SECURED TRANSACTIONS
PART 1 à THE CREDITOR-DEBTOR RELATIONSHIP
I. Creditors’ Remedies under State Law (Chapter 1)
a. Introduction
– Focus – procedures the law provides for the collection of debt
– Security interests only attach to particular assets (is essentially a property right)
– Critical attributes of secured credit
o 1) Right to self-help remedies (generally this is a right to repossess when there is a default and the creditor can retrieve the property)
§ What gives the creditor the right to retrieve the property is a contract question (secured transactions is a contract notion in this sense)
§ The debtor and lender enter into a security agreement, under provisions governed by UCC Art. 9 (there are just 2 parties)
§ Self-help remedies, in a general sense, looks at contract issues between the debtor and the lender
§ This is ATTACHMENT – a contract has been created that gives the lender a security interest in the debtor’s property and permits the lender to engage in self-help repossession
o 2) Priority
§ In the event of insolvency, the secured creditor is paid off first (such as in bankruptcy, or an insolvent decedent’s estate, etc)
§ Priority is most important in a circumstance of insolvency (when there are insufficient assets to cover debts, it is the only time priority matters)
§ Right to payment from proceeds of assets in which there is a security interest
§ To get priority, the secured creditor must PERFECT
– Policies problems implicated when there are insufficient assets to pay off secured and unsecured debts (when a debtor is insolvent)
o Basic problem – can assume that a debtor will lie and there nothing can be done about it
o The priority rules of the UCC tell creditors that to get priority they must PERFECT
§ Process of perfection – there are a number of ways to perfect, however essentially perfection involves contracting to cure the ostensible ownership problem
§ Principle way to perfect – filing a financing statement in the debtor’s name with the Secretary of State where the debtor is located
§ Must be correctly filed, and as a creditor you must be able to find them
§ This is a multi-party problem – because in insolvency you have unsecured creditors v. the secured creditor(s)
· If there is perfection, the secured creditor wins
· Can say to the unsecured creditor that they should have looked and watched for these perfected security interests
o However unsecured creditors rarely look
o Also, sometimes the unsecured creditors are lay people who were injured by an improperly designed product (can’t say to them that they should have looked)
b. Remedies of Unsecured Creditors under State Law (Assignment 1)
– It is very difficult and can be very expensive to collect on a debt if the creditor does not have a security interest
– Who is an unsecured creditor?
o A creditor is anyone who is owed a legal obligation that can be reduced to a money judgment (are a creditor of the party owing the obligation)
o A debtor/creditor relationship can be voluntary (loan arrangement) or involuntary (victim of car accident)
o Are an unsecured creditor unless the creditor contracts with the debtor for secured status or it is granted by statute
o A judgment creditor has obtained a court judgment to establish the debtor’s liability, but are still an unsecured creditor (until sheriff executes)
o The legal remedies available to unsecured creditors are available to all creditors
– How do unsecured creditors compel payment?
o If don’t have a secured interest, cannot obtain the property yourself without a judgment and a writ of execution
o Unsecured creditors do NOT have a self-help right (cannot seize a debtor’s property, but can set off)
o If an unsecured creditor engages in a prohibited seizure, could be liable for
§ Tort of conversion (the wrongful exercise of dominion and control over another’s property in denial of or inconsistent with his rights)
§ Larceny
§ Liability for wrongful collection practices
o Steps an unsecured creditor must take to recover from the debtor
§ 1) debtor is liable to creditor for an obligation
§ 2) creditor obtains judgment from court fixing liability of debtor (becomes a judgment creditor)
§ 3) creditor obtains a writ of execution, directing sheriff to levy and make a return within 3 months of the date of issuance
· Creditor must prepare the writ, have it entered by the clerk, and see that it is delivered to the sheriff
· Creditor should conduct discovery to locate and identify the property to be levied upon
· The writ is in the exclusive control of the judgment creditor – the sheriff must follow the creditor’s reasonable instructions regarding the time and manner of making the levy and must abide by special instructions to make immediate levy, when creditor demonstrates necessity
§ 4) sheriff executes
§ 5) sheriff returns the writ; must file a verified statement of when and how much money was collected and the balance due on execution fees and costs
· Sheriff cannot levy after the return date
· Once an execution is returned, the Sheriff cannot levy
· BUT, successive levies under one writ of execution are permissible
§ 6) proceeds of sheriff’s sale are paid to the judgment creditor
o Vitale v. Hotel California, Inc – plaintiff brought an action against the Sheriff for failing to execute the full levy issued by the court. Where executing on the debtor’s bar, which was only open late and the bouncer’s were refusing access to the sheriff. The Sheriff only levied once
§ Holding – multiple levies under one writ of execution are permissible if the initial levy does not satisfy the judgment
§ If property levied upon is not sufficient to satisfy the execution, a return should not be made without a showing that attempting another levy would be fruitless
§ If the sheriff has returned the writ, the judgment creditor can obtain an alias writ expecting that there is more money or property that can be levied upon
§ Limits on a sheriff’s refusal to execute on a judgment creditor’s levy
· There is no known limit on the number of times a sheriff might be required to levy
