Ware, Fall 2006
I. Goals & Definitions, Etc.
i. Creditor pursues ATTACHMENT to become a Secured Creditor against their debtor
ii. Secured Creditor uses PERFECTION to achieve PRIORITY against their debtor’s other creditors
B. General Contract Formation
i. Formation of Contract – 9-203(b)
ii. Terms of the Contract – what is the collateral and what obligations does the collateral secure
iii. Performance or Breach
iv. Remedies for Breach
i. Attachment – necessary to become SC; requires value given by creditor to debtor with rights in the collateral pledged and an authenticated agreement evidencing the creditor’s SI in the collateral.
ii. Future advances – loans to the debtor in the future (line of credit where borrower can keep drawing)
iii. Garnishment – judgment creditor has debtor’s creditor (typically employer) remit to them
iv. Judgment Creditor – someone who has prevailed on a claim against a debtor through the courts
v. PMSI à Money was loaned to debtor to enable him to purchase – money was used for the collateral (debtor used the proceeds from the loan to obtain the collateral)
D. Top Ten Things to Memorize about Secured Transactions
i. Most plaintiffs are USC
ii. USC can enforce debts by winning a judgment and obtaining a judicial lien
iii. Judicial liens are governed by non-uniform state law rather than Article 9 of the UCC
iv. An agreement (such as a SA, Mortgage or deed of trust) is the way to acquire a consensual lien, that is, to become a “secured” creditor
v. As b/w SC and debtor, contract law is the place to start
vi. As b/w SC and debtor, perfection is irrelevant
vii. As b/w SC and someone other than the debtor, perfection is relevant and often decisive
viii. There cannot be a perfected SI unless there is a SI
ix. Real estate is governed by non-uniform state law rather than Article 9 of the UCC
x. Lawyers must read statutes thoroughly and carefully
II.Creditors’ Remedies Under State Law
A. Remedies of Unsecured Creditors
i. Anatomy of a Lawsuit
1. P wins lawsuit, receives judgment:
a. Declaratory relief
b. Injunction or other equitable relief
c. Money Damages
2. Creditor tools (if Δ doesn’t pay)
a. Discovery of debtor’s assets (pre) post-judgment
b. Writ of Execution
i. Sheriff levies and sells, giving proceeds to creditor
c. Secured status (obtain beforehand)
d. Collect from 3rd parties owing the debtor (accounts)
e. Criminal prosecution (fine and jail)
f. Non-judicial tools to collect debt
i. Threat of bad credit rating
3. Debtor’s tools to defeat or soften creditor tools
b. Transfer assets
c. SOL Expiration on right to collect
d. Exemption state statutes (i.e. homestead)
ii. Vitale v. Hotel California, 1982
1. Trying to foil unsecured creditor by transferring assets
2. π should ask or a preliminary injunction to prevent the transfer immediately
3. Law: Judgment creditor is unsecured, but he can hold the sheriff liable for not executing writ
iii. Applicable Law / Statutes – Assignment 1
1. Unsecured creditor could take possession, but risks tortious conversion and larceny. Better method would be through the specified judicial process.
a. Small Claims court
b. Write a demand letter
2. If debtor isn’t in default, then unsecured creditor cannot do anything
3. Once in default, then unsecured creditor can get judgment
4. Then send sheriff to levy on property as long as not exempt
a. Writ or execution
5. Also worry about taking property subject to secured lien
6. Think about practical solutions, calling debtor and making a deal
a. Consider who our judgment is against (business v. person)
b. Uniform Fraudulent Transfer Act (UFTA) – it the debtor transfers the asset to avoid a creditor and doesn’t get in exchange reasonable equivalent value, then those assets are available to satisfy that creditor’s judgment
7. Additional problems: wrongful collection practices
B. Security and Foreclosure
1. Lien. Bankr. Code § 101(37). A charge against or an interest in property to secure payment of a debt or performance of obligation.
a. Lien = debt + collateral (security)
b. When a secured creditor makes a loan, they get both a property right and a contract right
2. Collateral. §9-102(12). Property subject to security interest.
3. Foreclosure. Process by which creditor compels application of value of the collateral to pay the debt.
4. Security Interest
a. §1-201(b)(35). (By way of §9-102(c))
b. Bankr. Code § 101(51). Lien created by agreement.
