Creditor’s Rights – Austin McKillip
Part One
The Creditor—Debtor Relationship
CHAPTER 1 CREDITOR REMEDIES UNDER STATE LAW
Assign. 1:
Remedies of Unsecured Creditors Under State Law
A. Who is an Unsecured Creditor.
1. Creditor: anyone owed a legal obligation that can be reduced to a $ judgment is a creditor of the party owing the obligation.
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2. Unsecured Creditor (a.k.a. general or ordinary creditors): a creditor will be unsecured if the creditor fails to contract with the debtor for secured status or is not granted secured status by statute.
a. Judgment Creditor: if the unsecured creditor has already obtained a court judgment to establish liability, then the creditor is a judgment creditor, but the mere grant of a judgment does not alter the creditor’s unsecured status.
3. Debt: liability, monetary or non that is owed to someone. There are fixed (no matter what) and contingent (suit determines). Liquidated (certain amount due) or unliquidated (don’t know how much will be due). Mature (due) unmature (not due). Disputed or non-disputed debt (∆’s to the debt)
a. Regulation of contractual terms – see slides
b. Debt collection
c. Fair Credit Reporting Act: debtor has access to credit report. Fair and Accurate Reporting Act : more debtors rights. Enhances dispute opportunities and obligation to provide correct information.
d. Fair Debt Collection Act: Check out slides
B. How Do Unsecured Creditors Compel Payment?
1. Prohibited Remedies:
a. Self-help Seizure: unsecured creditor is not allowed to exercise self-help seizure of the debtor’s property.
*Exception: this “self-help seizure” rule does not prevent the creditor from “setting off” a debt owing to its debtor against a debt owing from its debtor; it merely prohibits the creditor from seizing property for the purpose of creating such a setoff.
i. Conversion (civil liability): prohibited seizure of a debtor’s property by an unsecured creditor is conversion, which is “the wrongful exercise of dominion and control over another’s property in denial of or inconsistent with his rights.” Wrongful intent is not necessary. Chevy-Olds-Pontiac, Inc. v. Condon, 830 S.W.2d 740 (Tex.App. 1992).
ii. Larceny (criminal liability): the creditor that wrongfully takes possession of property of the debtor may be charged with larceny even though the value of the property taken is less than the amount owing
iii. Wrongful collection practices under the Fair Debt Collection Practices Act (F.D.C.P.A.): though the creditor has the right to demand payment from the debtor, if it does so in an unreasonable manner, it may incur liability for wrongful collection practices. The creditor is entitled to coerce payment of the debt only through the judicial processes specified by the state.
2. Acceptable Remedies:
Burderns of Unsecured Credit
– self-help = theft, conversion
– lack of leverage
– hard to find unencumbered property of debtor
– exemptions protect other property
a. Writ of Execution & Levy: “A successful plaintiff who obtains a judgment against a defendant may cause the personal property of the defendant/judgment debtor to be seized and sold and the proceeds applied to the judgment and costs by way of execution…. The proceeds from the sheriff’s sale of seized property are paid to the judgment creditor or to his or her attorney or the court clerk.”
i. Successive executions: are possible upon the same judgment.
–Alias Writ: if the first seizure is insufficient, the creditor may seek an alias writ for levy upon other goods [of the debtor].
–Pluries Writ: the plaintiff/judgment creditor may seek an unlimited number of pluries writs until the judgment is satisfied.
· Vitale v. Hotel California, Inc. (holding that: (1) successive levies
are possible under one writ of execution; (2) sheriff should not have refused to levy as instructed by plaintiff/judgment creditor for the reason that creditor’s request was “unreasonable or onerous”; and, (3) the conduct of the sheriff and his office regarding the writ subjected him to amercement).
b. Writ of Garnishment: if a 3rd party is in possession of property of the debtor or owes $ to the debtor, the creditor can cause the sheriff to serve a writ of garnishment on the 3rd party. The effect of the writ is to require the 3rd party to pay the judgment creditor rather than the debtor.
