This action might not be possible to undo. Are you sure you want to continue?
• • Goal of Secured Credit: To facilitate lending and encourage desirable economic activity Methods: Provides creditors with coercive remedy that does not destroy too much of the value of the collateral in the process; Lets lenders know before they lend what priority in the collateral they will have against third parties in the event of default
• • Lien: an interest in the specific property of the debtor used to satisfy the debt Judicial Lien: Lien obtained with judicial process
Creditor’s Remedies Under State Law
• Unsecured Creditor: Method when not getting paid ○ (1) File suit and get a judgment for amount owed ○ (2) Draft a writ of execution ○ (3) Tell sheriff what to do – seize property, etc. (if you don’t know what debtor has, get a deposition and examine under oath; levy on property. ○ (4) Once sheriff takes possession of the debtor’s property pursuant to writ of execution, you have a judicial lien Defined: anyone owed a legal obligation that can be reduced to a $ judgment is a creditor of the owing party Debtor-Creditor Relationship: May be entered into voluntarily (loans) or involuntarily (tortfeasors judgments)
Who is an unsecured creditor?
Unsecured Creditor: Creditor whose debt is not backed up by security or collateral Judgment Creditor: Creditor who obtained court judgment to establish liability Limits on Power of Creditor: Self help seizures of property are prohibited Recovery of Debt via fraud or other illegal methods: Usually produces counterclaim for debtor, may cause them to face larceny charges or may cause debtor to incur liability for wrongful collection practices Conversion: Prohibited seizures of debt’s property will constitute tort of conversion and creditor can be sued for damages – then can only counterclaim for amount of unpaid debt File Lawsuit: obtain judgment Discovery: do discovery to ascertain assets held – sheriff cannot act without proper info If Win: obtain writ of execution from court – certifies ability to collect judgment Take writ to sheriff w/ instructions of what to seize and sheriff seizes it and conducts sale/auction. Creditor pays costs of seizure, sale and auction, then distribution (auctioneer, lawyers, etc. paid first) Debtor can challenge auction method or claim exemptions under state
How do unsecured creditors compel payment?
• • •
• • • • • •
Vitale v. Hotel California • Rule: Sheriff must follow creditor’s reasonable instructions regarding the time and manner of making the levy • Holdings: ○ Successive Levis Under One Write: Levies can be made under same. It is universal rule that further levies under one write are allowed under same write before the return day if the initial levy doesn’t satisfy the judgment ○ Reasonableness of Requested Levies: ∏ has duty not to request inordinately frequent and numerous levies ○ Amercement: By proceeding in amercement, a judgment creditor may hold a sheriff liable for failing to properly excuse against a judgment debtor • Other Remedies: Small claims courts; Garnishment (can compel employer to pay directly)
Procedural and Practical
• • Creditors can sue until debtor defaults: no legal remedy until breach JCs have obligation: to use discovery to locate assets – sheriff will only act on clear info ○ JC Can Ask Questions: about assets under threat of contempt/perjury but debtor with $10,000 in may still lie ○ If Property Seized: Turns to be that of a third party, JC may be liable for any damages caused to the third party – wrongful exercise of dominion/conversion
○ Even if JC discovers location of assets – they may be moved Assets are Mobile: Even if discovered, can be moved before sheriff gets there ○ Debtor May: Sell and disperse cash in deals; move out of state ($ judgment only enforcement in state where rendered); may continue to do business, losing and converting assets; may repay other creditors first ○ Attachment: if the debtor is fraudulently disposing of its property during the lawsuit, creditor may have right to attach immediately what the debtor still has Exemption Statutes: Prevent sheriff from seizing certain assets under writ of execution ○ Only for Individuals: Not corporations, usually for vital goods, homes, cars, % of GI, etc. ○ Only protects: against unsecured creditors ○ Both Federal and State: Protects debtor’s wages – federal statute provide that a minimum of 75% of the earnings from personal services will generally be exempt in all states; TX and PA exempt al earnings Defined: Limits on what debtor can do in resisting collection All 50 states: Have laws that allow creditors to set aside their debtor’s fraudulent transfer and recover the property transferred Two Types: ○ (1) Any transfer made with actual intent to hinder, delay or defraud any creditor -UFTA § 4(a) – Intent is key. ○ (2) Any transfer made without receiving a reasonably equivalent value in exchange for the transfer if the debtor was insolvent at the time of the transfer - UFTA § 2(a) Practically: Fraudulent transfer law is useless Enforcement: of civil judgments for money damages is often ineffective ○ Strict enforcement methods for some things like child support but not money judgments, wages or most contract breaches Criminal Remedies: Reserved for violations of rights we hold more dear than mere money obligations
• • •
• • •
Effectiveness: Law for Unsecured Debts
Problem Set 1 Problem 1.1 – Jeff loans neighbor $1000 to buy furniture. Neighbor Lisa signs an IOU. Jeff wants to take furniture. Can Jeffrey get his stuff back?. – Jeff may not simply enter Lisa’s backyard and repossess the furniture. – Self-help seizures of property are prohibited and may constitute the tort of conversion. Larceny - prosecuted Conversion – tort – an exercise of dominion over Lisa’s property inconsistent with the right of ownership – Process: Jeff must first get a judgment against Lisa. To do so, he has to prove that he loaned Lisa the money (needs to have an IOU). If he is successful in getting a judgment against Lisa, he must then get a writ of
500). prosecute both or none. How do you advise creditor/ – Try to repurchase the lobsters and return them to their owner. – Other alternatives? AK: might have to think deviously. The point of the problem is to show that unsecured creditors go down if debtor goes down. not self-help. and not Jeff. The threat of a treble damage lawsuit is often enough to end matter. They are not behind on payment to Benning. Problem 1. Lots of people end up being unsecured creditors. Small claims court is an option in a jurisdiction with a streamlined process.000 short of full debt. Remember: you want to keep your client out of jail. This is likely not worthwhile for Jeff because law firm costs are more than value of furniture. Jeff’s options are really poor. – Look to loan agreement to see her options. But if business asks for 10 million. There is a colorable case of fraud.– – execution and take this writ to the sheriff so that the Sheriff.2 – This is a story about some unsecured creditor who tricks the debtor into giving unsecured creditor valuable property. The debtor really runs the show once the money has been paid over. ○ Can go to prosecutor and say that this person is guilty of criminal fraud – go investigate.. We want to avoid the criminal charges. But because Jeff has union agreement for consultation. but the lobster value is $11. . but she has no leverage to do that ○ Might be a lot better to have security than a few extra dollars of interest . the bank is going to take security interest in car.3 – This involves a loan in business situation. Payment has been made and discovers that all kinds of things happen at day care center that makes loan precarious. may levy on Lisa’s furniture. Problem 1. If you go into bank to buy car. The creditor tricks the debtor to giving up lobster (under pretense it was going to Stephen King). she could exchange some credit for better security. She may try to negotiate for some security but she has no leverage to do it. – What can she do? ○ She could help – give some business advice. – How to avoid prosecution? You should bring prosecution for criminal charges first. So when debtor responds and brings criminal charges back at you. To be an unsecured creditor is bad situation if debtor is unable to pay. For public interests. the bank will give it for unsecured credit (maybe to get business and working relationship). the lawyer can tell Jeff how to handle the issue in small claims court (less than small amounts like 2. If she is on better relations. Benning gives $$ to day care center. But debtor could always say larceny – go investigate. The judge’s remedy was a civil remedy along with a criminal remedy. the prosecutor would probably not go forward with either charge. he could be in trouble for conversion or larceny if he does not return them and perhaps some form of criminal liability – He should identify assets of his debtor and then get a writ against him for the amount to be executed by a sheriff. If small claims court is not an option.
Principle residence: exempt if less than 40 acres. She needs to find out some unencumbered nonexempt assets! – Records: state records. The real record is at the DMV Problem 1. You may find that assets are not owned by daycare center. C. There is no incentive at all to come into depositions and show what is owned. AK: As a matter of policy. Exempt under S 815. Wisconsin S 815. How does Benning get paid? Benning is a judgment creditor. It’s a service for repeat players.000 a. except for “professional books. He has every incentive to prolong deposition. She is going get a writ of execution and go to the Sheriff. As lawyer for Benning. B. Equipment from day car center worth $10K a.“Equipment” defined as “goods used or bought for use primarily in a business…” iii. A four-year-old Toyota worth $6. House from his mother worth $35K a. – Deposition? Like Hotel California. – Motor vehicle records ○ Could get records to see if he owns the car ○ Automobile records are titled/public records and will list secured creditors in the record.18 (g) says Motor Vehicles exempt up to $1200 BUT can add the consumer goods exemption. She needs to know what assets she can levy on. personal property records. the lawyer took deposition to discover assets.500 – but daycare center is shut down i.4 – The daycare folds.” so we could .20 – up to 40K as long as he lives there! b. – These assets cannot be covered by state exemption statute and cannot be secured by another creditor. and you have default judgment against owner. tell her that it’s expensive.Problem 1. free of any liens and security interests: (Read statute .AK: could say the other categories have a definition in the definition section. Statute exempts equipment “used in the business” not to exceed $7. only “professional books used in the business” – implying that other stuff doesn’t need to be used in the business! 1. too.5 – Assume you took deposition and Knopf (debtor who borrowed 10K) moved to WI and you took his deposition.Could argue that under (b). Could argue that as a policy matter. if you don’t use it up on all consumer goods – so you have $6200 to play with there .WI exemption statute may apply to certain assets to allow debtor livelihood. He testifies that he owns the following property. – Sit visit – see all kinds of stuff lying around – Credit reporting service could get a lot of this information for you ○ Problem: Credit reporting service is not open to private people. natural instinct would be to say that “used in the business” applies to all the mentioned categories iv. ○ Problem: depositions require hiring court reporter (very pricy).) A. what’s the difference if it’s currently running or not? ii.
265. though absolute on face.18 (k) exempts depository accounts up to $1. You need to get a writ of execution from the court to order bank to pay you as creditor. S815. regardless of its form. Problem 1. will be considered to be a mortgage when the instrument is executed as security for a debt Security Provides More Protection than Unsecured Loans • • • . You can take a bathroom break during deposition and serve writ right away. it makes more sense not to make the exemption turn on whether it’s currently used in the business. If debtor withdraws money before Sheriff serves writ. Examples: – Does any person or entity owe you anything of value? – Account receivables from the daycare? – Is there anyone from daycare center who owes you any money for your services? – Have you made a prepayment for anything? – Have you brought a legal action against anybody? Do you have any legal rights against anyone? – Security deposit? Last month rent? – Refund for taxes? Insurance income? – Any pre-payments in connection with insure? – Have you paid any bills for which you might be reimbursed by insurance? – Have you been paid for all the day care equipment which you sold off? – Check from car insurance company for overpaying? Security and Foreclosure • • • Parties who wish to do so can easily construct the security relationship using the everyday conventions of sale and option to purchase: Could still enter into STs but it doesn’t protect against forfeiture Clever Parties: Can use existing legal forms in ways unanticipated by lawmakers In determining which transactions are in the nature of security and must be foreclosed: one cannot rely on documents Lien: Charge against or an interest in property to secure payment of a debt or performance of an obligation Security Interest: any lien created by contract between creditor and debtor.say that’s the only one that needs to be “used for business – but what he really thinks is that as a matter of policy. You can try to collect a lot of assets. but if you ask the question quite specifically.6 – It’s very difficult to prosecute anyone for perjury. 9 applies to any transaction. Bank account worth $2. that creates a security interest in personal property or fixtures by contract ○ A deed conveying real property.000 b. but whether it was used in the business at all. then it may become a lot easier to nail them. Don’t just look for cash assets. a right in property contingent on the non-payment of debt Intended as Security Doctrine: § 9-109(a)(1) – Art. D.92 a. creditor is SOL.
Referring to accounts receivables ○ True Lease v. the lease is a true lease NOT a security interest. or lease it for 7 and give it the option to terminate at 3 years. If Parties lease car for only 3 years. during or after foreclosure Judicial Foreclosure: Above accomplished by the entry of a court order ○ (1) Creditor holding SI or mortgage files civil action against debtor Foreclosure Procedure • • • . has precisely the same economic impact on parties as a lease for the entire economic life of the property (3) Sales of Accounts: Art. ○ Buyer becomes the owner of the goods and the seller becomes a secured creditor for the price of the goods (2) Leases Intended as SI: A sale. will be considered to be a mortgage when the instrument is executed as security for a debt. even if embodied in a mortgage • Analysis: Same doctrine also applies to personal property. Erhai Holdings: Intended as Security Doctrine • Facts: ∏ contends that a deed in lieu of foreclosure was intended to be a security and thus constitutes a mortgage • Rule: An equity of redemption cannot be waived or abandoned by any stipulated of the parties at the time. combined with an SI securing payment of the purchase price. a security interest may be found to be intended despite the name by which the parties give it • Held: A deed conveying real property. • Reasoning: Court looks beyond term of instrument to real transaction – and when that is shown to be one of a security. Same is true if the parties agree to lease car for 4 yers and lessee has an option to buy it at the end of the lease for $100. lease is an SI. although absolute on its face. Possession of Collateral: Foreclosure is ownership transfer. 9 applies to Sale of Accounts and security interest in accounts.• ○ Can create security interest if you do not mean to Right of Redemption: the debtor’s right to pay the debt and own the property free of interest Basil v. Security Interest: If you lease a car that is expected to work for 7 years. ○ § 9-102: Article 9 provisions apply to any transaction intended to create a security interest in personal property. it will give effect to the actual contract of the parties. Four Types of Transactions Intended as Security • • • • (1) Conditional Sales: Title remains in seller until buyer finishes paying off goods ○ § 2-401(1): Any retention or reservation by the seller of the title in goods shipping or delivered to the buyer is limited in effect to a reservation of the security interest. change of possession may occur before. (4) Asset Securitization: to securitize an asset is to divide ownership of its value into large numbers of identical shares (can be done with anything but usually mortgages and accounts arising out of credit cards) Foreclosure: process that transfers ownership from debtor to the purchaser at the foreclosure sale and sets off the debtor’s right to redeem the collateral Foreclose v.
. etc as security.• (2) Complaint is serves on debtor and any subordinate lien holders who usually have around 20 days to raise defenses ○ (3) Typically – as part of judgment the court will set a date for FC sale ○ (4) On that date. sheriff disburses the sale proceeds ○ Writ of Assistance: Court order allowing sheriff to remove debtor’s who refuse to leave from foreclosed property and put the purchaser in possession Deed in Lieu of Foreclosure: Voluntary transfer of the debtor’s ownership/right to redeem to the creditor (the right to redeem is transferable property). equipment. “No property otherwise exempt may be claimed as exemption…against the claim or interest of a holder of a security interest. no need to FC or go through judicial proceedings ○ If there are no other liens or interest in the collateral. the debtor can simply transfer the property to the creditor by these means ○ Simply ends the mortgage and underlying mortgage debt ○ Security Agreement Gives: creditor right to sell property in event of default ○ Each state has own procedure including cure period and ad requirements ○ In deed of trust states. secured party may sell. property is in hands of 3rd party agent who effects the sale Avoids: messy litigation unless debtor refuses to vacate but this would be a separate legal issue Art. 9 governs disposition of collateral after default: § 9-610(a) ○ Upon default.” You have a security agreement taking a car. discharges any subordinate SI or liens § 601(a): In the alternative. license the collateral. Statute says. house. discharges the SI under which disposition can be made. ○ Sale of disposition itself forecloses debtor’s right to redeem the property § 9-623(a) ○ A secured party’s disposition of collateral must be commercially reasonable § 9-610(b) § 9-617(a): Governs effect of the disposition of collateral ○ After default – a secured party’s disposition transfers to the transferee for value all debtor’s rights in collateral. the SC may foreclose by any available procedure Real Property Power of Sale Foreclosure • • UCC Foreclosure by Sale • • • Problem Set 2 Problem 2. the sheriff of clerk will conduct an auction ○ (5) Generally the FC sale must be confirmed by the court – the purchaser is then entitled to possession ○ (6) After confirmation has been entered. etc. What items can Benning reach through foreclosure of her security interest? – State foreclosure exemptions don’t apply to secured creditors who foreclose.1 – Page 35 – Wisconsin statute exempts certain property (see page 16). lease.
There are a number of transactions in which the form of a lease is actually a security interest. Therefore. ○ UCC §1-201(37): whether a transaction is a lease of security interest depends on the facts of the case. The minute Knoff enters into a security agreement. The entry of judgment does constitute a lien against most real property in almost all states. You can’t use the exemption to defeat the bank’s claim from the mortgage or no one would ever give our mortgages to buy houses. Maybe the substance of the transaction is actually a sale with a security interest. ○ One of the most litigated issues is whether the transaction constituted a lease or sale. Bonnie plans to begin leasing the cars rather than selling them. . however. You cannot get out of the foreclosure requirements by doing this. She wants to lease the cars for a per month figure giving the lessor the option to purchase at the end for $10. You cannot get around giving public notice by calling your document a lease when it is really a security interest. There. Problem 2. Policy: The WI statute specifically preserves the mortgage from the homestead exemption. Typically.2 – Here Bonnie runs a used car lot and ends up repossessing a lot of cars. because he has a security interest. a transaction that is a lease in form is treated as a security interest if the lessee cannot terminate the agreement. See if lessee has right of termination. She would provide that on default. In the second paragraph of the definition of security interest. the lease terms are exactly the same as security agreement. if so. you will not have such an easy fact situation. You can’t use the exemption to defeat the bank’s claim from the mortgage or no one would ever give out mortgages to buy houses. Is this correct? NO! – This lease is actually a sale with a right of repossession in the event of default as the equivalent of a security interest. – The second factor is that the lessee has an option of ownership for nominal consideration. then a lien in the property exists and need not be established by judicial procedure.○ ○ ○ Here the WI exemption statute does not apply because it applies only to liens that result from judicial procedure. the lien is created only once the property is actually seized. She thinks this way she can just repossess without having to foreclose under article 9. ○ The courts are concerned with the economics of the transaction. that takes us out of this paragraph. he can reach all those items. but not in respect to personal property. This would mean that the rent payment is not really rent but rather an installment plan. To ease her administrative burden. The WI statute specifically preserves the mortgage from the homestead exemption. the sheriff has to seize it for there to be a lien. she has the right to terminate the lease and the right to buy. The problem is supposed to be simple.
– Note: when you look at a contractual waiver of exemption rights. the lawyer should not give advice to an unrepresented person other than the advice to attain counsel. know this and they don’t actually have a lawyer. and you aren’t allowed to do that. ○ Can you negotiate with her if she is unrepresented if you do all these things? Yes. If the bank avoids foreclosure. you can’t force her to get counsel. you represent the bank. Sometimes. They get her to sign a paper saying she understands they do not represent her. That seems to be okay. – You. the bank saves money. . so what do you tell Mrs. – If they go through the foreclosure procedure. then you are giving her advice perhaps. but that the housing market is slow now and attempts to sell the house haven’t gone well. ○ What if she asks you to explain the drawn up deed to her. the debtor does not have any exemption rights when a security interest is concerned BY DEFINITION of the word “exempt. ○ During representation. so maybe they can negotiate. She wants to know if she can just turn the house over to the bank because they don’t want to be sued or have a foreclosure on their record.” ○ Policy reason is clear! You never have a transaction involving the security interest of the individual where all these things are exempt – (then it wouldn’t be secure!) Problem 2. ○ The bank could tell her that they do not represent her or her interests. what would a good lawyer tell them? Giving the bank a deed in lieu of foreclosure is giving the bank the excess money in the house and it is saving the bank the costs of going through the foreclosure process including the cost of delay. O’Hurley? So you’ve told her you’re not disinterested. notifying her of her default. You are now told to begin foreclosure proceedings on Linda O’Hurley. not her and that she’s free to get her own lawyer.3: The statues of the state in which you are practicing authorizes foreclosure against real property only by judicial process. You work for Enterprise State Bank who performs dozens of foreclosures at a time. O’Hurley’s would get the amount over their defaulted loan. The bank’s best option is to take the deed and maybe give up some money. What is the obligation of a lawyer for a secured creditor with respect to dealing with a debtor not represented by counsel? You have no legal or fiduciary obligation. ○ So you’d advise them to negotiate with the bank for some money for the O’Hurley’s to make it worthwhile for them. – What about the explanation issue? Any explanation may be construed as violating ABA Model Rules of Professional Conduct (see caption). but you want to be careful in dealings as to not expose your own client. A) Linda says she realizes they cannot afford the house. but states that the house is worth more than the balance owed. as the bank’s lawyer. There might be a legal problem with the fact that the bank doesn’t represent O’Hurley. that will mean not taking maximum advantage of people like the O’Hurley’s. – Suppose the O’Hurley’s have their own lawyer.
but otherwise you will record it? – This is really the equivalent of a security interest. But in some situations it’s worth thinking about. the debtor can stand by and do nothing. and the secured creditor assumes the corporation’s other debt. occurs under Article 9 so this is done much more quickly. the actual sale of collateral.5: There is another way to deal with collateral. but the debtor corporation is probably in default to others. which is expensive and time consuming procedure. the time the debtor should raise defenses. You don’t have to worry about statutory rights of redemption. creating less uncertainty.A) What if the O’Hurleys execute the deed today. Repossession of Collateral • Reasons to Possession Collateral Pending FC: ○ Debtor may have little incentive to preserve and maintain property ○ Economic value enjoyed during period ○ Potential buyers may have limited access while debtor has control Security Agreement May: provide that creditor has the right of possession immediately on default • . During the whole period. with an understanding that you will give it back to them if they make up the bank payments within 60 days. but if you acquire enough company stock to control its actions you can expedite the foreclosure process by making the company consent to the transfer. Take a security interest in both real property and personal property. The creditor gains stock of corporation and gets company to deed real estate. If deed is effective immediately. – The creditor takes control of debtor’s corporation. Problem 2. changing the debtor’s right to redeem. Judicial foreclosure takes a long time. Usually debtors think tomorrow will be better. and I will give you my book tomorrow where there is no consideration. the secured creditor is liable for the cleanup. See UCC 1-201(37) and Basile. maybe. that would not be a security interest. instead of six. Mashimoto has an idea for a deed of trust. The efforts of reform try to make the redemption period run smaller. That is. – The form most seriously considered involves trying to get state foreclosure procedures to mimic federal bankruptcy procedures. Two months. Some issues of foreclosure involve overreaching by creditors too.6: How would you change the high cost and excessive litigation involved in judicial foreclosure? The issues in foreclosure cases usually involve efforts by debtors to prolong everything. The difference is between giving you a book now (effective now as a gift).4: Mr. The foreclosure of stock. in event of default the creditor forecloses. ○ If debtor’s corporation spill toxic stuff on land. Problem 2. the statutory period. If you include a power of sale within the transaction you can avoid a judicial foreclosure. A secured creditor can deal with default situations in ways that are not most time consuming. The bank’s interest is contingent on nonpayment of the O’Hurleys. Problem 2. unlike real property.
takes advantage of it • Due Process Clause in Repo or Garnishments: ○ (1) Debtor must have hearing before property is taken OR ○ (2) Debtor is provided with certain pre-repo procedural safeguards. coupled with a prompt post-deprivation hearing before final judgment • Breach of Peace: In taking possession an SC may proceed without judicial process if it can be done without breach of peace or may proceed by action Art. jurisdiction may require that the SC follow particular procedures to obtain that possession Repossession of Personal Property • Secured Party’s Right after Default: § 9-609 – If the SC can get possession without breaching peace. if debtor resists – the SC must get court order and have sheriff take possession. Court stated that fact that deputy did not say anything was insignificant ○ Creditor returned to recalcitrant debtor with two intimidating men ○ Creditor cut chained fence and left property unprotected to repo Limits to Self-Help: Breach of Peace • • . he can take it immediately after default. owner’s alleged that repo procedures violated their due process rights • Rule: The due process clause guarantees the right to an opportunity to be heard and thus no hearing need be held unless debtor having received notice of his opportunity. 9 Right to Self-Help Repo • • • § 9-609: Provides that after a default a secured party may take possession of the collateral Generally: Courts hold the duty to refrain from breach of peace during repo a non-delegable duty making the SCs liable for the consequences of illegal repos by their contractors § 9-609(a): Creditor has option to leave equipment temporarily in the possession of the debtor but render it unusable § 9-609(b): Permits self-help without breach of peace – cannot be waived before default – § 9-607 ○ See § 9-624 Waiver for Post-Default Cases with Holding of Breach: ○ Debtor consented w/ no confrontation b/c creditor brought police officer. Carpenter: Notice • Facts: Store is repossessed – Del’s owners had no notice until repossession. May either: ○ (1) Take possession or ○ (2) Render collateral unusable With Resistance – Writ of Replevin: orders sheriff to take possession of property and give it to the ∏ ○ (1) SC Files a civil action and show that he is likely to prevail in it at hearing ○ (2) Contingent upon creditor posting a bond in case debtor ultimately prevails • Del’s Big Saver v.○ Whether enforced or not depends on circumstances – even if SC obtains the right to possession from a provision.
CO Creditor Union: Trespass • Facts: Creditors repo cars by trespass on secluded area belonging to third party.. Bank v. • Rule: § 9-404(a) – gives the debtor the same defenses it had against the debtor against the creditor after it received notice of assignment .m. repossessor took car. the entry was onto a secluded ranch yard of an isolated ranch where the vehicles sought were not even visible from a public place. Debtor who received noticed to pay creditor but paid debtor instead – an account debtor was required to pay SC sum that debtor owed creditor. creditors allow debtor to collect account but must apply portion to loans ○ Account debtors directly pay creditor ○ Sometimes account debtors must deposit payments in PO box of creditor § 9-607: Creditor who knows identity of ARs can send them written notices to pay the SC directly § 9-406(a): Account debtor who received such a notice can discharge its obligation ONLY by paying a secured party – forces the account debtors to pay creditors once they receive notice that they are no longer supposed to pay his debtor as they had ben Marine Nat. Account debtor should have had relief from the debtor but here the debtor was out of business and account debtor was forced to pay debt twice. Also. Debtor did not know car was being taken until repo safely departed with it ○ Locksmith changes locks on door to repo collateral ○ Repo of rigs due to fraudulent misrepresentation but no threat of violence ○ Creditor allowed access to debtor facilities by friend and peacefully repo’d Salisbury Livestock v. Airco: Account Debtors • Facts: Creditor sued Acct. entry onto 3rd-party residential premises could trigger a breach of the peace • Rule: A trespass breaches the peace only if certain types of premises are invaded or immediate violence is likely • Held: Jury should decide whether this is a breach or not • Reasoning: Breach depends on (1) Potential for imminent violence and (2) Nature of premises intruded on ○ Trespass is not auto breach – depends on circumstances ○ Violence or potential for is not necessarily required for breach Self-Help Against Accounts (Receivables) • • • Generally: Debtors often borrow against AR as collateral. Privacy expectations of rural residents are sufficiently different from those of urban dwellers to warrant a jury trial. 30 days later.• Cases Holding NO Breach ○ Creditor stealthily took back truck at 2 a. frightening debtor ○ Repo agents stood b/w debtor & car while they retrieved personal items ○ Repo despite threat of violence from debtor.
• Reasoning: AR may be hard to collect if AR debtor realizes that debtor is headed out of business ○ May be hard to manufacturer to sue them on an unpaid account ○ Bank financing the manufacturer may not have the info necessary to prove account obligation ○ Result – accounts can be expenses or may become completely uncollectible General Rule: Debtor remains owner of the property and is right to repossession of it until the court forecloses it and the sale is held. J cannot just go take the lawn furniture (if unsecured creditor). it is like appointing a receiver. – – Problem 3. leave the minute there is any sign of confrontation. see Williams and Rain-water. it makes it easier. He may find himself in front of criminal trial. . and some courts are reluctant to give effect to it Right to Possession Pending FC: Real Property • • • • Problem Set 3 Problem 3. Ford Motor Credit Co. functional equivalent of taking possession. The danger of confrontation is less at night. called in for original mortgage docs (used to preserve value) Acceleration: Right of mortgagor to accelerate payments if debtor defaults Assignment of Rents: Like receiver. says you can go back even if there was threat of breaking the peace the first time.2: Collection department and repossession policy. There are often good business reasons for not pushing ahead.1: J lends money to N. What are general guidelines for repo people. maybe interest will not be served by taking furniture. But its also true that lenders lose more by trying to help debtor through period of financial troubles. J probably wants to sneak onto the property and take furniture. Suppose the debtor comes out and says what are you doing and the debtor says don’t do that. do not use force while attempting to repossess. No matter what the circumstances say avoid confrontation. Looking at cases. you don’t have to leave so long as they don’t attempt to interfere or order you off the property you don’t need to leave. He can self-help repossess if he does not breach the peace. Sometimes if you put a provision in the security agreement that says you have the right to enter the debtor’s premises. mortgagees never become entitled to possession of mortgaged real property in their capacity as mortgagees – purchaser at sale is entitled to dispossess debtor but may have to sue for eviction Receiver: Officer of court with FD to all with an interest in the property can be requested by either party – rarely appointed. – When N does not pay. The N may play load music at night. Unless they order you to leave. Can you come back later once a confrontation has occurred? Wade v. The picture changes if J is secured creditor. The debtor has less possibility of doing things that would increase chance of violations. In long run. entitles mortgagee to rent from property as additional security in case of default ○ Because collecting rents from mortgaged property that has been rented to third parties.
then don’t repo.4: If both the debtor and creditor have the best legal advice regarding self-help repossession follow it carefully. it creates a business for people looking for ways to take the property of poor people without getting caught. Problem 3. Repossession people have their biggest clientele. Repo usually wins only against stupid debtors. If there is potential for immediate violence. too many people would get hurt. C) There is a guard.2 of the ABA Model Rules of Professional Conduct. What if you say you have a court order but you are lying? Cases differ. too --. Commercial property repossession is much rarer. You can always come back later. What about the ethics rules about professional misconduct? A lawyer may discuss the legal consequences of proposed course of conduct. If both get good legal advice the debtor will likely prevail because self-help just isn’t going to work against a wellinformed debtor. But the threshold is objection +. taking possession. The site is a little more secure. the repo people can still do it. But people could get hurt the other way. D) A right granting Maretka the right to trespass when making repossessions. This would help make it easier to repossess without Problem 3. you still cannot consent to the breacher of the peace. At the same time. There is a greater possibility for violence when you are mistaken for a thief. B) Suppose there is a fence but no guard. Question really is – if the secured creditor and the debtor could give the best advice possible on resisting repossession. rendering equipment unusable. then do it peacefully.even with the provision authorizing consent. Its probably ok. Suppose you say that the debtor says it is okay to enter to the guard. The debtor is always going to win if both sides play it smart. who wins? The debtor is always going to win if both sides play it smart.3: What advice can we give the debtor to prevent repossession? Article 9-609. Repo usually wins only against stupid debtors. The case law seems to favor when the people do it at night. who could give the best argument possible? Debtor -. . People who will not confront repossessor are those who: a) are dumb and don’t know what’s going on b) don’t know their rights (poor/uneducated/etc. If all the people are doing is objecting. If no one will start conflict or confront repo.A) Assume no guard and no fence. you just can’t encourage him or conduct in it yourself.) The idea of forcing people through the judicial system like that puts a burden on the judicial system. See rule 1. consumers mostly. You could discuss this with the client. a secured creditor may proceed without judicial process if it proceeds without a breach of the peace.showing up in a secluded ranch in the middle of the night might well lead to someone getting hurt.
The bank takes a security interest in the accounts owned by the dealer. or the buyer. It needs financing and uses it’s A/R to receive a loan from First Bank. it requires the dealer to submit copies of all invoices. Ponzi scheme (Bernie Madoff . THEN you can compare the checks received. Deare has requested that Firstbank’s interest in the accounts not be made known to the account debtors “because it might make them nervous. OPM needed a lot of money to buy computers. The Dealer borrows money from the bank. to invoices that are sent BUT that is still not perfect because the dealer could be pulling an OPM (Other People’s Money haha ) on you by submitting forged checks. committed enormous fraud. which is pretty good.5: Deare has a bunch of A/R from its customers. Had to raise capital and didn’t have enough flowing in to raise it. the dealer is supposed to apply those payments immediately to his bank obligations. The business in this transaction is called the “account debtor. you’re just spending their money and paying out dividends from other people's money) – Problem 3. One factor is that you really want to make some assessment of what type of person you’re dealing with and the only way to do that is if you’re in contact with them. but you don’t really have a business. – – – – is . So. etc). Then. since was in the computer leasing business. giving the bank a security interest in the account. – – This is the basic transaction. 2 ways of policing: 1 – Making sure that the transaction against which bank is making the loan genuine 2 – Making sure that the money that flows from the business to the dealer is applied to the indebtedness of the dealer to the bank – Risks of this arrangement: ○ First Bank not being able to talk to customer limits its ability to find out if customer will pay them or if the equipment is a good product (defenses. Businesses raise money this way all the time! Dealer always needs money so has to borrow money from the bank 1980’ s – Dealer. deposited into the accounts. Only way to check that is to have copies of the sales invoices and check with the buyers. You have a security interest in A/R. What you can do: As payments are made by the business from the dealer.” What are the risks of this arrangement? How might Deare cheat you? Is there any way you could discover this cheating without contacting Deare’s customers? – – You’re taking a security interest in what could be liquidated assets! This isn’t money that gets paid over by dealer every month. OPM (Other People’s Money). they forged a whole bunch of pieces to a 3rd party and got the money to finance their business.Basic Transaction: Dealer sells property – computers – to a big business and the business owes the dealer $100K. You can require the dealer to establish an account with the bank in which it deposits the proceeds of the payments to you.” The bank will be either the secured party.when you have all these people invest. But one of things that could happen when the dealer goes bust is that suddenly the businesses don’t deal with someone they know – they’re dealing with a bank who they don’t do regular business with.
○ That is the A/R. Is it accurate to say that Bank has security interest in farm equipment when in the hands of the customers. It is a lot easier to talk about customers if we know who they are. and four months ago Firstbank notified the account debtors to pay it directly. This is why Bank needs to know something about customers of Deare. But Deare has something of value. The stream of payments is one thing. Problem 3. This is a much more complex transaction. That is more typical. claims that it paid Deare in full last month and refuses to pay Firstbank. Between Deare and Bank. the money will be in there. but typically what happens in that situation. how creditworthy they are. and each level involves an extra layer of defense. foreclose on Deare. A) Horne’s Feed and Seed. so have customers send checks directly and compare against Deare’s deposits. the collateral has already been spent. It is thinking about the farm equipment. Only way a business can discharge its obligation is by paying the bank. This stream of payments accounts for the figures heavily. it wants a security interest in the underlying collateral. what can Bank foreclose? ○ You cannot get at the farm equipment because the Banks interest is subject to non-payment by customers. a security interest in the farm machinery. but not with farm equipment and cars. It is not useful to have security interest in the collateral and when you need it.Bank to Dear to Customers. Does the person who owes the debtor money have to pay twice? They were told four months ago to pay the creditor. but the customers of Deare are not in default of Deare.○ ○ ○ Deare may cheat. is that the dealer is bust and the business has to pay twice. the paid the debtor one month ago. The business can go back against the dealer and get his money back. they own all the sticks making up the property interest. You want to make sure that if Deare defaults. Deare would assign to bank an A/R + a security interest in the farm machinery (stock in trade of retail consumers). You want a security interest to back the A/R’s. Doing an audit is expensive. ○ But secondly. There are situations that bank finance transactions backed only by A/R. It is highly liquid and available form of return. Firstbank is back. one of Deare’s account debtors. If Deare is in default. and steps into Deare’s shoes. and it is the secured creditor. There has to be notification to the business. Bank can go against Deare.6: A year after the proceeding problem. – – – What is Bank’s security? There are two kinds: it has the stream of payments made by customer to Deare. . If it pays the dealer instead. The person who owes the creditor must then pay twice. Deare ultimately defaulted on the loan. If Deare is in default. We want to think about this 3 party transaction to realize that typically we have 2 loans. then it may have to pay twice because the bank can collect.
If you repossess and there is a defense. If you have power of sale or transfer.000 in equipment. then it won’t be immediate.8: What do you do by way of going ahead trying to get possession when debtor claims a defense? Don’t go ahead. there is the risk of conversion. but must pay the creditor. If the secured creditor has security in the collateral. you can always find some reason for delay that sounds more in tune with public good. you may need them in the future --. imposes an obligation on the client to pay a party with whom it has never dealt. then they both have the same leverage.000. the debtor cannot continue paying the other debtor. it is to keep the work going and keep paying the employees. The account creditor may discharge its obligation by paying the assignee and may not discharge its obligation by paying the assignor. 9-607(a) gives the creditor the debtor’s enforcement rights as against his debtors. d) With any unsecured creditors. looking at the rule of professional conduct. You could instead go through a judicial foreclosure proceeding where the debtor must go through defenses and litigate them if they have any (you don’t have to go through the sheriff and get a writ of . Problem 3. The secured party simply by telling the client you have to pay us. Problem 3.a.if he really needs the inventory. it cuts off future business. those go quickly. has refused to pay claiming that they received $42. 9-406(a) says that once notified. the delay isn’t just for delay itself. BUT bear in mind that unsecured creditors can’t do any self-help repossession so don’t have much leverage. You want to know whether they have to go through judicial foreclosure or not. Wilson’s Farming Goods. and they can turn off the lights. What can Firstbank collect from Wilson’s? 9404(a) gives the debtor the same defenses it had prior to receiving notification. c) The utility people have lots of leverage. but it will probably just take a few months. Different foreclosure rules mean different leverage for debtors/creditors. b) Loan is secured by trade fixtures and equipment.7: a) Bank has mortgage on business premises. You probably want to deal with the utility people first. It’s expensive to foreclose. Depends on what kind of foreclosure process we’ve got judicial foreclosures take a long time. Citizens repossess the trade fixtures and equipment. This is not illegal. One solution would be to have a interpleader to cut this off. they would probably hold off. B) Another account debtor. If we do not have a sale. they have warranty claims amounting to $19. On the other hand it is very hard to tell where to draw the line. You are trying to advise your client who to pay first when he is having cash flow problems.
An article turned up in the newspaper and circulated among commercial law teachers. with the deed to be delivered only after installment has been made Typically Sale Must be Held • • Strict Foreclosure • • . However. There is no provision that allows disabling of consumer goods. 9-609a2 Problem 3. it isn’t worth much as she claims. If there is a mistake and the person has paid then there is a conversion for sure. the public sale must still be held in many states Auctions: ○ If the auction fetches higher value than debt – the debt is repaid and excess equity remitted to debtor ○ If the auction fetches lower value than debt – debtor can still be liable for deficiency if the creditor petitions for a Judgment of Deficiency Defined: Assets are not sold. a classification that does not relate to consumer goods. The disabling rules allow a creditor in event of default to disable equipment. property held in satisfaction of debt Contract for Deed or Installment Land Contract: Most strict FCs ○ A contract for the sale of real property that provides for the payment purchase price in installments over many years. Request statements from American Financial Corporation … but you could get a bogus pdf attachment. 1-202e (formerly 1-201(26). Real Estate Judicial Sale and Deficiency • Basics: When there is a FC by a secured creditor. You see the last 4 digits of your MasterCard account number in the e-mail.10: As you were cleaning the sludge from your spam filter. subsequent liens are gone Generally: Even if mortgage specifically provides for the SC to become the owner of the collateral in the event of default and FC.replevin).9: Give weekly code to start car. It is unclear whether this is ok. 9-201. then she has no defense. You could also be in trouble if there is a malfunction and someone is hurt. It’s a question of how we will interpret the default provisions. Don’t do it If Evans turns out to have a good defense. Then what? You probably want to get to MasterCard and ask them if they assigned it … but they’re in big financial trouble and probably won’t get back to you. no code. you see an instruction to pay your MasterCard bill to American Financial Corp. If not up to date. there will be liability. The sale is subject to all prior liens. meaning the purchaser buys the property with all the prior liens still attached to the property. People are split. there may be prior liens and there may be subsequent liens on the property. Sensible solution is to go through a foreclosure to litigate whatever defenses. 9-602. a) What do you do next? UCC 9-406a and c. but there are some risks to doing that Problem 3. See UCC 9-102(a)(33). Could levy the car. if it is valuable. and cannot drive the car. The debtor will have some problems with suing for conversion because if it’s a lemon.
US Bank of IL: Superior lien existed on property. not often year and usually only for sales of real estate with relatively small values ○ Defined: Usually via auctions on certain days of the month. seller must FC through courts Policy: Strict FC forfeits a substantial equity that a buyer has built up over several years. Kant: environmental liabilities also do not nullify sale Rights to Redeem: majority of states – the debtor has a right to redeem collateral from buyer after the sale (6 months to 3 years after) by paying the purchaser the amount the purchaser paid at the sale ○ Freely transferable – debtor with right can sell this to others to exercise it ○ Debtor remains in possession until right expires Inadequate Sale Price: Debtor can bring suit to set aside for price. how bidder ID themselves. but will likely fail. lawyer denied such lien and purchaser bought property – no detrimental reliance complaint was allowed because of caveat emptor (did not check the title) unless there is fraud.• If the purchaser doesn’t make timely payments. high bidder who doesn’t perform may forfeit deposit and be liable for damages Dictated by State Statute: ○ Auction time and place ○ Post auction review and confirmation ○ Distribution ○ Right to Redeem: Debtor has right to redeem pre-sale by paying full mortgage amount plus interest and attorney’s fees. misrepresentation or mistake of fact ○ Horicon v. generally bad prices are due to: ○ Poor advertising ○ Difficulty or impossibility of inspection ○ Title and Condition (Caveat Emptor) ○ Hostile Situation ○ Buyer’s Statutory Right to Redeem Foreclosure Sale Procedure • • • • • • Problems with Foreclosure Sales • .) Creditor Typically Highest Bidder: Balance of purchase price must be paid within few hours or days and if high bidder doesn’t make good on bid – property may be sold to 2nd highest or may be a new sale. cut off at time of sale Title and Condition: Caveat Emptor rule applies – buyers take subject to any defects in title that they could have discovered through a search of the public records or an inspection of the property ○ Marino v. nearly always sales are conducted by public official (sheriff or clerk) Court That Orders FC Sale: may have discretion to determine some aspects of the manner in which the sale is held (ads. etc.
etc. (4) lack disadvantages that 3rd parties have like right to inspect. The bank wants to know how much it should bid at the sale. the bank will not be able to obtain a judgment for any deficiency remaining after the sale. Bid either way just in case the junior creditor gets the fall? If the value of the property ends up being more than what is owed by the debtor. C defaults.Armstrong v. (3) if outbid.232. Csurrilla: Sales Prices • Facts: A sells C gas station for $230K. Under the law of the state. AK says bid 530 because there’s no reason not to – if they can’t get a deficiency there’s no reason not bid the full amount. Is it worth more than that? Maybe bid up to have the other match you. Redemption is another issue.1: Bank has a judicial foreclosure sale. for what amount should they buy the property? They should bid the full amount of their debt.231. $53. C) A third party bids $44. it will collect the whole of its secured debt otherwise it has the property to resell for profit. If they can get a deficiency. Is it a bona fide bid? It may indicate that the market value is more than you thought it was. Problem 4.000 get the place appraised.000. then he could end up getting the windfall (more than what he is owed). should the bank go higher? You should bid nothing and let them win.232. • • Problem Set 4 A) The bank is the only bidder present at the sale. The bank estimates that the house is worth $40-45. you may have to do it all over . (2) minimizes likelihood debtor will exercise right to redeem. Think about who the third party bidder is. If that bid is not bona fide. A buys it for $90K and court recognized that the debtor’s property was sold for less than its FMV but also recognized that this is what generally happens in FC sales • Rule: When an inadequate prices does not fall into the shock the conscience range (25% plus or minus 15%) it may still be so inadequate (if less than 2/3 of the appraisal value) as to call for judicial invalidation of the sale if the circumstances leading to unfairness are present • Two Circumstances to Invalidate Low Repurchase: ○ (1) Price shocks the conscience ○ (2) Circumstances are unconscionable • Burden: Debtor faces heavy burden in convincing a court that an FC sale price is inadequate Anti-Deficiency Statutes • Three Types: ○ (1) Prevent court from granting deficiency judgments in certain circumstances (to react to fact FC sales rarely yield FMV) ○ (2) Grant court discretion to grant deficiency judgments ○ (3) Limit amount of the deficiency to be granted Most Common: Credits the debtor for the FMV of the property even if the property brings a lower price at the FC sale Credit Bid: When the creditor bids on the property at an FC sale for up to the amount of the debt ○ Incentives for Creditors to Bid Highly: (1) minimizes chances sale will be set aside for price. The balance owing on the mortgage is $53. then there’s a reason to bid the 400. B) A third party bids $531.
When you go to the realtor.She should sell the house. Maybe the bank would split the equity. so Sallie should file bankruptcy and if the brother owns the house. She can stir things up a bit. She can go into bankruptcy and get rid of the deficiency and gets to live in the house because of the homestead exemption. What about the deficiency.000 to 45. What if First City Bids its debt of 53.000 when the house has a market value of 40. However. which Sallie would be happy to do. What happens if he pays off the mortgage? If there are any junior liens. Especially true if someone like Sallie has an equity in the house.000. Sallie wouldn’t get a deficiency judgment against her. . If first savings bids 20. my sale should be confirmed at 20. Why .000: Her danger is that she cannot count on the bank to bid that amount. she can try to sell the house herself.000. so that’s a positive thing.000. So that is what Sally would want to do. In many cases she can redeem at the FMV and get the house back. Maybe the bidding price would put her in bankruptcy. C) Sallie’s brother deals in real estate and has the ability to buy the house.2: Give advice to a defaulting debtor who owes $53. He is willing to do so and allow Sallie to keep living in it.000: She has equity of 17 grand.000? I think you would not bid because you’d be paying in excess of the houses’ FMV. She should let them buy and then redeem at 44. what should Sally do then. Maybe it would be better to look for a bidder to give closer to $70. A) FMV between $40-45. they survive.000 because that is FMV.000 on mortgage. If the potential buyer knows this is a distress sale. you don’t want to explain the desperate situation.000. Maybe she can raise money on a second mortgage. It is not a slam-dunk answer. then Sallie gets to stay in it.again. Commercial is going to have to response by figuring it out. If she wants the full equity. The court would then have to decide what that was. So suppose first savings bids 20. Suppose there are no junior liens – who owns the house if he pays off the mortgage? Sallie owns it and if she has any other creditors. she cannot count on the bank to bid this amount. maybe she could redeem at 20. any responsible buyer would do a title search. which would reveal the judgment of foreclosure. Problem 4. She probably won’t want to mention the foreclosure sale because the prospective buyer will think he can get the house at a cheaper price. Brother could exercise Sallie’s right of redemption. If he is the owner of the house. B) FMV $700. then you are in a problem of interpretation on FMV that gets credited. then that buyer may offer less than FMV. she still has that problem so long as first savings goes in and gets a deficiency judgment. She should look out for potential bidders. How does that change your answer. Sallie can live in it and her creditors cannot go after the house. Foreclosing mortgagee would be able to scoop up that equity as a windfall for itself. or the FMV What if First Savings bought at 400K and gets s deficiency of 90K? Bank can still get a deficiency if Sallie redeems. The creditor can ask for a deficiency. Depending on the jurisdiction would either be 530 (the amount of debt). then they take it off the house. She could assign her right of redemption to her brother in law who can buy the house and she can continue to live in it. so it does not matter.000.
It’s really hard to know what to do. If house is worth 70. But unless the home owner is cooperative there are lots of things you won’t find out.giving property to second highest bidder if highest bidder unable to . What to bid? . A secured lender buying at sale may get a court order that allows it to get the house tested. – You’d want to know the condition of the house. and 25 million. But if there is no cash. Assume the house is worth 70.000 in FL where there is no statutory right of redemption. A statute designed to protect creditors. The mystery bidder turns up and bids 20 million. If brother buys at auction brother gets title. if brother pays off mortgage sally keeps title to house. Problem 4. At that point.In theory bid low and go after guarantors for deficiency. there is a possibility here.000 and at that point suppose the brother says why don’t I just pay them off. The house may have serious problems. What do you want to know about the house? Is it worth my time to get interested in this house? AK: If house value is less than mortgage debt. See 9-617(a). They’ll be happy to have their judgment paid off. But this strategy invites litigation. but you won’t. before the foreclosure sale takes place. As Sally’s lawyer what do you say? What will be the difference in the title to the house situation in the two scenarios. she may be able to purchase a right of redemption. – You can go to the various lien recording places and find everything (title search). If she thinks the bank got it too cheaply. Maybe the mystery bidder is a shell corporation with no assets. The mortgage is 20 million and FMV is 18. All junior liens end at foreclosure. then you have to start all over again with another sale process. If house value is greater than mortgage debt. If you want to buy and pay off mortgage you buy subject to any other liens because it never got to foreclosure. You can let them get it.000 and know first savings knows it is worth 70. What if there are three bidders. Problem 4. – Very chancy to buy at a foreclosure sale. If first savings stops at 53.4: American Insurance Company is creditor and debtor defaulted on loan. But why aren’t the wealthy guarantors at the sale. Maybe he is in there to make sure that the guarantors are off the hook. – You’d want to know about the redemption statutes or – if there were other liens on the house because if you buy and there are other liens on the house you’re stuck with them.3: You are the buyer and see a house in foreclosure. . they figure first savings is going to bid 53.5. Why might Sally be better off without title? She could have other creditors.doesn’t the brother in law pay of the mortgage before the sale and let Sally repay. 12. You’ll need a lot of information. so also depends on whether Sallie will be willing to cooperate. it’s a waste of time to get into this because First Bank will bid up to its debt in a foreclosure sale. The more the sheriff talks. the more he is exposed to liability. what is the downside of doing that. The foreclosure sale discharges all liens subordinate to the foreclosing secured creditor. then you would be able to buy.000. because bank will credit bid full amount. Four wealthy people guarantee the loan. all senior liens survive.000 what do we do? We’d bid higher than that because bank just wants its money paid back they don’t really want to try to resell the house and the like. The Ins Co was going to bid 500. What happens turns up in b and c. – You don’t assume anything about the condition of the house. You want the value of the house to be more than mortgage. The Ins company has to make a judgment about the mystery bidder in a hurry.
You hope that you’ll be able to collect 6 million (the difference). building may depreciate while litigation continues. then there is a big delay and the mortgagee will lose a lot of money.so a nominal consideration is a big risk. Marshak. Big game of chicken with regard to how high the guarantor and guarantee should go. then you have definitely lost the 6 million. If you bid higher. If you just bid a nominal bid. then our bid fixes the value and the guarantors are off the hook. must sell to 2nd highest bidder. For what amount should they buy the property? AK: The danger is that you’re just fighting an attack on the foreclosure sale for inadequate consideration. Maybe they saw in our foreclosure proceedings that we had set ourselves up for subsequent litigation that they could use as a way of settling their guaranteed obligations at a smaller amount.5 million. you don’t know if you’ll be able to collect from the guarantors or not. If it is a ploy to get the mortgagee to bid a little bit more.5 million. You end up at Square One --.5 million. if high bidder at public sale fails to purchase property.complete sale. Maybe the mystery bidders are somehow the alter-ego of the guarantor. so maybe you should err on the side of not bidding higher. Alternative: How about trying to upset the sale for inadequate consideration on the facts of this case? Or. It is hard to figure out what to do – if they don’t pay up. b) Raises a really difficult problem for a mortgagee – what happens if a mystery bidder bids $20 million? Mortgagee says great – mystery bidder pays up and we get our full mortgage BUT what if there were some kind of ploy going on? Our client is afraid of mystery bidder because if mystery bidder doesn’t pay. The point is that a benign statute that had aimed to help creditors by withholding the sale has the potential to be used to hurt the creditor. if you could prove collusion.5: The bank is approached by a shopping center developer.1 million. . a) American is the only bidder at the sale. and one bids $12 million and the 2nd immediately bids $25 million. then it’s a possibility. Also. Problem 4. Discuss in text re: Mexico case. AK: Q to ask is why didn’t guarantors show up and bid at the sale? If they showed up. AK: The problem from the bank’s perspective is that it has to ask how does Marsha know what to bid? Suppose he wins the property and it worth less than 2. In the real case. The developer thinks the value of the shopping center is $5. the mortgagee was spooked and it did bid higher. you’re asking for trouble and delay. What should you do? AK: At the point when you have to bid. c) Under the law of your state. wouldn’t have been stuck with a price – could guarantee. which tells you various percentages court finds too low. then you might have a chance. the mortgagee will bid up to the loan so that you won’t get it.5 million standby commitment to enable her to bid on a shopping center that is to be sold at a judicial foreclosure sale. What do you want to know? What is the outstanding balance on the loan being foreclosed? If it is more than 2. If cannot recover 8 million from guarantors you can always claim conspiracy.might be used to creditors disadvantage. Does this change your initial bidding strategy? What if the 2 are strangers at your sale. then house could depreciate. If the outstanding balance of the loan is less than 2. who would like a $2.
