Select Page

Secured Transactions
University of Kansas School of Law
Rosenberg, Arnold

Article 9 Definitions
Definitions §9-100
Attachment §9-200
Perfection and Priority §9-300
Rights of Third Parties §9-400
Filing §9-500
Default §9-600
Transition §9-700
Secured Transactions
Secured transaction
A credit transaction that gives a creditor the right to foreclose on specific property to collect the secured debt.
Secured Debt
Personal right of recovery vs. the debtor, AND
Right to foreclose on specific property to satisfy all or part of that right of recovery
Ex: Mortgage Loans
Auto loans
Most business loans to SME’s
Crop loans
Construction…
Unsecured debts
Student loans
Credit card bills
Rent
Utility bills
Medical bills
How to enforce unsecured debts… (really long and inefficient process)
Informal debt collection efforts
Collection agency
Attorney “demand letter”
Fall under (FDCPA) Fair Debt Collection Practices Act à limits debt collectors activities 15 U.S.C. 1692 et seq:
Generally prohibits harassment and abuse of debtors
False and misleading representations by debt collectors
And Unfair practices to collect debts
It requires validation of debts, notice of right to demand validation
Can end up in the imposing of a $1,000 fine + attorneys fee, can end up being millions of dollars if you are not careful
Must be clear and conspicuous validation notice
“This is an attempt to collect a debt. You have 30 days after receipt of this notice within which to dispute the debt or any part thereof in writing and request verification….”
No calls after 9 P.M. or before 8 A.M.
No contacts with 3rd parties that disclose debt
Cessation of communications on written request
Collection suits filed in venue of consumer’s residence or where contract was signed
File lawsuit
Discovery, pretrial proceedings – 1 year or more, if D doesn’t default!
Trial (or default), entry of judgment
Judgment collection
The objective: create a lien on specific property of the judgment debtor
Key methods of enforcing money judgments:
Levy and execution
Judgment lien on real property
Garnishment (bank accounts, wages)
Deposition in aid of execution
Execution: Seizure and sale of the debtor’s property to satisfy the judgment (4 steps)
Issuance of a writ
Levy on the debtor’s property (no self help): seizure of property pursuant to execution
Sheriff follows creditors instructions for levy
Sheriff must take physical possession
Sheriff has liability for wrongful execution
Sheriff require creditor to indemnify the sheriff
Sale of property
Application of proceeds to the debt…
Exemptions from execution: Property the sheriff cannot seize on a writ of execution
“necessities” specified by state statute…
Prejudgment attachment
Sheriff seizes property as on execution
Creditor must prove “extraordinary circumstances”
Few creditors entitled
Self-help repossession: Creditor takes physical possession of debtor’s property without legal process
Setoff: on default, Bank can set off the bank account by changing the account balance to zero
Unsecured creditors cannot proceed by self help (conversion = illegal)
The unsecured creditors’ remedies are execution, garnishment, prejudgment attachment, and setoff
The process by which an unsecured creditor can obtain a judgment, execute, and obtain payment (about a month to a year)
Unsecured creditor remedies are ineffective because the debtor is warned and so can conceal, transfer, encumber, or exempt property before seizure.
Conversion is the wrongful exercise of dominion and control over the property of another inconsistent with his rights. The converter “purchases” the property for market value.
Vitale v. Hotel California – Tort claimants like Vitale are at a disadvantage compared to lenders and other contract claimants, who can require the other party to give a security interest in property to secure payment… Not really fair
Security and Foreclosure
Security Interest: An interest in (specific) property contingent on the non-payment of a debt
Lien – A charge against or an interest in property to secure payment of a debt or performance or an obligation. Bankr. Code §101.
Transactions fitting this definition are security interests
Even though the documents show an absolute transfer
Even though the parties don’t realize they created a security interest
Event though the parties didn’t intend the effects of security
The debt becomes Collateral
UCC § 9-109(a)(1): [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract.
Example 1: Debtor grants Secured a mortgage in Blackacre to secure a $50,000 loan.
1. Debtor owes a debt to Secured (the obligation to repay the loan).
2. Secured has a right in Blackacre if Debtor doesn’t pay, but not if
 
·        
Basile v. Erhal Holding Corp.
A modern example of the “deed absolute mortgage” – the use of title to property as a security device under the “intended as security” doctrine
Original loan with allegedly usury rates à settlement included new mortgage that said on default Holding Corp. could record the deed. What is the “right of redemption” à on default in terms of real property courts often give this right for a year… other times it can be as little as 10 days. Most of the time the only person that shows up at the sale is the secured creditor
Didn’t Basile represent to the court that she understood that if she defaulted she would lose the property
Why does the court let her out à Debtor Pays
“Intended as Security” Doctrine:
o        Conditional Sales (under the UCC it is considered a security interest)
§         Seller sells to the buyer but retains title to the property sold until the full price is paid
o        Leases intended as security: e.g., car leases, equipment leases
o        Sale of accounts
o        Securitization
·         Why does it matter
o        Bankruptcy – If one party owns it then it is part of the estate…
o        Some other thing that the annoying girl said… should be in the book
·         Most car leases are not considered security interests under the UCC
o        Sale of accounts “with recourse” à good for Creditor, b/c Debtor takes hit
§         Debtor operates a business that generates accounts, (credit cards)
§         Debtor wants to f

g Bank judicially forecloses on the mortgage. At the foreclosure sale, no one else shows up. Big Bank credit bids $60,000 of the loan and acquires Blackacre
o        Big Bank obtains a deficiency judgement against Ellen for $40,000. It garnishes Ellen’s salary and collects the $40,000
o        After the redemption period, Big Bank sells Blackacre for $200,000
Total paid to Big Bank: 240,000
Repossession of Collateral – not talking about title, talking about Possession
·         3 ways to get possession
o        Volunteer surrender
o        Judicial process
§         Real estate: Writ of possession, writ of assistance
§         Tangible personal property: Replevin
·         Secured party has right to possession UCC § 9-609
·         Powerful: sheriff delivers temporary possession early
·         Two procedures both Constitutional:
o        Writ and Levy before OR after notice
o        Depends on convincing judge collateral’s danger
§         Intangible personal property: Creditor’s bill/creditor’s suit
o        Self help
§         Not by mortgagees (except rents)
§         Not by lessors
§         Yes by Article 9 secured parties (for tangibles, accounts, payment intangibles)
·         The importance of possession Pending Foreclosure
o        Quicker recovery by creditor tends to preserve value
o        There is an economic use for the interm period i.e. no mortgage payment
o        Also Prospective buyers will have a hard time evaluating if D is still there
o        Sometimes debtors are not at fault and evicting them could cause irreparable harm
o        Basically giving the property to one side or the other, gives all others better bargaining power and hurts the other (debtors or creditors)
·         The Right of Possession Pending Foreclosure – real property
o        Debtor right to possession until foreclosure equity of redemption
§         Mortgages never become entitled to possession of mortgaged real property in their capacity as mortgages
o        Appointment of receiver
§         Example of debtor/landlord collecting rents but not paying mortgages
§         The receiver collects (and can also turn profit) – Rare
§         Even when the mortgages so provide, appointment is an equity remedy that remains in the sound discretion of the court. 
§         The creditor must show that under the circumstances of the particular case its remedy at law is inadequate. 
§         The court is likely to be more receptive to mortgagee’s request for the appointment of a receiver during the time of appeals.