Professor: Angela Littwin (Spring 2014)
Book: Secured Credit: A System's Approach – LoPucki and Warren
STATE LAW REMEDIES FOR UNSECURED CREDITORS
Rules
A) Creditors – anyone owed obligation that can be reduced to money judgment
1) Unsecured – general/ordinary or judgment creditors
2) Voluntary & involuntary
B) Unsecured compel payment
1) Unsecured CANNOT use self-help – result in tort of conversion or larceny
2) Unsecured CAN use judicial process when contract is violated
a) File complaint w/ court
b) Serve process on debtor
c) Tell the sheriff exactly what you want to levy on
3) Vitale v. Hotel California: Unsecured got levy on bar for $$$, sheriff levied but only recovered 1/7th the amount. Sheriff stopped levying; Holding – sheriff must levy as many times as needed to complete the recovery, if # is reasonable
a) RULE: if one levy doesn’t satisfy the writ, further levies are permitted unless unreasonable amount, creditor must continue to assist the sheriff
4) Ellerbee v. County of Los Angeles: P obtained writ on killer for 1M damages, gave writ to sheriff, sheriff didn’t levy immediately, killer filed for bankruptcy; Holding – sheriff didn’t have mandatory duty to levy immediately, must only levy w/in statutory deadline (180 days)
a) RULE: Sheriff doesn’t have obligation to levy immediately, can manage their own resources, must levy before statutory deadline only
C) Limits on compelling payment
1) States adopt laws authorizing courts to void transfers by debtors brought by creditors
2) Creditors may have immediate attachment to all remaining property
3) Debtor penalties:
a) Refusal to answer questions – contempt saction
b) Lying – perjury
4) Money judgments – only effective in issuing state
5) Debtor favor one creditor over another
a) Absent bankruptcy – transfers cant be voided
6) Exemptions:
a) Only applies to unsecured NOT secured
b) Homesteads (dollar amount, anything, nothing)
c) Salary (federal minimum 75%, state may increase)
D) Fraudulent Transfers (2 types – fraud)
1) Transfer made w/ actual intent to hinder, delay, or defraud creditor (Statute defines intent)
2) Transfer made w/ receiving reasonable value of asset – IF debtor is insolvent (No intent required)
Policies
A) High risk on creditor if they collect 3rd party’s goods by mistake
B) Debtors may move, consume, or hide goods once they have disclosed their assets
C) Exemptions prevent creditors from taking most valuable easily accessed assets
D) Creditor must give up some of the debt to try and motivate a new contract
SECURITY AND FORECLOSURE
Rules
A) Security Interest – requires foreclosure to recover
1) Foreclosure – allow creditor to recover loss while not unfairly advantaging him over debtor
B) Transactions intended as Security
1) “Intended security” doctrine – substance over form; if it looks like SI it is an SI §9-109(a)(1)
2) Basile v. Erhal Holding Corp: P borrowed money in exchange for property, K stated that D could record title in lieu of default, P default and tried to pay full in exchange for land; holding – SI was created, full payment satisfies obligation
a) RULE: Security in exchange for debt creates SI; debtor can remedy property at any time before sale is made (pay principle and interest)
3) Conditional Sales
a) Seller becomes SC IF seller retains rights in goods until full payment 2-401(1)
4) Leases as SI
a) If lease extends for entire economic life it is an SI
b) Example: Satellite worth 500M, dies 5 years, rent for 100M for 5 years, at the end no one owns anything = SI
c) Example: Lease car w/ average life of 7 years
i) Option 1: lease 7 years – SI
ii) Option 2: lease 4 years w/ option to purchase at end for economic value – SI
iii) Option 3: lease for 3-7 years w/ any time termination – NOT SI
iv) Option 4: lease for 3 years w/ option to purchase for nominal value – SI
d) Distortion – lease for less than economic life and give option to purchase for market price at end
5) Sales of Accounts
a) Accounts payable – “Accounts” 9-102(a)(2)
b) Person owing an account – “Account debtor” 9-102(a)(3)
c) Obtain fast cash:
i) Option 1: sell accounts for percentage (1M accounts for 950k cash)
ii) Option 2: use accounts as credit for bank loan
iii) **Whoever bears risk of accounts is true owner**
d) 9-109(a)(3) – article applies to sale of accounts and SIs in accounts
6) Asset Securitization – dividing ownership into number of shares
a) Special purpose vehicle (SPV)
i) Desires to be lender NOT owner – to get recourse
ii) Desires not to be lender – to avoid bankruptcy involvement
C) Foreclosure Procedure
