Creditor's Remedies Under State Law

Question 1

Definitions

1. Security Interest
2. Creditor
3. Debtor
4. Unsecured Creditor
5. Priority
6. Foreclosure
7. Collateral
8. Redemption

Answer 1

1. Security Interest - a security interest is a consensual encumbrance that secures an obligation’s payment or performance.
2. Creditor – A creditor is one to whom an obligor owes payment or performance of an obligation
3. Debtor – the person owing the obligation.
4. Unsecured Creditor - no collateral secures the underlying obligations.
   
   1. May be voluntary (e.g., agreement w/o collateral) or involuntary (e.g., judgment creditor)
5. Priority – the creditor with priority is paid in full before any of the other creditors get anything.
6. Foreclosure – the process by which the creditor compels application of the collateral to the obligation owing.
   
   1. only after default under terms of agreement.
7. Collateral – virtually any type of property can serve as collateral.
8. Redemption – until the moment of foreclosure sale, the debtor has the right to pay the secured debt even after default and retain ownership of the collateral.

Question 2

How do Unsecured Creditors Compel Payment?

Answer 2

1. Private Methods
   
   1. Offsetting a Debt – creditor may offset debt creditor owes to debtor for debt debtor owes to creditor.
   2. Demanding Payment – allowed, but must be done according to debt collection practices of the state.
2. Litigation - (1) sue; (2) get a judgement; (3) and force a sheriff’s or other sale of the debtor’s non-exempt property.

Question 3

Transactions Intended as Security

1. General Rule
2. Conditional Sales
3. Leases Intended as Security
4. Sale of Accounts

Answer 3

1. General Rule - a consensual interest in proeprty contingent on non-payment of a debt is a security interest, even if the documents show an absolute transfer.
2. Conditional Sales - UCC 2-401(1) - Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest.
   
   1. buyer becomes debtor and seller becomes creditor.
3. Leases Intended as Security - UCC 1-203(b)(1) –
   
   1. if no reversion of any part of economic life in car to lessor = security interest.
   2. if some reversion of any part of car’s economic life to lessor = true lease.
4. Sale of Accounts - when businesses buy accounts receivable, the buyer usually has recourse against seller for the unpaid accounts.
   
   1. recourse creates security interest since bank has obligation on the debt.

Question 4

Classifying Types of Collateral Under Article 9

Answer 4

1. Goods
   
   1. Consumer Goods – goods acquired for personal, family, or household purposes.
   2. Inventory – things that are either held out for sale or used in the process of one’s business
   3. Farm Products – things that are produced in the farming process.
   4. Equipment – default category if collateral doesn’t fit into the above categories.
2. Quasi-Tangible Property - Records
   
   1. Instruments
   2. Chattel paper
   3. documents
   4. investment property
   5. letter of credit rights
3. Intangibles – if it doesn’t fit into any of the other descriptions, we generally describe it as an intangible.
   
   1. Accounts
   2. deposit accounts
   3. commercial tort claims
   4. general intangibles (software, causes of action, patent rights)

Question 5

Rights of Creditor After Default

Answer 5

1. Right to Immediate Possession - UCC 9-609 – secured creditors have the right to take immediate possession upon default.
   
   1. may use self-help to take possession of collateral or render it unusable so long as no breach of peace.
2. Right to Disposition of Collateral - UCC 9-610(a) - after default, the secured party may sell, lease, license, or otherwise dispose of any or all of the collateral.
   
   1. must be done in a commercially reasonable manner.
   2. creditor must give prior notice of the intended sale to the debtor
   3. debtor can redeem by paying full amount of debt plus expenses before the sale
   4. sale forecloses the debtors right to redeem

Question 6

1. Order of Disposition of Proceeds After Sale of Article 9 Collateral
2. Limitations on Surplus and Deficiency

Answer 6

1. Order of Disposition of Proceeds -
   
   1. expenses related to sale (including legal fees) incurred by creditor
   2. pyaing off obligation to creditor
   3. paying off subordinate security interests (if they gave notice)
   4. then the debtor gets any equity left over.
2. Limitations on Surplus and Deficiency
   
   1. creditor liable to debtor for any surplus equity
   2. debtor liable to creidtor for any deficiency after disposition of collateral.
      
      1. Exception - if creditor buys at sale for substantially less than commercially reasonable price, deficiency calculated based on amount that would have been realized by sale to a 3d party.

Question 7

Acceptance of Collateral in Satisfaction of Payment

1. General Rule
2. Partial vs. Complete Satisfaction
3. Special Consumer Goods Rules

Answer 7

Acceptance of Collateral in Satisfaction of Payment

1. General Rule - a secured party may accept collateral in full or partial satisfaction of the obligation it secures only if:
   
   1. the debtor consents to the acceptance (see below); and
   2. the secured party does not receive, a written objection within 20 days of the date the proposal was sent from the debtor or other secured creditors.
2. Acceptance in Partial vs. Complete Satisfaction
   
   1. Consent in Partial Satisfaction - debtor can consent to partial satisfaction, other than in a consumer transaction, in a record authenticated after default.
   2. Consent in Complete Satisfaction - debtor can consent to full satisfaction:
      
      1. (1) in a record authenticated after default or
      2. (2) if the creditor sends a proposal for full satisfaction and the debtor doesn’t send a written objection within 20 days
3. Special Consumer Goods Rules
   
   1. No partial satisfaction of consumer goods
   2. consent to full satisfaction of consumer goods only allowed after repossession
      3.

Question 8

Notice Before Article 9 Sale

1. General Rule
   
   1. Exception
2. Specail Rules for Consumer Goods
3. Timeliness of Notice
4. Waiver of Notice

Answer 8

Notice Before Article 9 Sale

1. General Rule - UCC 9-611(b) – the secured party is required to send notice to the debtor and any secondary obligors (e.g., co-borrowers, guarantors, and some lienors) of the intended sale.
   
   1. Exception - no notice required if collateral is type normally sold on a recognized market not subject to negotiation (e.g., NY stock exchange)
2. Special Rules for Consumer Goods - creditor must also send notice to
   
   1. other creditors who sent the foreclosing creditor written notice of their claim; and
   2. any creditors who had a properly perfected security filing
3. Timeliness of Notice - general rule is reasonableness under the circumstances
   
   1. Safe Harbor for Non-consumer Gooods - notice sent at least 10 days before disposition is reasonable.
4. Waiver of Notice - debtor may waive right to notice by written agreement after default.