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Bankruptcy & Creditors' Rights
West Virginia University School of Law
Cardi, Vincent P.

Bankruptcy Law Cardi Fall 2012

STATE DEBTOR AND CREDITOR LAWS

I. Consensual Security Arrangements: (1) parties agreed to; (2) guarantee for obligation to be performed; (3) giving the creditor the interest in some property; (4) to pay for another; (5) lien → interest that one person has in property of the other. Not to be used broadly.

1. Mortgages and Deeds of Trust

1. mortgages → obligor gives the obligee the interest in the Real Estate

2. deed of trust: obligor deeds his property to the third party to guarantee the debt

a. WV: common way to give Security Interest in Real Property

2. Article 9 Security Interests in Personal Property

1. Debtor which owns underlying obligation

2. Debtor on security arrangements

a. Security arrangements: guarantee payment of money and performance of other obligations

i. Example: small construction company. I want to build. Give me the guarantee of performance → SI to guarantee the performance of K. Breach of K → you can close K through SI. Your client can have the leverage on K. Art. 9 of UCC.

3.Common Law Consensual Security Interests in Personal Property

1. Not covered by Art. 9 → personal injury claims (common law of WV)

4.Guarantees and Sureties

1. A “surety,” or “guarantor,” is someone who is obligated to pay a debt primarily owed by someone else.

2. Contingent on the principal debtor’s failure to fulfill an obligation when it becomes due.

3. If required to pay the debt, a surety has a right of reimbursement from the principal debtor.

5.Creating Set-Off Opportunities

1. Example 1: $100,000 debt before the Bank, due September, 15. The Debtor’s banking balance: $10,000 → “I’m setting off $10,000 which I owe you against $100,000” → he owes Bank $90,000, and Bank owes him $0.

2. Example 2: Air Conditioning Working K = $60,000. If they fail, you can set-off if they owe you some money.

6. Default on SA → grabbing the collateral

1. Breaching obligation

2. When SA say it occurs

7. Insecurity clause, p.5

1. The court will enforce as long as the party feels insecure in good faith

a. Test: whether honestly and in good faith felt insecure?

b. Insecurity clause: should be explained in K

II. Automatic Pre-Litigation Statutory Liens: (1) non-consensual

1.Mechanics’ Liens → automatic lien (for someone who performs services to real estate or supplies goods to real estate

1. Example: designer → has lien on Real Estate where services performed

2. Work on RE:

a. Lien of RE to automatically get paid (landscape architects also

b. Lien is lost unless:

i. Notice is filed with the county

ii. Within 100 days

c. If mechanic has not K with the owner, he should give the notice to the owner also.

d. To keep lien alive:

i. Record with the county

ii. Within 100 days

a. Alive only for 6 months. Then bring suit to the court

2. Lien against corporation for work or labor, § 38-2-31:

1. A person who performs work for a company has a lien for the values of his work upon all RE and personal property of the company:

a. Not necessarily work for RE, just work for the company

2. The lien is created when the work commences.

3. The lien has priority over any lien created by deed or otherwise on such RE or personal property subsequent to the time when such work or labor was performed.

3.Artisans’ Liens

1. Example: mechanic gets fixed your car. You leave your car with him → the car is the lien to guarantee your payment

a. Lien is created by possession → automatic lien

b. If voluntarily surrender possession → you lost the lien

2. Example: repairing equipment job. How to increase your chances for getting paid?

a. Advanced payment

b. Take possession of property → get the lien

c. Deeds of trust on real estate or personal property

d. Art.9 SI →

i. To execute SI

ii. Sign it

iii. Define what should be secured

iv. Filing the financial statement → perfection.

