1 secured transactions assignment 13 default, acceleration and cure under state law
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1
Secured TransactionsAssignment 13
Default, Acceleration and Cure Under State Law
2
The Big Picture
Chapters 1 and 2. Creditors’ Remedies
Chapter 3. Creation of Security Interests
Chapter 4. Default: The Gateway to Remedies
3
The Big Picture
Chapters 1 and 2. Creditors’ Remedies
Chapter 3. Creation of Security Interests
Chapter 4. Default: The Gateway to Remedies
Assignment 13. Default, acceleration and cure under state law.
Assignment 14. Default, acceleration and cure under bankruptcy law.
4
Basic Concepts
Installment loan. A loan repayable in more than one payment
Line of credit. An arrangement in which the creditor agrees to lend and receive payment at times elected by the debtor, up to the line amount and until the contracted due date of the line
How does this “line” differ from your Visa or Mastercard “line?”
Payable on demand. Immediately payable when the creditor requests payment
5
Basic ConceptsDefault. Breach of the loan agreement (contract principles)
Acceleration (of installment payments). Rendering a debt previously payable at some future time due and payable now.
Cure (of default). Reversing a default by tendering performance
Tender. “An unconditional offer of money or performance to satisfy a debt or obligation.” Black’s Law Dictionary
The relationship between acceleration and cure:
Old Republic Insurance v. Lee. “[A] mortgagor, prior to election of . . . accelerat[ion] . . . may tender the arrears due and thereby prevent [acceleration].”
Default triggers a race:
If acceleration is first, default can’t be cured
If cure is first, obligation can’t be accelerated.
6
When does acceleration occur?
Generally: When the contract says it occurs
But: In re Crystal Properties, Ltd., 268 F.3d 743 (9th Cir. 2001)
“[A] creditor must take affirmative action to put the debtor on notice that it intends to exercise its option to accelerate.
“Both state and federal courts have made clear the unquestionable principle that, even when the terms of a note do not require notice or demand as a prerequisite to accelerating a note, the holder must take affirmative action to notify the debtor that it intends to accelerate.”
7
Problem 13.1, page 234Truck loan
made
8
Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”
Pat missestwo payments
Truck loanmade
Problem 13.1, page 234
9
Problem 13.1, page 234
Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”
Pat missestwo payments
Truck loanmade
Pat sendscheck
Problem 13.1, page 234
10
Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”
Pat missestwo payments
Bank rejectspayment
Truck loanmade
Pat sendscheck
Problem 13.1, page 234
11
Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”
Pat: can they get away with this?
Pat missestwo payments
Bank rejectspayment
Truck loanmade
Pat sendscheck
Problem 13.1, page 234
12
Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”
Pat: can they get away with this?
Not if she cured before acceleration.
Pat missestwo payments
Bank rejectspayment
Truck loanmade
Pat sendscheck
Problem 13.1, page 234
13
Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”
Pat: can they get away with this?
Not if she cured before acceleration.
When did Pat cure?
Pat missestwo payments
Bank rejectspayment
Truck loanmade
Pat sendscheck
Problem 13.1, page 234
14
Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”
Pat: can they get away with this?
Not if she cured before acceleration.
When did Pat cure?
Pat missestwo payments
Bank rejectspayment
Truck loanmade
Pat sendscheck
Problem 13.1, page 234
15
Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”
Pat: can they get away with this?
Not if she cured before acceleration.
When did Pat cure? At “tender,” p.223; §1-202(f).
At option exercise.
Which happened first?
b. What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration?
Waiver? No. Waiver by estoppel? No reliance.
Pat missestwo payments
Bank rejectspayment
Truck loanmade
Pat sendscheck
Problem 13.1, page 234
16
Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”
Pat: can they get away with this?
Not if she cured before acceleration.
When did Pat cure? At “tender,” p.223; §1-202(f).
When did Bank accelerate? At option exercise.
Which happened first?
b. What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration?
Waiver? No. Waiver by estoppel? No reliance.
Pat missestwo payments
Bank rejectspayment
Truck loanmade
Pat sendscheck
Problem 13.1, page 234
17
Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”
Pat: can they get away with this?
Not if she cured before acceleration.
When did Pat cure? At “tender,” p.223; §1-202(f).
When did Bank accelerate? At option exercise, notice effort
Which happened first?
b. What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration?