What can she go wrong if she wins the bid? There could be a statutory right of redemption. then you start to wonder why it is in default – why is the shopping center owner unable to make enough money to pay off a smaller mortgage than Marshak is contemplating? The message of this problem is that if Marshak is an insider. Marshak might have information if she is an insider. Concerned with lack of information. not public official. Reason the debt is not being serviced. we’ve assumed that the mortgage balance is below the value of the shopping center so why is the debtor unable to turn enough of the profit to pay the mortgagee.5 million and it is still in default. If the loan balance is less than 2.5 million. if collateral is consumer goods. Make the mortgagor say that if the property is redeemed the debt will be paid out of the redemption price. that is a warning signal. 9-620 – The debtor has the right to a sale of the collateral after default regardless of the original contractual language (sale is essential part of the FC process) Strict FC. Article 9 Sale and Deficiency • • Sales: Under Art. can consent only after repo. waiver to sale is valid only in writing) § 9620(e)(1) and (2) § 9-610 Sale of Collateral: SC conducts the sale. then why won’t the mortgagee of the shopping center put a bid in the property and then arrange to sell it. then it will be able to get the information needed to make a judgment. He has to know what the outstanding balance is on the loan – if it is more than 2. 9 Sale and Deficiency Basics • • • • • . This is a situation where you are more likely to make a loan to an insider than an outsider. if in fact the property is worth more the current owner might scare up enough cash with a partner to make it worthwhile to redeem. then Marshak will know more about the condition of the shopping center and its income potential. The big question is.§ 9-620: Debtor can consent to a secured party retaining the collateral in full or partial satisfaction of the debt ○ Consent: the absence of objection within 20 days of notification of intent to retain the collateral (oral is not sufficient) – § 9-620(c)(2) ○ Conditions for Rights to Consent: § 9-620(c) – No objections from other lien holders. This is highly unusual in commercial sales. 9 serve essentially same purpose as judicial sales – determine value of collateral and convert value into cash Like Real Property FCs: Requirement that collateral be offered for sale as part of the personal property FC process cannot be waived or varied in the initial lending contract § 9-602(7) § 9-602(10).Maybe Marshak won’t be able to pay. Must be commercially reasonable – get a good price ○ § 9-611 Notice: the SC must send debtor notice of the sale § 9-623 Right of Redemption: Debtor must pay entirety of debt as well as creditor’s reasonably expenses and attorney’s fees ○ NO right of redemption after sale Debtor’s Defenses: Art. Suppose you go ahead and lend her the money. for consumer goods only – less than 60% has been paid (if 60% or more has been paid.
§ 924(b) Strict FC is not allowed if paid over 60% of cash price of CG on credit or 60% of loan against other consumer goods § 9-610 governs the procedure for sale Different with Real Estate: SC (not public official) conducts sale/distribution with broad latitude to determine method and timing of sale Limits: Must be commercial reasonably § 9-610(b) ○ §9-627(a) What is reasonable: (1) usual manner. or larger-than-appropriate deficiency judgment) ○ Good Faith Purchaser: can buy with confidence that it will not lose bargain because sale is set aside § 9-617 Sale Procedure Under Art. 9 • • • • . deficiency judgment will be limited to what it would have been had the sale been reasonable § 9-610(b) Improper Notice: Every aspect must be commercially reasonable – a method that reasonable owners of that particular type of property would use when their own money is at stake Acceptance of Collateral: Strict FC § 9-620 • • • Acceptance: similar to acceptance of deed in lieu of FC under real estate law Strict FC Can Occur: When debtor consent to the creditor retaining collateral in full or partial satisfaction of the debt after default Consent: Debtor must give consent to creditor to accept collateral and in most cases it is not real only implied ○ § 9620(c)(2) implies consent if the secured party sends the debtor a proposal for retention of the collateral in full satisfaction of the debt and does not receive a notification of objection to the proposal within 20 days. if delay is unreasonable.○ ○ ○ § 9-610(a) Failure to Sell Collateral – SC may sell collateral after default with narrow consumer goods § 9-620(f) exception § 9-626(a) No fixed time within which sale must occur while in creditor’s possession the collateral may decline in value. An oral objection is insufficient ○ Right to Consent Subject to 4 Conditions: § 9-620(a)(2) No objection from lien holders (g) Partial satisfaction not permitted in consumer transaction (a) Consumer goods – debtor can consent in writing or silence to strict FC only after repo (a)(4) and (e). (2) at usual price or (3) usual practice ○ § 9-611(c)(1) Notice ○ § 9-623: Common law right to redeem: debtor must pay full amount of debt including SC’s attorney fees and expenses of sale. no additional statutory right to redeem after disposition Debtor’s Right to Set Aside a Defective Sale: More constricted than most judicial sale procedures (may only sue for loss of equity – rare.
The bank refuses the offer because of their policy of selling all repossessed cars through auto auctions. says that BMV’s notice was inadequate to preserve the right to such a claim • Rule: A notice that fails to inform the debtor that the intended method of disposition is a private sale. that that the debtor has a right to accounting and that the debtor will be liable for any deficiency the sale is not sufficient to preserve the creditor’s right to a deficiency claim • Notice § 9-611: Secured party must send notice to debtor. time. – UCC 9-615(d) – deficiency is the difference between the sale price and the obligation owed. c) If Maxwell has enough money to redeem the car. If the sale was commercially reasonable. ○ Deficiency here is $30K. but if he buys another car for 80K. what is the proper amount for the court to award as a deficiency? UCC 9-615(d) and 9-626(a)(3) and (b). would you recommend that he do so or that he purchase another car just like it for 80K? • If he redeems. d) Max’s friend offers $80K for the car. the total circumstances should show that the seller took all steps considered reasonable by prevailing practices to insure that the sale would bring a fair price • § 9-610: Every aspect of a disposition (method. including the method. place.” ○ The standard is commercially reasonable.In re Dowling: Requirement of Notice of Sale • Facts: ∏ objects to unsecured deficiency claim of creditor BMW in his bankruptcy case. time. Frazier: Requirement of Commercially Reasonable Sale • Facts: Δ alleged the ∏ sale of repo’d jet was not commercially reasonable • Rule: To make a determination of commercial reasonableness. manner. – UCC 9-623 – to redeem a person must pay for all obligations secured by the collateral and any reasonable expenses and attorney’s fees. principal. he pays 100K (70K for car and 30K for deficiency). then the debtor is responsible for any deficiency. b) How much should Maxwell have to pay to redeem the car? $30K. a) If the FMV is 80K and it sells for 70K in a commercially reasonable sale. including. etc. The balance owed on the loan.) of collateral. place. The friend can’t go to the auction . • 9-623(b)(2) says reasonable expenses and attorney’s fees in addition to the redemption price. guarantors and some lien holders ○ May have to conduct a search of public records to identify the lien holders Chavers v. and other terms.1: The bank repossessed Max’s Hummer and notified him that it would sell it in a private sale after 10 days from the notice. attorneys fees. interest. and expenses of sale is $100K. – UCC 9-610 sets the standard for “commercially reasonable. must be commercially reasonable ○ Leaves to discretion of creditor – reasonable is case-by case Problem Set 5 Problem 5. he still has a 30K deficiency so it costs him more.
A) Can the creditor throw away the hull? 9-610(a) seems to give secured creditor a choice. If there is a surplus. Your attorney’s fees are $3. Problem 5. The total debt is 57.345. Auto Parts sends you a letter saying they are owed 4. the secured creditor will get a deficiency judgment and the debtor will bear the sale expenses. That money is now in your possession. But if the debtor does not pay the deficiency judgment. .4: Bank repossessed hull of helicopters. plus interest to date of the sale for $3. only if it is included in the security agreement and here it was. then under 9-626 it might be commercially unreasonable and therefore entitle him to only the difference between Debt and FMV. Under UCC 9611(a)(2): the debtor can waive notification. Dealer auction is not a recognized market under comments. it just depends if this meets one of the statutory requirements for commercially reasonable under 9-627(b) or if not.886.000? – We’d have 7. Who should you pay with it? How much is the deficiency? – Autoparts is an unsecured creditor. where the debtor cannot participate anyways since only dealers are invited? – If security agreement has a waiver.541.136 so the deficiency is 20. the debtor gets the remaining amount before the unsecured creditor. we are entitled to get repaid because we are the only secured creditor. the sale takes care of it. So they are owed a grand total of 67. How it works: If there is a surplus.316. How much is the deficiency? 9-626. All other expenses of the sale are always included.000.345 plus 3. a) Assume the highest Bid is 47. There are is a total sale expense of 6.650. – You didn’t get a judgment so too bad. b) If the highest bid is 75. Problem 5.because it is only open to dealers.541 for a total of 60. if sale is under recognized market (under 9-611(d)). The debt is $345.864 left over after paying off secured creditor. the car sells for $70K.500 preserving the collateral and $750 advertising the sale. But the comment is designed to make it clear that you DON’T have a right to sell it in the present condition if you can make more on it by fixing it up. You have to give this to the debtor as opposed to the unsecured creditor because under the statute the surplus goes back to the debtor and if you send it to Autoparts it is conversion. – Attorney’s fees get included in the expenses. But comments have not been enacted by legislature.136.000. finding out that debtor has taken out engine and stuff.3: Does East Bank have to send notice to defaulting debtors of auction. 9-627(a) & (b) – UCC 9-627(b)(3) says you can sell at a dealer’s auction. You’ve spent $1. First. the creditor bears the cost of sale. At the auction.200 to be paid out of the proceeds of the sale.250. or 10 grand. The security agreement provides that the debtor will cover the creditor’s reasonable attorney’s fees on default. 9-615(a) They do not have a lien or a secured interest against the inventory or equipment sold. If there is not enough money to pay for sale expenses and secured creditor. The highest bid is 47. leaving a hull with no resale value. The debt is personally guaranteed. then maybe no notice required. they don’t get anything.2: You are a creditor owed a debt of $57. What is commercially reasonable? We would have to decide whether it’s commercially reasonable to reinstall old equipment or buy new stuff. Problem 5. A secured creditor can sell collateral in present condition or following any commercially reasonable preparation.
secured and unsecured creditors must think about what happen if debtor goes bankrupt Bankruptcy Act: filing of the petition of bankruptcy is that it keeps creditors – both secured and unsecured – from taking any action against the debtors ○ Freezes creditor’s remedies – emphasizes collective nature of proceedings Compared to State: Can take a while for efficient resolution Discharge: Forgiveness of Debt Extension or Debt Adjustment: Rescheduling Payment Always Possible: to go with Federal Bankruptcy and not state Federal Bankruptcy System • • • • Filing a Bankruptcy Case • • Initiation: Filing can be from either a debtor or its creditors – most are voluntary from debtor To File: Fills out forms of disclosures of assets.” Creditors Remedies in Bankruptcy • • Bankruptcy: Changes relationship.000? 9-626(a)(3): LOOK at – this provision.5: The owner of a business wants to retire and sell store to a new party. – Secured creditor says he is entitled to full amount of debt less value of what it was when he took it back. The debtor may argue that 9-626 does not apply because there was no defective sale. which was the excess it owed after crediting him for the value of the store. the creditor’s deficiency is limited (reasonable sale provisions).000 to get 345. The secured party is entitled to 0 even though it would have had to spend 245 to realize 345. seems to reach an absurd result for determining deficiency amount.000 (commercially reasonable).000.000 to get 345. etc. Note: proceeds means gross sales. – Look to 9-617(b): good faith transfers “A transferee takes free of the rights and interests described in (a). income. This is because “expenses” does not include the 245 under 9-623(a)(3) (B) if it is not actually spent on rebuilding helicopter. But if in reality. history. liabilities. the creditor actually spent the 245. Problem 5. – Can the old owner sue for the deficiency without selling the store first? Under 9-626: if the secured party fails to prove that the collection disposition was conducted in accordance to the provisions of this part. The creditor just kept the property. then that amount is real and counts as an expense under 9-623(a)(3)(A) and is added to the deficiency limit. There is no deficiency judgment if the creditor could have spent 245. It is probably a drafting error.B) What if Grizzly could have spent 245. ○ Creates Bankruptcy Estate: consisting of all property of debtor § 541(a) (1) . The old owner takes the store back and sent defaulting buyer a bill for 131 grand. even if the secured party fails to comply with this article or the requirements of any judicial proceeding. 9-626(a)(3). The new party cannot run store. The new party put down 50 grand and signed a promissory note for 277.
creditor’s vote (each class has a veto) but the court can confirm despite veto (cramdown). if debtor is individual – all remaining debts are discharged § 727(a)(1): if corporation. court discharges all debt (Except non-dischargeable and reaffirmed debt) § 552(b): Debtor keeps property exempt under state law (§ 552(d)) and lists federal bankruptcy exemptions that are an option for debtor instead of exemptions under state law § 704: Debtor’s assets are liquidated and distributed pro rate to general creditors.. court confirms plan if it meets requirements and if debtor performs plan. adequate protections can be extra payments. debtor proposes a plan to repay the debt. only protection from decline in the value of the collateral. remaining debt is discharged § 1325(b). Secured Creditors in Bankruptcy . § 1302. plan binds all of the creditors Idea: We want some of these businesses to continue to run Creditors: must get at least what they would get under Chapter 7 § 1104(a). corporate shell remains with not assets but still owing all debts Key: Debtor will remain in possession of assets during case. after discharge. etc. § 1328 Unsecured Creditors: File proof of claim – statement of debt owed and get pro rate distribution of same percentage of debt to each creditor in class The Stay for Secured Creditors: Usually in place until end of case § 362(c) and will hold deliberate violators in contempt and court or sue for damages for breach of stay § 362(h) Secured Creditors: lifting the stay ○ Promised eventual access to its collateral or property or money of equivalent value ○ Right to participate individually in the case ○ § 362(d) Stay must be lifted when: Lack of Adequate Protection: protection against decline in value of SC’s collateral – no protection for time value of its money. § 1129(a)(7) Strict Eligibility: Individuals with unsecured debt less than $300K and secured debt less than $1M (no corps) Key: Debtor will retain all debtor’s property. no voting by creditors because you are paying everything possible. interest. liens against other property and is decided by court Chapter 11: Business Reorganizations • • • • • • Chapter 13: Individual Reorganizations • • • • Unsecured v.○ Stay Created: against any collection activities automatically imposed § 362(a) Chapter 7: Liquidation • • • • Trustee: Debtor surrenders all property to a trustee (except exempt under state law) and trustee sell property and distributes proceeds. debtor proposes plan to pay all disposal income to creditors for three years (five years for debtors with above median incomes).
Can you go through with the repossession? Can the sheriff levy on the property of a bankrupt debtor after judgment has been entered? – NO – neither you NOR the sheriff can go after the debtor once it is in bankruptcy. the court enters an order continuing its effect § 362(e) In re Craddock-Terry Shoe Corp: Lifting Stay • Facts: ∏ was SC contesting a debtor’s ability to reorganize and sought protect from the decline in value of their property. Whatever unsecured creditor gets to the court first has the best chance of collecting his debts. or recover. Two SCs – LW and both have SIs in mailing interests and catalogues – argue that no reorganizations will be effective and that no adequate protection exists for thee value of the collateral – which is declined (mailing lists become more stale as time goes on and bankruptcy has reputational tolls • Held: Lists vital to reorganization so stay is not lifted but that doesn’t mean the debtor need not provide them with adequate protection nevertheless • Adequate Protection Rule: For an SC. assess. She wants to do serious collection efforts. because the purpose of sending a statement is to induce payment. to retain SC collateral. – The automatic stay prevents you from any effort to collect and probably even sending a statement would be a violation of an automatic stay. it freezes ALL collection action. What do you say? – The automatic stay is the paradigm of the collective nature of bankruptcy against the individual orientation of state remedy law. collateral is not necessary to an effective reorganization. ○ The whole idea of bankruptcy is that the whole pool of unsecured creditors who sink or swim together. You have a judgment and the sheriff is ready to levy on the goods. If do it. ○ Under state law. Under §362(a)(6): when under stay. though the type of protection may differ from the bargain initially struck between the parties ○ Depends on valuation of collateral – debtor says it is worth much less than SCs BUT we use FMV ○ Adequate protection is the opportunity cost for not having the asset in the outside world – if this is less than the going concern surplus then it is a socially optimal thing to do – creditors get alternate liens in other collateral Problem Set 6 Problem 6. You should just submit claim in bankruptcy court. trustee or debtor must show that retention serves a bankruptcy purpose Cushion of Equity: excess of collateral value over loan amount Automatically Ends: unless within 30 days after an SC moves to lift. the remedy goes against the swiftest creditor. No Bankruptcy Purposes: No equity in the collateral that might be realized for unsecured creditors. .1: CEO says a bunch of their clients are in bankruptcy. Problem 6. cannot act to collect. There is really nothing you can do here.2: You represent a bank that is trying to collect collateral that is the security for one of its loans through self-help repossession. this means that they must receive the same measure of protection in bankruptcy that he could have had outside of bankruptcy. then may get fined or be held in contempt. at that moment you learn the debtor has filed for bankruptcy. however.
The longer the debtor stays in reorganization. so the court probably won’t lift the stay. have to assert that there is: No adequate protection (§ 362(d) The following conditions are met (§ 362(d)(2): (A) debtor does not have equity in property AND (B) property is not necessary to effective reorganization .000. Note: In 362(b)(4). Once the stay is lifted you can foreclose under state law. What do you do? – If the boat is destroyed by a storm. This will likely be granted because the debtor has no equity in the property and because they had already closed the business it was necessary for reorganization. There is still adequate protection because there is a 390 grand cushion. in the enforcement of police or regulatory power – (basically for government entities) ○ Problem 6.000 on a loan of 175. Problem 6.4: The bank wants to foreclose on a Chapter 11 restaurant owing $210K. 362(d) There is a lot of equity here. so they might say there is a lack of necessity here. Bank wants to know how quick you can foreclose on it and take a quick but minimal loss. the property is necessary for effective reorganization. Also. the more likely it is that the property value will decline. The company files for chapter 11. But the restaurant is worth about 600 grand. You represent the bank and bank is trying to collect collateral that is the security for one of its loans through self-help possession. Bank will not get paid according to its contract even if it really needs the money – that is not a ground for lifting the stay. You are helping out a debtor food processor. it says in the enforcement of a judgment.6: Your firm does some debtor’s work. There is no adequate protection of its interest because the insurance is critical and if the hurricane comes along to destroy the boat the collateral is gone. other than a money judgment. You can move to have the say lifted. – A nice equity cushion here but most courts would say that without insurance. – You cannot foreclose under state law! Cannot foreclose under 362(a)(3) because you cannot take possession. a) The first irate creditor calls and says he wants his loan amount of 126 grand. The boat has no insurance and the owner goes into bankruptcy. . the bank does lack adequate protection because if the boat is destroyed.5: You have a security interest in a yacht worth 350.You can probably get stay lifted through § 362(d) since there is no equity here and the collateral property restaurant is already closed and needed for the chain to reorganize Even as a secured creditor. Problem 6. So the equity cushion may not be meaningful. If you start to lose your adequate protection you can go back into court. and the secured property is worth no more than that. At the end. there is a provision that is excepted from the automatic stay. There is nothing n the language of 362(b) that provides an exception.3: Restaurant chain owes $250k. there would be total loss for the bank. there will be a complete loss for the secured creditor. Debtor filed bankruptcy. T you can try to lift the automatic stay and then foreclose get stay lifted. Problem 6. Automatic stays apply to both secured and unsecured creditors.– Any action to obtain possession of the property of the estate is stayed. you cannot foreclose because there is an automatic stay.
If the unsecured creditor gets any money at all. the defaulting amount of 50 grand is less than the value of the equipment (40 grand). It may raise the that that pertains to the past. If they win that will doom the reorganization plan if you lose that equipment. if there IS liquidation. – The secured creditor is going to move to lift the stay. the collateral will drop in value and the question will be what is the $10K drop in the value of the collateral show? Is it temporary? Will there be a rebound? Protection against any future value in decline that will be likely to occur.000 drop in the value of the collateral drop point – Does it point to the value of the collateral really heading south or has it hit rock bottom and it is going to go up. so measured form now you have no claim. • However. Pretty straightforward. we’d have to provide as of this moment another 10. Craddock Terry(sp). but NO plan. it hasn’t been filed yet. and we aren’t adequately protected. there is lack of adequate protection (because the collateral is appraised at less than what the secured creditor is owed. is a case with the minority rule. – They are not going to win under 363(d)(2) because property is crucial to reorganization.– – Problem unsecured creditor. unsecured creditors don’t get anything. c) In a typical case. are you entitled to additional protection. So he is SOL. it will not be until: ○ 1) A plan is confirmed or ○ 2) The debtor is liquidated. that isn’t the rule in all jurisdictions. adequate protection is what? Suppose there is a likelihood of decline in the collateral. it is valued at 40. it is probably essential to the business however. – Retroactivity rule. and has to wait along with the rest of the unsecured creditors.000 of additional collateral in order for them to be adequately protected.when do you measure adequate protection from. so no additional jurisdiction needs to be granted yet. if the motion is filed instantly.000 and that is what your collateral is worth. – But under 363(d)(1).) ○ The debt is 50 but the secured collateral is worth only 40 grand. can you demonstrate that now. – The declining of the collateral took place before the filing of the motion. • But even in a majority rules jurisdiction. but in the future. such as filing relief from stay. Most courts say you don’t get additional adequate protection from the date the debtor filed bankruptcy protection. - apply only when the motion for adequate protection is filed. The secured creditor is going to say what. However. The parties are going to introduce evidence and fight over what happens to this kind of collateral in this kind of market. saying that unsecured claims are generally nonexistent. You only get adequate protection from the time you took efforts to protect yourself. (calculating the amount of an unsecured claim) it is usually just done by the debtor – but it doesn’t mean very much because of the text under subsection b on page 117. Under a jurisdiction with this case. ○ By and large. b) The next creditor has a security interest in the sterilization equipment to secure a $50K debt. . ○ Issue . Yes! The real question for the court is which way does the 10. Calculating the amount of secured claims is pretty important in this course and debts on 119. there isn’t adequate protection because the collateral is appraised at less than what the secured creditor is owed.
○ §502(b)(1): claims against estate are accelerated. Under chapter 11. attorneys fees and other expenses are incurred Discharge: a discharged debt still exists but creditor is permanently enjoined from collection but if a lien of SI hasn’t been removed during bankruptcy.Treatment of Secured Creditors in Bankruptcy • • • Debt: sum of money owing. typically tort. if there is a non-recourse debt and the lien not removed during bankruptcy. contract and antitrust – fluctuates as interest accrues. debtor files list of creditors and what is owed —creditor doesn’t have to file anything unless something is incorrect. creditor can foreclose on it after Nonrecourse Debt: § 524(a)(2) . 9 SIs together with real estate mortgages and deeds of trust under the term § 101(51) Lien: Rights of a previously unsecured creditor who has levied against property of the debtor § 9-102(a)(55) Mortgage: Rights of a creditor consensually secured by an interest in real estate § 9-102(a)(55) ○ Some states – these rights may be in form of deed of trust Claim: Creditor’s claim in bankruptcy is the amount of the debt owed to the creditor under nonbankruptcy law at the time the bankruptcy case is filed § 101(5) and (12) Allowed: Only claims that are allowed are eligible to share in the distributions § 502(b) ○ List of claims that are not allowed – so slight How much creditors are paid depends on: ○ (1) How much the various creditors are owed ○ (2) Creditor’s relative priority in the estate ○ (3) Value available with which to pay them System for Creditors to Establish ○ §502: amounts debtor owed each creditor under state law at time of filing ○ §501: proof of claim describes debt and states that it is outstanding and if no one objects. then it is allowed under §502. 9 – the special collection of rights of a persona property secured creditor ○ Bankruptcy Code groups Art. determined under nonbankruptcy law. it continues to encumber the collateral afterwards and the creditor can force an FC after bankruptcy but he cannot then get any deficiency if the sale doesn’t cover debt ○ Nonrecourse Unsecured Debt: Not connected to anything and has no consequence ○ Nonrecourse Secured Debt: Non-repayment may still have consequences Security Interest: under Art. ○ §502(c): disputed claims can be estimated if they threaten to delay process ○ §558: bankr estate has defenses available to debtor had outside bankr.Discharged debt that cannot be enforced against debtor. • • • • • Claims Process • • .
). Absent a dispute. allow in the estimated amount. • If the ultimate resolution of a claim threatens to delay the bankruptcy case or distribution. debtors often have substantial incentive to dispute collection claims (even on the flimsiest claims).○ §507(a): some groups (e. Bankr Code5 8. Bankr. 5 • If the debtor outside bankruptcy had a legal defense to payment. Bankr. If the debtor disputes all or part of the debt. creditor is entitled to post-petition interest. Code5 01(a) • If one objects to the claim. Code5 (a) 02 • Under chapter 11. debtor files list of creditors and what is owed—creditor doesn’t have to file anything unless something is incorrect. are only accruable to the extent that value of collateral exceeds value of the claim secured by it (over secured claims) ○ Example: 40K loan. ♦ Under nonbankruptcy procedures. Code558 . a creditor can obtain a quick judgment and enforce it by seizing the debtor’s assets. ○ Interest Entitlement: Calculating the Amount of a Secured Claim . outstanding. Bankr. the bankruptcy court can estimate the amount of a claim. tax authorities and employees) get priority over other unsecureds System for Creditors to Establish Claims • The creditor must file a one-page form called a proof of claim describing the debt and stating that it remains . see §5 07(a): (e. • Bankruptcy law gives some groups of unsecured creditors priority over others. etc. fees. fees and costs IF 3 conditions are met: ○ (1) fees and costs are reasonable. quicker resolution than under state law. the bankruptcy estate will have the same defense. 50K collateral – fees can be accrued up to 10K 40K loan. and proceed. the creditor typically has no remedy until the dispute is resolved. Meanwhile. then it is allowed. 35K collateral – fees cannot be accrued on either secured or unsecured portion. the debtor can remain in bustiness and continue to use its assets. Bankr. 50 2(b)(1 Most claims are resolved in a single evidentiary hearing (as opposed to a full-scale trial).g.g. Code1111 (a) • Claims are accelerated due to bankruptcy – if claim is disputed. tax authorities and employees) Calculating the Amount of an Unsecured Claim • • • • • • • • • Amount Owed: Is amount owed on debt at moment bankruptcy is filed § 502(b) No Accrual: of interest or fees after that moment are owed § 502(b)(2) Fees and Costs: Only added if contractually mandates and if before declaration of bankruptcy § 502(b)(1) Once value of all appraised: distributed to creditors pro rata Most UC: get nothing in bankruptcy Step 1: Amount of the SC claim begins with determining the amount owing under non bankruptcy law at the time bankruptcy forms filed § 502(b) Step 2: Bifurcate the claim – claim of a secured creditor can be a secured claim only to the extent of the value of the collateral – the remainder is an unsecured claim § 506(a) Example of Bifurcation: 40K loan but collateral only worth 35K ○ Value of Collateral: is a secured claim – 35K secured ○ Additional Value of Loan: an unsecured claim – 5K unsecured SS 506(b): On secured claims. and ○ (2) payment is contractually mandated by agreement and ○ (3) Interest.
full lien is paid off and excess remains with estate for general distribution § 506(c): Trustee who has incurred reasonable disposition costs can recover them for SC’s property Only if SC has benefited from the sale – if SC would have had to pay those fees ○ Undersecured SC fees will be deducted. § 1129(b)(2) (A) Selling the Collateral • Trustee § 541(a): Trustee usually sells property subject to SI – this is because usually sells only the debtor’s equity in the property subject to an SI because that is the estate is entitled to ○ Subject to Lien: Sold for value of debtor’s equity. lien goes with the property. if less than value of claim ○ If more than value of claim. § 506(b) Post-confirmation Yes. § 1129(b)(2) (A) Yes. § 1129(b)(2) (B) Yes. § 502(b) No. buyer is not liable for any deficiency unless buyer assumes and agrees to pay ○ Free and Clear of Liens § 363(f): Sale would then transfer lien from collateral to proceeds of the sale ○ Abandon Property of Estate that is Burden or of Inconsequential Value § 554: Creditor moves to lift the stay and foreclose Example: Boat worth 50K and debt is 40K – trustee sells boat for 10K. trustee is allowed to abandon property burden to estate . subject to lien of 40K ○ Terminates automatic stay and bank now free to foreclose § 362(c)(1) ○ But forclosure is probably unnecessary because buyer of attached lien and is prepared to pay it Example § 554(a): If boat is worth 35K with 40K lien.debtor’s equity in the collateral is so inconsequential not worth bothering with ○ If debt has not been paid and property abandoned.Unsecured Undersecured Oversecured Prepetition Yes § 502(b) Yes § 502(b) Yes § 502(b) Pendency No. stay is lifted and creditor can repossess Example § 363(f): Trustee can potentially sell collateral free and clear of liens ○ Whatever amount it fetches becomes security claim of bank. Timbers Yes. because would have had to pay fees out of collateral value ○ Oversecured SC fees won’t because fees would’ve been taken out of extra equity above loan price • • • Expenses of Trustee • • .
• Rule: The formula approach is the appropriate method for determining the interest rate for installment payments made in bankruptcy pursuant to § 1325(a)(5)(B) – cramdown Problem Set 7 Problem 7.: Market Rate of Interest • Facts: ∏ filed an objected to Δ’s proposed bankruptcy repayment plan for truck SCS had financed for them.700 (30.1: From now on. it says you cannot get unmatured interest. Attorney fees can only be claimed if agreed upon before hand. They get six months interests so 2. reduce the amount of the secured debt and lien and reschedule payment over a longer period Confirmation of Chapter 11 Plan: discharges old secured debts and payment schedules and substitutes new one § 1141(d)(1)(A) Chapter 13: discharge only after debtor completes all the payments under the plan § 1328(a) Cramdown: authorization of a plan to which the creditor’s object ○ § 11129(b)(2)(A).700. Market Rate of Interest: Number of factors to consider: ○ Inflation. The total before petition is 32. SCS Credit Corp.$100 now is equal to $110 a year from now. § 1325(a)(5): Unless the creditor agrees to the plan the debtor must (1) Surrender the collateral or (2) distribute the creditor property with a value as of the effective date of the plan that is not less than the amount of allowed secured claim Time Value of Money: amount of money that must be paid at some later time to have a value of $X as of the effective date of the plan is $X plus interest at the market rate from the effective date of the plan to the date of the payment ○ Example – if borrow $100 with promise to pay back plus 10% in one year . Neither of them can collect these fees if they are not in the original contract. under §502(b)(2).Chapter 11 and 13 Reorganizations • • • • Debtor typically seeks: to keep property subject to an SI and continue using it. There is almost always an agreement for pre-petition attorney’s fees for both secured and unsecured creditors.000 x 18% x 6/12). . risk that borrower will not repay the loan or repay in full – interest rates are added so the promise of future payments will have present value ○ Greater the inflation and risk – the higher the charge for the loan – the higher the interest rate In re EI Parks: Creditor objects to debtor’s amended plan b/c plan didn’t propose to pay market rate of interest ○ Held: appropriate discount rate must be determined in light of risks involved Valuing Future Payments • • • Till v. put it in the contract!!! 450 per month (x 6 months) = 2700 The creditor claim would be limited to 30 grand plus interest until the debtor filed bankruptcy. Interest for unsecured creditors stops being collectable at the minute the party files for bankruptcy. After the petition is filed. Dataeserve could sue its prior counsel for failing to include an attorney’s fees provision in the contract.
A) Interest is 20.575/1.000 mark.000 kicking around there. The creditor becomes an unsecured creditor after that amount and cannot charge unmatured interest. C) If the reorganization plan is not confirmed for another year. A) The claim is bifurcated under 506(a). that lowers your cushion even more. The debtor filed Chapter 11.400 interest = 360.000 + 20. After that. B) You don’t get post petition interest on any claim because the collateral cannot handle it. 360.400 (the claim at the filing date).400 for a total of 328. of 400.788 in interest for 12 months so that brings you up to 400. Since it does not. the debt goes up.000 plus 6 months of interest at 12%. The plan would have to promise payment on the effective date of plan with interest at a market rate.000.212 dollars and add a market interest rate on top of that.400. With this kind of collateral we’re talking about something in the neighborhood of a 5-10 month payout plan. You have 1% interest per month. The debt owed is 360. C) The claim will stay the same this year or next. The calculation of the payments that gets discounted Problem 7. Can you get post-petition interest on a secured claim if is provided for in the plan and if the collateral is sufficient. (59.000. There is lots of temptation to jack up the attorney fees.191.400. then what? You can keep piling on the interest of the year. After your secured claim is capped at 400. owed 340. but you’d rather have it this year than next year.00 x 12% x 6/12). The scheme of payment under the bankruptcy code has some unsecured creditors getting payment before others.3: Our client CI is a secured creditor.2: Every unsecured creditor gets 5%.4: The secured claim is capped at 325. is unsecured.000.5: Now assume same problem as above but the party is not secured. Nobody will have a big enough stake to make a claim.400 x 3% = 10. 35.540. . But the interest does not go past the 400. and had prefiling collection expenses. The plan has got to propose a payment schedule that when discounted amounts to a present value of 371. Our client was probably lucky to get anything with 59.000. B) If plan was confirmed today. more than their original loan. That is what happens to unsecured creditors.400.635 and writes off the excess of 31.700 so our client get 1. Another 28. the creditor cannot charge post petition interest because it acts as an unsecured creditor.000. secured by equipment worth 400.000. So they get the 325.212. You would have to propose payments that have a discounted value of 371. The secured claim is 325.000 + 10% of 35. for a total of 360.365.Problem 7. You do post filing interest on the 360. As a secured creditor you want to push for approval of the plan. you may end up with an unsecured claim as well. but the claim is not allowed. The creditor could only get post petition interest if the collateral exceeded the debt. You are going to close this up you’ll get the same. you can add an additional 12%. Problem 7. Problem 7.500) x 32.212. A) Her company is an unsecured creditor for 340. the remaining amount. If the contract provided for collection expenses. but only up to the amount of the secured collateral.240.400 (340.
000 – (interest for 6 months on mortgage i. If sold after 6 months.024. 3750 is left in trust for unsecured creditors. the bank could get the mortgage on the house. but the rest is unsecured and they all get it pro rata. . Perez “summer house” is in estate. 1000 costs. the house will produce 100. It allows the bank to go ahead with its foreclosure procedure. another 4. The mortgage is 85. If sell for 100.000. 4.000.000.250) = 3. This way. might want to sell.6: You are appointed to act as TIB in chapter 7.000 (Real Estate Commission) – 85. 4350 add int. You are appointed to act as TIB in chapter 7. Sometime between 6 months and one year. which includes interest accrued to date at the contract rate of 10% per annum.B) They get 10% of this so 36. If the house is sold a year later. the secured creditor gets the 26. Perez “summer house” is in estate. The house is encumbered by mortgage to first capital.750. Problem 7. Problem 7. and abandon it. = 96. the trustee may want to look out for unsecured creditors.000 – 6. 85000 mtg.7: the secured creditor gets its money and the unsecured get the rest pro rata.000 (Mortgage) – 1.e.250 of mortgage interest is added because the bank has a secured interest in that collateral. If it takes a year then the interest goes up by 4250 and your total is above 100000. For the coin collection. This is a summer house so it won’t qualify for an exemption so they can go after it.250. 6000 com.
9 – SCs or real estate mortgagees are consensual creditors – they have enhanced collection rights because their debtors consented to them Formalities for Art..with the present intent.most agreements are this type and terms allows all possibilities of signed documents (email. provisions defining default.a record ○ Record: information inscribed on a tangible medium that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form §9-102(a)(69) ○ Intent of the parties to create a security interest only becomes relevant if there is language in the agreement that can be construed as granting a security interest In re Thompson (Wieberg v. Thompson) (p. obligations on debtor (care for collateral and insurance) ○ Authenticate: to sign. rights of creditor on default. 9 Allows 2 Different Kinds of Security Agreements ○ (1) Authenticated Records: A signed writing § 9-102(a)(69) .to identify the person and adopt.) ○ (2) Taking Possession of Goods by Oral Agreement to Create Security Interest: § 9-203(b)(3)(B) – pawns are most common example of this – possessor secured lending is relatively rare Field Warehousing: Ways to take possession without depriving debtor of use of collateral but these methods add unwarranted expenses and complexity Authenticated a Security Agreement Means: ○ (1) Oral contract when creditor is in possession of collateral • • Possession or Authenticated Security Agreement • • • . 9 Security Interest • § 9-203(b): Lists 3 formalities that are required to create an enforceable SI against the debtor (attachment) ○ (1) Either SC must possess the collateral OR the debtor must authenticate a Security Agreement which contains a description of the collateral ○ (2) Value must have been given AND ○ (3) Debtor must have rights in the collateral Only when all three requirements met: does the SI attach to the collateral and become enforceable against the debtor § 9-203(a) and (b) Security agreement: description of collateral. obligations secured. or to execute or adopt a symbol....134) Art. 9 or under real estate law have one key feature in common – they obtain their status by contract with debtor Art. etc.Creation of Security Interests • • Formalities for Attachment: creditors taking an SI either under Art...
in addition. • Held: Yes. evidenced only by financing statement and telephone notes • Two Part Test: ○ (1) Does language of writing objectively indicate that parties intended to create interest? ○ (2) Did parties actually intend to create that interest? • Composite Document Rule: Signature + Clear Intent + Description of Collateral = SI ○ Must be (1) cross-referenced and (2) apparent and actual intent ○ Jurisdictions are split • Majority Rule: So long as documents have internal connection.1: Do the following meet the authenticated security agreement requirement of 9-203(b)(3)(A)? – Promissory note for 50K that was signed by debtor. the SI will generally attach only the limited interest § 9-203 (2) Fraud: Some owners who got property rights by fraud have the power to transfer to bona fide purchasers ownership rights they themselves do not have § 2-403 (3) Obtaining Collateral: SI only becomes enforceable at time that debtor obtains collateral Debtor has Rights in the Collateral • • • • Problem Set 8 Problem 8. agreement itself needn’t even contain the term security • Note: Courts founds all of the elements of a security agreement in a single sentence In re Ace Lumber Supply: Security Interest Claims • Facts: ∏ claimed a SI in debtor. past consideration (allows change from unsecured to secured) Person Cannot Grant SI in Someone Else’s Property: § 9-203(b)(2) (1) Lease: If debtor owns limited interest in property (lease). and grants an SI in the property. reciting that “secured by collateral described in security agreement bearing same date”. signed agreement when collateral is in possession of debtor (3) Tangible medium record such as email or electronic agreement In re Shwalb: Security Agreements • Facts: The security agreement was at hand and said. . “You are giving a security interest in the following property…” Court has to determine whether the words you are giving adequately created or provided for an SI in the cars. no magic words necessary to create a SI. Value under Art. ○ NO – There is no description of the collateral.○ ○ (2) Written. they may be read to together to include collateral of second agreement under signature of first agreement Value has been given • § 1-201(44): Value defined so broadly that requirement is virtually always met. Assumed that creditor has to be the one to give value. 9 includes all contractual notions of consideration and.
If you know that the client will commit perjury. you forgot to attach the description to the blank spot.3: Security agreement with collateral description that read: “The restaurant equipment described on the attached list. The value is given with the first check or 38.– Letter from the debtor’s attorney to the creditor that states. Lawyer knows that this would be a violation because it is a lie to say that these documents were together at the closing. “Enclosed are the promissory note and FS which give you a security interest my client’s inventory & equipment. You cannot prove it after stay. ○ What about composite document rule? Why does the financing statement not serve? It has a description of the collateral and although not signed it was executed by debtor. ○ Do the documents stand alone or do you need to read the testimony? See 9102(a)(7) for definition of authentication seeming to require signature or mark of some sort on the document. The bill of sale is the time in which the debtor had rights in collateral. • Is this sufficient? 2 cases say yes and 2 cases say no (page 148). can you still withdraw without telling trustee? Client is willing to fix mistake and then lawyer will turn you in? – If the lawyer creates a security interest now. Closing was completed and loans disbursed. The client sent it to you and you stuck it in your desk but forgot to staple it together. and in between that time. Problem 8. Also. this will be a violation of ethics. Problem 8. But the date of the financial statement is the date when notice was given to third parties. If we read the documents. What about the composite document doctrine? It’s not signed by debtor but in some of these composite document doctrine the debtor does not sign everything. see 9-203(b). there were some famous cases where there was a closing and the debtor rushed in to file.” No list was attached and parties signed without realizing this. See UCC 1-204. 363(a)(4). You need to have value given for attachment to occur. another person rushed in and got priority.4: After debtor goes into bankruptcy. There may be something in there that will take you out of the composite document agreement. they should refer to each other. ○ Cannot create a security interest after the fact! – What about if the client fires me and wants all the documents back? Should I give him the documents? .” No other writings were introduced. Did the bank have an enforceable security agreement? You cannot have a security interest without a description of the collateral. Problem 8. 9-203(a). The composite document doctrine makes reference to each document internally.2: You are asked at what point in time First National Bank’s security interest attached to the Fisherman’s Pier restaurant. ○ NO – a lawyer cannot sign for debtor. 9-203(b)(3)(A). The description is later mailed and stapled to security agreement. -Was there a security agreement when the financing statement was filed in the Fisherman’s Pier example? One of the great advances for secured creditors was that they were allowed to file a financial statement before security agreement was filed. • If Pablo is in bankruptcy then what? The bankruptcy court says you cannot create security agreement while in stay. The rule says that debtor must authenticate the agreement (who cares if security did not sign).000 not the promissory note. and 2501(1).
Most lawyers wouldn’t go through all this ethical trouble. They would just staple the documents together and send the security interest – this would be both client and selfpreservation.3? Maybe it wont be assisting fraud to keep silent. MRPR: a lawyer is required to keep confidences of a former client. Does 3.5: Do you turn your ex client into the court? This is confidential information. they are likely to interpret them more literally that in accord with the intention of the debtor and secured party. but it is still UNETHICAL. especially considering that there is an argument that the composite document rule covers this whole thing and it meets §9. not everyday definition (e. 149 – lawyer shall take remedial measures At this juncture. You need to keep confidences of former clients.3a2 require you to turn in a prior client (it clearly requires you to turn in a present client). Meastre is not a present client. Kaufman advises against taking this action even though situations like this are common in practice. What about 3. “Assisting” does not mean aiding and abetting in the criminal law sense. What Collateral and Obligations and Covered? • Security Interest: The right to apply the value of the collateral to the holder’s debt ○ The value of the security interest cannot be more than the value of the collateral covered by it Most Secured Transaction: There will be at least two descriptions of collateral ○ (1) In the security agreement that is the contract between the parties ○ (2) In the financing statement that will be filed in the public records Debtor Against Creditor: Court discern intent of parties as objectively expressed in written K.g. That includes provisions that state the collateral Interpreting Descriptions of Collateral: Afforded Art. – Would I then turn in the client after it was my mistake that has harmed client’s financial interests? Kaufman notes that there is no easy way out of this situation and that this is why extra care must be taken to properly create a security interest at the time of closing. accounts. I would also have to call my malpractice insurer because I have clearly committed malpractice. Mr. the SA can be reformed Creditor Against 3rd Party: SAs also bind 3rd parties – other creditors and purchasers of collateral ○ Effect: is that the secured party often takes collateral that the other creditors were counting on for collection ○ Interpretation: courts have to construe the meaning of security agreements that involve a 3rd party.– – ○ See rule 3. he is a former client. 9 definition means. a security interest is a K between debtor/creditor § 9102(a)(73) and rules that govern K interpretation generally apply to SAs as well § 9-201(a) ○ Ambiguities: Parol evidence may be used ○ Mutual Mistake: Where writing results from it.3(a)(3) p. Problem 8. equipment) ○ “Accounts” – 9-102(a)(33) • Interpreting Security Agreements • • • .
inventory) Authorization § 9-204(a): Extends valid collateral in SAs to after-acquired property Ineffective with two types of Collateral: ○ (1) Consumer Goods that debtor acquires more than 10 days after the secured party gives value ○ (2) Commercial tort claims • • Stoumbos v. creditor. other creditors disadvantaged by grant of security. which enables an interest in after-acquired inventory. application stated that Δ retained a SI in all merchandise purchased. arguing that failure to identify the fridge resulted in Δ not having an SI in the item. ∏ bought fridge from Δ using a credit card.○ ○ ○ ○ • • “Inventory” – 9-102(a)(48) “Instruments” – 9-102(a)(47) “Consumer goods” – 9-102(a)(23) “General intangibles” – 9-102(a)(42) Sufficiency of Description: Art. • Rule: The majority rule. becomes ineffective after filing bankruptcy § 552(a) . courts In re Shirel: Interpretation • Facts: K of adhesion purported to create security interest in all merchandise bought with credit card. Δ seized all inventory and equipment in AAM’s possession. • Held: Court invalidates the K. • Held: Δ’s description of equipment does not imply after-acquired property. • Use of After-Acquired Property: is to allow SI to float on collateral that constantly changes – often the category rather than individual items in it. Kilimnik: After-Acquisition • Facts: Δ sold business to AAM. 9 Security Agreement Description: Primarily to enable interested parties to identify collateral Need to Enable Interested Parties: ○ Debtor. when AAM defaulted. too broad and imprecise Describing After-Acquired Property • After-Acquired Property: property a debtor acquires after the SA is authenticated or the SI is otherwise created ○ Floating Lien: Collateral that debtor obtains on a rolling basis (AR. including inventory and equipment acquired after sale. Δ asserted a lien. does not apply to equipment. trustees in bankruptcy. ∏ moved for an exemption. When ∏ filed for bankruptcy. • Rule: Phrase all merchandise does not sufficiently describe collateral to create a security interest under the UCC. retaining an SI in it. though inventory does. read in most unfavorable light to the creditor ○ § 9-108(c): All debtor’s assets or personal property not specific enough to identify collateral ○ All Merchandise: doesn’t do work that § 9-203 expected (notice and ID). where the description is not specific as to time.
They want a security interest in crops because crops means cash. – The land description seems ok.g. 9 SAs – make sure it is in the SA ○ Can be included in real estate mortgages with limitations in some states Non-Advance Provisions: Attorney’s fees and collection expenses are included in total debt Description: Must describe land sufficiently to identify it Acceptable: to refer to separate documents such as maps or plats for that purpose Ambiguity: Refer to parol evidence Vagueness: If it is too vague. and there is no current crop.1: The farmer gives security interest in “crops growing on farm in Osprey. County. if there is a plausible claim. With malpractice insurance. ○ What about the land itself? The land is probably encumbered already. You have to spot the issue about whether the language covers this year’s crop or crops in the future. you have to describe the land too. Suppose repayment is one year.• § 552(a): after acquired property clauses become ineffective upon filing of bankruptcy General Rule: Almost any obligation can be secured if the parties make their intentions clear § 9-204(c): allows for SAs in future advances Dragnet Clauses: where every obligation of any kind that comes into existence in the future is secured. They could always sue their lawyer. This would apply to future crops. all grantor’s property in the county. The security description is ambiguous. – Bottom line is that a lawyer must take extreme care before representing a debtor. maybe the security interest is for the future crops growing on the land. meaning that whatever grows on land becomes a security interest. Is that sufficient? – With crops growing on land. Problem 9.2: What about the sheep the farmers raise on the property? Are the sheep equipment? Are they crops? – They are valuable for their wool. The security agreement says “crops growing on farm”. are generally good What Obligations are Secured? • • • • Real Estate Mortgages: Descriptions • • • • • Problem Set 9 Problem 9. The lawyer that left them in this fix is a perfect target. What is the difference? . the mortgage may be rendered void Broadness: E. meat. and milk. about 14 miles from Tilanook” and most of their farm equipment. then current crops may be the only crops encumbered. ○ The current crop might qualify as after acquired property under 9-204. Equipment sits in fields. – The farmers want to borrow more money from another lender but that lender won’t go because the crops are already encumbered by First National. Maybe the sheep are on land and not on farm. What should the farmers do? ○ Litigation takes time. the lawyers will settle and not fight it. although some states do not allow them unless it can be shown that existence of the duty was thought of while making the contract (pre-securitize any further money advanced by creditor) ○ Valid for Art. The wool is a crop in Webster’s dictionary. You want to know more details. But if at the time the loan is taken out.
and accessories incorporated therein or affixed thereto. You can define it at one level of generality – such as equipment. They cannot just describe interest in everything bought on credit card anymore. Doesn’t really know the answer to the Q. such as inventory. owner absconds. Officer could still make a mistake in judgment. such as all assets or all property (to protect the mom and pop stores). 6 years later. The purpose of this section was to protect the consumer. A/R’s. As a matter of policy. like failing to check a few boxes on the security agreement because they’re in a hurry. you need to list the types of property. Not sure that the consumer protective explanation works. except for the few boxes that are checked off of items not covered. Problem 9. if they were consequently replaced. If you want to include everything. Bank takes possession of bar and finds no personal property. So what do you do? Set up a program that makes it impossible for the loan officer to make a mistake in failing to check a necessary box because the program won’t let you continue. Problem 9. There is a small risk but the odds are in their favor. farm products.Likely not. Is this possible? -. You cannot give an opinion letter in absolute affirmation that the sheep’s wool is not covered. equipment. However. What should they do? Walter should outfit their cash register with a documentation database that will give a computerized security agreement at the point of sale.7: This is a common problem when lawyers are repeat lawyers and are repeatedly doing business with bank official who may not know what they’re doing and make a mistake. etc”.5: Someone wants to create a form taking an interest in everything of debtors.3: The security agreement says “all of debtors equipment. additions. The creditor is now claiming that accounts include the proceeds owing from the sale of real estate. why should a description saying “all the debtors property” be invalid? Because the drafters were worried debtors would not understand the exactly how much there were agreeing to.– An opinion letter leaves great potential for malpractice. . but not as far as checking boxes goes. would violate 9-108(c) One can say that you don’t want to prevent the secured creditor from locking up all the debtor’s property that easily. then the fixtures that existed at the time of foreclosure were not the collateral as the original fixtures. repairs.. Accounts did not include real estate proceeds in 97’. taking all of the fixtures & equipment in the bar with him. the fixtures and equipment that existed at the time were collateral. etc. Problem 9. Without limitation the term equipment includes all items used in recording. etc (but cannot use “all consumer goods” under 9108c). You could create a standardized form and check off what does not apply.4: Walter takes an interest in everything the debtor purchases on their credit card. but it’s not clear? – This description comes out of a case. How could this be so? – When the security interest was created. but says he has taken no collateral.8? Skipped this problem in class! Client executed a security agreement in 1997 in “accounts”. in which the court granted summary judgment against the secured creditor.6: Bank lends against the “fixtures & equipment” of a bar. Does this include new equipment? Does the word additions sufficiently describe after acquired property? It might. including replacement parts. and state “after acquired property” too (look at 9-108). Problem 9. It is an example of the court. Debtor admits to taking all of the fixtures & equipment. as long as it is not super generic under 9-108c. Problem 9. Problem 9.
inventory to AR. There is no way to handle this problem without dealing with First Bank. I can’t collect more than I am owed. You have to tell your client that he cannot ignore First Bank. proceeds are automatically covered ○ Proceeds are not type of collateral per se – instead they are what happens to collateral after debtor has sold the collateral ○ Cannot have proceeds without original collateral – derivative § 9-315: an SI attaches to any identifiable proceeds of collateral § 9-102(a)(12): Proceeds are within general definition of collateral Example: if I have an interest in your snow blower. goods to cash Art. and you trade it to your neighbor and your neighbor gives you a cow.but became accounts upon adoption of revised Article 9. you are at risk Definition of Proceeds • • • • • § 2-403(2): Watchmaker • McLemore v. you are stuck with an Article 9 category over time. Did the expansion in article 9 definitions of “accounts” expand the scope of First Banks security interest? If you use an Article 9 definition. I have a security interest in the cow’s proceed. transformations in value become less threatening to SCs § 9-102(64): Whatever is acquired upon sale of collateral ○ Whatever is collected on or distributed on account of collateral ○ Rights arising out of collateral (expands what may be proceeds) ○ Claims arising out of damage to collateral ○ Insurance claims arising out of damage to collateral § 9-203(f): Attachment of an SI in collateral gives the SP the rights to proceeds ○ Even when an agreement is silent on the issue. 9 Makes it Harder to Trace Value: because proceeds of proceeds are no longer defined as proceeds – Comment 13(d) § 9-102 By giving its SC an interest that floats from one item to another as value is transferred. but also have a security interest in the snow blower. Products and Other Value-Tracing Concepts • • • Collateral Changes Form: Oil to plastic. According to 9-102(a)(2) “account” is a right to payment of a monetary obligation for property that has or is to be sold… Proceeds. Mid-South Agri Corp • Facts: Held that a cash payment for not planting crops under a federal subsidy program was proceeds acquired from the disposition of crops . but my security interest has ballooned Will SC be better of than you when you give your watch the watchmaker to repair it? ○ Gives watchmaker all power to transfer all rights of the entrusted to a buyer in ordinary course of business ○ Thief cannot pass good title but the watchmaker is not thief so when § 915 says except as otherwise provided in 2-403(2) that’s what they’re talking about ○ Every time you take your watch to get repair.
• Key: Gives rights into the entire value of the exchange despite value that might be added from wholesale to retail SCs Sometimes Allow: debtors to dispose of the collateral free of the SI Authorization: may be ○ (1) Contained in the SA (when the inventory lender to a department store agrees that the store can sell inventory to customers free of the security interest) ○ (2) May be expressed by the SC later on (bank financed car allows to sell it) or ○ (3) May be implied by circumstances or conduct (as when the SA between an inventory lender and a department store is silent on the matter of sale of collateral or where the bank that financed a herd of cattle knows that the debtor has been selling cattle from the herd to buyers who do not think they are taking subject to a security interest and the bank has not objected to the sales) § 9-315: Gives effect to all three types of authorization – buyer takes free and clear of the security interest and the SI can look only to the debtor and the proceeds After Unauthorized Disposition: Debtor has power to transfer ownership of the collateral to the buyer ○ SI continued in collateral and the proceeds notwithstanding sale Limitations on SC’s Ability to Trace ○ § 9-315(a)(2): SC will still encumber proceeds only as long as they remain identifiable – tracing rules are limit on the extent ○ Particular problem – collateral is converted into money and that money is placed in an account that is commingled with other money (must apply tracing rules) ○ Lowest Intermediate Balance Method: Debtor is assumed to have withdraw unencumbered funds first and then encumbered funds last – result is that amount of proceeds in the account will be equal to the lowest account balance in the relevant period (majority) In re Oriental Rug: Creditor repo’d rugs that were bought with proceeds from rugs that were collateral – burden is on creditor to track the proceeds when claiming interest in results them results of commingled funds ○ Proceeds from the sale of collateral (oriental rugs) went into a bank account. [or presumably put in an after acquired clause] ○ Rule: Where a creditor wishes to claim an SI in proceeds received in exchange for collateral. So include both Termination of SI in Collateral after Authorized Disposition • • • Continuation and Limitation of Security Interest • • • • . Held that if the creditor wanted new inventory to secure the old debt he should have required a separate bank account. the burden is on the party claiming the SI to ID the proceeds Non-Value Tracing: distinction between after acquired property and proceeds can a fine one. Funds from account were used to buy new inventory.
If the debtor has already given a security interest. inventory. inventory. The horse wins 50 grand purse. products. it wants security interest in proceeds. 9-315a2. fixtures. etc.3: What about security interest in race horse and “proceeds. Of course. and is also attachment of a security interest in a supporting obligation for the collateral. d) Myna Bird: is it not an account because a Myna Bird is not a monetary obligation. or other disposition of collateral. Problem 10. products. license. offspring. . c) New computer to replace the old one? She would have to use the proceeds to buy it. What about 102(a)(64)(c)? It could be rights arising out of collateral. The description in the security agreement is a starting point but that description does not limit the coverage. Any manufacturer selling to retailer does not expect that security interest will follow into car itself. and accounts” without mention proceeds. whether or not entered by performance. the courts would probably infer intent. What about equipment? Does after acquired property work for equipment too (its seems like it is inferred to A/R and inventory but not equipment). substitutions. Replacements are not mentioned in security agreement. We want to get rid of the inventory loan that B took out. The most likely scenario is that they got paid on their A/R. lease. The money in deposit account could. it makes the job of a lawyer very difficult. The secured creditor is the enemy in the bankruptcy proceeding. exchange. 9-102a64: proceeds whatever is acquired upon sale. and accounts”? a) $ is now in Polly’s bank account. and then that money could come in and become furniture. You cannot get the purse in 102(a)(64) because you did not get the purse in disposition of the collateral. The bird is not part of the business because it’s kept as a pet its not equipment or inventory. Once this loan is paid off. b) The parrot that Polly took in payment of an overdue account.Problem Set 10 Problem 10. The parrot falls under the definition of proceeds.1: First Bank has secured interest in “equipment. be proceeds from inventory sold or equipment sold. Problem 10. But in this case. Account does not mean deposit account. however. additions. or replacements. You should include the magic words of “after acquired” accounts. The term means a right to payment of a monetary obligation.4: J contracted to buy Toy Shop. Can inventory become A/R? Inventory could transform into an A/R. a security interest attaches to any identifiable proceeds of collateral. the security interest will be gone. Problem 10. equipment. The text suggest that after acquired property is inferred when you take a security interest in inventory and accounts (since they are constantly changing). and profits”. etc. Maybe the purse is a profit. It gives the creditor an interest in lots of other property. “Accounts” is defined in 102(a)(2). The whole system is geared towards producing money for unsecured creditors. It goes with the debt. 9-203(f) the attachment of a security interest in collateral gives the secured party the rights to proceeds provided by §9-315.2: What of the following are collateral of FB under secured interest in “equipment.
so it’s enough to cover the 35. When Golan rights a check for 2. say 29 grand worth.000. There is 6 grand in account that is still proceeds of old collateral. The copier gets destroyed.000 grand. The 38 grand was 3 grand debtor cash and 35 grand of secured creditor collateral left. to insurance. The security agreement list copier with serial number. You trace the old machine. 2) The secured creditor can make sure that it is named in standard mortgagee clause. and you are not subject to insurance company’s defenses. proceeds includes insurance proceeds of collateral. the insurance company can assert that defense to the creditor. This is still proceeds. violating the rights of a secured creditor. A transferee take free and clear. its not proceeds at all. Once the check is written. 1) Following Gilmore theory. Those funds are paid from debtor’s funds first. The collateral is 35 grand. There are two ways for ELP to get protected: 1) have itself named loss payee. The debtor deposits the check in bank account. you get first dibs. But if ELP is named as loss payee. Is this new machine collateral? There are several possibilities. This new machine cost 32 grand. Tracing Collateral Value During Bankruptcy • Differences in Bankruptcy under § 552: ○ Interest proceeds. This is not unheard of in article 9.000 value. Lawyers don’t do it for some reason. but the lowest intermediate balance rule says you get the lowest amount in the account. The authors think that the last suggestion is bizarre. That there is no such proceed interest left in article 9. It has not cost anymore to get a standard mortgagee clause. profits. a) the insurance company paid proceeds to debtor. The lowest intermediate balance says that the 2. Then G writes a check to the IRS for 32000. there is 38 grand left. 2) Since if you can trace most of the proceeds. rents and offspring will continue . and signs a security agreement. and the debtor in applying for insurance has misstated certain facts.Problem 10. to deposit in account. The new copier is not entirely related to secured creditor’s old collateral interest. the creditor is screwed and has only 6. The proceeds are commingled with debtor’s funds. The lawyer who lets the debtor get insurance but does not get the creditor a standard mortgagee clause is an idiot. The collateral grew. We can trace it by using lowest intermediate balance rule: up to extent of collateral value. as their interest may appear. unless the transferee acts in collusion with the debtor.000 that was paid out was paid from the extra 5 grand and not your 35. Under 9-102(a)(64)(e). products.6: What if the debtor wrote a check to buy another copier? What is the collateral now? Is the new machine covered by the security agreement? The security agreement says copier but gives a serial number.5: ELP loaned Golan money to buy copier (35 grand). with 6 grand left in the account. It would be a mistake for ELP to be named loss payee. Can you get money back from the 2. Since it is not entirely proceeds. to new machine.000 claim on that account.000 creditor or the IRS? 9-332b. But that happens in many types of situations. you cannot trace funds out of bank accounts to the transferee. 29/32 of the copier is yours. Golan gets loan. and if named. OR 3) You can identify the bank account. you could say that the secured creditor security interest is lost. you can trace all the proceeds to the new copier. Problem 10.
but does not permit the secured creditor to enhance its position by claiming assets that would have been available equally to all creditors (reflects idea that trustee is prohibited from favoring one creditor over another Four interpretations of proceeds under Art. creditor seeks access to (post-petition) milk as “product” of cow after debtor files for BR. ○ (2) Products ○ (3) Offspring ○ (4) Rents ○ (5) Profits Result: secured creditor can keep collateral value it had as of BR filing but can’t acquire additional collateral value during bankruptcy. a creditor secured by proceeds must share jointly with those who contribute to production of proceeds during Chapter 11 • Held: Product belongs to the SC in proportion of input to product – farmer retains % of value of his own work • Formula: tries to give us a mathematical solution to milk produced by a cow in bankruptcy. CC = (D/D+E+L) x P . 9 ○ 1978 Art. creditor’s SI should not extend to post-petition revenue to the extent that such revenues had been enhanced due to post-petition toil and effort of debtor’s employees In re Delbridge: Cow • Facts: cow is collateralized. § 552 permits a secured creditor to trace collateral value from one form to another.• • • • But interest in after-acquired property will not since it cannot be traded to original collateral allowed the SI to attach would take value that could be distributed amount the USCs at benefits of the SP Tracing Value in Reorganization: Courts use equity discretion under Bankruptcy § 552(b) to apportion only part of the value of products to the creditor to allow for reorganization Value tracing limited to five concepts: ○ (1) Proceeds. Farmer argues that milk is not product of cow. but of farmer’s expenses and labor • Rule: Lender is entitled to the same percentage of the proceeds that his capital contribution represents to total inputs of production ○ Jointly: Once debtor is in bankruptcy. 9 ○ Delbridge Approach ○ Hotel Approach ○ In re Cafeteria Operators: Bankruptcy Tracing • Held: Equity of the case exception provided a sound rationale for splitting proceeds • Post-Petition Operations: Even assuming that revenues generated from post-petition operation of business could be regarded as proceeds. can’t claim additional assets. 9 are possible: ○ New Art. In effect. The formula is set forth on page 190.
the debtor usually needs to control major company assets (real estate. certain of the income generate by the property to pay the same expenses as would a received. exchange. ice making. ○ Court says that although the SC has perfected interest.Net Proceeds Solution to Proceeds Dilemma • Method: Accounting for debtor’s and SC’s respective contributions to postpetition revenues ○ First: debtor is reimbursed for expenditure made to generate the postpetition revenue ○ Second: whatever remains is collateral In re Gunnison Center Apartments: (In the case of apartments and hotels. and other assets) to manage the business. computers.” • Thus. collection or other disposition of collateral or proceeds. equipment. the business becomes a debtor in possession of assets for which one or more creditors have a legal claim to recapture. room cleaning. but not those attributable to services such as check-in. autos. telephone. with supervision. the definition is probably that under article 9 at the time the bankruptcy code was adopted (the 1978 UCC definition of proceeds): § “Proceeds includes whatever is received upon the sale. four views of what “proceeds” means: o As defined in UCC §9-1 (a) 02 o As defined under 1978 official text of article 9 o Only that portion of proceeds attributable to the collateral under Delbridge test o Only the net proceeds derived from use of collateral under Hotel Sierra Vista test • Cash Collateral in Bankruptcy • • • Debtor’s in Bankruptcy: Can used collateral to keep business running § 363(c)(1) and (b)(1) Same for Cash: § 363(a) defines cash as highly liquid collateral like cash. They are not asking to be liquidated (all assets sold) and receive a total discharge of existing debts. except to the extent that it is payable to a person other than a party to the security agreement. its leaders hope to modify their operations and finances to correct the problems causing the necessity for bankruptcy. the debtor was entitled to use. etc. check-out. bell-hop. Insurance payable by reason of loss or damage to the collateral is proceeds. if one were there ○ Key: Court interpreted rents and proceeds to mean net rents and net proceeds Are all proceeds under the definition in Article 9 proceeds in bankruptcy? th th • 5 and 9 circuits have said yes th • 11 Circuit says no because that would give state law makers the ability to define terms in the federal bankruptcy statute o If this rule prevails. However. Therefore. negotiable instruments Restraint: only restraint is that debtor must provide adequate protection to SC against loss/diminution ○ Adequate Protection: When business files for Chapter 11 reorganization bankruptcy protection. as well) lender is entitled to the portion of the room rates that are attributable as rents from room occupancy. These creditors must be given adequate protection that these assets will not be misused or destroyed .
will it be subject to Firstbank’s security interest? The security interest includes all equipment. If it is this category we could not get it now since bankruptcy limits the value tracing concepts to 5. It’s either proceeds or its not. Is your claim stronger. i. – Most of the time the court will say that it is services and will refuse to address the issue. where the security agreement said “proceeds and profits”? The debtor filed bankruptcy now and the money is in a trust account. and the proceeds serve as collateral to secured creditor. weaker or unchanged? – The horse won the purse.e. she worked for 28 straight hours repairing a dangerous leak at Golan Industries’ power plant and billed Golan at $65 an hour for a total of $1.2. There is no change then. one looks at bankruptcy code § 552. creating a new account. – Suppose she uses inventory and equipment to produce this account receivable. she uses O rings and other materials. Does the later work. and the dollar bills are proceeds of track promise. from problem 10.3 we had said that maybe it could be rights arising out of the collateral. and gets resolved in favor of secured creditor. There is an interest in cash and the amount doesn’t increase.• • Cash: Protection usually comes in form of a lien against some of the inventory produced by the workers – not really proceeds but mirrors structure and logic ○ Difference – that is doesn’t need to be a lien on proceeds. then the situation is unchanged. accounts. The automatic stay interrupted this – The other argument is that this is just proceeds. filed bankruptcy but continued to run her business. The court probably won’t buy this argument. The proceeds cases have been pretty generous. In problem 10. winning a 50 grand purse. grow or change during the proceedings.2: Polly. Somewhere half way in between where some inventory was used would probably go half way. §9-102 (a) “whatever is acquired on the disposition of collateral.” You could also argue that the account is a right arising out of the collateral. So if its services it cannot go to the bank. The account arises out of her services and if it were services then this wouldn’t be part of the Banks collateral.820. Problem 11. since it really doesn’t matter what the definition of proceeds is since the creditor had an interest in the winnings before the bankruptcy proceedings began. When Polly receives the money. Proceeds include accounts received upon the disposition of the inventory. The court is likely to say that the equipment and value of inventory used up was negligible. – So the claim would be unchanged in this case. create a security interest for First Bank? – That’s an after acquired property clause and in bankruptcy this cannot be taken by the creditor. besides in this case the amount is so little. If that security interest is good. – Among the categories of collateral: ○ Account ○ Monetary obligation for service . It is not at all clear that a court would say it was not proceeds. and inventory.1: What about the racehorse example. A few days later. Maybe the court will apply some equitable remedy here as in the Delbridge case where the creditor is entitled to the same percentage of proceeds as its capital contribution. There is nothing in there that says proceeds have to come entirely from the disposition. it can be a lien on anything Notice: required notice and a hearing to SC before trustee can use cash collateral § 363(c)(2) Problem Set 11 Problem 11.
the debtor has to offer adequate protection in the form of a lien of other property – What is the authority for claiming $35K for adequate protection?: ○ Retroactive adequate protection from the date of the filing of the petition – owed after the petition.4: Security interest in Hotel Sierra Vista. The debtor used the money wrongfully because of a lack of permission. there is no depreciation. The cash collateral would be 0. Under §363. If you think reorganization should be carried out. the debtor did not do so here.000 from room revenues goes to cash collateral and proceeds. the debtor should have obtained the court’s permission before using the money. Does it have a proceeds claim to the copier? Do we have proceeds to deal with here? – We don’t like windfalls under the bankruptcy code so we won’t give you security interest in the whole copier. ○ All authors of article 9 are trying to expand definition of proceeds. You could ask for adequate protection and look around for anything that has value. if you want to use cash collateral. Even Article 9 probably wouldn’t say that is proceeds. After fire but before insurance. what is ELP’s argument that it is entitled to proceeds? It is an insurance claim arising out of the destruction of the previous copier and proceeds are allowed. . There is only 6k left in the account instead of 40k. You don’t have any security interest in the copier. What does the secured creditor get under Sierra Vista? – – You have to distinguish the revenues generated by room rental from services. ○ Under §552. The debtor violated the stay provision. operating under bankruptcy rules. there is a loss. though. then read net into revenues. forcing the third party transferee to give the money back on tendering the new copier. Assuming they received the new copier. so the cash collateral would be 0. one of the questions is – is there adequate protection? Before we get there. Problem 11. OR might say that the equities of the case call for selling the copier and you may get 29K out of it – hard to know what they’ll say in bankruptcy because it’s hard to know what Article 9 will be interpreted to say on it – What about adequate protection? Under bankruptcy code. even though it came in afterwards – NOTE – the transfer of something in which the debtor has no interest is not property of the estate Problem 11. ○ The trustee could probably void the transaction. Golan filed for bankruptcy. ○ Under Delbridge. What is the collateral in the bankruptcy case? – The thing that is different is that under automatic stay provision. came from prebankruptcy services. and the secured creditor had as proceeds 35 grand in bank account. but you can trace the full 32K in the copier. Golan got the check for 35 grand. it applies to revenues and not net revenues. that the trustee could upset that transaction. There is an argument under §549. In bankruptcy. but if read literally then read just revenues. there is a Chapter 11 reorganization. If you do it that way. This didn’t come from pre-bankruptcy collateral. the case is that maybe she owed $2. the debtor in possession was acting in possession.3: The copy machine caught on fire problem. and then started to write checks without prior consent or hearing. deposited it. so all $510.
000. They would only get interest if they were over secured up to the amount of their collateral. so there is a loss since here we distinguish the room revenues or rents from the services. Some courts are not reading this article literally b/c they don’t want to believe that Congress wants to foreclose the businesses.5: You represent a client. So it probably means gross rents. What can you do? A) What is the secured claim at the time the petition is filed? The secured claim is for 700. then what? In Delbridge the Court applies a complicated formula to give something to the creditor for the depreciation of the collateral by the use of it by the debtor and over time. they are in bankruptcy and the creditor is under secured and hence interest doesn’t operate since if they were to get interest it would be going to their unsecured claim. In this case over the 17 day period the depreciation was 0 and hence if we apply the formula just as it was is Delbridge then the result is 0. under that theory. B) Can Globus accrue interest on that amount? No. There is a managing company that wants to use cash proceeds of 10k monthly to pay off expenses and run the business.200 of the revenue – AK thinks that’s what the court means when it says it’s so easy to figure out but it’s not so easy Problem 11. The Hotel could use the other 21k of profit made on the food and drinks. “Globus” who is a secured creditor for 900k on an apartment building worth 700k. .A) If the court follows Hotel Sierra Vista. IT would be yes for the Courts that read the article literally and no or perhaps for those courts who read it differently as discussed above. (0/0 = 0). it is under §552b of BC. Here. what is the collateral? The collateral would be 0 since 520k-510k= -10k. and the debtor would have no cash with which to operate the business and hence it folds. C) If the Court applies BC §552(b)(2) literally without applying equity? The cash collateral would be the entire revenue – 510k. The statute does not say anything about net rents. they just lose it for the purposes of the bankruptcy proceeding. The Court in Hotel Sierra Vista takes the net room revenues as what goes to debtor to be used to continue the life of the business. Unless they come out of bankruptcy without a discharge then maybe you have something but this almost never happens. the value of the collateral. and therefore. they should get 36. C) The 10. B) If we follow Delbridge. In Delbridge since we were dealing with a cow there was always a positive outlook since it was producing milk. but the Prof thinks that the lobbyists that wrote this article may have pretended just that. In the numerator we could place the rental value of the collateral and that way we can more faithfully represent the contribution of the secured creditors capital to the amount of money coming in. Is that collateral? Yes.The Prof thinks that the formula could be modified. the creditor cannot accrue the interest not even in their unsecured portion. They produce 30% of the effort to produce 121K of revenue.000 rent is received after filing. In a way it is like the Art 9 definition of proceeds. leaves it to the discretion of the BR judge to avoid the windfall – If there is no equity adjustment then the debtor cannot continue to operate the business.
You go to 7 o’clock hearing and oppose the motion. Hale Contracting Co. which is 10 grand a month. In this case the adequate protection may have to be for the 200k (900-700= 200 unsecured). Might be able to lift the stay. Default: Gateway to Remedies • Default: Both SC and debtors are interest in precise definitions of default ○ If creditors exercise remedies: before the debtor is in default. d w xico Ban atAlbuque k rque o Debtors failed to pay interest on revolver – bank calls loan based on default and insecurity • Company must prove bank lacked good faith belief that its prospect for repayment was impaired • Ruleof law: A creditor has a right to accelerate a loan only if it in good faith believes that the prospect of payment or performance is impaired. etc. many times expectation is that certain balance will rollover • J . saying that because you are in default. Every secured creditor who winds up to be under secured is in a bad situation but it happens for a number of reasons. So here Globus has to go the hearing and try to get the automatic stay lifted. the collateral changes etc.R. UCC 1-309 • Acceleration and Cure • Acceleration: By K. If the Court allows the cash to be used then Globus is going to be losing daily.D) What about adequate protection? §363 of BC says that adequate protection needs to be given for the creditors interest. You should win on this argument because Pine Manor has no other property. the entire outstanding balance of the loan will be due . v Unite Ne Me . the creditor specific that if the debtor fails to pay and goes into default in any way. Globus should lift the stay instantly. • When is Payment Due? • • Installment Loan: Payment due in series of scheduled payments Single Payment Loans: entire value of loan is due on a specific day ○ Loan on particular AR ○ Rollovers: loans made payable with no expectation that the loan will be continued if the account remains in good standing ○ Loans on Demands: lender can call the loan in at any time Line of Credit: Generally ○ Bank Ks to lend up to certain amount of money ○ Lender borrows on line as they need it with check on bank account ○ Bank covers any overdrafts up to line of credit ○ As debtor gets revenues from operations. Pine Manor has no other assets so I don’t know how they could provide protection. You would argue that you need adequate protection against apartment house and decline in value of rest of collateral. ○ You don’t know what debtor is or isn’t doing to adequately maintain the property. pays down obligations ○ Due: Sometimes K specifies date during off seasons. you owe the entire balance. they will be liable ○ Debtors want: defined as narrowly as possible to avoid them Consequences: often that the SC sends the debtor a notice.
once the mortgage holder has exercised his option to accelerate. the right of the mortgagor to tender only the arrears is termination. 9 and Rev. the debtor may only redeem by paying the entire outstanding balance on the debt ○ Some States: provide for reinstatement by statute ○ Allows debtor to cure and reinstate by payment of only the arrearages ○ Generally only to mortgages and the like Enforcement of Payment Terms • • • • Courts Split: on if creditors have duties to debtors when they loan on demand Lender Liability (6th Circuit): obligation to act in good faith requires a period of notice to allow reasonable opportunity to seek alternative funding Easterbook (7th Circuit): Knowledge that literal enforcement means some mismatch between parties’ expectations and the outcome doesn’t imply a general duty of kindness Some changes to Art. She noticed her omission before bank gave notice of acceleration. the Bank had to accelerate. often will to try and keep control of assets ○ Allows creditor time to evaluate defenses Procedures after Default • • • • Problem Set 13 Problem 13.• • • Old Re public Ins urance Co. However. even if debtor is current on payments ○ (2) If creditors accelerates because he feels prospect of payment is impaired. o Basically. Art. prior to the election of a . v Le – Pg 227as a general rule of law. once acceleration occurs. The bank mailed the check back to her saying that they called the whole loan.1: Pat missed two payments of $434. 1 reflect these concepts of good faith but the yare unclear and yet to be adopted most often Secured Creditors Options: Depends on what he knows about debtor will determine which one (1) Self Help Remedy: repo on notification to account debtors (debtors of the debtors) ○ Creditor risks a lender liability action if debtor is not in default (2) Foreclosure: safer but is slow and the debtor may be selling off assets (3) Replevin: Middle ground ○ Heard much faster and though the debtor doesn’t have to respond. a mortgagor. e right to accelerate by the mortgage holder upon the occurrence of default. Does the bank have to give notice of acceleration? Look to the contract? Can the Bank get away with accelerating the loan? – The agreement says “at the parties option” so when she missed the payment. once the mortgage holder has exercised his option to accelerate. . Cure: Debtor pays the amount of the loan on which he is in arrears – acceleration generally has the effect of eliminating the debtor’s ability to cure it’s default Limits to Enforcing Acceleration Clauses: ○ (1) Creditor can accelerate for any default no matter how small. requesting the balance. he must show good faith belief that repayment is impaired Debtor’s Right to Cure: Generally. The bank says that it’s a default and the secured creditor can accelerate the loan. the right of the mortgagor to tender only the arrears is terminated. may tender the arrears due and thereby prevent the mortgage holder from exercising his option to accelerate. She sent a check for overdue payments.
Is it a waiver of default to deposit the check? It’s an intentional relinquishment of rights. He is worried about what happens next. or ENSURE THERE IS A NOTICE REQUIREMENT When does the bank accelerate. Many banks return the checks in situations like this to avoid any possible claim that they waived default by the debtor! ○ Bank wants to avoid any possible estoppel claim that debtor may have (although no detrimental reliance here)! Better safe than sorry! Bank may end up with a bleeding-heart judge that wants to stick it to them! ○ Note: This is NOT a waiver of bank’s right to accelerate b) What would have been the effect if the Bank had accelerated the loan on their books before receiving the check? Many banks would not accept the check just to avoid the estoppel argument. So did she cure her default before the notice or before acceleration? So when was the debt accelerated and when was the tender made? It’s a question of timing. If they accelerate the books by making the entry that is pretty good evidence that accelerated before debtor tendered payment. Would seem to depend on whether notice is required by the contract. Now. ○ – – – a) Pat asks you if the Bank get away with accelerating the loan §9-623 (c) tells us redemption can operate any time before the debtor ○ (1) Has collected the collateral under 9-607. The Prof. or ○ (3) Has accepted collateral in full or partial satisfaction of the obligation it secures under 9-622. If the bank had decided to accelerate before receiving the check then she may have not cured her default. The default provision is set out in the example: default means an outstanding amount EXCEEDING one full payment which has remained unpaid for more than 10 days after the due date. But when they get the check.– – – – What about notice? The authors do not say anything. . “Postbox rule” – maybe a check counts as mailed once it was placed in the mail. when they put the notice in the mail? When the board records the decision in the minutes of the meeting? When is the tender made? When put into the mail box? Maybe just by raising these questions the Bank will want to negotiate to avoid a negative decision on the books of the bank. why should bank send it back?. then the bank is right and they can accelerate the loan under the circumstance that she is in default Compare acceleration v. thinks that if the bank received the checks before the accelerated then this would be a good tender. on Oct 1 we are one full payment late but not exceeding one full payment late. ○ (2) Has disposed of the collateral or entered into a contract for its disposition under 9-610. in which the creditor takes back the collateral. debtor tendering payment. She may have an estoppel claim. Options for debtor: ○ Debtor can perhaps redeem by paying whole balance which she might be able to do Better plan for debtor: DON’T ACCIDENTALLY MISS PAYMENTS. The comment to this article says that if the entire balance is due. if acceleration has occurred then the entire balance would have to be tendered. He missed the October 1 payment. so assume there is no notice provision.2: You are asked advice by friend with temporary cash flow problem who cannot pay mortgage (monthly payment of $860). If we treat this as you don’t have to give notice. The debtor must show some kind of reasonable reliance to his detriment. Problem 13. . Apply it to payment of principal.
You have to cure the default and then you have to have additional payments of the secured creditor’s attorneys’ fees and other expenses that have been incurred because of the foreclosure sale – expenses are usually large. The banks security agreement says “payable on . Easterbrook (Case on p.3: There is a provision in the loan agreement requiring that insurance be effective and notice be given annually to secured creditor and failure to give notice is an event of default. 9-201(?) defines good faith as honesty in fact and the observance of reasonable commercial standards of fair dealing. 9-102 definitions only apply to article 9 issues. How about the secured creditor waiver by not asking proof of insurance (waiver by estoppel since it did not ask in the past)? It’s hard to find a waiver by not acting within 23 days in Hale case (where the bank met with the debtor and remained silent). B) If under the Illinois Reinstatement act (p228) then the debtor would have 90 days after being served with a summons or publication in the foreclosure case during which he could try and reinstate the mortgage by paying all costs and expenses required by the mortgage. which sometimes can run very high (10k for instance). It is costly for the bank. one could reinstate within 90 after the summons has been served – but that is not costless. The Creditor knows that the debtor is a good debtor but the creditor needs money on the spot and he can recall this loan based on the fact that he has not provided insurance info. The contract has gone on for 2 years without providing insurance info. but you have to pay the entire balance due because of the associated finances. (c) If Macklin calls the loan in bad faith. might be in bad faith Problem 13. 12 (10 days over due).4: A debtor gets a line of credit with a bank and signed a note for 150k although she is only drawing 75k. wonders that with a clause like this one if this more like a drafting error that the creditor has made since he is giving the debtor 2 months leeway. Can you recall the loan if the debtor has not provided the certificate of insurance? – There is a general requirement of good faith. after Nov. The present article 1 definition in every state except VA and TX only talks about honesty and fact. If you are representing someone who is trying to hold off as long as possible you have to read these clauses carefully. you could redeem. According to the IL statute. 12 we would be late exceeding one full payment. If he doesn’t pay then the creditor can accelerate payment and foreclose on the mortgage. The Prof. This is a big deal since it gives the debtor a big power. the debtor would have to come through will all the attorneys’ fees and others. The interest plus the unpaid amount would add up quickly and we would be overdue much sooner. A court sympathetic to a debtor would have to follow the comment. We have to be more than 10 days late. Some states don’t allow the accrual of interest by overdue payment by statute. then he is in default when interest accrues on October 12. 230) would say that the contract declares default and the secured creditor can take advantage of it. There is a disconnect between article 1 and revised article 9. – Until the sale is actually confirmed by the court. can Lance sue for damages? Sword/shield distinction re: good faith – we just don’t know (d) Are you willing to continue representing Harvey? If you continue to represent him. This is an easier standard to meet. A lawyer who enters that fee arrangement must be very careful. Problem 13. Can the bank argue that the whole is due even though foreclosure did not go through.A) When does the debtor absolutely have to make the payment? Nov. As of this moment revised article 1 has only been passed in VA and TX. but it’s not costless. Every state has a rule of responsibility that fees must be reasonable. If interest was accruing on unpaid portion.
saying that the bank misled the creditor re: line of creditor. You probably will face liability for destroying the debtors business by proceeding without notice. Problem 13. your initial instinct is that the bank would be better off if you pull the plug now. – The debtor may deplete the inventory. If she makes too much noise about it. – When it looks bad enough.demand. then maybe initial bank would work with you. so loan office proposes giving him another 30 days. will there be a substantial risk that the collateral will decline in value? – They buy their inventory on credit. Advising the client is pointing out all the risk. If not written.6 situation. You should still call the loan. If you proceed by thinking you are in a 13. but you are not really in a 13. she should sign the note. Maybe she got a lower interest rate for signing a demand note. You can call it an assurance or a prediction. This is a long time customer. • 2nd – declare a default. Claim whole value of the business. pull them out. ○ She could make the loan come due once a year instead of on demand. • 3rd – show up with the sheriff. it looks like they will lose 50 grand. Good faith comes in the acceleration problem – not the demand problem.” The debtor is in no position if the demand note is called. If complaint looks good enough.6: It looks like lender liability to tell another lender the financial problems that caused initial lender to call loan. If you really think the threats are empty. who has been a good debtor. the bank will follow it up with a writ of replevin and shut her down. It blocks attempt to refinance. . – What about oral assurances? ○ They are not worth anything. It destroys business. etc. – Do you have to give notice? REMEMBER: We’re not in the acceleration problem at all. how should bank proceed? If we promise 30 days notice. she will go down as a trouble maker. If she wants the money. Arbitrarily increasing line of credit.5: The loan officer wants to give the debtor in financial trouble 30 days notice to find additional money to deal with financial problems instead of pulling the plug. ○ You’re concerned about reputation in the community. That is the way business is done. – What if she signs a note for 100k? ○ When push came to shove she signed a demand note. Do you approve the proposal to give notice? How much notice? If not. Then take the keys? Step for the debtor – declare bankruptcy! Problem 13. and as the loan officer looks at collateral they have. you want a release from any liability extending backwards. What about relying on her relationship with her loan officer? There is always turnover. the parole evidence rule will keep them out. ○ If you’re the bank. – File a lawsuit. What if the bank decides to execute the demand provision and calls the loan? – If she cannot meet it instantly. as a condition of getting a loan. Oral assurances are certain to be followed up by a written agreement. but why wouldn’t you give notice? They’re going to sell the collateral at the fraction of its value! At a substantial discount! So what are you going to do? You pull the plug! What are the steps for the creditor?? • 1st – make your demand.5 situation. Recite the whole history of what happened. She is only liable up to the amount that she took out. but you still want to be careful. Giving 30 days notice puts the bank at risk. but hold off on getting a writ of replevin. But watch out for Lender Liability.
) Reinstatement and Cure under Chapter 13: Allows for resuming obligations of current loan if: ○ (1) Cure all defaults as in 11 but only within reasonable time not lump sum (not beyond period of plan) ○ (2) Future payments must remain due at the times scheduled originally ○ (3) Compensation for damages will be required only if required under state law ○ (4) Plan doesn’t alter the rights to which SC is entitled ○ Chapter 13 Debtors: more likely to use reinstatement than modification because modification can only last over period of plan – 3 or so year which is too short for long-term obligations Stage Two: Reinstatement and Cure • • • • . etc. Reinstatement and Cure Modification: allows the rewriting of a loan if: ○ (1) Minimum due under moficiation – present value of the amount allowed under the secured claim using a market rate of interest ○ (2) Chapter 11 – allows payments to extent over period that is fair and reasonable ○ (3) Chapter 13 – allows payments over period of the plan (usually 3 years) Reinstatement and Cure Under Chapter 11: allow for resuming obligation of current loan if: ○ (1) Debtor Cures any default – occurring before or after beginning of bankruptcy ○ (2) Future payments – due as specific in original K ○ (3) Creditor compensated – for damages incurred through reasonable reliance ○ (4) Plan doesn’t otherwise alter legal or equitable or K rights of the SC ○ If conditions met – plan met be imposed on the creditor ○ Why choose reinstatement over modification: Modification is prohibited on mortgages against the principle residence of the debtor in both Chapter 11 and Chapter 13 Debtor may want to preserve some favorable term in the original K (interest rate. You can also go through judicial foreclosure – go to court and only show up the sheriff after you’ve obtained a court order. Default under Bankruptcy Law • Stage One: Protection of the Defaulting Debtor Pending Reorganization ○ Stay is automatically imposed and remains in effect until a plan is confirmed ○ Debtor must still give adequate protection – only protection against decline in value of the interest in the collateral ○ Chapter 13 – will have to resume making payments no later than 45 days after petition for bankruptcy ○ Chapter 11 – need not resume payments until plan has been confirms Modification v.
. $600 total) Binding Lenders in Absence of Fixed Schedule for Repayment (Credit Lines): No right to cure under bankruptcy MODIFICATION VS.500 total). ∏ filed for Chapter 12 reorganization and demands return. Chapter 13 ($130. § 9-611. 612.Too Late to File Bankruptcy to Reinstate and Cure? • • • • • DeSeno: Modification but not reinstatement is available to debtor in possession (after foreclosure) Bankruptcy Reform Act (1994): Reinstatement available until the residence is sold at a foreclosure sale and modification has since been disallowed under 11 and 13 for primary residences Result: Debtor in possession can reinstate but not modify mortgage on primary residence Debtor’s Choose 13 because Less Expensive. it can keep operating. or to enforce a prepetition or post-petition lien against any property of the BR estate. • Held: Court affirms the Bankruptcy Court order for Δ to turn over car to ∏. 614 says that creditor must give debtor 10 days notice before disposing of it Problem Set 14 Problem 14. $2. and can give the bank adequate protection.∏ defaulted on 2 monthly payments after a year of timely paying and Δ promptly repo’d. 13 Bankruptcy – § 362(a)(3)-(5) automatically stays any act to exercise control over. • Rule: Once a debtor files for Chap. same day car was repo’d. Sometimes the bank will just tell Rebel what it proposes to do and that he will file chapter 11. • Reasoning: Car is part of Bankruptcy Estate – which includes all the legal or equitable interests of the debtor in property § 541(a)(1) ○ § 9-623 grants ∏ the right to redeem the car any time before Δ disposes of it.1: What can the debtor do in bankruptcy to change position from 13. despite better treatment in Chapter 11: ○ Fees: Chapter 11 ($800.5? The debtor could stop bank in its tracks by filing chapter 11. CURE & REINSTATEMENT Modification (rewrite Cure & Reinstatement loan) Debtor proposes new payment schedule Arrearage is included in payments Interest at a market-based rate set by the court Debtor pays the unsecured potion to the same extent that debtor pays other unsecured claims Debtor returns to original payment schedule Arrearage is paid separately Interest at the contrite rate on the reinstated payments Debtor pays the unsecured portion in full In re Moffett: Payments • Facts: ∏ debtor sues Δ to give back car they repo’d . If indeed Rebel is viable. The bank will give same advice as Rebel’s lawyer.
5 with a 30 days notice provision if not in default. You should pull it all out and file chapter 11. He would also have to make up post petition results. so they can find new sources of capital or deal with cash flow issues. . 11-29(b) you can cram down the plan over the banks’ objection. A) If you chose option 1 and the bank calls the loan the sheriff can show up with a writ of replevin right away. you have to file a plan within 15 days and pay 30 days after that initial 15 days.000? You should pull full line of credit. the bank really should give her time. Does the loan look any different from a line of credit of 150. and if she is viable. For this client. the bank might call the loan instantly. look at Easterbrook case. He does not have to cure the default in a lump sum. so may be worth the extra interest you would pay to have an advance notice of a call of a loan. they may be able to charge interest on the arrearage depending on non-bankruptcy state law. the bank must be open to draws or can be subject to a tremendous lender liability suit in that situation. B) IF notice when fully drawn then no difference from the answer in A. – banks don’t like to declare a default.2: The bank will lend Teresa $150. Why would a bank ever allow that to happen. and then file in chapter 11. it is expensive for them so they try to keep the debtor making payments. the debtor increased its loan substantially after the loan had been called. You are better off taking prime + 2%. – If you are in chapter 11 the homeowner doesn’t have to make any payments until the plan is confirmed.Problem 14. and then the lender’s lawyer with increasing demands. and the big chapter 11 filing fee. What can Teresa do? – She can either refinance or file chapter 11. – Chapter 11 is for two kinds of businesses. cash flow problem or capital problem. but chapter 11 eliminates the worry that you’ll go out of business the second the sheriff shows up. and then goes into default. However. the 30 days is not going to do her much good. Once it has given notice. she can find another bank and refinance. If she is viable. but if she’s in bad shape she wont’ be able to get refinancing. That interest is a lot to pay. but once the plan is confirmed he must pay the sum in areas at confirmation and post petition defaults and some attorney’s fees.3: homeowner financing mortgage at 8%. He has a choice now that he has a choice between chapter 11 and 13. she will not be able to find substitute financing. ○ Under bankruptcy. given the alternatives from chapter 11. The chapter 13 fees are not as big either. that is exactly what happened. she can cram down a plan even if the bank does not like it. with a stream of letters from the lender. He has to pay it over a period of the plan.000 to keep going. the automatic stay will keep her in position. there is a big upside in bargaining for an advanced notice with an agreement in the loan agreement that you can borrow full amount.000 according to two options. ○ If she is really not viable. here she has try to get new financing. If Teresa hasn’t solved its finaces in 30 days and the sheriff comes she can file chapter 11 and use the 50. make sure he makes payments soon. if he cures. – Under chapter 11. – Suppose you advise him to go into chapter 13. You can rewrite the loan over a longer period of time and you can stay in possession. If we are thinking about January then think what teresa could do if the bank calls the loan. he has to pay lump sum from arrearage at effective day of plan. or 2) lend at prime plus 3. Also. And if that’s realistic. – Suppose she is not really viable. Problem 14. 1) lend at prime plus 2% on demand note. There could be an advantage to option 2. Under chapter 13.
Use the ability to walk away and stick the bank with a condo worth only 23. But you cannot get a plan confirmed under 13 unless she proves that she can make the payments. and she can modify under chapter 11 and stretch the payments out over 20 to 30 years.4 a) They cannot modify their mortgage under chapter 13 so maybe they should not enter into bankruptcy and try to work something out with the bank beforehand.000 or forget about it another condo for 23. The Prototypical Secured Transaction: Example • • BB borrows Money from ITT: to fund its inventory.000 debt and buy the condo when the bank sells it for 23. If they moved out they might be able to file a chapter 11 and have the payments extend over a longer-term. and rents it out. what if she moves out. like less than three years to go on the mortgage. Reinstatement under chapter 13 works well with long-term mortgages. paying a higher interest rate and 6 months to pay fixed arrearage. d). They can file under chapter 7 give the condominium to the bank and discharge the 71. paying a higher market interest rate. b) The only way they can keep it is to pay 71. They’ve got some big leverage right now. but you avoid the big fees of chapter 11 and most lawyers would push for chapter 13 instead of a chapter 11. see 1322(c)(2) ). the noblemans could discuss with the bank options 2 and 3 and then work out a deal with the bank. the bank might decide to deal with the devil they know rather than the devil they don’t know and taking a big hit. b) What about a balloon payment after five years? – She could reinstatement and cure. The one kind of mortgage you can’t modify are the home mortgages for some crazy reason for some people’s belief that that will bring in more lenders. But she would have the balloon payment due in two years anyways. what is his best move? Don’t file chapter 13 until the 6 grand is past due so that it’s not maintained under the plan but rather as arrears Problem 14. you have to start making payments soon. But she keeps the house. that is only the case in less than one percent or one percent. If he files under chapter 13 he has to resume regular mortgage payments and payments to cure default within 30 days of filing bankruptcy. – Her only possibility is to find another source of financing and with her difficulties that is highly unlikely.000. You have to file a plan within 15 days and start making payments in 30 days.500 as some leverage to work a deal with the bank. yes you have to get started paying sooner.– – You cannot modify this mortgage. – Whether there is interest on the arrearages will depend on the state law of the jurisdiction where he lives. using the rental payments to rent another house? – If she moves out.500 and then they could. e) If Willard did not file but instead re-negotiated terms. its not her principle residence. Security Agreement: typical ○ Names of parties ○ Description of collateral . ○ (you can’ t modify a mortgage unless the last payment is due on the date on which the final payment of the plan is due.
equipment) ○ If creditor is worried about leaving the debtor in possession. They persuaded the creditor to operate a field warehouse on the premises. under lock and key – SC requires that the inventory be deposited in the locked portion of the premises. which was a wholly owned sub of American Express. supplier will buy it back at full invoice price ○ With this K in place. it was a way of preventing the debtor from disposing of the collateral without paying the loan of the proceeds of the sale (expensive) Problem Set 15 Problem 15.1 (a) – The problem was identical to a real case.• • • • • • ○ Promises by debtor and creditor ○ Acceleration clause ○ List of what is default ○ Parties’ signatures Financing Statement: For filing in UCC filing system of state – gives public notice of SI Personal Guaranty from Bonnie: ○ Proprietor of business signs personal guarantee of repayment ○ Gives incentive to owner to minimize deficiency without it there is less incentive to keep business going ○ Incentive to pay the debt Floorplan Agreement: K with inventory supplier and lending bank ○ If bank must seize collateral. which is under the control of an employee of the field warehouse company. While this would include her shares in the company. Allied Crude Vegetable leased the oil tanks of a refinery. creditor will let the debtor continue to use the collateral to produce the funds to repay but the SC will establish tights control (more than inspection checks) ○ The SC establishes a physical warehouse on the debtor’s premises. guarantor has rights of reimbursement. usury laws also prevent banks from charging ridiculous rates Field Warehousing: Debtor is usually willing to offer a collateral items debtor needs for its business (inventory. contribution and subrogation (can assert rights of the bank) ○ BB doesn’t borrow directly: all of the K complexities would be avoided it so but all of BB’s assets could still be seized by company ○ Bank could only go after Bonnie personally. supplier can offer 100% financing to qualified deals because bank put up money and if inventory supplier had to do financing itself it would still have to it anyways ○ Bank can supply debtor more credit than it otherwise would do Guarantor is BB: A creditor can get the money from the guarantor who then has the rights to recover from the debtor. the bank’s security interest would be subordinate to other creditors who have a security agreement with Bonnie’s Boat World directly Unfair to Bonnie: Banks have strict K terms rather than offering a complete menu with different prices ○ Banks wouldn’t want to lend to anyone who would agree to a huge interest rate – sign that no intention to repay it. They induced the major .
The debtor will have an incentive to avoid or minimize the judgments that might be taken against them. Check the sales ledger. The major figure in Allied went to jail. which describes the car and has the manufacturer’s plate on it Problem 15. so the seller would have to give it up to get the owner’s certificate of title for the buyer Problem 15. Allied acted as either (1) broker (agent for sale) or (2) purchaser for resale on its own account. 2) There was a glass cylinder that was pure vegetable and the rest was water. presented them to the banks. but will have a Manufacturer’s Statement of Origin. 265). you cannot collect on them.3 Personal guarantee of the debtor (p. and got huge loans from the banks. Look for advertising of sales. How were they deceived? 1) The tanks only had a small amount of oil on the tops. That means if he goes to a bank that he has worked with before and asks for a loan. but the debtor might keep two sets of books. Look to see if the buyer has painted a name on the side of the boat. Allied had loans for more vegetable oil than could actually be produced through out the country.2 (a): What if Bonnie sells as many boats as possible and wires proceeds to Bahamas? How can you stop her? Requirement that the buyer’s bank send the money directly to the creditor. Not interested in B because you go in and see that there are no boats. Can demand all statements of origin. Some creditors have too many debtors to monitor all of them. how do they check to see if the card is free and clear? ○ Go to the financing statement – see if it lists inventory or a car ○ Why won’t checking titles work? Dealer of inventory of cars won’t have a certificate of title. They rely on the initial credit check and do not perform random checks. The major figure in Allied had been prosecuted for fraud in an earlier point in his career. so how are they useful? Induces the owners to cooperate.producers of salad oil to store their oil in those tanks. Means he used the same card as collateral on TWO loans. 3) The tanks were interconnected. you have to surrender to get a certificate of title. so they would change the contents of the tanks as the checkers moved around. They settled and could not take the risk that the corporate veil would be pierced. It was formed under an ancient statute. He stole blank receipts. the suppliers and the bank’s secured creditors would check the collateral. (b) Debtor sells the boat and does not report the sale to the secured creditor. The debtor will want to avoid the stigma of bankruptcy. Look at the registration numbers on the boat. American Express was not a corporation (at the time). Surprise inspections or requirement that the debtor keep the bank account at the creditor’s bank. More checks by the inspector. The individual stockholders were individually liable for the debts of American Express. He managed to sell most of the vegetable oil supplied by the major companies and pocket the proceeds. A number of his employees were hired by the creditor to operate the field warehouse. 9 out of 10 cases. Trade-off: May lose business to banks who are less risk-averse and don’t require personal guaranties. The field warehouse employees. .
. Does the debtor have the power to keep the boats? How long? If the bank tries to repossess the boats. (b): The debtor gives up the collateral without a fight: 9-608(a)(4) – a secured party shall account to and pay debtor for any surplus. (c). Deutche can come in – reassess the boats and then sue for deficiency. Problem 15. the secured creditor’s lawyer has mentioned the violation of the criminal statute? – Designed to prevent lawyer conduct that looks like extortion. The secured creditor will be required to use judicial process.e. File a petition in chapter 11 – automatic stay stops the replevin. 9-609(b) The secured party may proceed without judicial process (i. foreclose. (d). and the obligor is liable for any deficiency. §9-601(a) – after default. The debtor might have to file for bankruptcy. The bank will have to get the stay lifted. notice is not required. you don’t want to make them that mad. The agreement for wholesale financing and the floorplan agreement give the secured creditor the power to repossess the boats at its discretion. a secured party may reduce a claim of judgment. Model Rules of Professional Conduct A lawyer shall not threaten criminal prosecution solely to gain advantage in a civil matter. Does it turn on whether in the first instance.4 Duetsche has a right to the boat. or agricultural lien by any available judicial procedure 9-609(a) – a secured party has the right to possession of collateral after default. Failure to pay within 10 day is prima facie evidence of a willful and wanton failure to pay. A debt is not dischargeable in bankruptcy when there is fraud!!! What’s the advantage of having her on a guarantee? – If the business is worthless. In this problem. which will take time and money.He is more likely to favor the creditor with personal guarantees over other creditors. she has it by contract and by statute (9609) when she is default. she has an incentive to cooperate with the lender because she is liable herself. The debtor wants the secured creditor to give up an advantage in the civil matter. or otherwise enforce the claim. security interest. the debtor could create a breach of the peace. Deutsche will immediately try to repo (a): The bank declared BBW in default and demands surrender boats. self-help) if it proceeds without breaching the peace. She could be prosecuted under the Illinois statute: Ill Statute (p173) – it is unlawful for a debtor to dispose of the collateral and willfully and wrongfully fail to pay the secured party the amount of proceeds due under the security agreement. it is the other way around. The bank could prosecute the debtor to send a message to its other customers. What is the point of doing all this? Can the debtor use the threat to delay in chapter 11 to get them to agree not to prosecute her? Danger that Deutsche could try to get her put in jail (fraud).
If the lawyer does not go to the prosecutor, it looks suspicious. This has been a requirement of determining whether “solely” was met. If the secured creditor agrees not to prosecute it supports an inference that the purpose of threatening the criminal prosecution was to “return the stolen money.” The client can make the deal not to prosecute, but the client’s lawyer cannot. Can the lawyer tell the client to threaten criminal prosecution? 1. A lawyer cannot violate the rules through the actions of another. You are not supposed to unjustly delay, but has the lawyer delayed them, he has given them their boats in the deal. The initial refusal to turn over the boats doesn’t violate article 9 because article 9 says self-help possession only if they can do so without breaching the peace. The ability to hold up a secured creditor, through chapter 11 and breach of peace, gives the debtor considerable leverage. –
PG 170 – Make example out of her. Keep debtors honest – this is what we do when we lend collateral out of trust. Problem 15.5 There is no consideration. Once it has given consideration it is done and the argument is gone. Thinks it is a waste of money to make that argument if the loan has been made and if it hasn’t been made you won’t be in court because the bank won’t be a creditor. AK: This is an exercise in using a magnifying glass, but this is typically what a statement in transaction will look like. It’s not easy to figure out what the finance charges are. First 30 days, no interest charge – AK’s best guess is that Shoreline is picking up the tab. Is Bonnie liable for a deficiency if she gives back the boat and it’s not enough? – Shoreline definitely has a deficiency but it’s not a secured party ○ Shoreline is secondarily obligated to DFS on Bonnie’s debt – Look 9618-d ○ If we look at (d), an assignment, transfer, or segregation, described under Section 9(a), is not a disposition of the collateral under Section 9(a) – Last piece of the puzzle is the agreement between Bonnie & DFS ○ Paragraph 10 of the agreement – Bonnie and DFS have agreed about what happens when there is a default – page 259 “And private sale of such collateral under the UCC…” • But using 9618 – this is not a disposition of the collateral Parties seem to have agreed that segregation rights do not apply – what we have here is a private sale of the collateral – in which case, Shoreline is a buyer and buyers are not entitled to a deficiency judgment The agreement makes Shoreline a buyer and so Shoreline does not get any deficiency from Bonnie and it can’t claim segregation rights ○ OR is Shoreline more like a party that has taken over the rights and duties of DFS? Our authors say Shoreline looks more like a purchaser at a private sale, BUT AK thinks the whole transaction is transfigured in a way that requires Shoreline to take over DFS’s position if Bonnie defaults Problem 15.6 Bonnie consults you before signing each of the following deals, what is your advice?
a) Thinks it means that the next 60 days the interest days is prime – 1, over ninety probably means prime + 2.1, if it is late it is prime +5.5, some kind of add on
b) 9-109 (d)(11) could take priority over the interest in contract rights, lots of
litigation over transfer of interest, if article 9 were to apply wouldn’t be contract right but general intangible. Doesn’t think they could get lease as general intangible, because the exclusion ought to control. No security interest in the rents, the rents aren’t proceeds of your collateral. It can become a separate item of collateral, it just doesn’t follow from your interest in the lease. You can give someone a security interest in a deposit account, yes, but you can’t give a creditor a security interest in lease and then by virtue of that have it extend to rents (???). What about the deposit account? Is a deposit account an account? Def. of accounts, right to payment of a monetary obligation, doesn’t include deposit accounts, 9-102(a)(2). How might deposit accounts be included, if proceeds from collateral go into the deposit accounts, proceeds from things that are undeniably collateral go into account. Contract rights used to be an article 9 term, some has gone into definition of accounts and some into general intangible. Turns up in some people’s security agreements. Do general intangibles cover a bank account, don’t think that it is sufficiently ambiguous to allowing officer to testify as to what it meant. c) Can they give a demonstration ride? Paragraph 5(b) of prototype agreement says you can’t demonstrate without the written permission. Why is that? The value of the demonstrating boats goes down. Demonstration models get sold at a cheaper price. Under our agreement use as a demonstrator is an event of default giving Deutsche a right to call the loan.
d) When there is a reposed boat, Shoreline says they will pay Deutsche the value
of the boat, but whatever happens there is no deficiency for Deutsche because it gets paid in full by shoreline. Can it get a deficiency under 9-618? A secondary obligor, shoreline, acquires the rights and has the obligations after. The sale to shoreline by contract is a disposition and thus shoreline is in the position of a buyer and not a secured creditor. By contract shoreline has been done out of the ability to get a deficiency judgment. Comment 3, transfer to a recourse party, shoreline, can sometimes constitute a disposition that discharges a security interest. Prof. thinks that is wrong, because of 9-618 proposition of subrogation, there is a case called The French Lumber Case, said someone subrogated to position of former debtor, he thinks that once shoreline pays Deutsche finance, it is subrogated to Deutsche’s position by obligation of law and you don’t have to worry about 9618. Whatever is in paragraph 10 of Deutsche Bonnie agreement shouldn’t bind shoreline. Shoreline more like a purchaser at auction or one who takes over debt. Takes over debt then should be on hook.
