Secured Transactions Outline
Rafael Pardo, Winter 2012
01. INTRODUCTION
A. SCOPE OF ARTICLE 9, 9-109
1. 9-109(a)(1) provides that Article 9 applies to “a transaction, regardless of its form, that creates a SI in personal property or fixtures by contract.”
B. FOUR QUESTIONS RELATED TO CREDITOR-DEBTOR RELATIONSHIP
1. Formation – When does the law recognize formation of an enforceable SA?
a. If no enforceable SA, no right to go after property.
2. Terms – Once an enforceable agreement has been formed, what are the terms of that agreement?
a. Terms dictate the respective obligations of the parties, as well as the scope of the SI (all or just some of DB’s property)?
3. Performance – When does the duty to perform in accordance with those terms arise?
4. Remedies – If a party to the agreement doesn’t perform, what are the remedies available to the non-breaching party?
CREDITOR’S REMEDIES UNDER STATE LAW
02. REMEDIES OF UNSECURED CREDITORS UNDER STATE LAW
A. Unsecured vs. Secured Creditors
1. As compared to secured creditors, unsecured creditors are:
a. Costly;
b. Inefficient; and
c. Much more difficult to get paid.
B. Process Unsecured Creditors Use to Compel Payment – Unsecured CRs can coerce payment only through the judicial process specified by the state.
1. Process for Judgment Collection (Debt Collection)
a. Small Claims
i. File complaint with appropriate court.
ii. Deliver service.
iii. Hearing.
iv. Judgment.
v. Obtain writ of execution from court clerk.
b. Civil Procedure
i. File complaint with appropriate court.
ii. Deliver service.
iii. DB must submit answer.
iv. SJ or Trial.
v. Judgment.
vi. Obtain writ of execution from court clerk
2. Execution is used when the debtor has the property; garnishment is used when a third party has the property.
C. Limitations on Compelling Payment
1. Possible Damages & Tort of Conversion – CRs have right to demand information from (backed up by threat of civil contempt and jail) and can compel sheriff to act only on clear directors about what to get and where to get it. However, the risk of error is great. If property seized turns out to belong to a 3P, the judgment creditor may be liable (1) for damages to the 3P and (2) for the tort of conversion (wrongful exercise of dominion and control over property).
2. Provisional Remedy Eligibility – After CR has filed suit against DB to collect an unsecured debt, the CR may be eligible for a provisional remedy before obtaining a judgment.
a. Generally called attachment (rather than execution). Generally have to prove to court that there is a threat of the property disappearing.
3. Contempt and Perjury of DB – When DBs refuse to answer questions during discovery, they can be subject to contempt sanctions; if they lie, perjury.
4. In-State Money Judgment Requirement – Money judgment can only be enforced in the state where it is rendered. Thus, CR must establish judgment in the destination state before invoking the enforcement procedures of that state.
5. Exemption Statutes – Prevent sheriff from seizing certain property under a writ of execution. Essentially, prevent CRs from taking the most valuable and easy-to-locate assets that debtors own.
a. Homestead Exemptions – Allow certain houses and real estate to be protected (generally have dollar limits, but some don’t).
b. Wages Exemption – Federal and state law protect debtors’ wages. Federal statute provides a minimum of 75% of DB’s earnings from personal services generally be exempt in all states.
i. N: Exemptions are not applicable to SPs.
6. No Right to Self-Help – Unsecured creditors never have a right to self-help.
D. Notes from Questions
1. Unsecured CRs need to go through judgment collection process to secure a debt. Resorting to self-help can make one liable for conversion, larceny, and/or trespass.
2. Unsecured CRs have no cause of action until actual breach has occurred. If CR is worried that breach might occur in future, she can (1) offer more money for a SI, or (2) negotiate for a one-time payment at a discount.
3. Before getting sheriff to levy on the property, an unsecured CR should be certain the assets are not exempt, encumbered, or owned by a 3P.
a. After figuring out what assets can be levied upon, unsecured CR should move quickly, because if the debtor moves states or hides assets, it will be more difficult to recover.
03. SECURITY AND FORECLOSURE
A. INTRODUCTION AND DEFINITIONS
1. Lien: A charge against or an interest in property to secure payment of a debt or performance of an obligation. Bankr. 101. Thus, a lien is a relationship between a particular property (the collateral) and a particular debt or obligation. Generally, if debt not paid when due, CR can compel application of the value of the collateral to pay the debt.
a. Security Interest, 1-201(b)(35): “An interest in personal property or fixtures with secures payment or performance of an obligation.” A security interest:
i. Is the most common form of a lien, and it includes any lien created by K between DBs and CRs.
ii. Only has effect in the event of DB’s default.
iii. Is typically enforced by sale of collateral and payment of as much of debt as possible from proceeds of sale.
iv. Creates a contingent right of the CR to take the collateral, sell it, and pay debt with proceeds.
b. Judicial Lien: A lien obtained by an unsecured CR through the judicial process.
2. Foreclosure: The process by which the CR compels the application of the value of the collateral to payment of debt.
a. Foreclosure (1) transfers ownership from DB to purchaser immediately when sale happens and (2) extinguishes DB’s right to get the collateral back under 9-623(c).
B. LEASES INTENDED AS SECURITY
1. Consequence of Creating a SI in the Form of a Lease – When SP tries to take the property back and the lessee fights for the property, the SP will have to go through the same process as any other SI holder.
