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Secured Transactions
University of North Carolina School of Law
Broome, Lissa Lamkin

Secured Transactions Outline – Spring 2010 (Broome)
 
I.                     Background
a.        Primarily looking at state, statutory law. If Code doesn’t give the answer, only then do you look to the common law for the answer. 1-103 (Supplementary General Principles of Law Applicable). Common law is supplementary.
b.       Why is it important to have uniform and statutory scheme for commercial law?
                                                               i.      Reliability and certainty
                                                              ii.      However, we need flexibility and fairness which is diminished by a statutory code.
                                                            iii.      Thus, the Code tries to create a balance between i) and ii).
c.        Laws:
                                                               i.      3 examples of regulations of the contractual terms applicable to a debt:
1.       Uniform Consumer Credit Code: limits the amount of finance charges that a creditor may charge and prohibits some types of collection practices in consumer transactions
2.       Usury Laws: limit the interest rate that creditors may charge in certain types of transactions or for certain types of borrowers
3.       FTC regulations: prohibit creditors in consumer transactions from using a variety of contractual devices that the FTC has concluded are unfair and requiring buyers be given three days to rescind purchase contracts made in certain door-to-door transactions.
                                                              ii.      Equal Credit Opportunity Act: limits the permissible grounds for granting or denying credit; prohibits a creditor from discriminating against potential DRs based upon their race, color, religion, national origin, sex, or marital status
d.       Statutory Construction Techniques
                                                               i.      Navigational tools:  table of contents (633), cross references w/in provisions
                                                              ii.      Defined terms:  9-102
                                                            iii.      Tabulate:  begin w/ general rule and ignore exceptions
                                                            iv.      Interpretive aids: Comms, cases, cross references, PEB
1.       PEB: (Permanent Editorial Board) Commary by PEB about specific issues that pop up between revisions.  It is persuasive authority like the Comms.
e.        Starting point for Art. 9 analysis is whether Art. 9 even applies.
 