Creditor-Third Party Relationship
• Priority - Competition for SC’s Collateral: Law treats many of the contests over rights to collateral as questions of Priority
Perfection: Personal Property Filing Systems
• • • • Priority: Contests to rights to collateral Liens: Relationship between debt and property that serves as collateral Remedy: Attribute of a lien where if debtor fails to pay debt, SC can foreclose the lien, force a sale of the collateral, and have the proceeds of the sale applied to payment of the debt Priority: Relationship between liens and other liens against the same collateral ○ Senior lien priority gets paid over junior liens ○ Each lien is relationship between an obligation and an item of collateral; priority is the relationship between these relationships
Peerless Packing Co v. Malone • Facts: USCs ∏ claim that SC Δ of bankruptcy debtor was unjustly enriched. ∏ sued because Δ knowing it was going to foreclose on store allowed ∏ to continue delivery on goods for a week before Δ took over; 13 USCs of grocer, one took SI and got everything • Rule: A theory of unjust enrichment is not applicable in a case governed by the UCC • Purpose and Effective of UCC: would be substantially impaired if interests created in compliance with procedure could be defeated by applicable of this doctrine ○ Only truly egregious circumstances verging on fraud would warrant setting aside from UCC procedures
How do creditors get priority?
• • General Rule: Liens rank in CHRONOLOGICAL order in which they are perfected Perfecting a Lien: ○ (1) Filing ○ (2) Possession ○ (3) Control ○ (4) Posting notice on the property Theory of Filing: Allows those with SI in property to leave a message giving notice to other creditors Problems – sophisticated lenders will know about it while the others will not; must know rules too; searching is hard and expensive and adverse consequences arise only if the debtor lies on the loan application (disincentive to lie)
the TIB can upset security interest as voidable preference. it’s the debtor who has decided who is going to give priority. Real estate. property tax. lawyers generally choose service company ○ Costs: searching is generally $50 per name. • Facts: ∏ sought determination that certain patents and trademarks were property of the bankruptcy estate. Between these two creditors. • Art. of State? • Held: Comprehensive scope of federal copyright law clearly meant to preempt state filings.• • • Multiplicity of Filing Systems: Each county can have variety of recording systems ○ UCC. although some allow members of public to search. • Rule: An SI in a copyright is perfected by filing with the USCO rather than filing a UCC-1 FS with the appropriate Sec. Felicia’s lien is not perfected since . If this occurred before 90 days of filing before bankruptcy. The sheriff can still go ahead and levy. Filing is generally $15 with a service company ○ Reduce Costs: by dealing with office and knowing procedures or get access through remote connection Best Method: best to just file everywhere if you are uncertain what type of property you are dealing with but the decision where to file requires an understanding of the law In re Peregrime Entertainment • Facts: SI in copyrights held by Δ and not registered with the Copyright Office were challenged by the debtor in possession. There is nothing left for Felicia.1: Felicia (judgment creditor) wants to have sheriff levy on car (Honey). which includes IP Problem Set 16 Problem 16. local tax lien. The debt is greater than the amount of the car. – Bernie by going out and filing the financing statement and entering into a SA has perfected first. 9: governs the method for perfecting a SI in patents as it applies to general intangibles. The secured creditor is not subordinate to the lien creditor if it perfects first. etc. only employees may access records. • Issue: is SI in copyright perfected by filing with the US Copyright Office or Sec. Felicia’s lien is not perfected since Sheriff does not have possession. ○ Federal systems – copyright office. • Rule: an SI in a patent is perfected when the assignor files a proper UCC-1 FS in accordance with state law. and Felicia is not. office of patent and trademarks Method of Costs and Searching: ○ Methods: many times. Bernie is perfected. and the active sale is a conversion of Bernie’s rights. tack on cost of service company and printing. 9-317(a)(2) is the disposition that refers to the competition b/w a lien creditor and a secured creditor. All Bernie has to do is notify the sheriff and say he has priority over Felicia. of State In re Pasteurized Eggs Corp. may have to search many names or variations. money judgment. and you discover that there is a security interest on car given to Bernie. It’s up to Bernie to see if he can stay off bankruptcy for 90 days.
Sheriff does not have possession. Bernie is perfected, and Felicia is not. The debt is greater than the amount of the car. There is nothing left for Felicia. In most States an unsecured creditor obtains an execution lien by reducing its claim to judgment obtaining a writ of executing and having the sheriff levy on the assets. Under the law of most states the levy both creates the lien and perfects it by the Sheriff’s possession. (p280). In this case the SI comes before and has priority. Bernie became a secured creditor long before after being a creditor. Did Bernie give value to get this SI? Are the past loans considered as value? §1-202 (44) defines value: the taking of property in satisfaction of or as a security for a preexisting claim. The debtor decided who would be the secured creditor. Both of these guys have a right to money from the debtor. The debtor decided who was going to win basically. Can he do this? Is there anything that cuts down on the debtor’s ability to do this? Bankruptcy Law prevents the debtor on the eve of bankruptcy from preferring one debtor over another. Bankruptcy law prevents the debtor to prefer one debtor, the law is in favor of equality of debtors, to share the assets of goods of the debtor on a pro rata basis. The preference period is of 90 days (this is why in the facts of the case it says just over 3 months ago), so in this case the preference laws don’t work. If this occurred before 90 days of filing before bankruptcy, Felicia can upset security interest as voidable preference. It’s up to Bernie to see if he can stay off bankruptcy for 90 days. The idea is that if you have a SI you are going to prevail over unsecured creditors is one of the great certainties of commercial law.
If debtor is going to go under, whole notion of bankruptcy – distribution? The sheriff can still go ahead and levy. All Bernie has to do is notify the sheriff and say he has priority over Felicia, and the active sale is a conversion of Bernie’s rights. Could Felicia sell the car subject to Bernie’s priority? The junior creditor can sell the item subject to the senior creditors rights. §9-401 “it can be transferred involuntarily.” As a buyer of course you aren’t going to pay very much for the car or anything. In this case you have a 10k car with someone else who has a 12k priority in it. So the car isn’t worth anything to anyone else, she couldn’t sell. In some cases a Court won’t let the junior creditor sell if the senior creditor objects. If in this case Bernie comes in and says he wants to conduct the sale and not let the junior sale conduct the sale, then the junior creditor should seize in his sale. The senior creditor has the right to exercise the first sale. Selling subject to the senior creditors priorities isn’t per say a prejudicial circumstance to the senior creditor. The real problem for Bernie would come if the debtor was in default to the junior creditor alone and not to the senior creditor. This would be a problem since the junior creditor would have a right to foreclose. In this case Bernie could declare a default even though the payments are not in default to him. This is the reason behind a provision in the SA by which a default in subordinate liens is to be considered a default in the loan you are making! When there is an original disposition the proceeds are multiplied since
the creditor has access to the collateral and the proceeds received form the sale. Problem 16.2: This is a small claims problem. There is Sergio the street vendor, paying some money to a seller for a vender cart. Seller goes into business, but street vender finds out that seller previously gave a security interest in cart to financer. The financer is fully protected. Street vender is not a BOC of business. Sergio cannot sue seller because of bankruptcy stay. Under UCC, there is nothing you can do for Sergio. You could look to the footnote in Peerless Packing, talking about fraudulent conduct by secured creditor (GFC). It’s not general finance company’s fraud. It’s seller’s fraud. The GFC of this world are tuff guys in a tuff business. You can find something to give leverage. Problem 16.3: You are order UCC searches for collateral below in anticipation for lending against it. In what systems will you make the filings and conduct searches? a) Tools: look to state UCC system. The tools are equipment. b) Patent: file in both places- Patent and UCC system, Kazinsky is unclear in National Peregrine whether we have to file in Patent Office. c) Royalty on Copyright: probably in copyright office. You would want to double file because there is uncertainty. What about the proceeds from the copyright? You have to order 119 searches. That’s a lot of money. One of the purposes of the copyright office is to set up a filing system for searches. That makes it harder for searchers not easier, since it adds a multiplicity of places to look. d) Rare Automobiles Dealer: If not inventory then its equipment. There is lots of fraud with respect to motor vehicles. Trade Mark (“American Originals”): You might have to search/file in both UCC and Trademark Office for trademarks. – You’ll probably end up filing and searching in the patent office, in the trademark office, and in the UCC system If you want to buy something, you can know that there is a security interest in the goods when you can’t know that the sale to you would be a violation of the security interest. Will come up in 9-320. Problem 16.4: Should you search or file first? File first because you may lose priority in the mean time. Plus, there may be someone ahead of you and it has not yet shown up in the records (the filing office has 2 days). What if there is a delay? There is no penalty against the filing officer.
Art. 9 Financing Statements: Debtor’s Name
• Key: Even if a filer and search go to the same filing system, it still may not be enough to ensure that the message is received. Filer must not only go to the right system but they must leave in the right place in that system, in such form that the searcher who finds it can realize its relevance Financing Statements: Paper records which are filing at FO ○ Methods: of storage whether paper, microfilm, etc. do not allow for searching the content of the financing statement ○ To Find Specific: FS you must have the file number assigned to it by the clerk upon filing Index: What the typical searcher knows isn’t the file number but the name of the debtor so the FO maintains an index of the FSs by the debtor’s name
Components of a Filing System
Also includes the file number and address of the debtor May include description of collateral, the name and address of the creditor and date of filing Search Systems: In a system of millions of alphabetized name it is easy for some to get lost due to misspelling by filer or data entry error by clerk ○ Search logic can be programmed to pick up some but not all of the errors ○ May or may not be disclosed and no two logics are the same ○ The Basket: Not all financing statements may have made it in to the index yet, if not ○ ○ § 9-506: A financing statement substantially complying with the requirements is effective even if it includes minor errors or omissions unless the errors or omissions make the FS seriously misleading Individual Names Rule: Correct name is the name by which the individual is generally known, for non-fraud purposes, in the community ○ Problems ○ With regards to individual names, the indexing system is built on sand ○ Courts favoring longer more formal names over short more colloquial versions ○ Filer’s Rule: File in full, formal name of the debtor ○ Searcher’s Rule: a searcher may still be required to make multiple search to protect himself Corporate Names: Because corps can only be formed through a charter or COI with Sec. of State in the state of Inc., a corporation has only ONE correct name at any given time ○ Generally required to designate as such through suffix ○ Exception – CA ○ States will refuse to incorporate a second corp. with the same or a confusingly similar name but two corps. Can have the same name if Inc. in different states Partnership Names Rule: Name of the partnership is that by which it is generally known in the community Trade Names: Name other than legal name by which a person or entity does business ○ Rule: Neither necessary nor sufficient to identify a debtor on an FS § 9503(b) Entity Problem: If looking to see if Harvard Law property was encumbered, what name would you look under? ○ § 1-201(28) ends the definition of organization with the words or any other legal or commercial entity ○ Implication: an entity may be a debtor for the purposes of Art. 9 even though it is not a legal entity for any other purpose Errors in Debtor’s Names on FS: A lender who lends pursuant to a search under an incorrect name will nevertheless be subordinate to a lender who filed prior to them ○ § 9-503(a) A FS filed under an incorrect name is ineffective
Correct Names for Use of Financing Statements
and A/Rs owned by McErny Leasing and Bob McErny. • Rule: an individual debtor’s legal name MUTS be used in the FS to be sufficient under 9-502(a)(1) • Held: By using the debtor’s nickname. Suppose it’s not a corporation.1: Your client wants to lend against equipment. Ask Bob what his full name is? It’s Robert Joseph McErny. lien creditor or future SC Test for Misleading Names § 506: if the FS was not found in a search under the debtor’s correct name. You want to know what kind of entity McErny Leasing is? Verify with Secretary of State. If you are in a system that does not show up variations. What will you ask for from Bob to conduct a UCC search under “McErny Leasing and Bob McErny”. standard is whether an abbreviated or erroneous name sufficient identifies a taxpayer where a reasonable and diligent search would have revealed the existed of the notices of the federal tax liens under these names ○ US as involuntary creditor of delinquent taxpayers is entitled to a special priority over voluntary creditors Problem Set 17 Problem 17. If you file under the most formal name. the question is how are you going to search all . How do you know that company owns collateral? You have to trace title from inventory and equipment to sources of sale. using the filing office’s standard search logic. inventory. Δ failed to perfect the SI and Bankruptcy reversed. at a familiar address.• § 9-517 An FS that was misfiled by the filing officer is nevertheless effective – search may have cause of action against the filing officer if the state has waived sovereign immunity ○ § 9-502(a): any future SC or lien holder may gain priority by demonstrating that a prior filing was insufficient because it didn’t provide the name of the debtor ○ § 9-506(c) Test for sufficiency of name: not whether the FS was actually found but whether it would have been found in a search by a trustee. Ask the filing officer to do a search in all variations of the name he is known in the community. • Reasoning: Federal form preempts any state law on lien notices including the UCC • The Standard: Only questions is if IRS sufficiently identifies Spearing in its notices. the name is seriously misleading ○ In re Kinderknect • Facts: ∏ appealed from a decision of the bankruptcy court preventing him from avoiding alleged SIs held by Δ. Bob is the owner of the company. McErny Leasing could be a trade name and that is no good to file. and if that name is not used. parties in interest should be to assume that the debtor’s property is unencumbered. In re Spearing Tool and Manufacturing • Facts: ∏ files a complaint with the Bankruptcy Court alleging its lien against Spearing Tool and ∏ had a higher priority than the IRS Δ lien. Δ failed to provide the name of the debtor within the meaning of the UCC and failure to provide the correct name is seriously misleading as a matter of law under § 9-506(b) • Reasoning: When a UCC search of a debtor’s legal name provides no matches. • Rule: An IRS tax lien doesn’t need to perfectly identify the taxpayer. You are looking for something that looks like McErny Leasing Co. It all depends on the system’s search logic. it’s probably an ineffective filing.
the more thorough the searching. work? – No middle is equivalent to all middle names – J is first letter of first name – so it’s OK Correct name: Robert Don McErny. so ineffective Correct name: John Phillip Smith IV. Does Smith IV.variations. Electronics Corporation. work? Yes – says “Corporation” Correct name: Heartland Corporation of Iowa. Does K W M Electronics Corporation work? No – it ignores the punctuation Correct name: Heartland Inc. Does Mr.W. you start to run into big bucks. Does Harland Inc. so it is OK that there is no hyphen. Does Eduardo Sanchez-Garcia work? – OK Correct name: Eduardo Sanchez-Garcia. AK knows some systems ignore the suffix. Does Heartland Corporation work? AK thinks “of Iowa” is part of the corporate name and the name will be ineffective Correct name: Heartland Corporation of Iowa. Does Smith. Correct name: Robert Don McErny. so it’s OK.M. John work? Standard search logic treats no middle name as the equivalent of all middle names . Does Heartland Corporation. so it is OK (?) . Does Eduardo Sanchez Garcia work? – System ignores cultural differences. but would be effective in most systems Correct name: John Phillip Smith IV. John Philip work? – Middle name is misspelled. the bigger the loan. with “Sanchez” listed as the last name? – Standard search logic says Sanchez is the middle name. The lender has to come up with a policy. Don Robert McErny work? – If system ignores suffixes. but we don’t know how to work ith the suffix. Does Smith IV. work? No – it is misspelled Correct name: John Phillip Smith IV. Because if you start searching for all the variations. Does Eduardo Sanchez work. AK thinks that it could come out either way. Mc Erny work? – System ignores spaces. Correct name: Heartland Corporation of Iowa. Does Heartland of Iowa. Correct name: Eduardo Sanchez Garcia. Does Heartland Corporation work? No – it ignores “the” Correct name: K. J. then it is OK Correct name: Eduardo Sanchez-Garcia. but doesn’t know about all systems. Inc. Does Don R. an Iowa corporation work? Yes Correct name: The Heartland Corporation.
.2: Susan Alexander? John Phillip (“Jack”) Smith? Tessie’s Tire City? You want to know what entities these are before you go down to the filing office. end of the second business day. UCC 9-506(c) All those filings are effective against John Phillip Smith because the search logic employed by the Secretary of State’s office allowed it to turn up in the search. Jr. b) If you want to lend to Lee Leasing against a whole bunch of collateral.Correct name: Eduardo Sanchez-Garcia.You want to know if they own it! They might just be leasing it! Problem 17. Because it turns up in the searching logic.3: Name – John Phillip Smith. when does it have to index it under 9-519(a) and (h) and 9-523? It has to index it by Friday. Tessie’s Tire City is not a corporate name because it does not have an inc. So on Friday. – System doesn’t allow for cultural differences. since it came up under our search. Smith. search it. Once you find that out the business name. The Secretary of State office did us no favor by giving us all those names..5: If filing office receives an original financing statement on Wednesday. co. What are you looking for when you check with the Secretary of State? If they say they have Lee Leasing on file. corp. which should you search? John Phillip Smith. Je. it’s probably not a seriously misleading mistake. but also search with trade name to make sure (even though its probably ineffective). Problem 17. so treats unhyphenated names the same as hyphenated names. There is a hard copy but its probably old. it’s 2 days to be recorded and 3 days to show RD . so you will probably request a computer search. The information has to be current as of 3 business days. John Phillip Smith.” BUT not the other way around. You’d probably want to ignore the suffix in the search because there’s a high probability that the filer ignored the suffix. You ask for Susan Alexander. find out: . but different middle initial. etc. 9-519(h). John Philip Smith. the searcher has a duty to check it out.. what do you want to know about Lee Leasing and its collateral? Find out what kind of entity Lee Leasing is. otherwise you’d get too many search results. AK doesn’t know what standard search logic is – doesn’t know if the system will show the results that spell Philip with 1 “L” Problem 17. States differ in procedure. Which ones do you order? If there is a mistake in the middle name. and others with same name. and see which one’s match the address of your person. Curse the Secretary of State. and order all the financial statements. What’s the transaction about? Is it a developer? Is it a consumer? You first want to know the address before you go to the filing office. The problem is learning the search logic and dealing with it. Filed names: John P. they don’t have to report on information except from Tuesday. Does Eduardo Sanchez Garcia work? With “Sanchez Garcia” listed as the last name? – No – not OK AK says you’re asking for trouble if you put two unhyphenated names as the middle name. Jack Smith. Might want to devise a system where “Smyth” shows up as a result if you search for “Smith. Overall. THE FILING OFFICE HAS TO REPORT/COMMUNICATE ON THE RECORD BY THE 3 BUSINESS DAY AFTER RECEIVED ORIGINAL. What day would the last search go out that did not include reference to this financing statement? UNDER 9-523(C)(1). it aint serious if the name that its under is ineffective.4 If name s John Phillip Smith. John Philip Smith. Problem 17. John Smith.. (a) If a search returns a name.
Problem 17. Because the filing office can do it at the end of the day on the second business day. Do a search now. and here that day is Monday. .. There is NO sanction if they do not comply with the requirements. searching.up in a request. Secretary of State’s Office in CT was 144 days behind. the search will pick up our statement and anything before ours. you want to ask on Tuesday also. The only thing that will show up is if the debtor has given someone else an interest. so if you receive it on Monday. File your own financing statement. Who knows if you can be ready by end of closing day? They may follow state procedure. This means that the request may not be current until 3 days after filing. . schedule closing for 16 days from now. in case anyone filed financing statements ahead of you.Must enter it by the end of Friday – the latest date a filing officer can respond to a search request is the 2nd business day after it receipt. We probably won’t be ready in 16 days because the filing office has to index it.When you ask for a filing.7 Options 1-3: not good alternatives Option 4: A combined 50-state filing system would be too enormous. Kaufman thinks we should go with what we’ve already got – multiple filing systems. by what day must the filing office index it and thereby render it searchable? 9-519(a) & (h) . you have to respond by Wednesday. a. b. Whether the filing office indexes it immediately or holds it for 2 days and then indexes it. Second search should come up the same as the first search. so schedule closing for 7pm on the 16th day. This system depends on the filing office complying with the requirements – indexing. 9 Financing Statements: Other Information • Generally: Most file in hard copy on an official form in § 9-521 but the form is not required. Some file the SA itself . Art. but didn’t stop business in state of CT!!! Problem 17. What can we do. have to get a search that shows my financing statement on it.6: You are going to search for security interest on Tang and on Argon. you want to search for something that will pick up your financing statement – want to pick up all the preceding financing statements ahead for you. do everything. Running out of time. etc. So if you ask on Monday.Political difficulty of eliminating filing office. but we won’t find anything that comes between now and 16 days from now. what is a practical solution? Run your search now. a) If the filing office receives an original financing statement on Wed. hold the papers in escrow until you do a second search that comes up clean.
Debtor’s Address 9-516(b)(5)(A) 9-516(b)(4) 9-516(b0(5)(B) 6.) 7. it will be effective against all but a purchaser who reasonably relies Errors are only fatal if they are seriously misleading Additional Rules • • • • • • Filing clerk should not consider the accuracy of any piece of info. Debtor’s Name 2. If it is accepted it is nevertheless ineffective If it is erroneous? Minor errors are only fatal if they are seriously misleading Secured Creditor’s trade name is only fatal if seriously misleading Errors are only fatal if they are seriously misleading Clerk should reject the filing If Accepted it will be effective against all but a purchaser who reasonably relies § 520(c) Clerk should reject the filing If accepted. Secured Creditor’s Name § 9-502 3. Type of Debtor (Individual or Corp. it is ineffective Unauthorized Filing: Victim of bogus FS may file a correct statement ○ Filing Correction Statement: helps gives notice to potential lenders but title to the collateral is still clouded Authorization to File a Financing Statement .Required Information on Financing Statements and the Result of Erroneous Information UCC § Required Information 1. Secured Creditor’s Address If left blank? Clerk should reject the filing. Description of Collateral 4. Jurisdiction of Origin 9. Type of Organization If the debtor is an organization 8. Organization ID # 5. but should reject it only if it is left blank If Filing Office Wrongfully Rejects: filing is still effective against lien creditors Unlike SA: all assets is a sufficient description of collateral Description with Wrong Address: Statement may still be effective Must have Permission in Authenticated Document: § 9-509(a)(1): ○ (1) Signing a SA automatically the creditor permission to file an FS ○ (2) If the FS is not authorized.
but the secretary of state by statute is required to reject it if it does not have the number. What happens if a busy body in the secretary of state office sends it back to you? The danger of doing nothing. The secretary of state office did something wrong. and you prove that you are perfected under the statute. The filing office does not reject it if it is a wrong number. the address didn’t exists but the FS was valid because the sarched had enough info to inquire In re Pickle Logging • Facts: ∏ sought reconsideration of Bankruptcy Court’s decision that it failed to perfect an SI in piece of logging equipment. From a substantive reason there is none. • Rule: Description of collateral in an SA and FS is sufficient if it reasonably identify what is described • Reasoning: ∏ misidentified both the model and serial numbers – compounded by the fact that the incorrect numbers matched each other ○ There was no inconsistency that could alert a person of ordinary business prudence that further investigation of this alleged SI was required UCC Insurance • • Coverage: The rusk of most kinds of errors in the filing and search process and some aspects of attachment. The debtor authorizes it but you don’t know its organization number. It’s not required to be effective. The effectiveness only goes to the debtor. So are you violating that? The lawyer should later file an amended statement on Monday with the correct number.1: You have a filing statement that has to be filed today. There could be an estoppel argument. you will lose to a secured creditor that relies on the misrepresentation and . You are perfected. Deere • Facts: BOA files FS listing collateral as all equipment. creditor. But they have sovereign immunity. You should not rely on fault of secretary of state mishap. There is no difference from leaving it blank or telling you to fill in a false number. and later some creditor is deceived. perfect and priority Does not Cover: Against possibility that the debtor does not own the collateral Problem Set 18 Problem 18. but you are perfected because you put false information. Therefore while you are lien perfected with the wrong number. and collateral description. What did the first creditor do wrong? You can claim a lack of good faith argument. A lawyer shall not make a material misrepresentation of fact to a third party. that creditor is going to say that you should have done something. SPB files FS listing collateral as three specific machines and SPB claims that prior FS is ineffective failure to describe collateral • Rule § 9-505: Huge leeway in description of collateral for FS ○ Either by type or category or by saying all assets ○ Under this standard – BOA wins. reasonable search had necessary info to make further inquiry ○ Even more generous standard in Teel Construction – SI granted in collateral at certain address.○ Real Estate: attempts to remedy this problem by requiring that the mortgage by witnesses and acknowledged Grabowski v.
B) It has the correct name so it is effective. is a searcher who wishes to find a secured party even without an address. Hard to see how someone is going to rely on organization number then. so the failure to put an address wouldn’t make any difference to the searcher. so is it still effective? Yes under 9-520. What you are really saying is that you get to do the morally correct thing by violating a rule of professional ethics. a searcher won’t have any difficulty at all in finding that bank. . and organization was there. jurisdiction. How does article 9 deal with it? 9-338 it is effective. C) Assume that the filing officer has accepted it. What kind of reliance are you going to have on a false organization number. because they are required to accept the financing statement even though it had the incorrect debtor address. 9-338 limits the priority of the secured party in favor of a purchaser who gives value in reliance on the wrong information. the trustee in bankruptcy. Is this a problem for a hypothetical searcher. this one really does interfere with the operation of the system. How do you have your cake and eat it too? A) In the context of the particular facts. Can the trustee avoid it? When it is lien perfected it applies to trustees in bankruptcy as well. This is a federally chartered bank. C) 9-338 again talks about the purchaser who gives value in reasonable reliance on incorrect information. (Using the debtor’s trade name is the a problem. but it does have consequences. but he didn’t. 9-506(a) it is effective even if there are some minor errors unless it is seriously misleading and here the trade name is so different from the actual name that. That is what the comments say. Problem 18.2: Being perfected at debtor’s bankruptcy is critical. The filing clerk is required to accept it anyways. In the usual situation it is going to be perfectly obvious that the organizational number is wrong. Although. especially if there were addresses. B) 9-516(d) a record communicating to the filing office with the fee which the filling officer refuses to accept is effective except with respect to a person who gives reasonable value (a purchaser) with reliance on the absence. but here using the secured creditors trade name so we don’t have that kind of situation). Doesn’t article 9 set you up to do it? Maybe you could include in parenthesis that this is not the right number to save you from disciplinary action. A) 9-516(b)(4) (requires the mailing address for the secured party) the filing officer should have rejected. as much as searches are not conducted under the party’s name an error in the name of the secured party will not be seriously misleading. but it is generally effective against the person you are probably most worried about. The other author says 9-516 comment 3 doesn’t say it is okay to do it all it does it not provide a penalty for filing with the wrong organizational number. A secured creditor is a purchaser according to 1-201(32) and (33). sure. If you don’t file with a false number and someone gets in before you then you could be on the hook for medical malpractice. If it made the secured creditor hard to find then perhaps it could be considered misleading.the fact that filing with an incorrect number got you by. After all the name is required to be there for a purpose. giving the wrong organizational number is not a material misrepresentation if taken to mean what they do in 441.
Are you safe to levy on the inventory. . the accounts receivable by looking at the financing statement that says equipment and finding no other financing statements and no other liens. You should say. F) The filing officer should have rejected. the searcher should have been put on notice that there was some kind of security interest in something the debtor owns and of what value is the description of the collateral in the financing statement? Suppose you find equipment and you want to know if you can levy on inventory or accounts receivable. You are entitled to rely on apparent state of the record. let me find out. and Ill get back to you. You have not sold anything yet. Financing statement is facially defective Problem 18. The author’s suggest that there is a pretty good argument that that requirement ought to be offended. What you going to do? You should levy on Trimble Ave.4: Glacier is supposed to have a security interest in Trimble Ave collateral but financial statement got screwed up. so go ahead and levy.Kaufman thinks that Comment 2 is wrong. Kaufman thinks it is seriously misleading and it is true that you don’t search in the name of the secured party and at times you are entitled to rely on what you find there. As a matter of policy how should this turn out. secured party’s name and description of the collateral. Do you lie? Some jurisdictions take lying seriously. Unless they are minor errors that are not misleading. as a matter of article 9 it is defective. The financing statement must have the following correct information: Debtor’s name. The landlord knows that the other location is new and not listed. Then go get one at that point before Smith levies. but once she says it isn’t her. Kaufman doesn’t see why you can’t rely on that at least to the extent of saying that it is seriously misleading.Searcher can’t make an inquiry because the secured party isn’t identified at all. . A security interest that starts in equipment can drift off into other items as proceeds. But they you look at 9-506 comment 2 that says an error in the name of the secured party will not be misleading. A) It doesn’t seem that likely that Glacier is perfected.You can’t get an estoppel claim unless there is REASONABLE reliance! E) The description of the collateral is just wrong and aside from the problem with the financing statement. A lien creditor calls and asks you about it because he wants to levy. but even though he took it. whose debtor SCI wants a loan . The people who defend it say that it ought to be a starting point.3: The other creditor has 5 financial statements stated at a particular addresses other than Trimble Ave. What about if you got a call from another bank.D) You can inquire of the stated secured party. . Could Trimble Ave collateral be perfected? Maybe. If that is effective and it turns out that both Elizabeth Warren and Lynn LoPucki says I will pay you a little money and I’ll be protected by your filing. 9-502 are the three items that have to be right except for minor stuff. The law may sanction it. B) Reasonable chance you should go ahead and levy because it is reasonable to assume that Glacier is going to be unperfected. is there another problem? They listed what was at A and meant to cover what was at B and by the particularity of the description they have missed the collateral that they wanted to include. the searcher cannot rely on the name so there isn’t going to be any estoppel relied there. Problem 18.
You don’t. use same description as that in security agreement because authorization in security agreement only covers property in the security agreement. however. Kaufman is doubtful that is the correct result because priority section states priority from date of filing. If the consumer sales to another consumer. The authors think the first filer loses since there is no written authorization. which has expanded privacy rights over the years. they don’t have to and there is automatic perfections. and you may want to file one with high ticket items. want to be put in a position of making a flat out lie. want to find out what’s going on. Maybe filing means authorized filing. A) If he hasn’t signed anything authorizing the filing then the first filer loses. Normally we have our second national bank on March 1. as a consumer to consumer transaction under 9-320(b). you want to have a look at state law in jurisdiction. 9-322 the basic priority rule. Second Bank Filed first. Also. A) The execution of a security agreement is the necessary authorization for the secured creditor to file a financing statement. and you who are the first lender. Normally the first filer wins. Problem 18.6: The issue here is that you had an early financing statement with only an oral authorization. That execution constitutes authorization. But it was authorized orally. that then constitutes the authorization. And here second bank is the first filer. and the second filer should have seen that filing. when another bank calls and wants to know debtor status? Creditors by and large do not have confidentiality with debtors.5: typically department stores who take security agreements don’t file financing statements. But you file a financing statement. our authors say our client doesn’t. the more suspicious the person will get. and they were on record first. So if the financing agreement goes first. B) What does the authorization consist of? You are authorized to file a financing statement based on security agreement so the collateral description ought to be the same or you might find that you didn’t have permission. You can then go get the debtor to approve of anything you need and get the security interest filed. and you have a negative pledge clause preventing giving a junior lien to yours. and some later creditor files one. why doesn’t our client win. but here there was no authorization of filing. Here a loan officer from another bank calls you. . and Nations Bank on March 10. It is the other parties mistake for calling you and putting you on notice that I am about to levy. This is your debtor going to another bank for a loan. The more I talk. B) Is there something there for you if you’re honest. You don’t need explicit permission to file against a customer who has already executed a security agreement. to finance new inventory. On the other hand. that second consumer will take free and clear of security interest. The authors say that the only way to read filing is authorized cause you can’t just go out and file against everyone and you’d have priority if you later made a loan. A) You might try to get off the phone as soon as possible. You don’t have a duty to do the other person’s work for them.and gives an application? Is there a difference is confidentiality arrangements between Glacier and debtor. and the first filer subsequently executes a security agreement. and with respect to consumer goods. you need a writing. as long as there is no financing statement filed. The debtor normally has to authorize an execution of a financial statement in writing. You want to find out Problem 18.
you go to the Bank of America. even if it leaves the debtor with a check book and doesn’t have any say as to what checks debtor writes ○ Protecting collateral in the way that Deutche Bank checks collateral with Reznick (1) Possession: Money. Bank of America might make its check out to Cambridge Honda. Authors don’t agree. many forms of collateral (2) Automatic Perfection by Operation of Law: PMSIs in Consumer goods (purchase money security interest) (3) Notice to or through some person or organization that control the collateral: example of deposit accounts Three Ways to Perfect a Security Interest Outside of Filing • • • - Authors give us the superseded definition of “purchase money security interest” o 2 situations in which we have PMSI § Seller who sells good on credit and keeps a security interest in the goods sold to the debtor • Deutche Bank is putting up the money/financing the purchase and gets the security interest in the boats that Shoreline sells to Bonnie • If you buy a car from Cambridge Honda. so that you don’t use the check for something else. – – – Written authorization is there to protect the debtor At every turn of Article 9.Nations Bank should have searched the file. but isn’t the priority date in this kind of situation ○ If you don’t remember anything else from this course. o PMSI is a really good thing to have § Very good for debtor because it is a way for the debtor to be able to buy something on credit when it has already borrowed money • Gives the PMSI to the seller. who is willing to sell because it will have priority over the secured creditor who has the filing statement . and we looked at what was not there. we are trying to limit the powers of the trustee When we looked at what should be in the financing statement yesterday. until the security agreement gets signed. willing to read authorized but they got subsequent written authorization so the first in time Kaufman thinks should be prevail. remember this*** Huh? – – – Exceptions to Art. who puts up the money for the car and gets a security interest in the car you bought.it is the same theory here! Lien creditors don’t check the file just as the trustees never check the file ---. authorizing the filing of the financing statement It unsettles the date of priority from the date that is stamped on for the filing of the financing statement – priority date was supposed to be carved in stone in Article 9. the trustee loses because the lien creditor loses on the theory that lien creditors never trust the file --. SO LONG as they make sure that the exact money they give you is the money that winds up in the hands of Cambridge Honda. or YOU AND Cambridge Honda. 9 Filing Requirement • • When Creditor Takes Possession: Generally.same kind of policy argument ○ Drafters of Article 9 did everything they could to protect secured creditors against junior secured creditors and trustees and lien creditors Eliminates requirement of signature of debtor on the financing statement because thought it would screw up electronic filing Financing statement is not effective at all. it is pretty clear what is going on in SC world Substitute Notion of Control: When you cannot take over certain things like bank account ○ SC still has control.
instruments.Possession: Perfection • • • • • • Both Art. SP and Bank can authenticate a record instructing the bank to comply with the SP’s instructions ○ (3) account may be put in the name of the SC thereby making the creditor the customer of bank ○ Control: is potential not actual – the SP may choose to control the account but until then the debtor can use it freely PMSIs: Automatic Perfection ○ § 9-309(1): Creates exception to filing for most purchase money security interests in consumer goods ○ Definition: An SI is a PMSI to the extent that it is (a) Taken or retained by the seller of collateral to secure all or part of its purchase price (b) Taken by a person who by making advances incurring an obligation gives value to enable the debtor to acquire the rights in or the sue of collateral if such value is in fact so used ○ Created in Two Situations: (1) Consumer buys a good on creditor from a vendor. The employee is the agent. This is the case of a gas station with one employee on the premises. instruments. money or tangible chattel paper Agents and 3rd Party: a SP may possess collateral through an agent. the 3rd party takes an SI in the good ○ ONLY for Consumer Goods: Automatic perfection – in other situation they must be perfected through system – § 9-102(a)(23) consumer goods) ○ Gallatin Bank v. the vendor takes a security interest in the good (2) Consumer gets loan from 3rd party to buy goods from a vendor. but the owner oil company retains possession even though its name might not appear anywhere on the premises Possession as Means of Perfection: May take any of three roles in perfections ○ (1) Sole means of perfection: as with money as collateral § 9-312(b)(3) ○ (2) Alternative means of perfection to filing: as with goods. 9 and Real Estate: Recognize possession of some types of collateral as a substitute for public notice filing § 9-310 and § 9-313 – permits perfection by possession if the collateral is negotiable documents. § 9-104 Indicates three ways a SP may take control of a deposit account ○ (1) SP may be bank where account is ○ (2) Debtor. negotiable documents and certified securities § 9-313(a) ○ (3) Notice that Under § 9-330(d) and 331(a): a perfection by possession of the above (except goods) trumps prior perfections by filing ○ (4) Ineffective for Perfection: SIs in accounts and general intangibles may be perfected ONLY by filing or some other form of automatic perfect – not possession Deposit Accounts: Generally bank account in 9-102(a)(29). chattel paper. Lockvich: S $32.500 Boat counts as a consumer good for which a PMSI can automatically be created . goods.
and thirdly. Possession is better because if you have only perfected by filing. Is that enough if debtor still pays that person? The creditor has to pay the teller as an employee? B) Negotiable promissory notes: falls under instruments.• Security Interests Not Governed by Art. then you should probably possess. 9-312(b)(3). If it is an account. Suppose it isn’t’ an instrument because it doesn’t fit the article 3 definition of an instrument. Another example is just a plain old lease that is used as collateral (contains monetary obligation and an interest in goods themselves.1: Permissible ways to perfect question? A) Cash in the Register: the only way to perfect a security interest in actual physical money is by taking possession of it. E) Obligations of customer to pay for merchandise evidenced by a promissory note and a security interest. Have an employee of yours’ run the machine. 9 or Another Filing Statute: Collateral excluded from Art. The concept of negotiable promissory notes is to make them as much like dollar bills as possible. Associates v. Does it transfer? Kanards are filing using money for a contract for payment that they’ve gotten from someone else for payment. and a security interest in the goods. It cannot be both an account or an intangible. is it an instrument. . 9-330(b) and (c) possession is favored over filing unless you work the number of filings by stamping each piece of chattel paper. If it is an instrument. So what do you do? You want to do both because it isn’t crystal clear which you should do. an authenticated report signed by debtor and bank saying bank will comply with secured party instructions. F and S Firm claim that they were first in line because they filing an FS. In UCC terms. second.2: K for Payment. a purchaser (which includes another creditor) who takes possession will take priority over the prior filer. the secured party becomes banks customer with respect to account which means secured party named account holder. a contract for payment is what: is it an account. It has to be one or the other. you have to file to perfect. Problem 19. Chattel paper. Account definition excludes instrument. or is it a general intangible. C) Money debtor keeps in Deposit Account: 9-104: bank holding an account. D) Stock: perfect by either filing or by taking possession of certificate. Filing is a weak protection because you can lose to another creditor. a debt of the buyer of goods. • Held: Under § 9-109 such interest in non-commercial tort suit is not governed by Art. You can make the teller your employee. promising certain installments plus interest? Instrument or Account. You’d have to see the document itself to try to figure out if it is an instrument. in which perfect by filing or possession. Fireman’s Fund • Facts: Deals with settlement for legal malpractice suit for payment of $600K. 9-102(11) it is something in writing that evidences a monetary obligation. or having shares registered by GM in name of secured party. 9 Coverage § 9-104 ○ Wage claims ○ Insurance policies and claims ○ Real estate interests ○ Tort claims ○ Most kinds of bank accounts Bluxome St. Then what would it be? Then it could be an account. You can perfect by possession or filing. General intangible is any personal property other than an instrument. 9 and Contractual lien was valid and enforceable without notice required Problem Set 19 Problem 19. the interest of the owner).
A secured creditor under 9-104 (private agreement between bank creditor and debtor) or a bank under 9-104. and they got a lien. you should take a good look at the equipment. Tort claim? How to perfect? What is this lawsuit about? Is it a breach of contract? If it’s a breach of contract. But what if this is a tort claim? Then look to see if it is a commercial tort (where claimant is with an organization. and you picked somebody that is subordinate. as Sabine’s agent will control access to room. What does the second creditor do to perfect as a second secured interest. Problem 19.Problem 19. Maybe have a 4th party hold it in escrow. because 9-310 says that unless otherwise provided. Land and Fixtures Recordings Systems • Personal Property: anything capable of being owned except real property . one with both possession and a 60 grand first security interest. so we file. But the comment explains that debtor cannot qualify as agent for the secured party for purposes of the secured party taking possession. but Sabine is going to be using equipment in business. and agree the its in Sabine’s possession. 9-108e says you cannot say just file by identifying “commercial tort claim”. There is nothing talking about commercial tort claim specifically. or in fact.5: Borrow 100. it’s not a tort claim. with this information printed on door. You also worry about whether salesperson had it free and clear when sold it. You should refinance that loan and add it to your 300 grand. Bill (President of Jersey). You can use an employee of the debtor to take possession under comment 3 of 9313. The library of congress could be holding the books for the secured creditor and does not have to tell you under 9-313(g)(2). relying some on the debtor at that point. Trace source of title. B) Rare Book Collection: it could be PMSI. which gives the mortgagee an interest in that mobile home.7: Sabine sells musical equipment to Jersey on credit with a security interest in equipment. and take possession of note. D) Diamonds: could be PMSI. So this is a dual agency situation. G) Almost anything can be consumer goods. Find out where the money came from. Before you spend a lot of money.4: How to protect yourself against automatically perfected security interest. or the claimant is an individual and the claim is in the course of person’s business)? 9-109d12commercial tort claims but not tort claims are in article 9. a financing statement must be filed to perfect all security interests. sublease it to Sabine. F) Checking account at Bank of West and in Kettering’s name: You perfect by control. E) Computer Equipment: located at office. but the problem is that the agent is the president. The provision that makes things easy for takers of security interests in consumer goods makes it difficult for searchers. Problem 19. This is not like the field warehouse where the agent is an employee of the creditor. They put it in separate room. Problem 19.3: Instrument with another party holding possession. Could this mobile home be a fixture on the land. but you have to identify the nature of the claim. There are two creditors. How to perfect a general intangible? You have to file. but the stock stuff makes it look like personal use. A) Mobile Home: may have a PMSI automatically perfected. Although the separate room is to give notice and warn a creditor who levies on it not to waste their time. which would tend to look like business not consumer. almost certainly you can only comply with filing according to certificate of title rules. permanently on the land? There may be a mortgage on the land. You don’t have to go into great detail.000 using potential lawsuit winnings as collateral. but rather it’s a general intangible (this a catch all category). You may have an automatic security interest. C) Mercedes Benz Automobile: if in certificate of title state. is the debtor.
o Land touching multiple counties must be recorded in the recording system for all of the counties.• • A. certain interests in land such as easements and permanent structures on land Overlap: Fixtures Fixtures • • Defined: Permanent buildings are part of the land on which they stand unless they are specifically excluded. What may be a fixture in one state might not in another . and each county maintains a real estate recording system. Real Property: Includes land. including deeds. § Enables users to determine who owns property as well as who has liens against it § Bills of sale. the personal property equivalent of deeds. real estate searches can be conducted not only by the names of the parties. B. o Land in one county must be filed in the real estate recording system for that county. the description of the property. Typically it is located in the county seat. • The real estate recording system is not self-purging. o Real estate records are duplicated by private firms across the United States. Re Prope Re al rty cordingSys ms (p344 te ) § Each state is divided into counties. but also deeds that show transfers of ownership. proper place to record a mortgage on these building is real estate filing State Law: UCC states that goods are fixtures when they have become so related to particular real property that an interest in them arises under real property law. v The clerk would place your now-recorded mortgage in a basket for photocopying and indexing and later someone would add it to the appropriate place in the index and mail the original back to you § Differ from personal property filing systems in that: v Real estate system contains not only documents evidencing liens against real estate. • The advantage is that searchers can see the actual debt. but also by tract. • There is no uncertainty as to which filing system is correct for the real estate system. • The debtor’s name is relatively unimportant in the real estate system because the filing system records tracts of land and chains of title. o A search with the wrong name would present no documents at all. who authenticates the debtor’s signature by affixing the official’s own signature and seal. o Split authority as to whether a mortgage that omits entirely the amount of the debt or expresses it in general terms is valid o General rule is that a description of the collateral is not too vague so long as it is possible to identify the property by a rule of construction or through evidence extrinsic to the mortgage § The actual mortgage document is filed in the real estate system – not just notice of the existence of a document. o In most counties. § Recording usually requires that the mortgage be signed in front of a witness and be acknowledged before a notary public or some official. § Resemble personal property filing systems in that: v If you took a mortgage to the recording office a clerk would take a small fee for recording and would immediately stamp the date and time of the recording on the face of the mortgage. • The disadvantage is that additions or changes may require a new filing. Filings in the real estate system are permanent and do not have expiration times like UCC filings. What is Re corde (p346 d? ) § Formalities for the creation of a mortgage • A mortgage document • Signed by the debtor and • Perhaps Containing a description of the debt secured and the collateral securing it. are not recorded in the personal property system v It is more expensive to file in the real estate system. This system has both recording and transfer fees.
D. 1 1 p3 g . UCC 9 1(a). it merely requires filing in the real estate records by means of a fixture filing. HowDoe a Se s cure Cre or Pe ct in Fixture d dit rfe s? • In many situations it will be impossible to predict whether the courts would consider particular property to be fixtures. 99 48) o A ski chairlift was classified as a fixture under a three-part test. and would have required filings in hundreds of counties. which is sufficient to give constructive notice § If the debtor doesn’t have an interest of record in the real estate. . m arcy – p 54 – Issue re: perfecting a SI in a mobile home and ) g3 how to maintain that perfection. 9-5 (b)(4) 02 o 3) Filing an ordinary financing statement under the UCC § Allows perfection of a security interest in goods that are fixtures. § However as shown in 33. o In the case. 9-334(b). • Goods that are fixtures or may become fixtures may be used for a security interest under article 9 if allowed under the state real estate law. but there is nothing in article 9 that says one must make a fixture -50 filing to perfect in fixtures. § Is the property annexed or attached to the realty § Is the attached property adapted or applied to the use of the realty § Is it intended that the property will be permanently attached to the realty o Fixture filings are permissible in Michigan in both the real estate and UCC systems. Fact that a mobile home is without wheels and designed as permanent living quarters does not exempt owners of mobile homes from having to obtain a certificate of title under Arkansas’s certificate of title laws. can also perfect security interests in future fixtures. • This simplifies filings against railroads and power companies who have fixtures strewn across the country. when filed.2. • In reCliff’s Rid eSkiing Corp (Bankr. § UCC 9-501 doesn’t require filing in the real estate records to prefect in fixtures. Often this will lead to filings in both the real estate and personal property filing system s. the owner of the record must be disclosed. Thefinancing state e m m nt ust: • State that it covers collateral that are fixtures or are to become fixtures • State it is to be recorded in the real estate filing system • Contain a description of the real estate where the fixtures are located or are to be located. W Mich. this is of limited effect In re Re naud (Ricev Sim ons First Bank of Se . 3. Pe ctingin t Fixture of a Transm ingUt y – Pg 3 rfe he s itt ilit 55 • 9-50 1(b) allows for the filing of security interests in the fixtures of transmitting utilities to take place in the office of the secretary of state. three different entities were found to hold security interests in the chair lift. • Se curity inte sts in fixture m bepe cte thre ways re s ay rfe d e o 1) Mortgage filing in the county real estate office § Under most if not all state law a mortgage creates an interest in fixtures and this interest is perfected when the mortgage is filed o 2) Fixture filing under the UCC § Must file a financing statement that meets the standard requirements of 9-31 0(a) and under 950 2(a)(3). o Real estate mortgages. yet such a filing does not qualify as a fixture filing. • 9-10 2(a)(8 defines transmitting utility to include businesses such as radio and television stations that do not 0) have lines or tracks running through numerous counties. .
The mortgage follows the debt. § The drafters extended coverage to mortgages by saying that attachment of a security interest to a right of payment secured by a security interest in real property (the note) is also attachment of a security interest in the mortgage. even though the partnership or trusts owns nothing but real estate. Cliff Dev. Couldn’t be a fixture. CRD: FoA wins. 9-102(a)(44). If SLP perfects by recording a mortgage. The note that evidences the promise to pay is physically incorporated into the purchase money mortgage.Personal Property Interest in Real Property § If a person owns land in fee simple. The authors try to show that the trees are crops grown for harvesting. they are goods. However. the mortgage covers everything on land. There are 3 creditors: FoA. a) How should SLP (lender) perfect in PI’s (debtor) 1/3 interest in 160 tract of land known as Devil’s Valley? Trees all over the tract of land are realty. § Article 9 considers a mortgage to be a security interest in a note. but this does not meet the definition because it does not have a contract for sale on it. and if you take interest in partnership interest. FN: CRD wins. § A SC perfects its interest in the debtor’s interest in the partnership or trust by filing in the Article 9 system. § If they form a corporation or a partnership. the stock or interest in the partnership. the partnership’s interest is personal property. If it’s not goods. under 9-501(a)(1)(a) timber to be cut is filed in U. CRD v. 9-302(g). including trees but not excluding other things.C. PI could be a tenant in common. does the mortgage have to mention trees? No. PI recorded in real estate office and original is now in PI’s possession. Under 9-203g. SLP wants security interest in that mortgage and note. FoA v. FN: FN wins. There was not one unified priority scheme. it cannot be fixtures.C. personal property. and therefore covered by article 9. SI would have to go to the real estate system. their interest is in real property and a security interest in that interest must be recorded in the real estate system. is personal property and is governed by article 9. Problem Set 20 Problem 20. a transfer in an interest in the note automatically transfers the underlying security.C.1: This has to do with the Cliff Case. and then maybe its not covered by article 9. If you describe one and you don’t describe the others there is an argument that you didn’t get the others. If title of property is held in Pacific Interest partnership. and First National. § Creation of a lease of real property is governed by real estate law. or PI might have a beneficial interest. Before trees are cut. If you have a beneficial interest it would be more like a general intangible and you would have to go to the U. the secured creditor by perfecting the security in the promissory note perfects a security interest in the underlying mortgage. her interest. You can put in the mortgage. After cut. they are something different. If PI owns the property. so they don’t seem to be part of the land. you file in UCC.C. the debtor’s interest in a partnership or trust is personal property. you don’t have to file in the real estate records. Theoretically. and thus. Does it mean that it might not be covered by article 9? (d) If SLP perfects by recording mortgage against the second parcel. equity answers the subordination question. does it have to mention the trees? The problem with mentioning the trees is inclusio est exclusio est.. Old adage: With a note representing an obligation to pay. FoA v. system. b) Pine trees growing on land. § 9-109(b) provides that the application of article 9 to a security interest in a secured obligation (the mortgage note) is not affected by the fact that the note is secured by an interest (the mortgage) to which the article doesn’t apply. . You perfect a security interest in the underlying mortgage by taking possession of the note. e) PI has a mortgage and note from another party. Similarly.
security interest.Z) may want additional documentation and the borrower has agreed to pay for it. But here a buyer takes it home and the PSF (mortgagee of buyer) forecloses on mobile home. including to successors. This enables priority over estate. also. This is in here in case the bank forgets to do something in closing. You need a notary at the time the debtor signed. – Last sentence of paragraph If the mortgagee sells the mortgage to X and X sells it to Y and Y passes it on to Z.But if you are really counting on real estate security. etc.3: Folds sells mobile homes. In some jurisdictions. A new buyer from FLEET may want additional documentation. the client is perfected under article 9 because it did file under the UCC. . the secured creditor can write up a filing statement and file it because the security agreement implies debtor authorization. In some jurisdictions you need a witness. and a standard UCC financing statement. If this is not a fixture. They may want additional stuff that did not turn up in search. If sufficient. which files a les depends. If you don’t have the proper witness and notary you cannot file it as a mortgage. each one of those (X. he has buyer execute a promissory note. which gives notice of the mortgage. If land is involved. it is to prevail over any interest obtained by legal or equitable proceeding. The question is whether the security agreement sufficiently describes the collateral.2: The eccentric debtor gets a million by signing security agreement in manufacturing facility on a food stained napkin. is there sufficient description to record a mortgage on the land? In many jurisdictions. The TIB stands in the shoes of a lien creditor. that would be so vague as to be barred. and there is at least an argument that this gives the equivalent of notice. file in the real estate office in case they turn out to be fixtures. describing the brand mobile home. But if it’s a fixture. it had to file as a fixture filing before mortgage under 9-334(e). Ask whether there is an interest so related to realty that they are part of the property arising in real estate law.Y. serial number. a notice of pending lawsuit. which says that if client perfects by any method under article 9. Folds may have a PMSI. Is the mobile home a fixture? Maybe. But to take priority over mortgagee. But maybe you can start a foreclosure suit. You should file in Secretary of State’s office if they turn out to be equipment. The costs are heavy. But it will beat the trustee in bankruptcy under 9-334e3. as a fixture filing. and files it in the Secretary of State office. in her presence. Problem 20. they allow extrinsic evidence. What do they have to do in order to file in real estate records? Problem 20. because someone searching the title in the real estate records and does not find it will be pissed off and their may be litigation. including additional financing statements that have to be filed. most careful lawyers will file in the real estate records. Folds should file in real estate records. h) The fact that they call them store fixtures does not make them store fixtures.4: There is a mortgage clause saying that borrower has to give lender any requested financing statements. Problem 20. then our client is home free.
an SI in specific goods and software used in the goods or a lease of a specific goods Perfection: Two ways ○ (1) By filing ○ (2) By possession: Purchasing chattel paper with no knowledge of a prior SA is superior to filing § 9-330(b) – purchaser is broad enough to encompass both buers and takers of SI including bank lenders Example: Purchasing a boart for $20. not chattel paper. v. and is of a type that ordinary course of business is transferred by delivery with any necessary endorsement or assignment Perfection: Two ways ○ (1) Filing § 9-313(a) ○ (2) Possession 9-313(a) Defined: A right to payment of monetary obligation. instruments. chattel paper. instruments and accounts all involve a debt owed by a third party to the debt. documents. tort of deposit account or general intangible General Intangibles: A right to personal property other than accounts. copyrights and trademarks that are not usually represented by a particular document • CDs: instruments under UCC. etc. instrument.Characterizing Collateral and Transactions • Keys: Chattel Paper. Valley Bank: Instrument v. deposit accounts.” is still a right to payment of money which is in the ordinary course of business transferred by delivery with any necessary endorsement or assignment .000 with no money down financing and a SI in the boat – the $20K promissory note along the with SI constitutes chattel paper Defined: When docs show a right to the payment of a monetary obligation. Perfection: By Filing Chattel Paper • • • Instruments • • Accounts • • • Omega Environmental Inc. is not itself an SA or lease. General Intangibles • Instrument: means a negotiable instrument as defined under 3-104 or any other writing which evidences a right to payment of money and is not itself a security agreement or lease and is of the type which is in the ordinary course of business transferred by delivery with any necessary endorsement or assignment • General Intangible: intended to cover types of personal property such as goodwill. commercial tort claims. goods. because although say “nonnegotiable and nonassignable. The debtor is using its right to that money as collateral to secure its own debt to the creditor Defined: When documentation evidences both a monetary obligation and an SI in specific goods.
