Remedies for Unsecured Creditors
I. Types of Creditor debtor relationships
a. Bank-Debtor (usually governed by K)
b. Judgment Holder-Defendant
c. Driver-Other Driver (automobile liability)
II. In order to collect, unsecured creditors must:
a. Bring a lawsuit
b. Get a Judgment. To collect on a judgment, you must:
i. Secure a writ
1. of execution
2. of attachment: debtor owns the property
3. of garnishment: used to seize assets belonging to the debtor that are held by a third party.
a. Classic example is a bank account. If you’re lucky enough to find a bank account, get a writ of garnishment immediately.
ii. Find the stuff you can direct the Sheriff to take
1. this usually occurs through formal discovery
iii. Sheriff must levy the goods
1. you can have successive levies on a single writ
2. It is generally reasonable to have the sheriff collect at any time during the day, and some (but not unreasonable) danger may be expected
iv. When the writ is returned, the Sheriff can take no more goods on it.
1. Sheriff returns the writ when there is nothing left to reasonably collect, or three months have passed.
2. Must then get an alias writ or additional writ to get anything more
1. If the creditor can prove that the sheriff has completely failed to perform his duty, he can hold the sheriff liable for failure to collect. This is a fairly rare occurrence—courts are going to be sympathetic to the sheriff.
III. Limitations on Collection
a. Self-Help Remedies
i. Are generally forbidden by law for unsecured creditors, and will result in a claim for conversion or larceny.
b. Movement of Assets
i. A debtor is free to move their assets, and even to secret away funds. Usually, the only probable recourse is a charge of perjury during discovery.
ii. Generally, you cannot seize assets that the debtor has transferred to third parties.
1. Fraudulent Conversion: You may be able to claim fraudulent transfer if the transfer was done solely for the purpose of thwarting the ability of the creditor to collect.
2. Payment of other debts, even if it leaves nothing for another judgment creditor, is not fraudulent.
iii. Assets moved or located to another state: must file to get a writ in the state where the assets are located, and the sheriff levying it must be from that state.
c. Debtor Protection Statutes
i. Exempts certain items from execution in the collection process. Often includes certain homestead exemptions.
ii. If the value of an item (e.g., a car) exceeds the protected limit, you would sell the item, and give the debtor the exempted amount.
IV. Efficient System of Secured Credit:
a. Process = Cheap. If the secured credit system is to work, we have to be able to avoid all those costs and constant process, pleadings, discovery, etc., inherent in the unsecured collection world.
b. “Money at the end of the rainbow.” We need there to be something at the end that we can take and use from which we can recover the debt.
Security and Foreclosure
a. Security Interest: Any lien created by contract between a debtor and creditor
i. 1-201(35): interest in personal property that secures performance of an obligation
b. Lien: An interest in the property of another to ensure performance of an obligation
II. Types of Liens
a. Judicial: Where a lien attaches to property after a judgment from the court
i. Tax Lien: If you don’t pay your taxes, the federal government has an interest in your stuff (and that lien has super-priority).
ii. Mechanic’s Lien: If som
deed of trust)
i. Not allowed in all jurisdictions
ii. Must be included in the security agreement
iii. Deed of sale is given to a trustee
iv. If debtor doesn’t pay loan, creditor can inform trustee
v. Debtor then has a set period of time (usually 90 day) to make good
vi. If debtor does not pay, trustee transfers deed to the creditor
vii. If there are irregularities, debtor still has power to bring suit
c. UCC Foreclosure through sale
ii. Deals with personal property.
iii. After default, the secured party may use self help to sell, lease, license, or otherwise dispose of the property
iv. Debtor has a right to redeem until the creditor sells the property. Sale forecloses the right to redeem. 9-623.
v. Easier because real property is the foundation of our country. Personal property does not always share this distinction.
vi. Disposition of the property must be in a commercially reasonable manner.
d. Deed In Lieu of Foreclosure
i. In order for a deed in lieu of foreclosure to be effective, it must be effective immediately.
ii. If D gives C a deed in lieu of foreclosure, with the understanding that C will record in 1 year, if D has not fulfilled his obligation, this is a security interest, and equity of redemption will apply.
iii. Often is an exception to the rule in most states where it is required that you foreclose on real estate through judicial or power of sale.