William S. Richardson Fall 09 Secured Transactions Outline with Professor Booth
Answers to questions
Creditors’ Remedies Under State Law
Assignment One – Remedies of unsecured creditors under state law
I. Class notes.
a) Rule of 72. 1% = 72 years to double. 2% = 36 years. 18% = 4 years. 24% = 3 years.
b) Can only grow if allow people to borrow money at a low rate. How do you do this? Allow people to put of security. Question – what is good collateral from the lender’s point of view.
i) Enter into agreement with lender and grant them some kind of collateral or interest in a property you own.
ii) Cash – would like to have the cash collateral in their account. From borrower perspective, cannot use the money.
iii) Real estate – tangible and will not go away. Retains it values better than other collateral classes and cannot dispose of it quickly. From bank’s perspective, foreclosure takes time (it is a slow process).
iv) Treasury – kind of like cash.
v) Equipment – generally high value and hard to get rid of. For individual consumers, will generally be cars (this is probably the best collateral for banks – can get it quickly if someone defaults).
vi) Personal items, i.e. computers – depreciates so quickly, not worth having as collateral. Same goes for household appliances. Question – why might some companies still want a security interest in personal items? Power, able to take everything you have. Not worth much to them financially, but worth a lot to the consumer, who will find the money to keep it.
c) Secured transaction at the heart of economy. Need cash to grow businesses. This is tied into the interest rates.
d) Loans.
i) Fannie Mae and Freddie Mac – govt backed entities that buy mortgages. Issue billions of dollars of mortgage backed security.
e) Need to keep eye on big picture – have to master Article 9 of UCC. Code sets groundwork for this course.
i) One of the most important developments in US commercial law.
II. Remedies of unsecured creditors under state law.
a) Legal categories of debtor and creditor are broad. Anyone owed a legal obligation that can be reduced to a money judgment is a creditor of the party owing the obligation.
b) Unsecured creditor. Unless the creditor contracts with the debtor for secured status or is granted it by statute, the creditor will be unsecured. Unsecured creditor is the general creditor or ordinary creditor which populates state collection proceedings.
i) If unsecured creditor has already obtained a court judgment to establish liability, then the creditor is also a judgment creditor.
c) Legal remedies available to unsecured creditors are the minimum collection rights guaranteed to anyone owed an obligation that be reduced to a money judgment.
III. How do unsecured creditors compel payment?
a) Remedies for unsecured creditors are narrow. Many alternatives are prohibited by the law. Unsecured creditors CANNOT use self help seizure of the debtor’s property and in most cases this method will be considered the tort of conversion.
i) Tort of conversion. The wrongful exercise of dominion and control over another person’s property in denial of or inconsistent with person’s rights.
ii) If creditor wrongfully takes possession of debtor’s property, creditor may also be charged with larceny. Furthermore, though creditor has right to demand payment from debtor, creditor cannot do so in an unreasonale manner (may result in liability for wrongful collection practices).
b) Creditor can only coerce payment though the judicial process.
c) Vitale v. Hotel California, Inc. (N.J. Supreme Court 1982).
i) Facts: plaintiff Vitale brought motion to hold Sheriff of Monmouth County, William Lazaro, liable for failing to execute a writ based on a judgment against Hotel California.
ii) After Vitale obtained a full judgment against HC, learned that it owned a bar in New Jersey. A writ of execution and cover letter instructed sheriff to levy all monies and personal property at the bar.
(1) Sheriff first told plaintiff that levy not possible since bar was only open between hours of 10 pm and 2 AM. Plaintiff advised sheriff that needed to levy during open hours. A deputy sheriff then went to the bar with a police officer during the bar’s open hours, but was turned away by bouncers. Fearing violence two men left.
(2) Plaintiff advised deputy sheriff to make levy and arrest anyone who interfered. Deputy sheriff conferred with superiors and told plaintiff that court order would be needed to gain access to the bar.
(3) Court ordered that sheriff be permitted access to the bar and arrest anyone interfering. Deputy sheriff able to seize some money and other personal property. Plaintiff instructed DS to make further levy until writ was satisfied. DS said had to consult with superiors. Later informed plaintiff that only one levy was needed under writ of execution.
(4) Plaintiff requested additional levies. Counsel for sheriff’s office informed plaintiff that sheriff was instructed not to make additional levies. Plaintiff threatened amercement and file motion.
iii) Sheriff contended that it was unreasonable to expect any sheriff to go to the bar at unknown hours for an unspecified number of occasions. Suggested that plaintiff could pursue other alternatives.
