Secured Transactions – Fall 2016 Outline – Professor Jacoby
UNSECURED PARTY REMEDIES
Formal Collection: an unsecured creditor may exercise formal remedies ONLY after debtor has defaulted
Becoming a Lien Creditor: §9-102(a)(52): there are three ways to become a lien creditor—
Levy: an unsecured creditor who won a judgment against a debtor, obtained a writ of execution, and then obtained a lien by levying on specific property of the debtor
Execution: execution occurs after the court’s judgment has been entered
Garnishment: judgment creditor can reach a third party’s funds that it owes to the debtor to satisfy the debt of the debtor
Real Property Filing for $ Judgment: recordation of a money judgment in real property recording system creates and perfects a lien against all real property owned by the debtor
Bankruptcy Trustee: is seen as the “ideal” lien creditor in bankruptcy
Remedy of Levy: Unsecured parties may become secured by obtaining a judgment on debt to become a lien creditor
Breach of K: Must have an enforceable contract for payment and the debtor defaulted on payment
Cross Default: Can constitute a “default” to allow for remedial collection if the debtor defaults on any loan
Valid Judgment: Can obtain a court order for the sheriff to seize the debtor’s nonexempt property and take into custody
Judgment Creditor: a creditor has obtained a court judgment to establish liability (creditor still unsecured)
Writ of Execution: Deliver the writ of attachment or execution to the sheriff with instructions à the sheriff must follow the creditor’s reasonable instructions to collect the property from the debtor
Property: creditor must do whatever discovery necessary to identify property that is subject to seizure
One Writ = Multiple Successive Levies: The sheriff will need to attempt multiple times to collect if unsuccessful the first time à possible under one writ
Physical Force: is permitted and sometimes required
Reasonable Instructions: The sheriff can refuse creditor’s instructions if they are unreasonable.
In Vitale, requiring the sheriff to attempt to collect 9 times in the middle of the night was reasonable
In Ellerbee, not going to require the sheriff to go out in the middle of the night.
Amercement: a judgment creditor may hold a sheriff liable for failing to properly execute against a judgment debtor; if the sheriff is found to be liable, may then indemnify the debtor for that amount à rarely enforced
Liable: In Vitale, the court ordered the sheriff to make a payment to the creditor, and seek indemnification from the debtor because it failed to use force to collect from nightclub.
NOT Liable: In Ellerbee, the sheriff was NOT liable for negligence because there was no mandatory duty of the sheriff to perform ASAP, so as long as performed within 180 days, then okay
Exemptions: The debtor’s property must not be exempt property* (ONLY applies to unsecured parties)
Companies: Corporations and LLCs do NOT have property exemptions** (“debtor” defined as an individual)
Partial Exemption: The property would be liquidated, and the creditor could take the amount that was owed, and the debtor would be able to retain the remaining amount of the proceeds
Will still (1) have lower priority than secured creditors and (2) be subject to property exemptions
Limitations on Collection:
**State of Judgment/Collection: the creditor MUST establish the judgment in the destination state of the debtor before invoking enforcement procedures in that state
Discovery: creditor responsible for whatever discovery is necessary to ID property subject to seizure, but CANNOT be a fishing expedition à burden of SP
Self-Help: Self-help method of collection of property is PROHIBITED for unsecured creditors.
Wrongful Possession: if a creditor incorrectly takes possession of collateral, risks conversion and larceny charges
Demand of Payment: if done so in an unreasonable manner, may incur liability for wrongful collection practices
Preferential Transfers: NOT fraudulent for a debtor to pay one of its creditors to the exclusion of the collection of other creditors (so long as not for the purpose of defrauding others or in bankruptcy)
Voidable Transfers: some transfers are voidable—
Intent to Delay or Defraud: UVTA §4(a): Any transfer made with the actual intent to hinder, delay, or defraud any creditor is voidable
Insolvent: UVTA §5(a): Any transfer made without receiving a reasonably equivalent value in exchange for the transfer is voidable if the debtor was insolvent at time of the transfer (debts > unencumbered, unexempt assets)
Bonafide 3P Purchaser: If a debtor sells property to a bona fide purchaser for value and disperses the proceeds in numerous transactions, that value is likely beyond the creditor’s reach
3P Ownership: If the property seized is owned by a third party, then can be liable to the 3P
Writ of Garnishment: If a third party is in possession of property of the debtor, the creditor can cause the sheriff to serve a writ of garnishment on the third party to require the 3P to pay the judgment rather than the creditor
Informal Collection: (1) write a letter/make some phone calls; (2) restructure debt to become a secured creditor
WHAT IS A SECURITY INTEREST?
