Nickles – Fall 2010
Many states have enacted comprehensive debt collection laws that explicitly prohibit harassing or deceptive collection practices and provide a private right of action
· As a result, when letters and phone calls fail to convince the debtor to pay, creditor may seize the debtor’s assets or income
· Some creditors bargain in advance for the right to seize property by obtaining a mortgage or security interest
o Secured creditors generally earn interest if the value of collateral exceeds value of their claim
· If have not bargained for security interest in advance, must sue the debtor before attaching the debtor’s property
o Prejudgment attachment are unconstitional absent extraordinary circumstance
o Under current law, unsecured creditors must obtain a judgment before a court will attach debtor’s property
o After obtaining a judgment, creditor must find some property to attach
§ Many of debtor’s assets will be pledged as collateral or protected by state and federal exemptions
o Reach assets held by 3rd party
§ Typically use garnishment proceeding
· Creditor obtains order compelling 3rd party to pay portion of assets to creditor rather than debtor – wage garnishment most popular use
· Limited to lesser of 25% of take home pay or amount which debtor’s take home pay exceeds 30 times federal minimum wage
1. The starting proposition, and the most general rule of debtor-creditor law, is that a creditor cannot hold, take, apply, or otherwise in any sense take any property of the debtor unless and until the creditor gets some kind of legal or equitable claim to the property itself.
a. Generally, that claim to the property comes in the form of a lien . A lien is some property interest in favor of the creditor in the debtor’s property that allows the creditor to seize the property to satisfy the debt.
b. so the answer to “when” can you take debtor property is when creditor has a lien
c. ANALYSIS FOR PRIORITY – DO BOTH PARTIES HAVE THE INTEREST THEY CLAIM IN THE PROPERTY? Then WHEN ERE THE LIENS ACQUIRED/BECOME EFFECTIVE?
2. Debt alone creates personal obligation, not necessarily any property claim.
a. There is a great difference between liability and property interest; liability in of itself creates no property interest.
b. Liability is distinct form property interests; this is especially pertinent because Bankruptcy discharges liability but not liens of the property interest.
3. This general, no-take rule applies without regard to the nature of the underlying debt, which may be contract, tort, statute, or some other law.
4. Typically, the claim to property that a creditor gets and enforces against the debtor and other persons is a lien.
5. Generally, a creditor who, without a lien, takes property of the debtor for the purpose of satisfying even a perfectly lawful debt has essentially stolen the property. Cf. Hicks v. Dunn-Benson Ford, Inc. (N.C. App. 2009).
a. In Hicks, buyer argued conversion (tort with punitive damages) and unfair trade practices (collecting attorney fees).
b. Assuming liability, creditors have no right to take another’s property unless go through the necessary legal procedures to obtain a lien.
c. Sales hypo-right after sale, buyer says I’m not going to pay, seller cannot grab it back–he is now a creditor and must obtain a lien.
6. At the broadest level, debtor-creditor law involves only three issues:
a. when and how a creditor gets a claim (usually, a lien) on or to property of the debtor,
b. how the lien is enforced against the debtor, and
c. the lien’s priority in relation to third parties’ rights to the property, including other creditors’ liens and claims to the property and the claims of transferees of the property.
7. The general rule for getting a lien requires a creditor to reduce her claim to judgment and then enforce the judgment through a post-judgment remedy called execution. Getting a judgment and enforcing it through execution produce liens of judgment and execution that are collectively called judicial liens.
a. Although this may be the general rule, exceptions have arisen depending on the nature of the lien itself. Over time, the number of exceptions has grown so that they swallow the general rule. If don’t use exceptions, then most of the time a debtor will file for bankruptcy the moment
nough value on the property (can have infinite number of liens)
o Basic principle is that the first creditor gets first bite (derivative title)
o Second creditor’s rights are only the debtor’s rights minus existing liens
Exceptions to the first-in-time rule.
○ First, with respect to competing liens, a purchase-money lien is often given priority even over an earlier lien that was first in time in creation and perfection. Purchase money means that the lien secures the creditor who gave the value that enabled the debtor to acquire rights in the very property that is collateral.
○ The second exception applies when a lien competes for priority with the rights of certain buyers and other purchasers (not all of them, only certain of them) of property subject to the lien. When the need to insure free and uninhibited trade outweighs the goal of protecting private property rights, the principle of derivative title gives way to exceptions allowing purchasers of property to take free of liens.
§ The purchasers who are protected from liens by these exceptions must usually be deserving folk, that is, they must have acquires their interests in good faith, without notice of liens, and for value. In other words, they usually must be good-faith purchasers (BFPs).
§ Yet, there is no general rule of law protecting all innocent purchasers for value from liens on, or other claims to, property. A good faith purchaser, as such, is never entitled to priority over a preexisting lien whether or not the lien is perfected. She wins priority, if at all, only when other circumstances of her purchase place her in a legally well-defined, usually statutory subclass of innocent buyers whose activities, for policy reasons, are more deserving of protection than the lien rights of creditors.