2. Analysis—
a. 9-109(a)(1): Article 9 applies to “any transaction, regardless of its form, that creates a SI in personal property or fixtures by contract.” OC2 elaborates, providing that “when a SI is created, this Article applies regardless of the form of the transaction or the name the parties have given to it.”
i. 1-201(b)(35): “Security Interest” means “an interest in personal property or fixtures with secures payment or performance of an obligation.”
b. Lease Distinguished from SI, 1-203
i. 1-203(a): “Whether a transaction in the form of a lease creates a SI is determined by the facts of each case.”
ii. 1-203(b): A transaction in form of a lease creates SI if:
§ Consideration lessee pays lessor for right to possession and use of goods is an obligation for the term of the lease;
§ Lease is not subject to termination by the lessee; and
§ One of the following:
o Term of lease is equal to economic life of the goods;
o Lessee is bound to renew the lease for the remaining economic life of the goods;
o Lessee has renewal option at end of lease for nominal consideration (1-203(d): Consideration is nominal if “it is less than lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised); or
o Lessee has option to become owner of goods at end of lease for nominal consideration.
C. OTHER FORECLOSURE PROCEDURES
1. Real Property “Power of Sale” Foreclosure – About 25 states permit the mortgage lender and borrow to opt for a quicker, simpler method of foreclosure against real property. The CR and DB do so by including in the SA (mortgage or deed of trust) a power of sale.
a. How it Works – Deed of trust states that collateral will be held in trust by CR or 3P such as a bank or title company, and DB agrees that in the event of default, the trustee can sell the property and pay the loan from proceeds of sale.
i. CA Procedure
§ (1) Upon default, CR can file in \ public records a notice setting forth the nature of DB’s default and CR’s election to sell the property.
§ (2) If DB does not cure default within 90 days, the creditor can set a time and place for sale, advertise it for 20 days, then sell the property at auction.
§ (3) Trustee then conveys title to the purchaser at the action, and the sale forecloses DB’s right to redeem.
2. Judicial Foreclosure – Foreclosure process is judicial if it is accomplished by entry of a court order.
a. How it Works
i. CR holding mortgage or SI files civil action against DB.
ii. In complaint, CR details terms of loan and nature of default, and request that equity of redemption be foreclosed.
iii. Complaint is served on DB and any subordinate lien holders, who then have a period of time (usually 20 days) to raise defenses.
iv. Once SC has established it is entitled to foreclosure, court will enter final judgment of foreclosure.
§ Court sets date for foreclosure sale, and on suc
request proof of the assignment. Ultimately, the account DB, at its own risk, must determine whom to pay.
c. N: 9-404(a) [CR’s Rights Subject to Terms, Claims, and Defenses of Account DB]: The rights of a CR are subject to: (1) all terms of the agreement between the account DB and CR and any defense or claim in recoupment arising from the transaction that give rise to the contract; and (2) any other defense or claim of the account DB against the assignor which accrues before the account DB receives a notification for the assignment authenticated by DB or CR.
D. NOTES
1. 9-603(a) provides that parties may determine by agreement the standards measuring what constitutes a breach as long as the standards are not manifestly unreasonable. Also, doesn’t apply to breach of the peace under 9-603(b) and 9-602(6).
2. If representing an DB that needs a little more time and wants to resist the CR taking possession, the best thing to do is to keep a guard at the location who will tell the repo men to leave. This is the case because 9-609(b) allows a CR to seek self-help repossession so long as he doesn’t breach the peace.
3. If an account DB wants a bank to not notify its customers of the lending arrangement, the bank should be skeptical if the arrangement just required DB to send invoices to the CR. Invoices can be faked, and if they are, the CR may become under-secured. A way around this problem would be to (1) request deposit slips that given information any time the account DB has made a payment on an invoice (allow the CR to match payments to actually be deposited at the bank; or (2) to audit the DB’s records.
4. Every time there is a violation of Article 9, go to 9-625(b) damages provision. See also OC3, 9-625(b).
05. ARTICLE 9 SALE AND DEFICIENCY
A. ARTICLE 9 SALE REQUIREMENT
1. The requirement that the collateral be offered for sale as part of the personal property foreclosure process cannot be waived or varied in the initial lending contract.
a. Ex: If a provision in a car loan agreement says SC can retain care in satisfaction of debt in default, it is unenforceable.
B. ACCEPTANCE OF COLLATERAL, 9-620 – Similar to acceptance of deed in lieu of foreclosure in real estate law.
1. Process
a. 9-620(a): After default, a SP may accept collateral in full or in partial satisfaction (exception, 9-620(g): no partial satisfaction if consumer goods) of the obligation it secures if:
i. Debtor consents to acceptance under 9-620(c). 9-620(a)(1).
§ Consent is implied if SP sends DB a proposal for retention of collateral in full satisfaction of debt and does not receive a reply objection within 20 days. 9-620(c)(2).
ii. There must be no objections from others holding liens against the collateral. 9-620(a)(2).
iii. If collateral is consumer goods, collateral is not in possession of DB when DB consents to acceptance. 9-620(a)(3).
iv. SP is not required to dispose of the collateral under 9-620(e) or DB waives the requirement under 9-624(a).
§ 9-624(a): DB may waive notification right after default in authenticated writing.
§ 9-620(e): SP that takes possession of collateral shall dispose of the collateral pursuant to 9-610 (foreclosure sale) with 90 days after taking possession or a longer period if agreed to in writing, if:
o (1) 60% of cash price has been paid in the case of a PMSI in consumer goods, or
o (2) 60% of principal amount of the obligation secured has been paid in the case of a non-PMSI interest in consumer goods.
§ N: Strange thing about 9-620(e) is that is provides no protection to consumers who have paid less than 60% and no protection to non-consumers.
