Select Page

Secured Transactions
University of North Carolina School of Law
Jacoby, Melissa B.

 
Melissa Jacoby for Secured Transactions in Fall 2015
 
 
Intro: Article 9 Specific Sections
1.      Scope
a.      Applicability: 9-109(a)(1)
b.      What Article 9 doesn’t apply to: 9-109(c)
2.      Definitions: 9-101, 102, or 1-101 and 102.
3.      Secured Transaction = a credit transaction in which the creditor is given an interest in property (personal or real) to secure payment or performance of the obligation
a.       TWO separate obligations in secured transactions:
                                                              i.      (1) Underlying obligation to pay money back to creditor
1.      This doesn’t get wiped out if something happens to the SI
                                                            ii.      (2) Security/collateral
4.      Law of the Course
a.       SIs in real property are governed by state real property law
b.      SIs in personal property are governed primarily by Article 9 of the UCC
c.       BK law to the extent that it affects SIs
5.      Focus of the Course is Art. 9
a.       UCC governs the sale, payment, and financing of goods
                                                              i.      NOT a federal statute
1.      It is a uniform, model law that has to be adopted by each state in order to go into effect
2.      States can adopt non-uniform versions if they want to, but NOT so much with Art. 9—Art. 9 has been adopted extremely uniformly across the country
 
 
(Creditor Remedies When a Debtor Defaults)
        I.            Remedies of unsecured creditors (p. 3-19)
a.       Who’s an unsecured creditor?
                                                              i.      Anyone owed a legal obligation that can be reduced to a money judgment is a creditor of the party owning the obligation.
                                                            ii.      I.e., company with a valid patent infringement claim, the consumer with a defective product still covered by a warranty, and the child who is the beneficiary of a non-custodial parent’s court-imposed support obligation.
Most debtor-creditor relationships are entered into voluntarily.
Unless a creditor contracts with the debtor for secured status or is granted it by statute, the creditor will be unsecured.  Unsecured creditors are the general creditors or ordinary creditors. 
If the unsecured creditor has already obtained a court judgment to establish liability, the creditor is a judgment creditor, but the mere grant of judgment does not alter the creditor’s unsecured status.
How do unsecured creditors compel payment?
                                                              i.      The law provides procedures for the collection of unsecured debts and regulates or bars many alternatives.
                                                            ii.      Self-help seizure of the debtor’s property is PROHIBITED.
                                                          iii.      If the creditor has the right to demand payment from the debtor, and does so in an unreasonable manner, it may incur liability for wrongful collection practices.
Vitale v. Hotel California
                                                              i.      Sheriff and bodyguards case.
                                                            ii.      P sued D and got a judgment.
                                                          iii.      P then has to get the sheriff to execute the writ.  Sheriff went to bar to try to execute but was turned away by bouncer.
                                                          iv.      Debtor was the corporation Hotel California.  They were renting the place and furniture where the bar was, so sheriff couldn’t take the property.
                                                            v.      Sheriff finally gets in and levies $714 from D’s registers.
                                                          vi.      Issue: Whether multiple levies can be executed under the same writ and is the request to levy several times under one writ unreasonable?
                                                        vii.      Multiple levies are possible until the return date, and as long as early levies are not returned.
                                                      viii.      Multiple levies are only unreasonable after no more assets could possibly be levied.
                                                          ix.      After the first writ is satisfied, P must file for an alias writ if he wants more.
Exemptions to levies: Under state law, some things are exempt à  See the Wisconsin statutes in the book on page 16.
Writ of garnishment is another possible levy.  This would require the 3rd party to pay the judgment creditor rather than the debtor if 3rd party is in possessions of property of the debtor or owes money to the debtor.
Limitations on compelling payment:
                                                              i.      Obtaining information about the debtor’s assets through discovery can take a long time.  You also have to ask the right questions
                                                            ii.      The creditor must establish the judgment in the destination state before invoking the enforcement procedures of that state.
                                                          iii.      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.
                                                          iv.      Exemption statutes can be an impediment to the collection of judgment debt.  These statutes prevent the sheriff from seizing certain property under a writ of execution.
Is the Law Serious About Collecting Unsecured Debts?
                                                              i.      Courts can order those subject to their jurisdiction to meet their legal obligations and imprison them if they refuse to comply.  This does NOT include judgments for personal injuries, the wages of working people, or the breaches of most kinds of contracts.
                                                            ii.      The availability of effective remedies to enforce particular rights reflects to some degree the relative values society places on those rights.
k.      Ex. Problems: Problem Set 1 (p. 19)
                                                              i.      Prob. 1.1: Benning made a 50K loan to Ted, issues to consider:
1.      The problem doesn’t say there’s been a default on the loan (just rumors); so debtor not yet in default; the problem doesn’t give details of the loan agreement (i.e. Is Benning able to demand payment of the loan ahead of time?)
a.       Go to the sheriff and get a writ of execution against assets.
                                                                                                                                      i.            To find out what the assets are, could go to court and order the debtor to provide a schedule of assets
                                                                                                                                    ii.            To find debtor’s assets, could consult public records.
b.      If creditor wants to take the daycare equipment:
                                                                                                                                      i.            Some assets may be shielded under exemption rights
2.      Takeaway: Unsecured creditors don’t have an absolute right to force someone to listen to their advice. To get this right, it’s usually contracted in the form of a security interest.
                                                            ii.      Prob. 1.2: What are Benning’s remedies now since there’s default and she’s owed 60K?
1.      Needs to get a writ of execution from the judge to execute a levy (send sheriff to collect assets)
                                                          iii.      Prob. 1.3: Lisa borrows 1K from Jeff (neighbor) to purchase lawn furniture. Is there a contract? Can’t tell from facts
1.      Can’t use self-help remedies (so can’t take the furniture just bc it’s the value and Jeff’s willing to take it); Jeff does not have a security interest in the collateral; self help not the same as filing a law suit, issuing a writ, and sending sheriff to get property (this is the proper channel).
2.      Also, don’t know that there’s a default.
                                                          iv.      Prob. 1.5: Ted now living in WI, and has certain property free and clear of liens and security interest.
1.      Even if creditor goes through proper channels, may still not be able to collect on just any assets if there’s exemptions allowances in the state.
2.      (a) He gets to keep the car bv there’s a 4K exemption, and an additional 12K potential for consumer goods *debtor wins here
3.      (b) Debtor needs to find 50K of protection for the equity in the house (worth 275K, but mortgage is 225K) *debtor wins here
 