· Sheriff cannot complain about business hours of the debtor’s (odd hours); sheriff can determine reasonable hours of operation
· Can execute on a weekend
o Levy under a writ of execution may be made at any hour of the day
· Even if there is a threat of violence, must levy because sheriff can breach the peace (only excusable if there is imminent harm)
§ By a proceeding in amercement, a judgment creditor may hold a sheriff liable for failing to properly execute against a judgment debtor
o Garnishment
§ Is a another possibility for collection on a debt by a judgment creditor
§ If a 3rd party is in possession of property of the debtor or owes money to the debtor (i.e. wages, etc), the creditor can cause the sheriff to serve a writ of execution a the 3rd party
– Limitations on compelling payment
o A sheriff will only act on clear direction about where to collect on a debtor’s assets (a judgment creditor has an obligation to use discovery to locate the assets)
o Creditors cannot conduct fishing expeditions by just showing up at the debtor’s place of business with a sheriff
o Provisional remedies – a creditor who has filed suit against the debtor to collection on an unsecured debt can obtain a provisional remedy before obtaining a judgment
o Until the sheriff arrives to levy on the debtor’s assets, the debtor can continue to transact business
o A judgment can only be enforced in the state where rendered
o About exemptions
§ Exemption statutes prevent the sheriff from seizing certain property under a writ of execution
§ Exemptions do NOT apply when a creditor has a security interest in the property (there are different exemptions for bankruptcy)
· Giving a security interest waives any interest the debtor might have in the property
o KY Exemptions
§ Makes it harder on debtors and easier on creditors
§ $5000 homestead exemption
§ $2500 car exemption (no ability to do add on with a consumer goods exemption)
§ $300 equipment exemption
§ $1000 wildcard exemption (can be used for any property, like a bank account)
– Order to get property when are levying
o 1) cash (because is most volatile)
o 2) property that is the easiest to find
o 3) car
o 4) real property
§ When a judgment is docketed it automatically puts a lien on real property
c. Security and Foreclosure (Assignment 2)
– The nature of security
o A lien is more effective set of collection rights than unsecured credit
§ Lien = a charge against or an interest in property to secure payment of a debt or performance of an obligation
§ A lien is a relationship between particular property (the collateral) and a particular debt or obligation
§ The general nature of t
ter a final judgment of foreclosure
· 4) Typically, as a part of the judgment, the court will set a date for the foreclosure sale (usually a statute governs this)
o The sales are usually held at a particular place on a particular day
o Sales may be advertised beforehand by the person conducting it
o The period of advertising ranges
· 5) On the date for the actual sale, the sheriff or clerk conducts an auction (are required to pay the entire amount at sale or a portion – by statute)
· 6) Upon receipt of the money, the sheriff or clerk certifies that person to be the highest bidder
· 7) Under the procedures of most jurisdictions, a foreclosure sale must be confirmed by the court – after the auction is held, parties to the mortgage foreclosure case have some period of time in which they can object to the manner in which it was actually conducted
· 8) After the confirmation order has been entered and the time for appeal has expired, the sheriff or clerk disburses the sales proceeds
o If the amount is greater than that owed to the foreclosing creditor, the surplus is distributed first to holders of junior liens and mortgages and then to the debtor
o If the amount realized from the sale is less than the amount owed the foreclosing creditor, the foreclosing creditor can request a judgment for the deficiency
§ Ordinarily the debtor will remain in possession of the mortgaged premises until the sale has been confirmed by the court – the purchaser is then entitled to possession
· If the debtor will not surrender the premises, the purchaser is entitled to a writ of assistance, which in some states is known as a writ of possession (these direct the sheriff to remove the debtor from the premises and put the purchaser in possession)
§ Statues in some states mandate delays or waiting periods in addition to those the debtor can gain by defending the action
· WI statute – no sale involving a one- to four-family residence that is owner-occupied at the commencement of the foreclosure action, a farm, a church, or a tax-exempt nonprofit charitable organization may be held until the expiration of 12 months from the date when judgment is entered
o Effect – takes a year to do the judicial foreclosure
o Problem – the debtor is likely to be in possession of the property during this year – thus, the property will likely not be in good condition (they have no incentive to take care of it and may destroy it)
§ Deed in lieu of foreclosure
· With the cooperation of the debtor after default, a secured creditor may be able to avoid the necessity to foreclose
· 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 (lose the home now and have no further liability)
· In lieu of foreclosure, the debtor executes a deed in favor of the creditor
· If the property does not bring as much as the debt, the creditor cannot sue the debtor for a deficiency judgment
o To get a deficiency judgment against a debtor, must go through the foreclosure process
· This can be a good deal for the debtor if the property is low value, can be a good deal for the bank if the property is of high value
o If do have some equity value in the home, the debtor should bargain with the creditor who wants a deed in lieu of foreclosure because are saving the bank a lot of expense (should do it anyway, really)
· Even if have a deed in lieu of foreclosure, the debtor still has the right to redeem up until the actual sale (Basile v. Erhal)Power of sale foreclosure