5. Types of liens
a. Judicial liens (available to everyone)
i. Execution – tangible property only
ii. Garnishment – property held by a 3rd party or intangible property
iii. Judgment – usually real property
b. Statutory liens (granted by statute, don’t need debtor’s consent)
i. Mechanic’s lien
ii. Tax lien
c. Consensual liens (lien obtained through a K)
i. Security interest – personal property
ii. Mortgage – real property
1. §9-109(a)(1). Article 9 applies to any transaction, regardless of form, that creates SI in property.
2. §1-203. Article 9 may apply to leases if it creates security interest
1. Judicial foreclosure §9-601
a. Real property vs. personal property. Statutes can allow debtor to keep house for a long time. Farm Credit of St. Paul case.
2. Foreclosure by Sale for Personal Property
a. §9-601(a)(1). After default, secured party can foreclose by any available procedure.
b. §9-609. After default, the secured party has right to possession.
c. §9-610(a). After default, a secured party may sell, lease, license or otherwise dispose of the collateral in commercially reasonable manner.
d. §9-617(a). Effect of disposition by secured party: (1) transfers debtor’s rights in collateral; (2) discharges SI under the disposition; and (3) discharges subordinate SI or other subordinate lien.
e. §9-623(a). A debtor, secondary obligor, other secured party may redeem collateral.
1. After default for house, creditor gets a judgment and then debtor has right to redeem.
2. Statutory exemptions don’t work against consensual liens
3. Holding a foreclosure sale after a foreclosure action costs time and money.
a. Unsecured Creditor
i. Sue – win – get writ of execution – sheriff levies (judicial lien then arises) – sale – proceeds to creditor
b. Secured Creditor
i. Foreclosure – wins – foreclosure sale – money to S.C.
ii. Replevin action – private sale after sheriff levies – money to S.C. (court will issue writ of replevin for sheriff)
iii. Self help is another option (if no breach of peace)
4. A lease can be a security interest governed by Article 9 if it meets §1-203.
Typically a private repossession and a private sale.
Sheriff repossesses (takes) collateral and holds sale.
Court foreclosure action. Public auction/sale
1. §9-620. Retention of the collateral in full or partial satisfaction of the debt.
a. Partial satisfaction
i. Consent under §9-620(c)(1)
b. Full satisfaction
i. Consent under §9-620(c)(2), and it can be by silence.
c. The right to consent is subject to 3 conditions
i. §9-620(a) Debtor consents in writing or silence (if consumer goods, only after repossession)
ii. §9-620(a)(2) No objection from other lien holders
iii. §9-620(a)(4). There can’t be sale under §9-620(e) if more the 60% paid by debtor unless waiver after default under §9-624(b).
d. §9-602(10). This section may not be varied by contract!
ii. Sale Under Article 9
1. §9-610. Disposition of Collateral after Default.
a. §9-610(a). After default, a secured party may dispose of the collateral after “commercially reasonable” preparation.
b. §9-610(b). Everything must be “commercially reasonable.” Otherwise, there is a defense!
c. §9-610(c). If secured party wants to purchase, must be at public sale or private disposition on market such as stock.
d. Comment 4: (a) doesn’t grant secured party the right to dispose of collateral “in its then condition” under all circumstances
a. §9-611(b). A secured party shall send notice to those in (c)
b. §9-611(c). Shall send notice to debtor, secondary obligor, and, if consumer goods, any other person who has a claim and perfected secured creditors.
c. §9-611(d). If it’s perishable like produce or stocks, no notice required.
i. §9-613. Notice for non-consumer goods
ii. §9-614. Notice for consumer goods.
e. §9-602(7). You can’t vary notice rules.
f. §9-603. But you can alter them.
i. §9-612. 10 days is sufficient w/ non-consumer transaction
g. §9-624. You can waive notice.
3. Right to redeem
a. §9-623(a). A debtor has a right to redeem.
b. §9-623(b). To redeem, debtor must tender obligations
c. §9-623(c). Redemption has to be before the sale with personal property. Different for real property.
d. Cmt 2. The payments may be “accelerated.”
e. Real estate redemption – foreclosure price
f. Personal property redemption – full amount of debt
a. Rebuttable Presumption vs. No Deficiency Rule
i. §9-626(a)(1). The debtor has to put commercially reasonable in issue.
ii. §9-626(a)(2). Secured party has the burden. Rebuttable presumption that they didn’t comply with commercially reasonable requirements. They have to prove collateral was only worth so much.
iii. §9-626(a)(3). The liability of the drbtor.
1. Minority view says no deficiency. They don’t grant deficiency judgment.
§9-626(b) and Cmt. 4. This doesn’t apply to consumer transactions