Waiver? No. Waiver by estoppel? No reliance.
Pat missestwo payments
Bank rejectspayment
Truck loanmade
Pat sendscheck
Problem 13.1, page 234
18
Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”
Pat: can they get away with this?
Not if she cured before acceleration.
When did Pat cure? At “tender,” p.223; §1-202(f).
When did Bank accelerate? At option exercise, notice effort
Which happened first?
b. What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration?
Waiver? No. Waiver by estoppel? No reliance.
Pat missestwo payments
Bank rejectspayment
Truck loanmade
Pat sendscheck
Problem 13.1, page 234
19
Problem 13.2, page 235
Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”
One pay-ment due
Oct 1
Now
20
Problem 13.2, page 235
Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”
One pay-ment due
Oct 1
Now
21
Problem 13.2, page 235
Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”
Is Art in default?
One pay-ment due
Oct 1
Now
22
Problem 13.2, page 235
Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”
Is Art in default? No. Just late.
One pay-ment due
Oct 1
Now
23
Problem 13.2, page 235
Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”
Is Art in default? No. Just late.
a. When will Art be in default?
One pay-ment due
Oct 1
Now
24
Problem 13.2, page 235
Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”
a. Is Art in default? No. Just late.
b. When will Art be in default?
Ten daysafter
One pay-ment due
More thanone pymt due
Oct 1 Oct 11 Nov 1
Ten daysafter
Nov 11
Now
25
Problem 13.2, page 235
Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”
a. Is Art in default? No. Just late.
b. When will Art be in default? Nov 12.
Ten daysafter
One pay-ment due
More thanone pymt due
Oct 1 Oct 11 Nov 1
Ten daysafter
Nov 11
Now
26
Problem 13.2, page 235
Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”
a. Is Art in default? No. Just late.
b. When will Art be in default? Nov 12.
c. What happens if he doesn’t pay?
Ten daysafter
One pay-ment due
More thanone pymt due
Oct 1 Oct 11 Nov 1
Ten daysafter
Nov 11
Now
27
Problem 13.2, page 235
Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”
a. Is Art in default? No. Just late.
b. When will Art be in default? Nov 12.
c. What happens if he doesn’t pay?
Ten daysafter
Accel-eration
One pay-ment due
More thanone pymt due
Oct 1 Oct 11 Nov 1
Ten daysafter
Nov 11
ForcbeginsNow
28
Problem 13.2, page 235
Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”
a. Is Art in default? No. Just late.
b. When will Art be in default? Nov 12.
c. What happens if he doesn’t pay?
When is Art’s last chance to pay without serious repercussions?
Ten daysafter
Accel-eration
One pay-ment due
More thanone pymt due
Oct 1 Oct 11 Nov 1
Ten daysafter
Nov 11
ForcbeginsNow
29
Problem 13.2, page 235
Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”
a. Is Art in default? No. Just late.
b. When will Art be in default? Nov 12.
c. What happens if he doesn’t pay?
When is Art’s last chance to pay without serious repercussions?
Ten daysafter
Accel-eration
One pay-ment due
More thanone pymt due
Oct 1 Oct 11 Nov 1
Ten daysafter
Nov 11
Forcbegins
d. Different under the Illinois reinstatement statute?
Now
30
Problem 13.3, page 235
We represent Second National. We plan to pull the plug on Walt Rebel.
31
Problem 13.3, page 235
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
32
Problem 13.3, page 235
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
If we do, what is the worst that could happen?
33
Problem 13.3, page 235
Liquidation 30-day risk?
Inventory $240k
Equipment $80k
Lease $40-80k
Total $360-400k
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
If we do, what is the worst that could happen?
34
Problem 13.3, page 235
Liquidation 30-day risk?
Inventory $240k Sale and diversion
Equipment $80k
Lease $40-80k
Total $360-400k
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
If we do, what is the worst that could happen?
35
Problem 13.3, page 235
Liquidation 30-day risk?
Inventory $240k Sale and diversion
Equipment $80k
Lease $40-80k
Total $360-400k
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
If we do, what is the worst that could happen?
36
Problem 13.3, page 235
Liquidation 30-day risk?
Inventory $240k Sale and diversion
Equipment $80k Destruction
Lease $40-80k
Total $360-400k
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
If we do, what is the worst that could happen?
