and the time it becomes final may
have substantial economic value
(c) if

E. THE LIMITS OF SELF-HELP: BREACH OF THE PEACE

(a) UCC 9-609(b)(2) permits self-help repossession only if the secured creditor can repossess without breach of the peace

(b) What constitutes a breach of the peace?
Salisbury Livestock Co. v. Colorado Central Credit Union
(i) 2 primary factors for a breach of the peace:
(a) potential for immediate violence
(b) the nature of the premises intruded upon

(ii) if there is no confrontation and the timing and manner, including
notice or lack of notice, are found reasonable, the entry is privileged

(iii) Ask if a demand for the property is necessary
-if demand would be futile then it is unnecessary
-notice is not an express requirement of the statute, but is a
common law element which helps to determine the reasonableness
of the respossessors’ actions…

(iv) a trespass breaches the peace only if certain types of premises are
invaded, or immediate violence is likely

(v) confrontation or violence is not necessary to finding a breach of the
peace. The possibility of immediate violence is sufficient.

(vi) entry onto the premises of a third party not privy to the loan
agreement may trigger a breach of the peace

(viii) examples of breach of the peace. pp. 50-51

F. SELF-HELP AGAINST ACCOUNTS AS COLLATERAL

(a) accounts payable and accounts receivable, referred to accounts in UCC
9-102(a)(2), may be used as collateral

(b) Arrangements:
(i) SC gives debtor complete freedom to collect the accounts and use
the proceeds in business
(ii) SC may agree to let the debtor collect the accounts but require the
debtor immediately to apply a specified portion of them to the loan
(iii) SC may arrange with the debtor that the account debtors will pay
directly to the secured creditor
(iv) SC may vary the arrangements by requiring the debtor to direct
its account debtors to make their payments to a post office box that is
under the control of the secured creditor

(c) Self-help remedies in the event of default:
(i) UCC 9-607-SC who knows the identity of the account debtors can
simply send them written notices to pay directly to the secured creditor
(ii) UCC 9-406(a) provides a self-help remedy as well.

Assignment 4: Judicial Sale and Deficiency

-Article 9 security interests can be foreclosed judicially UCC 9-601(a)(1)
-Sale procedure commonly employed in nonjudicial foreclosure UCC 9-610(a), (b)

A. STRICT FORECLOSURE

(a) Strict Foreclosure-doe not require a sale of the collateral

(b) Most common:
-contract for deed
-installment land contract

B. FORECLOSURE SALE PROCEDURE

(a) statutes specify the manner in which a foreclosure sale must be held

(b) Steps:
(i) sale conducted by a public official, the sheriff, clerk of the court,
or a court commissioner
(ii) court reviews the circumstances under which the sale was held
and confirms the sale before it can be consummated
(iii) Sale proceeds are then disbursed

(c) Right to Redemption-exists while foreclosure is in process
(i) mortgage debtor has the right to redeem the property from the mortgage
by paying the full amount due under the mortgage, including interest and
attorney’s fees
(ii) Common law right to redeem-cut off as of the time of sale
(iii) Statutory right to redeem-right to redeem the collateral after the
sale, ranges between six months to three years, one year being most
common