secured transactions outline second half

8/17/2019 Secured Transactions Outline Second Half

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Secured Transactions Outline 2nd Half

Spring 2006

Professor James McGrath

I. Assignment 11: Tracing Collateral Value during Bankruptcy

. Distinguishing Proceeds from After Acquired Property

i. Article 9 permits a secured creditor to trace the value of its collateral through concepts such as proceeds or prodii. Also, allows the secured creditor to pick up additional collateral by means of an after-acquired property clause.

iii. No distinction is made in the two if it is clear that the property qualifies under one of the ideas.i!. Bankruptcy Code § ! permits the secured creditor to trace the "alue of its collateral# $ut the rules on

picking up additional collateral are narro%er than those in Article &'

". Once a debtor is in bankruptcy, the secured creditor can no longer pick up additional collateral by meanan after-acquired property clause.

2. No additional collateral through after-acquired property. § !(a) #. racing is limited to five concepts! proceeds, product, offspring, rents, or profits. § !($) $. Secured creditor can keep what collateral value it has at the time of the filing of the bankruptcy case, ev

if it is transformed, but cannot acquire additional collateral value during bankruptcy.

%. Polic&' Once bankruptcy stays creditors from collecting on its debts, it must safeguard its entitlementsa. de(tor ma& not use assets (elonging to the (an)ruptc& estate in fa!or of one creditor o!er

another* such proceeds must be shared among all the creditors.

i. de(tor in (an)ruptc& cannot use propert& of the estate to pa& one pre+petitionunsecured claim ,ithout pa&ing other claims of the same )ind pro rata.

ii' To permit de(tors to use unencum(ered propert& of the estate to (u& propert& that

,ould then (e collateral for pree-isting de(ts ,ould ena(le particular secured

creditors and there(& depri!e unsecured creditors of their e-pectanc& in

unencum(ered !alues. (. § ! permits orders $ased on the *equities of the case' !$ allo%s the court lee%ay to

fashion an appropriate# equita$le remedy after e"aluating any e+penditures $y the estate

relating to proceeds and any related impro"ement in position of the secured party'

!. ,ethods for taking into account the respecti"e contri$utions of the de$tor and creditor to post-petition

re"enues'

!i. In re el(ridge

". /acts' "airy farmer was arguing that for the purpose of his #h. $$ bankruptcy, milk was not the produc

cows, that it was the product of the dairy farmer, and the cow functioned like a machine in which thefarmer had to place feed and make decisions. he attorney had done it to keep away the inequity of thesecured creditor getting all the profits from milk produced post-petition.

2. Issue' %hether the transformations of proceeds from collateral must always go to the secured creditorwithout regard to the &fairness' to the debtor.

#. ecision' No, this is a reason to apply the &equities of the case' language of § !($). echnically, the was encumbered because it is the produce of a cow, but (()*b+ allows the court leeway.

$. ule' he purpose behind the equities of the case rule of (()*b+ is, in a proper case, to enable those wcontribute to the production of proceeds during #h. $$ to share ointly with pre-petition creditors secur by proceeds.

%. ationale' /quities can be considered without making the court look silly and mangling the language. provision allows the court to evaluate any e0penditures by the estate relating to proceeds and any relateimprovement in position of the secured party. he granting of tracing statutes is subect to other chapte

the code.6. ule' he basic rule is that secured creditor is entitled to part of the produce from the collateral in the s proportion as depreciation of the collateral relates to all e0penses incurred in making the produce.

1. /our Possi(le efinitions of Proceeds'3

a. 1## 29-$3)*45+6e0as 7ule(. "efinition in the $98 :ankruptcy #ode * the former 1## 9-;34+c. he Delbridge est6the ratio of depreciation of the collateral to all e0penses that went into th

proceeds.d. he Hotel Sierra Vista est6receipts minus e0penses.

!ii. 4otes after the case


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". "ebtors can be reimbursed for e0penditures made to generate the post-petition revenue, and whateverremains is collateral.

