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Secured Credit
University of Nebraska School of Law
Wilson, Catherine Lee

CREDITORS RIGHTS – WILSON FALL 2006
 
CREDITOR REMEDIES. 2
1.     Unsecured Creditor2
2.     Secured Creditor2
3.     Repossession. 3
ARTICLE 9 SALE & DEFICIENCY.. 3
1.     Disposition of Collateral3
TIMELINE.. 5
CREDITOR REMEDIES IN BANKRUPTCY.. 5
3.     Relief from Stay:6
4.     Calculating Amount of Claim.. 6
5.     Cram Down 6
CREATION OF SECURITY INTEREST. 6
1.     Enforceability. 6
a.     Attachment6
COLLATERAL CLASSIFICATIONS. 8
1.     Types of Collateral8
2.     Collateral must be property. 8
PROCEEDS: 9-203f – 9
DEFAULT – 9
2.     Acceleration. 9
3.     Waiver.9
4.     Anti Waiver Clause. 10
5.     Cure. 10
8.     BT. 10
PERFECTION.. 10
2.     Financing Statement10
e.     Incorrect Info. 11
3.     Perfection other than Filing: Could be filing, possession, control, or automatic. 11
4.     Land & Fixtures. 12
5.     Lapse & Termination in Filing. 12
6.     Changes. 13
7.     Filing Location. 13
PRIORITY IN FORECLOSURE.. 14
PRIORITY.. 14
3.     Lien Creditor v SC.. 14
4.     LC v. LC.. 15
5.     BT v. SC.. 15
c.     Avoid Preferential Transfers. 15
6.     SC v SC.. 16
7.     Priority of Future Advances. 16
8.     Priority of After-Acquired Property. 16
9.     Priority of PMSI’s. 16
10.       Priority in Proceeds. 16
11.       Fixture Filing Priority. 16
13.       Buyers v. SC’s. 17
14.       Consumer to Consumer17
 
 
 