37
Problem 13.3, page 235
Liquidation 30-day risk?
Inventory $240k Sale and diversion
Equipment $80k Destruction
Lease $40-80k
Total $360-400k
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
If we do, what is the worst that could happen?
38
Problem 13.3, page 235
Liquidation 30-day risk?
Inventory $240k Sale and diversion
Equipment $80k Destruction
Lease $40-80k Default
Total $360-400k
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
If we do, what is the worst that could happen?
39
Problem 13.3, page 235
Liquidation 30-day risk?
Inventory $240k Sale and diversion
Equipment $80k Destruction
Lease $40-80k Default
Total $360-400k
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
If we do, what is the worst that could happen?
What should we do?
40
Problem 13.3, page 235
Liquidation 30-day risk?
Inventory $240k Sale and diversion
Equipment $80k Destruction
Lease $40-80k Default
Total $360-400k
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
If we do, what is the worst that could happen?
What should we do? Replevin
41
Problem 13.3, page 235
Liquidation 30-day risk?
Inventory $240k Sale and diversion
Equipment $80k Destruction
Lease $40-80k Default
Total $360-400k
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
If we do, what is the worst that could happen?
What should we do? Replevin
With or without notice to Walt?
42
Problem 13.3, page 235
Liquidation 30-day risk?
Inventory $240k Sale and diversion
Equipment $80k Destruction
Lease $40-80k Default
Total $360-400k
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
If we do, what is the worst that could happen?
What should we do? Replevin
With or without notice to Walt? Notice creates the 30-day risk!
43
Problem 13.3, page 235
Liquidation 30-day risk?
Inventory $240k Sale and diversion
Equipment $80k Destruction
Lease $40-80k Default
Total $360-400k
We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?
If we do, what is the worst that could happen?
What should we do? Replevin
With or without notice to Walt? Notice creates the 30-day risk! JR Hale Contracting, page 225.
44
Basic Concepts
Waiver. The voluntary relinquishment of a known right
Waiver by estoppel. Misleading a debtor into the honest and reasonable belief that the creditor intended a waiver
Good faith. Honesty in fact and the observance of reasonable commercial standards of fair dealing. §1-201(b)(20); 9-102(a)(43).
Insecurity clause. A provision that the loan is in default if the secured party “deems itself insecure” or the like.
§1-309. A creditor can exercise an insecurity clause only if the creditor in good faith believes the prospect for payment impaired.
Comment 1. “This section has no application to demand instruments . . . .”
45
Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”
Pat: can they get away with this?
Not if she cured before acceleration.
When did Pat cure? At “tender,” p.223. §9-623 comment.
When did Bank accelerate? At option exercise, notice effort
Which happened first?
What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration? Waiver? Waiver by estoppel?
Pat missestwo payments
Bank rejectspayment
Truck loanmade
Pat sendscheck
Problem 13.4, page 236
46
Basic Concepts, Good Faith
§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.
§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.
§1-309: “A term providing that one party . . . may accelerate payment . . . ‘at will’ or ‘when he deems himself insecure’ or in words of similar import shall be construed to mean that he shall have the power to do so only if he is in good faith . . . .”
47
Basic Concepts, Good Faith
Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith.
§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.
§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.
48
Basic Concepts, Good Faith
Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power.
§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.
§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.
49
Basic Concepts, Good Faith
Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. ■ This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced . . .
§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.
§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.
50
Basic Concepts, Good Faith
Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. ■ This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness
§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.
§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.
51
Basic Concepts, Good Faith
Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. ■ This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.
§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.
§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.
53
Basic Concepts, Good Faith
Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. ■ This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.
§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.
§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.
54
Problem 13.6, page 236Macklin Mortgage needs money. Wants to call Lance’s loan.
a. Does Macklin have right to call it for:
1. Failure to furnish proof of insurance last year?
No. Probably waived
2. Failure to furnish proof of insurance 23 days ago?
Yes? Too soon to imply waiver (J.R. Hale case)
b. Lance: “Macklin waived this year’s proof by estoppel when it failed to require last year’s proof.” Good argument?
Contract ¶13 negates that implication
c. Is Harvey risking a damage judgment by calling the loan?
d. Are you willing to continue representing Macklin?
e. If you had to continue, what would you advise?
55
Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.
Problem 13.6, page 236
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