 
II.                    Collecting Debts Generally
a.        Creating Debt
                                                               i.      Secured: credit w/ COLL (real or personal property) securing promise to pay
1.       Ex.: home mortgage (COLL: real property); commercial borrowing (COLL: mortgage on business premises/inventory, etc.); personal property-secured loans; car loans (COLL: interest in the car)
2.       Credit enhancements:
a.        COLL Is  a security enhancer that may allow a DR to borrow from creditors more easily (ability to borrow, lower interest rate)
b.       Cosigner: ex., parent
                                                              ii.      Unsecured: credit w/ no COLL; creditor lends on DR’s word
1.       Ex.: credit cards (generally unsecured), student loans, power company credit
                                                            iii.      Course is about SECURED CREDIT secured by PERSONAL PROPERTY COLL!
                                                            iv.      Advantages of Secured Credit Over Unsecured Credit
1.       Secured Transaction: D borrows $ from a lender (i.e. a credit transaction)
a.        Secured credit:  credit secured by real or personal property
                                                                                                                                       i.      Art 9 deals w/ credit secured by personal property [9-109]                                                                                                                                       ii.      The most important factor for receiving credit is ability to pay.
                                                                                                                                    iii.      Having security is a form of credit enhancement
1.       A guaranty is another type of credit enhancement
b.       Unsecured credit:  i.e. credit cards, student loans
2.       Why is it important to get secured credit?
a.        Enforcement versus DR:  A SP (SP) can repossess property and hold it or sell it if D defaults, but an unSP (UP) must get a judgment and then have the sheriff levy on property before it can get property in satisfaction of a loan.
b.       Priority over other creditors:  SPs prevail against unsecured creditors, and there is only a priority contest among SPs (first in time, first in right). For UPs, priority becomes a footrace among UPs; whoever gets a judgment and the sheriff to levy first has the first crack at the property after the SP has a crack at the property.
c.        Enforcement in bankruptcy:  Bankruptcy is the acid test for a SI.  Among UPs, the estate is split equally.  If there is a SP, then he gets paid first and gets the value of his COLL up to the amount he is owed.
d.       Secured credit is advantageous to D as well.
                                                                                                                                       i.      Lower interest rates b/c less risk to creditor
b.       Collecting Debts Non-judicially (Informal Debt Collection)
                                                               i.      Remember: creditors are not immune from tort law
                                                              ii.      Nonjudicial collection is cheaper, easier and faster than judicial collection.
                                                            iii.      Informal Methods:
1.       Simply request payment (dunning is when you request frequently)—“dunning” when requests get more persistent
2.       Send a bill (plus threaten credit reporting or threaten to sue)
3.       Threaten to sever relationship/stop service provided
4.       Setoff: available when two people each owe money to the other and allows a creditor to apply one mutual debt against another to avoid the absurdity of making A pay B when B owes A
a.        Debts must be both mature (due and owing) and mutual (owed in the same capacity)
                                                            iv.       Basically: call them, send letter, threaten to sue or affect credit report, set-off (common law right), etc.)—best advice is to collect the debt informally (w/out using the courts).
1.       Limits
a.        Criminal Law: example would be hiring someone to break DR’s knees (this would also be tort liability)
b.       Tort law: creditor will incur tort liability if it or its agent engages in behavior resulting in defamation, abuse of process, malicious prosecution, negligence or other intentional torts
                                                                                                                                       i.      Some jurisdxns recognize invasion of privacy or infliction of emotional distress as actionable claims against creditors
c.        Fair Debt Collection Practices Act: applies to consumer debt, passed to address unsavory debt collection practices; when it applies, FDCPA governs how the debt collector communicates w/ the DR and w/ the other persons about debt; prohibits harassing and abusive behavior, false/misleading representations, and unfair/unconscionable means of collecting debt
                                                                                                                                       i.      Note: may be analogous state law
d.       Fair Credit Reporting Act: regulates activities of consumer credit reporting agencies
                                                                                                                                       i.      Experion, Equifax, TransunionàFICO Score which are assigned to consumers (credit score)
b.       Collecting Debts Judicially (if nonjudicial methods don’t work, use judicial methods)
                                                               i.      Obtaining and enforcing judgments (SUE the DR)
1.       DR is servedàenter judgment
a.        If does NOT respond to lawsuit in a timely manner, then court will enter default judgment against DR.
b.       If DOES respond, suit will go ahead—creditor usually wins.
2.       Execution on a judgment to obtain a judgment lien (lien = property right, makes the property liable to the debt); judgment creditor gets the lien recorded in the county (this gives in rem interest in all the DR’s property in that county); NOTE: If the property is in a different county, you must record in that property. If real property is not enough, you go after personal property (which this class is about):
a.        First, find DR’s assets (credit report, ask questions, basically post-judgment discovery process).
b.       Note that there are time limits (state-mandated)—unless renew to extend S.O.L.
c.        Real property lien: judgment can be entered where property exists, and such entry creates lien on such real property.  The creditor may then foreclose, typically by selling the property, to extract value from the property and thereby pay the debt. Record the judgment in the countyàjudgment lien on the DR’s property w/in that county
d.       Writ of execution: delivered by sheriff to levy (seize/take/possess) the DR’s personal property; the act of levying creates a lien on the property seized in favor of the judgment creditor; sheriff then prepares the property (real or otherwise) for an execution sale to use the proceeds to satisfy the debt—usually a public auction.
e.       Writ of garnishment: get money that is in the hands of the 3rd person; if other  liens are not sufficient to satisfy debt, writ of garnishment can be used, which creates lien on intangible assets (e.g., bank deposits and brokerage accounts) or on tangible assets of the DR in the possession of someone else
                                                                                                                                       i.      Example: wages
f.         Creditor may attempt to shortcut the process of obtaining judgment by including in the K a “confession of judgment” clause—DR consents in advance to creditor obtaining a judgment w/out notice or hearing (some consumer protection laws prohibit this)
3.       Unsecured DR’s right of redemption:
a.        Common law pre-sale redemption right: right to redeem/get back the property subject to the writ (stop the execution sale any time before it’s completed); DR must pay the full amount of the debt (possibly also sheriff’s fees)
b.       Post-sale redemption right available for real estate in certain states
4.       Fraudulent transfer: transfer by a DR w/ objective of keeping property out of the reach of (delay, avoid, hinder) creditors. If you give property away when you are insolvent, or give property away at cheap price, this is also Fraudulent Transfers…. Giving a gift when you are insolvent is fraudulent transfer.
a.        The common law dealt w/ this problem by developing the concept of a fraudulent conveyance, which is a conveyance that can be rescinded, thereby allowing the creditor to seize and sell the property.
b.       Uniform Fraudulent Transfer Act (UFTA):  codifies the concept of a fraudulent conveyance.  This Act also rescinds certain transfers for which the DR did not receive reasonably equivalent value in exchange (e.g., gifts), based on the maxim that “a DR must be just before being generous.” [21] c.        If a DR’s liabilities exceed his assets, he can be subject to UFTA.  Conceivably, an insolvent person who