2. /.g. ation would have been impossible for business$. %hy this tortured reasoning? ortured the language and law6failed to use the equities clause in (()*b

!iii. In re Hotel Sierra 5ista imited Partnership

". /acts' @ierra ista defaulted in its loan for building the hotel in Ari>ona and the @ecured #reditor begaforeclosure. @.. filed bankruptcy #h $$ and moved to have post-petition revenues sequestered. he cheard the motion but did not decide the issue. hen they ordered @.. to sequester the post-petitionrevenues to pay for operating e0penses. %hile in the final cramdown of the plan, the :ankruptcy #ourinitially said that post-petition revenues were cash collateral, they denied them to the secured creditor bon the fact that secured creditor had not proven the e0tent of its interest in the collateral.

2. Issue' %hether hotel revenues post-petition are all cash collateral automatically due the @ecured #redit#. ecision' No, reversed and remanded to use the formula to calculate the value of the secured creditors

collateral.$. ule' A party seeking to prove the &e0tent' of its interest under :ankruptcy #ode 2 ;4;*p+*)+ must do

following two things!a. Brove it has a perfected security interest in post-petition revenues to which its liens still attach(. Brove the amount of money to which its liens attach.

%. ationale'


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/ . $$.). Bolly, after filing bankruptcy, worked ) hours G F4(Ehr. @ecured creditor has security interest inn &equipment,inventory and accounts.' "oes security interest reach the payment for Bollys labor? -o. 2(()*a+ /0cept as provided insubsection *b+ property acquired by the estate after the commencement of the case is not subect to any lien resulting fromany security agreement entered into by the debtor before the commencement of the case. *e0cept &proceeds'+

G . $$.;. /HB has security interest in Iolans copier *F;(k+. #opier is destroyed in a fire. Iolan files bankruptcy. Cnsurancecompany pays Iolan F;(k. Iolan then wrote F)k and F;)k checks, leaving F4k in the bank account. %hat is /HBscollateral? he insurance check is a &proceed'. /HB could move for &adequate protection' from other collateral. /HB m be able to have the e0penditure of the F;)k check set aside, depending upon what it went for. /0s collateral is the 2344left in the bank and perhaps the new copier. 2(()*b+*$+ e0cept as provided in sections ;4;, (34*c+, ()), (5(, (58 and (5this title, if the debtor and an entity entered into a security agreement before the commencement of the case and if thesecurity interest created by such security agreement e0tends to property of the debtor acquired before the commencementthe case and to proceeds, products, offspring, or profits of such property, then such security interest e0tends to such proce products, offspring, or profits acquired by the estate after the commencement of the case to the e0tent provided by suchsecurity agreement and by applicable non-bankruptcy law, e0cept to any e0tent that the court, after notice and a hearing a based on the equities of the case, orders otherwise. *)+ 7ents

H . $$.5. Ilobus holds security interest against


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I . 11'. Jour client Ilobus Kinance owns a security interest in Bine Danor Apartment :uilding mortgage is 933,333, buildin

worth 833,333. Bine Danor filed a motion to use cash collateral during #h. $$ :ankruptcy. Ilobus security interest e0tto rents and proceeds of the building and was perfected prior to filing of #h. $$. Barties e0pect $3,333 per month rent.Hogans wants you to &get aggressive' with Bine Danor. Bine Danor wants you to sign a consent to the cash collateral us%hat was the amount of Ilobus secured claim at the time #h. $$ was filed? 2844,444. b+ %as Ilobal entitled to accrueinterest on that amount? -o. c+ %ill the $3,333 in rent received in the first month after filing be Ilobus collateral? 9es, pbankr. :ode %%&b'. d+ Cf he court permits Bine Danor to use the cash collateral, to what protection is Ilobus entitled?

;dequate protection. essuch use, sale, or lease in accordance with the provisions of this section.

