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

Secured Transactions – Broome

Spring 2015

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?

1. Reliability and certainty

2. However, we need flexibility and fairness which is diminished by a statutory code.

3. Thus, the Code tries to create a balance between i) and ii).

C. Laws:

1. 3 examples of regulations of the contractual terms applicable to a debt:

i) 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

ii) Usury Laws: limit the interest rate that creditors may charge in certain types of transactions or for certain types of borrowers

iii) 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.

2. 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

1. Navigational tools: table of contents (633), cross references w/in provisions

2. Defined terms: 9-102

3. Tabulate: begin w/ general rule and ignore exceptions

4. Interpretive aids: comments, cases, cross references, PEB

i) PEB: (Permanent Editorial Board) commentary by PEB about specific issues that pop up between revisions. It is persuasive authority like the comments.

E. Starting point for Art. 9 analysis is whether Art. 9 even applies.

Chapter 1 Collecting Debts Generally

A. Creating Debt

1. Secured: credit w/ COLL (real or personal property) securing promise to pay or performance of the obligation

(1) TWO separate obligations in secured transactions

(a) Underlying obligation to pay money back to creditor

(i) This doesn’t get wiped out if something happens to SI

(b) Security/COLL

(2) The primary obligation is to re-pay the loan(promissory note) on schedule

(a) If all goes well, the SI is never triggered (lender will exercise it if something goes wrong)

ii) 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)

iii) Credit enhancements:

(1) COLL Is a security enhancer that may allow a DR to borrow from creditors more easily (ability to borrow, lower interest rate)

(2) Cosigner: ex., parent

2. Unsecured: credit w/ no COLL; creditor lends on DR’s word

i) Ex.: credit cards (generally unsecured), student loans, power company credit

3. Course is about SECURED CREDIT secured by PERSONAL PROPERTY COLL!

4. Advantages of Secured Credit Over Unsecured Credit

i) Secured Transaction: D borrows $ from a lender (i.e. a credit transaction)

(1) 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

a. Guaranty=pledge

(2) Unsecured credit: i.e. credit cards, student loans

ii) Why is it important to get secured credit?

(1) 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.

(2) 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.

(3) 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.

(4) Secured credit is advantageous to D as well.

(a) Lower interest rates b/c less risk to creditor

(5) REMEMBER: HOW TO GET A CONSENSUAL LIEN

(a) Security interest: 1-201 – interest in personal property or fixtures that secures payment or performance of an obligation

(b) 1ST àCREATION OF A SI – ATTACHMENT – 9-203

(i) VALUE has been given (by secured party (SP) – lender taking a security interest (SI) in the collateral (COLL))

(ii) DR has RIGHTS in the COLL

(iii) AGREEMENT about creation of SI

(iv) Mnemonic {RAVE}: R(RIGHTS in COLL by DR) A (AGREEMENT about creation of SI – authenticated by DR describing COLL & granting language; SP in POSS of COLL pursuant to SA evidences SA) V (VALUE given by DR) E = ENFORCEABLE

(v) Then à PERFECTION of the security interest (next day)

5. Focus of Course

i) Consumer Transactions & Art. 9

(1) Sears delivers a fried to you and take possession of it before you have actually paid

(a) Art 9 deals with:

(i) How does Sears properly establish such a SI.

(ii) How do you file a SI

1. Sometimes has to be made public

(iii) Priority of Sis in contests for the COLL

(iv) What does Sears have to do to repossess?

(v) Once you repossess it, what can you do?

1. Do you have to sell the COLL in a certain way?

B. Collecting Debts – Nonjudicially Methods

1. Ways to Collect

i) Request a Payment

ii) Threat to report the DR’s failure to pay to credit reporting agency

iii) Threaten to sue

iv) Threaten to cut off the service

v) Setoff

(1) Available when two people each owe money to the other and allows a creditor to apply one mutual debt against another. The debts must be mature (meaning due and owning) and mutual (owed in the same capacity; could not do this if the deposit was in the customer’s name and the debt in a corporations name in which the customer is the sole SH)

(2) Example

(a) C has $2,000 on deposit in Bank and owes Bank $10,000 to repay a loan C received from B. C is both a DR of B (for the 10k loan) and a creditor of B (for the 2K deposit). Similarly B is both a creditor of C (for the 10K loan) and a DR of C (for the 2K deposit). If C fails to pay the loan when due, B may simply debit the deposit account. The 2K deposited with B could be offset form the 10K debt to reduce C’s obligation to B to 8K.

2. Limits

i) Criminal Law – Example would be hiring someone to break DR’s knees

ii) Tort Law – creditor will incur tort liability if it or its agent engages in behavior resulting in defamation, abuse of process, conversion ,battery and violation of privacy rights (Ex. In the book store the person puts a picture of an individual saying don’t extend credit to this persona & others can see)

iii) 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

(1) Note: may be analogous state law

(2) Debt= obligation owed by “consumer”

(a) Consumer obligations incurred primarily for family, personal or household purposes 15 U.S.C §1692a(5)

(b) Neither creditor owed debt nor employees of that creditor are “debt collectors”

Activity Prohibited

Provision (15 U.S.C.)

Calling before 8:00am or after 9:00pm

§1692(c)(a)(1)

Using obscene or profane language

§1692d(2)

Contacting third parties, other than the consumers’ attorney, spouse

§1692c(b), (d)

Making a false representation about the character or amount of the debt

§16

the sheriff will conduct an execution sale

c. To obtain a lien on intangible assets

i. Obtain a writ of garnishment directing a third person to turn over the creditor whatever the person owes to the DR.

(4) 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.

(a) Pre-requisite to obtaining property

(i) If auction doesn’t fix the entire debt can apply for multiple liens if the DR has remaining property

(ii) Might be able to engage in post judgment discovery to find out what assets the DR has

(5) 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

(a) Example: wages

(6) 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)

(7) Time limits on execution

(a) Common law the time to execute a judgment was a year and a day. Meaning that if a writ of execution was not issued within that time period the creditor could not execute on the judgment without first bringing on an action to revive the judgment. Most states have time limits based on statues.

(i) Will become dormant if not within the year

(ii) Must bring action to revive it

(iii) Limits on judgments as well

1. Unless an action to renew the judgment is commenced prior to the expiration of the station of limitations period, the judgment becomes unenforceable.

2. Unsecured DR’s right of redemption:

i) Common law pre-sale redemption right: up until the moment an execution sale is completed the DR has a 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)

ii) Post-sale redemption right available for real estate in certain states

iii) By statutory law the DR may redeem the property post sale by paying the sale price to the sheriff or the judgment creditor.

3. Enforcement of Judgment Across state lines – when the debtor has property in a state other than the state in which judgment has been entered.

i) Start in the second state an action on the judgment from the first state.

(1) Under the full faith and credit clause of the U.S Const the second state must give full faith and credit to a valid judgment form the first state. By obtaining a judgment in the second state, the creditor will then be able to use the statutory processes in the second state for executing on that judgment

ii) Use the Uniform Enforcement of Foreign Judgments Act

(1) This act provides a summary process for registering a judgment from one state with the clerk of court in another state. The court of court in the second state sends notice of the registration to the debtor and after a short waiting period, the creditor may then use state process in the second state to execute on that judgment.