1. Why it is recommended to do it? → priority b/c artisan’s lien starts only when the work starts. Perfected SI is not dependent on taking possession.

e. Advise your client to have both:

i. SAgr perfected +

ii. Artisan’s lien (possession of equipment you repaired)

4.Landlords’ Liens → on lesee’s property to guarantee the rent payment

5.Tax Liens

6.Seller’s Reclamation Under UCC 2-702

1. If Seller supplies → he can grab off his goods if no payment. Unusual situation. Usually, deferred payment. You cannot grab off the goods → usually, SI under Art. 9. UCC 2-702: Seller’s limited right to void the transfer and claim the goods

a. S has the right to reclaim the goods if

i. The goods were sold to B on credit

ii. The debtor was insolvent when it received the goods

iii. S demands return of the goods within 10 days after B received them.

1. If B gave S a written misrepresentation of his financial condition within the 3-month period before delivery of the goods, the 10-day limit does not apply

7.Other UCC Article 2 Liens

8.Non-Statutory Equitable Liens

1. Example: he hires me to collect the debt. I’ll do it for 10% of what I collect.

a. You can make it also through set-off. Also, the right to equitable remedy.

III. Extraordinary Right to set aside transfers and recover property

1. Fraudulent transfers: the transfer performed to avoid paying debts is void

2.Article 6 Bulk Sales:

1. Business of selling goods → sale outside of the ordinary course of business →

a. if B pays for the goods →

i. Creditors of S can go against B and take goods back

ii. Creditors can recover the value of goods delivered to B

1. → hidden lien, B should take the list of all unsecured creditors

2. Bulk State Acts

3.Equitable remedies such as tracing

IV. Litigation Remedies

1.Pre-judgment attachment statutes: allow record notice on RE before you’ll take the judgment

2.Post-judgment remedies:

1. Judicial liens

2. Execution liens

3. Garnishment of Debtor’s property which is in hands of 3rd party

4. Wage garnishment

3.When you get judgment → go and stamp it with the court clerk → notice and record (where deeds are recorded) → property is subject to judgment lien

V. Exemptions

1. Some property is exempted from lien process

2.WV: $5,000

VI. PROBLEM SOLVING, p. 3

der’s right to foreclose is unencumbered by any obligations.

4.Form:

1. Writing

2. Must contain the exact words provided in the statute

3. The date

4. the grantor’s name

5. the trustee’s name

6. a granting clause from the grantor to the trustee

7. a description of the property being transferred to the trustee to secure debts

8. a description of the debts to be secured.

9. Signature of the grantor

5. The trustee must sell the property if all four of the following conditions are met:

1. There is a default on all or part of the debt

2. A creditor or surety secured by the deed requires the trustee to sell

3. Any conditions precedent to the sale as expressed in the deed of trust are met

4. Proper notice of the sale is given

a. Notice of a pending foreclosure sale must be given to the grantor and published to the general public →

i. once a week for two successive weeks

ii. common practice: to advertise on the first and second Mondays of the month and hold the foreclosure sale on the third Monday.

iii. Must contain:

1. Time and place of sale

2. Names of parties to the deed

3. Date of the deed

4. Office and book in which the deed is recorded

5. Quantity and description of property to be conveyed thereby

6. The terms of sale

6. A sale under a deed of trust

1. Public auction

2. The trustee:

a. Must be WV resident

i. If the corporation:

1. To have its principal office in WV AND

2. Must be chartered under WV or federal law

b. At the sale:

i. must be present at the sale

ii. must conduct or supervise it unless the deed of trust allows the trustee to delegate that authority

iii. to only sell as much of the property as is necessary

iv. not permitted to purchase at a sale he conducts

c. after sale:

i. must prepare a deed for the property transfer using the exact words provided in the statute

ii. must apply the sale proceeds as prescribed by statute:

1. deed of trust expenses, including a trustee’s commission equal to 5% of the first $300 and 2% of the rest of the proceeds.

2. Debts secured by the deed of trust

3. Any surplus remaining shall be paid to the grantor.

iii. Within 2 months after selling property:

1. Must submit report of the sale to the clerk of county commission OR

2. Forfeit his commission on the sale

iv. Under the grantor’s or beneficiary’s request, to give bond equal to the full value of the property, with good security.