M . Bankr' Code § 00(e) Notwithstanding any other provision of this section, at any time, on request of an entity that has aninterest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest.his subsection also applies to property that is subect to any une0pired lease of personal property *to the e0clusion of su property being subect to an order to grant relief from the say under 2 ;4).


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4 . Bankr' Code § 8&(a) /0cept as provided in subsection *b+ or *c+ of this section, the trustee may avoid a transfer of propof the estate6*$+ that occurs after the commencement of the case= and *)+*A+ that is authori>ed only under other sections*:+ that is not authori>ed under this title or by the court.

O . Bankr' Code § ! Post-petition effect of security interest (a) LMBroperty acquired by estate or by the debtor after thecommencement of the case is not subect to any lien resulting from any security agreement entered into by the debtor befthe commencement of the case. ($)(1)9if the debtor and an entity entered into a security agreement before thecommencement of the case, and if the security interest created by such security agreement e0tends to property of the debtacquired before the commencement of the case and to proceeds, products, offspring, or profits of such property, then suchsecurity interest e0tends to such proceeds, products, offspring, or profits acquired by the estate after the commencement othe case to the e0tent provided by such security agreement and by applicable non-bankruptcy law, e0cept to any e0tent ththe court, after notice and a hearing and based on the equities of the case, orders otherwise. (!) Lif the debtor and an ententered into a security agreement before the commencement of the case and if the security interest created by such securiagreement e0tends to property of the debtor acquired before the commencement of the case and to amounts paid as rents such property or the fees, charges, accounts, or other payments for the use or occupancy of rooms and other public faciliin hotels, motels, or other lodging properties, then such security interest e0tends to such rents and such fees, charges,accounts, or other payments acquired by the estate after the commencement of the case to the e0tent provided in such secagreement, e0cept to any e0tent that the court, after notice and a hearing and based on the equities of the case, ordersotherwise.

P . 2CC § &-01($) /hen commingled proceeds identifia$le' Broceeds that are commingled with other property areidentifiable proceeds! *$+ if the proceeds are goods, to the e0tent provided by 2 9-;;4= and *)+ if the proceeds are not goo

to the e0tent that the secured party identifies the proceeds by a method of tracing, including application of equitable principles, that is permitted under law other than this article with respect to commingled property of the type involved.


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II. Assignment 1!: The egal imits on /hat ,ay Be Collateral'

. The egal imits on /hat Can Be Collateral

i. Article 9 places no e0press limits on what may serve as collateral.ii. Ct defines and authori>es the use of broad categories such as &equipment and general intangibles'

iii. o%e"er# there are many things of significant monetary "alue that are not property that ha"e cau

a *doctrinal metaphysical result'

9 . Property that Cannot Be Collateral

i. Property of a Personal 5ature

". ule' Ct is inappropriate for creditors to take and enforce non-possessory, non-purchase money securityinterests in property that is highly personal in nature and has little resale value.

2. his argument weakens the further from the body the property goes. Brevails as to furniture# applianchousehold furnishings# 25?44 T>?@ A6? 42B4TA5T=A VA2?'

#. Polic&'a. Dean spirited nature of the process b. 7epossession was not so much an effort to collect the debt from the proceeds of the sale of

collateral as it was to make good on a threat to deprive the debtor of its use.c. he chances for conflict in such repossessions is high, making them difficult for the legal syst

to deal with$. he /0emptions, in state law and under bankruptcy afforded debtors on their consumer goods only app

collection efforts of unsecured creditors. he e0emption laws themselves do not bar either the grant orforeclosure of security interests in debtors homes, tools of trade, clothing, household goods or weddingrings.

