Secured Credit Outline

–Secured Credit–
Chapter One: Creditor’s Remedies Under State Law
Assignment 1: Remedies of Unsecured Creditors under State Law
A.     Who is an Unsecured Creditor?
1.      Creditor: Anyone who is owed a legal obligation that can be reduced to a money judgment
2.      Types of creditors:
a.    Voluntary creditor: the party enters into a contract to be owed an obligation
b.    Involuntary creditor: obligation arises due to an event out of party’s control
c.    Secured creditor: has a legal claim to specified collateral if the debtor fails to satisfy obligation
1.    Security interest a property interest
2.    The security interest is connected to the debt (e.g. home loan, auto loan, business loan)
3.    The security interest is connected to the collateral (property)
4.    Note: security interest in property is a mortgage
a.    Usually consensual
5.    Lien—nonconsensual
 
d.    Unsecured (a.k.a. general or ordinary creditors): no collateral
1.    Usually referred to as a lien
e.    Judgment creditor:
1.    Creditor who has a court judgment establishing liability
2.    Judgment does not alter unsecured status
 
B.     How do Unsecured Creditors Compel Payment? (note: these remedies available to both un/secured creditors)
1.       Remedies prohibited to unsecured creditors
a.    Self-help seizure of debtor’s property will constitute the tort of conversion
1.    Wrongful exercise of dominion or control
2.    Over property of another
3.    In denial of or inconsistent with his rights
4.    Intent: to exercise dominion or control over that property
b.    May be charged with larceny
c.    May incur liability for wrongful or abusive collection practices
d.    Note: Setoff is allowed
 
2.      Steps in the debt collection            process [Vitale] a.    File complaint
b.    Final judgment
1.    A successful plaintiff who obtains a judgment against a defendant
2.    May cause the personal property of the defendant/judgment debtor to be seized and sold and
3.    The proceeds applied to the judgment and costs by way of execution
c.    Plaintiff obtains a writ of execution:
1.    Directs sheriff to levy
2.    Must be promptly executed and returned
3.    May be returned if judgment cannot be satisfied any further, even with diligent effors
d.    Sheriff must make return within three months after the date of issuance
e.    “Return”:
1.    Physical return of the original writ to the court clerk, endorsed with the executing officer’s brief description of what was done
2.    Once writ has been returned, sheriff cannot levy on any more property under the writ
f.     Officer must file a verified statement of when and how much money was collected and the balance due on execution fees or costs
g.    Creditor may seek unlimited number of writs until judgment is satisfied
 
 
 
3.      Vitale v. Hotel California, Inc. (1982)
a.    Facts:
1.    Vitale obtained judgment, learned that California has assets in the bar “The Fast Lane”
2.    Writ of execution issued, writ delivered to sheriff with instructions to levy
3.    The levy mess begins
 
b.    Issues
1.    Are excessive levies possible under one writ of execution?—YES
2.    When may a sheriff refuse to levy as instructed by plaintiff, on basis that the request is unreasonable or onerous—here, request REASONABLE
3.    Was the conduct of the sheriff enough to hold him liable for amercement?—YES
 
C.     Limitations on Compelling Payment
1.      It’s the creditors job to figure it out
2.      Execution can be risky (conversion)
3.      Information and control problems: Finding, obtaining assets can be difficult (discovery, people hide assets, etc.)
4.      Provisional (pre-judgment) remedies are limited/rare
5.      Exemptions: see Wisc.Stat. §815.18—Property Exempt from Execution
 
D.     Fraudulent Transfers
1.      Any transfer made with actual intent to hinder, delay, or defraud any creditor [UFTA §4(a)] 2.      Any transfer made without receiving a reasonably equivalent value in exchange for the transfer is fraudulent if the debtor was insolvent at the time of transfer [UFTA §5(a)]  
E.     Is the law serious about collecting unsecured debts?
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assignment 2: Security and Foreclosure
A.     Intro
1.      Lien:
a.    A charge against or an interest in property to secure payment of a debt or performance of an obligation
b.    A relationship between the collateral and a particular debt or obligation contingent on nonpayment of a debt (e.g. there must be a default)
c.    Collateral: property pledged for repayment of loan
d.    Statutory liens: liens granted by statute or common law; nonconsensual
e.    Judicial liens: liens obtained by unsecured creditors through the judicial process; nonconsensual
f.     Security interest: any lien created by contract between debtor and creditor (includes mortgages and Article 9 property interests); consensual
 
2.      Foreclosure: Creditor’s exercising its right to compel the application of the value of the collateral to payment of the debt, cuts off the debtor’s rights to keep the collateral so that creditor can sell it and pay the debt
 
3.      Right of redemption: right of the debtor to keep the collateral by paying off the debt [UCC §9-623]  
4.      What property serves as the security interest depends on the custom and needs of the particular parties
 
5.      Collateral ultimately depends on:
a.    How much value the creditor can extract from it after default (any resale value?)
b.    How much leverage the creditor can derive from its ability to deprive the debtor of the property
 
6.      Considering the disadvantages of being an unsecured creditor, why wouldn’t everyone be secured?
a.    Some receive higher interest for being unsecured
b.    Involuntary unsecured creditors (e.g. accident victims)
c.    Some unsecured creditors agree to a contract leaving them unsecured without even realizing it
d.    Sometimes constrained by business custom (e.g. law student who accept large firm job)
 
B.     The Necessity of Foreclosure
1.      Why does the law permit one creditor to have superior collection rights over others?
a.    Law would be tremendously complex if there were no provisions for security
b.    Debtors temporarily short of cash still would have been able to sell their property, but buy it back later when they had the cash
 
2.      Invention of Security Story
a.    Mechanism used in the story:
1.    Debtor sells and deeds Blackacre to Creditor
2.    Creditor pays $100 for Blackacre (even though Blackacre worth $500)
3.    Creditor give Debtor option to purchase Blackacre on March 1 for $110
4.    Debtor late payment, Creditor says agreement breached, Creditor loses option to purchase
5.    Debtor went to chancellor for equity, saying that his $500 property would be forfeited for failing to repay $100 on time
6.    Chancellor ordered Debtor to redeem property by paying loan with interest
7.    Another time, Debtor keeps failing to repay, so Creditor finally asks Chancellor to foreclose Debtor’s equity of redemption so that the title can be clear of the equity of redemption
8.    This was the first mortgage foreclosure
 
b.    Illustrates that parties who wish to do so can easily construct the security relationship using everyday conventions of sale and option to purchase
c.    Existing legal forms can be employed in ways unanticipated by the lawmakers
d.    Determining which transactions are in the nature of security is determined by intent to provide one party with an interest in the property of another that is contingent upon the nonpayment of a debt
C.     Transactions Intended as Security [Doctrine] 1.      Generally
a.    Applies to both real and personal property
 
b.    UCC § 9-109. Scope.
1.    §9-109(a)(1)“Any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract” 
 
c.    Comment [2]: “When a security interest is created, this Article applies, regardless of the form of the transaction or the name that the parties have given to it.”
 
2.      Basile v. E