(1) Plaintiff argued that it had difficulty collecting judgment, personal property in Cali was found to belong to landlord of establishment, thus cancelled a sheriff’s sale, Cali president completely disclosed assets, but when attempted to levy corporate bank account, it was already overdrawn.
iv) Issue: whether successive levies are possible under one writ of execution. 2) whether a sheriff may refuse to levy as instructed by plaintiff for basis that request is unreasonable or onerous. 2) whether sheriff’s conduct as to the writ of execution subjects sheriff to amercement.
v) Holding: in favor of plaintiff on all issues.
vi) Rule: Successive levies under one writ. Further levies under one writ are authorized under the same writ before the return day if the initial levy does not satisfy the judgment.
(1) Use of physical force in attempting a levy. May force an entry into any enclosure except the dwelling house of the judgment debtor to levea fieri facias (writ of execution??) on the debtor’s goods and even in the case of the debtor’s home, when the officer is once inside, he may break open inner doors or trunks to come at the goods.
(2) Amercement. Judgment creditor may hold a sheriff liable for failing to properly execute against a judgment creditor through amercement.
(3) Amercement – definition. The “pecuniary penalty in the nature of a fine imposed upon a person for some fault or misconduct, he being ‘in mercy’ for his offense.” Used to describe a fine imposed on officers of the court for failing to turn over money, more particularly, for a sheriff’s neglect to levy upon or turn over proceeds of an execution. Plaintiff has burden to prove amercement and was deprived of “substantial benefit to which he was entitled” under the writ, but for officer’s conduct, would have received such benefit through the execution.
vii) Discussion: Successive levies under one writ. Successive levies under one writ is possible. If property is not levied sufficiently to satisfy the execution, should not make return without a showing that attempting another levy is fruitless.
viii) Reasonableness of requested levies. As to objection to unknown number of occasions would have to attempt to levy, the amount of levies under this judgment may be unusual, but it is not unreasonable. Under the circumstances of this case, it was not successive since the bar was only open during the summer season. Also fact that seized several hundreds of dollars at one time demonstrates effectiveness of this mode of levying.
(1) As to irregularity of when bar was open, acknowledged that could consult ads in local newspaper advertisements and call the bar itself.
(2) As to unreasonable hours, bar was generally open mostly on weekends between hours of 10 PM and 2 AM. Under a writ, can levy at any hour.
(3) As to threat of violence, a court ordered that anyone interfering with execution could be arrested.
ix) Amercement. Can hold sheriff liable for failing to properly execute against a judgment creditor through amercement. If sheriff fails to perform any duty imposed upon him by law in respect to writs of execution resulting in loss or damage to the judgment creditor, shall be subject to amercement in the amount of such loss and damage to and for the use of the judgment creditor.
(1) Plaintiff has burden of proving amercement. Plaintiff did all that was necessary regarding the execution. As to whether plaintiff suffered a loss, plaintiff does not have to prove the value of the subject property, only has to prove that suffered a loss.
(2) Court held that P was denied the benefit of the writ.
x) Writ of execution process. P who has a judgment against D can cause personal property of the D/judgment debtor to be seized and sold and proceeds applied to the judgment and costs via execution. P obtains a writ of execution, which directs sheriff to levy and make a return within three months of issuance.
(1) Return. The physical return of the original writ, indorsed by executing officer’s description of what was done. Also have to file verified statement of when and how much money was collected and balance due on the execution.
(2) No more levies on any property can be executed under the writ after the writ has been returned. Valid levies CANNOT be made after the return date. Successive executions upon the same judgment are possible. Thus if first levy is unsuccessful/insufficient, creditor can sell alias writ for levy on other goods. Can seek unlimited number of pluries writ until judgment is satisfied.
(3) Writ is in “exclusive control” of judgment creditor. Sheriff has to follow creditor’s reasonable instructions and must abide by special instructions to make an immediate levy.
xi) NOTE – court was reluctant to issue amercement, but was overcome by convincing proof that sheriff owed and breached duty to P to make the successive levies as requested.
d) Main purpose of case was to illustrate the process for levying property and the length of time it may entail – plaintiff first got favorable judgment in 1980. Opinion was written in 1982. For unsecured creditor, there are a lot of “hoops” that have to be jumped through and the length of time is really long. Lot of obstacles for unsecured creditor.
e) In this case, the sheriff is the one who ends up paying the creditor-plaintiff.
f) Vitale illustrates power of judgment creditor to coerce payment. In this case, coercion was through the remedy of levy under writ of execution.
g) Other remedies include garnishment. If a third party possesses property of the debtor or owes money to the debtor, creditor can cause sheriff to issue a writ of garnishment on the third party.
