#13 - Default under State Law Flashcards
Default
A default is an action or inaction by a debtor that triggers the loan to come due and enables the creditor to exercise Art 9 rights. The default is the gateway to using their rights. All remedies depend on there being a default first.
When does a debtor default? This depends on K. Can be more than just nonpayment. Creditors want this to be expansive but debtors want it narrow. Often it’s broad anyway.
9-601(a) provides rights and remedies available to a secured creditor only if the debtor is in default.
Much of this is about contract law.
Default and Bankruptcy Interactions
Everything in this assignment is about how state law works with default. But in bankruptcy those rules change. Under state law, while under a loan agreement, maybe it has become too late to cure, but after filing for bankruptcy, bankruptcy can force a cure period on the creditor.
A primary motivator for filing bankruptcy is missing car payment, then you’re facing repo, so you file for chp 13 bankruptcy, then keep the car and cure the default.
Acceleration
An acceleration clause is a provision that must be bargained for in the agreement and triggers upon default, requiring the borrower to pay up the entirety of the loan to avoid the creditor coming after them.
acceleration decision must be clear and unequivocal
Example: Consider an installment agreement. You borrow 50k and and pay 1k per month. Then you miss 2 payments. Normally the creditor could only sue for those missing 2 payments. But with an acceleration clause, they can then demand the entire rest of the amount owed. They all have acceleration clauses in them.
Cure
“Cure” means fixing the default and preventing the creditor from exercising all of those default rights (including calling the loan via acceleration).
Enables a debtor to undo its default by paying the entire amount due.
K’s enable debtors to cure their default before the debt accelerates in full.
Accelerated debts are much harder to cure and favor creditors who insert them into the security agreement.
If you cure a default before the creditor accelerates you are clear of any wrongdoing w/r to the debt.
post-acceleration, cure is no longer available to debtors.
Is notice required to accelerate?
While often a contractual term, some jurisdictions mandate that the debtor recieve notice of accelerated debts.
If the jurisdiction mandates notice before acceleration takes effect and you accelerate with insufficient or no notice, you could be liable for conversion.
This could lead to LENDER LIABILITY
Lender Liability
Briefly, lender liability law says lenders must treat their borrowers fairly, and when they don’t, they can be subject to borrower litigation under a variety of legal claims
To avoid lender liability, if you allow debtor to avoid a default or calling the loan, follow-up w/ a letter notifying the debtor that this is a one time exception in favor of the debtor; not standard dealing.
Often times in commercial financial transactions, the bank does a lot of interaction with the company that’s a borrower without their lawyer. In the course of a banking relationship lasting a long time between bank and a business, often times the parties go to each other’s christmas parties etc, but then the business falls on hard time and defaults (maybe still making payments but defaults nonetheless on some nonmonetary grounds). Then the business says hey we’re not gonna be able to make payment, BUT we are gonna bid on a US dept of energy project coming up, but we will need another loan to make that happen. But we feel very confident that if we have this loan we can get this contract and if we get it, it will be very lucrative and we can pay back all loans. In the past, this business has been able to do stuff like this before. Then the loan officer says ok sure just send in a new application. Then they go back and forth, nothing really ever happens, they think they’re gonna get the loan so they bid on the dept of energy project, they end up not getting the project, and then the bank pulls the plug and comes after them for everything. The borrower says bullshit, WAIVER BY ESTOPPEL (our prior course of dealings suggested you would extend this loan and make a new loan to us) and they were successful. The parties ended up settling. This often arises with business people when they don’t bring the lawyer in. The bank regulator saw the financially weak position and said call the loan, but the loan officer had intended to do it, and the debtor relied on that. It’s a disconnect between the loan officer and loan committee. That might happen to you if you work for a bank and the main idea behind this is “LENDER LIABILITY”
Waiver
Express waiver –> authenticated post default
Waiver implied in fact –> implicit in the course of dealing.
Wavier by estoppel –> requires detrimental reliance
