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Debtor Creditor Rights
University of Toledo School of Law
Whipple, Mary Ann

8/28/06 – Class Notes

Jurisdiction – Not something tested but is important to understand, Bankruptcy courts are courts of limited jurisdiction.. Article 1 or legislative tribunals – inferior courts including Tax and Bankruptcy. Sovereign immunity issues. Bankruptcy focuses on property that the debtor owns. In 1978, Bankruptcy was supposed to be expanded to deal with all creditor/debtor issues. In 1982, Northern Pipeline case – Filed a breach of contract claim in the Bankruptcy court. One of the parties was a bankruptcy debtor. This bankruptcy scheme was called into question. The Solution ended up being through new statute – Bankruptcy courts have jurisdiction to hear cases “related” to bankruptcy case. Bankruptcy court resides in the article 3 district courts. Article 3 courts have power to refer actions to the bankruptcy courts. Acts as “units” of the district court. Non-Core bankruptcy issue gets set ________. Many separate lawsuits can arise, should they all be heard by Bankruptcy judge??

Does bankruptcy court have right to try a case by a jury?

Creating the creditor/debtor relationship

Bankruptcy trustee have power to attack unperfected interests or improper security interests
What does it take to create a proper security interests? In order to create security interest under Article 9 – has to attach, debtors property will be used to pay obligation. Then the secured interests must be perfected against the rest of the world – especially bankruptcy trustee.
4 things that have to happen :

1) Basic agreement b/w debtor and the secured party – must be clear. (harley, AR, equipment, etc.) – Security agreement must have an authenticated record. The attended relationship must be related.

2) Must give some value to the debtor for that relationship in order to take affect. Loaning

money or the promise to loan money can be value under Article 9. Preexisting loan may

be good value under article 9. Preference – ok under state law but causes problems in

bankruptcy.

3) The debtor must have some rights in the collateral. Commercial context – after acquired

property clause (ex. wells fargo takes security interests in another’s inventory). When the

party acquires inventory then wells fargo acquires a security interests in the property.

o These three steps can happen in any order. Can start out as purely unsecured relationship. Does not have to be agreement first. Line of credits can be used on prior security agreements

4) The forth step the debtor has to do is to perfect. Notice to the rest of the world that someone has an interest in certain property.

o How to perfect a security interest?

(1) File a UCC financing statement with secretary of state – most collateral,

(2) Filing through another statute (state or federal law), certificate of title (cars, boat, motorcycle) – must be noted on certificate of title. Some circumstances – IP, When a boat becomes a ship, these are governed by federal law that crop up in bankruptcy proceedings.

(3) Possession of collateral – few kinds of collateral can only be perfected by

possession. The only way to perfect by possession – is money.

(4) last method – automatic perfection – purchase money security interests in consumer goods. (ex. elder bearman – purchase a sofa on credit card – the security interests is already perfected. Could not possibly register every sofa sold by the store). Comes up in computers. Reaffirmation agreements in personal property. Individual consumer debtors can avoid perfected security interests – Many kinds of household goods – a debtors right under bankruptcy – perfectly good state law but can be avoided through bankruptcy law.

Security agreement will be perfected when all four of these things happen
Sometimes perfection will happen before the other three steps. The security interests will be perfected after the forth action happens
If one of these four things do not happen, then the bankruptcy trustee can attack it
Security agreement can say almost anything it wants to say.
Once a security interest is properly created and perfected. That security interests will go through the bankruptcy proceeding in tack. In personam and in rem obligation. The idea of the bankruptcy discharge is to get rid of the in personam debt not liens. Fundamental principle of bankruptcy is that liens ride through.
Debtors have to reaffirm debts if they want to keep their car or home.
After discharge – creditors have a default against the debt or the debtor can reaffirm debt. So even if the debtor is current with a payment a secured creditor can seize the car because of the bankruptcy.
Reaffirms the in personam debt
Complex interplay b/w in rem and in personam liability
Default Provisions in security agreement ***** (Yacht Case)
Creditor is only a secured creditor only to the extent of the collateral value. That is why a bank would still come and take your car when through bankruptcy they lose the in personam liability.
In Real Property – law of mortgages creates a security interest. The proper amount of signatures or other reasons to attack the validity of the mortgage. Until they are recorded they are not perfected.
Other ways of creating liens that are not consensual –

1) Judicial Liens – 101(36)

2) Statutory Liens – 101(53)

3) Mechanics Liens – Construction

4) Common Liens – Artisans lien – fixing someones car, or having a someone

fix your TV. Possessory in nature – Hold car or TV until you pay. Could

not sell the item.