C. Limitations on Compelling Payment
1. 3rd Party Liability:
a. Damages: if the property seized turns out to be that of a 3rd party, the judgment creditor may be liable for any damages caused to the 3rd party.
b. Conversion liability: wrongful exercise of dominion and control over the property of 3rd party constitutes the tort of conversion.
c. “Right to Refuse”: 3rd party can refuse to accept return of property offered by judgment creditor and instead recover its value from the judgment creditor.
d. Fishing Expeditions: Creditors have no right to conduct “fishing expeditions simply by showing up at the debtor’s place of business with a cooperative law enforcement officer.
2. Debtor’s Examination: right of judgment creditor to obtain info about the judgment debtor’s assets through discovery process.
a. Contempt and Perjury Sanctions can be brought against debtor but are rarely enforced
b. $ judgments can be enforced only in the state where rendered.
3. Fraudulent Transfers: all states have adopted some version of U.F.T.A. authorizing the courts to void debtors’ fraudulent transfers in actions brought by creditors.
a. Bona Fide Purchaser Exception: if a debtor sells his property to a bona fide purchaser for value and disperses the proceeds in numerous transactions, that value is probably beyond the reach of the unsecured creditor.
4. Attachment: “provisional remedy” available to the creditor before obtaining a judgment against the debtor if the debtor is fraudulently disposing of his property during the lawsuit, which gives the creditor the right to an immediate “attachment” of whatever property the debtor still has.
5. Preferences: it is not fraudulent for a debtor to pay one of its creditors, even if the effect is to leave nothing for others, so long as the debtor does not make the payment for the purpose of defrauding the others. Such a payment is referred to as a preference, and, absent the filing of a bankruptcy case, once such a payment is made, it is irreversible.
6. Exemption Statutes: another impediment to collection of the judgment debt. Exemption statutes prevent the sheriff from seizing certain exempt property under a writ of execution. Exempt property is exempt from the remedies available to unsecured creditors.
Exemptions prevent creditors from taking many of the most valuable and easy-to-locate assets that debtors own. Such laws also protect individual debtors, in part by keeping households intact and preventing some debtors from becoming charges of the state. See Dick Garden Handout.
a. Homestead Exemption:
b. Debtors’ Wages: both state and federal law protect debtors’ wages from collection. 15 U.S.C. § 1671 provides that a minimum of 75% of debtors’ earnings from personal services will generally be exempt.
c. Pensions and Retirement Accounts: generally are exempt under state/federal law.
D. Is the Law Serious…? (no outline material here).
Problems
1.1
Must have a judgment and writ of execution or writ of garnishment – no self-help repossession.
Timing – it takes a few months to get a judgment – approx. 4 months for U/C to repo furniture.
1.2
Since Look took the lobsters and got $19,000, he would be liable to Kostandin for conversion, larceny, etc. without a judgment and a writ of execution or garnishment. Look should probably either keep quiet or give the $19,000 back and proceed judicially.
1.3
She is essentially powerless at this point in any collection attempts until D defaults she cannot seek judicial intervention/reduce her debt to judgment. Offer to renegotiate to alleviate debt or lend more debt to get some collateral – open up the negotiation to resolve the transaction.
1.4
You need to find out what assets Knof has and where he has them. Bank accounts, credit applications, paid checks, your own file etc. Get a writ to the sheriff to levy on those assets or record against any real property owned and get a sale in the making. It may take a while before Karen can be compensated. She could ask the manager, who was fired. Go back to the application – they were willing then to provide asset information. Try public records.
1.5
Check the Wisconsin exemption statutes. Need to move in a hurry, because other unsecured creditors are probably thinking the same things you are. Neb. Statute is not overly generous.
Ted owns this property Free and Clear
Ø 4yr old Toyota (WSA § 815.18 (g) – motor vehicle exempted up to $1200, but (d) states that any unused portion of the $5000 consumer good exemption can be applied against the motor vehicle). NE STAT ANN. § 25-15-554
Ø Occupied Inherited house worth $35,000. WSA §815.20 – homestead exemption. $40k limit, must be primary residence not exceeding 40 acres.
Ø Daycare Equipment with $10k resale value. 815.18(b) – business property? Is it still used in a business if the daycare folded?
