Secured transactions allows the US economy to function as it does
Large businesses can issue bonds but most small businesses finance themselves in the beginning
Debtor: one who has an obligation to another
Creditor: the person to whom that obligation is owed
Unsecured transaction: when debtor owes an obligation that is not secured by any of the debtor’s property
Simply by being owed a debt, you do not obtain an interest in any of debtor’s property
Unsecured creditor: is owed money by a debtor but has no pledge/interest in property
Secured creditor: creditor who has loaned money or extended credit it some fashion and in part of the repayment agreement, the creditor has received an interest in debtor’s property
Personal property: anything that is not real property (i.e. not land or attached to land)
1. Any creditor has a property right in a sense: a debtor has an obligation that someone else may be willing to buy. Thus, the right to collect is an intangible property right.
2. There is no right to self-help in the law for unsecured creditors.
a. You must go through judicial process to help you collect your unsecured debt. We give the gov’t a monopoly on the use of force. The law in all states is very favorable to the unsecure creditor.
3. Once you get a judgment, you take it to the courthouse in the jurisdiction.
a. If debtor has real property, you file the judgment and you will then have a lien on the real property of the debtor. You then follow with a judgment lien to foreclose on the property.
b. If you have personal property, you go to the jurisdiction and enroll the judgment. To collect, you ask the court to issue a writ to the sheriff saying “go collect on this judgment”. The sheriff goes forth and does so “levies” or “executes” on the debtor’s property.
c. Note: Sheriffs HATE collecting. Debtors will deny that any of the property legally belongs to them. Additionally, sheriffs can be sued for conversion
d. If you enroll the judgment in the jurisdiction where the debtor lives, you can subpoena them and subject them to a debtor’s interrogatories. You can seize property right there on the spot
5. Fourth Amendment does not apply to debt collection! It only applies to criminal cases, debts are civil.
As long as the initial judgment was valid, and the sheriff follows the steps, the debt will be collected (see Pennoyer v. Neff).
6. In sum, being an unsecured creditor is risky business. This led to the development of secured credit.
A bit about bankruptcy:
1. The majority of our cases stem from bankruptcy courts.
2. SIs are fully enforceable in bankruptcy
a. However, the trustee will always be trying to argue that there is a flaw in the SA.
3. If there were no law governing secured transactions, it would occur anyway.
4. What does the debtor get out of this?
a. A debtor that has a spotty credit record or no credit record is more likely to get a loan when they have something to pledge
b. Favorable interest rates/terms
Chattel mortgages: secured transactions in real property
Until about 1900, you had to physically give the personal property to a lender. Pawn shops are private transactions where the physical property is transferred. But this is no longer required. Secured transactions are a uniquely American process and vaulted the USA to become the corporate giant it became in the 1920’s.
The Typical Secured Transaction
§ 9-109(a)(1) Scope
This article applies to (1) a transaction, regardless of it
ng to last for full life of good à ST.
b. When the agreement calls for anything substantially less à pure lease.
Types of Collateral
Tangible Collateral (Goods)
1. Consumer Goods
3. Farm Products
3. Chattel Paper
4. Investment Property
2. Letter of Credit Rights
3. Deposit Accounts
4. Commercial Tort Claims
5. General Intangibles
The use in the hands of the debtor determines the category into which a particular good falls.
The categories for tangible goods:
1. Consumer Goods (23) – goods that are used or bought for use primarily for personal, family or household purposes (consumer good)
2. Farm Products (34) – (think inventory of a farm)
3. Inventory (48) – goods held for lease or sale; any good used or consumed in a business
4. Equipment (33) – the catchall, everything else
§ 9-102(a)(23) Consumer goods
Goods that are used or bought for use primarily for personal, family, or household purposes.
§ 9-102(a)(33) Equipment
Equipment means goods other than inventory, farm products, or consumer goods. [Catchall]
§ 9-102(a)(34) Farm Products
Farm products means goods, other than standing timber, with respect to wchih the debtor’s engaged in farming operation and which are:
(A) crops grown, growing or to be grown, including: