Commercial Law Outline
I. Creditors’ Remedies Under State Law
a. Remedies of Unsecured Creditors Under State Law (Assignment 1)
i. Unsecured Creditors
1. A debtor-creditor relationship is that between lender and borrower of money. Anyone owed a legal obligation that can be reduced to a money judgment is a creditor. The relationship exists because one party has performed its obligation and the other party has not yet performed its obligation.
a. A bank and a lender.
b. A car dealership and a financing purchaser.
c. A victim and a tortfeasor in a car accident.
d. A company with a valid patent infringement claim.
e. A consumer with a defective product still covered by a warranty.
f. Employee and employer relationship.
2. Unless a creditor contracts with the debtor for secured status or is granted it by statute, the creditor will be unsecured. Unsecured creditors are general creditors or ordinary creditors.
a. Circumstances that do not permit prior negotiations – the car accident example.
b. Incautious creditors
c. Uninformed creditors
d. Creditors who were unable for a number of reasons to negotiate for security.
ii. How Unsecured Creditors Compel Payment
1. Judicial liens are one method of compelling payment. A lien is attached to property of the debtor to show that the creditor has an interest in or a right to the property, then the property is sold off and the proceeds are used to satisfy the debt. Lien and debt are inseparable – you cannot have a lien without a debt. A lien is a creditor’s interest in the debtor’s property. To obtain a judicial lien, you need to sue and win a judgment, file and record the judgment in a public venue such as a county courthouse, and then get a writ of execution issued by the clerk of the court that allows the sheriff to levy or seize property to satisfy the judicial lien. There are several different types of judicial liens:
a. Consensual liens – such as mortgages. These are secured creditors.
b. Judgment liens – these pertain to real property only.
c. Execution liens – these pertain to both real and tangible/personal property. Some statutory exemptions however prevent certain property from being attached.
d. Garnishment liens – this allows a creditor to obtain an interest in property of a third person that is owed to the debtor. The writ is issued to the garnishee (third party) telling the garnishee that the money owed to the debtor is to be paid to the debtor’s creditor. In essence, this is a way of cutting out the middleman.
2. Vitale case.
3. Unsecured creditors are prohibited from self-help seizure of the debtor’s property. A prohibited seizure of a debtor’s property will constitute the tort of conversion. The creditor that wrongfully takes possession of property of the debtor may be charged with larceny, even though the value of the property taken is less than the amount owed. Though the creditor has the right to demand payment from the debtor, if it does so in an unreasonable manner, it may incur liability for wrongful collection practices.
iii. Limitations on Compelling Payment
iv. The Law and Collecting Unsecured Debts
b. Security and Foreclosure (Assignment 2)
II. Creditors’ Remedies in Bankruptcy
a. Bankruptcy and the Automatic Stay (Assignment 6)
i. The federal bankruptcy system
ii. Filing a bankruptcy case
iii. Stopping creditors collection activities
iv. Lifting the stay for secured creditors
1. Bankruptcy promises secured creditors eventual access to either their collateral or property or money of equivalent value – the secured creditor has the right to be paid at least the value of its collateral.
2. 11 U.S.C. § 362(d): the automatic stay can be lifted by secured creditors under 3 circumstances:
a. For cause, incl. lack of adequate protection. § 362(d)(1)
i. Adequate protection includes making cash payments, providing an additional or replacement lien, or granting such other relief equivalent to the interest in the property. 11 U.S.C. § 361
b. When the debtor does not have equity in the property and such property is not necessary to an effective reorganization. § 362(d)(2)
c. With respect to real estate, when the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time or the debtor has commenced monthly payments to each creditor whose claim is secured by such real estate. § 362(d)(3)
3. The debtor can retain the secured collateral only if he can show that retention serves a bankruptcy purpose. (Either debtor has equity
cated a security agreement that provides a description of the collateral.
iii. The writing serves an evidentiary purpose.
iv. In this case, the court found that the combination of the financing agreement and telephone notes do not satisfy the requirements of Article 9 because none of the documents contained any language creating security interest despite the composite document rule.
1. Composite document rule = if there is a writing or writings signed by the debtor describing the collateral which demonstrates an intent to create a security interest in collateral.
v. Test for whether a security agreement is established (2 inquiries):
1. Whether the language embodied in the writing objectively indicates that the parties may have intended to create or provide for a security agreement crosses the objective threshold; and
2. Whether the parties actually intended to create a security interest.
vi. Holding: a UCC-1 financing statement standing alone is insufficient under § 9-203(b)(3)(A) to create a security interest in debtor’s assets.
vii. Please note however that case outcomes in this area are not easily predictable – courts have found security agreements exist in similar situations under the composite document rule – it is a fact-based analysis. Use your best judgment in deciding cases such as these.
e. Reasons for the requirement of an authenticated security agreement:
i. Preventing fraud. Modern theory is that courts should be skeptical about agreements that are not in writing. On the other hand, to refuse flatly to enforce unwritten agreements, particularly when their existence is not even in dispute, may facilitate more fraud than it prevents.
Minimizing litigation. There will be less chance that the debtor and the creditor will differ as to whether a security interest was granted