Ø $2,265.92 deposit account. 815.18(k) – $1000 exemption. Probably need to move quickly.
1.6
– Seek an attachment to make sure these things don’t disappear during trial?
Do you have any $ in any bank accounts: savings, checking, investment accounts? How much $ is on you? What about your account receivables? Is someone else holding assets for you? Do you have a judgment against anyone? Ask about recent transactions, where is your debit card, check book? Retirement accounts? Prepaid for any contracts or services? Plaintiff is any lawsuit? Causes of actions or rights to bring lawsuit? Where is your tax return? Interest in partnership or corporations? Any trust funds?
Assign. # 2:
Security and Foreclosure
A. The Nature of Security
1. Lien: “a charge against or an interest in property to secure payment of a debt or performance of an obligation.” Bankr. Code § 101 (definition of “lien”).
Foreclosure: the process by which a debt not paid when due is satisfied by compelling the application of the value of the collateral to payment of the debt. Cuts off the equitable right of redemption.
a. Security Interest (voluntary lien): any lien created by contract between the debtor and creditor.
i. Real estate mortgages.
ii. Deed of trust.
iii. Security interests in personal property created under Art. 9 of U.C.C.
-See Bankr. Code § 101 for defs. of “security agreement,” “security interest,” and “lien”.
b. Non-consensual (involuntary) liens:
i. Statutory liens: liens granted by statute (e.g., mechanic’s liens, ag chem./fertilizer liens)
ii. Judicial liens: liens obtained by unsecured creditors through judicial process.
2. Default: The security interest itself has effect only in the event of the debtor’s default. The default may be a failure to pay the debt or a failure to comply with some other provision of the security agreement. Because the rights of a holder of a security interest are principally rights that take effect after default, a security interest can be described as a right in property that is contingent on nonpayment of a debt. In other words, the right to enforce the debt against the property that serves as collateral is contingent upon the occurrence of a default. The typical methods of enforcement lead to a sale of the collateral and payment of as much of the debt as possible from the proceeds of the sale.
3. Right of Redemption under Basile v. Erhal Holding Corp, 538 N.Y.S.2d 831 (1989) (holding that creditor’s sole remedy was to institute an action in foreclosure for debtor’s default on mortgage payments for the reason that the debtor did not waive her right of redemption on the mortgaged property; debtor had the right to redeem the property at any time prior to the actual sale of the property by tendering to creditor the principal and interest due on the mortgage).
– “A deed conveying real property, although absolute on its face, will be considered to be a mortgage when the instrument is executed as security for a debt.”
– “It is an established doctrine that a court of equity will treat a deed, absolute in form, as a mortgage, when it is executed as a security for a loan of $. That court looks beyond the terms of the instrument to the real transaction; and when that is shown to be one of security, and not of sale, it will give effect to the actual contract of the parties . . . It is also an established doctrine that an equity of redemption is inseparably connected with a mortgage; that is to say, so long as the instrument is one of security, the borrower has in a court of equity a right to redeem the property upon payment of the loan. This right cannot be waived or abandoned by any stipulation of the parties made at the time, even if embodied in the mortgage. This is a doctrine from which a court of equity never deviates (citation omitted).”
4. “Intended as Security” Doctrine: applies to personal property transactions under Art. 9 as well those involving real property.
U.C.C. § 9-109(a)(1): provides that Art. 9 applies to “any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract”
Cmt. 2: “As to which transactions give rise to a ‘security interest,’ the definition of that term in Section 1-201 must be consulted. When a security interest is created, this Art. [9] applies regardless of the form of the transaction or the name that parties have given to it.”
U.C.C. § 1-203. Lease Distinguished From Security Interest.
B. Foreclosure Procedure
Foreclosure transfers ownership from the debtor to the purchaser at the foreclosure sale and cuts off the debtor’s right to redeem the collateral. Foreclosure operates on ownership, not possession. For example, a secured creditor may foreclose, purchase property at the foreclosure sale and lease it back to the debtor who has been in possession all along.
