Remedies for Unsecured Creditors
I. Types of Creditor debtor relationships
a. Bank-Debtor (usually governed by K)
b. Judgment Holder-Defendant
c. Driver-Other Driver (automobile liability)
II. In order to collect, unsecured creditors must:
a. Bring a lawsuit
b. Get a Judgment. To collect on a judgment, you must:
i. Secure a writ
1. of execution
2. of attachment: debtor owns the property
3. of garnishment: used to seize assets belonging to the debtor that are held by a third party.
a. Classic example is a bank account. If you’re lucky enough to find a bank account, get a writ of garnishment immediately.
ii. Find the stuff you can direct the Sheriff to take
1. this usually occurs through formal discovery
iii. Sheriff must levy the goods
1. you can have successive levies on a single writ
2. It is generally reasonable to have the sheriff collect at any time during the day, and some (but not unreasonable) danger may be expected
iv. When the writ is returned, the Sheriff can take no more goods on it.
1. Sheriff returns the writ when there is nothing left to reasonably collect, or three months have passed.
2. Must then get an alias writ or additional writ to get anything more
1. If the creditor can prove that the sheriff has completely failed to perform his duty, he can hold the sheriff liable for failure to collect. This is a fairly rare occurrence—courts are going to be sympathetic to the sheriff.
III. Limitations on Collection
a. Self-Help Remedies
i. Are generally forbidden by law for unsecured creditors, and will result in a claim for conversion or larceny.
b. Movement of Assets
i. A debtor is free to move their assets, and even to secret away funds. Usually, the only probable recourse is a charge of perjury during discovery.
ii. Generally, you cannot seize assets that the debtor has transferred to third parties.
1. Fraudulent Conversion: You may be able to claim fraudulent transfer if the transfer was done solely for the purpose of thwarting the ability of the creditor to collect.
2. Payment of other debts, even if it leaves nothing for another judgment creditor, is not fraudulent.
iii. Assets moved or located to another state: must file to get a writ in the state where the assets are located, and the sheriff levying it must be from that state.
c. Debtor Protection Statutes
i. Exempts certain items from execution in the collection process. Often includes certain homestead exemptions.
ii. If the value of an item (e.g., a car) exceeds the protected limit, you would sell the item, and give the debtor the exempted amount.
IV. Efficient System of Secured Credit:
a. Process = Cheap. If the secured credit system is to work, we have to be able to avoid all those costs and constant process, pleadings, discovery, etc., inherent in the unsecured collection world.
b. “Money at the end of the rainbow.” We need there to be something at the end that we can take and use from which we can recover the debt.
Security and Foreclosure
a. Security Interest: Any lien created by contract between a debtor and creditor
i. 1-201(35): interest in personal property that secures performance of an obligation
b. Lien: An interest in the property of another to ensure performance of an obligation
II. Types of Liens
a. Judicial: Where a lien attaches to property after a judgment from the court
i. Tax Lien: If you don’t pay your taxes, the federal government has an interest in your stuff (and that lien has super-priority).
ii. Mechanic’s Lien: If someone does work to your house and you do not pay, they can follow a process and take a lien by statute, rather than via judgment.
c. Security interests
i. Voluntary/consensual liens entered into by contract
ii. In real property, these are mortgages
iii. In all other (personal) property, these are security interests. This is ARTICLE 9.
III. The “Duck” Rule 9-109(a)
a. We look to form over substance in determining if a security interest exists.
b. Essentially, a security interest is anything to ensure that a debtor follows through on an obligation.
c. 1-203: Lease vs. Security Interest
i. A lease is a security agreement if:
1. The lessee has an option to become the owner of the goods for no additional consideration, or for nominal consideration
2. The original term of the lease is equal or greater than the remaining economic life of the goods.
IV. Equity of Redemption
a. When something is a security interest, certain legal processes have to be followed—a security interest takes something from law to equity, and equity abhors a forfeiture.
b. Generally, equity of redemption allows that until the sale of the property, the debtor can get his stuff back.
c. If there is a security interest, the rights of redemption apply. In order to get rid of the equity or redemption, you must foreclose
i. The one exception: If someone voluntarily gives someone property in exchange for being released from their obligation. Since this is an immediate transfer, the equity of redemption does not apply.
V. Types of Foreclosure [don’t flashcard these, know UCC process]
a. Judicial Foreclosure
i. Accomplished by entry of a court order
ii. Usually requires the holder of the mortgage/security interes
In return for any consideration sufficient o support a simple contract.
b. Debtor has rights in the collateral
i. A limited interest can attach, but the debtor cannot give an interest in more than they have.
ii. There must be some sort of right to control
iii. Anything is a right if it is legally enforceable—the right does not have to be fully vested.
c. Debtor has authenticated a security agreement that provides a description of the collateral (9-203(b)(3)(A)) or the collateral is in the possession of the debtor (if an oral agreement is made—9-203(b)(3)(B))
i. Authenticate 9-102(a)(7): to sign, or to execute or otherwise adopt a symbol, or to encrypt or similarly process a record in whole or in part—essentially allows electronic signature.
ii. Security agreement: an agreement that creates or provides for a security interest (9-102, 1-201(35))
a. Agreement 1-201(3): is not as formal as contract—it means a bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade
b. Security interest: 1-201(35): interest in personal property that secures performance of an obligation
2. What makes an agreement a security agreement?
a. Subjective intent: Did the parties actually intend to create a security interest?
b. Objective intent: Is there language in the document that indicates that intention?
c. There must be language in the instrument that leads to the logical conclusion that it was the intention of the parties that a security interest was created.
i. This is language that specifically says something along the lines of “I am giving you rights.” There is a big difference between subjective and objective intent.
1. Ex. Unsigned financing statement accompanied by a signed writing authorizing the secured party to file to protect their rights is not sufficient, because there is no actual language granting rights.
d. What documents are an “agreement”?
i. We can look at any evidence—ALL documents—of the bargain of the parties using the definition of “agreement” under § 1-201(b)(3).