Remedies for Unsecured Creditors I. Types of Creditor debtor relationships a. Bank-Debtor (usually governed by K) b. Judgment Holder-Defendant c. Driver-Other Driver (automobile liability) In order to collect, unsecured creditors must: a. Bring a lawsuit b. Get a Judgment. To collect on a judgment, you must: i. Secure a writ of execution, attachment, or garnishment c. Have the sheriff levy Limitations on Collection a. Self-Help Remedies generally forbidden b. Debtor free to move assets & secret away funds. c. Cannot seize assets transferred to third parties unless transfer done solely for the purpose of thwarting creditor’s collection d. Debtor Protection Statutes: e.g., homestead exception Security and Foreclosure I. Definitions a. Security Interest: Any lien created by contract between a debtor and creditor b. Lien: An interest in the property of another to ensure performance of an obligation Types of Liens a. Judicial: Where a lien attaches to property after a judgment from the court b. Statutory: tax or mechanic’s c. Security interests: voluntary/consensual The “Duck” Rule 9-109(a) a. We look to form over substance b. A lease is a security agreement if the lessee can own the goods for nominal or no additional consideration and the original lease term = economic life of the goods Equity of Redemption a. If there’s a security interest, the debtor has a right of redemption. In order to get rid of that right, creditor must foreclose. b. Exception: Voluntarily giving someone property in exchange for being released from their obligation. Default: governed by contract, e.g., wasting, selling, not insuring the collateral a. General Rule = freedom of contract, whatever buyer & seller agree i. Protections: Estoppel (reasonable reliance), waiver, bad faith b. Acceleration Clauses i. allows secured creditor upon debtor’s default to collect the entire amount due rather than only the outstanding payments ii. Debtor can typically cure by making past payments, until acceleration occurs. Types of Foreclosure [don’t flashcard these, know UCC process] a. Judicial Foreclosure b. Power of Sale Foreclosure (also called deed of trust) i. Not allowed in all jurisdictions; must be in security agreement ii. If debtor does not pay, trustee transfers deed to the creditor c. UCC Foreclosure through sale (personal property only) i. After default, the secured party may use self help to sell, lease, license, or otherwise dispose of the property ii. Debtor has a right to redeem until the creditor sells the property in a commercially reasonable manner, thereby foreclosing the debtor’s right to redeem. d. Deed In Lieu of Foreclosure (must be effective immediately)
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Creation of Security Interests I. Attachment a. Value given b. Debtor has rights in collateral (can’t give more than you’ve got) c. Authenticated Security Agreement i. describe collateral (no supergeneric, not by “type” unless it’s a consumer goods transaction) ii. after-acquired language NOT NEEDED for inventory & accounts iii. proceed = right arising from collateral & identifiable How to PERFECT? Characterize the collateral. a. File (9-502, 9-516, 9-520) i. Generally, MUST file on everything, unless listed below ii. Required: 1. Name of debtor, name of creditor (sufficient so long as not seriously misleading) 2. Description of collateral (can be very vague, can be supergeneric, just can’t be seriously misleading) 3. creditor & debtor’s mailing addresses 4. indication of whether debtor is individual or corporation iii. Improperly Rejected? 1. Info above only needs to be provided; doesn’t have to be correct 2. Valid as filed record except against purchaser of collateral giving value in reasonable reliance upon the absence of records in the files. iv. Improperly Accepted? 1. Effective so long as 1(a)-(b) are there 2. 9-338 exceptions = only for errors in debtor’s mailing address & status (ind. or corp.), no exception for omissions. (If it’s omitted, it isn’t incorrect, and it’s valid!) Allows filing to “win” against all other creditors except those who reasonably detrimentally relied on incorrect info. 3. Errors in name/address of creditor = completely valid unless seriously misleading b. Possess i. instruments (& possession beats filing) ii. goods iii. tangible chattel paper iv. money (CANNOT FILE, must possess) c. Automatic i. PMSI in consumer good so long as the value is in fact so used for the intended good d. Control i. electronic chattel paper ii. deposit account (CANNOT FILE, must control) Priority a. Senior interests survive foreclosure by junior parties b. Possess? Senior may generally exercise right to possess if collateral faces waste or distribution, but may not possess just to stop a foreclosure c. Lien Creditor v. Lien Creditor = First to levy wins (minority says first to deliver writ wins, to prevent lazy sheriff) d. Lien Creditor v. Secured = Secured wins IF it is secured & perfected before lien creditor levies e. Perfected Secured v. Perfected Secured = first to file or perfect wins