1. Judicial Foreclosure: accomplished by the entry of a court order. (approx 6mos.
to regain possession)
a. Procedure (see pp. 29-30 of c/b):
– Creditor files suit against debtor, alleging in the Complaint the terms of the loan and the nature of default, and requests that the equity of redemption be “foreclosed.” The debtor will have a period of time, usually 20 days, to raise defenses
i. Final Judgment of Foreclosure: Court enters order only when issues between creditor/debtor have been resolved and the plaintiff-creditor has established that he is entitled to foreclose his lien.
ii. Foreclosure Sale: Statute requires the county sheriff or the clerk of the court conduct the foreclosure sale.
As part of the final judgment, the court will set a date for the foreclosure sale – the method for which is usually specified by statute requiring the county sheriff or clerk of the court to conduct the sale
– the sale is usually held around mid-day and outside the main door of the courthouse
– the sale is usually statutorily required to be advertised – this is usually done by posting ads or printing them in a newspaper of general circulation – the period for advertising ranges from a week to six weeks and commences after the final judgment has been entered
iii. Confirmation: Court must confirm foreclosure sale. After the public auction is held, parties to the mortgage case have some period of time in which they can object to the manner in which sale was actually conducted.
– Debtor might file numerous objections to form and fashion of sale in order to buy time/frustrate process until they can get the $ necessary to redeem the property or reinstate the mortgage. Typical objections include: not advertised properly, someone was prevented from attending, the sale was not held in the precise location advertised, some arrangement “chilled” the bidding or the highest bid was grossly inadequate.
– Some jurisdictions require confirmation hearings even if no objections to the sale have been raised
iv. Distribution of Sale Proceeds: Occurs after the confirmation order has been entered and the time for appeal has expired by having the sheriff or clerk disburse the sale proceeds.
– Surplus: if amount is greater than that owed to the foreclosing creditor, surplus is distributed first to the holder of junior liens or mortgages and then to the debtor.
– Deficiency: more often, the amount realized from the sale is less than the amount owed to the foreclosing creditor, in which case the creditor can request a judgment for the deficiency.
*Anti-deficiency statute may prohibit the granting of deficiency judgments in particular kinds of cases or give the court discretion to deny them.
*”Waiting Period/Delay” – Statute require a period of time to elapse (i.e. 6-12 months after entry of judgment) before foreclosure sale can occur in order to give debtor time to redeem. See Wisonson Statutes p. 32.
b. Debtor In Possession During Foreclosure
Ordinarily, the debtor remains in possession of the mortgaged premises until the sale has been confirmed by the court – the purchaser is then entitled to possession.
Writ of Assistance: if the debtor will not surrender the premises, the purchaser is entitled to a writ (a.k.a. a writ of possession), which directs the sheriff to remove the debtor from the premises and put the purchaser in possession.
Farm Credit of St. Paul v. Stedman, 449 N.W.2d 562 (N.D. 1989) – an egregious example of a debtor fighting tooth and nail to remain in possession – was successful for more than 5 years.
c. Deed in Lieu of Foreclosure: secured creditor may be able to avoid the necessity to foreclosure with cooperation of debtor after default. (approx.
4 mos. to regain possession)
i. How it works: if there are no other liens or interests in the collateral, the debtor can simply transfer the property to the creditor by means of a deed in lieu of foreclosure. Such a deed does not “clog the equity of redemption” if it immediately extinguishes the mortgage and the underlying mortgage debt.
*Selling point: creditors sometimes persuade the debtor to grant a d.i.l.o.f. by persuading the debtor that it is better to lose the house [property] now and have no further liability than to lose the house later and be liable for a deficiency. In other cases, creditors persuade debtors to surrender the property by paying the debtor an additional sum of $ – in effect, purchasing the debtor’s equitable right of redemption.
2. Power of Sale Foreclosure (quicker, simpler method of foreclosure against real property):
a. “Power of Sale” provision: Security agreement (either in the form of a mortgage or a deed of trust) includes a power of sale. Allowed by 25 states.
i. Effect: provides that the collateral will be held in trust by the creditor or a 3rd party such as a bank or title company. The borrower agrees that in the event of default, the trustee can sell the property and pay the loan from the proceeds of the sale.
ii. Advantage: foreclosure is still necessary when the creditor has a power of sale, but is can be accomplished through a non-judicial sale of the collateral that does not include the filing of a lawsuit by the creditor. Sale forecloses the debtor’s right to redeem!