ing the DR a notice and an opportunity to be heard and a process for allowing a seizure of the property w/out such a pre-seizure hearing but w/ a prompt post-seizure hearing
2.       Priority over other creditors
a.        If you don’t get priority, there’s a chance you won’t get paid in full
b.       Examples pages 35-36
3.       Enforcement in bankruptcy
a.        Creditors are paid to value of COLL
b.       Relief from AUTO stay may be available (get paid before the conclusion of the bankruptcy proceeding)
c.        Example on page 37.
                                                            iii.      Benefits: easier and cheaper to get than going through the entire judicial process
1.       Appointment of the receiver: receiver takes over management of the property (DR wasteful)
2.       Take priority on property—secured creditors eat first in the asset buffet!
a.        Limits: fraudulent transfer, failure to perfect the lien, etc.
                                                            iv.      Bankruptcy:
1.       Guarantors remain liable
2.       In rem liens survive bankruptcy discharge
                                                              v.      Constitutional considerations: creditors protected on their liens.
                                                            vi.      Analysis: whether statute impairs K rights:
1.       Does the state law operate as a substantial impairment of the contractual obligation?
2.       If so, is the state law designed to promote a significant/legitimate public purpose?
3.       Is the law narrowly tailored to achieve that purpose?
 
 
 
                          
 
Type of Interest
Type of Property
Governing Law
Possessor of Property
Consensual Liens
SI
Tangible & intangible personal property
UCC 9 (mostly)
Typically the DR, but could be anyone
Mortgage or Deed of Trust
Real Estate
State real estate law
Typically the DR, but could be a lessee
Non-consensual Liens
Judicial Liens
Judgment lien
Real estate
State statutes or the common law
Typically the DR, but could be a lessee
Execution lien
Tangible personal and real property
State statutes or the common law
Sheriff or marshall
Attachment lien
Tangible personal and real property
State statutes or the common law
Sheriff or marshall
Garnishment
Personal property
Fed. and state statutes
A 3rd party
Statutory Liens
Tax lien
All property
Fed. and state statutes
Anyone (for income tax); DR (for property tax)
Mechanic’s Lien
Prop. improved by mechanic
State statutes or the common law
Creditor (unless real prop)
Landlord’s Lien
Tangible personal prop. on premises
State statutes or the common law
Creditor
Attorney’s Lien
Monetary recovery
State statutes or the common law
Creditor
 
d.       Credit and DR Struggle
                                                               i.      Balance the need of the creditor to cash in on the obligation and the need for the DR to function in society.
e.       UCC in General
                                                               i.      The commercial code is a state-by-state proposition.  The UCC attempts to standardize the various state commercial codes.  There are variations from state to state, but the variations are relatively miniscule. Art. 2 deals w/ sale of goods. Art. 9 deals w/ secured transactions.
                                                              ii.      North Carolina’s version of UCC Art 9:  Art 25 of the N.C. Gen. Stat.
                                                            iii.      The UCC deals w/ consumer issues as well as commercial/business issues.  The UCC handles business to business transactions, business to consumer transactions, and consumer to consumer transactions. New Art. 9 became effective in 2001, it is 2.5x longer than the old Art. 9… much more detailed now.
                                                            iv.      There is federal law overlay upon consumer to consumer transactions (e.g., Truth in Lending Act [2], Equal Credit Opportunity Act [2]) that serves to protect consumers; this federal law must be considered along w/ the UCC provisions.
                                                              v.      Advantages: stability, predictability, certainty that the statute provides us
                                                            vi.      Caveats: we want to make sure we don’t get too rigid in order to provide fairness in individual cases…. There is a need for a degree of flexibility. It seems as though certainty has triumphed over the flexibility need.