Robert Lawless
Secured Transactions
Spring 2016
CREDITOR’S REMEDIES UNDER STATE LAW
REMEDIES OF UNSECURED CREDITORS UNDER STATE LAW
Anyone who is owed a legal obligation that can be reduced to a money judgment is a creditor of the party owing the obligation
Unless a CR contracts with DR for secured status OR is granted it by statute, CR is unsecured.
CR/DR relationships can be voluntary (consensual loan) or involuntary (tort judgment)
If the unsecured CR has already obtained a court judgment to establish liability, the creditor is a judgment creditor, but the mere grant of a judgment does not alter the CR’s unsecured status
How do Unsecured Creditors Compel Payment?
Difficult for unsecured creditors to collect on judgments/debts
Judgement is just a piece of paper – doesn’t make them pay à a whole separate judicial process must follow to get actual payment
No self-help seizures à CR that wrongfully takes possession of property of a DR can be charged with larceny (crime) or sued for conversion (tort)
Setoff is permitted, but seizure for the purpose of setoff is not
Although the CR has the right to demand payment, if the CR does so in an unreasonable manner, the CR may incur liability for wrongful collection practices à only entitled to coerce payment of the debt through the judicial processes specified by state
Can’t threaten to take action (i.e., litigation) that you actually don’t intend to take à violates FDCPA
The need to work through government officials is substantial barrier to effective collection
Sometimes cheaper for your client to write off the debt than to pursue a judgment and then collection (both costly)
Unsecured CR debt collection process
File a complaint with an appropriate court, and serve process on DR-defendant à pre-answer motions à answer à trial months in the future (or summary judgment)
Typical length à 6mo to a year
Abbreviated process for small claims court
Vitale v. Hotel California: CR was owed money from a judgment, instructed sheriff to levy on DR’s bar during open hours – late weekend (after some post-judgment discovery) à after facing some obstacles in the levy process (and successfully levying once), the sheriff refused to further levy at the bar to fully satisfy the writ
Issues: (1) are successive levies possible under one writ of execution; (2) when may a sheriff refuse to levy as instructed by a plaintiff, on the basis that the request is unreasonable or onerous; and (3) Can the sheriff be held responsible for the amount of creditor’s debt for failing to carry out his ordered duties (amercement)?
Holding (1)/Rule (multiple levies): multiple levies under one writ are authorized under the same writ before the return day if the initial levy does not satisfy the judgment
Rule (reasonable levy request): sheriff may refuse unreasonable or onerous levy requests à practical, operational considerations of a sheriff’s office impose an obligation on a plaintiff not to request inordinately frequent or numerous levies
Rule (timing of levy): levy under a writ of execution may be made at any hour of the day à there is no issue of privacy that might dictate otherwise à sheriffs and their deputies may be obliged to work at times of the day and week when the rest of the population sleeps or recreates
Rule (physical force in levying): an officer may force an entry into any enclosure except the dwelling house of the judgment debtor in order to levy on the DR’s goods and even in the case of the DR’s home, once the officer is inside, he may break open inner doors or trunks to levy on the property à the privilege of civil service occasionally demands risking bodily harm to oneself
Holding (2): levy request was not unreasonable
Rule/Holding (3) (Amercement): Under super old and never used doctrine of amercement, sheriff can be held personally liable for failing to properly execute against a judgment DR (where the levy request was reasonable)
Practically: sheriff will pay DR, go levy on DR to repay himself.
Execution procedure on p. 8
If a 3P is in possession of property of the DR or owes money to the DR, the CR can cause the sheriff to serve a writ of garnishment on the 3P à requires the 3P to pay the judgment CR
Ellerbee v. County of L.A.: judgment CR was owed money à ordered sheriff to serve writ and garnishment promptly b/c debtor was going to be paid a large sum à Sheriff did not do so.
Holding: Sheriff has discretion on how and when to effect service à Sheriff not liable for not levying to CR’s specifications so long as levy occurs w/in return date of writ.