Example
Under California law, upon default a creditor can record in the public records a notice setting forth the nature of the debtor’s default and the creditor’s election to sell the property – if the debtor does not cure the default in 90 days, the creditor can set a time and place for sale, advertise it for 20 days, and then sell the property at auction
iii. Purpose: avoid the expense and delay of litigation.
iv. Wrongful sale: debtor can bring a tort action against creditor.
v. Resort to the Court?; if the debtor refuses to surrender possession after the sale, the purchaser must sue for it. The cause of action may be for unlawful detainer, ejectment or eviction.
v. Deficiency Judgment?; some states allow but others do not
3. U.C.C. Foreclosure by Sale (much simpler, quicker for a secured creditor to foreclose a security interest in personal property than for comparable foreclosure process for real property).
a. Art. 9 controls foreclosure of S/Is in personal property.
i. After Default, Secured Party May Sell, L
ver Foods, Inc. v. Carpenter Cook, Inc., 603 F.Supp. 1071 (W.D.Wis. 1985) (plaintiff/debtor had repeatedly defaulted on their promissory note so that defendant/secured creditor was entitled to possession of property pursuant to UCC § 9-609. Court held that the trial court’s application of UCC § 9-609 to plaintiffs did not deprive them of their 14th Am. right to due process b/c the property was not taken w/o notice or an opportunity to contest the possession by the defendant/creditors).
D. The Art. 9 Right to Self-Help Repossession
1. Right to “Self-help repossession”
a. General Rule: secured creditor with an Art. 9 S/I in tangible, personal property can bypass the courts and the sheriff and repossess the collateral on its own. Saves time, effort and $.
§ General “Self-help repo” rule is derived from UCC § 9-609, which provides that after default a secured party may take possession of the collateral.
o Most security agreements require that the debtor surrender possession upon default.
b. Involving the courts: a secured creditor can file a lawsuit against the debtor, obtain judicial recognition of its right to possession upon default, and send the sheriff out to take possession of the collateral.
i. Disadvantage: secured creditor can move even faster and save time and $ without judicial process if he takes initiative via self-help repossession.
c. Non-delegable duty: courts generally hold that the duty to refrain from breach of the peace during repossession is non-delegable, meaning that the secured creditors are liable for the consequences of illegal repossessions by their independent contractors (i.e., repo men).
§ UCC § 9-609(a)(2): gives the creditor the option to leave “equipment” temporarily in the possession of the debtor but render it unusable.
o Example: collateral is a large piece of equipment, such as a tractor, for which removal to a warehouse would be slow and costly, thereby allowing the creditor to remove key parts from the engine so that the equipment can not be used pending sale. Comment 6.
E. The Limits of Self-Help: Breach of the Peace
1. General Rule: a secured creditor is entitled to repossess collateral. § 9-609.
a. Breach of the Peace Exception: UCC permits self-help repossession only if the secured creditor can repossess w/o breach of the peace.
§ See UCC § 9-609(b)(2).
Salisbury Livestock Co. v. Colorado Central Credit Union, 793 P.2d 470 (Wyo. 1990) (holding that the entry onto a ranch to repossess motor vehicles taken on behalf of the secured creditor was not privileged either by the self-help statute nor by consent of the debtor).
Elements in order to determine when a creditor’s trespass onto a debtor’s property rises to the level of a breach of the peace:
1. The potential for immediate violence; and
–confrontation or violence btw debtor and creditor’s agent is not necessary to find breach of peace, the possibility of immediate violence is sufficient.
2. The nature of the premises intruded upon.
–residential dwelling vs. commercial property.
· 9-602 – Breach of Peace requirement cannot be waived by debtor
· 9-603 – S/A can define what constitutes breach so long as not manifestly unreasonable
· 9-605 – S/C is liable for breach of peace (actual & statutory damages) and may waive right to deficiency judgment.