Security Interests Generally
Lien: a charge against or an interest in property to secure an obligation
Security Interest: the most common type of lien that is created by contract
Includes: (1) mortgages and deeds of trust and (2) security interests in personal property created under Article 9
Excluded Items: future earnings, pension rights, licenses and franchises (sometimes), and certain low-value consumer goods
Security K: K creating a property interest to secure performance of an obligation (usually repayment of debt)
Binds 3Ps: §9-201: K is effective between the parties of the K, purchasers of collateral, and against creditors
ASK—(1) Real or personal property? (2) If personal property, is it a secured transaction?
Real Property: Security Interests: security interests can include mortgages and deeds of trust
Real Property Law: Real property interests are governed by real property law, NOT the UCC
Intended as Security Doctrine (Basile): A deed conveying real property will be considered to be a mortgage when the deed is executed as security for a debt à substance over form
Right to Redeem: The debtor will have the right to redeem the property at any time prior to the actual sale of the collateral by tendering to the creditor the principal and interest due on the mortgage
Right exists under both real property law and the UCC
Basile: Even though the parties contracted otherwise, the mortgage arrangement created a security interest, and thus, the debtor had the right to redeem
Fixtures: §1-201(35): security interests in fixtures are governed by both real property law and the UCC
Personal Property: Security Interests: Security interests include interests in personal property created under Article 9
Is the creditor a secured party?
Is there a security K? Must be an enforceable agreement (§9-102(74): “A K that creates or provides for a security interest.”)
Is there a security interest? Interest secured payment or performance of an obligation.
UCC §9-102(73): Definition of “Secured Party”
“Secured Party” means: (A) a person in whose favor a security interest is created or provided for under a security agreement, whether or not any obligation to be secured is outstanding; (B) a person that holds an agricultural lien; (C) a consignor; (D) a person to which accounts, chattel paper, payment intangibles, or promissory notes have been sold; (E) a trustee, indenture trustee, agent, collateral agent, or other representative in whose favor a security interest or agricultural lien is created or provided for; or (F) …
Secured Party: §9-102(73): Includes—
Holder of security interest that is created in security K
Holder of agricultural lien
Consignor (lender of goods to the consignee/seller of goods)
Buyer of accounts, chattel paper, payment intangibles, or promissory notes
Trustee or agent of secured party
UCC §1-201(35): Definition of “Security Interest”
“Security interest” means an interest in personal property or fixtures which secures payment or performance of an obligation.
“Security interest” includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Article 9.
“Security interest” does not include the special property interest of a buyer of goods on identification of those goods to a contract for sale under Section 2-401 …
Whether a transaction in the form of a lease creates a “security interest” is determined pursuant to Section 1-203.
Article 9 Security Interest: Must be—
Personal Property or Fixture: If personal property, within the realm of the UCC, although unclear if it’s a secured transaction
Secured Transaction (Article 9): Transaction must encumber property to secure payment or performance of an obligation
Security Interest: §1-201(35): includes—(1) interests personal property and fixtures; (2) consignments; (3) buyers of accounts; (4) buyers of chattel paper; (5) intangibles; (6) buyers of promissory notes; and (7) sometimes leases
Substance Over Form: §9-109(a)(1): Article 9 applies to “any transaction, regardless of its form, that creates a security interest in personal property” where the subjective intent of the parties does not matter
Intended as Security Doctrine: also applies to personal property (Basile); special instances—
ASK: What is the purpose of the transaction? ( “name” of transaction does not matter) To obtain money or to buy the collateral.
To Obtain Money: The actual owner of the property will be the debtor; the lender will be the secured party.
To Buy Collateral: The future owner of the property will be the debtor; the current owner will be the secured party.