According to the jurisdiction’s statute for imposition of govt liability à the only mandatory statutory duty is that the govt entity or employee act in accordance with the written instructions provided by the judgment CR à no reference to any duty to comply with deadlines or timing requests contained in the judgment CR’s instructions
Limitations on Compelling Payment
CR must do post-judgment discovery to identify property subject to seizure, and instruct sheriff on where and what to seize
First must find judgment DR and force them to sit for examination à DR may be less than forthcoming à may not keep assets in predictable forms
Another judicial process (every state court has PJD procedures) à deposition, interrogatories à pissed off former employees might know something à used to find out what kind/# of assets does DR have whether they can be seized (are there senior secured liens, exemptions)
Can also look in public records – RE filing office; UCC filings à or hire a PI
If DR refuse to answer questions during discovery, they can be subject to contempt sanctions à if they lie, s/t being charged with perjury
IL Discovery proceeding à file/serve citation to discover assets (form) à right to haul DR into court or your law office for depositions à or right to send interrogatories that DR must answer à DR can be arrested for failure to appear (“body attachment”)
Body attachment was widely abused because DR’s tend to be not well informed and CR’s tend to be sophisticated entities à body attachment substantially curtailed in IL à now must show that DR was actually served and had notice
Judgment CR is liable for damages caused to a 3P if their property is wrongfully seized à tort of conversion; crime of larceny à 3P can refuse to accept return of the property and instead recover its value from the judgment CR
Can only judicially seize property of the individual or entity the judgment is against
DRs can move, consumer, conceal, or transfer assets.
DRs can pay certain creditors, leaving no assets for other creditors à DR can continue to transact business until sheriff arrives to levy on DR’s assets à w/o violating the law, DR may lose assets in business operations, exchange them for other assets of REV, or apply them to payment of other bona fide debts à preference payments are only reversible in bankruptcy, otherwise not reversible unless also fraudulent
Money judgment can only be enforced in the state rendered à to enforce in another state, the CR must establish the judgment in the destination state before invoking the enforcement procedures of the state
Exemption Statutes: in all states, sheriff is statutorily prevented from seizing certain property under a writ of execution à property said to be exempt from remedies available to unsecured CRs
Can include car, consumer goods, family home (homestead exemptions – p. 17), a certain amount of money/assets, etc.
Federal statutes provide that a minimum of 75% of DRs’ earnings from personal services will generally be exempt in all states à some states exempt greater %
State and federal laws exempt most pensions and retirement accounts
In the first instance, the sheriff decides the threshold legal issues of whether the property can be seized or is exempt (thorny questions haven’t been adjudicated by court yet)
Affirmative requirement for DR to come forward and claim exemptions
Policy: don’t leave DR destitute – burden on society
Sheriff doesn’t seize bank accounts à bank account is debt that bank owes the DR à need writ of garnishment – send to bank à sheriff doesn’t execute – CR executes
Voidable (Fraudulent) Transfers
All states have adopted laws authorizing the courts to void DR’s fraudulent transfers in actions brought by CRs à allows them to recover property of the DR that was transferred
Elements
(1) Any transfer made “with actual intent to hinder, delay or defraud any creditor” OR (2) “without receiving a reasonably equivalent value in exchange for the transfer” if the debtor was insolvent at the time of the transfer.
(1) Although actual intent can be inferred from certain acts such as a transfer that is hidden or made to insider, still tough to prove
(2) no proof of fraudulent intent is required à a transfer made in good faith with no wrongful intent is voidable if the elements are present
DR can continue to do business or transact its affairs à DR can exchange its assets for other assets, so long as the other assets have approximately the same value
DR cannot make gifts or sell assets for less than REV
UVTA §3(b) says the price at a judicial sale is presumed to be REV
DR is insolvent if the sum of the DR’s debts is greater than all of the DR’s unencumbered, non-exempt assets
Can reach and reverse any transfer
Law is largely impotent as transfers are difficult to discover and avoid and easy to make.
