CHAPTER 1: Creditor’s Remedies Under State Law
ASSIGNMENT 1: REMEDIES OF UNSECURED PERSONS UNDER STATE LAW
· Who is Unsecured Creditor?
¡ Anyone who is owed a legal obligation that can be reduced to a money judgment is a creditor
¡ Term creditor embraces a wide variety of characters in multitude of circumstances
¡ Unless creditor contracts with the debtor for secured status or is granted it by statute- the creditor is unsecured
– Ex: Tort victims, uninformed creditors, etc
¡ If unsecured creditor has obtained a court judgment to establish liability, the creditor is a judgment creditor… but grant of judgment does not alter creditor’s unsecured status
¡ Legal remedies available to unsecured C’s = minimum collection rights guaranteed to anyone owed an obligation that can be reduced to a $ judgment
· How Unsecured Creditors Compel Payment?
¡ Law provides procedures to collect unsecured debts
¡ No self-help… no seizing property on its own- this could be conversion
¡ Creditor has a right to demand payment, but may not do so in an unreasonable manner or may incur liability for wrongful collection
¡ STEPS:
– File a Complaint and serve process on D
– To trial.. Judgment.
– Get a writ of execution—an order from the court telling the sheriff to go get the $ or property. Sheriff has to do it—NO self help, because person does not have interest in property (this would be tort of conversion if person did do this)
* Creditor has burden of instructing sheriff where to go
* Creditor needs to know what belongs to debtor – what is available to pay off debt—do this through discovery! (after writ of execution)
* Discoveryà
· Depose debtor- if business, want to know ownership structure—who is debtor (individual or business – risk of limited liab. If it is business)
· Public Records-are there any other judgments outstanding or security interests in the property?
– Levy on property– Sheriff gets possession. Note- more than one levy can be made under the same writ as long as it is before the return date (usually within 3 months of issuance)
* If property levied on is not sufficient to satisfy execution, a return should not be made without showing that another levy would be fruitless
* Levy under a writ can be made at any time of day
* Phsyical force & levyà generally, officer may force himself into any place except debtor’s home.
– Sheriff makes a “return”—physical return of original writ, with sheriff’s description of what was done
– Sheriff’s Sale of property to pay creditor
¡ Other Remedies besides Levy and Writ of Execution:
– Writ of Garnishment—if 3rd party owes $ to debtor, this can make 3rd party pay creditor directly
¡ Provisional Remedy—creditor can obtain this before a judgment if debtor is fraudulently disposing of propertyà This gives creditor the right to an immediate attachment of whatever property the debtor has
· Property Exempt from Execution –
¡ Via Statute-
– Burial property, consumer goods, car, net income, business equipment, depository accounts
– Wisc. Statute- in book- limits the amount that can be exempt- SEE P 15
– Ex: Cars (g) – partially exempt – exempt amount not to exceed 1200. But (9) says that if the property is partially exempt and indivisible, it can be sold and exempt amount paid to debtor.
– Homestead Exemption
– Fed Law says min of 75% of debtor’s wages are exempt
– Downside- not everything a debtor has is subject to levy… exemption prevents creditors from taking most of valuable and easy to locate assets
– Delaware statute- property claimed as collateral can’t be exempt
· Fraudulent Transfers-
¡ Debtor resisting collection may try to get rid of assets to avoid creditor taking them…
– Any transfer made with actual intent to hinder, delay, or defraud any creditor is fraudulent – have to prove BAD INTENT
– 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. This applies even if transfer was made in good faith.
· Problems-
¡ Nothing can be done to get $$ owed unless there is a BREACH of the loan… to avoid this, you can include provision in K that says if there is a breach, then entire loan is callable and will be due.
ASSIGNMENT 2: SECURITY AND FORECLOSURE
· Lien = relationship between particular property (collateral) and a particular debt or obligation
¡ Types of Liens-
– Security Interest- any lien created by contract between D and C
– Liens generated by statute such as Mechanic’s Liens
– Judicial Liens (for unsecured Cs)
¡ Security interest (lien) only has effect in event of Ds default. But agreement (security agreement) may impose obligations on D even in absence of default
– The right to enforce debt against the property that serves as collateral is contingent upon the occurrence of default
· When a transaction is intended as a security interest it will be treated as a security interestà SUBSTANCE OVER FORM– when security interest is created this article applies regardless of what name parties have given it (Comment 2 to 9-109).