Conditional Sales: §2-401(1): Article 9 applies to conditional sales
Seller of goods may retain title until paid for in full even though the buyer maintains possession à buyer becomes the owner of the goods and the seller becomes a secured creditor for the price of goods
Leases: a true lease of collateral is not a security interest, but leases can sometimes grant security interests
Creates a security interest if the consideration for the lease is not subject to termination and term of lease is equal to or greater than the economic life and there’s an option to buy for no additional consideration or nominal amount
Factors: If there a change in ownership at the end of the transaction, then likely creates a security interest
§1-203(a): Whether lease creates a security interest depends on the facts of the case
Sales of Accounts: §9-109(a)(3): Article 9 applies to sales of accounts
Businesses sometimes sell their A/R at a discount; th
eged Entry: entry onto private property is permissible and privileged until there is a breach of the peace
Trespass: Duke v. Garcia: A trespass occurred because a breach of the peace occurred, and thus, the entry onto private property was no longer privileged
MUST be property of the DEBTOR to be considered a trespass!!
Third Parties are NOT privileges to enter!!
K Provision: Will NOT be a trespass if the security K permits entry into private property
Fraudulent Misrepresentation: to enter property is not a breach of the peace
However, may be liable for some other cause of action
Forcible Entry: cutting locks to enter property or breaking into a house is a breach of the peace
Law Enforcement Aids with Repossession: Law enforcement can ONLY aid in preventing the breach of peace à CANNOT aid in the repossession without judicial process
Duke v. Garcia: because law enforcement aided in the repossession, it was wrongful
Variation by K: §1-302
May NOT Alter: Parties may not disclaim good faith, diligence, reasonableness, and care
May Alter Standards: Parties MAY alter the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable
UCC §9-607: COLLECTION AND ENFORCEMENT BY SECURED PARTY.
(a) [Collection and enforcement generally.] If so agreed, and in any event after default, a secured party:
(1) may notify an account debtor or other person obligated on collateral to make payment or otherwise render performance to or for the benefit of the secured party;
(2) may take any proceeds to which the secured party is entitled under Section 9-315;
(3) may enforce the obligations of an account debtor or other person obligated on collateral and exercise the rights of the debtor with respect to the obligation of the account debtor or other person obligated on collateral to make payment or otherwise render performance to the debtor, and with respect to any property that secures the obligations of the account debtor or other person obligated on the collateral;
(4) if it holds a security interest in a deposit account perfected by control under Section 9-104(a)(1), may apply the balance of the deposit account to the obligation secured by the deposit account; and
(5) if it holds a security interest in a deposit account perfected by control under Section 9-104(a)(2) or (3), may instruct the bank to pay the balance of the deposit account to or for the benefit of the secured party.
(b) [Nonjudicial enforcement of mortgage.] . . .
(c) [Commercially reasonable collection and enforcement.] A secured party shall proceed in a commercially reasonable manner if the secured party:
(1) undertakes to collect from or enforce an obligation of an account debtor or other person obligated on collateral; and
(2) is entitled to charge back uncollected collateral or otherwise to full or limited recourse against the debtor or a secondary obligor.
(d) [Expenses of collection and enforcement.] A secured party may deduct from the collections made pursuant to subsection (c) reasonable expenses of collection and enforcement, including reasonable attorney’s fees and legal expenses incurred by the secured party.
. . .
Rights to Payments/Third Party Liability: may be obligated to pay the secured party directly instead of sending payment to the debtor
On Notice: §9-607: a secured creditor who knows the identity of those owing $ to the debtor can send them written notices to pay amounts owed directly to the secured creditor à a third party on notice of the debtor’s default can be held liable
Notice: §1-202(e): a person “receives” a notice or notification when: (1) it comes to that person’s attention; or (2) it is duly delivered in a form reasonable under the circumstances at the place of business through which the contract was made or at another location held out by that person as the place for receipt of such communications
Paying Assignee: §9-406(a): Can discharge the obligation by directly paying the secured creditor/assignee
Paying Twice: In Airco, the secured party gave Airco notice to pay monies owed directly to them rather than to the debtor; when Airco paid the debtor instead of the secured party, it was liable to the secured party for the outstanding debt
Indemnification: The third party can indemnify the debtor, but often the debtor is insolvent and unable to pay