If BFP for value purchases DR’s property from transferee à outside reach of CR à only remedy is against initial transferee and DR
A CR may be eligible for a provisional remedy even before obtaining a judgment à if DR is fraudulent disposing of its property during the lawsuit, the CR may have right to an immediate attachment of whatever property the DR still has
This remedy is sharply limited by constitutional DP requirements and statutory prerequisites to the issuance of a writ of attachment in most states
SECURITY AND FORECLOSURE
S/A Covering Personal and Real Property: 9-604(a) recognizes that a S/A can cover both personal and real property à outlines procedure for dealing with that
Secured CRs have liens on some or all of the DR’s property à a lien is a charge against or an interest in property to secure payment of a debt or perf
personal property
After default, the secured party may sell, lease, license, or otherwise dispose of any or all of the collateral – §9-610(a) à that sale or disposition itself forecloses the DR’s right to redeem the property – §9-623 à it extinguishes the CR’s security interest in the collateral and transfers to the purchaser all of the DR’s rights in the collateral – §9-617(a)
Alternatively, the CR may foreclose by any available judicial procedure – §9-601(a)
Illinois is a judicial foreclosure state- half of all states.
For residential real estate, right of redemption for 7 months from the date of the service of the complaint
If debtor does not redeem in that period, redemption right is gone
Formerly in Illinois and elsewhere, there was another right of redemption that ran after the judicial sale. Statutory right of redemption
Repealed in Illinois and pretty much everywhere else
Right of redemption: DR’s right to pay the secured debt even after default and retain ownership of the collateral à effectively “buy back” the property before the sale
GR: right is available from time of default and acceleration until the collateral is foreclosed upon à UCC governs security interests of persona property à §9-623 gives debtor right to redeem collateral up to the time of the creditor’s sale or other disposition of the collateral
For RE, there might be statuary SOL for right of redemption (i.e., after the foreclosure sale)
Foreclosure ends the right of redemption (in most cases)
Exemptions (N/A for Secured Claims): IF there is a security interest/mortgage, the exemptions do not apply à exempt means they’re exempt from judicial process, not exempt from agreement that the DR voluntarily entered into regarding the collateral/lending
When there is a voluntary S/A à the DR is on notice that their property is s/t to seizure if the DR fails to pay à exemptions do not apply to consensual security interests and mortgages, they apply to judicial liens
Transactions Intended as Security
A transaction is in the nature of security if the intent is to provide one party with an interest in the property of another, which interest is contingent upon the nonpayment of a debt à even if the only document in existence labels the transaction as a sale, the relationship created may be a security interest à substance over form
Regardless of the form in which the parties choose to cast their deal, if it is security, the law will recast it as a security.
Basile v. Erhal Holding Corp. (IAS RE): P mortgaged property to D for a loan, later brought action to declare mortgage invalid for usury à in settlement, P agreed to execute mortgage to D for 101k and a deed in lieu of lieu of foreclosure à If P defaulted, D could record deed à P defaulted, D recorded the deed and brought motion for declaration that P waived her right of redemption.
Rule (Intended as Security Doctrine): a deed conveying real property, although absolute on its face, will be considered a mortgage when the instrument is executed as security for a debt à substance over form
Rule (Redemption Rights Not Waivable): right of redemption is inseparably connected with a mortgage à so long as the instrument is one of a security, the borrower has the right to redeem the property upon payment of the loan à cannot be waived or abandoned by any stipulation by the parties
Holding: Deed was executed with the intent that it be a security à P cannot waive her right of redemption in a secured transaction
Sole remedy is foreclosure à attempted waiver of redemption is ineffective
“Intended as Security” Doctrine also applies to personal property transactions
UCC §9-109(a)(1) provides that article 9 applies to any transaction, regardless of its form, that creates a security interest in personal property à Comment 2 says that when a security interest is created, Article 9 applies regardless of the form of the transaction or the name that parties have given to it
The subjective intention of the parties with respect to the legal characterization of their transaction is irrelevant as to whether Article 9 applies