Pay e Int ib s – Pg367 te e t e s s m nt ang le • Chattel paper. and therefore didn’t satisfy criteria of 9-309 thus Banks interest was not automatically perfected • Reasoning: Strong indicia of loans rather than sale because bank ○ (1) Has none of the potential ownership benefits ○ (2) Contractually allocated none of the risks 2. • 1-20 1(37) ssets forth the distinction between true lease and leases intended as security interests • In reW Com Inc. v If collateral qualifies as: (PRIORITY LIST – chattel paper seems to trump other categories) ♦ Chattel paper à it is chattel paper 9-102(a)(11 ) ♦ Instrument à it is an instrument UNLESS it qualifies as chattel paper (by containing a security agreement or lease) 9-10 2(a)(47) ♦ Account à it is an account UNLESS it qualifies as chattel paper OR an instrument 9-1 (a)(2) 02 ♦ Payment intangible à payment intangible UNLESS account. v A lease intended as security is a sort of security interest in disguise v A lease not intended as security is referred to as truele e . not the sale of a payment intangible. Account VS. Re y Pape – Pg3 alt r 67 • Realty paper is a promissory note secured by a mortgage or deed of trust. lessor is entitled to its property with no need to prove filing) *Courts have held that the practical inability of the lessee to return the leased goods due to the cost and difficulty of removal is evidence that a SI was created 3. • 9-50 allows the true lessor to file a financing statement when he is not sure it has achieved that status. the Court is essentially orld . instrument. The debtor is using its right to that money as collateral to secure its own debt to the creditor. Ins rum nt . o If it is a security interest then the deduction is for the annual depreciation and the interest instead. • Under 9-3 08(e the proper method to perfect in realty paper is to perfect in the right to payment ). OR chattel paper 9 10 2(a)(6 and (42 1) ) . Chat l Pap r. It can file 5 without the admission by the lessor that the transaction is a SI. • *Tax Rules: o If it is a true lease then under special tax rules there can be a deduction equal to the monthly payments of the lease. 12 v Catch: only perfection via possession will achieve priority over a later purchaser 9-3 (d) 30 4. examining whether the contractual option price was set lower than the predicted FMV of the goods in order to reflect the equity interest in goods that the lessee had previously accumulated. and accounts. Le e Inte das Se as s s as s nde curity –Pg 3 62 • Art 9 applies to security interest in personal property but not to leases of personal property unless they are intended as security. not sales. – Pg363 – in asking whether the lessee has an equity interest. presumably by paying more in “rent” than the parties would ave agreed to in the absence of an intent to allow the lessee to accumulate such equity v B/c the FMV of the equipment was not established.all involve a debt owed by a third party to the debtor. there may be no functional difference between the two. it mattered whether transaction was a lease or SI b/c the 2 are treated differently in BR ♦ (if transaction = lease. • In most cases this note is considered an instrument and hence perfection can be accomplished by taking possession of the note (9 3 -31 (a)) or by filing a financing statement (9-3 (a)). then automatically perfected upon attachment. if transactions were sales rather than loans • Held: Transactions were loans.In re Commercial Money Center • Facts: Court says that transaction as SI in a payment intangible. instruments. the Court was unable to determine whether WorldCom had acquired an equity interest on that basis v Court concluded that WorldCom had adduced sufficient evidence to create an issue of material fact as to whether GE possess a meaningful reversionary interest in the equipment v *here. as s • If the length of a lease and the payment schedule under a security agreement happen to be for exactly the useful life of the property. TrueLe e v . if payment streams were payment intangibles.
In some states. you need to take control. but in this case we’re dealing with real-estate and hence it escapes the scope of applicability of Art 9 and the filing need be done in the real property system. 9-109(d)(11): article 9 does not apply to creation or transfer of real property including a lease.” the concept of control by itself is a vague concept. but in either case. Another creditor could even take possession in the written certificate and the collateral now is in the hands of someone else d) An electronic book entry certificate of deposit: – – . including the interest in a lease Problem 21. So the answer here is to record the assignment in the real property record. and you should file a financing statement. the lease has to be a lease of goods. §1-201 has a definition of writing “printing and any reduction to a tangible form. by one of the three methods in §9104.Problem Set 21 Article 9 does not apply to original lease of the property. that is taking control. article 9 applies. The problem with these cases is always to be thinking about the “what ifs. so it is not chattel paper. This is not an article 9 transaction. For lease to be chattel paper. the debtor then can give someone else a SI in the written certificate. This is not a lease of goods.” what does that mean though? So the issue here is if an electronic records a tangible form. The Bank may issue a written certificate to replace the electronic certificate at the request of the debtor. It is probably a deposit account. The lease taken is chattel paper. but it does apply to taking a security interest in that property ○ But most courts have not read it that way ○ Most courts have said that it does not apply to any interest in 306. If it is an instrument. b) Wheat growing in farmer debtor’s field: Crops are goods under 9104(a)(44). any lease can be made into chattel paper. so record it in real estate office. crops may be fixtures. but if is a deposit account. You have to file in both places. Can you perfect by a fixture filing in the real estate record? There is one court that has held wheat planted annually cannot be a fixture. then you need to file or take possession. This is a critical distinction. c) Franchise to operate a BK franchise: this is a general intangible §9-102 (42) and can only be perfected by filing in the secretary of states office. but this section tells us that it has to be in writing. Additionally an instrument also requires that it be transferred in ordinary course of business and in this case we don’t really know if the transfer of these types of entries are transferred as an ordinary course of business.1: How should the secured party perfect the following security interests? a) Lessee’s interest under a lease in real property: a lease embodies a right to payment to lessor. that is an account maintained with a bank. because there is no intent of permanent connection to land. also embodies a right of reversion like chattel paper. you would think it was an instrument §9-102(47). The landowner shouldn’t allow or give a mortgage if the only thing being financed is the fixture b/c they put a cloud on title. but rather real property.
If we can take it off and transfer it. including software written by the debtor. If the program is so embedded with goods that it goes with goods (anti-lock brake example). §9-105 allows the creation of electronic chattel paper as long as the creditor can maintain control over it and can create it and store it in a unique and identifiable manner.3: Is there someway to structure a transaction to create a lease out of what is really a sales transaction? If you run the same payment schedule for . you can’t take it out with the transfer of the car. accounts also makes things complicated. Problem 21. One has to look at what the collateral really is before filing. but if it is not “embedded” then it is going to fall in the category of general intangibles.2: Why have separate systems? If you keep the real property and personal property divisions could you unite and make a single filing system for all personal property SI? Could you require a UCC filing for everything under one office? Prof thinks it would probably be a good idea. Farm products: filing is where crops are located but inventory is where the debtor is located. general intangibles and accounts: instruments by possession. The issue is over whether it is goods. The ability to perfect by taking possession seems to be more certain today than dealing with the filing system. b) With respect to the manuals to software: 9-102(75) defining software includes supporting stuff so this would also be a general intangible and hence perfection would be by filing. is the operating system software embedded? You can take it off and replace it etc. So what is embedded then. The anti-lock braking system in the car is a computer program is probably embedded in the car. under 9102(a)(42). then it is goods (§9-102(44)). In most cases as a creditor you can ask the debtor to give you a written or paper version of your electronic entry. No other bank would make loans. Instruments v. You could theoretically get rid of problems by having everyone file in the same manner. This section tells the creditor what he must fulfill to create it but one cannot be 100% sure how to create an electronic file that cannot be confused with copies. etc.and there is a creditor with priority under §9-330(d). You would have to take it from another creditor. The debtor would then find it hard to get extra or additional financing to try and re-finance the debt and pay up. So the software on a PC is not embedded most likely so it is not a good. software written by the debtor? In that case we’re talking about IP and copy write issues. Problem 21. then it’s a general intangible. So if it is not embedded in goods then its goods. Chattel paper v. Cert of Title on car. But goods could be perfected in a whole variety of ways: filing. If it’s a general intangible. so probably its not embedded. *With debtor’s own software. The best solution is simply to get the debtor to print out the certificate of deposit or whatever and then you’re back with the regular paper filing. a) Software on a consumer’s debtor’s personal computer. you have to file to perfect it. May place a greater burden on the debtor since the creditor could file against more of the debtors collateral more easily. possession. There could be issues trying to get the collateral from another creditor who has already perfected by taking possession. Kazinsky has to register by filing in copyright office.
The seller needs to assume some risk to take advantage of the full econ value of the property and to make sure that a Court will find that the deal was a lease and not a SI. we have a real problem here because there may be a secret lien. If we can’t trace the security interest. Somebody comes in with a pile of leases as collateral and your client asks if it is OK to go forward with this. The would-be debtor who wants to borrow this money for chattel papers may have a stream of income represented by the lease payments to a 3rd party that they aren’t telling you about.the whole life of the equipment you are going to end up having a secured transaction and not a lease. . – Crucial word in 9-310-c is “assigns. maybe we can trace the money if the debtor gives us a list of lessees and then we can find out who they have been paying.” Assign just means transfer – transaction can be either a sale or a loan in order to have the security agreement serve as collateral. The longer the lease and the closer the terms that the so called lease has similar to those of a sales contract the higher the risk of a Court finding that the lease was really a SI . This is the problem of true leases v lease intended for security. Their solution is to require filing for all true leases. 21. They want to say that you can turn a lease really intended as security into something that looks like a lease transaction by shortening the term and saying that you have to pay the reversionary interest. You say. after what the providers of Article 9 did in 2001.5 About how someone can protect themselves in the commercial money sense.
9 Self-Clearing and Continuation • • • Worthen Bank and Trust v.Maintaining Perfection • General Example: A financing is good for 5 years – then at end of 5 years. provided that the K doesn’t provide for further loans. SCs must do something else if they want financing statement to continue to be good at the end of the 5 years. Hilyard Drilling • Facts: NBC fails to continue SI in Hilyard AR. Worthen files FS on same asset and because NBA didn’t continue it. instead files new FS. becomes part of the FS Penalties for Not Filing: Becomes liable for actual damages and a civil penalty of $500 Release: SP may choose to release some collateral from the coverage of the FS by filing an amended FS in § 9-512 Financing Statements Lapse after 5 Years: unless a continuation statement is filed during the last 6 months of the 5 year period and upon lapse the SI becomes unperfected and is deemed never to have been perfected as against a purchaser of collateral for value ○ Loss of priority doesn’t apply in favor of a lien creditor or trustee in a bankruptcy who filed while the FS was valid ○ A continuation doesn’t violate the automatic stay of bankruptcy Self-Clearing: Old FSs automatically lapse – the filing office may remove the records from the office and destroy them over 1 year of lapse § 9-519(h): filing should be indexed within two days of receipt • • • Art. ○ File a continuation statement within 6 months of the end of the 5 year period ○ Filing new statement will not continue the effectiveness of the original FS unless you file continuation statement Maintaining Perfection Through Lapse and Bankruptcy • Art. the FS to which it relates becomes ineffective Termination Statement: Must ID the FS to which it related by its file #. 9 Termination and Release: A debtor may demand the SP file a termination statement within 30 days of satisfaction. W has priority • Held: The effective of an FS lapses 5 yearss from date of filing unless a continuation statement is filed prior to lapse ○ Continuation statements filed too early – inadequate ○ While those filed too late – ineffective . when the TS is filed. Also must state the FS is not longer effective.
Lawyers sometimes neglect to have the conversation with the client on who is going to accept responsibility. Section 362(b)(3) refers you to 9-546(b)(1) which says you are protected as against the lien creditor in the intervening period. He will have to file a new financing statement. File it between June 30 (or July 1) and December 30. 2006. 30th and the second is filed but doesn’t run until the old statement expires. 2006 . Will that be effective? You’ll have to see if somebody else has also filed or see if there has been a judgment and levy. it’s ineffective. The layer discovers that a client sold a restaurant and took back a PMSI. 2011 b) The next window if the statement filed on July 7.was that continuation filed properly? a) It was filed on time. which payments are suppose to go over 6 years. and the lawyer discovers that he did not file a continuation within the 5 years – 6 month period. Under 9-509. You have to file it within 6 months of 5 years. The second financing statement has no authorization because the security agreement only applies to the initial one. You can file the continuation after debtor files for bankruptcy. The bankruptcy dates do not change the dates. There may be an agreement in the security agreement that says you can file a continuation or another financing statement. Problem 22. Suppose you find another financing statement. Time in between is measured as 5 years from the day the original financing statement was perfected. a continuation on July 7. The debtor now has the ability to lend money on the security because there is no longer a perfected security agreement. June 30. 2011 – Dec. 30th 2011. 2001. c) There is no stay under 362(b)(3) to perfect on interest.2: The lawyer makes a mistake.1: Financing statement filed on Dec 30. It runs from the 30th because the old statement is effective until Dec. 30. Bank filed on time because it filed within 6 months. The continuation statement is an important document in any transaction that is ongoing. Does it run from July 7th or December 30th. a security agreement gives a debtor authorization in filing an initial financing statement and amendment (a continuation is not an amendment). 2006. Whatever is . so it lasts until Dec. and if you file it later or earlier. You are worried about any intervening interest in the last two months.In re Schwinn Cycling: Effect of Bankruptcy on Lapse and Continuation • Facts: ∏ files complaint with bankruptcy court against Δ seeking determination on their alleged SI in money made from sale of goods – dispute if ∏ interest remained perfected because it didn’t filed an FD with respect to the goods within 20 days after it relinquished custody of goods • Rule: A temporarily perfected SI in goods is not automatically continued indefinitely once the debtor initiates bankruptcy proceedings • Held: ∏ would have had to perfect the interest by filing or by taking possession again ○ Even if debtor is bankruptcy – SC must file continuation statements Problem Set 22 Problem 22.
don’t know what will happen. You can’t clear the title by merely paying 30. why didn’t you file a continuation statement Gomez? The continuation statement is supposed to occur in five years so then you didn’t even know that he will be your client. The developer is financed on entire holdings and then sales one lot.000 to get the lot released. and the buyer does not want to buy the lot with another’s mortgage stuck to it. what is it that you want to know. Suppose you find out that there is someone who has a priority over you now. You should always look to see if there is automatic perfection and possession. do you have to call your client? Can you say. if there is a release term hurrah. and under 9-308(c) if you perfect in different ways then both of them are continuous and you can tack them (if by another method). Before you call your malpractice insurer. Problem 22. What do you want to know. Who has the collateral now? Is that enough? No – because 9 years from now. You ought to clearly and in writing tell your client that perhaps it was the client’s responsibility to file the continuation statement or secure council to do so. he doesn’t have to tell you but this will signal red flags. The court is going to say to get a lot released you have to pay the entire 160.000. 3rd creditor in the picture would not lend money to buy the ski lift unless the 1st secured creditor would subordinate. You are going to do a search to see who has intervening filings. not just that no one else has yet to file. while the second filed first and the one with possession filed second. Problem 22. You could beg or try to get refinancing.3: This involves a fight between two secured creditors. suppose you file and you think it is alright. There is another question regarding if you have to notify your client of this. You are going to look at the terms of the mortgage. one with possession of the collateral when both filed. Do you have the authorization. Why not get authorization from the debtor? The debtor now has the ability to lend money on the security because there is no longer a perfected security agreement. . if not.decided should be memorialized in writing because the lawyer can always claim that Gomez was supposed to file a continuation. First in time under 9-322(a)(1). Want to reach the agreement with that other bank right away. Possession – method one – and filing – method two. Courts will enforce mortgage as written. what do you want to know? You want to know if you are able to file another financing statement. The possession works to beat out the first filing creditor. You have to know the situation with respect to the collateral. You ask the debtor where he got the goods from and ask the seller if he has a security interest. You can get an affidavit sworn to before a notary and dated as of the relevant date or pictures to prove you had possession of the assets at the date you claimed you perfected your interest. how you check for automatic perfection. then you tell your client he is going to have to beg because the court is going to enforce the mortgage as written.4: Real estate development.
Suppose the new lender goes to the old lender and gets an agreement from the old lender that it won’t take a security interest in the drill presses. its financing statement is prior to ours and it will have priority. The debtor has to authorize the financing statement. then it will be stuck. holds secured party liable for actual damages. If the debtor has authorized the filing of a financing statement that lists the equipment by type. You can get the secured creditor to give a statement of current collateral. You can try to refinance. Problem 22. The moral is that representing a debtor this is the sort of problem that the debtor runs into that the debtor authorizes the filing of a too broad financing statement. The debtor wants to get a release to so that it can take the portion of the financing statements coverage off. Suppose the debtor promises us he won’t give the original secured creditor an interest in the drill presses. they authorized the financing statement so it is just too bad. What happens when your mortgagee holds you up and says you owe more money than you really do and you need to close. Under FL statute.6: what happens if mortgagee tries to screw debtor? There are not a lot of options when closing is set. let the sail fall through and sue Global. The financing statement is much broader than the actual equipment the creditor has a claim against. You could refuse to pay the money. Is the loss of the deal avoidable damages under contract law because you could have sold and sued for a refund. If the financing statement is authorized. There is a very broad financing statement that has been filed that covers equipment. The financing statement says all collateral. you . Debtor wants lender to file a release but lender wants it as leverage. but the financing statement still allocates priority between secured creditors. which is not covered by lender’s SA. Nothing in Article 9 that says that if a debtor authorizes the filing of a financing statement that says “equipment” in favor of a secured creditor that is only financing one piece of equipment --. put releases in the statement. you can ask for an emergency order. You need the cooperation of the buyer. you can get attorney fees. They can’t do anything.5: There is a lender secured by forklifts and additions/replacements. but will you really sue for such a small amount.nothing says that the secured creditor has a release to enable the debtor to finance the rest of its equipment to someone else. Under FL statute. Secured creditor hasn’t made a loan against all the equipment of the debtor.Problem 22. AZ. You will be met with a defense. if they break that agreement we’re stuck. You could pay what they ask for and hope that they’ll give you a satisfaction of mortgage by closing date and then sue for a refund. it’s completely effective. In some jurisdictions. You can pay the ransom and sue for a refund after get satisfaction. So at that time. Maybe the buyer would help out. The new lender will not give a loan against the property that isn’t in the other secured creditors security agreement because (in bankruptcy no problem because security agreement doesn’t cover the equipment) if subsequently the original secured party lends some more money against the drill presses even though its security agreement will be second to us. There is nothing in article 9 requiring a release. it has only made a loan against some of the debtor’s equipment. when the statement describes assets by type rather than the particular assets covered. Now the debtor wants to borrow against a drill press.
you can ask for an emergency order. Collateral: Collateral described accurately on FS may have so much that even the search finding the old FS it will be unable to link the collateral to the FS (exchange for proceeds) ○ Example – FS may describe collateral as beans but by the time the debtor seeks a loan from the searcher. In some jurisdictions.can get attorney fees. Thinks that in a situation like this faced with the sellers problems will just want to wash their hands of it. holds secured party liable for actual damages. If there is a shorter time period maybe you could get the buyers cooperation.7: Under 9-513(c) the Suarezes would be entitled to a termination statement within 20 days of the payment of their debt. Identity and Use • Key: Debtor who comes to searcher for a loan may have changed its name and address since filer put its FS on file. Problem 22. instead of the 30 or 60 provided for in the AZ and FL statute. Complicate suit for a small recovery. This situation is not easy for a mortgager especially if you’re under pressure to have a closing. Maintaining Perfection Through Changes of Name. running a search in the old name as well as the new name • • • Changes in Debtor’s Name • . This does happen in the real world – there are sleazy people in the mortgage business. debtor may have traded beans for circus elephant Methods to Deal with Problem: ○ Hold FS ineffective if it wouldn’t have been effective as a new FS in the changed circumstance – holds filer responsible in monitoring changes and making updates ○ Hold that initially effective FS remains effective even though changes – places responsibility on search to discover prior circumstances of debtor and collateral Three Most Important Changes in Circumstances: ○ (1) Change of Debtor’s Name (2) Changes affecting collateral description ○ (3) Conversion of collateral into proceeds Corporation and Other Entities Change Names: Notice that corporate name changes are matter of public record and can be discovered by ○ (1) Insisting that debtor prove its incorporation under the law of some state or country ○ (2) Searching records of that state or country for changes in debtor’s name and ○ (3) Having discovered debtor with previous name. If debtor doesn’t reveal its old name and address to the search. NC allows money to be deposited with court and order execution of release once money with court. search may have difficult time find the FS that is on file. AZ.
It is a new entity with the equipment that will be transfer to it from T. Christofides: creditor took SI in assets of BTL. Inc. Inc. and the lumber is used to build a building that becomes a fixture ○ § 9-507(b) excuses the now-seriously-misleading description but doesn’t excuse the failure to make a fixture filing Type 1 Barter: Proceeds received by the debtor fall within the description of collateral in the already-filed FS ○ Result: The SI attached to the new item as proceeds even with a statement to the effect in the SA Changes Affecting the Description Collateral • • • Barter Transactions: Exchanging Collateral • . as a result (1) An SP that financed the purchase of a specific boat need not be concerned about name changes. BTL changed its name to Alma Marketing. Inc.• • • Lenders: Should be aware of changes by their debtors to things like names on checks and letterhead Individuals: A change in the debtor’s name renders a filed FS seriously misleading but the statement remains effective with regard to: ○ (1) Collateral Owned by the debtor at the time of the name change and ○ (2) Collateral Acquired by the debtor in the first four months after the change ○ Rule: The FS is ineffective for collateral acquired more than four months after a name change. In period between signing & filing. Court held the filing ineffective ○ Two Types of Changes: (1) A change in circumstances that didn’t control the place of filing but that does make the collateral difficult for search to identify as covered by the filing ○ Example – Collateral is pulled out of inventory for use as equipment ○ Even though the change may make the FS seriously misleading. Creditor delayed filing its FS for nearly 4 months after signing SA. It is not a name change. but an inventory financer for a boat store would need to be very watchful for name changes (2) Burden on the SP to monitor debtor name changes and other than K provisions there is nothing in the system that penalizes a debtor for failing to report a name change Differentiating Transfer of Collateral: Transfer of collateral under § 9507(a) are different than debtor name changes ○ Example – If T borrows money against the equipment of her business and later incorporates the business under T. the FS remains effective (2) A change in circumstances that is sufficient to affect the method of perfection that would have been appropriate for the initial filing ○ Example – an SI in lumber that is inventory. BT Lazarus v. Inc. FS filed against T would be effective against the collateral in the hands of T.
perpetual perfection in identifiable cash proceeds § 9-315(d)(2). the searcher cannot rely on the description of collateral in any financing statement Type 3 Barter: An exchange of collateral for non-cash proceeds of a type in which filing is required in a different office than the one in which the original collateral was perfected by filing ○ Result: SP becomes unperfected – doesn’t get the exception and must refile in the appropriate system to remain perfected. Not perfected because separate filing not make. so the bank’s perfected SI in the account didn’t extend to the real property. TO be continuously perfected from the original date – the SP must make the new filing within 20 days from the time debtor received the proceeds ○ Example – trading inventory for real property – in order to remain perfected the secured party must refile in the real estate system ○ National Bank of AL v. Bank argued that its perfect SI in a debtor’s AR should extend to parcel of real property the debtor exchange for the account • Rule: To perfect an interest in real property. the financing statement may encumber property not described in it. except that the new filing is required in a new office within 20 days Defined: Secured parties are granted continuous. must record deed signed by the grantor – UCC doesn’t apply to real property.• • Example – swapping a Coyote Loader for a Caterpillar Loader with a FS that just says Loader in description Type 2 Barter: An exchange of collateral for non-cash proceeds where those proceeds are property not covered by the description in the FS but are property in which a SI could be perfected by filing in the office where the SC FS is already on file ○ Result: SP remains perfected without a new filing under § 9-315(d)(1) ○ Example: an exchange of inventory for a circus elephant that will not be inventory – the elephant rule ○ Any time a debtor has swapped collateral. Unless the searcher knows that the debtor did not acquire the collateral in question in a swap transaction. Collateral to cash no new property Collateral to Cash Proceeds • . Collateral to Cash Proceeds to Noncash Proceeds • • • • • Defined: Exchanging something for money and then buying something else Provided it can trade proceed: creditor’s SI will reach the new property § 9-102(a)(12) Type 1: Original filing remains effective to cover goods of the same description Type 2: Exchange results in collateral that is not longer covered by the original description in the filing statement – the secured party has 20 days to file a new FS to remain continuously perfected Type 3: Treated like type 2 changes. Erickson • Facts: Secured loan on AR. AR is paid by grant of loan.
and under 315(d)(1) the secured party remains perfected without a new filing. which requires filing within 20 days for collateral to cash proceeds to noncash proceeds transasction. This is an unauthorized transaction. but maybe its consumer goods. If consumer goods. But if personal equipment. GB finances BBW inventory under a financial statement that describes collateral as “ inventory. Excuses seriously misleading description but not non-filing. It is probably equipment since the debtor is a business. even if change in circumstance makes financial statement seriously misleading after initial filing. Cash is placed in bank account. Under 507(a). She is working with Bonnie. and the bank have agreed in an authenticated record that the bank will honor instructions from the secured party (3) Account is in the name of the secured party Problem Set 23 Problem 23. d) What if BBW bought the forklift with cash from the proceeds of a boat sale? No longer effective under 9-315(d)(3).• Example: An elephant subject t to SI. HM found that B violated security agreement prohibiting use of inventory by keeping it at her house (using it personally). How do you sort it all out? A careful lawyer would initially file it as equipment. GB now has to file under COT office for boats. But if it’s owned by the business. accounts. . A transaction of this size would have paperwork. Bank account is cash proceeds and there is an SI on the account under § 9-102(a)(9) ○ SP may wish to take control under 9-314 to avoid reliance on cash proceeds ○ Control may be established in three ways: (1) Secured party is the bank with which the deposit account is maintained (2) Debtor. defining consumer stuff as used by individuals. sold for cash. owner of Bonnie Boat World. and chattel paper”: a) Changes affecting description of SAME collateral: On routine inspection. where same office. Did the interlude have any effect on GB’s security interest? Under 9-507(b). This is not a change of name (507c) but rather a transfer (507a) and the security interest follows. b) What happens when ownership of boat transferred from company to Bonnie? GB is still perfected. since the drafting is not clear. Change of use makes it misleading but the financial statement is effective under 9-507b. security interest follows to Bonnie (from BBW). Went from inventory to equipment. don’t worry about it.1: HM is a compliance officer at Gbank. secured party. and financing statement is still good. Barter transaction type 1. This is careless drafting under 9-102a23-26. This is the elephant rule. it is still effective if would file in the same office. the business cannot use it as consumer goods. c) BBW traded boat for forklift.
But the debtor has to authorize the amendment. Many secured parties make sure their names on insurance policies. and finally. Was security interest in original collateral perfected? If so. You perfect that in the same financing office.e) Bank should have. The reason insurance is handled differently in Article 9 comes out of pressure in insurance industry. So you can comply with 9315d1. . under 9-315c the proceeds are perfected. it’s a general intangible. Amendments are for adding new debtor or new collateral. The insurance payable to the second bank would say that its payable to second bank and Bonnie consistent with their respective interests. Before the insurance company pays out. How to remain perfected. trace it to the deposit account where it is still identifiable cash proceeds and 9-315d2 protects you. What if another bank takes a second security interest in the boat for extra collateral? If the second bank becomes loss payee. proceeds become unperfected unless comply with provisions.2: GB inventory loan to SW Appliance. Do secured parties as common practice always see if name is on insurance policy? No. The answer is that you have a proceeds interest but only to the extent of debtor’s interest in insurance. Under 9-507(c). Boats to Insurance is a 9-315d1 situation (barter in same office) and then its goes into identifiable cash proceeds (under 9-315d2 you are perfected). B) What about continuation statements and new names? There is nothing in article 9 that says new name has to be on continuation statement. Problem 23. Under 9315d. the financing statement is effective to collateral already owned by debtor before change. but was not listed as loss payee of former insurance policy – does bank have a perfected interest in claim against former insurer? Insurance loss is proceeds under 9-102(a)(64). then perfect cash proceeds within 21 days by taking control. 6 months ago debtor changed name to SW General. is it identifiable cash proceeds? If the insurance company owes you money. The peculiar wording of proceeds interest was insufficiently appreciated. So GB says that it is payable to debtor.3: What procedures to keep up with name changes? A) Check every 4 months minus a couple of days. and collateral acquired in first 4 months since name change. You may want to make it a shorter time in a jurisdiction that is behind. C) In the investigation of a loan applicant. so it has proceeds interest in it. Problem 23. If second bank’s interest is greater than amount of collateral. there is lots of malpractice out there. how old a name change could be relevant? 5 years. then debtor’s interest is zero and so is GB’s. Also. Assume yes. with a debtor name change. That opens up possibility that someone else on insurance policy gets money. There can be a proceeds interest unless someone other than debtor or secured party is named loss payee. then the first bank loses security interest in insurance proceeds. a 9-507c Amendment to change name to keep continuous perfection has to be filed within that 4-month period. so 9-109(d)(8) allows 9-315 to apply.
and bank accounts. if new collateral does not fit lawn dog description. Problem 23. and accounts. via collateral barter with collateral in same financing office. an SC has FOUR months (one year for corporations) in which to file the destination state – if the SC doesn’t the SI becomes unperfected § 9-316(b) ○ Agreements usually require the debtor to inform the creditor of a change in the principle residence – often fail to do it When Collateral Moves States. the local law of that state governs perfection of a nonpossessory SI ○ § 9-301(2) For a possessory SI. lawn dogs may cover other collateral fitting under lawn dogs (type 0 unlikely). You want to know if there is outstanding debt and that if there is lots of debt of unsecured creditors. Is there anyway Suti’s filing could cover more than the lawn dogs? Yes under 9-315d1.5: A bank lends 1 million taking security interest in equipment .000 of lawn dogs on inspection. There are only $25. There is only one financing statement filed by Suti. chattel paper. Maintaining Perfection Through Relocation of Debtor or Collateral • • State-Based Filing in National Economy: Rule that specify where to file and search are found in § 9-301-9-307 Initial Perfection: § 9-301(1) when a debtor is located in a state. But security interest follows/perfected to cash proceeds under 9-315d2. only if control if original or cash proceeds. describing the collateral as “lawn dogs manufactured by Suti”. But cash proceeds to other collateral needs financing statement under 9-315d3. Type 1 exchange! Also. Does lender have security interest in the bank account? Maybe. So. control of bank account sufficient.4: Lender wants to loan secured by substantially all debtor’s assets. this transfer creates same problem and the filing against the former debtor remains effective • Relocation of Debtor • • Transfer of the Collateral • . The lender files a financing statement. the law is that of the jurisdiction where the collateral is located § 9-307 Debtor’s Location: Individual debtor is located at principle residence (where living) ○ Organization – registered organization is under law of state of incorporation is the state of perfected filing ○ Non-Incorporated Organization: Located in its place of business or nerve center test Intent Test: An individual debtor may own multiple homes or changes places of residence so the debtor’s principle residence is determine by the intent of the debtor to domicile With Change: When a debtor changes principle residence. Are they identifiable cash proceeds under 9-315d2? It does not matter how long the cash proceeds have been in the bank account. One of the debtor’s assets is a bank account.Problem 23. The time factor is not important. Not Debtor: For filing operation. Also. cash proceeds ok and cash proceeds to bank account. Control is exclusive if original collateral. inventory.
so the creditor should file in all three places: Kansas –he is currently living there. Who is the debtor? Debtor is a defined term. A debtor that is an organization and has only one place of business. His ex-wife receives a percentage of profits. but it might be in three months. This tells us that it is two or more persons who have a joint account interest. and the creditor would want to be on file as soon as the debtor moves. So is Shatner an organization? So is he not a corporation because he isn’t two or more people? Under the current notion if you keep reading it doesn’t define an individual so Shatner Engineering could be something other than an individual. But where is the chief executive officer or does it have more than one place of business. 9-307 comment 2: “personal and business assets”. Subsection 28 suggests we have an organization here. A) So what is Shatner Engineering? What would you call it? This is likely a sole proprietorship. where are we going to file? 9-307 tells you to file at the individual’s principle residence. 1-201(28) is the definition of the an organization found in the UCC. But where is Shatner’s principle residence? In the short term he intends to move to MO. but he currently doesn’t own anything there? He currently lives in KA. So where do you file? 9-307(b) William Shatner. does that apply. Shatner lives in Kansas but will probably move to Missouri. Arizona – his summer home. AZ. The collateral of the business is located in Tucson. An individual debtor is deemed to be located at the individual’s principal residence. File in AZ as well because he has a long-term attachment to there. AZ is where he’s been the longest with a residence there. then you know you have an organization. not a security interest. The real question is. His wife also works in the business. Where should the creditor file for Shatner’s principal residence? It is uncertain. is there more than one place of business. it contemplates that an individual can be someone who owns business assets. 9: Affords the earlier filer a grace period in which to discover the transfer and perfect by filing in the destination state ○ If earlier filer does. the earlier filer remains continuously perfected and defeats even a competitor who was first to file against the collateral in the destination state Both Same for Countries Problem Set 24 Problem 24. AZ. is he an individual or an organization.1: William Shatner is the debtor. sounds kinda like a partnership doesn’t it. The nerve center is in MO during the academic year and AZ during the summer. he is an individual debtor under 9-307.• • Art. in the collateral whether or not the person is the obligor. You might also file in MO because he has an intent to live there. Missouri – where he is looking of a house. What state does the debtor conduct the business from. why don’t we file in MO? He does not have a residence in MO at the moment. You file in KA because residence doesn’t necessarily mean domicile so the intention not to remain may not stop KA from being the principal residence. You’d have to dig into that. If William Shatner owns the collateral. Is a sole proprietorship an organization. In the long-term wants to move to HI. located in Tucson. but he has no intention of staying there. He plans to move to Hawaii in a few years. AZ. What is the relevance of deciding she’s a partners. and it is not clearly specified in the problem. 9-102. but you already know he is looking for a new place. Who is the debtor? It is dependent on who owns the collateral. . The collateral appears to be owned by Shatner Engineering. Lets assume he is an individual. it probably isn’t good now. a person having an interest.
He would file at his principal residence --. In the end if you can’t assure yourself if this business you’ll file in another place.– – – Debtor is not the person who owns the debt. You would want to know if the equipment. If this is an organization. Look at the invoices from the corporation’s debtors to see if they are in the name of Shatner Engineering Products. What if Shatner Engineering Products. Inc. is a Nevada corporation? Before filing. all we know is that Shatner formed a NV corporation under Shatner Engineering Products Inc. How do you find that out? You’ll have to ask the debtor all the stuff about how the accts arose and if there was a Merger there will be a public record of it.“… or any other legal or commercial entity” ○ Is William Shatner an individual. How do you find out if the corporation owns the collateral? Look at invoices for the relevant equipment and inventory. If there is a corporation in the picture. Inc. make sure that the corporation owns the collateral that the creditor is taking a security interest in. to determine if the accounts are owned by the corporation. then you have to file at Chief Executive’s Office.his Kansas home. – What name is he going to file under? ○ William Shatner. . why would you file in NV. but the DEBTOR IS THE PERSON WHO HAS THE COLLATERAL. Might also file in Missouri or Hawaii. It won’t be one file – it’s going to be many ○ Will you need specific authorization from the ex-wife to file under her name? If there is a partnership. accounts and inventory belong to the corporation. file in Nevada. What name should he file under? ○ What kind of legal entity is Shatner Engineering? Is it an organization? What is an organization? • Look at 1-201 (“An organization is a person other than an individual…”) • 1-201(27) --. all these other things that you’re worried about. and Louise Godfrey (put them all on just to be sure). Shatner Engineering. then AK assumes that he filing on his half of the partnership and so he doesn’t need specific authorization from her if he has authority to execute security ○ What if you just pick one name and file under that name? The court decides who gets it right – you’d have a malpractice lawsuit against you A) Nevada Corporation. or both ○ 9-503(4)(A)(b) – you have to file under all these different names. Could just file in NV instead of saving money. the place of incorporation. you’ll start worrying about with respect to Shatner Engineering. or is Shatner Engineering an organization? A sole proprietorship in business could be thought to be something different than just a plain old individual. Shatner Engineering. unless there is only one place in business • Is his office where he teaches in Missouri his place of business? Or is the officer where he works from home a place of business? • The “nerve center” is wherever he manages most of the operations of business ○ 9-307 – Comment 2 – tells us that the residence of the individual debtor is the residence of both the individual and his business assets A) What names should we put on there? We are going to put William Shatner. If Shatner Engineering owns the collateral.
Problem 24.is there more than one place of business? Might have to file in each city Problem 24.3: Global bank. the proper place to perfect in the collateral is at the chief executive office. §9-307(b)(3).– How do you know that the debtor owns the collateral in which he’s giving you a security interest? ○ Hard Q to answer ○ Could be a fraudulent conveyance that upsets the transfer ○ If you’re giving an opinion. 9316(a)(3) – gives the secured creditor a year to discover the merger and perfect in a destination state. you might want to check on where the business is being run from. or withdraws.2 How should Firstbank monitor the location of the debtors? Would the answer change if the loan were for $25 million instead of $225. retires. the secured creditor who filed in the original state has four months in which to file in the destination state. If the organization has more than one place of business. Who do you check who owns the collateral? Look at invoice documents from time to time. the security interest becomes unperfected. – 1st. Louise and William Shatner. §9-316(a)(2). Unregistered Organization: Keep an eye on the office of the chief executive officer. accounts and general intangibles of . Inc.9 million to Tang Aluminum Products. who share ownership in the business as tenants in common. and if he cuts backs. is lending $1. to purchase the inventory. In what state do you file? Which names should be listed? An organization is two or more persons having a joint or common interest. equipment.000? – – Should monitor the location every 4 months or so to ensure that their principal residence hasn’t moved Principal residence is both where he lives AND his intentions – so you should monitor both Individual Debtors: Check the principal residence of the individual debtor in a time period that is less than every four months. Sale of assets: Close monitoring b/c it may not show up in the public records. Registered Organization – look at municipal records. you should ask the client what kind of checks he wants you to do to see where the current title is Insurance policy that lists equipment If the jurisdiction has a local property tax that might list the items of value on which the personal property tax is calculated Stock certificate (can take possession of it) Equipment – do the best you can Vehicles – certificate of title Harder with ordinary stuff that is lying around You need to show your client that you’ve done everything possible to ensure that the debtor is 100% the owner of this property without anyone else having a claim to it! D. Thus. If the secured creditor does not file. What if the business is unincorporated and Louise owns 1/3 interest as a tenant in common. §9-316(b). Monitor Shatner’s involvement with the business. The creditor should file at both places of business (where Shatner and Louise are both located). Merger: Check the public records for merger documents in a time period that is less than every year. When an individual debtor changes his or her state of principal residence. tax records. the client. are an organization.
NY complies to Suppose Afganistan did have a filing system and the company had a place of business in Kabul where its chief executive officer was as well as in NY. How should the lawyer conduct the UCC search? What inquiries should the lawyer make? Names to search? Filing systems? – – – Search for Tang AND Argon ○ Want to find out if they’re corporations. you’d like to know whether they own or lease them and if they own them. and all security interests are perfected without filing. A .4: Afghan law gives priority to the first security interest created and that country has no filing system. C SAYS THAT B APPLIES ONLY IF A DEBTOR RESIDENCE.5 – What would happen if: Delaware adopted a non-uniform amendment that excuses filing altogether. because valid claims can exist in previous valid names that exist. (9-307(b) applies b/c New York has a filing system). If Tang is not a registered organization you’ll have to worry about its place of business or its chief executive officers. You’d also like to know a change of identity through a merger. If Afganistan didn’t have a registry system you’d file in DC. You want to know how they got them because if they just bought them they just bought them from some CA company. Firstbank loans $1 million to Afghan. Note in the prior problem it had only one place of business which is why you could file in NY. Inc. Inc. 9-307(c) –9-307(b) only applies if the debtor is located in a jurisdiction whose law generally requires information in a filing system. Afghanistan is not a state. they might encumbered.Argon. You’d like to know if there has been a name change. Where if Firstbank required to file? Answer: File in New York. Under 9-307(b). an Afghanistan corporation whose headquarters and operations are in New York. – – Since it’s an Afghanistan corporation. If you find that they’re both DE Corporations ○ See if they just moved to DE recently Why are you worried about a merger? ○ Filing in a different state ○ Filing under a different name You want to know what other liens Argon had because Tang takes them subject to those liens. etc. If you are really counting on these assets you’re going to do some checking by asking for invoices and the like just to make sure they didn’t buy them from some other company. You’d also like to know if Argon’s in possession of its intangibles. When you look at c. Problem 24. ○ Afghan corporation is located in NY & NY is the place to file 9-307(e) does not apply What tells us that you file in the place of incorporation? E says a registered corporation that is created under the law of a state. PLACE OF BUSINESS. the debtor has only one place of business (New York). So e does not apply and we’re left with b. Where is the first place you’d go to verify what Tang has told you. you want to know how they got them. OR CHIEF EXECUTIVE OFFICER HAS ONE OF THESE SYSTEMS.. a Delaware corporation whose assets and operations are located in NY grants a NY bank a security interest. Inc. not a manufacturer. they might have bought them subject to a security interest perfected by filing somewhere else. 9-307(b) would still apply. Problem 24. The corporation division of the state to verify the names and the registration. The NY bank does not file a financing statement. Cherokee.
then AK thinks that the section should read the DE law applies. And Delaware’s substantive law provides that security interests are perfected without filing. The kind of credit information they get is very important to them. If we got rid of filing a private market would grow up that would serve the interests of the major creditors many of whom rely on the private information market in addition to the public market already. and none of the specific rules of E controls – You CAN’T read the last sentence of C to make DC apply if you don’t use 1. If (B) does not apply then (C) tells us what to do ○ But NY does have Article 9 If B doesn’t apply. all these except as otherwise provided really come home to roost.year later. but by applicable for such a notation Advantages to COT Systems: ○ Contains title as well as lien info – Art. you have to interpret 9-307 to mean that you never get to E even if DE has Article 9. You get to the District of Columbia. files for Ch 11 bankruptcy in New York and wants to avoid the bank’s security interest as unperfected. which provides that perfection is determined by the local law of the jurisdiction in which the debtor is located. They might find it less expensive to rely solely on the private market system. then E controls. 9 must determine from other sources the owner of collateral ○ All collateral identified by two numbers – Plate and VIN Certificate of Title Systems • • • • . Maintain Perfection in Certificate of Title Systems • Compliance: Equivalent of Filing – usually consists of getting certificate of title Key: In COT systems. 2. That is what they are really relying on most. • E is supposed to be the one sure thing about the location of the debtor – should be able to go straight to E! Solution: If litigation occurs in New York. it is the financial situation of their debtors. E is controlling and he thinks the drafters blew it. but (E) says (B) only applies if the states has Article 9. SIs are called liens and filing is called notation of the lien on the certificate of title To Perfect: an SC must deliver to the Department (DMV) its application for notation of its lien on COT SI Need Not be Noted: on the title to be valid – perfection is not accomplished by notation on either’s owner’s or DMB copy of certification. – – – (B) says we should file in Delaware. Cherokee. To say that DE doesn’t apply. Since the debtor is located in Delaware. *This hypo was put before the drafters when they drafted this section ○ What if you have a jurisdiction that doesn’t have a public notice filing system? They put that in to say that it won’t apply Did an awful job drafting it because the result is that if DE does do it. New York has adopted the official text of Article 9. It certainly wouldn’t serve the interests of smaller creditors that a public filing system applies. Inc. 9-301(1). 9-307(c) was drafted to take care of this problem. & 3. Delaware law governs. They shouldn’t have done it there.
B. so First Bank remains perfected in bankruptcy. the certificate of title is not designed to deal with the possibility of mortgages against particular parts of that whole. § Accession problems present the most difficulty with regard to property covered by a certificate of title system v The certificate issued in a certificate of title system implicitly assumes that the collateral is a whole and is mortgaged as such. putting it in safe deposit box. See page 428 of TB. It borrows from Second Bank. the property in b/w that is sufficiently integrated that is sufficiently affixed to be reached by a security interest in the whole. § 9-335 facilitates the financing of automobiles. The rule isn’t a rule about perfection. aircraft. Remember a purchaser is a Secured creditor and here the second and third banks have become perfected. the WI security interest remains perfected until it would have been perfected under that jurisdiction (forever. that is four months later. it’s a rule about priority but the drafters have no choice but to phrase it as a rule of perfection since that is an area in which State Law can regulate while bankruptcy law and priority is a matter of Federal law. creating a fixtures problem. Acce ions (p423) ss § Just as personal property can be affixed to real property. g ss he e hich thetw se o curit int re s w repe cte and even though the y e st e rfe d security interest in the accession is attached and perfected before the accession was affixed and before the security interest in the whole was created. But under e. v To give the accession-secured creditor priority would be to enable debtors to routinely defeat SI just by affixing the collateral to a whole financed at some earlier time. § The accession-secured party can perfect its interest in the accession by filing in the Art 9 system but must do so before the property becomes affixed. . Is First Bank still perfected? Here Kahled told the Dept of the second state that he lost his original certificate of title in order to get more loans on his car. if not perfected on second COT within 4 months after second certificate issued. Start at 9-316(d) and (e). ral ffe ly e re Problem Set 25 Problem 25. d does not apply to purchasers for value. but not sufficiently integrated that it can no longer be subject of separate financing (tires on car). v 9-3 35(e bars the holder of a subordinate accessions interest from enforcing it. but that are.1: a) First Bank lends 65 grand to Kahled to purchase a Jaguar. boats and other certificate of title property as wholes and makes accessions filing impossible. v 9-3 11(a)(2) provides that the filingof a financing st m nt is not e ct e t p rfe a se ate e ffe iv o e ct curit int re in y e st p e y s je t a ce ificateof titlest ut . v 3) Accessions. one item of personal property can be affixed to another item of personal property creating an accessions problem. § Unde §9-3 any se r 35 cure cre d ditor whosenon-ce rtificateof titlecollate is affixe to s ral d ome othe s cure cre r e d ditor’s ce rtificate of titlecollate e ctive los s its inte st. Under d. rendering it virtually ) worthless. But 9-316 is a priority statute that allows First Bank security interest to remain perfected against lien creditor and trustee in bankruptcy. By phrasing what happens in terms of perfection. First Bank perfects by notation on WI title. perfecting on AL clean title (Kahled gets a new one in AL) and then Third Bank also perfects on the title in AL. Kahled moves to AL. the drafters have succeeded in allocating priority in bankruptcy. § The biggest losers with this system are those who finance items not intended to be used as accessions. COT doesn’t expire). The bankruptcy code calls on state notions of perfection. § Thre Ty e of Acce ion Prob m e ps ss le s v 1) That which is not sufficiently related to the whole to be considered part of it and therefore not an accession (spare tire). v 2) That which is so integrated into the whole that it is part of the whole for financing purposes (mixer on the back of a cement truck). rop rt ub ct o rt at e v 9-3 35(d) giv s a se e curit int re in thew y e st holepriorit ov r a se y e curit inte s in an acce ion to t y re t ss he w hole re ardle of t ord r in w .
Under 9-316(d) the lien was noted on AL COT. as a secured creditor. UMVCTA 21c. People move all the time to new jurisdictions.Is First Bank perfected? ○ It is perfected against the trustee in bankruptcy because we look at: The certificate of title of Wisconsin to see if it is still effective What is the effect of the issuance of the AL certificate if the debtor moves to AL on Wisconsin’s certificate? If you look at Wisconsin’s 9-303(b). has a continuing relationship with AL COT. then Wisconsin’s certificate would still be good to perfect the security interest in the car ○ – – Second and Third Bank’s perfection is ahead of First Bank’s because the 4 months have expired. First Bank has never become perfected. All kinds of things happen when people move from one jurisdiction to another. Remember. If First Bank does bring an action of this kind Second and Third Bank will most – – . How can First Bank persuade Second Bank to registering of their prior lien? First Bank can threaten to bring and action for fraud under §26 of UMVCTA and apply for a new certificate of title to be issues only showing First Banks lien. Second Bank has priority What can First Bank do to protect itself? ○ First Bank. so their certificate of title in AL trumps the one in Wisconsin If you don’t perfect in 4 months. a secured creditor is a purchaser. It is common. Sometimes they say Article 9 supersedes it and sometimes it is the other way around. – Which prevails? The UMVCTA or the General Article 9? The UMVCTA is much narrower and it inundates Article 9. If AL had not issued a certificate. The minute they discover that he’s moving to AL. they can monitor and check his monthly address. and d applies. Suppose First Bank realized within 3 months and got it noted on AL certificate? First Bank fulfills 9-311(b). then you’re unperfected and you’re unperfected retroactively against the purchaser of value. it tells us that goods cease to be covered by a certificate of title at the earlier of the time that the certificate of title ceases to be effective or the time when the goods covered subsequently by the certificate of title issued by another securitization … which would be AL in this case AL asks if the goods would still be perfected in Wisconsin if AL had not issued its certificate. by definition. This is a very common situation. since they need to rely on the monthly receipt. but the subordinate lien holder needs to require mailing from lien holder in possession. There are situations where you can make a demand to get COT. and First Bank remains continuously perfected. ○ First Bank prevails under UMCTA (Certificate of Title Act) and Second Bank prevails under Article 9 the court has to decide which one wins Even though First Bank is continuously perfected. Still. The technology is making it harder for First Bank. since it paid every month. so First bank has some incentives to monitor his whereabouts. the minute the envelope with the payment check comes in.