%. >istory: Cn the 43s, #ompanies in the consumer finance industry borrowed money from banks at low rof interest and used it to make small loans to consumer debtors at higher rates. o protect themselves frdefault, they took blanket security interests in the borrowers household goods. %hen the debtors defau

they threatened to and sometimes did repossess the goods.6. Bankruptcy Code !!(f)a. Bermits debtors who file bankruptcy to avoid non-possessory, non-purchase-money security

interests in property listed in that section, if the interest prevents the debtor from taking advanof an e0emption otherwise available.

b. @ecurity interests in property in the possession of a secured creditor are e0cepted from ())*f+avoidance. *Hike a pawnshop or where the bank keeps the secured ewelry in its vaults+.

c. Purchase+Mone& @ecurity Cnterests in personal items are also e0cepted from ())f avoidance.*Hike @ears purchases+.he rationale is that repossessed items are more likely of value to a selwho is in the business of selling such items.


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d. ())f authori>es avoidance only of a lien that impairs an e-emption to ,hich the de(tor ,ouldha!e (een entitled ,ere the lien not in e-istence. hat restricts its protection to categories of property e0empt from the claims of unsecured creditors under state or federal law.

i. @uch property must be both e0empt and of a type listed in ())f.ii. he most important difference between the two sets of protections is that the e0empt

laws typically protect both homes and automobiles but ())f protects neither.iii. Also, ())f only protects assets of debtors who are in bankruptcy.iv. ())f does not prohibit the ta)ing of a securit& interest in the propert& or its enforcem

against a debtor outside bankruptcy. he K# published regulations that prohibit bothactions.

1. Bankr' Code § !!(f)(1)(B) Notwithstanding any waiver of e0emptions but subect to paragraph *;+, thdebtor may avoid the fi0ing of a lien on an interest of the debtor in property to the e0tent that such lienimpairs an e0emption to which the debtor would have been entitled under subsection *b+ of this sectionsuch lien is6a non-possessory, non-purchase money security interest in any6*i+ household furnishinghousehold goods, wearing apparel, appliances, books, animals, crops, musical instruments, or ewelry tare held primarily for the personal, family, or household use of the debtor or a dependent of the debtor= implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of thedebtor= or *iii+ professionally prescribed health aids for the debtor or a dependent of the debtor.

$' ederal Trade Commission# Trade 6egulation 6ules

i. he K# regulations which restrict the 1nfair credit practice of non-possessory and non-purchase-money securi

interests in household goods are enforced by bring actions for civil penalties or for cease and desist orders againviolators.

ii. here is no private remedy under federal law but state regulations allow private actions against persons engagedunfair trade practices which include inunctions, actual damages, small civil penalties in the range of F(3 to F;3and modes attorney fees.

iii. he K# regulation is both broader and narrower than ())f. Bractically, this discourages generally the use of no purchase money Article 9 security interests in consumer finance.

c' uture =ncome of =ndi"iduals'

i. A direct attempt to create a security interest in future income of an individual is called assignment of ,ages. ii. Article 9 does not apply. he reason is that &these assignments present important social issues that other law

addresses.iii. Non-1## law in most states restricts the assignment of wages as security or bars it altogether.i!. %hen some states permit them, they frequently limit them using one or more of the following devices.

". Assignments of wages cannot be made in consumer transactions2. %ages can only be assigned after they are earned#. Assignments of wages cannot e0ceed a certain percentage of the debtors income.

!. K# 555.)*;+ prohibits the taking of security interests in future wages". unless the assignment is revocable by the debtor= or 2. unless it is part of a payroll deduction or preauthori>ed payment plan.

!i. ule' Once an individual debtor files bankruptcy, any encumbrance of his or her earnings from personal service performed after the commencement of the case is void and of no further effect.

!ii. "ebtors bankruptcy will defeat any security interest in future wages.!iii. Policy Against /age Assignment

". "ebtors with encumbered future incomes will have less incentive to work and tend to become publiccharges. "ebtors should decide what obligations to undertake and what to secure them with. %e wantdebtors to emerge from bankruptcy with a fresh start.

i-. Pension 6ights: he requirements that make pension plans eligible for ta0 breaks also make the funds ineligibleserve as collateral for a loan.". In re Green

a. /acts' he plaintiff had participated in %al-Dart Brofit @haring Blan since $98 and had F$33worth of value built in it.


