Secured Transactions Outline

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 the relationship is that if the debt is not paid when due, the creditor can compel the application of the value of the collateral to payment of the debt
o        Security interest = the most common form of lien; is any lien created by contract between debtor and creditor
§         This includes real estate mortgages and deeds of trust as well as the security interests created in personal property under UCC Art. 9
o        There are consensual and nonconsensual liens
§         2 types of nonconsensual liens
·         1) liens granted by statute, such as mechanic’s liens (statutory liens)
·         2) liens obtained by unsecured creditors through judicial process (judicial liens)
o        What property will serve as collateral for a security interest depends on custom and the needs of the particular parties
§         Virtually anything recognized as property can serve as collateral
§         The usefulness of property as collateral will ultimately depend on:
·         1) how much value the creditor can extract from it after default
·         2) how much leverage the creditor can derive from the creditor’s ability to deprive the debtor of the property
o        The agreement that creates the security interest may impose obligations on the debtor that apply even in the absence of default
§         The default may be a failure to pay the debt or a failure to comply with some other provision of the security agreement
§         A security interest can be described as a right in property that is contingent on nonpayment of a debt
o        Secured creditors have enhanced collection rights – unsecured creditors get only what is left after provisions have been made for secured creditors (usually nothing)
o        Why some creditors have unsecured status
§         They are compensated by receiving a higher interest rate
§         Some do no choose it (victim of a car accident)
§         Some don’t realize or recognize the importance (prepaid rent)
§         Others may understand the implications of assuming unsecured status, but be constrained by business custom and practice from seeking secured status 
o        A security relationship can be created in nontraditional ways
§         For example – a sale and option to purchase can be constructed in such a way that it is essentially a security interest
§         Must look for intended securities
o        Intended Security Doctrine
§         A transaction is in the nature of a security if the intent is to provide one party with an interest in the property of another, which interest is contingent upon nonpayment of debt
§         If you meet the intended security doctrine, you have a security interest (no matter how disguised)
§         The intended security doctrine applies to personal property transactions and real property transactions (applies under the UCC)
§         A lease is an intended as a security interest if:
·         1) the lease payments are for a term, and
·         2) at the end of the term the person can become the owner of the property for little or no additional money
o        Even if don’t become the title owner of the property at the end of the lease, but the value of the property is totally gone at the end of the lease, it will be intended as a security as well (because have leased and used the entire useful life of the asset)
o        RULES
§         When a debtor gives a security interest in their property, after they default, they have a right in redemption
§         If your agreement is structured such that it is not a security agreement, but meets the intended security doctrine, will be held to have a security interest and must abide by all rules regarding security interests
§         Basile v. Erhal Holding Company – a deed in lieu of foreclosure will be intended as a security interest if it is executed along with the mortgage on the property. The deed in lieu of foreclosure cannot be used to waive the debtor’s right of redemption
§         An agreement to give up the equity of redemption in the future is not enforceable
–          Foreclosure procedure
o        After foreclosure, the debtor no longer has a right to redemption
o        The foreclosure requires a sale – after the sale, the property can be transferred free of liens
o        Real estate foreclosure procedures vary from state to state; the UCC provides a uniform method of foreclosure for personal property
o        Foreclosure of a security agreement v. Taking possession of the collateral
§         Foreclosure of a security interest
·         This process transfers ownership of the property from the debtor to the purchaser of the collateral and cuts off the debtor’s right to redeem (is typically accompanied by transfer of possession)
§         Taking possession of collateral
·         This is just the transfer of the property – it can occur before, during or after foreclosure, or not at all
o        Judicial foreclosure
§         A foreclosure process is judicial if it is accompanied by the entry of a court order
§         Steps for a judicial foreclosure
·         1) In a judicial foreclosure, a creditor holding a mortgage or security interest typically files a civil action ag