Secured Transactions Essentials Flashcards
Unsecured Creditors Essentials
Unsecured creditors CANNOT do self-help repossession.
Levy = seizure of property pursuant to execution. Majority Rule is that sheriff must take physical possession.
Exemptions from Execution = necessities of life that sheriff can’t seize enumerated in state statutes. Technically conversion by sheriff but he is indemnified by the judgment creditor usually.
Execution Process:
1. File a Writ of execution
2. Clerk issues writ
3. Sheriff levies
4. Sheriff sells property
Sheriff takes his cut and the proceeds pay the debt.
Setoff = survivor is creditor, person still in debt is debtor
Distinguishing a Sale from a Lease
1-203 distinguishes a lease from a security interest. It’s determined on a fact-by-fact case-by-case basis. What you’re looking for is usually a lease term that is only as long as the economic life of the goods, or the lessee is bound to renew for the remaining economic life of the goods or become the owner.
Judicial Foreclosure Procedure
Judicial Foreclosure Procedure:
(1) Secured creditor holding mortgage/security interest files a civil action against debtor.
(2) In the complaint, creditor lists terms of the loan, nature of default, and requests the “equity of redemption” be foreclosed.
(3) Service to debtor; usually have 20 days to respond w/ a defense.
(5) Court enters a final judgment of foreclosure setting a date of sale.
(6) Sheriff sells the collateral, collects proceeds, and holds them until the foreclosing creditor obtains an order confirming the sale.
NOTE: Debtor will usually remain in possession of collateral until sale confirmation. After which the creditor is legally due possession. Should the debtor fail to comply, a judge can order a writ of possession directing the sheriff to enforce change of possession.
Art 9 Right of Redemption / Equity of Redemption Equivalent
Art 9 Right to Redeem = if you pay the ENTIRE/FULL debt owed, it cancels the sale before the foreclosure sale. To redeem, you must tender 1) fulfillment of all obligations secured by the collateral; and 2) reasonable expenses and atty fees. 9-623
Note: there is NO statutory right of redemption after the foreclosure sale under Art 9
What if a debtor executes a “deed in lieu” w/ the understanding that it will be returned if they make up payments w/in 60 days, but otherwise it will be recorded?
This is clearly a security interest in a different form. Deeds in lieu are only accepted if effective immediately b/c it forces the debtor to recognize the pain of transferring the deed in the present moment.
What is a conditional sale?
Example: A wants to sell their car to B. A accepts B’s offer to buy the car via 12 monthly payments. The two agree A will maintain ownership of the car until B completes all payments. Meanwhile, B has the right to use the car, and A hold title until payments made.
This is not treated as a conditional sale! It’s recharacterized by Art 9 as a security interest and B has ownership of the car while A only has a security interest.
Right to Repossession
This is a right for ONLY secured creditors of personal property to take possession of the collateral after default and prior to a nonjudicial foreclosure sale. 9-609.
The secured party CANNOT BREACH THE PEACE.
This occurs despite the fact that the debtor still technically owns the personal property. Ownership only dies at foreclosure sale
How Can a Secured Party Repossess the Collateral?
1) Through judicial process under 9-609(b)(1), a secured creditor can get a “writ of replevin” and have the sheriff go take the property back. But in the consumer context they almost always choose a repo man instead:
2) Exercise “self help” by hiring a repo man to go take it from the debtor. The secured creditor can legally do this so long as the repo man doesn’t “breach the peace”.
Breach the Peace = this is a low bar
What is “breaching the peace”?
Threats of violence or physical violence are sufficient to breach the peace.
Trespass is permissible since creditor’s have a legal right to repossession under the UCC. asserting trespass =/= breach of the peace.
If kicked off property, repo man can resume repo efforts at a later time without breaching the peace.
If the debtor successfully resists repossession, the secured creditor can obtain a court order for possession and have the sheriff take possession from the debtor; moves from a self-help remedy to a judicial order. This is called filing a writ of replevin.
If the creditor or its agent causes a breach of the peace or
otherwise wrongly repossesses the collateral, the creditor may be liable for conversion damages and
possibly punitive damages.
How does one engage in self-help against collateralized accounts?
Self-help remedies exist for “assignees” of accounts. An assignee includes both buyers of accounts and creditors who have collateralized the account.
Under 9-607, the secured creditor who knows of the identify of the account debtor’s sends written notices to directly pay the creditor. It is up to the account debtor to determine whom to pay in such situations; they can request proof.
Credit Bidding
Credit Bidding = Creditors who force the foreclosure can bid up to the amount owed w/o actually using $USD.
BENEFITS OF HIGH CREDIT BIDDING
(1) minimize the likelihood the sale is set aside for inadequate sale price.
(2) minimize the likelihood the debtor exercises its statutory right of redemption (redemption = sale price)
(3) if outbid, creditor receives the total amount of the secured debt; if not outbid, it will have the property inspect, evaluate, improve, and resell at its leisure.
Judicial Foreclosure Sale Procedure
(1) foreclosure sale.
(2) proceeds used to pay for sale
(3) proceeds used to pay debt.
(4) in surplus, remaining proceeds go to debtor.