 
     II.            Intro to Security Interest and Foreclosu

rob. 2.2: Bonnie owns a used car dealership in a low income area, and decides to lease rather than sale, and give leasee option to buy the car at the end of the month for $10, but she still maintains ownership.
1.      This is a purchase mone security interest
2.      Bonnie is transferring possession of the car, but wants to retain ownership in the form of a lease.
3.      1-203 shows privisions of when a lease is distinguished from a security interest. The purse of the article is to try to determine the intent of the transactions. In this case, the payments consume the economic life of the collateral, and there’s nominal value for consideration, so this would be a security interest.
 
   III.            Repossession of collateral- tangible and otherwise (p. 40-53); UCC 9-102(a)(72) and (73), 9-609, 9-201, 9-602(6), 9-603
a.       Generally
                                                              i.      Intangible property like accounts receivables 
1.      Rights of SP, 9-607 (can just send written notices to pay directly to the SC, account debtor at its own risk, must determine who to pay, may risk double paying)
2.      Obligations/defense of acct. debtors’, 9-406(a), 9-404(a)
                                                            ii.      Before you can go through the process of foreclosing on debtor’s rights, you first have to take possession as creditor
                                                          iii.      Repossession & foreclosure are NOT the same thing
1.      Repossession shifts possession of the collateral, but doesn’t necessarily change the ownership rights at that moment; it’s the process of foreclosure that transfers ownership from the debtor to the creditor.
b.      Debtors Right to Remain in Possession of Real Property Pending Foreclosure
                                                              i.      Debtor CAN remain in possession of the house/collateral the whole time pending foreclosure
                                                            ii.      Some states allow redemption up until a certain point even after sale in a foreclosure.
                                                          iii.      Sometimes, creditor is allowed more protection even when a debtor remains in possession:
1.      Appointment of a receiver (officer of the court):
a.       Appointed totally within discretion of the court if the creditor can convince the court that the value of the collateral will deteriorate severely without one
b.      Debtor will still remain in possession, but turns over control of property to receiver for the purpose of collecting rents, maintenance, etc. Allows for the protection of the value of the collateral
2.      Assignment of rents:
a.       In the event of a default, all rental payments that were going to D can be assigned directly to the C.
c.       Debtor’s Possession of Personal Property Pending Foreclosure
                                                              i.      UCC 9-609
1.      Gives the SP the right to take possession immediately on default without involving courts or public officials, as long as it can be done w/o breaching the peace.
2.      So Two alternative way for SC to take possession:
a.       With Judicial Process: go to court, file for writ of replevin, sheriff will execute writ by seizing property.
b.      Without Judicial Process: ‘self-help’ w/o breach of the peace.
                                                                                                                                      i.            Factors from Salisbury in determining breach of peace: (1) potential for immediate violence, (2) nature of the premises intruded upon.