8/30/06 Class Notes

Oversecured Undersecured

The value of collateral is above the value of the debt.

This called an equity cushion.

In this case, attorneys fees and interest can be collect

Unsecured claim in this area or deficiency. Just like all other unsecured creditors

Collateral value is worth less

This area is the amount that is secured or the value of the collateral

Debt

Collateral

Value

Secured

· Priorities for some unsecured claims – (Taxes, child support, employee benefits)

· Dividing line is secured and unsecured.

· Secured claim – to the extent of the value of the collateral

· Debt and collateral the same value– this is a secured claim

· Motor vehicles are almost never worth the debt that is owed

· § 506 – what the Chart above is based on

Ø Non-judicial Debt Collection Techniques?

1) notice or demand letter

2) put on credit report

3) collection agency

4) Withdrawing services

5) Phone calls or harassing phone calls

Ø Credit Card debt is being sold between collection agencies or given over to collection agency

Ø Provisions in most major credit card allows them to cross reference other late payments to other credit cards and jack up your interests

Statutory Restrictions on the nonjudicial techniques

Ø Fair Credit Reporting Act – Reporting liability goes to the person who is reporting and the credit reporting agencies.

Ø Fair Debt Collection Practices Act – focuses on the direct communications with the debtor including letter, email and mostly be phone. Became effective in 1977. Communications with debtor and third parties and their attempts to collect debts.

1) Only applies to collect consumer debt. Consumer debt – any obligation or alleged obligation in

which it was used for personal, family or household use. Not business debt. Some issues when

something is consumer and business debt.

2) Who are the debt collectors that are covered? Debt collectors include interstate, phone, or third

parties trying to collect debt. Creditor trying to collect his own debt is not included in this statute.

Only when debt gets referred out

3) Most important issues are whether attorneys are subject to the act? At what point does the

attorney get involved in the business of collecting debt. At what point is attorney an actual debt

collector.

4) § 804 Acquisition of location information

-Very limited language in which you can use while trying to look for the “deadbeat”.

-Once a debt collector is informed that debtor is represented by an attorney

5) § 805 Communication in connection with debt collection

-Very important of what times a debt collector can call a debtor

-no false or misleading communication

– cannot threaten legal action if you do not attend to follow through with them

– threatening criminal prosecution is a huge problem

– No repeated phone calls or glaring letters

– Certain language and notices that debtors have to have from debt collectors, is also

on complaint filed with the court to cover attorneys under the act

Ø Some causes of action that involve state law abusive collection actions – invasion of privacy, libel, and slander. And intentional infliction of emotional distress could be asserted under state law for abusive debt collection actions. Under state law more outrageous conduct in order to be a cause of action under these theories.

Ø Lawyer Liability is limitations covered fair debt collections act, but may violate ethical rules. Cannot take action that will merely harass another. Should not use criminal threats in order to get civil damages. Very bad idea to threaten to go to prosecutor’s office over a bad check.

Article 9 Part 6 (Remedies Section)

1) Parties are free to establish the terms that governed that relationship. A creditor can go after debtor for defaulting. Very broad concept can include more than just not paying the debt. Failing to have insurance on collateral (house or car) or proper financial statements. Secured party can use the remedies when there is a default.

2) Basic remedy is to foreclose on the security interest.

3) 5 basic remedies a secured creditor has

1. foreclosure under the code.