Art 9 Foreclosure Sale Procedure
9-610 governs procedure of sales
Most important difference from real estate: the secured creditor conducts the sale, not a public official
Creditor can choose method and timing mostly: can choose auction, fixed price, or negotiating. Still has duty to debtor to choose procedure that is “commercially reasonable” in terms of method, manner, time, place, and terms 9-610(b)
Acceptance of Collateral for Full or Partial Satisfaction
After default, debtor can CONSENT to secured creditor retaining collateral in full or partial satisfaction (“partial” meaning debtor receives credit against the debt in some amount but continues to owe the remainder) UCC 9-620
Acceptance is roughly analogous to Deeds in Lieu of Foreclosure
For Full Satisfaction = if debtor does not respond to notice, debtor’s silence will be taken as consent to acceptance if the creditor gets no response within 20 days. This is only the case if the debtor hands the property over and there is no deficiency at all; must be full satisfaction. Anything less, and the debtor’s inaction can’t work as consent. The only way this NO RESPONSE CONSENT works is for full satisfaction.
For Partial Satisfaction = creditor must get the debtor’s consent in writing 9-620(c)(1)
For Consumers = there is no partial satisfaction in consumer transaction. If the creditor takes the collateral back, the creditor gives up their deficiency.
Requirement to Give Debtor Notice of Foreclosure Sale
9-611(c)(1) requires creditors doing a foreclosure sale to notify the debtor of the sale and describe: 1) debtor and secured party; 2) collateral being sold. The notice must state: 3) the method of sale; 4) the debtor is entitled to an accounting of the unpaid debt and charge for said accounting; 5) time and place of public sale
To identify lienors, the secured party may have to conduct a search of the public records. Failure to give this notice does not invalidate the sale, UCC 9-617, but it’s a defect that can affect the deficiency amount by lowering it or sometimes eliminate the deficiency.
Setting Aside the Sale
Only a lack of good faith by buyer will cause a sale to be set aside.
9-617(b) = Failing to comply with Art 9 is not enough to set aside the sale.
Consequence for Creditor Technical Misbehavior = If a creditor failed to technically comply with Art 9, the debtor gets an action for actual damages under 9-625(b)
Debtor Liability for Deficiency after Art 9 Sale
9-615(d) general rule: debtor on secured debt is liable for any deficiency remaining after the sale
Two anti-deficiency limits:
1. 9-615(f) applies when the secured party buys collateral at the sale for a price substantially below what would have been paid in a commercially reasonable sale. The amount that would have been realized in a complying sale to a third party is treated as if it were the actual sale price, thus limiting the recoverable deficiency to the creditor.
- 9-626(a)(3) applies when the sale does not comply with requirements of Art 9 (such as with notice). In calculating the deficiency, the amount that would have been realized in a complying sale is treated as the actual sale price.
What does “commercially reasonable” mean in the context of 9-610 Art 9 Foreclosure Sales?
Ordinarily, commercially reasonable will be a method that will be reasonable for owners of the particular type of property to use if their own money were at stake.
It’s vague on purpose, and its goal is to bring the knowledge and ingenuity of the secured party to bear in determining a reasonable way to dispose of the collateral.
Largely depends on what the collateral is. In many cases, this involves bringing in expert testimony.
Bankruptcy and the Automatic Stay
Bankruptcy does 2 things:
1) for debtor, it’s a fresh start
2) consolidates resolution of debt problems
Automatic Stay = Upon filing bankruptcy, all creditors are AUTOMATICALLY STAYED (enjoined) from collecting debts. The court then liquidates the assets or lets the debtor keep using them.
Bankruptcy Chapters
Consumers: Choose 7 for liquidation or 13 for plan. A sole proprietor could choose 11 for a plan also.
Businesses: Choose 7 for liquidation or 11 for plan.
Illusion of Choice . . . In reality, if you make too much money you have to go into 13 as a consumer and enter a plan to pay creditors over time. If you make too little, you’re gonna be driven toward 7. There’s a “means test” driving these pathways.
Lifting the Automatic Stay
Secured creditors ONLY can file a motion to lift the automatic stay. They must show:
1) Lack of Adequate Protection (362(d)(1)) OR
2) Debtor has no equity in property (aka the collateral is underwater) AND the collateral is not necessary for an effective reorganization
What is Adequate Protection? = protection against decline in the value of the secured creditor’s collateral (361, 362). This is a fact-intensive inquiry.
4-Step Analysis for Automatic Stay Problems (ON EXAM!!!)
1) Is the stay in effect?
Usually easy to find out
2) Does anything in 362a prohibit the act that the creditor wants to take?
Automatic stay is very broad, so likely yes
3) If so, is there an exception in 362(b) (20+ of these)?
If exception found, could pursue an action in line with the exception
4) If not, are there grounds for lifting the stay under 362(d)?
This will require court action analyzing the adequate protection and equity issues
Claim Calculation
Step 1: for secured and unsecured creditors, determine pre-petition amount owed. 502b
- Pursuant to contract, include interest/fees and attorneys’ fees
- Based on jurisdiction, add post-petition attorneys’ fees
Step 2: for secured creditors, determine value of collateral, compare to 502b claim from Step 1
- If value of collateral greater»_space; over-secured (go to Step 3)
- If value of collateral lesser»_space; under-secured
NOTE: Value of collateral is where the FIGHT OCCURS!
