Part One: The Creditor-Debtor Relationship
I. Creditors Remedies Under State Law
i. Remedies of Unsecured Creditors Under State Law
A. Who is an unsecured creditor
· Creditor – Anyone owed a legal obligation that can be reduced to money judgment is a creditor of the party owing the obligation.
· Unsecured Creditor – A creditor who has not contracted with the debtor for secured status or is granted it by statute
· Judgment Creditor – An unsecured creditor who has already obtained a court judgment to establish liability
B. How do unsecured creditors compel payment
· Not only does the law provide procedures for the collection on unsecured debts, it regulates or bars outright many alternatives.
· Among the remedies prohibited to unsecured creditors is self-help seizure or the debtor’s property.
o A prohibited seizure of a debtor’s property will constitute the tort of conversion.
o This rule does not prevent the creditor from “setting off” a debt owing to its debtor against a debt owing from its debtor.
· The creditor is entitled to coerce payment of the debt only through the judicial processes of the state.
C. Limitations on compelling payment
· The judgment creditor is obligated to use discovery to locate assets by the creditor’s right to demand information.
o The sheriff will only act on clear directions about what to get and where to get it.
o If property seized turns out to be that of a third party, the judgment creditor may be liable for any damages caused to the third party.
· While the judgment creditor has the right to information this can be limited by the debtor hiding assets or the assets being mobile.
o Mobile assets could be used or sold to another party.
o All states have adopted laws allowing courts to void debtors’ “fraudulent transfers” in actions brought by a creditor.
o A creditor, who has filed suit against the debtor to collect an unsecured debt may be eligible for a “provisional remedy” even before obtaining a judgment.
v But access to this remedy is sharply limited by constitutional due process requirements and statutory restrictions.
· A money judgment can be enforced only in the state where rendered, the creditor must establish the judgment in the destination state before invoking the enforcement procedures of that state.
· Preference – Until the sheriff arrives to levy on a debtor’s assets, the debtor can continue to transact business.
o It is not fraudulent for a debtor to pay one of its creditors.
o Absent the filing of a bankruptcy case, it is irreversible.
· Exempt – Property exempt from collection by statute that prevents the sheriff from collecting it.
D. Is the law serious about collecting unsecured debts
ii. Security and Foreclosure
A. The nature of Security
· Lien – A charge against or an interest in property to secure payment of a debt or performance or an obligation. Bankr. Code §101.
· Foreclosure – The creditor compels the application of the collateral of the debt after it is not paid when due.
· Security Interest – a lien created by contract between debtor and creditor. It can be described as a right in property that is contingent on nonpayment of a debt.
· Two types of nonconsensual liens
o Statutory Liens – Liens created by statute.
o Judicial Liens – Liens obtain
n confirmed by the court.
o Statutes in some states mandate delays or waiting periods in addition to those the debtor can gain by defending the action.
· If there are no other liens or interest in the collateral, the debtor can simply transfer the property to the creditor by means of a deed in lieu of foreclosure.
2. Power of Sale Foreclosure
· Under a power to sale agreement the collateral will be held in trust by the creditor or a third party.
· The borrower agrees that in the event of default, the trustee can sell the property and pay the loans from the proceeds of the sale.
· Foreclosure is still necessary, but it can be accomplished through a procedure that does not include filing a lawsuit.
3. U.C.C. Foreclosure
· Article 9 of the Uniform Commercial Code governs the foreclosure of security interest in personal property.
· It provides that after default, the secured party may sell, lease, license, or otherwise dispose of any or all of the collateral. U.C.C. §9-610(a).
o That sale or disposition itself forecloses the debtor’s right to redeem the property. U.C.C. §9-623.
o It extinguishes the creditor’s security interest in the collateral and transfers to the purchaser all of the debtor’s rights in the collateral. U.C.C. §9-617(a).
o Alternatively, it may foreclose by any available judicial procedure. U.C.C. §9-601(a).