¡ UCC 9-109 – Article 9 applies to any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract
¡ Basile v. Erhal Holding Corp. – P took out mortgage, and gave creditor a deed “in lieu of foreclosure”—and if D defaults, then creditor can record deed and become owner. Court said that form of transaction was a security interest, because the mortgage was executed as a security for the loan of money.
– With security interest- debtor has a right to redeem the property at any time prior to the actual sale of the collateral by tendering payment + interest… this is called right of redemption
¡ Deed in Lieux of Foreclosure AHEAD of timeà give it to creditor with mortgage and say that cr wont record it unless dr defaults—this is NOT OK.
– This is essentially a security interest- mortgage.
· Other Transactions that have FORM of Security Interest
¡ Conditional Sales – UCC 2-401 (1) – Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest.
– Essentially- buyer becomes owner, and seller becomes a secured creditor.
¡ Leases Intended as Security Interests – consider factors-
– If lease is for entire remaining economic life of the collateral, tends to be SI
– UCC 1-203. Lease Distinguished From SI. Whether a transaction creates a lease or a SI is determined by facts of each case. Transaction creates a SI if the lessee has an obligation to continue paying consideration for the term of the lease, if the obligation is not terminable by the lessee, and if one of four additional tests is met. Four tests:
* Original lease term is equal to or greater than remaining economic life of goods
* Lessee is either bound to renew the lease for the remaining economic life of the goods or to become the owner of the goods
* Whether lessee has an option to renew the lease
nded as a security interest if it is executed along with the mortgage on the property. The deed in lieux of foreclosure cannot be used to waive the dr’s right of redemption
¡ An agreement to give up the equity of redemption in the future is not enforceable
ASSIGNMENT 3: REPOSSESSION OF COLLATERAL
· Importance of Possession Pending Foreclosure-
¡ Reasons the Secured Creditor will want possession pending foreclosure
– Debtor may have little incentive to preserve and maintain the property
– The use of collateral between the time the right to foreclosure accrues and the time it becomes final may have substantial economic value—rent it to someone else
– If the dr is in possession pending foreclosure/sale it may be hard to show to prospective buyers and may diminish resale value
¡ Leverage Issues-
– Creditor who can make a credible threat to dispossess debtor has extraordinary leverage over the debtor
– Debtor who can credibly threat to retain possession of collateral for a long time, run up cost of repossession, or reduce value of collateral before the creditor can gain possession may be able to take advantage of dr
– Holder of enforceable right to possession pending foreclosure can terminate dr’s business or allow it to continue, control access to property…
¡ Most security agreements provide the CR with right to possession immediately upon default… Even if secured creditor has the RIGHT to possession upon default, specific jurisdictions may require certain procedures to be followed
– UCC 9-609- gives secured party the right to take possession immediately upon default.
· Right to Possession Pending Foreclosure – REAL PROPERTY
¡ Right to Possession:
– Debtor retains right to possession until the court forecloses the dr’s equity of redemption and the sheriff sells the property
– Only the purchaser at the foreclosure sale (which may actually be the mortgage bank) is entitled to dispossess the dr
¡ Appointment of a Receiver
– While foreclosure is pending, any interested party can appoint a receiver to preserve value of collateral
– Receiver will be an officer of the court with fiduciary obligations to all who have an interest in the party.
– Appointment of collateral will cut of cash from from dr’s collateral to the mortgagee- receiver will generally use the cash flow to maintain value of the collateral. Mortgagee does not get access to cash flow directly.
– Appointment is rareà creditor must show that foreclosure (the remedy at law) is inadequate. This is usually true when value of property is inadequate to satisfy debt and mortgagor is insolvent so that any deficiency judgment will be uncollectible.
* Note—rarely does happen with residential real estate—dr’s nearly ALWAYS retain possession of residential homes
Receiver typically takes possession of the collateral during foreclosure and