Step 3: if over-secured, add post-petition interest/fees and attorneys’ fees (pursuant to K) until total claim equals value of collateral 506b. 506(b) entitles accrued interest + atty fees IF: 1) reasonable; 2) payment for fees/costs provided in agreement or state statute; 3) accrued value (such as interest) limited to total of collateral»_space;example: $40 debt secured by $50 collateral. Accrued interest + fees can’t exceed the $10 oversecured value of colllateral
Claims Process
Creditors file proofs of claims. The allowance process varies by chapter; generally, unless there is an objection, claims that are filed or scheduled are allowed. 502a
How is the secured creditor paid in bankruptcy?
Secured creditors look to collateral for payment.
Unsecured portion of claim is paid through bankruptcy case (if claim is bifurcated, the secured creditor is basically unsecured for that portion)
If trustee sells collateral (typically in Chp 7), secured creditor: 1) receives its claim amount from sale proceeds under 363(f) or 2) collateral is sold subject to its lien and creditor requests payment from buyer (or it forecloses on collateral).
Whether sale expenses will be deducted from secured creditors’ recovery depends on whether the creditor is over- or undersecured
If trustee abandons collateral (Chp 7), 554a, secured creditor forecloses on collateral
If debtor confirms plan (Chp 11 or 13), secured creditor is entitled to have the value of its secured claim paid over the course of the plan. Calculate using the time value of money: prime rate + risk adjustment.
Attachment Definition and Requirements
Attachment means making the security interest effective between debtor and creditor.
Section 9-203 contains attachment rules.
Requirements for a security interest to attach:
1) Value must have been given by creditor to debtor (usually this is a loan) (creditor gives value to debtor in exchange for the security interest) (executing a K counts as value)
2) The debtor must have rights in the collateral (the debtor must have the right to give a security interest to someone else)
3) The debtor must have 1) AUTHENTICATED SECURITY AGREEMENT (a record) that
DESCRIBES the collateral OR 2) the creditor has possession or control of the property
ATTACHMENT ONLY HAPPENS AFTER ALL 3 (4 if you consider description of collateral like Quimbee does) OCCUR
Collateral Descriptions in Security Agreements
These are the specific rules for describing the collateral in a security agreement (which is necessary for attachment to succeed). NOT same as for financing statements.
Rule: You need a description of collateral in the security agreement to have valid attachment. The general rule in 9-108(a) is that a description of collateral is legit if it “reasonably identifies” what you’re talking about. It’s a low standard that leaves flexibility and includes safe harbors. Those safe harbors include specific listing of UCC categories and others that make collateral “objectively determinable”. 9-108(b).
No OMNIBUS / SUPERGENERIC descriptions allowed. “All assets” is not sufficient.
No “all commercial tort claims” must specify which ones.
No “all consumer goods” must specify which ones.
9-204 allows after-acquired property and dragnet clauses
Describing After-Acquired Property
After-Acquired Property = A type of property acquired after the security agreement has already been made. Via 9-204, the security agreement can include these and still have security interests attach despite the fact they are acquired later on by the debtor.
Majority: security agreement does not need to include after-acquired property language for accounts (accounts receivable) and inventory.
For anything that ISN’T accounts receivable or inventory, you NEED language for “after acquired” property. Like for equipment and after-acquired equipment.
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Goods” (44)
Goods (44) = tangible personal property. This is a broader umbrella term including: inventory (48), farm products (34), consumer goods (23), and equipment (33)
PERFECTION METHODS:
Filing = Optional
Possession = Optional
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Inventory” (48)
Inventory (48) = the stuff you find for sale at a store. Could also be stuff that’s leased, like a car at a car dealer. Either way, whether it’s sold or leased, it’s still inventory of the car dealer because they routinely deal in that type of good, thus making it inventory for that debtor’s purposes.
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Farm Products” (34)
Farm Products (34) = Mostly crops and livestock.
Could get more granular than farm products: “only crops” or “only livestock”.
Farm product supplies includes fertilizers.
These things only count as farm products in the hands of debtor FARMERS. FARMERS ONLY
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Consumer Goods” (23)
Consumer Goods (23) = Tangible personal property for personal, family, or household uses. That’s basically every single thing you own.
Your laptop, car, clothes, shoes; all are consumer goods.
There is a federal rule that prevents you from granting a security interest over many of your consumer goods, excluding things like cars
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Equipment” (33)
Equipment (33) = Think of it as tangible personal property you use in the everyday course and scope of your business. Goods other than inventory, farm products, or consumer goods. It’s basically a catchall for stuff other than those things.
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Instruments” (47)
Instrument (47) = means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement
Example: Checks and promissory notes are both instruments.
The term does not include (i) investment property, (ii) letters of credit, (iii) writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card, or (iv) writings that evidence chattel paper.
PERFECTION METHOD:
Filing = Optional
Possession = Preferred