2. Breach of the Peace Case Law:
a. Cases holding that there was a breach of the peace (See pp. 50-51 of c/b).
b. Cases holding that there was not a breach of the peace (See pp. 51-52 of c/b).
F. Self-Help Against Accounts (Receivables) as Collateral
1. Definition of “Account”: See UCC § 9-102(a)(2). – it is an account recievable
2. Objective: encourage debtors to routinely borrow against their “account receivables”, which serve as collateral for the secured creditor.
3. Alternatives: p. 53
3. Default: UCC §§ 9-607 and 9-406(a) provide a self-help remedy to the party holding a security interest in the debtor’s accounts.
§ UCC § 9-607: secured creditor who knows the identity of the 3rd party account debtors can simply send them written notices to pay directly to the secured creditor rather than the normal practice of sending payments to the creditor’s debtor.
§ UCC § 9-406(a) [Discharge of account debtor; effect of notification]. “…an account debtor on an account, chattel paper, or a payment intangible may discharge its obligation by paying the assignor [original debtor] until, but not after, the account debtor receives a notification, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee [secured creditor]. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee [secured creditor] and may not discharge the obligation by paying the assignor [original debtor of secured creditor].
o Cmt. 1: “…once the account debtor receives notification, the account debtor cannot discharge its obligation by paying the assignor….payment to the assignor before notification, or payment to the assignee after notification, discharges the [account debtor’s] obligation.”
o Marine Nat’l Bank v. Airco, 389 F. Supp. 231 (W.D.Pa. 1975) (applying the self-help remedy against accounts by holding that the bank, as the assignee, was able to recover its collateral (the account of Craneways, the assignor) from Airco, the account debtor, even though that required Airco to pay the bank more than it owed on its account to Craneways b/c the bank notified Airco that the bank held a security agreement covering all of Craneway’s account receivables and that Airco was to make payments due to Craneway to the bank).
o 9-404(a) – in an action brought by S/C against account debtor, the account debtor can assert any defense that would have been available to the debtor.
Problems
3.1
Pursuant to § 9-102(a)(72) and (73), Jeffrey is probably a secured party [102(a)(72)(A)] and the Personal Property Security Agreement probably constitutes a security agreement under 102(a)(73). Therefore, Jeffrey would be allowed to self-help repossession, so long as there is no breach of the peace under § 9-609.
3.2 – Breach of Peace
In general, she needs only be aware that the elements are the potential for immediate violence and the nature of the premises intruded upon. In this case, it is the developer’s premises, so the potential for violence may be the possibility of violence. See Salisbury Livestock Co. Remember too that pieces of the bulldozer can be taken so as to render it unusable. § 9-609(a)(2) & comment 6.
a) Where there is no guard nor fence, the potential for violence is remote.
b) Where there is a fence, but no guard, be careful of cutting the lock if there is other equipment within the fence. See Laurel Coal Co.
c) Where there is a guard, may need permission. See Rainwater. Don’t lie though. But see K.B. Oil Co.; advising your client to lie may be an ethical violation, but it is not a breach of peace.
d) What is within the security agreement is important. For example, if the agreement said that the creditor could enter any premises without liability for trespass,” the creditor could probably enter under any circumstances noted above. See Wade; § 9-201 (effect given to terms of security agreement); § 9-602(6) (cannot waive the right to have collateral repossessed without a breach of the peace); § 9-603 (terms of security agreement are enforceable so long as not manifestly unreasonable – can contract around breach of peace, but not totally); § 9-609(b)(2) (cannot breach the peace).
3.3
Can ethically discuss with Sal the ramifications of creating a breach of the peace situation. If sheriff comes, ask to see the writ. If no writ = breach of the peace because Sheriff presence is intimidation.
3.4
The debtor would probably win because of the breach of the peace standard.
3.5
9-102a2 – account is like an account receivable, a broad expanded definition. Account Debtor – person who owes the money 9-102a3.
Negotiate a combination of a lockbox arrangement and a audit the debtors accounts. Banks should be doing that.