– Repossess collateral, secured creditor can retain (strict foreclosure or selling

collateral)

– Can use self help to repossess the collateral as long as there is not a breach of

the peace.(ex. debtor near car and saying no – then there is a breach of the

peace, If in garage – Yes, If on curb then – No breach of peace)

– If a secured party has to go the court then this is called replevin.

o When court gets involved there is due process, where there is a specific time frame for notice and an opportunity for a hearing by the debtor. Can retain collateral or dispose the collateral.

o One limitation – After repossession and the creditor keeps the good this is called retention. If it is consumer goods and debtor has paid 60% then the creditor has to sell the goods. This also called strict foreclosure

o Strict foreclosure – the creditor has to give notice to debtor and then the debtor can object and force the creditor to sell the property if it has appreciated or is worth more then what debtor has paid.

o Creditor can sell through auction or private sale. Must be notice to debtor and all secured parties when there is a sale and the sale must be commercially reasonable.

o If deficiency, the secured party is entitled to collect from debtor. Creditor must follow all notice and reasonableness of sale

o Debtor still owns property when the creditor repossesses the collateral just losses t

– Subject to appraisal and limitation on sale price. At least 2/3 or value of property

1. Personal Property – Have to levy on personal property first.

2. Real Property – Can also have real property sold on execution by the sheriff (Buyer Beware). It is not a foreclosure sale. Mortgages will still be there in order to get it free and clear must go through foreclosure sale.

Right of Redemption – paying entire judgment amount and expenses that occurred.

4) Receivership

– Can be used pre and post judgment provided by statute

-A equitable remedy even though it is provided for by statute

– Independent officers of the court like bankruptcy trustees but in state court. Function is to preserve and protect property pending judgment. (ex. foreclosure actions involving commercial property – hotel, shopping center, apartments) Rents are being collected

-Can take months or years in which a property owner is receiving rents. Must be used to maintain property. By court will collect rents and will use rents to preserve the property to make sure the insurance premiums to be paid, fix the plumbing, etc.

-Important step in preservation of property in the commercial foreclosure setting.

-If business could have receiver run the business (More unusual circumstance)

-Must post bond.

-Can be used to liquidate assets and will be more important to the new bankruptcy laws.

– Extra money put into separate bank account

4) Garnishment

– Personal tangible property in control of the debtor.

– Bank accounts and debts owed to debtor.

– You can garnish wages in most states

-nonwage garnishments, the object of garnishment bank or brokerage. The entity or person that is receiving is called the garnishee. Once garnishee is served against the judgment debtor it is a responsibility to respond.

(p. 62) Webb v. Erickson

-garnishee blew off judgment and falsely answered.

-Judgment was satisfied from debtor so case set aside the default judgment. There is no independent claim.

-Floor minimum protection in case state statute is stricter. Consumer protection Act intended to be floor.

-Employers get notice and it is complicated deals with 25% of take home pay or some % times minimum wage.

-Creditors seeking child support and taxing authorities have priorities.

Issues come up when an unsecured creditor has a garnishment order and then later a tax or child support takes precedent.

– Wage garnishment is what propels a person into bankruptcy.

2 other mechanisms in Ohio that stop a garnishment is

1) Credit Counseling

2) Municipal court trusteeship

5) Injunction –

– not quite as drastic as garnishment or attachment

– Rule 65 – get a temporary injunction pending judgment. (TRO’s)

Grupo Mexicano (1999) US Supreme Court case

– Π asked for asset freeze injunction

– Under Federal procedure these judgments are not permissible

– This is not a good argument but maybe under state law

5) Receivership

– Used to wind up business after judgment

-Court appoints person. Collect rents and preserves property and they can sell the property or business. Hotels, Business.

-Ousting judgment debtor, bankruptcy gets that control back

-Have to post bond and answer to the court and not to the creditor involved.

-Federal and State procedure statute.

-Priorities not as well developed.

6) Injunctions

– Worried about debtor getting rid of or disposing of assets.

– A court order might stop the fraudulent transfers

-Like an asset freeze order

-preserve and protect until seizure

7) Creditors Bill

-Intangible Property