Secured Transactions Outline
Professor Wes Smith, Spring 2011
PART ONE: THE CREDITOR DEBTOR RELATIONS
I. Creditors’ remedies under state law
a. Remedies of Unsecured Creditors Under State Law
i. Unsecured Creditor
1. Creditor:
a. Anyone who is owed a legal obligation that can be reduced to a money judgment is a creditor of the party owing the obligation
2. Unsecured Creditor:
a. If the creditor does not contract with the debtor for secured status or is not granted it by statute
3. Judgment Creditor:
a. An unsecured creditor who has obtained a court judgment to establish liability. But the court judgment does not make the creditor “secure”.
ii. How Unsecured Creditors Compel Payment
1. Anatomy of a Lawsuit
a. Become Judgment Creditor
i. The creditor files lawsuit and receives a judgment.
ii. There are several possible judgments:
1. Declaratory relief
2. Injunction or other equitable relief
3. Money damages
b. Creditor Tools (If Debtor Doesn’t Pay)
i. Discovery of debtor’s assets pre or post judgment
ii. Writ of execution
1. Sheriff levies and sells, giving proceeds to creditor
iii. Collect from third parties owing the debtors (accounts)
1. Garnishment
iv. Criminal prosecution (fine and jail)
v. Non-judicial tools to collect debt
1. Threat of bad credit rating
c. Debtor’s Tools to Defeat or Soften Creditor Tools
i. Bankruptcy
ii. Transfer assets
iii. Statute of limitation expiration on right to collect
iv. Exemption state statutes
iii. Limitations on Compelling Payment
1. Self-Help Seizure Prohibited
a. A prohibited seizure of a debtor’s property will constitute the tort of conversion.
b. Conversion is the wrongful exercise of dominion and control over another’s property in denial of or inconsistent with his rights.
c. A creditor that wrongfully takes possession of property of the debtor may be charged with larceny.
2. Unreasonable Manner Prohibited
a. Although a creditor has the right to demand payment from the debtor, if the creditor does so in an unreasonable manner then the creditor may incur liability for wrongful collection practices.
3. Exemption Statutes
a. Exemption Statutes
i. Exemption statutes ensure that collection does not leave the debtor destitute.
ii. The purpose is “preserving to debtors and their dependents the means of obtaining a livelihood, the enjoyment of property necessary to sustain life and the opportunity to avoid becoming public charges.”
b. Kansas Exemptions
i. Homestead Exemption (K.S.A. 60-2301): Unlimited
ii. Household Goods Exemption (K.S.A. 60-2304(a)): Unlimited
iii. Motor Vehicle Exemption (K.S.A. 60-2304(c)): Up to $20,000
iv. Cash Exemption: Not exempt
v. Ornaments of the Person (K.S.A. 60-2304(b)): Up to $1,000
vi. Tools of the Trade (K.S.A. 60-2304(e)): Up to $7,500
4. If Property Belongs to Third Party
a. The creditor has the right to demand information because the sheriff will only act on clear directions about what to get and where to get it.
b. If the property seized turns out to belong to a third party, the judgment creditor may be liable for any damages caused to the third party.
c. Creditors have no right to conduct fishing expeditions by simply showing up at the debtor’s home or business.
5. Preference Payment
a. It is not fraudulent for a debtor to pay one of its creditors, even if the effect is to leave nothing for the others, so long as the debtor does not make the payment for the purpose of defrauding the others.
iv. Fraudulent Transfers
1. Transfers with Bad Intent
a. Any transfer made with actual intent to hinder, delay or defraud any creditor is fraudulent.
b. The only element of this is provision is bad intent, but intent can be difficult to prove.
2. Transfers of Assets without Equal Value
a. Any transfer made without receiving a reasonably equivalent value in exchange for the transfer is fraudulent if the debtor was insolvent at the time of the transfer.
b. The debtor can exchange its assets for other assets – provided that the other assets have approximately the same value.
c. The debtor cannot make gifts or sell assets for less than reasonably equivalent value.
b. Security and Foreclosure
i. Secured and Unsecured Transactions
1. Secured Transaction
a. Two parties to a secured transaction: a debtor (DR) and a creditor (CR).
b. The creditor provides the debtor with money, and in return the debtor provides a security interest in X.
c. X is also known as lien (a grant of an interest in property).
d. X is the collateral, the property that the debtor provides an interest in.
2. Liens
a. Overview
i. Lien: a charge against or an interest in property to secure payment of a debt or performance of an obligation.
ii. A lien is a relationship between particular property (the collateral) and a particular debt or obligation.
iii. The process by which the creditor compels application is called foreclosure.
b. Security Interest
i. Most common form of lien
ii. Encompasses any lien created by contract between debtor and creditor (i.e. real estate mortgages and deeds of trust).
c. Non Consensual Liens
i. Statutory liens: liens granted by statute or common law
ii. Judicial liens: liens obtained by unsecured creditors through judicial process.
3. Reasons C
ed on the debtor who may raise defenses, but these defenses are typically delays and technical defects in the complaint.
iv. Once the plaintiff has established he is entitled to foreclosure, the court will enter a final judgment of foreclosure.
b. Procedures for Sale
i. The court sets the date for the foreclosure sale.
ii. The sheriff sells the collateral, collects the proceeds, and applies them to payment of the secured debt.
iii. If the debtor will not surrender the property for sale, the purchaser is entitled to a writ of assistance or writ of possession, which directs the sheriff to put the purchaser in possession.
c. Avoiding Foreclosure
i. With the cooperation of the debtor after default, a secured creditor may avoid foreclosure.
ii. If there are no other liens or interests in the collateral, the debtor can simply transfer the property to the creditor by means of a deed in lieu of foreclosure.
3. Real Property Power of Sale Foreclosure
a. Overview
i. The deed of trust states in essence that the collateral will be held in trust by the creditor or a third party such as a bank or title company.
ii. The borrower agrees that in the event of default, the trustee can sell the property and pay the loan from the proceeds of sale.
b. Foreclosure Still Necessary
i. Foreclosure is still necessary when the creditor has the power of sale, but can be accomplished through a procedure that does not include a lawsuit.
c. Litigation May Still Occur
i. The primary purpose is to avoid the expense and delay of litigation, but it may still occur, such as if the debtor refuses to render possession after the sale.
ii. In some states, the debtor may also bring a tort action for wrongful sale.
4. UCC Foreclosure by Sale
a. The UCC provides that after default, the secured party may sell, lease, license, or otherwise dispose of any or all of the collateral.
b. The sale or disposition itself forecloses the debtor’s right to redeem the property.
c. It extinguishes the creditor’s security interest in the collateral and transfers to the purchaser all of the debtor’s rights in the collateral.
d. Alternatively, if the creditor chooses, it may foreclose by judicial procedure.