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b. Issue' %hether pension plan totals can be attached to security interests prior to being withdrawc. ecision' No.d. ule' Anti-alienation provisions prohibit the attachment of a security interest to retirement pla

with preferential ta0 treatment until the funds are in fact withdrawn, at which time they can bereached by creditors.

e. ule' %hen /7C@A plan funds are withdrawn, they can be reached by creditors to satisfy theirclaims, even though they are the proceeds of /7C@A plan funds.

2. Cn order to qualify for favorable ta0 treatment, however, the plan must provide that the beneficiary cann borrow against his or her interest.

#. %hen withdrawn before retirement, the beneficiary must pay ta0es on the money withdrawn plus a ta0 penalty equal to $3 of the amount withdrawn.

$. %hile some support the policy behind this ta0 penalty and restriction against its use of the collateral sathat it could $e foreclosed on and the person $e destitute at retirement ho%e"er# some say that itshould $e a matter of personal choice $ecause there could $e important reasons to $orro% against

The Ta+ Penalty is a compromise $et%een the t%o "ie%s'

-. ?+ception to 2sing Pension 6ights as Collateral

". shall provide that benefits provided under the plan may not be assigned or alienatedL*;+ *A+ Baragrap*$+ shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect participant pursuant to a domestic relations order. /ach pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order. Mhe

section goes on to define a qualified domestic relations order at length.2. /0ceptions to alienation depend on the party who is attempting to reach the property in question

*beneficiaries of qualified domestic relations orders rather than ordinary creditors+*P"7O+. Pualified"omestic 7elations Order6"ivorce.

D' 2T26? P6P?6T@ A4 CAT?6A

i. 1nder both 1## and real property law, a debtor can grant a security interest in property he does not yet own.". @ecurity interest will not attach until the debtor acquires an interest in the property2. An individual debtor ordinarily cannot effectively encumber his or her future earnings from personal

services, but a business debtor, whether a corporation or individual, can encumber future earnings of th business.

a. he business debtor does this by encumbering accounts, including after-acquired accounts, ch paper, money, and bank accounts Q the income the business will receive over time.

b. %hen customers later obtain services on credit or for cash, the security interest attaches to the

accounts, chattel paper, money, or bank accounts thus created or augmented.c. A business that has thus encumbered its future income can escape the encumbrance by filing

bankruptcy.d. An after acquired property clause ceases to be effective once the debtor files. he creditor is

entitled only to the proceeds, products, offspring, rents, or profits of the collateral e0isting at thtime of the filing.

e' Valua$le 5on-Property As Collateral

i. %hen debtor grants a security interest in *non-property+ &license'. he security interest cannot attach to the lic but it can attach to &proceeds' from the license. &debtors rights to proceeds from future sale of the license'

ii. icenses! Dost licenses are by law non-property. he purpose of this classification is a government decision tha particular license, right, or medallion should e0ist only for the public convenience and retains the right to revokeany time it ceases to be for the public convenience.

iii. hey are rarely revoked, the restrictions on their transfer are rarely enforced, and they are routinely bought and s

for huge sums of money. f. The propert& and non+propert& approachi. he inquiry is whether the item is property under state law.

ii. Cn Jac)son !. Miller 9; :7 5)$ *$9+, the court held a security interest in a liquor license to be void and of noeffect. he court relied on state law that said &the license shall continue as a personal privilege granted by the board and nothing therein shall constitute the license as property'. Any security interest taken in futureliquor licenses were invalid.

g. The Policy riented Approach Q these courts e0amine the consequences of permitting or not permitting the taking ofsecurity interests in the particular items


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i. hey tend to permit the use of licenses as collateral, reasoning that the grant of the security interest in no wayrestricts the governments right and ability to cancel a license the e0istence of which no longer serves the publicconvenience.

ii. 7ationale is that the license can be property between the licensee and the secured creditor without being proper between the government and the licensee.

