Chapter 17: Introduction to Secured Transactions
Subject of Art. 9
Intro: It is understandable that someone extending credit in a sale or loan transaction wants to be sure of repayment. Some debtors are so solvent and trustworthy that a promise to pay is enough. This is said to be unsecured. However, this is not always the case and the seller may require that the debtor obtain a surety (called a co-signer, guarantor and in UCC article 3 an accommodation party). Or securing the debt by nominating some of the debtors current or future property as collateral.
Lets look at some basic definitions under article 9.
A “lien” is an interest in the debtor’s property given by the law to protect a creditor. If a debtor voluntarily grants such an interest, it is called a “consensual lien”. If a consensual lien is taken in the debtor’s real property, then the lien is called a “mortgage.” A consensual lien in personal property is called a “security interest” and is governed by article 9. An involuntary lien can also be created by the courts called a “judicial lien.” A “statutory lien” is created by statute or common law in favor of certain creditors the law deems worthy of protection. For example, liens given to landlords, mechanics and even attorneys. In addition, if you fail to pay taxes the federal government can file a “tax lien”. Allows the federal government or state to collect.
Bankruptcy law provides for the development of a plan that allows a debtor, who is unable to pay his creditors, to resolve his debts through the division of his assets among his creditors. This supervised division also allows the interests of all creditors to be treated with some measure of equality. Certain bankruptcy proceedings allow a debtor to stay in business and use revenue generated to resolve his or her debts. An additional purpose of bankruptcy law is to allow certain debtors to free themselves (to be discharged) of the financial obligations they have accumulated, after their assets are distributed, even if their debts have not been paid in full.
Bankruptcy law is federal statutory law contained in Title 11 of the United States Code. Congress passed the Bankruptcy Code under its Constitutional grant of authority to “establish. . . uniform laws on the subject of Bankruptcy throughout the United States.” See U.S. Constitution Article I, Section 8. States may not regulate bankruptcy though they may pass laws that govern other aspects of the debtor-creditor relationship. See Debtor-Creditor. A number of sections of Title 11 incorporate the debtor-creditor law of the individual states.
Bankruptcy proceedings are supervised by and litigated in the United States Bankruptcy Courts. These courts are a part of the District Courts of The United States. The United States Trustees were established by Congress to handle many of the supervisory and administrative duties of bankruptcy proceedings. Proceedings in bankruptcy courts are governed by the Bankruptcy Rules which were promulgated by the Supreme Court under the authority of Congress.
There are two basic types of Bankruptcy proceedings. A filing under Chapter 7 is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee
transferors future creditors and is, therefore, a fraudulent transfer.
Book Notes: the evil under attack in this case is the secret lien that other creditors do not know about. If it is enforced by the courts, the other creditors who were deceived by the debtors apparently unencumbered prosperity are hurt. But, although the court in this rule against creditors security interest, most creditors took comfort from the decision because the court indicated methods by which the lien would of survived the trustees attack. Here are the major devices.
Common Law devices most of which have replaced!
Pledge: In a pledge the debtor (called a pledgor) gives physical possession of the collateral to the creditor (called the pledge) until the debt is paid. Possession than perfects the creditors interest in the collateral (even against the bankruptcy trustee).
b) Chattel Mortgage: The debtor could always mortgage land, so why not have something similar for personal property (chattels)?
c) Conditional Sale: see problem 260
Facts: J sold N a used car for 900 to be paid in 3 payments of 300. The contract was oral and when she missed the second payment the car was repossessed. N sued J for conversion. Who should win?
Answer: Nancy, because the contract was oral and no security interest was present so why should they be allowed to take the car.