This means that searcher cannot rely on COT. She gets a new COT from NY. So it is still perfected under subsection d. until earlier of new COT in another jurisdiction or MI law leaves unperfected. a) Is MI bank still perfected after 4 months and for how long? Under 9-303(b) the car in NY is covered by MI COT. the AL Court will order the Dept to issue a new certificate showing the three liens in order of preference.There may be a strong argument that the old certificate is still existing in any meaningful sense since then creditors looking at the MI title will be mislead. his security interest remains perfected in NY. but you still have subsection e. c) Suppose Babe has possession of MI COT and not the Bank.2: Babs has a Nissan in MI where she lives. A COT is like a bill of sale given to owner. But under UMVCTA. Registration is not a COT. Under UMVCTA §20 the same result will be reached. has possession of COT with lien. . – – – We’re back in the same area as 25. MI certificate still remains in existence if the Bank is still holding onto it Assuming that there is nothing in MI law that says surrendering in another state makes the lien unperfected.Registration has no effect – just means getting NY plates. She thinks she’ll be in NY for only a while so she thinks she doesn’t have to register in NY or apply for a new certificate.“existing” – pretty hard for MI Bank to argue that the certificate of title doesn’t exist. MI Bank can go to NY and have the certificate of title revoked for fraud. Since she had not applied for a new COT the law of the old jurisdiction applies. b) Suppose Babs registers the car in NY but NY Dept doesn’t issue a new certificate of title just the plates? The MI COT is still valid and the Bank perfected. Is the Bank still perfected? UMVCTA §20(c)(2)(A). An NY Court interpreting UMVCTA law should say that the MI certificate ceases to be effective when the NY application is turned into the Dept.9-303 says the MI certificate of title continues to cover until NY issues a certificate of title. indefinitely.1 20(c)(2)(A).likely be subordinate lien holders. There is nothing in MI law that is going to render the COT ineffective because of the move. and she moves to NY without telling the bank. there is still an argument that the lien remains perfected if possessed by NY. . . She titled it in MI and got financing from MI bank. But MI Bank still has argument against other lien holders and TIB. falsely telling them that lien was satisfied? She resorts to fraudulent methods of getting a clean title. if name of lien holder is shown on existing COT issued by that jurisdiction (MI). protecting purchaser for value. turning into NY old certificate. Problem 25.
9-309 says a PMSI interest for consumer goods is perfected upon attachment but 9-311b says that the property that is perfected by certificate or title system must be complied with and only perfection will occur if compliance is carried out (compliance with the certificate of title act). §1-201(32). under section 26 of UMVCTA there is a way for MI to revoke COT due to fraud. This section does not say that if you get it revoked you perfect a security interest noted on it. Is the Bank perfected? The MI certificate is still perfected against lien holders and TIB but not against purchaser for value (secured creditor). The ability to get the clean certificate revoked means what? If MI bank gets NY COT revoked. If in COT statute state. they are both state law so one has to try and put them together as best you can. a second creditor that comes a long is a purchaser and can be a purchaser for value. then you have to file COT. The plan of the Bank is a good plan and will hold up against trustees and lien holders. allowing you to beat out a TIB or a lien holder under 9-303c but not a purchaser for value.” Normally you don’t have to file a SI in consumer goods if you are dealing with high ticket items as collateral it is worthwhile to file a FS.3: What should MI bank do to perfect lien on COT of MI residents for automobiles? What if they move from MI to another state? The Bank plans to lend only to residents on cars that initially titled and were registered in MI. . So know your debtor. The lien does not say anything about priority of second secured creditor against somebody in the position of MI bank. wants to finance boats sold by its dealers in 23 states A) They want to know how to perfect PMSI. §9-316e However. Which controls? There is no clear answer. So a secured creditor. security interest. There is a section in the UCC that says that except as otherwise provided in the UCC a SA remains effective b/w the parties if there is something else that is missing. with own credit corporation. Problem 25. If there is a filing then there will always be perfection in these goods. lien. a) Suppose Bab’s lies and says there is no liens on MI COT. You will tell Shoreline that they should file b/c there may be boats that are not bought for the purposes of “consumer goods. lease.The thing is that here the UMVCTA and the UCC conflict on this particular point. Maybe that will be dealt with under article 9-316. Under 9-303a.4: Shoreline Boats. They are vulnerable to second clean certificate and will loose out to buyers for value on the automobiles. The agreement itself is going to have some value. what happens to its security interest? Problem 25. You can monitor debtors but that probably would not work out. which she lost a while ago and NY issues a new COT.(33) = defines purchasers as anyone who takes for sale. The Bank that puts up the money and takes a SI in the car is a purchaser. mortgage etc. you can go to another state and get a COT in another state. will make sure the Certificate carries a notation of the Bank’s lien and it will retain possession. If Shoreline isn’t in a state where certificate of title operates then to perfect a PMSI you file if a boat is considered a consumer good.
you can’t rely on the debtor telling you. The notation perfects although it is not going to be effective until the secured party complies with Art 9. it remains good. When Shoreline finances in a filing state what should Shoreline do? They perfect by filing in the state and then go to a state that allows titling of certificates of title and filing on the certificate of title to get additional protection. that is with Art 9. The problem is that a COT could be outstanding in any jurisdiction in the US. This is why you need to be careful. If Art 9 controls in this case then you’d file where this organization is registered and file there. If you move from a COT of title state to an Article 9 perfection state. If they go out and get a new one then the 4 month time frame operates. filing isn’t effective under Art 9. owned by IL corp.If there is no COT. Suppose you move from a Art 9 state to a certificate of title state= The Bank would have a 4 month grace period to apply for a certificate of title Suppose you move from a Certificate of Title state to a Art 9 state= as long as that certificate of title is still good. he would have to check to see if the debtor has moved recently from one jurisdiction to another to see if there is a certificate of title outstanding. §6 of UMVCTA could be used to find out if there has already been a certificate of title issues. can’t be sure how the goods will be used If you’re in a COT jurisdiction. the secured creditor will remain perfected. Under article 9-311(a)(2). then as long as the COT is outstanding.5: How to perfect on bulldozer. Problem 25. Certificates of title on trucks for example can be obtained in Maine no matter where you live.2. the filing of a FS is not necessary or effective when you must file on a COT. the boat in this case can be titled anywhere in the US and it will be effective. . Get a COT in case this isn’t special mobile equipment and to prevent the debtor from getting a COT later at some point. then Shoreline will remain perfected on the collateral. If the debtor moves from one certificate of title state to another certificate state and the debtor doesn’t ask for a new certificate in the new state the creditor will remain perfected on their certificate. If its some other type of unregistered organization the you file in IL since that’s where its main place of business is. If a second lender wants to check the item to serve as collateral. and used in MI? Coldwell offices are in IL but bulldozer is in MI? We need to look at the two statues that conflict with one anther: 1. there is no automatic perfection for consumer goods B) How should Shoreline Boats protect itself against later movement or retitling of the boats? Suppose we go from one pure Art 9 state to another pure Art 9 state = You have to file within the 4 month grace period (§9-316a2) during which to discover the move from one jurisdiction to another. Hopefully Courts would find that the drafters of the UMVCTA meant to say that special mobile equipment is to be perfected under Art 9 and a gratuitous COT filing will help searchers. In the end file in both places. If you are perfected under a COT. Under UMVCTA §5 tells us that a COT is optional and if you exercise the option and get a COT the perfection is not effective until the lien holder has complied with applicable law.
Priority • Key: To say that one creditor has priority over another is to say that if the value of the collateral is sufficient to pay only one of them. foreclosure sale discharges all liens with payment to the first lien holder and on down the line even if the first lien holder wasn’t the foreclosing lien holder) All Jurisdictions: have in common that those creditors who liens are discharged by the sale share in the proceeds of the sale in order in which their liens have priority • • • • • Basic Principles of Judicial and Foreclosure Sales • • Reconciling Inconsistent Priorities • • . ○ Debtor is unlikely to pay a debt owed on someone else’s property – the prior lien holder will have to foreclose on the property now owned by the purchase ○ Typically – the purchasers pay the prior liens Rules Above: Only for typical priorities and some states have different rules (e. the law requires that the value be used to pay the one who has priority Priority under State Law: Foreclosure Sales • • Two Basic Principles (1) Any lien holder may foreclose while the debtor is in default to that lien holder ○ Prior lien doesn’t block exercise of rights under subordinate one – any creditor may act under default (2) No lien holder is compelled to foreclose: matter of discretion Sale: Discharges from the collateral the lien under which the sale is held and ALL subordinate lien BUT NOT prior lien § 9-617(a) Transfers: Sale transfers the debtor’s interest in the collateral to the purchase SUBJECT to all PRIOR liens Proceeds of Sale: Applied first to the expense of the sale THEN ○ To payment of the lien under which sale was held THEN ○ To payment of subordinate liens in order of priority § 9-615 Debt Underlying Each Lien: Reduced by amount paid to the lien holder from the sale but the balance remains owing – the lien holder is entitled to a judgment against the debtor for the deficiency unless there is a statute providing otherwise After Foreclosing and Subordinate Lien holders have been paid: if there is money leftover it is returned to the debtor (ignored the claims of any unsecured creditors) If Purchased Doesn’t Pay a Prior Lien: The purchaser doesn’t become liable on the debt to the lien holder – the debtor remains liable.g.
United Farm • Facts: Senior creditor cannot ignore a default by the debtor to the detriment of the junior creditors. • Held: Court found that Grocers Supply as a prior secured creditor has the right to take possession of the collateral with a superior right to that of Intercity a mere judgment creditor and that Grocers Supply could regain possession of the collateral from the constable who had levied on the property. Liggett: ∏ which made mortgage loans on real property after judgment liens had been perfected against the property sought to share in the distribution of the proceeds from the sale of the property ○ Rule: Court may otherwise direct the distribution of the proceeds of the sale when it appears to the court that someone other than those specified in the statute has an interest superior to the specific persons ○ Grocer’s Supply v. ○ When senior and junior creditors clash. Sheriff took possession of the inventory of that store.” Intercity is also condemned to pay for the damage and pay expenses of holding the property in warehouse. • Rule: A prior perfected creditor has a right to take possession of its collateral from an officer who has levied on the property at the direction of a judgment creditor. Senior lien holder must foreclose or stand aside so junior’s can do so ○ JLH must surrender possession but may continue with the sale – under some states sale procedures. Intercity Investment: Right of Possession Between Lien Holders • Facts: ∏ perfected an SI of over $600K to secure its inventory financing of the Grocer and CW. • Rule: An SC cannot refuse to exercise its rights under an SA while it impairs the status of other creditors by preventing them from exercising valid lien rights • Reconciled with Grocer’s: Right of the senior to possession is not the right to possession for purpose of leaving the debtor in business and frustrating collection by junior lien holders. property can be sold even though it is not physically present • Negative Pledge Clause: debtor agrees that it won’t give a junior SI to anyone else and it agrees that no one else will obtain any sort of lien on the collateral – sometimes senior cannot avoid attaching another to the property ○ Junior LH must surrender possession but may continue with the sale – don’t let it happen if you are senior . So the senior creditor here has the right of way Frierson v.• Mortgages typically have priority over subsequent judgment liens because when a debtor has a judgment lien against their property – they cant get a mortgage anyway Bank Leumi Trust v. Intercity Δ obtained a judgment in the county court against Grocer for 26K and later in year the attorney for Δ levied writ of execution. Senior cannot just sit on the SI and wait letting time go by although the debtor has clearly defaulted to the detriment of the junior lien holders. the senior creditor has right of way.
and any subordinate liens or mortgages.000 that has not been disclosed.000. What do you expect the sale price to be offered? Here there is a car worth 75k with 90k worth of liens. She would have the property. There would be a deficiency judgment in the amount of $2. the lien is discharged 11 without notice Problem Set 26 Problem 26. The costs of the sale are 200. § If the search results arrive before the notification date. The expenses of sale are $200.000 bid would go to pay first the $200 cost of sale and goes to the sheriff.800 would go to the cover the $10. remain. you would only want to pay 8k since you have to pay off the 17k later to the senior creditor. This car isn’t really worth .000.2: What about a 75k Rolls subject to two SI.UCC Notice of Sale • Lien Holder Other than One Forced Sale: Must know the sale is occurring ○ Senior LHs whose debts are in default may wish to demand possession and conduct their own sales ○ Junior LHs may wish to protect interest by bidding at the Senior LH sales - Liens may be perfected in various ways that make them difficult/impossible to discover. Notice that a sale clears the mortgage or lien that is foreclosing. Senior mortgages. The sheriff seized the Rolls for a judgment creditor with a lien worth $8. the one at the bottom of the collection ring is going to end up paying for the expenses. In this case if the property is worth 25k. There is a senior mortgage of 17.000 on a property being sold at auction. The senior creditor has the right to foreclose to recuperate his loan.000 debt. however. secured party sends notice to the lienholders name in the search result and to any lienholder who furnished the foreclosing secured party with an authenticated notice of its claim. one worth 60k first creditor and 30k second creditor. o To take advantage of this safe harbor. the foreclosing secured party request a search of the UCC filing system 20-30 days before the notification date (date on which the foreclosing secured party will send notice of sale). Problem 26.000. See 9-617a. Then the $7. Neither creditor objects the sale. the person that conducts the sale is going to get the money. So in this case Gotlieb who is foreclosing (we presume the junior mortgagee for 10k) will get 7. If the senior creditor knows the buyer in the auction then maybe he would be willing to let Gotlieb as a junior creditor sell off the property and reinstate the terms of the deal with the purchaser of the collateral replacing the debtor. but that is for the debtor to deal with and not the purchaser. most likely a deal would have been worked out earlier to avoid the foreclosure in the first place. § 9-6 (c) does not require notice to the holder of properly perfected valid lien. If this were the case. the foreclosing creditor cannot give them notice UCC 9-6 forces foreclosing secured parties to give notice of sale only to other lienholders who are easy to find – 11 those who have properly indexed FS on file or who have perfected by compliance with a federal statute or state certificate of title statute. The foreclosing mortgagee is going to get the money out of the sale.800. If the foreclosing creditor cannot discover them.000. The client is willing to pay up to 25. The person who ends up bearing the expenses of the sale is the most junior lien holder.200 that would remain. but have a remainder of the senior mortgage of $17.1: Junior mortgagee creditor has a debt of 10. Up to how much should she bid? She should not bid more than $8. In this the $8.
There is no equity there to an outside bidder. So the foreclosing creditor has a credit bid has a bid for at least a couple hundred dollars. whatever you purchase will be subject to security interests of $60. There isn’t a case for a conversion lawsuit in a case like this. He is going to be willing to bid 60k credit bid. They’re going to bid up to the amount of their debt (credit bid). The executor is going to pay this out no matter what to pay the sheriff. What do you get besides possession and a bill of sale? The keys. Suppose the senior creditor in this case brings the sale. In this case the car isn’t worth anything. If the senior creditor bids over his debt then the surplus goes to the second mortgage holder.anything. yes you are forcing the creditors to spend money on lawyers but there is no way that this is conversion. so they might as well bid this much just in case so they get the car for a joy ride. and you get to drive around a Rolls for two months for a dollar. and buying subject to the mortgage. but if you buy property subject to a SI then you are simply recognizing that the creditor can come after the car. they should stop the execution creditors sale. If the execution creditor conducts the sale subject to the 2 SC. and you get the car for some more time.$90k of liability on a car worth $75k. the sheriff doesn’t work for free. but they don’t have a debt against you.000 later. There is a difference between buying property and assuming the mortgage. you don’t assume the debt. In the latter. This car is pretty much worthless . Then you just wait for one of the other secured creditors to come and foreclose. and $30. When they come to repossess you threaten violence. The foreclosing creditors are going to have to pay the sale expenses even if there is no bid. The Senior secured creditor should jump in and ask the court to let him conduct the sale. They can take the car away from you. The execution creditor can credit bid – if the seniors aren’t the foreclosing creditors. As a bidder you would only buy the property if there were equity in it. When an unsecured creditor has gotten a judgment and is forcing the sale the thing for the secured creditors is to not allow the execution creditor to conduct the sale. They cannot come after you for any deficiency.000 first. It’ll take them a couple months to get a writ of replevin. When you assume the mortgage you are agreeing to pay. What’s going to happen if you’re the winning bidder? Foreclosing creditor is liable for expenses of the sale. Suppose the senior secured finds out. What if you bid $0 or only the $200 to cover the expenses of a sale? If you take an outside bidder. Not well set-up to protect secured creditors in Article 9. If you were the junior creditor you could bid 61k. Let’s see the creditor come and take it. The negative pledge clause – event of default for debtor to let someone else get a lien on the collateral . What if you bid $10? If no one else bids you get title and the car (subject to security interests). The execution creditor has to bid at least $200. If the senior creditor bids 65k then 5k (minus the sale costs) go to the junior lien holder. they’re not going to be able to do that. if there were excess value in the property. Better tell the firsts to hold the sale themselves. pay off the senior creditor and then sell the car and get back 14k of your debt and then sue the debtor for the deficiency. at least for a couple of weeks or a month. The thought is that no one can buy this except subject to the security interest. so how can they be harmed? This example is how – some guy could be careening around in this car he bought for a dollar and seriously depreciating it. What you buy at a sale is the debtors equity in the collateral. What about $200? This is the cost of sale. You still have the car until they foreclose. You are going to have the use of this car for a while.
You are just making that much of a bigger investment in the collateral. You could also self-help. DHB lien cannot be displaced. It is set up that way because it hypothetically doesn’t matter. and you might get posted ahead (because replevin is faster). If we assume that he is an article 9 secured creditor instead and forces sale then it cannot be prevented. the equipment will bring at least 40 grand. §9-401 is the relevant section if the junior lien holder is a judgment creditor and we’d have to look at the state statute in this regard to see if the judgment creditor would have priority. This is a courtesy of banks to banks. they are buying into second position. DHB might not even know about the sale.000 at least. Don’t let someone else retain a lien on it. So the secured creditor can foreclose at that moment. etc. If you foreclose. D) Is DHB entitled to receive notice assuming the creditor is an Art 9 creditor? A judgment lien creditor does not have to give notice (unless it has received written notice from the other secured creditor that is has an interest in the collateral). A negative pledge clause is an event of default. DHB also runs the additional risk that it won’t be able to find the equipment because it is mobile. but remember it can be hurt if someone gets the property and tears it up. You can demand possession. (See §9-611).3: The debtor is current on his loan.C. Most courts will let them step in and stop sale and conduct the sale themselves. If its consumer goods then the creditors aren’t entitled to notice. improperly maintained. Remember the fact that DHB is in first position. a)You have heard rumors what a junior lien creditor may be forcing a sale of the equipment? DHB should be concerned because the new buyer may not maintain the equipment. A secured creditor has a limited obligation to search and make a limited effort to notify record holders who show up in the search. you don’t know your debtor. You represent DHB. It becomes clear as you read through Art 9 that the secured creditor doesn’t have to give notice. This is why there are negative pledge clauses in agreement. you are okay because the second interest . You could do a replevin. The issue is when the secured creditor gets notice only in certain circumstances. c) Can DHB prevent the sale? It cannot prevent the sale. You need to be concerned about who has control of your collateral – could be taken out of the jurisdiction. The creditor knows who his debtor and where the collateral is. If a subordinate creditor forces the sale.C. The new buyer does not keep up the insurance. even is sold a judicial sale.Problem 26. You are paying in full dollars. 9-611 and Comment 4. No notice is required under the U. b) What if DHB purchases to protect its position? If DHB knows there is a sale. o 3. DHB feels safe because at an auction.000. it could bid at the sale. It’s not DHB’s sale. which has a first secured interest on mobile equipment for $27. but can take possession of the collateral. so any money goes to subordinate creditor. the purchaser takes the property subject to SI. DHB will get a SI in the collateral still even when it changes hands. *So what could DHB do? The way to get ahead is for Diamond Head to foreclose before the lower creditor. If its something that’s not consumer goods then they are entitled to notice if its something that would come up on the FS on a search. The collateral is worth $40.
What you need to do is put in a couple of other clauses.000. Problem 26. What can you do? You can try to foreclose on the house. 4. The first is a cross default clause that says if you go into default on a loan with someone else you also go into default with me. The house is worth at least 90. The second says that no judgment liens will ever be placed against the collateral. She will give a second against a house she bought for 120. At an auction.000.000 subject to a first in amount of 80. in the worst case. you aren’t bidding into the first position as in the above case. you just have to be the foreclosing bidder. here you. if you don’t have these in the contract you are in trouble. If you think that the property is worth 100k and the senior creditor has bid 80k maybe you could bid 90k. But. You’ll have to bid $90 to protect your $10K – what’s a better scenario? Pay on their behalf and add it to your mortgage? a) Say the friend defaults on the 10k and you have to look to the house for repayment.000 and no money. The second mortgagee is really extending a line of credit under a wrap around mortgage.000 (or below).000. If your friend is about to default. You also run the risk that my buddy will tear up the house. I am the legal owner of the house subject to an $80. I am credit bidding. Because I have a second security interest I will end up with an unsecured deficiency of $10. If someone else bids more than 10k then you should let them take it since you will get your 10k and they will take the hose subject to the 80k senior creditors lien. There is a problem that you can’t foreclose if the debtor is not in default. a friend are unlikely to have 80k in cash to get your 10k out. b) Will that assure 10 grand recovery? Nope. It was decided the senior had a right to the inventory. Problem 26. what can you do? You can make a payment yourself and add it onto your mortgage (This is what is termed a wrap around mortgage).4: A Friend needs to borrow $10. so the sheriff made the junior return the stuff. You also run the risk that they will bid $80. (80 for the senior and the other 10 as a credit bid) you are going to have to put up 80k in cash and pay the expenses. d) Can you protect yourself against default in the first mortgage by a provision in your loan agreement? Maybe you could put in a clause that reads that when any term of the first mortgaged is breached you can foreclose.will be discharged. Would you really be willing to foreclose on your friend’s house? There is also risk in taking over the house and then trying to sell it again. This is why second mortgage lending is for professionals with capital. The senior gets access to the property if he . if no one shows up to bid you should bid $10. Should you lend a friend $10k to meet financial need when there’s already an 80K first mortgage on the house? The house is worth considerably more than $90K.000 mortgage worth at least 90. c) What happens if your friend makes payment on your mortgage but defaults in payments under the first mortgage? Now you run the risk that the first creditor will foreclose. It doesn’t look like a good deal. To make a credit bid you don’t have to be the senior party.000 so in theory you’d have the good to sell it and then pay the secured creditor.000 from you.5: What exactly happened in Grocer’s Supply? A junior creditor took possession.
he passes that right to the subordinates. The response is that as the senior should be able to control its own destiny. If you lose.” If these taxes aren’t paid in 2 years the state forecloses the property tax lien and the property is sold to the highest bidder at auction. We have to solve who has the right of possession. the seizure of the collateral will only cover the amount of the debt. The junior then could have bid at the sale. and get a writ from the court saying you have a right to possess the property. In Grocer’s Supply the senior wanted to foreclose. Another possibility from page 443 is we might be able to have a sheriff’s sale without taking possession of the property. The circumstances in Grocers are a little different. explain the situation. Rather than doing the sale first do a lawsuit first. The ideal would be to get declaratory judgment in this case asking the Court whether the secured creditor can shield himself by letting the secured creditor remain in possession. Go into court. is a creditor in Alaska who lends money and takes SI in real property. When the collateral is something that can be divided up. . The point is that then any debtor with a compliant senior secured creditor could frustrate all creditors. Problem 26. What can you do? We would argue to the court that a senior creditor also has a superior right of possession because he has priority. There are some people that still think that being a senior creditor means that you have control over the collateral and as such can let the debtor continue using the collateral. He is just saying no and letting the Grocery Store continue running the business. The order given to the sheriff in the writ says that he is to seize enough to satisfy the debt and not all the debtor’s inventory. -The problem is that Grocers and Frierson are from two different courts and are contradicting opinions.wants it. Now we have a senior who is not foreclosing. In Alaska there is a provision that read: “Property taxes. so you don’t get dinged with the costs of possession.6: Your client. together with penalty and interest are a lien upon the property assessed and the lien is prior and paramount to all other liens or encumbrances against the property. In Court you would bring up the Frierson decision where the senior creditor was found to not be able to hold off from foreclosing for no reason. In Frierson says that the senior creditor has priority but the debtor cannot use the senior creditor to shield himself from foreclosure this way. or it’s also possible that a third party would have come in and bid high enough to pay them both off. Junior would argue that if the senior doesn’t choose to foreclose. subject to the senior. and probably with an impending lawsuit. Someone will buy at that sale. You take a look at the agreements used by your client and notice that they say nothing regarding property taxes. The proceeds are applied first to the tax authority and then to the liens. you only lose court costs. The Junior creditor wants to foreclose and pressure the debtor but there is a senior credit and on the property and is in possession of the collateral. That will put it on the table quickly and you will be able to make the determination. They are choosing to liquidate the inventory through normal sales in order to preserve value for everyone. The advantage is the lawsuit occurs after. here the senior creditor has notice. The problem is no one is really going to bid. The senior can foreclose whenever it wants and doesn’t have to do what the junior wants. etc. The clause in Alaska gives the State a super priority and is constitutional and exists in many states. Fidelity Mortgage. such as inventory.
A) If one of Fidelity’s debtors fails to pay property taxes and the state forecloses what is the effect on your client’s mortgage? The proceeds are paid after the tax authorities are paid and you’d have a deficiency against the debtor for the remaining amount. The bank could create an escrow account to have the debtor pay the taxes and insurance on the house. C) What suggestions do you have for reforming your clients standard form contract? Since the tax authorities give the debtor 2 years to pay you can place some clause that says that any failure to pay property taxes gives the creditor the right to foreclose on the property. it is an event of default. become prior to the mortgagee. Priority in Bankruptcy Law • Key: SIs and Liens survive the filing of a bankruptcy case except to the extent – ○ Bankruptcy Plans (1) can reduce the amount of the lien to an amount equal to the value of the collateral as determined by the court and (2) Extend the time for payment ○ During bankruptcy some kinds of lien can be avoided because they are unperfected or are preferences Non-Bankruptcy: Any lien holder may foreclose while the debtor is in default to that lien holder ○ Bankruptcy: Automatic stay contradicts this principle – the SC cannot foreclose until the stay is terminated Key Principle: No lien holder is compelled to foreclose ○ Bankruptcy: The trustee or debtor in possession can sell the SC’s collateral free and clear of liens effectively foreclosing the SC’s lien on the trustee’s or debtor’s own time table Bankruptcy Focused: less on priority and more on creating value for all creditors. If you see property taxes going into default you pay them off and add them into your mortgage. so you can do that and get the bank out of the way. generally property taxes. B) If such a foreclosure is under way against one of your clients mortgages what can you do to protect the client? If the creditor pays the property taxes it ends the foreclosure. This way you can get the property sold before the state. senior liens survive. Make a failure to pay an event of default. The bankruptcy system hold secured creditors in place for the benefit of junior secured creditors. The creditor would have to come in and make the payments to the tax authority before theirs can foreclose. What happens in most situations is that a mortgagee will require mortgagor to deposit on a monthly basis in advance both the property tax payments and insurance payments in escrow accounts. even though they arise after a mortgage. Junior liens are discharged at the foreclosure sale. Property taxes tend to be small so it shouldn’t be too bad. 6. The bank will require that these payments be made to an account in control of the mortgagee on a monthly basis. general USCs and the debtor Contrasting Bankruptcy with Non-Bankruptcy • • • . Under state law.
WPV contended that debtor doesn’t comply with § 363(f)(4) because the sale wouldn’t produce a full money satisfaction of its judgment and § 363(f)(5) because there aren’t adverse proceedings against the preference it holds • Held: Court can allow the sale when the debtor is getting the best possible price for the collateral – WPV is judgment holder whose judgment is subject to attack and the collateral is subject to quick depreciation which makes this a special circumstances ○ Allows sale and debtor has right to sell collateral free and clear despite the SC objection • § 363(f)(3) In order to Sell. As the date of filing. creditor WPV was judgment creditor and objected.3M in lien. but in this case the liens are valued by the value of the collateral and in this case.9M. no one may be willing to buy it – here the collateral is burdensome to the state and trustee may abandon the collateral. Citi is secured for $1M since the collateral is now worth $1M. the real estate being sold was subject to $1. Under OL the secured status of SSB is $) and there isn’t much you can do about it Implications of Oneida • • • • Key: Any appreciation in the collateral will go to the purchaser and not the SC had he sat on the collateral and not foreclosed Ability to Sell: In Bankruptcy protects the value in depreciating collateral for junior creditors Weakness of a FC Sale Free and Clear of Liens: SCs who are unsure of amount and priority of their liens may face hard task in determining how much to bid – may bid under § 363(k) Misinterpretation of § 363(f)(3): because this interpretation any sale price would be sufficient for lien interests because they are defining the value of lien interests to be what the collateral can currently sell for . automatic stay terminated and lien holders may foreclose Free and Clear Sale: May chose this option § 363(f) – sold much the same way as if senior creditor had foreclosed on the property and sold it free of all subordinate liens. sale must be able to satisfy all liens on property: Here that would mean collateral would have to sell for $1. when this occurs – ○ Property is given back to the debtor. In this case automatic stay expires – SC becomes free to foreclose Abandonment: If the lien > value of the collateral. ○ Typically full value of the collateral is received and the proceeds are distributed amount the lien holders based on priority. Difference is that SCs are at mercy of trustee or DIP for timing • In re Oneida Lake Development • Facts: Debtor moved to have court allow sale of all real estate for 750k.Three Areas Where Priority Rights of Secured Creditors are Diminished • • • The trustee or debtor in possession’s ability to sell collateral: Sale options during bankruptcy (1) Subject to Liens: Collateral may be sold subject to liens of senior creditors.
Then during bankruptcy proceedings debtor needed money to renovate building in order to enter a lease with LC. If the value of the house or collateral rises again the person who gains the value is going to be the debtor. must be shown: (1) Estate is unable to borrow the money without granting a prior lien AND (2) There is adequate protection of the interest of the secured creditor whose lien is being usurped • • In re 495 Central Park • Facts: Hancock Mutual took an SI in a building which later the debtor bought subject to the SI. § 506 says that that a claim is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property” • Held: 1M is secured and is a claim of the creditor – it is allowed for the full 1M although its only really secured for 200K. Property would be improved by the proposed renovations and that increase in value will result so the value is sufficient protected – court allowed debtor to get senior priority and get another loan on the building Aletha Dewsnup v.Power to Grant Senior Liens • Under State Law: Liens generally rank in priority in which they are perfected – usually procedure is: ○ (1) Inspect collateral ○ (2) Search public records to determine what liens currently encumber it ○ (3) SO before making loan. • Timing: Time that is critical for the creditor is the moment of foreclose because any increase in value between the time of institution of bankruptcy proceedings and the time of FC has to go to the SC not the debtor Shift in Focus in Bankruptcy to Protect Junior Lien Holders • Occurs when: . Debtor wants to only be burdened with a 200K debt when he comes off bankruptcy. lender can know what priority its SI will have and that its initial priority will not change (exceptions are rare) Once Debtor in Bankruptcy: tenet that lien first created/perfected has 1st priority no longer holds! Trustee or Debtor in Possession May Grant Liens Senior to Existing Liens ○ In limited cases the DIP or trustee can borrow additional money from a post-petition lender secured by a lien prior to existing liens § 364(d) ○ For this to happen. • Held: The goal of adequate protection is to safeguard the SC from diminution in the value of its interest during the Chapter 11 Reorg. None of the lien is voided. Debtor defaults and Hancock accelerates trying to foreclose but is stayed. the existing lien holders must be notified and if object. Louis Timm • Facts: Debtor Dewnsup trying to strip down value of SI to say that claim is only worth 200k though house that served as collateral and loan were worth 1M. • Rule: Debtor claims that the creditor loses the value of his SI above the value of collateral when he enters into bankruptcy.
The question is whether these assets should be sold in bankruptcy proceedings and if it is sold then that will be the end for SSB. Some would argue that under bankruptcy 363(f)(3) you can only sell if the aggregate value is greater than the value of the liens. SSB thinks the market will come back around. Then the rest will be distributed in order of priority on down to the general unsecured creditors.000. Under Oneida Lake the secured status of SSB is $0 and there isn’t much you can do about it under this holding.9mill. Here the debtor is trying to sell the collateral right now at this price. Up to how much should she bid at a sale free and clear of liens in bankruptcy? Bid up to $25. it doesn’t have to sell on a particular day. and their interests cannot persist. What it takes away in value from the secured creditors is that they can no longer control the timing of the sale. The costs of the sale are 200. and the stuff will be sold free and clear. In this case the Citibank is secured for 1mill and SSB is unsecured for 800k and that’s it. Citibank would argue that the true value of the collateral is worth more than 1mill. Oneida Lake. The estate gets to determine the sale. Furthermore. The sale is free and clear of liens so it won’t be subject to a senior lien after the bankruptcy sale. One consequence is that if the estate can boost up the price.2: You represent SSB that holds an 800k second security interest in railroad cars. §363(f)3 tells us that in order to sell. they can fix stuff up. The client is willing to pay up to 25. In the depressed market the cart are worth about $1 million.000 that has not been disclosed. *What the debtor in the Aletha Dewsnup case is analogous to what the debtor is trying to do here in this case. The costs of sale will be paid for first. however tells us that liens are valued by the value of the collateral and in this case Citibank is secured for 1mill since the collateral is now worth 1mill.1: Junior mortgagee creditor has a debt of 10. The debtor who has the cars files for Ch 11 and proposes to sell free and clear of liens for current value. There is a senior mortgage of 17.000 to win. the sale must be able to satisfy all liens on the property. If sold for $1mill who will get what? Citibank will get $1mill and be unsecured for 100k.• Senior Lien Holders: Thought by court to be adequately protected against loss and ○ Stay: is likely to facilitate the collection efforts of subordinate creditors Focus: on creditors whose priority is sufficiently high that they may be able to be paid through an efficient liquidation or reorg but not so high that they will be paid in any event ○ Problem Set 27 Problem 27. In this case that would mean the collateral has to sell for 1. In bankruptcy the person can simply bid on the property paying what the property is worth. you can bet the estate will bring more money than at a sheriff’s sale because they can advertise. Given the estate’s interest. The buyer does not have to worry about costs of sale. The bidding will probably begin by having each mortgagee credit bid on the property.1mill held by Citibank. The incentive is to maximize the price for the estate. they will be paid by the trustee. There is an argument made partly in Dewsnup that in these cases where the debtor is in deep then the property should be abandoned and the debtor barred from doing anything with it. What is different here is that in Dewsnup is that the trustee is going to abandon the property at some point. SSB will be unsecured for 800k.000 on a property being sold at auction. SSB made the loan two years ago when the market was high and the collateral was worth $3mill. it lowers the residual claims that will persist against it. The first SI is for about $1. The debtor doesn’t have any equity in the railroad cars. . since it was purchased for 3mill. Problem 27.
Why is the debtor proposing to sell the property here? If the sale goes on then the person likely to bid will be Citibank and SSB. Citibank would credit bid. People associated with the debtor though are the ones that know most about the value of these cars and will be in there bidding (others or the same industry and profession as the debtor). Can SSB do anything about it? SSB could bid more, but they will have to bid more than their credit bid. They will have to end up paying cash to Citibank which isn’t a very good idea. There also may be some banking regulation regarding how long one of these two banks can hold onto. Maybe they can’t keep them for 3 years waiting for the cars to increase in value. If the debtor could get away with stripping down the value of the debt to the value of the collateral then the debtor would be in great shape since he would only have about 1mill of debts to deal with. *The Court however should say that the trustee is going to abandon the property since there is no equity in the property and clearly the property is not needed for an effective reorganization. The car should be turned over to the secured creditors with their SI in the car attached. To abandon in this scenario would be the equivalent of having the collateral going out of the estate and then going straight into the hands of the creditors. Then the two banks could negotiate and reach an agreement to hold onto the car and wait for the market to go back up. Citibank has serious leverage here though since Citibank may ask SSB to buy them out if they are so sure the market is going to go back up. All of this depends of course on extending the theory of the Dewsnup decision. • Some bankruptcy people think that this decision is terrible but its 13 years old and little attention has been given to it, the bankruptcy courts have discussed it little. *If the court however decides that Dewsnup doesn’t apply and that Oneida Lake controls what do you do as SSB? You appeal the decision and at least you can delay the judgment and hopefully the market for the cars will go up while you get another decision. You may have to put up a bond when appealing but this would be to protect the estate from a downturn, but what sort of downturn can occur if the market of cars has hit rock bottom. Problem 27.3: Client owns an office complex under construction and the loans under the property total 5mill. It wants more money but the asset cannot support it, there are too many liens against the property. If we weren’t in bankruptcy: Asset is worth $2 million; American has first in amount $4 million; and Lien Creditors have mechanic lien in amount of $1 million. The asset would all go to American, they would only get half of what they wanted secured, and everyone else would be general unsecured In bankruptcy, asset is worth $2 million. If we spend another $1.5 million, then the asset will be worth $4 million. Outside of bankruptcy no one would come in and lend because they would be subject to American. In bankruptcy, under 364, a new lender can come in and lend and take first position, as follows. So the debtor would have to grant a new lender priority over American Bank and get the loan for 1.5mill. American bank will argue that adding 1.5mill will not increase the value of the offices to 2mill more. The argument on the other side is that the 500k cushion of equity is sufficient as decided in the Central Park Avenue Case. American may not want to lend more since the debtor has proven that he has failed once and why give him a second chance. Dev. Asset $4 million New Lender $1.5 million American $4 million Lien Creditors $1 million Distribution: New Lender $1.5 million
American $2 million secured ($2 million unsecured) General Uns. $0.5 million If we look at the judgment in 495 Central Park Avenue Corp then its possible to think the judge may allow a senior loan on this shopping mall. The idea here is that under bankruptcy the debtor may be able to pursuade the judge to grant an extra loan while granting a new and more senior SI. Problem 27.4: Refer to problem 26.4 where you loan friend 10 grand on house, where there is already a first mortgage. He defaults on the loan and now he owes another first secured creditor 80k and you 10k. The house is worth 120k but the housing market is slow. If a foreclosure sale is held, that is in nonbankruptcy law you are going to get hosed b/c your debt will get whipped out by the senior creditor. Because it is subject to the senior lien your debt will be wiped out. The senior creditor will probably credit bid on the house and you will have a unsecured credit against your friend. In bankruptcy, he first mortgagee can’t proceed to a sale b/c there is an automatic stay. Our client is a junior secured creditor but is secured b/c there is equity in the property. If someone wants to sell you are entitled to adequate protection under these circumstances. The bankruptcy proceeding may allow a restructuring so the both creditors get paid at some point down the line. The junior secured creditor is in a better situation in bankruptcy than under nonbankruptcy law.
Competition for Collateral
• How and When
Lien Creditors v. Secured Creditors: The Basics
• How Creditors become lien creditors: Generally the prototypical lien creditor is an unsecured creditor who: ○ (1) Won a judgment against the debtor ○ (2) Obtain a writ of execution, and then ○ (3) Obtain a lien by levying on specific property of the debtor Most Jurisdiction: Attachment is legal process where ∏ obtain writ and gets it to sheriff who then levies on property. Distinction between attachment and execution is that attachment occurs before judgment is entered, which execution is after. Property seized pursuant to attachment is not immediately sold, it is held by sheriff pending litigation outcome. Garnishment: Process by which a judgment creditor in most states reaches debt owing from a third party to the debtor or property of the debtor that is in the hands of a third party Trustee or DIP in Bankruptcy: Has the rights of a hypothetical ideal lien creditor § 554(a) Found: Usually in state statutes and is on first come and first served basis Priority: Usually as of one of four dates (most common to least) ○ (1) Date of levy ○ (2) Date of delivery of write ○ (3) Date of service of writ of garnishment ○ (4) Date of recordation of judgment Writs of Execution: in competition between writs of execution, general rule gives priority to the first to levy on that particular property ○ Minority – gives priority based on dates the writs of execution were delivered to the sheriff Key: Priority between lien creditor and non-PMSI Art. 9 SC depends on whether the lien creditor becomes a lien creditor § 9-317(a)(2) – before the SP does one of two things: ○ (1) Perfects its security interest OR ○ (2) Files a FS and complies with ONE of the conditions of § 9-203(b)(3) (security agreement, possession, or control) Fight is About: If the secured creditor ever perfected – lien creditor will try to find some sort of deficiency in the SC filing ○ Meaning: An SC that has filed an FS and gotten an authenticated SA but hasn’t given value yet, can get priority over a lien creditor
Priority Among Lien Creditors
Priority Between Lien Creditors and Secured Creditors
from RFT. LC then levies on boat. ○ None of the victims individually perfected an SI or filed a judgment lien – but the attorney. which will give RFT priority since it is complying with §9-203(b)(3)(A). Purchase Money Priority (PMSIs) • • Priming: PMSIs may prime prior secured lenders – they are exception to the first in time principle PMSIs v.1: The local credit bureau reported the entry of a judgment of $125. Green • Facts: Δ tries to enforce an SI filed on property seized by state for payment of restitution to the victim’s of Δ’s alleged grand theft. The solution for the unsecured creditor who wants to levy is to get a declaratory judgment and not risk attorney’s fees the second time around. and a SA. Why would the debtor give RFT a security interest? RFT has been patient with the debtor and Sheng has already executed a judgment. The creditor . ○ If unsecured. if RFT delivers a writ of execution to the sheriff on the same day as Sheng. burglary and forgery. The secured creditor will hold off the lien creditor and assert its position to get the property back if there is a levy. if the PMSI attaches first. etc. You would have to get RFT to obtain and file a FS (with authorization). The debtor also owes $50.The debtor has leverage (the ability to give a secured interest to RFT and put RFT in a much better position). perfected an SI in all of the property and will get paid first. The debtor could use this leverage to obtain more credit. -Under the Ohio statute. Problem Set 28 Problem 28. Lien creditor will win unless the SC perfects within 20 days of sale. Lien Creditors: Can prime an LC’s interest only if the PMSI comes into being and attached to the collateral before the LC obtains its lien against the collateral. an unsecured creditor.People v. no injunction there can be no levy.000 (unsecured) to RFT. it must give the property to RFT. the holder of the PMSI has a 20-day grace period in which it can perfect and thereby defeat a lien that come into existence between the dates of attachment and perfection of the PMSI § 9-317(e) ○ Example: Debtor buys boat on credit. • Rule: State seizures and demands are not adequate to create rights in unsecured creditors • Held: State failed to file a proper petition seeking a TRO or a preliminary injunction or appointment of receiver or any other appropriate protective relief necessary to preserve the property or assets. Grocer Supply -. the amount will be distributed pro rata (see statute on p466). Therefore if the sheriff levies in favor of Sheng. RFT can say the debtor is in default and has a right to possession.000 in favor of Sheng Electronics. We’ll see later that under bankruptcy a trustee could upset the granting a SI in collateral within 90 days of the filing of bankruptcy. How can RFT get priority over Sheng? RFT can gain priority by perfecting a security interest before Sheng levies. The subsequent case (Friersan) says the secured creditor can’t keep holding off lien creditors forever. Negotiate -.RFT does not have to levy. Grocer’s Supply is not a long-term solution. Under §9-317(a) – perfect a security interest prior to the levy for Sheng’s judgment.
2: Phyllis loans Melinda $20. If you file according to a security agreement that is enough to get a toe hold. Melinda signs a financing statement. If Phyllis has made a promise or commitment that she will disburse. National’s loan procedure: First. then disburse loan amount within two weeks. All are made in a state in which a creditor becomes a lien creditor only when the sheriff takes actual possession of the property. (a) As matters now stand.4: What if National is in a state that adopts a statute like CAL. You don’t want to have to put dollars on the line to find out if you are first in line. which is secured by a scaffolding and construction equipment.000. prorata distribution). Phyllis receives the report. but Phyllis does not distribute the money. which creates a judgment creditor (and applies as a lien) by filing notice of the judgment with the Secretary of State? The situation does not change from Problem 28. On March 11. and promissory note. The judgment should show up in the creditor’s search since the CAL statute says that the judgment becomes a lien on personal property when the JLC files a FS with the secretary of state. and give money after the levy and win.” Problem 28. A SI hasn’t even attached. You can file and get a security agreement before the levy.000 loan despite the levy. . the sheriff levies on equipment pursuant to a writ of execution in favor of Star Plastering. (b) If Phyllis makes the $20. Hence. It seems they don’t have any problem. When you actually give value the security agreement goes back to the date of the filing – even if the levy has already occurred. Problem 28.5: What if National’s state adopts a statute like Ohio §2329. This is not likely to happen in one day even if the debtor cooperates. security agreement. Can an execution creditor come ahead of National? Once they see the collateral in the debtor’s possession (a judgment creditor has not already levied). The filing pursuant to a security agreement locks your date. these two things the filing of a FS and the signing of a SA allow you to have priority when you later give value.3. On March 10. under §9-317(a)(2)(B) it will also have a priority if it has filed a financing statement and the debtor has authenticated a security agreement describing the collateral under 9-203b3. it looks like a good plan.3: National specializes in asset-based lending to small businesses that are in financial distress. Problem 28. Phyllis files the financing statement the same day and orders a search. The policy for this is a way to make sure you are in first in line. Problem 28. So in a search then it will show up before the loan is made. Possible problem: Maybe there are loans over these goods are PMSI although their loans are not PMSI. because she has ordered a search. will she have priority over Star in the equipment? Yes. All of National’s loans are non-PMSI loans secured by personal tangible property. goods purchased with a PMSI that have a 20-day grace period under §9-317(e) “if a person files a financing statement with respect to a PMSI before or within 20 days after the debtor receives delivery of the collateral the SI takes priority over the rights of a buyer. National is ok under §9-317(a)(2)(B) if debtor also authenticated a security agreement. if Phyllis gives value she will be perfected. On March 7.10 (in which no preference is given to writs delivered on the same day – if amount is not sufficient. they file a financing statement. then this would be considered as having been given value for purposes of attachment of a security interest. then search to make sure collateral is in hands of debtor. is Phyllis perfected? No. UNDER 9-203(B) (1) –A SECURITY INTEREST ATTACHES AGAINST A DEBTOR AND THIRD PARTIES WITH RESPECT TO THE COLLATERAL IF VALUE HAS BEEN GIVEN.needs a judgment in order to get a writ of execution. under §9-308(a) she has not met all the requirements of 9-310 through 9-316 since she has not given value.
1 before the Sheriff takes possession. So if she is in default then she can demand possession from the sheriff. there was an unregistered Judgment against Edith from her husband. 1. the sheriff levies. National files a financing statement.5: Bonnie sold a boat to Edith for $35. but this has to be keeping the senior’s rights intact. Kaufman: Not likely. It was perfected when she signed the security agreement. Immediately after Edith takes possession of the boat she is followed to the marina and the sheriff levied on the boat in favor of Edith’s ex-husband.000 unpaid alimony and child support. When did the judgment creditor become a lien creditor? -The statute says in all other cases the writ of execution first delivered to the officer shall be the first satisfied – it does not say when the judgment creditor becomes a lien creditor with respect to Article 9. §9-102(26) – Consumer transactions are those where an individual buys something for personal or household purposes §9-309(1). Citing Grocer’s Supply we would be asking for it back based on the prior security interest. but the statute suggests that the judgment creditor becomes a lien creditor on Nov. She has to have a right to immediate possession and this will be if Edith is in default and the SA contains a provision that any levy constitutes default. 5. The judgment is interfering with the senior creditor’s ability to repossess. Problem 28. you are no longer automatically perfected. What can Bonnie do? IF PURCHASE MONEY SECURITY INTEREST WITH A SPECIAL SET OF 9-317(E). 15. As between our right to repo and the judgment creditor’s right to foreclose. On Nov. If we have consumer goods. It only discusses priority between two levying creditors. Bonnie ran an instant creditor check and missed the judgment against Edith for $22.SI perfects when it attaches when dealing with a PMSI in consumer goods. we have the stronger right (Remember that Grocer’s Supply isn’t everywhere).*Hypo: On Nov.000 -. You need to file a FS. Most sheriff’s offices keep records with respect to delivery of documents. §9-313(3)(a) tells us that a lien creditor is going to have priority if he becomes one before the SC perfects. THEY ARE CONSUMER GOODS THEN IT IS A RULES IN *If they are not consumer goods. the judgment creditor gives a writ. All these documents are sitting on Bonnie’s desk. under 9-317(e). Another problem with these state statutes is how extensive is this lien going to be. If you file within the 20 days then you are priming. So you would have to tell National that its uncertain and there is some minor risk involved here. Bonnie’s contract states that any levy on the boat constitutes a default. On Nov. If you are National’s lawyer. . There is automatic attachment and perfection when we are dealing with consumer goods. etc. Edith signed a security agreement and financing statement. It takes the date on which the writ is taken to the Sheriff to grant the status of lien creditor.500 down and a promissory note for the rest. §9-609 gives creditor right to possession. Once you have the sale go through. you would suggest that National change its procedures to protect them from this possible upset of priority. so National should add a search of the records of the county sheriff to be sure that nothing has been delivered. delivery of the writ to the sheriff in county 1 might establish priority with respect to county 2. you have 20 days to file because it is a purchase money security interest. It’s uncertain. In Ohio there are something like 70 counties so this evidently is a huge problem.$3. then we can ask for the boat back because we have a fully perfected security interest. The attorney would need to research case law. but it is possible that under the law of Ohio. Does it cover all the personal property of the debtor? So this is a problem in states like Ohio.
. But.Problem 28. Possible argument: There is a provision in the model code that says the lawyer cannot advise someone to do something the lawyer could not do themselves. Lien Creditors v. The Model Rules are in effect. construction financiers. Bonnie would be doing something perfectly lawful. who has priority? Generally. Problem 28. You may even be exposing Bonnie to criminal prosecution for fraud. You are not tricking Edith into doing anything she is not supposed to do (i. the unrecorded real estate mortgage prevails over the lien creditor since most states give priority to the first lien created. Edith was supposed to sign it anyway. “I’d rather BBW get the boat than my ex. C levies on the real estate. the ex husband has not. What do you tell them? It won’t do any good to sign now. the space on the SA for the signature is blank. Ethical Issues: Bonnie’s lawyer cannot advise Edith. who does not record. Bonnie can get Edith to sign as long as she does not represent the advice as coming from the lawyer. which contains a sentence that says it is not a violation to give legal advice to your client.9 The debtor grants a real estate mortgage to M. the client – that the security agreement is second in time.” (The sheriff has already levied). Warren: There are witnesses. In this case – Bonnie would not be allowed to pass along her lawyer’s advice to Edith. etc. Now the date that you would go back to is still after the judgment levy and §9-317e would not be applicable. -Now suppose you were present when all this happened and Bonnie asks you what she can do? Bonnie can sue for malpractice and come out of this whole. As between M and C. Secured Creditors: Future Advances • • Priority of Future Advances: Time an advance in made plays no role in determining the priority of a SI § 9-323 Comment 3 Two Situation When Question is One of Competition against Lien Creditor or Purchaser of Collateral When Security Advances are NOT measured by priority of the FS ○ Usually it is the date of the filing of the FS that determines priority of SI Future Advances: Secured inventory lenders. Justification for two different results: ○ there is usually more of a reliance interest in the case of real estate. The lawyer is required to explain the legal situation to Bonnie. But.6: Same facts as above EXCEPT Edith forgot to sign the security agreement. we are still in big trouble because of the judgment levy. often make additional loan advances to their borrows Priority of Future Advances: Personal Property • . signing the security agreement). Bonnie should have Edith sign it and waive it around in the sheriff’s face. you would have the obligation to advise Bonnie about her cause of action for malpractice.e. the fact that Bonnie get the boat back would be the equitable solution. We still tell her to sign and file now. -Lopucki’s advice: Bonnie has supplied value here. It attaches when she signs the security agreement. See if the sheriff asks the right questions or not. ○ and they don’t want to do anything to mess up a chain of title. and as a SC she didn’t do what she was supposed to do. Edith (the buyer) is sitting in your client’s office in BBW and is willing to sign the SA at this very moment. 9-317e tells us that it goes back to the time of attachment. ○ The lending of the money was not given with getting a reliance of the collateral when we talk about a judgment creditor. This is kind of shady since in reality you are backdating the SA.