h' ranchise Agreements

i. Assignment of a franchise is contingent upon the franchisors willingness to issue a new franchise to the &assignupon surrender of the franchise currently owned by the &assignor.'

i. In re SJ Bnterprises; Inc., ); :ankr. #t. "ec. $4;3 *$99;+i. V?6V=?/: Nissan franchisee is in bankruptcy and wishes to transfer his franchise to 7ohrman. he agreement

to terminate @7Rs franchise, permit 7ohrman to acquire as consideration, and if no acquisition, no sale. @7Racquired a Nissan franchise and entered into a financing arrangement with N:" to purchase new vehicle invent@7R subsequently obtained additional financing from @uccess :ank. he @7R filed for #h. $$. @7R filed a motiofor an order approving the sale of its assets to 7ohrman. #ourt entered this order= and also indicated that @7R wovoluntarily terminate its Nissan franchise upon receipt of $)(,333 from 7ohrman as consideration for terminatinfranchise. @7R argues the termination fee is not proceeds of the franchise because @7R did not assign or transfer franchise agreement to 7ohrman= all they did was terminate.

ii. =442?: whether the F $)(,333 payment to the "ebtor for the voluntary termination of its franchise *the SerminaKeeS+ is unencumbered or, instead, subect to the perfected security interest of N:" or @uccess.

iii. 2TC,?: he 7ohrman purchase contract and the ermination Kee constitute proceeds of that intangible6the

franchise. he termination fee represents consideration paid for the &disposition' of the franchise, and therefore,either proceeds of N:"s lien on &contract rights' or &any other personal property' or @uccess lien on &generalintangibles.'

i!. 6 2?: here is no requirement that the collateral be transferred or disposed of to anyone= rather &proceeds' inclany amount received for disposition of collateral, even if disposition is by termination.

!. 6 AT=5A?: 1nder Se the profits. :uta lot better than nothing.

i!. Ct does not assure that a bankruptcy court will honor the security interest if the license or franchise is e0changed something else of value during bankruptcy.

' 6 ?4T6=CT=54 5 T>? E6A5T 4?C26=T@ =5T?6?4T4 ,AD? =5??CT=V?

i. 9-53 renders contracts and laws that attempt to restrict the grant of security interests in general intangiblesineffective.

". he purpose of this was to e0pand the range of collateral available for the protection of secured credito2. "ebtors can grant security interests in intangibles, despite contract provisions and even laws prohibitin

such grants.

#. he secured parties cannot enforce their security interests to the detriment of the party protected by thecontract provision or law, but the secured parties can sit back and wait for liquidation of the collateral.$. 1## 9 protects only the right to grant the interest, and if the state law provides that the particular right

not &property' then 9-53 does not apply.l. In re


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iii. 6 2?: A liquor license is not property, and therefore not a general intangible, e0cept in regard to state and federta0 liens and federal due process requirements.

i!. D=4C244=5: Kor a liquor license to be a general intangible, it must first be found to be personal property. he clegislative pronouncement that liquor licenses are not property has been consistently supported by case law, all othe cases holding that a license to sell into0icating liquor is not a property right.

m' Assignment 1! Pro$lems

i. $).$. #lient bank is contemplating F)3DD loan to station. #lient wants a security interest in each of thefollowing items. #an it get such an interest, and, if so, how should the security agreement describe the collatera/lectronic equipment used in broadcasting. 9es. quipment, proceeds, replacements now possessed or after+acquired. Beacock logo, which is protected by trademark and cost F$(k to design. 9es. >eneral 6ntangibles anintellectual property. :ould list trademark registration numbers. :roadcast license. 9es. >eneral 6ntangibles?goodwill@ now eisting or after+acquired. ven though cannot attach the license itself, by listing it as collater

creditor may attach proceeds if it is sold. . 7eputation. -o. 0robably not property. @tations cause of action agaformer employee for slander. 9es. :laimsA Description by type is insufficient for commercial tort claim &to

prevent security interest in claims that havent happened yet' but since this claim is eisting, by listing this claim

specifically in the security agreement, it can be collateral. F8.;DD advertising revenues station is e0pected to efrom its operations in the remainder of the current year. 9es. ;ccounts, including after+acquired accounts, chatte

paper, money, and bank accounts. ?;ccounts@ automatically means after+acquired accounts. But the station ca prevent attachment to any future earnings by filing bankruptcy.