CREDITOR REMEDIES
Unsecured Creditor – ordinary or general – no K w/ D for SI
Backed only by promise to pay – like a credit card or judgment d
Getting paid:
                                                              i.      NO self help
1.      conversion: “wrongful exercise of dominion and control over another’s property in denial of or inconsistent with his rights.” Condon
a.       intent is irrelevant
2.      Larceny: doesn’t matter if collateral is less than amount owing
                                                            ii.      Fair Debt Collection Practices Act – UC must act reasonable
1.      stop bugging them after bankruptcy (applies to SC also)
2.      should have gotten an SI – UC had most leverage before loan
                                                          iii.      Fair Credit Reporting Act
1.      gives D rights such as power to dispute and duty on C to provide correct info
                                                          iv.      Get a Judgment – can only sue after default
1.      Process – demand letter →file →obtain j →locate d’s assets →writ of execution→ have sheriff levy
a.       Writ of execution & levy
                                                                                                                                      i.      Amercement v. sheriff if sheriff doesn’t collect Vitale
1.      unreasonable or onerous isn’t an excuse
                                                                                                                                    ii.      Alias Writ – if 1st seizure ineffective C can get this
                                                                                                                                  iii.      Pluries Writ – writs keep coming until satisfaction
b.      Writ of garnishment
2.      Debtors examination through discovery – USC can get contempt sanctions
3.      Fraudulent Transfers void unless Bona Fide Purchaser for value + multiple transa
a.       Get an attachment!
b.      D can pay his preference unless in bk unless intent is fraudulent
4.      Exemptions: Homestead, D wages (75% generally 15 USC 1671), pensions
3rd parties: if wrong property seized, SC owes damages to 3rd
                                                              i.      No fishing expeditions
                                                            ii.      “Right to refuse” – 3rd party can sue for damages and refuse return of property
Cons of being UC – time consuming litigation, locating property/person, exemption statutes,
                                                              i.      WI exemption statute: house, 5k consumer goods, 1.2 auto, business equipment
Secured Creditor – Remember 1-103 says that Art 9 doesn’t foreclose claims like fraud
Definitions:
                                                              i.      Lien – “charge against/interest property to secure payment of debt or performance” §101
1.      SI – most common – property secures payment of debt – voluntary lien
2.      statutory lien – involuntary – mechanics lien
3.      judicial lien – UC gets judgment and gets judicial lien
Scope Art 9 – 109a1 – applies to transaction, regardless of form, that creates SI in property by K
                                                              i.      Consensual K to create (oral ok)
                                                            ii.      Court looks at substance over form – beyond the words Basil
1.      lease(not part of Art 9) v sale (covered by 9) 1-203
a.       lease = si when lessee must pay entire term, lessee cannot terminate and lessee can purchase at end for nominal or minimal consideration  
b.      9-505 says that you can file FS and wont count as estoppel
2.      Is this “intended as security”? If so Comment 2 says SI, regardless of title
                                                          iii.      Can reach Exempt Property – Freedom of K
Foreclosure – after default, ownership/possession transferred to buyer, no more right to redeem
1.      Only available to secured creditors; cuts off equitable rights of redemption
                                                            ii.      Judicial Foreclosure  – Complaint→ Judgment → Notice →Sale → (D can object to notice, chilling, commercially reasonable, grossly inadequate $) Confirmation → some stat right to redeem →distribution of proceeds (anti-deficiency sometimes)
1.      get Writ of Assistance if D wont leave – Stedman (D kept it 5 yrs!); unlawful detainer, ejectment or eviction
2.      caveat emptor applies = purchaser must check title, SC is clear Marino
a.       get environmental before, high bid from ignorance is tough luck Horicon
                                                          iii.      Power of Sale Foreclosure – SI can include (25 states allow)
1.      3rd party holds title, after default sale occurs w/out judicial, no right to redeem!
                                                          iv.      Deed in Lieu of Foreclosure – Debtor gives title after default for debt extinguishment
1.      no clog on equity right of redemption if after default
                                                            v.      UCC F by Sale: 9-610a – SC can rent or sell after default but commercially reasonable
1.      redemption can occur any time before SC has disposed of collateral/entered K
2.      SC can use judicial 9-601a
Repossession – Sc wants to preserve value and get leverage, collect rents
ME never entitled to possession only purchaser at F sale
                                                              i.      In equity get receiver – at courts discretion – happens more in commercial
1.      ct allowed on farm even though 1 year right to stat redemption Bruett
                                                            ii.      Assignment of Rents: notify tenants to pay SC directly
Take Possession 9-609 – after default SC has right to immediate possession (never before)
                                                              i.      (B2) Self Help ok w/out courts– BUT cannot breach the peace
1.      (1)Potential for Violence – potential for immediate violence?
2.      (2)Nature of Premises – was it at night, plain sight, in public, 3rd party premises?
a.       3rd party premises more likely to be b of p Salisbery (property not visible)
3.      Self Help Examples
a.       Yes – bringing police, come back later w/ more men, guard (get permiss)
b.      No – trickery, break locks (replace), public, come back (ok after threat)
                                                                                                                                      i.      Lying/advising a lie may be ethical violation KB Oil Co.
4.      SC liable for acts of repo men, even if independent contractors
5.      Put in SA, that SC has right to enter and possess after default w/out trespass prob!
a.       D cant waive breach of peace 9-602(6); but can modify but no terms can be manifestly unreasonable 9-9-603; effect given to terms of SI 9-201
                                                            ii.      Replevin: SC files, motion for possession pending outcome, hearing in 10-20 days, d may not know, if SC shows that likely to prevail=possession, D can keep if pay bond, default J
1.      this doesn’t violate due process Del’s Big Saver Foods  
                                                          iii.      Disable Collateral: 9-609a2 – Comment 6
                                                          iv.      Debtors Objection – debtor can make objection and force judicial process
                                                            v.      Seize Account – AR can serve as collateral
1.      defined in 9-102a2 – receivable for work done, or work to be done
2.      pay directly 9-607a – SC gives notice to paying party
a.       9-406a, after notice, account debtor must pay or no discharge Cmt 1
b.      9-404a, SC subject to account debtor ∆’s against debtor
3.      commercially reasonable manner – SC has burden 9-626a
ARTICLE 9 SALE & DEFICIENCY – After possession – SC may dispose by sale 610a OR strict foreclosure
Disposition of Collateral 9-610b – must be commercially reasonable (every aspect, burden on SC 626a)
SA can identify standards for SC or debtor to meet 9-603
                                                              i.      Notice of Disposition 9-611 – before disposition SC must send reasonable authenticated notice to debtor and secondary obligor
a.       this gives debtor time to find financing, attract buyers, challenge
2.      (1)Timeliness of Notice 9-612 – is a question of fact
a.       Must be sent after default and reasonable time before disposition of collateral 9-612a
                                                                                                                                      i.      Safe Harbor – for non-consumer goods, over ten days is fine
                                                                                                                                    ii.      Consumer is a case by case basis
b.      4 month delay is fine – Lanier “intent of code is to prevent early sales”
3.      (2)Contents of Notice for consumer & non: safe harbor if 9-613↓
a.       Describe debtor & SC; describe collateral; state method of disposition; debtor entitled to accounting of unpaid debt; time/ place of sale
                                                                                                                                      i.      For Consumer goods you need all 5 + Need to state deficiency & # where more info available and # where to redeem 614
b.      Non Consumer – get close to above notice requirements (? of fact 613-2) + send notice to those SC’s who sent you

