CREDITORS’ RIGHTS
Spring 2004 Professor Donnelly
Twin purposes of Bankruptcy: 1. Protect the Debtor 2. Provide a means for collecting debt (I don’t think this is right) Chapter’s 7 & 13 deal with individual debtors, although 7 is liquidation bankruptcy and also applies to corporations. It is largely a debtor protection device. Chapter 13 is an arrangement for individual debtors; pays future income. For corporate debtors, we have chapter 7 and 11, the latter being a corporate arrangement proceeding.
Liens: By contract o Article 9 security interest Deals with personal property o Mortgages (on real property) o Garnishment – called ‚attachment‛ (NY) Wages – called ‚income execution‛ (NY) Accounts Judicial Liens: o These are judgment liens (see last class) Real property Personal property Procedure: 1) docket the judgment, 2) if real property: record; if personal property, get writ of execution, a) deliver to sheriff, b) sheriff will levy on property. Priority is based on the levy in NY. o Attachment lien – called ‚judicial remedy‛ (NY) Procedure: 1) get order from court granting right, 2) serve the defendant, 3) deliver the order to the sheriff. It can mature into a judgment lien By operation of law o Mechanics Lien The mechanic keeps your car until you pay him You would have to fill out a form, and file it in the real property records o Film makers lien o Stableman’s lien o Landlord’s lien Creditors’ Remedies: Income o Garnishment Wages – called ‚income execution‛ (NY) o Wage Assignment This is by contract Property
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Judgment Lien Attachment Lien Bank account (garnishment) o Repossession (per Article 9) Judicial Replevin Self-help o Mechanic’s Lien o Mortgage Foreclosure Person of Debtor o Arrest o Imprisonment for Debt
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State Grab Law
Prejudgment Remedies Attachment (order obtained from the court on a hearing without notice) Garnishment (NY = ‚income execution‛ – ‚garnishment‛ refers to the process of attaching one’s bank account). Mechanics’ Lien Arrest Replevin. An ancient remedy (form of attachment) where one may obtain an order of seizure; (requires a hearing on notice). Usually brought for repossession of property. Article 9, part 6 also allows for self-help repossession. NY – replevin = repossession by judicial remedy (judicial act). Advertisement Sale Judgment Lien Garnishment Post-judgment Remedies
Mortgage Foreclosure
FEDERAL ANTI-GARNISHMENT ACT
Maximum = 25% of disposable earnings Floor = 30x federal minimum hourly wage o Current minimum wage = $5.15 an hour: 5.15 x 30 = $154.50 – creditors cannot reduce debtor’s disposable earnings to an amount below $154.50/week.
Disposable earnings: the part of an individual’s earnings after the deduction from those earnings of any amounts required by law to be withheld. Garnishment = any legal or equitable procedure through which the earnings of any individual are
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required to be withheld for payment of any debt. Exercises (§§301-303). Debtor: $200 (gross pay) – $40 (SS and income tax) = $160 take home o Garnishor: 25% of $200 = $40 (floor is $154.50) – Garnishor takes $5.50. Debtor: $300 (gross pay) – $60 (SS and income tax) = $240 – $60 (wage assignment (25%)) = $180 (net take-home) o Garnishor: 25% of $180 = $45.00 (floor is $154.50) – Garnishor takes $25.50 Wage assignment It’s an amount required by law to be withheld. §302(b). Not automatically a legal procedure (must become one to be enforced, though) – distinguish from legal or equitable procedures through which the earnings are required to be withheld. Creditor must give notice to Debtor, accompanied by a tear-off hearing request form. If Debtor returns the card, he gets a hearing. Mechanism for legal proceeding in statute. Exercise. Debtor: $400 (after SS & income tax) – $240 (60% - family court support order) = $160.00 Permissible? Yes, under §303(b)(1)(A) so long as Debtor is not supporting an additional child. §303(b)(2). Garnishor could get up to $5.50. Family court order (60%) is an amount required by law. In NY, family court support orders trump any garnishment (regardless of when filed). In NY (max = 10% traditionally), floor $85/week (from $35/week) – violate federal law? New York = 10% of gross pay (subject to 30x the minimum wage or 25% of disposable income). §5231(b). Thus, calculate the 10%, then figure out if it exceeds either standard.