IV. Limitations on compelling payment.
a) Judgment creditor has obligation to use discovery to locate assets. This means that creditor has right to demand information and that the sheriff will only act on clear directions about what to get and where to get it.
i) There are risks to this method. If the property seized turns out to belong to a third party judgment creditor may be liable for any damages caused to the third party. Wrongful exercise of dominion and control over the property of another constitutes tort of conversion.
ii) This process can be long and assets may not remain stationary, even if judgment creditor is able to ascertain location of assets. All states have adopted laws authorizing the courts to void debtors’ “fraudulent transfers.”
b) Provisional remedy. This can be obtained before judgment is obtained. If debtor is fraudulently disposing its property during the lawsuit, creditor may have right to an immediate “attachment” of whatever property the debtor
(like public records as to deeds to property, trusts, etc.). Can go online and get credit reports for people.
ii) As to daycare center equipment, the judgment is against Knopf PERSONALLY! Need to know who the equipment is owned by – may be owned by someone other than Knopf (does not matter is issues arose from problems of the daycare center). Have to look who the judgment is against and then go down that path!
e) Problem 1.5. have to look at exemption statute. Based on Wisconsin statutes. Much hurry for sheriff to levy since Knopf may move some the assets. However, any transfers the courts hold fraudulent may be voided. (page 13).
i) Car – $1200 is exempt, so up to $2800. however, there are not consumer goods, so can add the $5000 to the $1200 to get a total of $6200. So NO levy on car, since car is worth less than the aggregate for exemption. HI – would argue that the $2575 is exempt and tied to subsection three also.
ii) House –if he selects it for exemption and occupies it then up to $40,000 is exempt. (exemption is to protect minimum values) HI –
iii) Equipment – only up to $7500 is exempt, if using it for business = so up to $$2500. But if not using for business, then can take all??? Have to ascertain who actually owns the daycare equipment.
iv) Bank account. $1000 is exempt.
v) Getting at the various state statutes that make certain property exempt from efforts of creditors to get to debtor’s property.
vi) Purpose of exemption statutes – protect livelihood of debtor. Varies among the states. Issue – lot of exemption amounts are historical. Though they may have been relevant at time it was implemented, it has not been updated over the years.
vii) HI – $20,000 – $30,000 exemption for real property. $30,000 is head of household or over 65 years. If not then only $20,000 is exempt. Not a lot in HI.
f) Problem 1.6. hire a private investigator . Is he a plaintiff in a lawsuit, prepaid for any K or services, have any causes of action to bring against anyone, have bank accounts, own autos, real estate, how much money or property gave someone to hold, does he have any money/property on him now.
i) How do you get the debtor to show up?
ii) Trying to us to think of all the possibilities of what to asked debtor. In these depositions, key thing is to ask the RIGHT questions.
g) With unsecured creditor, there is a minimum amount that cannot take and is protected for the
Thursday – look at problem 1.5 and compare to the HI law.
Assignment Two – Security and Foreclosure
I. The nature of security.
a) More effective set of collection rights is known as a lien. This is a “charge against or an interest in property to secure payment of a debt or performance of an obligation.” Lien is the relationship between particular property (collateral) and a particular debt or obligation.
b) Foreclosure. If debt is not paid when due, creditor can compel the application of the value of the collateral to payment of the debt.
c) Security interest. Most common form of lien. Encompasses any lien created by K between debtor and creditor. Includes real estate mortgages, deeds of trust and security interests in personal property created under Article 9 of the UCC.
d) Statutory liens. Liens granted by statute or common law. Example – mechanic’s lien.
e) Judicial liens. Liens obtained by unsecured creditors through judicial process.
f) Collateral. Almost anything recognized as property can be collateral. Usefulness of property as collateral ultimately depends on 1) how much value the creditor can extract from it after default (will it bring anything at resale?) and 2) how much leverage the creditor can derive from the creditor’s ability to deprive the debtor of the property (how much will the debtor be willing and able to pay to keep it?).
g) Agreement that creates security interest may impose obligations on the debtor that apply even in absence of default. Security interest only comes into effect when the debtor defaults.
i) Thus, security interest described as a right in property that is contingent on nonpayment of a debt. Right to enforce the debt against the property that serves as collateral is contingent upon a default occurring.
h) Enhanced collection of rights for secured creditors diminishes effectiveness of collection of rights of unsecured creditors. Unsecured creditors will only get what is left after provisions have been made for secured creditors.
i) Invention of security – Pseudo history. Blackacre story illustrates point that parties can easily construct the security relationship using everyday conventions of sale and option to purchase. Also demonstrated that attorneys and parties can use existing legal forms in unanticipated ways, i.e. way structure the transaction.