Rather. Most SAs Provide: In event of default. they relate back to the first date of perfection and share that status against judgment creditors. including attorney’s fees Priority of Non-Advances: Personal Property • • Uni-Imports v. ○ Non-Advances dod not constitute new SAs under § 9-323(b) and they relate back to the first date of perfection and share that status against judgment creditors ○ Security Advance: each advance gives rise to a new SI. Exchange Bank • Facts: ENB SC Δ continued to make advances to debtor after a judgment creditor sought to enforce its lien • Issue: Do these non-advances (reasonable costs and fees) qualify for priority over lien creditors under § 9-323(b)? • Rule: SIs relating to advances created after the intervention of a 3rd party as lien creditor or purchaser should be subordinated to the interest of the 3rd party. It would be unfair to permit after enlargement of the SI after the lien creditor has successfully levied on the property . in case of default. Debtor agrees to pay these non-advances. which arises when creditor extends value – perfection when a debtor signs an SA containing a description of the collateral • Held: Non-advances relating to advances made before the levy have priority of the first advance. the debtor will compensate SCs reasonable expenses of collection.” UCC 9-301(4) therefore does not apply to such expenditures ○ Relate Back: decisions though confirm that nonadvances do not constitute new security agreements under 9-323(b). including attorney’s fees. even if the SC making the advance knows of the lien’s existence (even IRS tax liens) Every Advance Without Knowledge: Similarly protected ○ Even if the SC knew about the levy at the time of the advance.• • • Exception (1) § 9-323(b): gives future advances priority over lien creditors provided the creditor making the advance doesn’t have the knowledge of the lien Exception (2) Every Secured Advance Made within 45 Days after a levy: entitled to priority over the lien. if there was no knowledge of the lien at the time of the commitment to make a future advance. Although protecting nonadvances benefits revolving credit lenders and this presumably improves debtor’s chances of obtaining such loans it does so at the cost of squeezing out lien creditors. then the advance is secured ○ Secured lenders argue this provision is necessary to provide businesses with the money they need to remain in business Non-Advances: Akin to attorney’s fees and collection costs that are arranged for in an SI. while non-advances relating to advances made after the levy have only the priority of the future advances • Note: Many security agreements contain provisions that the debtor will pay the secured creditors’ reasonable costs of collection. According to this case. these expenditures are not really “advances.
but AK thinks that this would be apportionable pro rata. Secured Party incurs $5. Debtor defaults on the loan owing the full balance and $10. J obtains a judgment for $100. (The Restatement 3rd of property also says this is what is going on – this isn’t to say there aren’t minority jurisdictions. We talked about a similar concept when we were dealing with comingled funds – the proceeds of the secured collateral are the ones that stay in there as long as possible. Mortgagor defaults owing $10. Problem 29.000 from Secured Party and executes a note and a security agreement that state that future advances up to an additional $25. – If states start to recognize this distinction for personal property. In this case the advance was optional the JLC would have priority over the second 25k and would have priority over a portion of the attorney’s fees and interests related to the 25k. J obtains a judgment of $100. Involuntary third parties really can’t wiggle their way in with judgment liens. Then Mortgagee loans an additional $25.000 against Debtor and becomes a lien creditor by levying on the collateral. it would seem that it would be natural to introduce the same kind of distinction into real estate law. *What if we were in a jurisdiction that distinguishes b/w optional and obligatory advances? – *Pro-rating is the most likely way to handle it. since knowledge is not a factor in the first 45 days! In real property according to the Shutze case the mortgagee will get $75. Debtor borrows $50.000 against mortgagor and records a lien on the real estate. knowledge doesn’t matter.000 attorney’s fees. As between Secured Party and J. The secured creditor gets protection BEYOND the 45 days if the secured creditor DOES NOT HAVE KNOWLEDGE. Secured Party lends and Debtor accepts an additional $25.000 pursuant to the mortgage agreement.000 from the Mortgagee. The mortgagee gets nonadvance costs as well. but this is the majority view). Secured Party has no obligation to make such advances. The security agreement also states that it secures interest at 10%. but when dealing with personal property and the UCC.000 with knowledge of the lien. First $50. The mortgagee will also get all nonadvance costs. who has priority in the real property? The mortgagee will get priority. the secured lender wins if this were real estate. However. This . The mortgage states it secures interest at 10% and attorney’s fees in a collection action.000 interest and $5. Thereafter.000 in the future.000 goes to the secured party (both real estate and personal property).000 may be made by the Secured Party in the future. Mortgagee has no obligation to make the future advance. Secured Party perfects.000 in interest. where the statute doesn’t speak to that. Notice that for a mortgagee.000 (optional advance made 60 days after with knowledge of the existence of a JLC).000 of attorney’s fees that are recoverable against Debtor under the terms of the security agreement. The states that do it in the personal property context will probably do it in the real estate. Sixty days after the levy. As between Mortgagee and J. Secured Party has actual knowledge of the lien. who has priority in the personal property? Secured creditor will have priority on the 50K. The mortgagor borrows $50. As for the $25. Also get attorney’s fees and probably get funds allocated pro rata.000 advance.1:Real property and future advances. and executes a note and mortgage that states that future advances can be made by the Mortgagee for $25.2: Personal Property and future advances.Problem Set 29 Problem 29. the Judgment Lien Creditor wins according to 9-323(b).
Bob is back to ask Carol another favor. He says even if they go through with the sale they won’t get anything. Here although there is a new SA Carol could use the same old FS but there would need to be a new SA. All interest and fees attributed to the $50K get the same priority as the $50. If it was limited to the $1. So there are three circumstances here. We also have to worry about the costs of the sale. advise them to GIVE NOTICE because you don’t want Carol to lend more money because if she does. There is nothing in the statute that tells us. then Carol would need a NEW security agreement since SI arise as a matter of contract. ○ the SC had actual knowledge.000. What happens to the JL and Carols liens? What happens if the bidder only bids 10k? Then the lien will be paid off and the lien will be discharged. BCA recently recovered a judgment against Bob in the amount of $45. Carol asks if this will work? What would happen if Carol did not make the additional loan? The sale will happen. Note: We don’t know if the original agreement had a provision for future advances. the secured party had no obligation to make advances. It now sits in the Sheriff’s compound. Carol lent $1. there is a danger here that the SA contains a future advance clause b/c Carol could have made a future advance at some point b/w the bidding process. so that would trump Carol’s ability to make future advances on the boat.500. the time the SC acquires knowledge of the buyer’s purchase or 2. If the boat is worth $32. they levied on the boat. In order to get priority over the JLC it . 45 days after the purchase. the interest and attorney’s fees) when dealing with personal property they are split. On March 1.000. give her knowledge. the sale will go as high as $31. If this were real estate. Bob wants an advance of $31.000.additional advance made by the secured party was made after 45 days of the JLC perfection and the secured party did not make a commitment prior to the JLC perfection.000 interest will continue. under §9-323. and saw that the financing statement was duly filed. Once the bidder purchases the boat. The SC should not be protected any further once they know that someone else has bought the collateral.000 to her friend. The purchaser of the boat would need to tell Carol about the purchase instantly. This is the way that §9-323(d) reads. Bob. and Carol loaned additional money within 45 days – Carol has priority over the lien creditor.A buyer of goods takes free of SI to the extent that it secures advances made after the earlier of: 1. etc. Whatever is associated with the second advance gets that same position – behind the judgment lien creditor. Problem 29. ○ had no commitment to make advances and ○ the 45 days have passed now. Now. There is no credit bid on cost of sale. *Under §9-317(a)(2) – if the security agreement included a future advance clause. So here the JLC could bid $31. the earlier of 45 days OR the time that the SC receives notice of the purchase. Bob’s lawyer says the advance will protect the boat from judicial sale. Bob gave her a security interest in his new boat. then she’ll have priority over the future advance!!!!!!!!!!!!!!! If someone comes along and purchases the boat at auction.000. .3: A year ago. The JLC will get proceeds but they don’t attach to the boat. Concerning the expenses (nonadvances. What about the nonadvances then? How do you distribute them? Maybe you can pro-rate them. but Carol’s 1. the mortgagee would get them all.000 loan without a dragnet clause or anything of the sort.000.
she said she would have to consult her attorney before giving you the information. What’s a future advance? Carol’s second advance could be considered a future advance but we and the UCC is referring to a future advance clause contained in a SA. In preparation for the bidding and sale. But this does not help the bidder. and goes to the sheriff to demand possession under Grocers Supply? . The lien creditor can’t get it on its own. and it should bid zero b/c it would buy subject to the security interest. if the secured party gets knowledge that the boat will be sold on March 29. It will prevent the secured party from making an advance. According to 9-210.4: BCA is attempting to collect the $45. b/c the financing statement and security agreement is outstanding and Carol could lend additional money right before the sale. The response to an inquiry has to arrive within 2 weeks – not enough time. you discover Carol’s financing statement. a) Can a court help you with this problem? What if Carol doesn’t make the loan. Then. just a few days from now. But to know how much that is you need to know the amount secured by Carol’s interest AND how much Bob owes Carol. When you call Carol. Problem for the lien creditor: provision in Article 9 that says the debtor can require Carol to supply the 3rd party with the details of the security agreement. The secured party must have knowledge of the purchase. you should bid $31. So. The amount is not found on the financing statement. The drafters of the UCC recognized the notion of the split SI after future advances are made.$1.000).000. The drafters do this simply by giving us rules that tell us who wins certain contests. The new security agreement would be perfected too late and the Carol would not have priority over the judgment creditor. a) How do you plan to get the information? UCC 9-203(b)(3)(A) – The levying creditor wants to know how much to bid and what to tell others how much to bid. A judgment creditor could put Bob under oath and ask how much he owes.000 and future advances. Look to §9-323(d) – the buyer of goods acquires free of the security interest to the extent it secures advances at the earlier of 1) the secured party has knowledge of the purchase.The bidder does not know how much the secured creditor is owed. and then do the discovery. The lien creditor would have to take Carol to court. Buying subject to the $1. b) If you can’t get the information. I assume they come into court with a paper saying $1. or 2) 45 days after the purchase. The value of the boat is assessed at $45. I would also ask Bob.The lien creditor would use Freierson – especially if Carol lets Bob use the boat.000 security interest. Problem 29. the inquiry must be made by the DEBTOR.000 .000. Carol has not called you back. but this will not be at sometime before the foreclosure. what will be your bidding strategy at the sale? – Should bid zero -. but only in certain circumstances in which the JLC could come before the SC. Typically. (Value of $32. it’s not good enough to know that there is a 1k lien on the boat.000 judgment against Bob. Another option: You could string the sale out for 45 days. The levying creditor needs to know how much the loan is at the instance of sale. You don’t want to bid higher than the value of Bob’s equity in the boat. Can you force Carol to give you the amount of the loan? Maybe if you are the execution creditor you can get her in Court to give the amount of the loan and immediately paying her off and having the court order her to remove the FS on the boat. The sheriff’s sale is set for March 29.000 judgment .would have to be done after a SA contemplated advances. the lien creditor would pay off Carol’s 1. We are still not safe because they can still make future advances.
a company that is in financial difficulty. . Looks like Grocers Supply – the debtor is friendly with a creditor in order to block a judgment creditor. The best thing to do is to put a future advance agreement in the original contract with your buddy. each covering all the assets of the debtor Conda Copper. and then come in at any point. At the moment though there probably isn’t much that our client can do. The search turns up three financings statements. Sheng. The financing statements have been filed a little over 3 months ago. Some of the law under these Acts is very obvious and other not so much.5: A creditor. pure notice. runs a search in preparation for a levy. (b) What should you do? UCC 9-317(a) and 9-323(b) – Uniform Fraudulent Transfer Act 3(a). I have one debtor and one creditor who are in cahoots.Problem 29.” From your discovery earlier. 4(a). Serves distributive function by insuring that secured creditors don't get benefits against unsecureds in bankruptcy that secureds couldn't get outside of bankruptcy § 544(a) Power: Gives the Trustee the Power toe Avoid any Transfer that could be avoided by one of the three hypothetical people 1) TheTe of Bankruptcy Code§ 54 xt 4(a): a) The text of the provision says that the TIB has the same rights as: i) A J LC w e nds cre and le s at thetimeof bankruptcy ho xte dit vie ii) A cre ditor with e cution re xe turne uns fie Ignore it. Each names a different secured party and describes the collateral as “all of the assets of Conda Copper. Uniform Fraudulent Conveyance (and Transfer: two different Acts) Act: is aimed at transactions with the intent to hinder. 5(a) Put the last two questions together with Grocer’s Supply. Trustees in Bankruptcy v. The facts say that 3 months have passed and the reach back of the trustee in bankruptcy to upset transfers like this is normally 90 days. You can say you are harming my stuff. very subtle complex transactions. Secured Creditors: Strong Arm Clause Purposes of § 544(a): Lets TIBs demote unperfected SCs to status of USCs in bankruptcy – two reasons: a. Frierson limits Grocer’s Supply when they are both trying to repossess. d atis d: iii) A Bona fidepurchas r of re prope who could perfect against the debtor e al rty (1) This is trying to get a state recording statutes where you might have a race/notice. It is better to be second in priority instead of an unsecured general creditor. you know that at the time of those filings. It allows the first secured lender to protect its position up front. or pure race statutes. CC was in such bad financial condition that you doubt that anyone would have been stupid enough to lend them money unsecured. (a) What do you think is going on? Copper is wrapping herself in security agreements in order to ward off judgment creditors. delay or damage creditors. “Polices” compliance with the filing requirements of Article 9 b. These are transfers normally given without fair consideration.
Get paid ahead of all unsecured but behind the SCs DIP in Chapter 11: Tend to be management of the corp. the person who levies can be defeated by the person who subsequently files --. Which security interests can the trustee avoid under §544(a)? (a) Secured creditor can’t save itself here because hasn’t perfected. Reasoning: Had an equitable lien but that such a lien would not be good against a bona fide purchaser. Bridge Facts: MB refinances a mortgage for 260K. When the bank attorney files the FS on April 22.1: You are employed as attorney for the trustee in the Ch 7 bankruptcy of GI Inc. § 546(b) – post-filing perfection is fine if it is perfection that would be good against any entity prior to filing Grace Periods Problem Set 30 Problem 30. and often do not want to avoid SIs a. It is a violation of the automatic stay to perfect AFTER bankruptcy unless there is something in the bankruptcy code that allows you to perfect afterwards. he will be in big trouble because he violated the automatic stay. MB argues that it retained an equitable lien on the property because under equitable subrogation doctrine they would be able to replace the new mortgage and replace the first a. PMSI filing How Possible: a. TIB wins. Implementing the Strong Arm Provision Non-Self-Executing: TIB or DIP must file lawsuit in bankruptcy to demote the unperfected SCs Chapter 7 TIB: Lawyers who are not paid if there is nothing in the estate but fully encumbered property a. § 363(b)(3) Exception from auto-stay for perfection allowed under § 546(b) b. if there is a grace period. Hypothetical Bone Fide Purchase: this trustee is deemed to have paid value for the property and is deemed to have perfected his interest as a legal title holder in the subject property as of the date of the bankruptcy petition’s filing Held: Bank did not have a good mortgage against anyone at time of bankruptcy. Look at 546 – pg 323 . A lien creditor would defeat the secured creditor.546 (b)(1) – the trustee powers under 544 are subject to state law that permits them to be perfected … before the date of bankruptcy basically. and the case was converted to Ch 7 on October 15.because it’s a grace period! This would NOT be a violation of the automatic stay . Old mortgage is discharged – but bank fails to record a new one until after bankruptcy initiated. § 544(a)(3) gives trustee the powers of a hypothetical bona fide purchaser and entitled to trustee to avoid the equitable lien of the unrecorded mortgage. Filed chapter 11 on April 15. Have granted this SI in the first place in order to screw unsecured creditors Key: Unperfected creditors at time of bankruptcy can take advantage of relate back provisions that allow them to take action post-filing that would make them secured from some pre-filing event.Midlantic National Bank v.
the filing is fully effective. but it was accepted. It is a properly filed and perfected security agreement. perfect. A lien creditor would have priority over an unperfected security interest. • §546(b)(1) the rights and powers of a trustee under 544 are subject to any general applicable law that permits perfection of an interest in property against any entity that acquires such rights as of the date of perfection. A trustee cannot fit into this description. The trustee. . No. We don’t have someone who is a purchaser or gave value. It doesn’t violate an automatic stay in that case. Under §9-338. you have to make a negative inference. So if you are within 20 days you’re alright. cannot avoid it. but it is impossible to tell if the filing is against the debtor or a business using a trade name. Does the exception in §9-338 apply? §9-338 (Priority of Security Interest Perfected by Filing Financing Statement with Incorrect Information) – the creditor is subordinated to a purchaser who buys in reasonable reliance on the incorrect info. • §348(a) – the conversion of a bankruptcy case does not effect a change in the date of filing of the petition or commencement of the case. Once you’ve gotten it on file. we might be okay on 30 day things. they have 20 days to perfect. • The facts here suggest we might have a PMSI with respect to collateral. if the filing office accepts a financing statement that does not give the information required.The secured party filed its financing statement on April 22. (b) Same facts as (a). • Bankruptcy Code §544(a) says that trustee can avoid it because he takes on the role of a lien creditor as of the date of the bankruptcy file on April 15. Under §9-520(c). NOTE: It may be a voidable preference under §547. 363(b)(3) filing of a petition does not operate as a stay of an act to perfect to the extent that such rights and powers are subject to such perfection under 546(b). The attorney filed a financing statement on April 22nd. If FS is PROPERLY filed and SA perfected before debtor files for BR. Would filing a financing statement violate an automatic stay if the collateral were acquired prior to April 2nd? 362(a)(4) any act to create. It is possible that you can’t beat the purchase money under article 9 and that you haven’t violated the stay. The trustee loses. the trustee can’t use 544(a) – that is the meaning of 544(a). one day before the debtor filed under Ch 11.” and it omitted all the information required by §9-516(b)(5). comment 3. with respect to collateral acquired after 2 or after then the person might be okay. if you become a lien creditor before it is perfected. it cannot be avoided under §544(a). and as such it can avoid the unperfected security interest because he has priority over the un-perfected security interest at this point. therefore. and as of this date the secured party had not perfected. (c) The creditor listed the debtor as “Gargantuan Industries” and left off “Inc. but in the most recent change of the bankruptcy act they changed the 10 day period to 30 days. The filing officer should have rejected the financing statement. §9-520(c). ******* • 9-317(a)(2). The security agreement still showed up in the search. but with respect to property acquired 22 days before you might not be okay? The rest of 362(a)(3) unless the act is accomplished under the period set forth in 547(e)(2)(a) used to provide a 10 day grace period. or enforce any lien violates the automatic stay. It can be avoided b/c the effective date of bankruptcy filing is April 15. except the bank properly filed its financing statement on April 14. Go back 30 days from April 22.
they put in this workaround. Under 9-317 it is a PMSI (purchase money security interest) so you get 20 days. Model Rules of Professional Conduct . Comment 3. Article 9311(b) compliance with that is the equivalent of filing a financing statement.(d) The creditor filed a financing statement 5 years prior to July 15. so the lien creditor does not get an advantage. Bennie fills in the blank. Two years later. If a security interest becomes unperfected upon lapse. so she won’t have responsibility for what her colleague did unless she supervised him. What happens when the financing statement ceases to be effective? 9-515(c) – a security interest is unperfected upon lapse. 546(b) gives you a bigger window subject to generally applicable law. On April 6. Section 20(b) of the motor vehicle title act gives you a ten day grace period. Grace is an associate. it is deemed to never have been perfected ONLY against a purchaser of the collateral for value. If you are thinking about filing for bankruptcy. Bennie has also falsified documents to court and could be disbarred. and tells the trustee. a bank financed the purchase of a company vehicle.6. CA has a very restrictive notion to the exceptions of confidentiality and they don’t encompass what Grace did here. the lawyer wants a subordinate lawyer. resigns from the firm. nine days before the company filed for Ch 11. For purposes of bankruptcy. So the trustee loses. (e) Florida National Bank was unperfected at the time that Gargantuan filed for bankruptcy. The lawyer and the client agree in writing that this expressed their original intention. The financing statement lapsed on July 15. Here.attorney probably shouldn’t have revealed that the client was unperfected The lawyer forgets to fill in the description of the collateral on the security agreement. If it is filed within the 20 days you are okay. so it was effective on the date bankruptcy was filed on April 15. Under 9-311(a) you don’t need a financing statement because cars are done by certificate of title. But. In NY it is the intention to commit a crime. Grace to fill in the blank. What about the fact that the DMV only gives you 10 days? Note that the DMV gives you 10 days to maintain your status – not 10 days to file. When article 9 was revised they wanted more time for PMSI and rather than asking all of the DMV’s to change the amount of time. and he can go to jail. Under the old version of the Model Rule 1. example 2. you still have 20 days to file. Look at comment 8 to 9-317. we are outside 10 days.6. does that . The lien creditor did not rely on the filing system. A lien creditor would not have prevailed if it levied on April 15. The question is whether you get the 20 days in PMSI or the 10 days from the DMV? You have to look at the comments. (f) Grace period is 10 days. you should wait until the financing statement lapses. Did the bank violate the automatic stay? The bankruptcy code allows you to file within a window under 362(b)(3). It is all about reliance. Under the new version of Rule 1. The DMV only gives you 10 days. The bank filed the certificate of title on April 25 after it learned of the bankruptcy. Grace is not allowed to breach confidence. but failed to file a continuation statement. but under 20 days. Grace refuses. Even after the perfected secured creditor becomes unperfected it still has priority over someone who becomes a lien creditor when it was perfected. See §9-515(c). This comment is a wraparound. Grace can breach confidentiality in order to prevent the financial harm to a 3rd party. You can file whenever you want. Another lawyer in the firm. What have Bennie and Grace done wrong? Bennie has violated the automatic stay of §362(a)– criminal contempt of court. as does 547(e)(2)(A).
$8 million of secured debt to Oriental bank. Can argue either way – if legislature doesn’t do it. then courts will do it the best they can Problem 30. the sheriff (who was unaware of the filing) levies on the car and takes possession of it.3: Debtor has $10 million in assets. the trustee effectively delivers its writ to the sheriff on the day of the filing. The answer to the question is that there are enough risk one ought to change the procedure and not disburse the proceeds early. you don’t have a lien until the sheriff seizes the property.gives us an argument that 9-317(e) applies. Two days after the petition is filed. Can the TIB avoid the levy under §544(a)? The trustee will prevail if a hypothetical lien creditor that levied on the date of bankruptcy would prevail over the yarn shop. the yarn shop – having delivered the writ of execution first – would prevail over a hypothetical lien creditor who delivered a writ of execution and levied on the same day. regardless of when their priority relates. the Yarn Shop delivered a writ of execution to an Ohio sheriff along with instructions to levy on an automobile owed by Gargantuan. Under Ohio law. The financing statement does not show up in a search under the debtor’s name. The yarn shop has already delivered its writ. Kaufman: what about the provision of the Ohio lien law that says you have to levy to get a lien? The sheriff had not levied by the date of bankruptcy in this problem. The debtor also has $20 million in unsecured debt. The priority dates from the writ of execution. yes. borrowers need the money and put on a lot of pressure to disburse the proceedings once the closing has taken place and sometimes it is hard to resist them. The OH statute is a moderately common statute. The argument for 546(b)(2) is that there is an inchoate lien here. if you are dealing with PMSI. Problem 30. and you can imagine that when a bankruptcy is occurring there are unsecured creditors outside scrambling to get liens. 9-506(b) – a financing statement is seriously misleading if it fails sufficiently to provide the name of the debtor . §362(b)(3) is not applicable in this problem – allows you to perfect a lien that you already have. The existence of a lien and priority are two different things according to Kaufman. Could be problem if doesn’t get it on file within 30 days or if someone files ahead of us or that we won’t always fill out the financing statements perfectly right and the filing office properly rejects them. Authors: Based on state law: Ohio lien law (p466) – priority between liens does not depend on day of levy BUT delivery of the writ to the sheriff. Is the reference in the bankruptcy code to noncode law to determine the rights of the hypothetical lien creditor. 360(2)(b)(2)? gives us a 30 day window for file to beat the trustee in bankruptcy if it isn’t a PMSI. The bankruptcy petition comes between delivery of the writ and execution. The DIP may avoid. that if someone files a PMSI within 20 days. The sheriff is permitted to finish the execution. (g) One week before Gargantuan filed its bankruptcy petition. He might make this argument.2: if you disperse the profits early. and it relates back to the delivery of the writ. Unless you have a security interest that priority doesn’t do you any good. This section does not apply b/c under Ohio law. There are two viewpoints – authors and Kaufman. we’ve got 20 days after the debtor receives possession of the collateral and if we do that our client will have priority over trustees in bankruptcy and even with respect to certificates of title with 10 day provisions. What else should we look at to solve the problem? Violated §362(a)(3) Automatic stay – the sheriff levied after the filing of the petition in bankruptcy. So how do we regard the trustee.
Oriental is vulnerable but within limits it is up to the DIP to decide what it wants to do. other unsecured creditors. but rather a pro-rata portion of the debt. c. Filing is easy and it is easily proved in most cases. they should accept the proposal. there is $28 million in unsecured debt. If the DIP does not avoid its security interest. Kaplan -. Kaufman isn’t so sure about repealing 544(a): we could have a rule that just protected creditors who actually relied on the situation as it was. How much can Oriental get under chapter 11? It is entitled to what it would get in a chapter 7 liquidation. . they should not accept the plan.$5 million for Oriental. $4 million for the unsecured creditors. Oriental: accept the $5 million if they think the DIP will avoid their security interest.71 cents on the dollar. An unrecorded mortgage is effective in most instances. Avoided – 20/28 * $10 million = $.29 cents on the dollar) • • How much money are unsecured creditors entitled to receive? It turns on what the DIP does with Oriental’s security interest. 2. it is entitled to the full $8 million. Absolute priority rule under bankruptcy. – – – – How much money are shareholders entitled to? None. But this does not happen very often. The position of the unsecured crediors is strong for getting permission to avoid it. lien creditor – principles of equitable subrogation might edge out the trustee in bankruptcy. Unsecured creditor: ○ If they think Oriental is a friendly creditor to the DIP and the DIP will not avoid Oriental’s security interest. ○ If they think Oriental’s security interest will be avoided. . Who actually looked at the files and were misled by either a mistake that was made by the filing officer or the filing party. and $10 million in assets.1 million d. they don’t have much of a defense. Proposal by the DIP -. You could do something like reduce the rights of real estate mortgages.$2 million is left. would that have changed the outcome? The trustee would only have the rights of a lien creditor under §544(a) with regards to personal property. The minute you have rules that turn on reliance.Lien creditor vs. Bridge had been personal property rather than real estate. So. Not avoided .4: If the property in Midlantic v. $8 million – but since it is now unsecured debt. If the case against Oriental is open and shut. and $1 million for the shareholders.9 million a. so Kaufman thinks there is a lot to be said for just leaving things as they are. §544(a) – only says that the trustee in bankruptcy “may” avoid. Should real estate and personal property be the same. 7.29 on the dollar. b. – – Problem 30. What has the DIP in possession accomplished if the proposal is accepted? ○ The shareholders have equity left in the company. (8/28 * $10 million = . 8/28 of the 20 million. The unsecured creditors might be able to bring a lawsuit against Oriental to avoid its security interest. those rules do encourage lying. the creditor will probably not get the entire $8 million.
Secured Creditors: Preferences – Priority Among Unsecured Creditors: ○ Under State Law: Basically the USCs jockey with one another and debtor can prefer one creditor over another by promoting them to the status of SC ○ Under Bankruptcy: USCs are one big family ○ If Promote to SCs Prior to Bankruptcy: Bankruptcy looks back in the 90 days prior to filing and knocks out any attempts to promote creditors from USC to SC What SIs can Be Avoided as Preferential? § 547 Transfers Must: ○ (b)(1) Be a transfer of property for the benefit of a creditor OR ○ (b)(2) On account of antecedent debt (excludes new loans secured by new SIs) ○ (b)(3) Must be made when debtor is insolvent (debtor is presumed insolvent in the 90 days prior to filing) ○ (b)(4) Be made in the preference period – usually for most creditors it is 90 days For insiders – period of preference is 1 year. for insiders outside the 90 days presumption – the avoider must actually prove insolvency ○ (b)(5) That improve the position of the creditor Improvement Test: Imagine two otherwise identical Chap. is the SI voidable as given on account of an antecedent debt? – – . you file the FS. 7 Liquidations. If creditor gets more in such a liquidation because of the preference. thus perfected when ○ (1) A bona fide purchaser couldn’t beat interest (real property) ○ (2) When a JLC couldn’t beat interest (personal property) Example – under an after acquired property clause.Trustees in Bankruptcy v. if you sign a note and then give minutes later. rather than when the initial statement was filed – void anyway. one where the creditor had benefit of preference and one in which creditor didn’t . the interest in after acquired property is not created until it is actually acquired. it is voidable – When does transfer of Security Interest Occur? Basic Rule: Transfer occurs at the moment of perfect Perfection: Defined under state law by imagining a hypothetical challenger to the SI. (a)Exceptions for Accounts Receivable and Inventory ○ Since AR and Inventory Constantly Turn Over: Voidable preferences could mean that these creditors would always be unsecured in bankruptcy ○ Under (c)(5): Treat AR and inventory as a single pool – basically you are secured up to the value of your inventory or accounts as of 90 days before filing regardless of if they are actually different products in place during the 90 day period – Relation Back Rules: Problem of creating Secured Loans during 90 days period .timing.
Which transactions can be avoided as preferences? (a) On Aug. When Transfer Occurs: ○ Takes Effect: when the SI attaches ○ Occurs: at the time of perfection or the earlier authentication of an SA and filing of the FS or if the interest if perfected within 30 days of attachment. both covering equipment owed by the Company. 15 b/c the security agreement was filed within 30 days and wasn’t for antecedent debt. Therefore. 15. Is Firstbank’s security interest preferential? Not avoided. then the creditor will never be subject to a preference attack If Existing Debt-Security at 90 Days<Existing Debt-Security at Filing= Preference Fidelity Financial v. They executed loan documents that day. USCs may file for involuntary bankruptcy to insure that there is something in the estate left Savvy USCs: will go to creditor and threaten involuntary petition and demand they be upgraded Problem Set 31 Problem 31.000 from Firstbank. They included security agreement and financing statements. On December 30.○ ○ No – you have ten-day relation back period § 547(e)(2) 20 day relation back period for PMSIs In re Ebbler: Two Point Test – First Determine: Amount of the loan outstanding 90 days prior to filing and value of the collateral on that day – Second Step: make the same determination as of the date of filing the petition – If there is reduction: during the 90 days period of the amount by which the initially existing debt exceeded the security – there is a preference – § 547 Makes only the Extent of the Preference Voidable – If the creditor is fully secured 90 days before filing the petition. Aug. Company borrowed $300. When was the transfer made? Aug. Fink – Facts: Broad statutory history of the preferences provisions persuasively suggest the Congress intended § 547(c)(3)(B) to establish a uniform federal perfection period immune to alternation by state laws permitted relation back – Implications: No longer matters for purposes of preferences avoidance what grace period a state gives the holders of PMSIs in which to perfect – When Transfer Takes Effect v.1: Company filed Ch 11 bankruptcy on September 1. the case was converted to Ch 7. 15 b/c a security agreement was signed. Firstbank filed the financing statement the following morning. it is not for antecedent debt even though it was in . the transfer is deemed to have occurred at the time of attachment under the relate-back provision Strategy of Preference Avoidance – – – Debtors Wanting to Give Preference to Some Creditors: Will wait for 90 days in order to be outside the limits Unsecured Creditors: will monitor filing to see if debtors are promoting some USCs to SCs – indicates financial struggle. When did the transfer take effect? That is to say when did attachment occur. A partner in the law firm was appointed trustee.
it was found by a postal employee. but it is still within the 30 day window of §547(e)(2). and financing statement. It was not contemporaneous under §547(c)(1) and does not meet the 30-day window exception under §547(e)(2). It would no longer meet the definition of a PMSI. EMS delivered the network the following day. (c) On Feb 7. When was the transfer made? July 11. Company purchased a network and hardware from EMS. The security interest will put the creditor in a better position. and it was accepted for filing on July 30. you still have 30 days for preference purposes. The transfer is perfected within 30 days and so is not avoidable. Avoided – transfer for benefit of creditor on antecedent debt within 90 days of filing bankruptcy. §9-103(b) – purchase money security interest in goods. When is the transfer made? July 11 for antecedent debt.000 from Thirdbank on a secured one-year note. Fourthbank mailed the financing statement to the Secretary of State. On July 11. Fourthbank issued the loan check on July 21. . Company signed a security agreement that granted a Secondbank a security interest. §547(e)(2) – relation back for security interests perfected within 30 days after the interest takes effect between debtor and creditor. b) On February 7. Company signed a promissory note. officer. it includes the relative of a GP. Company borrowed $300. 30 day window after debtor gets possession of the collateral under §547(c)(3). No antecedent debt – the debt was created on the day the transfer was made (day of attachment). §547(b)(2) requires there be an antecedent debt. When was the debt created? Feb. So here it would be voidable since here we would consider this to be a deal with an insider so the one year term applies and this would be a transfer. TIB is going to be able to avoid this one. There is no preference here. When does the transfer take effect? July 11. Five months later. and Secondbank immediately perfected. The financing statement was not filed until April 9 which would make it voidable. (For priority purposes. 2? PMSI §9-103(a)(1) – “purchase money collateral means” goods or software that secures a purchase-money obligation incurred with respect to the collateral. Even if it isn’t a purchase on a security interest. security agreement. The financing statement was lost in the mail. Company borrowed $300. 7. On July 11. (d) On July 21. When is the transfer made? July 21st – after 30 days from when it took effect.the preference period. Avoided – not within the 30 day window.000 from Secondbank on an unsecured oneyear note. It borrowed $300. §547(e)(3) – a transfer is not made until the debtor acquires rights in the property. director. August 4th would be the date) (f) On March 9. Company financed the purchase with a $30. Not avoided – there is no preference b/c of 30 day window.000 from the wife of the CEO. (antecedent debt). Remember that the trustee loses the presumption of insolvency under §547(f). §101(31) defines insider and if the debtor is a corporation. Company did not have the money to make its payroll. §547(b)(4) gives a preference period for insiders of one year. What if this was filed on Aug. the UCC filing office accepted the filing.000 note from Fourthbank. (e) Would the result be different in (d) if Company had issued the check to the Company and the Company used other funds to purchase the network? Not a different result.§101(45) defines relative and it means an individual related by affinity or consanguinity within the 3rd degree. or person in control of the debtor.
Kaufman thinks that one could cram a conditional sales contract and chattel paper into the exception of §547(c)(5). . Problem 31. you will push the Company into bankruptcy and then they’ll all be in the same boat.”? What will You need to ask. The other creditors can… . the loan balance was $150.If you say to the other creditors.Put the debtor in bankruptcy. Solution: This section creates what is called two point test under §547(c)(5) • Within 90 days of filing (June 1) – $130. The case was tried more than two months ago. that will cost you your security and loss.$80.Save your security! . I’ll give you your security and maybe a little money. date of bankruptcy filing. §547(b) . and later they go into bankruptcy – your security interest may be avoided while the others will be outside the preference period. On the day after the verdict. (2) Threaten involuntary bankruptcy unless the Company gives you a security interest or money. “If I push the debtor into bankruptcy. But. the court entered judgment on your verdict. The result will be that you’re not going to get much money out of it. The formula doesn’t deal . If the debtor has 12 or more creditors. it’s 500K.Threaten with involuntary bankruptcy.000. Eleven days ago.avoid the other creditor’s security agreements filed the day after the judgment. On June 1 – balance of loan was $250.000 and value of inventory was $120. All other unsecured creditors have their security interests voided as preferences. Here the SC has improved its position and so that 50k improvement represents a preference. you filed suit against Company on behalf of your client. On Aug. even if it doesn’t get me a lot f money. So what are you going to do for me?” ---.000.4 Security interest in inventory §547(c)(5). (150-70=80) Preference of $50.Problem 31. The suit is on an unsecured promissory note. With all the other creditors hanging around you probably aren’t going get much money.So then you think that you haven’t gotten your judgment yet for execution. What is your next move? How do you use the preference call to your advantage in this situation when you’re behind on a bunch of other creditors? . Unless they cut you in on their preferential position. by how much did the unsecured creditor improve its position by that date and the commencement of bankruptcy? In this case.000 difference between loan and value of inventory. Yesterday.2: Over a year ago. Watchdogs get no special reward – only pro rata distribution. the judgment became final and you entered writs of execution and garnishment on Company’s property. and you won a verdict of $547. (250-120=130) • Date of filing -.000 and the value of inventory was $70. (1) Involuntary bankruptcy§303(a) -.000 difference between value of loan and value of inventory. if you get a security interest. It isn’t a good idea to get the debtor to give you a SI since at anytime bankruptcy can be entered and then you’ll be in the preference period. so this is not a good option.000. (3) Best option: Go to the other creditors and bargain with them.The other formerly unsecured creditors and the debtor are close – that’s how the creditor gave the loan unsecured. . it takes 3 creditors to file an involuntary petition. 29. four other creditors of the Company filed financing statements and recorded real estate mortgages against Company.000.What if the debtor says “I don’t want to go into bankruptcy. The Company is still selling motorcycles on its showroom. So 50k will be voidable by the TIB.
it only comes into play when the debtor is under secured. Under §544(a) the Bank wins over the trustee in bankruptcy. but lien creditor didn’t foreclose for a while so antecedent debt strong arm statute. there is no preference! Within 90 days of bankruptcy: (100 debt and 125 collateral) AND Date of bankruptcy: (100 debt and 200 collateral). Lein creditor can beat bank. a lien creditor is a secured creditor b/c the judgment is secured by the lien. This removes from the trustee the power to avoid security interests voidable under Article 9 b/c the creditor who can defeat an unperfected security interest is not an unsecured creditor. Should the trustee abandon the equipment? §544(b) – gives the trustee the power to avoid transfers that can be avoided by an actual unsecured creditor. HYPO: If you are oversecured on day one. The whole value of the lien is not avoided! The question the trustee should ask itself is: this lien I avoided. The . In bankruptcy. THEREFORE THEY CAN ALWAYS BE AVOIDED IF OCCUR DURING 90 DAY PERIOD AS A PREFERENCE. except in this situation: What c With this Assignment.) Avoided Under Strong Arm Statute? Trustee in bankruptcy can’t attack the bank under §544(a) b/c the bank has perfected before bankruptcy. so then bankruptcy trustee can step into their shoes and avoid the bank. We can’t use 544(b) but there is another way to do it It is like Moore v. does it have any bankruptcy priority that I can take advantage of? Because 544-1(?)/551 (?) says that I step into the shoes of the lien creditor I am able to avoid … that I can use to attack someone’s security interest that I can’t attack directly? Purpose of problem is to see that debtor can’t attack bank directly either via 544-1 or the preference because they perfected their security interest. there is NO preference! What do you tell the trustee in bankruptcy about its ability in handling the equipment under 544(a)? Transfer took effect on 1st – that’s when the security interest attached When was the transfer made? Kaufman’s problem to illustrate §544(b) The Bank loan and creditor’s judgment are each in excess of the value of the equipment. consider the following scenario: 7/1/05 Bank makes loan and takes a security interest in debtor’s equipment 7/2/05 Judgment creditor of debtor levies on its equipment 7/10/05 Bank files its financing statement 9/15/05 Debtor files in bankruptcy Lien creditor steps into the shoes of the judgment creditor and will prevail to the extent of the value of the bank. Bay – achieves the same result by using the rights of an actual judgment lien creditor. Only a lien creditor can defeat an unperfected security interest. but the bank’s security interest (unlike in Moore) is only avoided to the extent of the lien. The trustee can’t attack the bank’s security interest under §544(b). (NOTE JUDGMENT LIEN CREDITORS ARE ALWAYS PERFECTING ON ANTECEDENT DEBT. which only gives unsecured position.with the situation in which the SC is fully secured. §544 is useless with respect to secured creditors.
Although 544 does not allow the TIB to use rights of lien creditor directly. the trustee preserves that lien and by preserving it for the benefit of the estate it preserves the priority it enjoys over the bank. The transfer is made at the time the transfer takes effect which means the giving of a SI. all it has to do to transfer is attach. The TIB has avoided the lien of the lien creditor. The JLC gets its interest in the property when it levies. The relation back only operates when you file within the 30 days. §547(e)(2)(A) gets you around the notion that the transfer is made for antecedent debt. Transfer taking effect means when it attaches. §547(e)(2)(A) is important. The SI doesn’t have to be perfected. The trustee in effect steps into the shoes of the unperfected SC and enforces the SI for the benefit of the estate and indirectly the unsecured creditors. What about the judicial lien creditor? Can the trustee avoid the judicial lien creditor? There is a case of classic preference. The lien creditor can prime the bank for the amount of the judgment. The delay in filing allowed the lien creditor to get priority over the bank to the extent of the lien. Perfection depends on beating out the lien creditor. Therefore. If he hasn’t levied then 9-317 doesn’t give the creditor any rights. the judicial lien creditor’s interest can be avoided as a preference under 547(b).trustee can’t step into the shoes of the lien creditor here because under bankruptcy law. by using 9-317 and 551. 30 days after the SI is perfected. §551 – any transfer voided or lien voided is preserved for the benefit of the estate. The Bank hasn’t beat out the JLC until he files on the 7/10. The trustee can’t go against the judicial lien creditor. The TIB thus achieves the result that was formally achieved by Moore v Bay using the rights of an actual creditor to defeat the secured creditor but measures by the amount of the priority of the avoided lien. the TIB can use the rights of an actual lien creditor against the security interest. it has to be perfected within 30 days of attachment. lien creditors are considered to be secured creditors. To the extent of the amount represented by the JLC the trustee is going to be able to exercise the right over the equipment and reduce the right of the bank to that of an unsecured creditor completely. The loan and the transfer are considered simultaneous. The SC can relate back to 7/1 since he has filed within the 30 days. This is why the trustee can’t avoid the transfer under the true transfer avoidance. through this end run. The minute the judicial lien creditor gets its rights by levying it looses its status under the bankruptcy code as an unsecured lien. In order to get the relation back and the retroactive effect. Avoided as Preference? The perfection is on account of an antecedent debt in literal terms but we have the 30-day window provided in §547(e)(2)(b). The trustee steps into the shoes of the lien creditor. The indebtedness of the judicial lien creditor must date to way back before the Bank’s since by the 7/2 he already has gotten a judgment and levied (his original loan must be much older). The judgment creditor primes the bank b/c the bank is not perfected before or did not file before judgment creditor levied. Secured Creditors: Basics – Basic Rule: First to file or perfect . Remember §9-317(a) –judgment creditor has priority over the bank. Here the SI attaches on 7/1 and is filed in the window of 30 days and hence IS NOT considered antecedent debt. If the bank had filed after 30 days then the FS may be considered for antecedent debt. The estate gets the amount the lien creditor can get. So for purposes of the bankruptcy code the judicial lien creditor is safe. Secured Creditors v.
bank1 files FS against W1. Hypothetical: At T1. first filer win even if they don’t perfect until after the second filer. bank1 loans money. Who wins? Answer: Bank1. At T3 Bank1 perfects by taking SI and making advance against W1. bank2 loans money. v Example § SC1 securitizes debtor 1 for equipment. Under § 9-322 Bank 2 perfected first and so should win but § 9-325 says that Bank 1 wins before it was perfected in the widget prior to the transfer – § 9-325: exception to pure race for asset transfers v Subordinates security interests perfected against a transferee to those perfected against a transferor. Art. At T2 + 20 days. Then. Between Bank1 and Bank2 who wins? ○ Answer: Bank 1 wins. Bank2 perfects an after acquired property clause against Debtor2 at T0. B2 perfects against W1. SC1 (transferor SC) wins as long as it pe cte before the sale rfe d § This is because SC1 had a security interest perfected against the transferor prior to the sale which trumps the security interest SC2 has perfected against the transferee regardless of who perfected first. At T2. D buys and takes possession of new equipment financined by a PMSI by Dealer. though D has none now. As between B2 and B1 loan who win in priority? Answer: B1 wins. ○ Example – bank files at TI and bank 2 lends and files at T2 (perfects) and then Bank 1 lends (and thus perfects) at T3 – Bank 1 wins. § SC2 files. At T2. At T4. § Debtor 1 sells asset to debtor 2 § Even though SC2 filed first. At T3. Exception for Transfers § 9-325: Example of Bank1 perfects against Debtor1 widget at T1. At T2 bank2 files against the W. Priority for Future Advances – Hypothetical: At T1. Who wins between Bank1 and Dealer? ○ Dealer Wins. Bank1 files against D’s W. 9 Innovation makes inventory financing practical – otherwise bank would have to constantly filing FS to stay perfected Basic Rule: Under § 9-324(a): a PMSI wins if it is perfected within 20 days of when the debtor gets possession Hypo: B1 perfects against Ds equipment at T1.Basic Rule and Exceptions for Transfers – Rule § 9-322(a)(1): Under this rule. dealer files against Ds equipment. Debtor1 transfers widget to Debtor2 without any release of Bank1’s SI. At T4. PMSIs in Inventory: § 9-324 doesn’t apply to PMSI in goods that become inventory in the bands of the purchaser ○ Will generally be financed by inventory lenders not by PMSI – Priority in After Acquired Property – – Priority of PMSIs – – – . with a future advance clause in its SA. SC1 files and perfects. It was first to file or perfect and later advances secured by the same collateral relate back to original perfection in the collateral and beat out Bank2. at T2. debtor actually buys widget. SC2 securitizes debtor 2 for after-acquired property.
Bank 1 vs.○ ○ Still possible if: (1) Seller files before goods are in possession of debtor and (2) seller notifies the inventory lender Bottom Line: Inventory lenders do not need to continually search inventory and wait 20 days before disbursing money.1: There is a debtor who gives several security interests in the same collateral. At T2. instruments and chattel paper (not accounts). your cousin perfects against the machine.Bank 2 perfected before the lien creditor filed as they had a SA and a FS. . Purposes to facilitate account financing Basic Rule: When something is comingled. the first to FILE OR PERFECT has priority and here Bank 1 first filed the FS on Aug 1. Bank 2 vs. A has priority to B. B perfects in the Fert. Lien Creditor Lien Creditor wins. so Bank 2 has priority Need a financing statement AND security agreement Bank 1 vs. Accession: Perfection in objects that are incorporated into other objects remains but an SC in the new object can keep the first SC from removing the original object ○ Hypo: At T1. Bank 1 would need a security agreement and financing statement to beat Bank 1 under §9-317(a)(2)(b) since Bank 1 didn’t have a SA by the time the lien creditor takes possession of the law dogs and UCC tells us that a FS and a SA has to exist. facilitated quick lending Purchase Money Proceeds – – Basic Rule: Priority of PMSI creditor continues even if the original collateral is converted into something else subject to an SA Flow through only applies to: Cash. perfection continues in the new item Hypo: A has perfected SI in Nitrate. §9-322(a)(1) -. Lien creditor is superior to Bank 1. At T3. so it has priority When did bank 2 perfect? August 5 – C Dogs perfected August 7th. The security interests are the following: 8/1 – Bank 1 filed a financing statement (but there is no commitment yet). you incorporate the machine part into a machine. Nitrate is combined with something to make Fertizilizer. to different creditors on different dates.). The Court allowed the junior creditor to take the property. Bank 2 Bank 1 wins. Lien Creditor Bank 2 wins. 8/5 – Bank 2 filed a financing statement and advanced funds to debtor 8/7 – C-Dogs became a lien creditor by levying on the equipment and taking possession 8/10 – Bank 1 approved the loan and disbursed the funds Who has priority in the equipment? Easy – bank 1 first to file. but your cousin can keep me from yanking it out of the machine Priority in Comingled Collateral – – – Problem Set 32 Problem 32. some lawn dogs. §9-317 -. How do you divide up the collateral? Circular priority problem (Similar to Ski Ridge in assignment #20 where the court broke the circular priority where there was a subordination agreement. I perfect in a machine part.Between the holders of two security interests in collateral. I have priority over your cousin as to my part.
HOWEVER.which may be true. Additionally §9-507 tells us that even when disposed of the FS remains effective against the collateral being sold.” --. then Debtor 1 sells its property to Debtor 2 and suddenly the secured creditor of Debtor 2 says. Bank 2 second and lien creditor last. which is perfected indefinitely. ○ the security interest created by the other person was perfected when the debtor acquired the collateral. Under the old Article 9 this problem would come up. The problem is that there are Art 9 rules and common law rules regarding the priority of the lien creditor that clash here. a security interest created by a debtor (Pilots Unlimited) is subordinate to a security interest in the same collateral created by another person (Flight Analysis) if: ○ debtor acquired the collateral subject to the security interest created by the other person. who has a priority to the 750K? First National has first rights to its collateral. It depends on if you are pro-secured creditor or not. Centurion loaned money to Flight Analysis against “flight simulation equipment”. A. If one were to follow the Art 9 rules then Bank1 would come first. Will Centurion be ahead of First National if Flight Analysis sold its equipment to Pilots Unlimited? You relied on 9-325 – we have the earliest financing statement on file. BUT Centurion has priority to the ___. Problem 32. but they have it against Debtor 2 and Debtor 1 had already given a security interest to its debtor. See . First National’s security interest clings to the equipment). Debtor 2 takes the equipment subject to the security interest of Debtor 1/A AND subject to its own priority. so B cannot take advantage of the transfer of the security interest to Debtor 2 to claim priority.There is no logical way to break out b/c there is inconsistency in the priority rules. even if Centurion filed against Pilots Unlimited before First National filed against Flight Analysis. but it did not realize that First National Bank had previously filed a financing statement covering the same collateral. “Well we have the earliest financing statement on file.2: Double debtor problem. but 9-325 subordinates the security interest because Centurion wasn’t even in the picture when the security interest was taken by First National This is the double debtor problem – what happens when you have 2 debtors that give security interest with respect to their property? Debtor 1 gives A a piece of equipment. Under §9-325 (a). §9-325 is deliberately designed to prevent pulling off the scheme to take advantage of an earlier filed financing statement and allege that the collateral would be covered under an after-acquired property clause. look at 9-325 (b) When there is a sale. which is perfected by control If you look at 9-325(1): “A security interest created by a debtor is subordinate to a security interest in the sale collateral created by another person if: (1) the debtor acquired the collateral subject to the security interest created by another person. Debtor 2 gives the same kind of collateral as security interest to B. (Yes). Centurion had a security interest in another company and a first FS (in Pilots Unlimited) describing the same collateral and after acquired property (last year sometime). (Yes. Centurion’s security interest in the equipment sold to Pilots Unlimited will be subordinate to First National’s security interest. Maybe the court will divide the payment after liquidation.” (a) bank should not have to worry every time someone else has access to that account Solution: No. and people in the position of Centurion would look around and find an earlier financing statement even though the other deal was in the records. The court faced with the problem must decide which party does public policy favor in the situation? The court will have to invent some solution here and favor one of the creditor. and (Yes) ○ there is no time when the security interest was unperfected.
If the FS becomes seriously misleading they’ll have 4 months to file a new one. accounts). So. The financing statement does not have anything to do with the amount outstanding. so long as the original financing statement gives notice of the possibility that there will be future advances made that will have no priority Can file a financing statement before any advances are made at all and befre a new security agreement is signed Problem 32. Under §9-322. Bob wants Carol to advance him $31. Bob fell behind on payments to BCA. 9-203d and e tell us that the SA entered into by a corp is binding on the taker. Bank A will have these rights without tracing mechanism. According to §9-325 we’re still in the same situation. This will of course be limited to the description of the collateral. As a matter of law. There is a protection in the UFTA for recipients of transfers if they are in good faith and have given . A financing statement is good for any number of security agreements as long as they relate to the same description.” ONB has approved a $40. the contracts that are inherent to the assets of one part of the business become binding on the other parts when the collateral moves. there has to be a second SA. but does it have to file a new financing statement? ONB does not need to file a new financing statement. A part of Bank A’s collateral goes to Bank B (inventory. In the case above the conditions of the SA b/w Bank A and the collateral is binding on the Bank B. It may even be dangerous to file a second FS since you open yourself to the argument that the 2 nd FS refers to the second loan.000 secured by his boat. §9-322(a)(1).000 secured by his boat and other items. if this inventory and the account receivables these now create after acquired inventory and account value.4: (a) Carol lent Bob $1. and BCA repossessed the boat. Problem 32. Since ONB’s financing statement covers “equipment” all advances made by ONB have priority as of the filing of the first financing statement. Bank A will have a SI over the after acquired inventory and accounts. Will this work? Yes. What happens though. BCA loans Bob $45.000 advance since both creditors are under Art 9 law and BCA has filed first. ONB knows it must prepare a new security agreement. delay.3: ONB made a $7. the original FS serves the notice giving function.500 loan to George and filed a financing statement that contained no provision regarding future advances.000 line of credit for George secured by the dry cleaning equipment in his shop. The security agreement defines the terms between the parties and a new SA needs to be made. The idea is that the “buyer” that in this case is a fraudulent buyer would have the possibility of looking and searching before making the purchase to see if what they are buying is subject to a SI. It indicated that the collateral was “equipment. Under §9-502(d) – a financing statement may be filed before a security agreement is made or attaches The authors tell us this is so. HYPO: A Holding Corp owns Bank A and Bank B. Possible problems: Fraudulent transfer – hinder. defraud creditors.000 so BCA can’t sell the boat or collect. the 31. He’s taking advantage of the power to transfer. A month later. §9-508 tells us that the FS naming an original debtor is effective to perfect the SI in collateral in which new the new debtor has or acquires rights in the FS that would have been effective.Comment 3. §9-325. This would be so even if it were another advance on the same thing the first loan was made.000 advance has the same priority as the original $1. Advances made under new agreement will have priority. So here there will be control on the after-acquired accounts and inventory.
is there a good reason for the advance? She made it to defeat a creditor who levied on the boat. Comment 4 to §9-322. It does not turn up anything under the name of the debtor. Problem 32. Carol can lend $31. leaving the searcher at risk. If the officer wrongfully rejected it then the original FS would have gone back to the filing office b) (2) They have moved within the last four months. Comment 4 of §9-322 tells us jus this. The first secured creditor may desist from making an advance in exchange for money from the second secured creditor. he found out that FN has a security interest of 1. He had Centurion lend to Grumman 150 grand unsecured.5 million in all Grumman’s assets (liquidation value less than 1. the scheme would work even if Bob had not authorized a security agreement and Carol had not lent any money.6: Harley is under pressure from Centurion to stop messing up. The first secured creditor isn’t likely to give a subordination agreement across the board. 9-316(a) – continuing perfection of security interest following change in governing law.5: How does a second creditor protect themselves from advances made by the prior secured creditor? Subordination agreement --§9-339 . What happens if the transfer is avoided? Carol has a lien for money that she gave. See. the FS is effective. When you have a secured creditor. . but the lien may be worthless in the face of the earlier seizure by the lien creditor. But. See §4a2 and §8 of UFTA: a transfer made with actual intent to defraud or hinder any creditor of the debtor. but Bob had not authorized a security agreement and Carol had not sent any money. However. As Carol’s lawyer. you should discuss the reason for making the loan.000 and foreclose and that will knock out the subordinate security interest. the filing without a SA is going to act as a marker for your first position. If a secured party properly reperfects its security interest before it becomes unperfected under (a) it is continuously perfected. (b) Assume that Carol had filed a financing statement against Bob before BCA repossessed. You don’t even need a future advance clause. e) (5) It could be a partnership with the financing statement under the name of one of the partners. 506b d) (4) The filing officer made a mistake by misindexing it. Only the person entitled to priority may make such an agreement: a person’s rights cannot be adversely affected by an agreement to which the person is not a party.5 million). There is reasonably equivalent value b/c Carol advanced $31. Harley ran a search. it is still effective.a person entitled to priority may effectively agree to subordinate its claim.reasonably equivalent value. all you need to do is get a subsequent security agreement. c) (3) The debtor’s principal residence is in another jurisdiction then the FS somewhere else will be effective. A security interest perfected under the law of one jurisdiction remains perfected for a fixed period of time (four months or one year) even though the jurisdiction whose law governs perfection changes. Would the scheme work under these circumstances? Yes. Problem 32. The first secured creditor may benefit from a fresh infusion of cash from the second secured creditor and this way may be able to have the debtor continue with the life of the corp and maybe pay back the loans. Remember Grocer’s Supply.000. Is the creditor safe – can First National have an effective filing even though the search came back blank? 1) Is there any way that FN could have an effective financing statement that doesn’t show up in the official search in the state in which Gruman’s business is located? a) (1) If the filing officer wrongfully rejects the financing statement.