1) SC – preference between private and judicial
2) Unsecured – must go through judicial foreclosure
3) **some jurisdictions may preclude non-judicial foreclosure
4) Judicial foreclosure
a) Enter court – file complaint
i) Debtor finds problem in complaint to buy time
ii) Debtor retains possession until sale – purchaser gets writ of assistance if debtor wont turn it over
b) Many states mandate delays in foreclosure dates
i) Waiving right to deficiency may shorten the period
c) Deed in lieu of foreclosure
i) Creditor convince debtor to turn property over to avoid foreclosure or potential deficiency charges
5) Real Property Power of Sale Foreclosure (non-judicial)
a) Option for lender to sell property and repay loan @ default
b) ~90 day cure time; failure leads to 20 day advertisement, then auction
c) Fewer requirements than judicial foreclosures
6) UCC Foreclosure by Sale
a) After default – SC may sell, license, lease or dispose of any and all collateral 9-610(a)
b) Sale ends debtor right to redeem – 9-623
c) Extinguishes creditors rights, transfers possession to purchaser 9-617(a)
d) Creditor may choose judicial foreclosure 9-601(a)
Court Positions
A) Accounts:
1) Courts generally recognize right to recourse for purchaser of accounts if not paid
2) Essentially treated as secured loan – but they don’t treat it this way
Policies
A) SC usually aren’t limited by exemptions
B) SI doesn’t void contract under exemption limitations because it inherently waives exemptions
1) Waiving exemptions doesn’t function as SI
C) Debtor cant avoid foreclosure until they are feeling the pain
1) Example: only after default can the debtor do something to drop the right of foreclosure – usually by curing
D) Extending foreclosure minimum – allows debtors to find another place to live & get a better price at sale
E) Reducing foreclosure minimum – allow banks to recover faster, hurts debtors
REPOSSESSION OF COLLATERAL
Rules
A)
he purchases it
C) Foreclosure Sale Procedure
1) State statute – specifies manner of foreclosure
2) Court specifies details
3) Debtor may object based on – misconduct, inadequate sale price – court may confirm/deny
4) Creditor may request deficiency if needed
5) Common law – right to redeem cut off at sale
D) Problems w/ foreclosure Sale Procedure
1) Debtor can sue for inadequate sale price
2) Armstrong v. Csurilla: P purchased plots for 232k, defaulted, foreclosed for 90k back to creditor; holding – considering depreciated land value probably got >50% of value so didn’t shock the conscience
a) RULE: price must shock the conscience to be overturned; 10-40% normally shocks but court discretion; 40%-2/3 can shock but greater chance to get deficiency judgment
E) Advertisement – minimum method fixed by statute
1) Officer doesn’t care about price ONLY about compliance
F) Inspection – only creditor has right to inspect property before sale
G) Title and Condition
1) Caveat emptor applies to judicial foreclosures – if they would be discovered by public record search
2) Marino v. United Bank of Illinois: Lawyer told D there were no encumbrances but not confirmed, D purchased and learned of prior bank lien; holding – caveat emptor applies unless there was fraud, no fraud here, subject to bank lien
a) RULE: Caveat emptor applies to judicial sales unless they are induced by fraud/misrepresentation
H) Anti-deficiency Statutes
1) Court discretion
2) ONLY limits homeowners NOT commercial property owners
3) Most common to credit debtor w/ fair market value
I) Credit Bidding at Judicial Sale
1) Creditor may bid on credit up to amount of debt – incentive to under bid
2) Mortgage foreclosure in two steps:
a) Judicial sale – cuts off right to redeem
b) Sale at market price – returns property to productive value
Court Positions
A) Common law – right to redeem cut off at sale
1) Minority – statutory right to redeem for set period after default regardless of sale
Policies
A) Deed of contract – buyer can lose substantial equity if installments aren’t completed
B) Aspects of foreclosure can contribute to lower prices
1) Poorly advertised, little opportunity to inspect, caveat emptor applies, take it “as is,” no use until redemption period expires
C) Hostile environment
1) Creditor wants to bid low and resell
2) Officer isn’t obligated to furnish information – liable if providing false data
3) Debtor may litigate to delay or destroy property before possession by purchaser
D) Debtors w/ equity exceeding foreclosure sale value are motivated to liquidate assets
E) Deficiency caps help protect home owners
