9 Security and Foreclosure Flashcards
(a) What is a security interest?
(b) Must a security interest be formally created?
(a)
Definition: Delayed ownership transfer contingent on debtor’s non-payment or failure to perform secured obligation.
(b)
§9-109 – a security interest can be created regardless of how a transaction is formally structured (substance over form).
What is the basic test for determining if a lease is really a “true lease” vs. a Security Interest (disguised sale)?
TEST: It is a true lease if there is a reasonable likelihood at the start of the lease that the lessor will eventually get the leased goods back with meaningful remaining value.
(a) What are some signs that a lease is really a disguised security interest?
(b) Why do these matter?
(a) signs of a disguised lease -
o Term of the lease >= the economic life of the goods;
o Option to renew for remaining life or become owner for little to no consideration. See UCC § 1-203(b)
(b) why it matters -
o Determines whether foreclosure is necessary;
o Lessors don’t have to give public notice to get priority over other creditors
(a) What right does the debtor have with respect to property that has been seized or repossessed?
(b) Does it apply in all jurisdictions?
(a) Right to Redeem: the debtor has a common law right to redeem the property (pay the debt to end foreclosure) until the foreclosure sale takes place
(b)
o Exists in both judicial and non-judicial foreclosure
o Likely achieved by taking out new mortgage from different lender
When will a bank prefer foreclosure sale?
Bank’s Prefer Avoiding Foreclosure Unless:
1.) There are *No other bidders
2.) State *Allows deficiency claims
3.) Debtor or 3dp *Guarantor can afford deficiency claim
4.) No *Statutory redemption rights
5.) Favorable “shock the conscious” standard (MO)
6.) Property FMV is high compared to debt owing (rare)
Practically, these circumstances never happen.
Think:
High Gross Margins in Missouri + NAGS
What are the four main bidding considerations when considering to bid in a foreclosure sale?
1) Credit Bidding: Creditors can bid on credit up to the amount of the debt—removing cash payment req. makes bidding very convenient
2) Deficiency Judgement: Creditor can sue debtor for the difference between the proceeds of the foreclosure sale and the amount of the debt
• Some states don’t allow deficiency judgements
• Right to deficiency judgment isn’t worth anything if they debtor would be unable to pay
3) Inadequacy Judgment: Debtor can sue for an inadequacy judgment alleging the foreclosure sale was for an inadequate price
• Shock the conscious standard – typically 20-50% of FMV
4) Redemption Rights: Debtor may have a right to redeem for the foreclosure price
• Incentive to full credit bid when state has statutory redemption rights
(a) What is the Debtor’s perspective when in the context of a foreclosure sale [of the debtor’s property]?
(b) What remedies might the debtor have?
(a) Debtor’s perspective -
A debtor with equity wants to avoid foreclosure or get higher bidding at foreclosure to protect the equity.
Debtor also wants to avoid having a deficiency claim against them.
(b) Remedies:
• Redemption rights
• Inadequacy judgment
• Advertise foreclosure sale to increase number of bidders
What is a third party perspective (potential bidder/outsider) in the context of a foreclosure sale ?
Third Party Perspective Hard to get information that would allow informed bid at foreclosure sale, nobody is obligated to give most important info, and generally nobody is incentivized to do so. Wants to know: • FMV • State of title (existence of liens) • Condition of the property • Existence of equity
Why would a seller disguise a sale as a lease?
The lessor is attempting to avoid having the transaction being subject to rules under UCC Article 9.
- to have priority over secured creditors