e
B treats RT same as SC §101-51. B also treats SC like LC §101-37
What Happens
Estate of Bankruptcy is created §541a– Trustee is in charge now – unless property exempt §522b
Enter Proof of Claim, §501a – no objections = claim allowed. Don’t need to enter in 11 b/c D will list SC’s and amounts of debt
                                                              i.      Claims are accelerated when B filed – §502b1 – Estimations are ok §502c
                                                            ii.      Estate has same ∆’s as D would have §558
Automatic Stay §362a – creditors must stop collection efforts
                                                              i.      No filing suit, enforcing judgment, repossessing property, pending suits must stop, enforce lien, taking any action to collect
1.      if Creditor gets property after stay=they must return it to trustee
2.      D can sue for damages §362h
3.      criminal proceeding aren’t affected §362b1, subject to gov regs 362b4
                                                            ii.      Exceptions for alimony, child support, paternity
BT sells property – This terminates stay §362c1
                                                              i.      Can be – but only D equity – so collateral is subject to SC lien §541a
                                                            ii.      Can be free and clear – so SC is now interested in proceeds §363f
1.      SC must pay if “benefits from sale”
2.      BT gets interest in property for reasonable expenses and that is deducted §506c
BT can abandon inconsequential property under §554a – stay lifted
Relief from Stay:
USC NEVER gets it – file proof of claim §501a, hope for best, expect worst – pro rata
(1)For Cause – §362d1 OR
                                                              i.      Lack adequate protection – collateral is deteriorating – debtor can pay diff and keep
1.      no insurance is a good one
2.      To reverse – D makes extra payments, gives SC lien in other property
3.      SC should have same standing as before w/F or l.a.p. Craddock-Terry Shoe
                                                            ii.      Proceeding nearing a close
(2)No Equity + Unnecessary for Reorg §362d2 (debtor shows reorg will succeed +necessary)
                                                              i.      7=no reorg so equity is the issue
BT can abandon property and then you can F!
Time Frame –
                                                              i.      Debtor is business, Ct has 30 days after notice to lift or lift is automatic §362e1
                                                            ii.      Debtor is Individual, Ct has 90 days §362e2
NOT continuous, 30 day expiration and must file continuation §362e
Calculating Amount of Claim
Unsecured doesn’t get % after filing date, only % from before  
                                                              i.      Unsecured Formula: (total available to unsecured) / (amount of debt) = pro rata
SC – debt secured up to amount of collateral, bifurcate §502 to amount of collateral §506a
                                                              i.      Pre-petition % is ok & attorney fees ok if K
                                                            ii.      Post-petition is ok IF: Reasonable, K provides & extent value of collateral is greater than debt §506b
1.      this can include attorney fees if K in some courts
                                                          iii.      Remember that underlying debt keeps building if not taken care of in B.
Cram Down – 11&13 – sets up new debt and payment schedules §1141d1a
11=discharge and then new debt; 13=discharge when D makes last payment
                                                              i.      Takes into account the time value of money, such as interest
1.      so although debt % is x, ct will set at market rates In re EI Parks
CREATION OF SECURITY INTEREST
Enforceability
Attachment: 9-203a – si attaches to collateral when si becomes enforceable need these: 9-203b↓
                                                              i.      Enforceable SI = SA + Value Given + Debtor has rights in collateral (Order don’t matter)
1.      SA b3 – either possession or authenticated sa w/description of collateral
a.       Possession = 3rd party ok
                                                                          &n