ii. $).). :ank made the loan and the station defaulted and filed bankruptcy. At the time of filing, the station ow

nothing not on the list in $).$. :alance owing clearly e0ceeds the present value of all assets. %hat steps do youtake for :ank? 5ile proof of claim and security agreement. Cove to lift stay &under $!3&d'' if station is not goito reorganie. :ould move to lift the stay because debtor has no equity and all property is collateral for Bank.

&Bankruptcy :ode $!3&d''. But might be better to let the trustee sell the business in whole to maimie value.


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D.


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III. ssignment "# The Gate,a& to emedies' efault; cceleration; and


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h' Cn some arrangements, the debtor does not even have a bank account. Ct pays bills by sendinginstruction to the bank= the bank writes and mails the checks, charging them to the debtors loaaccount. %hen the debtor receives payments from customers, it forwards the payments to the bank, which logs them in as loan payments.

i' @ome banks require that the line debt fall due at a particular date during the debtors off seasondebtor who can pay the line to >ero each year will not mind doing so.


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6. ule' One party to a T will use his past commercial dealings with another party as a basis for theinterpretation of the other partys conduct.

1. ule' @ilence may form the basis for estoppel if a party stands mute when he has a duty to speak.D. ule' he debtor has the burden of proof in disproving good faith.:. ule' A party may accelerate payment or performance &only if he in good faith believes that the prospe

payment or performance is impaired.'"0. 6 2?: Cf a lender accepts partial payment on a loan after it has already accelerated, the lender will be

estopped from acceleration and claiming default."". U has adopted the 1## definition of good faith that provides good faith means &honesty and fairness

the observance of reasonable, commercial standards of fair dealing.' B . The De$tor3s 6ight to Cure

i. A debtor has a right to cure a default by paying the amounts then due.ii. Cf a debtor cures before the creditor accelerates, the necessary sum may be small.

iii. ule' Once acceleration has occurred, a debtor cannot cure, but can redeem, only by paying the entire amount oaccelerated debt.

i!. Old epu(lic Insurance


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6. 6 ?A45=5E: his obligation to act in good faith would require a period of notice to TD# to allow it areasonable opportunity to seek alternate financing, absent valid business reasons precluding Crving fromdoing so. Rust as Crvings discretion whether or not to advance funds is limited by an obligation of goodfaith performance, so too would be its power to demand repayment.

1. =54?C26=T@ CA24?: A clause that says we can call the loan if they feel like there is a good chance ththey wont be able to collect on the loan. his requires good faith.

i!. Cham 4ate8s Shoes 4o. 2; Inc. !. /irst 9an) of hiting.

". /acts' @hoes opened a F;33,333 line of credit with the bank in a T that provided for cancellation on fivdays notice and that nothing &provided herein' will constitute a waiver of the :anks right to terminatefinancing at any time.' "ebtor quickly took F8(,333= then the bank mailed a letter stating it would mano more advances.


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events? %hen is the last time he can make this and subsequent payments without serious repercussions? %hat those repercussions? "efault, Acceleration, Koreclosure, Koreclosure sale= the last time he can cure is beforeacceleration possibly Nov. $3.


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I5. Assignment 18: Default# Acceleration# and Cure 2nder Bankruptcy a%'

. 6e"ie%

i. @tate law generally enforces the T between the debtor and secured creditor regarding default, acceleration, and cii. %ithout a statute to the contrary, under state law generally once acceleration has occurred, it is irreversible6no

option to cure.iii. 7equires consideration of state and bankruptcy law together.i!. #reditors rights are found in state law, but debtors rights are found in bankruptcy law.