f. Perfected Secured v. Attached Secured = perfected wins g. Attached Secured v. Attached Secured = first to attach wins h. After acquired collateral relates back to time of filing (but for PMSIs, & but for transferred collateral) i. PMSI i. non-consumer goods = so long as creditor files within 20 days, he wins over all other creditors ii. consumer goods = automatically perfected, wins over all other creditors iii. inventory = must perfect no later than when debtor gets possession AND provide advance notice to inventory lenders of intent to acquire this interest iv. proceeds = PMSI priority flows into proceeds in chattel paper, money, and instruments but NOT into accounts j. Future Advances i. Secured v. Lien = secured loses to lien where interest secures an advance made more than 45 days after lien is created UNLESS advance made without knowledge of lien. Secured & debtor may enter new security agreement in those 45 days & can TRUMP LIEN IF collateral was covered by original financing stmt ii. Secured v. Secured = The date of filing stmt is the date of the advances
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Fixtures I. 9-102(a)(41) Fixtures are goods that have become so related to particular real property that an interest in them arises under real property law. a. Only goods can become fixtures. Money is not a good. Virgin Timber is real property. Good = fixture when it’s annexed or attached to realty, adapted or applied to use of realty AND intended to be permanently attached a. UCC process, perfects as good & loses to perfection in land recording system b. Mortgage/Property Law: must indicate it covers fixtures to be recognized by UCC, otherwise dealt with in state system c. Make a “Fixture Filing” per UCC rules: filing of a financing statement covering goods that are, or are to become, fixtures and has all other requirements (see full outline). Must be filed where mortgage would be recorded. Maintaining Perfection I. II. Generally financing statement not rendered ineffective if information provided becomes seriously misleading Changes in the name of the debtor making it seriously misleading: a. effective to perfect collateral acquired before & within 4 months after the change REGARDLESS of refiling b. NOT effective for stuff after 4 months UNLESS amendment is filed within 4 months of the change c. Amendment filed AFTER 4 months = perfects new collateral acquired after date of new filing Changes Affecting Description of the Collateral a. Inventory becomes equipment, or vice versa (filed in same place, but collateral is hard to identify) = remains perfected, NO exceptions b. Titled property, e.g., car going from inventory to equipment, or a boat (filing required in different system/place) = must re-file. Changes in Debtor Location from state to state a. Individuals = creditor has 4 months to file in new state, then new stmt merges with old i. If no re-filing in 4 months, then = unperfected and is deemed to NEVER have been perfected as to a purchaser of collateral for value, but are still perfected for those 4 months against judgment & lien creditors b. Corporations = rules essentially the same as above, except grace period is 1 year instead of 4 months Proceeds: become unperfected on 21st day after security interest attaches UNLESS the filed financing statement covered the original collateral + proceeds are collateral that could be perfected by filing in same office as original + proceeds not acquired with intervening cash (or if party re-perfects within the first 20 days) a. Collateral becomes non-cash proceeds i. If falls within description of collateral already provided on stmt, no additional action needed ii. If not covered by original stmt, but could be perfected by filing in same office, then no additional action needed iii. If not covered by original stmt & cannot be perfect in same office, then must re-file b. Collateral to cash = remain perfected (incl. money, checks, & deposit accounts) c. Collateral to cash to non-cash = MUST re-file UNLESS the non-cash item is one covered by the original stmt d. Disposition = security interest remains attached ONLY IF secured party did not authorize disposition. The stmt remains effective even if secured party authorizes it. Governing Law and Relocation of Debtor or Collateral a. Perfection is through possession: law of state where collateral is located (you’ll always be perfected) b. Perfection is through filing: file in state where debtor is located. i. Registered organizations = state of registration/incorporation ii. non-registered organizations = place of business or (if multiple places of business) at chief executive office (where managerial decisions are made) iii. individuals & sole proprietors = place of principal residence (more than location, less than domicile) Buyers I. II. General rule: security interest follows the collateral Exception: a. Buyer in the ordinary course of business can assert an affirmative defense to stop a lender bank from seizing the collateral.
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