2) How can you find out if a financing statement exists without shooting yourself in the foot? Warren’s answer: Search alternative names. If you can find the wrong filing, you 5know they made a mistake, and it is not enforceable against me. 3) What should you do? Harley offers to loan an additional $100,000, if Grumman secures all $250,000 (giving Centurion a possible first). The old $150,000 advance will remain vulnerable as a preference in bankruptcy for 90 days, but the new $100,000 will not. What should Harley do? First, Harley could file a financing statement, and then call First National to see if they have a security interest in the debtor’s property. Harley can’t file a financing statement unless they have authorization from the debtor. The debtor is unlikely to authorize unless the creditor agrees to lend money. Harley should carefully word the requirement for giving the debtor additional money. Second, wait four months for name and venue change windows to pass. Third, call FNB. Now you can tip your hand because you already have a security interest filed. Fourth, cut a deal between the two if FNB has a possible security agreement. Rather than litigate, have FNB and Harley sign a subordination agreement. Harley will not lend anything more than the $250,000 and that Harley won’t be sued. -Here if Harley enters into a SA and has filed a FS it doesn’t mean that Harley’s Bank will give any money. The SA lays down the conditions that will apply when the Bank decides to give the money. The wording in the SA would have to say that this new loan will only be given if this loan is going to have priority. If FN has an effective FS it can withdraw the loan and if not the Centurion will have priority for 250k. -If there is a dispute b/w Centurion and FN then you can always agree on a subordination agreement and Centurion will be willing to forgo its priority for something in exchange. 4) What happens if you look under an incorrect spelling and find First National’s filing? Ethical issue? §9-506 – ineffective if seriously misleading. Finding it by accident doesn’t cure the flaw. It didn’t show up under the logic of the filing system. It is not effective. Ethical issue/Business judgment: The lawyer would not have an ethical issue. But, can Centurion take advantage of First National’s mistake? It might adversely affect Centurion’s reputation and business ethics – look at standard practices in the business community. Only $150,000 is at stake. Harley Davidson wants to file to protect his job, but the client is Centurion. The attorney should look out for the best interest of Centurion and not Harley who’s an employee. Problem 32.7: Sara sells speakers to customers (who have inventory lenders). How can Sara get a first security interest in the speakers she sells to customers? §9-324(a) – a PMSI has priority in goods OTHER than inventory. But this is inventory. §9-324(b) – steps an inventory purchase money security interest must do to have priority: (a) A)The purchase money financier must perfect no later than the time the debtor receives possession of the collateral. This would be done by perfecting a SA and filing a FS (although if this is consumer goods it would be automatically perfected, but we are selling to dealers). And; (b) B)The purchase money financier must give advance notice to the inventory lender that it expects to acquire a PMSI in inventory. a. It must search the system for all secured parties with a filing in inventory of the type if plans to sell. The lender should send notice by certified mail. Like a financing statement, the notice expires at the end of five years. The inventory lender must learn of the financing before disbursing against the collateral. The notification is going to say that Sally is taking a SI in the speakers. What is the inventory lender’s position? They probably will not let the debtor give a PMSI in inventory. The debtor is double-financing and the creditor will probably have a provision in the SA that says that it’s an event of default if someone else gets priority on
the collateral. The debtor is using the money from the inventory lender for some other purpose. What do you tell Sara, who sells the inventory? What is better than taking a purchase money security interest? Get paid out of the inventory financing – cash on delivery or an arrangement that the inventory lender sends money straight to Sara.
Competitions Involving CrossCollateralized and Asset Marshaling
Marshaling: C1=$100, C2 = $60 C1 →→→→→→→ C2 →→→→→→→ A B $80 $80
C2 $60 (c) Overview: More than 1 Unsecured Surplus: $0 piece of collateral can But, what happens when C1 goes after B first? satisfy a single debt. C1=$100 C2=no $, but unsecured claim for $60 (d) Debtor’s: Do not like Unsecured Surplus = $60 cross-collateralization How do you decide which asset(s) to go after? Relative liquidity. If C1 and C2 are direct competitors, because all can be take B so that C2 now has no SI. confiscated if default on What about PMSI’s? PMSI’s: when Creditor holds PMSI’s in a variety of collateral, the burden is on the holder to establish how much of each item is secured on a PMSI. If not clearly stated in K, then creditor one (although most loans LOSES PMSI STATUS. An after-acquired property clause will generally operate to void a PMSI. have clauses e.g. default on one means all are automatically in default)
If C1 seizes A first
(e) § 504(2)(a)(2): If SI secures indebtedness, then unless otherwise agreed, SP is entitled to deficiency from debtor a. Occurs almost any time after an after-acquired property clause reaches an additional item of collateral (f) Secured Creditor’s Right to Choose Remedy: Generally SC secured with more than 1 piece of collateral have right to choose when it will FC against each – can strategically force a debtor into bankruptcy a. Single Action Rules: Limits to items of real property, e.g. can only seize one item of real property (minority) b. § 501(4): IF Sec. Ag. covers both real and personal property, SP may either: proceed for ONLY personal property under Article IX; or real property and personal property under state’ real property law (g) Release: all collateral is encumbered until debt is paid in full a. § 9-307(1) default rule: Sale of inventory automatically releases the property sold from any SI created by the seller. (Can K around though with items expensive items like aircrafts, etc.)
(h) Defined: Creditor’s election to proceed against one item of collateral rather than another can determine fate of other unpaid creditors § 9-504(4) and (1) (i) Marshaling as Limit on Choice: Equitable doctrine developed to limit the senior secured creditor’s choice of which collateral to pursue. When it applies, it requires the creditor to look for its recovery in that/those asset(s) not encumbered by junior liens (this enabling junior lienholders the ability to recover the only assets available to them) a. (1) Cannot be used to compel FC against home property b. (2) Cannot be applied if senior creditor is prejudiced
he could resort to the fund that did not have a junior lienholder. w/ debtors destroyed its PMSI status. legislative or contractual. Problem Set 34 Problem 34. What additional facts might allow the creditor to recover by virtue of the second mortgage? Marshalling – Has the first secured creditor cross-collateralized? If the secured creditor had two funds to satisfy the debt. (2) 2 funds owned by debtor (here – sale of proceeds from Dry Dock III and the assignment. Limitations of marshalling: Can’t force the creditor to foreclose on a homestead if the other alternative is a non-homestead. how much do you expect to recover? Zero. machinery. (2) BWAC’s exercise of future advances and after-acquired property clauses in its Sec. while the other creditor can look to only one fund.FDIC can satisfy its claim from all debtor’s funds.000. The first secured creditor is entitled to the whole amount. equipment. (a) Every month D pays certain % of each invoice. Ag. Unsecured creditor’s claim that allowing marshaling here would be prejudicial (k)Three Required Elements: a. and can sue for deficiency under §9-615(d)(2). (4) How do you allocate against the assets? What’s the relationship between Warner Acceptance Co and the D’s here? Warner was financing all inventory purchases over time. If no additional relevant facts come to light.000. present. and future indebtedness. borrowed $6. Borg-Warner (1) Court places on secured creditor the obligation to trace its $ into particular items of collateral and keep the account. the INA settlement. (b) PMSI is valuable to break up bank. ensures maximum value. *Elements for marshalling: (1) two creditors of the debtor (2) two funds owned by the debtor (3) ability of one creditor to satisfy claims with either or both of the funds. The house is worth not more than $200. inventory and other tangible personal property. (5) Why is it important for Warner to get a PMSI? Gen’l first-in-time rule. In 1987/88 Bank of New England (eventually FDIC) loans D $9MM to buy a dry-dock and gets a PMSI. 2/92 D still owed $5MM. . PMSI exception. Provision: Prior. while PA can only look to Dry Dock III and equipment. gave SI in current and after-acquired fixtures.In re Derecktor’s Ship of RI (j) Facts: Derecktor’s Ship building/ repair facility is in bankruptcy.) c. just loses its priority status as a PMSI lender). Can’t be less equitable to the senior lien holder. etc.1: The creditor holds a second mortgage on a house. (3) W/o some guidelines. the courts should not be required to distill from a mass of transactions the extent to which a security interest is purchase money.5MM from Port Authority to set up business in 1979. machinery. and inventory for payment (l) PA Rights as SC: legally superior to USCs so no equal footing – thus prejudice argument doesn’t fly Effect of Cross-Collateralization on Purchase Money Status (m)Key: PMSI status can be easily lost as a result of cross-collateralization § 9107 Southtrust Bank of AL v. (BWAC does maintain a secured interest in goods. (3) Ability of one creditor to satisfy claim from either or both funds: while the other can look only to one of the funds . furnishings. (1) Existence of 2 creditor’s of D (FDIC and PA) b. There is an outstanding first mortgage of $220.
One junior lien creditor can’t use marshalling in a situation where it would hurt another junior lien creditor who has a good lien. $25.400k Hurst – 25k (a) If Hurst requests that CE marshall assets: Apartment proceeds $660.000 to Hurst.$55.000 judgment 6 months ago and recorded.000 to UCB (remaining $210.000 to Hurst. The TIB could theoretically go into court and ask for instructions (b) If the yacht sold for only $200. The TIB can’t force marshalling b/c he is a representative of the unsecured creditors.000.000.000 to UCB.000: $450.3: See the debtor’s secured property below: A judgment creditor obtained a $10. Under the rule.000 Balance) . Yacht: $190.000 Balance) Home (exempt homestead property) -. It does not help the trustee b/c all the other people have good junior liens.000. held a second security interest in the yacht securing $25. The $400.000 to CE). an apartment building and a yacht. If you took the minority view that the TIB was a lien creditor. The theory of marshalling is that the person who has taken the time and gone out and gotten security should be able to get some money and disfavor the unsecured creditors.000 First security interest – PCA $44. the Chapter 7 trustee sold the two assets free and clear of liens and the liens transferred to the proceeds of the sale. ($210. Hurste can compel that CE look to the Apt first. Is it collectible? Farm -.660k UCB-450 Yatch-250k (200k) Carp Eq.000 to CE). he owned only two non-exempt assets.000. Hurst. The apartment building had a first mortgage held by UCB for $450. Hurst is out $15.000 Second interest –SBA ($54. but the D has all property encumbered.000: $190. Problem 34. The estate is left with a surviving amount. Apartment proceeds: $450.000 to CE and $10.$63.2: When the debtor filed for bankruptcy. There is nothing for the TIB.000) Machinery -. By consent of all the parties. That is this problem. Yacht proceeds $250.$60. If you are in a jurisdiction that recognizes the TIB as a junior lien holder (the minority) then you’re not going to be able to marshall. $35.000 to the estate (TIB).000 (a) First Security interest -. he would have no incentive to C-c? since he may be forced to marshal. The first security interest in the yacht was held by CE for $400.000 and is unsecured for that amount.000 note was also secured by a second mortgage against the apartment building.000 to CE.000 Balance) Second mortgage – PCA ($44.000 in legal work done more than a year before the filing of bankruptcy.000 • • • First mortgage – National City Bank ($35.000 Balance) Third (judgment) – Miller’s lien against property ($10. Apartment building sold for $660.SBA ($54. Apt Building. The debtor’s lawyer. Problem 34.If the senior SC feels over secured in two loans made.
The robot will be equipment in the hands of MW. NCB would foreclose on the house to obtain its $35.000 in cash and signs a promissory note for the remaining $50. In this case there is enough money for everyone. MW also signs a security agreement granting Becky a security interest in “all equipment” to secure “all obligations owing from MW to Becky. This is the intro to the notion that with respect to a single item of collateral. they can go after the homestead.000. This is a home free. Or buy out PCA (cheaper option). All the efforts have been directed at getting SBA to foreclose on the homestead.000 of debt. they are purchase money to the extent of $50. there can be part of it that secures PMSI and another that doesn’t. Threatening in pro of litigation. but there is a problem with the homestead b/c perhaps the senior doesn’t want to close on someone’s home first. If SBA wants to. Or buy out SBA and foreclose against the homestead – and pick up the excess of the machinery. which is $19. If the goods are purchase money collateral. Problem 34. PCA will have to get $19. Becky sells a miniature submarine to MW for $60. PM collateral are goods that secure the partial payment of an obligation.000 on the foreclosure of the farm which will pay off the difference between $25. (b) On November 1.000. 40k of this debt is PM. SBA will levy on the home.A security interest is purchase money only to the extent that the collateral secures an obligation that is the purchase price of the collateral.000. which is a protection of the homestead. you will scare SBA into thinking that they’ll waste a lot of time and money on a litigation instead of just going after the home.000 from the machinery.6: On October 1. It will allow Miller to collect something without hurting SBA and PCA. In what amount is the submarine encumbered? What is the amount of the debt that encumbers the sub? The submarine is equipment and is encumbered with $90.000. It will leave SBA $36.000.How can Miller get his money? Under normal circumstances: The house is worth $60.” The security agreement makes no mention of purchase money status and provides no rules for applying payments.000. Kaufman: This is an unrealistic problem. Issue: How do we persuade SBA to go against the homestead? Threaten litigation if SBA makes a move against the machinery.000 of PCA’s interest in the machinery to Miller.000 and $44. Yes.Can a junior lien creditor (Miller) use marshalling to force a senior creditor (PCA) to go after other collateral in such a way to force SBA to look to its collateral (homestead) in which it is senior? You can’t use marshalling to force someone to go against a homestead. On the facts. This problem addresses the difference between equipment and then inventory. MW pays $20.000.000.000 loss.000 would go to PCA. By buying out ether one of them then you’ll be in control of the mortgage and you can do whatever you want to foreclose. You might convince the judge that PCA is getting fully paid on the farm. when it can get money out of the homestead. the goods are purchase money with respect to the security interest. SBA will foreclose against the homestead on its own b/c the most PCA can get out of the farm is $25.000. to what extent? §9-103(b) -.000. (a) Is Becky’s security interest purchase money? If so. The submarine will be equipment in the hands of MW. Issue: Double marshalling argument -. HYPO: PCA is only owed $25. Miller would be left with nothing. MW pays $20. SBA is getting fully paid from the machinery. There is no rule that says SBA on its own can’t decide to go against the homestead.000. It will also pay off the judgment of $10. and it will not swallow an $18.000. The effect is that Miller is forcing SBA to go against the homestead. you get the excess $25.000 in cash and signs a promissory note for the remaining $40. An equitable assignment of $1.000 from the machinery. The remaining $25. Becky sells a robot to MW for $70. .
The Bank is more likely to rely on the financial condition of the debtor than on the SI it is getting. (a) Who has priority? Two parties have contributed to the purchase of the equipment – the seller and the lender. Firstbank takes a security interest in the loaders.$1. Does DFS need a subordination agreement even though DFS plans on only financing Shoreline boats? Suppose that Firstbank gives debtor $100 to help make down payment on a Shoreline boat. c) These are both lender. And the description in FB’s security agreement is broad enough to cover a Shoreline boat. but it did not have to b/c it was the first filer. First bank did not give notice to Duestche Bank under §9-324. It is unlikely that the seller would give it. the second submarine is PMSI only to the extent of $40. Coyote is preferred as it handed over actual collateral.000. The authors of the book tell us that it’s too complicated to try and differentiate. Bonnie uses the loaders as equipment. the $90. Coyote perfects by filing a financing statement on June 2 and. without mentioning Coyote’s lien. Bonnie’s Boat World purchases two Coyote Loaders for $90. Firstbank is cross-collateralized.000. The collateral is inventory. disburses the loan proceeds directly to Coyote. Comment 7 tells us that is has to go to the oldest PMSI. b)What should the losing party have done to avoid this unexpected setback? There is nothing the lender can do – it might be able to get a subordination agreement from the seller. §9-324(g) – conflicting PMSI – priority is granted to the PMSI created in favor of the seller over PMSI that secures enabling loans (lenders). Rationale: it is too difficult to try to match each loan with respect to each item when inventory is flowing in and out.000 from Firstbank against the loaders. the security interest in the robot would be a purchase money security interest.8: Deutsche Financial Services finances “inventory”. If it is inventory.000. and perfects by filing a financing statement on June 1.000 for the purchase price. (e) What if the collateral were inventory? You add it all up and don’t differentiate with PMSI.000 is credited against the oldest obligation.000 attributed to? §9-103(e) -. The UCC gives priority to the provider and not the long term financer. a)Who would have priority in the Shoreline boat? Firstbank has priority b/c it has lent money to make the payment and the debtor has used it to buy the boat so it has a PMSI.7: On May 31. . Firstbank will have a PMSI in the boat. b) For how much is it PM? The collateral is inventory so firstbanks debt. the robot. What is the $1. The manufacturer may be willing to do this so it can make a sale. so the PMSI goes to 39k. the loaders while the Bank only gave cash to buy the loaders. Under §9324(a) -. finding a financing statement filed by Firstbank covering inventory. Bonnie borrows another $40. (d) MW pays down $1. Debtor tells DFS that FB only financing Bayliner brand. Since it is equipment. but in the right circumstances it may be possible. the debt secures a purchase money obligation with respect to that collateral. This is a big advantage to the SC. Coyote takes a security interest for $50.(c) The definition of PMSI. Coyote Loaders b/c they are the seller under §9-324. and delivers the loaders to Bonnie’s on June 3. so the Firstbank security interest in Shoreline is PMSI to the extent that it secures any inventory. In other words you’d have a 90k SI in the submarine. Problem 34.To the extent that the security interest in the robot secures the price of the submarine. so it secures the entire Firstbank indebtedness. and then conducted a search. who has priority over the other? §9324bc and g. Duetsche needs a financing statement with respect to financing the Shoreline boats. Problem 34.000 purchase money security interest is against both items.A perfected PMSI in goods other than inventory have priority over a conflicting security interest if perfected when the debtor receives possession of the collateral or within 20 days thereafter. the whole thing (not just the $100) is PM. So it all gets added up with a total of 90 grand PMSI against both the sub and robot. §9-103(b)(2) -.
○ If Duetsche bank have priority if they filed first? Yes. They would have priority if they had filed first. .Otherwise. First Bank filed first and has priority. If Duetsche Bank filed first. So here. it would have priority. Firstbank could lend money and it will come first.
1:Davis Store sold a TV-VCR to Beavis on credit. he is buyer. Bank of Hayward: When is a Buyer a Buyer? • Facts: Car dealer has loan secured by inventory. promissory note. Beavis paid no money down. court will sometimes imply consent. buying an appliance at the mall • Real Personal Buyers: Generally purchase subject to SI § 9-315(a) ○ Authorized Disposition: SCs can allow owners to sell property free of SI ○ Regardless of Whether Buyer Searched and Found SI. sells a car to a customer who makes a down payment but title is not delivered. Rev.g. Beavis sold the TV-VCR to Butthead at a garage sale.Buyers v. • Issue: Is car free and clear of secured lenders SI? • Held: Buyer becomes buyer when the car is identified to the K even if payment is not complete and title has not passed. but signed a security agreement. . Consumer to Consumer Sales • ○ ○ ○ ○ Buyer in Consumer to Consumer Sales: Takes free of SI even if perfected if the buyer buys: Without knowledge of the SI For value For personal use and Before the filing of a FS covering the goods Problem Set 36 Problem 36. Secured Creditors • General Principles: ○ Security doesn’t effect alienability – you can sell a car with a lien on it – it will probably sell for less but you can alienate it § 9-401 ○ SCs expect to be secured in value § 9-401 ○ Some purchasers expect to get good title without searching e. Davis Store filed in the statewide UCC records. • Buyers outside ordinary course of business: Do not get an exception. as when a SC knows that an owner is making a sale in violation of the SA and does nothing – Split. and financing statement. The security agreement provides that Beavis agrees not to sell the collateral. 9 left the split in place • Buyer’s in the Ordinary Course of Business § 9-320: BOC take free of SIs ○ Ordinary course of Seller’s biz ○ Regardless of buyer’s knowledge of SI ○ Only free interests created by the seller – if it is encumbered by interest created by someone else – the seller’s seller – then buyer takes subject to those interests ○ Does not apply to farm equipment Daniel v.
If Sun Rise were a consumer what would happen? The buyer has knowledge and the certificate of title is the equivalent of filing a FS. she would know that there would have to be some document from All Season’s releasing Eddy from the SI. The bank doesn’t have to pay. The buyer bought the stereo by paying a negotiable promissory note. b) What if the consumer buyer wants to see the certificate of title? Sun Rise will show the certificate of title – it will show All Season’s lien.Butthead did not know about the security agreement. The security agreement authorized sales in the ordinary course of business. Sound City filed for bankruptcy. All season’s security interest survives b/c Eddy is a consumer. The security interest continues under 9-315(a). An antecedent debt is value for Art9 purposes. The following transactions took place before the filing of the petition: (a) A buyer purchases as stereo from Sound City. The trustee abandoned the inventory. The security interest was created by Eddie here (the seller’s seller). When Alicia buys from Sun Rise. The SI is created by Eddy here (the seller’s seller) and not by Alicia and hence the SI survives. and required Sound City to deposit the proceeds in a designated account. does not know to ask for this separate document. If there had been a release of the lien by All Season’s when Eddy sold the RV to Sunrise.3: All Seasons RV sold to Eddy a motor home (Eddy owes 17 grand).” Asking to see the certificate won’t solve Alicia’s problem.2: UCB has a security interest in inventory of Sound City. Can Davis repossess the TV-VCR from Butthead? The transfer can take effect under 9-401(b). But how you expect a consumer to know about the filing system and check? If it’s a high ticket item then maybe you would be willing to check it out. the ordinary consumer. (b) The lawyer takes the sound system in payment for services. and the dealer is likely to say it will take care of it. On the bank of the certificate there will be Eddy’s signature. Davis has filed a financing statement and the later consumer who buys will not have priority over the second consumer.A buyer in the ordinary course may buy for cash. Dealers in situations like this don’t get certificates of title in their . The dealer would most likely say “I’m getting it for you. Here the buyer can buy on credit. or on secured or unsecured credit. Eddy sells to another dealer. prohibited sales on credit. Problem 36. UCB can’t get this stereo. The conditions of consumer to consumer exception of 9-320(b) are not met (because a financing statement has already been filed) so the property is still encumbered. But someone in the position of Alicia (a regular consumer) isn’t going to know this. The security continues in the collateral and Beavis is not a ordinary seller in this type of collateral. It is signed by Eddie in blank. If this were a genuine transaction. Under §1-201(9) -. In this case the buyer is buying in the ordinary course although he is buying on a credit sale. Sun Rise (subject to All Season’s security interest created by Eddy). Alicia is a buyer in the ordinary course but she only takes free of security interests created by Sun Rise. Under §1-201(9) – a buyer in the ordinary course does not include a person that acquires goods for total or partial satisfaction of a money debt. Problem 36. Butthead can go after Beavis for the $960 he paid. in exchange of other property. A deficiency remains owing on the loan. Eddy is not a dealer in the ordinary course of business. and if she knew to ask. it would be in a separate document (there’s no place on it on the certificate). Alicia. At the end of this section though it says that partial satisfaction of a money debt is not going to be a buyer in the ordinary course of business. It is hard to make an authorized disposition b/c All Seasons is selling to a consumer. Butthead paid by check. a) Alicia wants to sue to remove All Season’s lien from the car? Is her case any good? The consumer gets stuck by the “created by its seller” in §9-320. Sun Rise took the RV under the condition that the SI would continue.
all you needed was an agreement. but you don’t get certificates of title on pianos. but it is pretty unusual. there is a danger for the bank. Once Alicia buys the car. it takes a couple of weeks for the certificate of title to get to you from the registry of motor vehicles – but title has passed under any version of §9-320. The bank can be fearful about the cars on the lots being bought previous to delivery.” Is the Bank right? Under Daniel. although it may help prove that the dealer has been selling cars out of trust without the knowledge of the Bank. BOC. Alicia will take the piano subject to the security interest. and part b. part a. Theoretically. a bank cannot know anything by the presence of a vehicle on the lot. Do you agree? If there is a vehicle on the lot. the Bank comes to you for advice. the SC was going to be in bad shape. title had passed. But this was true under Chrysler too. Alicia would not take free of the other piano company’s security interest. Problem 36. But buyers of cars like to take their cars right away.This is just like the RV case.4: A consumer wants to buy a reconditioned piano at the mall. (When you buy a car and drive away. There’s a risk of there existing an ongoing chain of past ownership. a) The lot could be full of vehicles but all paid to prepaying customers. Title can pass from a seller to buyer as a matter of contract law without the certificate of title being in the hands of the buyer. Does she have anything to fear? §9-320(a). What can you suggest? There are a couple of things the bank can do. Difficult to check the records – ask for the bill of sale to find the name of the former owner. It will not be the case with respect to the hundreds of cars on the lot. Problem 36. the dealer will send the certificate to the RMV to get them to issue a new certificate with Alicia’s name on it. then there was trouble. Ex: if American bought the inventory of another piano company going out of business – American could take subject to the interests of the other piano company since it is not a BOC.6: After the Daniel v.own name. title in the legal sense has already passed over to the buyer. So there is no guarantee about anything. If the person who originally owned the piano has a security interest. the buyer did not title in the sence of having the certificate of titile. c)In the Daniels case the Court said that the Bank is in the business of lending money and has access to information on how to protect itself. You would look at the filing system of the prior owner’s residence –and every place the prior owner lived while he/she owned the piano (Comment 3 §9-507). there may have been a previous owner before that. it would have been a buyer in bulk and not in OC. (1) keep possession of the car (under §9-320(e). They will hold on to Eddy’s with the transfer of title on the certificate. you can narrow the risk as much as possible but there is no real way to be 100% safe. The Bank would have to establish their possession of the collateral (and use . and a buyer has already bought the car. consumer to consumer sales. What do you tell Alicia? You can’t eliminate all risks. but it’s no usual for this sort of thing to endanger a large part of the collateral. you can only narrow the risk. don’t work when secured party has possession). So holding on to the MSO won’t do that much. Hayward Bank Case. They send someone form the bank to inspect the vehicles physically every once in a while. now the buyer can just sue us for it.) Even before the RMV gets around issuing the “certificate of title”. Now though the bank could have sold the cars way before. b)Under Chrysler the Bank says that “we controlled delivery of the MSO. but the dealer may be “servicing” and getting the cars ready for delivery or something. Can the problem occur with new good as well? Yes. If the dealer agreed that the title passed even before getting the certificate of title. AND. If the agreement said something about the passage of title occurring when the consumer bought the car. The buyer wants representation at the closing.
buy two cars from Dover motors and made an arrangement to pay for them by transfer of funds later this afternoon. Problem 36. You want to defeat the secured creditor of the dealer. Cars in the field warehouse are in possession of the bank. a) Is the Bank right? b) Is there anyway the Bank can use §9-320(e) to prevail even as to vehicles actually delivered to the dealer’s lot? c) What advice would you give to people like the Daniels who want a car custommade for them. partners in Sherrock Toyota Dealerships. What the Bank can do is set up a field warehousing operation. Problem 36. but are faced with the inevitable demand from the dealer for a substantial down payment? The Daniels could try and contract around this issue. That way the Bank says buyers like Daniel won’t be entitled to vehicles on which they have made down payments before the vehicles show up on the lot.A buyer in the ordinary course – buys goods. They leave the cars at Dover motors.§9-320(e) to defeat 9-320(a)). Then. Does inventory lender fit the definition of buyer in the ordinary course? No. Secured party can prevail even when vehicles were actually delivered to the lot. Is this a good idea? Yes. The innocent purchaser will not think they are buying someone else’s car. It causes a lot of trouble. §1-201(9) -. which includes a lender. b)What happens if Dover files for bankruptcy and the brother’s cars are entrusted to Dover.7: The Bank asks you what you think about a new plan. and the purchaser under §2-403(2) will divest entruster of title. and hence the SI of the secured creditor didn’t attach on the car b/c it belongs to you. • Another possibility here would be to do a search and find the dealers inventory lender and send the lender a notice that says that the Daniel’s are taking a PMSI in their own car. they can defeat the buyers this way. Dover is in financial difficulty. You want to make the Daniels the buyers as soon as possible. So this is dangerous since someone could come along and purchase the cars free of the SI. . the inventory lender only has a security interest. Is there a problem with leaving the vehicles on the lot? a) What happens if Dover sells the cars in the ordinary course of business? Article 2403(2) – Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business. you give the dealer money for value and then the Daniels would have to file to perfect. -Can the dealer be an agent of possession for the creditor? This is hard to do. the manufacturer and the carriers will hold possession of the vehicle’s agents for the bank that finances the dealer’s inventory. The bills of lading for new vehicles will provide that from the moment of identification of a new vehicle to a dealer’s contract for sale until the vehicle actually arrives on the dealer’s lot. §2-403(2) doesn’t protect the inventory lender. This is a weird way to get priority but theoretically it would work. the secured creditor of the dealer. and the inventory lender claims the cars? A “purchaser” is a person who takes by purchase.8: Two Sherrock brothers. The dealer is simply the agent for the Daniels and not acting as a buyer themselves. • The need to do things like this suggests that the addition of 9-320(e) to get rid of certain cases wasn’t such a good idea. The bank can still maintain possession under a field warehouse arrangement and put up a sign that constitutes notice. The contract would have to say that the Daniels become a buyer when the car is identified in the contract. there is going to have to be an employee on your payroll to control access to the field warehouse.
this is fraud. Also. HYPO: A neighbor entrusts his snow blower with another neighbor. In some jurisdictions this used to be conclusive proof of fraud in others it was just indicative. When the secured creditor finds out that X has bought the collateral. It is a funny use of entrusting b/c the secured creditor did not entrust the goods to merchant X. The neighbor entrusted with the snow blower does not deal in goods of that kind. POLICY: Maybe not good policy -. good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing. If the person buying (X) is a merchant (rather than a ordinary purchaser). after someone has purchased. Authorized Disposition? There is no restriction in the inventory lending agreement about selling to dealers.” In article 9. A buyer in the ordinary course of business must take in “good faith. what about acquiescence? Often a debtor restricted from selling will sell in a situation where at least there is an argument about whether the security interest does not attach b/c acquiescing is equivalent to entrusting under §2403(2). and the secured creditor does nothing about it. ○ § 6231(2) and (3) – doesn’t become valid against 3rd parties (SCs and purchasers) until a notice of the lien has been filed under § 6323. when the tax is assessed. so he does not have the power to transfer title. The Swiss watchmaker sells watches. This is a way of protecting the consumer that buys from the merchant. . or at least take them off the lot and park them on the street. we may not have to reach 9-320. A lot of this has disappeared but a lot of this turns up on particular cases to make it a problem to cause a sufficient amount of worry. Can the neighbor sell the snow blower and have the power to transfer the rights to an owner in the ordinary course of business? No. So the best thing here would be to drive the cars immediately. The buyer in the ordinary course from X is protected. the lien comes into being. the neighbor-owner will be able to get the snow blower back. There is a body of common law doctrine that says when a buyer leaves the seller in possession of goods. some courts will say §2-403 applies because acquiescence is entrusting within the meaning of §2-403(2). maybe its acquiescence. HYPO: Taking your watch to the Swiss watchmaker for repair. Note: UFTA makes it a rebuttable presumption that leaving the goods in the possession of the dealer is not in good faith. Article 2 (sale of goods)— good faith means honesty in fact and the observance of reasonable commercial standards in the trade. so the watch maker could sell in the ordinary course of business. The owner of the watch would loose to the bona fide purchaser.Overview: What is the brothers’ claim? The brothers will claim to be BOC who takes free of the security interest. In the automobile trade. The Basics of Federal Tax Liens • • US Government: One of the principle competitors for debtor’s assets Creation and Perfection of US Federal Tax Liens Federal Tax Lien: All encompassing. So. the standard is not for the dealer to have possession of the cars.two equally innocent parties.
you prevail against the tax lien. it attaches to property no matter where it is located.• • Maintaining a Perfection in Tax Lien: § 6323 – required refilling period for a Notice of Tax lien is the one-year period ending 30 days after expiration of ten years after the date of assessment of the tax a) LMS Hold Com any –(IRS knew that debtor sold property subject to the tax lien. Problem Set 38 b) J udg nt Lie Cre me n ditor v. The lien remains valid even if the debtor leaves the residence. Each is worth between $50. and the IRS ing p did not file a new notice) i) Held: the IRS has an affirmative duty to refile Notices of Tax Lien that could not be discovered upon a search and the IRS knew of the change. §6323(a). 1994 – judgment recorded for $250. If you buy TV from Best Buy between a lien creditor (law as a purchaser.(d) – an interest that arises subsequent may prevail over the tax lien. b) Once properly filed. ii) The court decides what instances trigger refilling and how long the IRS should have to refile. (similar to bankruptcy law ○ (2) Must be protected against a hypothetical subsequent judgment lien and levy. under §6323(b)(3) the purchaser will prevail over the tax lien (unless the purchaser knows of the lien).000: 1993 – Debtor bought the Adams parcel June 1994 – Debtor bought the Baker parcel Nov 1994 – Inherited the Charlie parcel . ii) Ex: in some states. you a) Purchas r v.000 and $30. Tax Lie – must acquire its status as a purchaser BEFORE the government files a e n tax lien. 26 USC §6323(f)(2)(B). Problem 38. the repayment of which is secured ○ (1) There is no security interest until the property is in existence. May 5. §6323(b)(4) says that if you don’t know about the tax lien and what you buy in the yard sale is less than $1. a real estate purchaser would have to file a deed money or iii) Mayer Dupree – person purchased an automobile before the government recorded a notice of money’s worth tax lien.(c). must be i) Purchaser is defined as “a person who for adequate and full consideration in money or money’s worth acquires an interest valid under local law (state law) against a subsequent “perfected purchaser without actual notice of the interest. Tax Lie n c) Exceptions in §6323(b). Name Changes or Property is Sold: • Competing Interests: What must a competing interest do to be valid and prevail over tax lien? ○ § 6323(h) security interests exists only when (a) the property is in existence and the interest has become protected against a judgment lien under local law and (b) the holder has parted with the money or other value. when there are two real estate iii) §6323(b)(8) – attorney’s lobby parcels that the debtor owned before the notice of tax lien was filed. 2) What happens if the debtor moves? (In re Eschenback) a) A federal tax lien attaches to any property owned by the delinquent at any time during the life of the lien. the filing or recording is likely to protect the transferee against a tax lien filed later parted with against the transferor.000 August 23 – IRS filed a tax lien for $953.000 December 24 – IRS levied on 3 parcels of real property owned by the debtor December 27 – debtor files for bankruptcy The three parcels are the only property of value in the debtor’s estate.000. ○ (3) Must have (1) If local law requires the filing or recording of transfers of particular personal property. So. firm) and a filed tax lien – ii) If you buy at a yard sale.1: Priority i) Personal property retailer – ex: file a tax lien against Best Buy. The person did not file a certificate of title. The IRS can seize the car b/c the person who bought the car is not “purchaser” since she did not record).
George must acquire status as a purchaser before the government files notice of its tax lien §6323(a). If George pays her the $2.500 to raise money to keep the business going. The non-payment must stop. The IRS will probably not file a notice of tax lien. whether real or personal. (very discretionary). She has a message on the answering machine from the IRS office. §6323(a) – the federal tax lien had been recorded. She has committed a crime. After-acquired property (property acquired in Nov 1994): federal tax lien is given priority (if it has been recorded – McDermott). before calling the IRS back she comes to her lawyer with the following questions: Does the IRS have a lien against her business. §6323(h)(6). If the taxpayer does not pay within 10 days after notice and demand. §6321. it has a lien against all her property upon notification of assessment! When the IRS notifies the taxpayer of its assessment. They will set up a schedule for the payment of taxes. 1993 Adams parcel and June 1994 Baker parcel go to the judgment creditor.500 and she gives him possession of the bird. that notice constitutes demand in §6321 and the tax lien comes into existence and relates back to the date and time of assessment. This is true even if George know of the troubles with the IRS and knows there is a lien outstanding.2: Sally owes $14. they will put Sally out of business. belonging to” the taxpayer.923 in payroll taxes. §6334 – is much like the homestead exemptions on p16 of the textbook. What does her mother have to do to prevail over a tax lien? A security interest exists only when (a) the property is in existence and the interest has . but has not yet received a notice of the filing of a tax lien. She has received two notices of assessment. And. George does not have to do anything to prevail over a subsequent purchaser in this case – he can’t file for title. can the IRS take it back? Does it matter whether George knows about the unpaid payroll taxes? In order to prevail. Who prevails in the after-acquired property? When property is inherited. The lien attaches to “all property and rights to property. The principal residence of the taxpayer is exempt unless if the district director or assistant district direct of the IRS personally approves the levy in writing OR the secretary finds that the collection of tax is in jeopardy.There is an exemption section.Who is entitled to that value? A judgment creditor does not have to “levy” against real property. Sally’s mom loans her money and takes a security interest in the birds. then the chances for getting the taxes paid will be small. Sally wants to sell one of her birds to her friend George for $2. the IRS can levy on the taxpayer’s property. house (which is exempt from execution under state law). both the lien of the lien creditor and the lien of the tax lien attach at the same moment. The IRS can levy in two ways: IRS employees can levy and sell assets. but it is not included in the statute book. security interest. (Notice is notice that a levy is forthcoming. first in time first in right. etc. If they file a notice of tax lien. but the IRS is not likely to go after her. not simply notice of a tax lien). but no notice has been filed. The IRS just wants to get the taxes collected. or birds? Yes. or serve a notice of levy on a 3rd party (easier and less complicated). What can the IRS do? What are they likely to do? Sally has converted trust funds. Problem 38.
where should the IRS file Notice of Tax Lien? Assume NY and PA have identical statutes to the NY statute §240 reproduced in text. Note: perfect by possession (non written security agreement). Here there is antecedent debt. NY. Where should the IRS file a notice of a tax lien against Sally? (using NY lien law). Eighteen months later. Moral: Tax liens are filed in county of residence. there is nothing on file in the Secretary of State’s office and nothing on file in the county of residence. The secured creditor must do as follows: (A) security interest must attach under §9-203(a). The notice of tax lien is filed in NY. What do you do? LMS . Sally ran her business from her office in the back of the Niagara County store. Sally’s business is an individual proprietorship – when searching the records. What if Sally did not run her business as a sole proprietorship.3: Sally lives in Wyoming County. you must find out more about the corporation b/c they might have assets in other states. The only real estate she owns is a home in Wyoming County. Under §6321 – the IRS tax lien reaches all property and rights to property. the buyer files under chapter 7 and you are appointed as trustee. Problem 38. Personal property is deemed to be situated at the residence of the taxpayer at the time the notice of lien is filed. There is nothing in the definition that requires that the value be given at the time the security interest is given (contemporaneously). a secured creditor that is properly perfected will prevail over a lien creditor. Compare to article 9: filing in secretary of state. Filing in the individual’s county of residence will cover the sole proprietorship. Dan grants a security interest in the wagon to Firstbank to secure a loan in the amount of $10. Problem 38. If they get a written security interest and financing statement on file BEFORE the notice of tax lien is filed. whether real or personal. Dan sells the wagon to a buyer who does not check the records and does not have actual knowledge of either encumbrance. PA. Where the corporation has personal property in NY and PA.000. NY and her business is in neighboring Niagara County. belonging to the taxpayer.become protected against a judgment lien under local law AND (b) the holder has parted with money or value. The IRS files a tax lien against Dan. the principal executive office is probably in NY (Sally ran the business in back of Niagara county store). If you are lending to a corporation on the strength of the corporation’s PA assets.Dan’s only asset is a lunch wagon worth about $18. but her business was incorporated – and the corporation owned the pretzel shop in Niagara County and Erie.000. A searcher in PA will not find anything. the secured creditor will be protected against the subsequent lien creditor. For Corporation in two states: Personal property – file in the county where the property is situated. but owned no real property at either location. and security interest must be perfected by filing (§9-310) or possession (§9-313) AND (B) give the money to the debtor. The residence of a corporation is deemed to be the place where the principal executive office is located. Under 9-317. Under these circumstances. For Individual – file in the individual’s county of residence (Wyoming County).4: Transfer of property by debtors -.
mortgages on real property. (2) Rationale: When you have a future advance lender who is disbursing to the debtor on a regular basis. d) Part c is different from part d because the secured lenders take priority even if know of tax lien on after acquired property. i) This defines collateral as commercial financing security for chattel paper. in which a secured party has a security interest at the filing of the tax lien. c) §6323(c) – protects after-acquired property within 45 days. The purpose was not to defeat lien creditor but rather to defeat the IRS under the tax lien act.” ii) Under FTLA. and inventory. the secured creditor would have to win with respect to advances over an article 9 lien creditor. There is a 45-day period where the secured lender wins over lien creditor even though it knows of the existence of the lien of the lien creditor. Assignment 39: Federal Tax Liens: Advanced Problems 1) Class Note Summary: a) Under §6323(d). accounts receivable. Unlike above. It has absolute priority for advances within 45 days.” LMS might be good law – but the circuit courts and SC have not ruled on the issue. and come ahead of the IRS tax lien. the business would be killed if they had to check the tax lien filing every time they disbursed. a secured creditor can make additional loans under future advance clause for a period of 45 days. a security interest exists only to the extent that the secured creditor has parted with money (made the loan). The secured creditor will come ahead of the tax lien with respect to the debt incurred in the 45 day period. a security interest may be attached and perfected if the secured creditor has given “consideration sufficient to support a simple contract. for a period of 45 days after that the secured creditor can make additional loans (1) If they don’t know about the existence of the tax lien. Refers to commercial lending in situations where there is a constant flow of money to the debtor and changing collateral. the inventory is sold and new inventory comes in. b) Also. 2) Protection of Those Who Lend After the Tax Lien is Filed: a) Commercial Transaction Financing Agreements . The courts read into the tax lien act a requirement on the IRS to re-file when it knows of a transfer of property. the secured creditor has no choice to cut off. They imply that it must be done in a “reasonable time. i) §6323(d) – with respect to any kind of collateral. The secured creditor has no choice. e) Note: How different from Article 9? i) Under Article 9.case – requires the IRS (if they know of the property has been transferred by the debtor to a 3rd party) to re-file in a reasonable time.
attorney’s fees. IRS f) Nonadvances . iii) First Interstate Bank v. iv) If a construction lender’s priority is protected under local law against a judgment lien arising as of the time of tax lien filing.§6323(b) – some statutory liens have priority over federal tax liens. ii) Applies only with respect to “commercial financing security”: accounts. e) Purchase Money Security Interests i) PMSI has protection against an earlier-filed tax lien. and mortgage paper.§6323(b)(7) – limited to debtor’s personal residence and contracts not in excess of $1. but the courts interpreted one and the IRS acquiesced. iii) Extends to collateral acquired 45 days after tax lien filing. iii) Protection only extends to the real property improved.§6323(b)(8) – for fees against a judgment or settlement amount obtained by the attorney on behalf of the client. and other expenses incurred by the secured creditor in protecting and recovering its collateral and collecting the amount of debt owing from the debtor. nonadvances under a security agreement are equal in priority to the first advance.i) Floating Liens -. out of an unsecured obligation – the protection extends to advances made after the construction lender knows about the tax lien.§6323(c) protects Article 9 floating liens that occur within 45 days of filing the tax lien.§6323(c)(4) d) Statutory Liens . inventory.§6323(e) i) What are nonadvances? Interest. ii) The construction lender must have entered into a contract to finance the construction prior to the filing of the tax lien. c) Obligatory Disbursement Agreement . b) Real Property Construction or Improvement Financing i) §6323(c) – protects construction lenders against a tax lien filed during construction.000. Problem Set 39 .§6323(b)(6) iii) Mechanics liens for improvements made to real property . even when those statutory liens arise after the federal tax lien is filed. ii) If the nonadvances are provided for in the security agreement and are reasonable. iv) Attorney’s lien . ii) No provision in §6323(b). chattel paper. i) Artisan’s liens in favor of those of make improvements to personal property and retain possession of the property as security for claims §6323(b)(5) ii) Real property and special assessment-.
Bank 1 filed a financing statement (no commitment to make the loan). which is after the tax lien was filed (Aug 7). If anything is left over. What is the priority between Bank 1 and the IRS? Does Bank 1 have a security interest as defined by the FTLA in §6323(h)? §6232(h) – a security interest comes into existence when it is protected by local law against a subsequent judgment lien and parted with money’s worth. Aug 7 – IRS files notice of tax lien.1 Aug 1. advanced funds to debtor. Bank 2 has a FLTA-defined security interest on Aug. What is the priority between Bank 2 and the IRS? Does Bank 2 have a security interest as defined by the FTLA in §6323(h)? §6323(h) – a security interest comes into existence when it is protected by local law against a subsequent judgment lien and parted with money’s worth. Bank Two. Aug 5 – Bank 2 approved the loan. Wait for search to come back.Personal property purchased at retail take free of filed tax lien: with respect to tangible personal property purchased at retail. IRS has priority over Bank 1. security agreement. Bank 2 has priority over the IRS. 10. filed the financing statement. and made the loan. 5. Policy of §6323 – the federal tax lien is effective against Bank 1 the minute the tax lien is filed. What could Bank 1 have done? Give a nominal amount ($100) on August 1. as against a purchaser in the ordinary course of the seller's trade or business. Bank One can take. The outcome would not change even if Bank 1 signed the security agreement on August 1 (unless it made a commitment to make the loan).first to file or perfect. Who wins when there is circular priority? A court will do equity in the situation and decide looking at Article 9 and the tax lien act and determine which principles are strongest in this situation. Tempted to say Bank One is at the top of the heap. The debtor is concerned about the following situations: (a)Will the customers who buy pets from the store’s inventory after the Notice is filed take free and clear of the IRS lien? §6323(b)(3) -. Problem 39. and the federal tax lien will be paid out of Bank one’s priority. which is before the tax lien was filed (Aug 7).2: The debtor operates a pet store. Aug 10 – Bank 1 – signs security agreement.Problem 39. Bank 2 has a signed security agreement. Bank 1 has priority b/c it filed on Aug 1 before Bank 2 filed or perfected (Aug 5). unless at the time of such purchase such purchaser intends such . The IRS notifies the debtor that it will file a tax lien in the next few days. and then “advance” the remaining amount (which will be within 45 days of the tax lien). filed a financing statement. Then. Bank 1 does not have a FLTA-defined security interest until it parts with money on Aug. What is the priority between Bank 1 and Bank 2? Priority between two secured creditors:§9-323(a)(1) -.
can the IRS take the money back? If the IRS levies the day before payday. but it is risky but might work. it diminishes the bank’s collateral.000 out of the collateral. If the business closes. (First Interstate Bank). They will not be able to get the deal done before the lien is filed. Then put those proceeds in a segregated bank account. But. The PMSI lender should prevail over the tax lien filed earlier in time.purchase to (or knows such purchase will) hinder. evade. (d) The business is financed with an inventory and accounts receivable loan from the Bank. What about using segregated accounts? The bank has priority in all inventory and a/r as of today. The bank lends 65% of the cost of inventory as the Debtor (pet store) receives it. Can the Bank work with the debtor without losing its priority over the tax lien? They can work something out with the bank. There is an outstanding $175. . but only for 45 days. The seller will file a financing statement. the bank will only get $50. (b) The debtor needs to install a new fish tank that will cost $5. the employees would be stuck b/c the debtor cannot pay out of a deposit account that has been levied. If the business continues. Use the segregated bank account to buy new inventory. The debtor believes the bank will work with him. If they are sold. §6323(c) – inventory and a/r within 45 day period. The security interest contains the usual provisions regarding future advances and after-acquired property. But. even acquired after the 45 day limit. (c) The debtor is worried about his employees. The notion of protecting the revolving collateral and loans in §6323(c) implicitly carries a notion of protecting proceeds – in the same way secured creditors are protected in bankruptcy and retain an interest in proceeds. or defeat the collection of any tax under this title. **Ordinary consumer is protected against the tax lien. the collateral will be worth that amount. The seller will provide 100% of the financing. but it is hard to actually “see” this in the FTLA Politically. The bank is not going to be interested in working with the debtor beyond the 45day period. The FLTA does not say anything about proceeds.000 balance on the loan.000. Purchase money security interest exception: There is no provision in §6323(b) for purchase money security interests. If he pays them with money which the IRS has a lien. Once there is a levy. but probably won’t search the public records. where do the employees stand? Everyone assumes that the employees take free and clear. The inventory lender could become a purchase money lender with respect to specific shipments of inventory (even after 45 days it would be protected). Kaufman does not know the answer to this situation. the IRS should not try to take the employee’s money. and the debtor will make payments over the next five years. you put the proceeds in a segregated bank account. the courts have read one into the provision. the lender has a problem b/c they can’t let the debtor make sales on credit b/c the Interstate case says you can’t have a PMSI in an account receivable (for purposes of the a/r). If inventory is sold after 45 days.
so it is not a casual sale. It is very expensive and it takes a while for tax liens to show up in the records. she does not have a problem. The newsletter does the searching every week.and 45 days went by without the client learning of it. The client continued to fund the loan and eventually lost nearly all remaining collateral to the tax lien. If another buyer purchases the piano when Alecia leaves. The client was recently burned in a situation where a tax lien was filed . Problem 39. personal effects. she loses.Problem 39.4: Should a debtor worry about leaving items purchased at a store? She is a purchaser. If she walks out with the item.5: If Alecia buys a used sailboat. Practical solution: People in this lending business. Is she right about leaving the piano at the piano dealer – entrusted with dealer? She will not be protected against the earlier-filed taxed lien b/c she is not protected against the subsequent purchaser w/o knowledge. How will she know if there is a tax lien against the boat? §6323(b)(4) – casual sales (household goods.000. and other tangible personal property) the tax lien is not valid in casual sale for less than $1. §2-403(2). Alecia has entrusted the piano with a dealer in those goods. The newsletter lists all the tax liens that have been filed. What can the client do to avoid recurrence of the problem in the future? Texas Oil and Gas case – refers to the problem of searching every 45 days.000. Problem 39. The buyer should check the records (and not only for tax liens but also security agreements of the bank that filed a financing statement). The sailboat is bought for $3. §9-403(b). and under IRC §6323(b)(3) purchasers are protected against even earlier-filed tax liens. use credit bulletins that put out weekly newsletters. .3: The client does a substantial amount of inventory and accounts receivable financing.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.