SNIADACH: at issue was a prejudgment garnishment statute used to garnish debtor’s employer on a promissory note. The order was (1) issueable by the clerk and allowed (2) up to 50% of the debtor’s wages be garnished (3) without any opportunity to be heard (4) without the need of extraordinary circumstances. Statute unconstitutional as violative of the 14th Amendment DPC. Rule: before any taking of wages (by garnishment) there must be a pre-taking hearing with both parties represented – extraordinary circumstances excepted. Wages are a special type of property because they can drive a debtor to the wall. Impact and Interest Analysis: 25% (disposable income) vs. 10% (gross income) 1. Debtors’ Interests a. Perhaps an interest in not paying (but not totally) b. But at the same time, debtors wish to have access to future credit 2. Creditors’ Interests a. Most creditors are institutional b. Make money by lending money via complex machinery 3. Public Interests a. These interests have a vague sense of neutrality b. Three specific interests: i. Preserve cost and availability of credit
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1. If credit is hard to get, few will get it – bad for creditors and debtors. 2. The institutional creditor wants to keep bad debts to a minimum. ii. Protect productive economic units (e.g., corporations). 1. Corporations provide jobs – economy centers on small businesses. 2. A larger garnishment takes away the incentive to work. iii. Promote and protect human dignity (i.e. prevent homelessness) FUENTES v. SHEVIN: two state statutes allowed for summary seizure of goods under a writ of replevin by ordering state agents to seize a person’s possessions upon an (1) ex parte application of any person claiming a right to them and (2) posts a security bond. The statutes provided (3) no notice requirement or (4) pretaking hearing to challenge the seizure. Court extended Sniadach to all property except in extreme circumstances. Statutes violative of 14th Amendment DPC. Q: could the taking of this property drive a family to the wall? Stove – maybe. Examples (extraordinary circumstances): Collect internal revenue Meet needs of national war effort Protect against the economic disaster of a bank failure Protect the public from misbranded drugs and contaminated food MITCHELL v. W.T. GRANT: Louisiana sequestration procedure for enforcing a vendor’s lien required a writ of sequestration (1) issueable only by a judge upon an (2) affidavit of the creditor going beyond mere conclusory allegations. Additionally, the (3) debtor was entitled to immediate hearing after seizure and to (4) dissolution of the writ absent proof by the creditor of the grounds on which the writ was issued. The nature of the claim and the basis for invoking due process here was different than Sniadach because both the buyer and seller had property rights (vendor’s lien)(creditor had no rights in Sniadach’s wages) and the types of property were different between the two cases. Statute upheld as an appropriate balancing of the competing interests. NORTH GEORGIA FINISHING CO: at issue was a writ of garnishment was (1) issueable by the clerk of the court (2) on the affidavit of the creditor or his attorney (who need not have firsthand knowledge), (3) based on conclusory allegations the property at issue as a corporate bank account, with (4) no pretaking hearing to challenge the taking. Statute unconstitutional. Rule: there must be an early hearing at which the creditor establishes probable cause for the taking. The taking of wages requires a pre-taking hearing (Sniadach). Other types of takings require a prompt post-taking hearing. Only extraordinary circumstances warrant takings without a pre-taking hearing (see, Fuentes). ‚Probable cause‛ for a taking in a civil case means probability (likelihood) of success on the merits – also must show a need for the taking (e.g., a creditor needs to seize a corporations bank account before the funds disappear to Tokyo)
NEW YORK ATTACHMENT STATUTE
ARTICLE 62 (CPLR) §6201 – grounds for attachment §6202 – any debt or property against which a money judgment may be enforced is subject to attachment.
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§6210 implies a hearing on notice (TRO). §6211(a) allows for an order of attachment without notice. §6211(b) requires such an order be confirmed by P within 5 days. §6212, on motion for an order of attachment or confirming such order, P shall show: 1. A cause of action 2. P’s likelihood of success on the merits 3. Grounds for attachment 4. Amount demanded from D exceeds all counterclaims known to P §6223(a) allows for a prompt post-taking hearing
Policy: Attachment is very efficient. New York allows prejudgment takings under §6201 circumstances because it’s hard to serve D in those instances. A corporation can be served by the secretary of state. A foreign corporation requires minimum contacts under International Shoe and is harder to serve. The judge has discretion not to grant the attachment, which acts as a check to the broadly written §6201(1). §6201(3) provides that P must show evidence of fraud or D is about to defraud P. Prof. Donnelly: §6201(4) is unconstitutional because there is no need; the guy is in jail and can be served without a problem. §6201(5) is unconstitutional because it is a post-judgment provision (D has already had his due process).
RECOVERY OF CHATTEL
ARTICLE 71 (CPLR) Replevin is like attachment only it deals with chattel (property) and is used for Article 9 repossessions. Generally, a pre-taking hearing on notice is required. §7101 – an action under this article may be brought to try the right to possession of a chattel. o The need for the taking in the replevin statute is the competing property interests between the two parties (unlike the attachment statute). o In Mitchell and North Georgia Finishing Co., Court required showing of likelihood of success on the merits. §7102(4) is on point. §7102(d)(4) – prompt post-taking hearing is required within 5 days of the seizure. §7102(d)(3) provides the only time for a taking without notice: the court must find probability that the chattel will become unavailable by reason of transfer, concealment, disposal, or removal from the state or will become substantially impaired in value. §7102(d)(1) – P must show probability of success on the merits in order to get the taking on a pre-taking hearing on notice.
RIGHT TO REPOSSESSION §9-609 – after default, secured party may take possession of the collateral by judicial process or self-help so long as it doesn’t breach the peace. No DP claim because not state action. §9-610 – after default, a secured party may dispose of the collateral in its present condition in a manner deemed commercially reasonable. Substitute for a sheriff’s sale. §9-608(a)(4) – a secured party shall account to and pay a debtor for any surplus, and the obligor is
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liable for any deficiency (which there usually is). Exercises. What to do when< 1.