#2 - Security and Foreclosure Flashcards
Security Interest
Security interest = property right in something else contingent on nonperformance, which is usually nonpayment of debt UCC 9-109(a)
Foreclosure
cuts off debtor’s rights to pay debt and keep the collateral UCC 9-601, 9-610
Right of Redemption
debtor’s right to keep the collateral by paying off the debt. UCC 9-623
Equity of Redemption = if you pay the entire 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
Judicial Foreclosure
a process accomplished by entry of court order to foreclose on real property
Junior (lower prio) mortgages get wiped out by foreclosure. Inferior creditors get transformed into unsecured creditors if the sale proceeds don’t reach down to them through the waterfall.
Non-judicial foreclosure (power of sale / deed of trust in context of real property)
Process set by state law that does not involve courts. With the UCC, you can use the non-judicial foreclosure process in just about every state. Secured creditors prefer the non-judicial foreclosure process.
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. Basically you’re looking for an economic situation where it’s really just a sale but the parties are pretending that it’s a lease.
What is a conditional sale? What is the hidden danger of leases for personal property?
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 a conditional sale! It’s a security interest and B has ownership of the car while A only has a security interest.
If you see a lease for a few years that woulud cost the full value of the item minus a tiny bit and then an option to buy it for that tiny bit at the end, it’s basically an installment contract like that above. So the lease would be recharacterized as a secured transaction. The buyer would lose their equity if the seller repo’d it. There is more protection for buyer by making it a secured transaction rather than a lease.
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. The bank can’t hold up a deal for a future DiLoF.