". hese two sets of laws combine to create a system in which the debtor who has the ability to cure a defand make the installment payments generally will have the opportunity to do so= to get that opportunitydebtor must go into bankruptcy.

!. 1nder bankruptcy, a debtor who has the ability to cure a default and make installment payments generally will hthe opportunity to do so.

!i. :ankruptcy protection of the debtor who has suffered an acceleration of installment debt occurs in two stages!". Cn the first stage, which e0tends from the filing of the bankruptcy case until confirmation, the automatic

stay protects the debtor from foreclosure while the debtor attempts to formulate a plan.2. Cn the second stage, confirmation of the debtors plan reverses the acceleration, the debtor cures its defa

and the installment payment contract between the debtor and creditor is reinstated.!ii. In re Moffett >Tide,ater /inance


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2. he debtor must commence making plan payments not later than ;3 days after filing the case.!ii.


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$. Dust not alter the legal, equitable, or contractual rights to which the claim entitles its holder. *Cf originaattys fees were going to be paid in the event of a default, that must still remain true in the plan.+

!. ule' Cf a class of claims is unimpaired under a #h. $$ plan, the holder of the claim in the class is conclusively presumed to have accepted the plan and is not entitled to vote on it. § 11!& (a)(F)

!i. #an be imposed on the holder of the unimpaired claim over its obection!ii. 6einstatement and Cure "' ,odification! Dodification keeps the debtor from making a lump sum payment

effectuated by confirmation of the plan.


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G . /hen is it Too ate to ile Bankruptcy to 6einstate and CureI A debtor can reinstate and cure a default and acceleraeven though the deadline for doing so under state law has passed before the debtor invokes bankruptcy procedure.

9an)ruptc& does not Kust preser!e rights e-isting under state la,; it recognies rights that state la, does not.

i. In re eSeno

1' /acts' he secured creditor, Did-Atlantic National :ank held a security interest in the debtor, Ds."e@enos, home. hey obtained a foreclosure udgment on the mortgage and the court issued a writ ofe0ecution authori>ing the sheriff to sell the property on Darch ).


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ii. 18'! a) Da"e says Bank can lend Teresa L1;#;;; she needs on golf equipment' Choose $et%een ($oth fi+ed

amount) demand note !M or prime plus 0'!M on an arrangement that pro"ides for 0; days notice'

". Brime plus ) demand note! his is probably better, because she can always file bankruptcy and get amodification.

2. Brime plus ;.)(, ;3 days notice before call! his is simply a higher rate with little help. he thirty daynotice is only if you are not in default.

iii. Bank is offering a line of credit instead'

". Prime plus !M# demand note:

2. Prime plus 0'!# 0; days notice $efore call: his would be better because she can rely on the ability tdraw money she needs. . "isadvantage of the line of credit is that if not fully drawn it can be cut off attime.

i!. 18'0 @pivak borrowed F3k on ;3 yr fi0ed mortgage G . @pivak made )9 monthly payments and then misse;3 and all payments since. Hender has filed for foreclosure. #urrent rate is $$ %illard is 8 months past due.

/=A6D 4P=VA 6 AT? PA@,?5T A66?A6AE?

B?6? ACC?6?6AT=5 F(8.3) F5,$39.$5

5/ "efault 7ate All "ue Now F8,3)4.35 X F5,$39.$5

C>APT?6 10

,D==CAT=5

$;))b) unavailable

C>APT?6 10 6 ?=54TAT?

A5D C26? NNN B?4T PA5

#ontract F(8.3)F$$5.$5

F5,$39.$5Bayable in reasonabletime

C>APT?6 11

,D==CAT=5

1navailable$$);*b+*(+

C>APT?6 11 6 ?=54TAT?

A5D C26?

#ontract F(8.3) in one year F$$,$(;.; to cure$9 monthsBlan is not confirmed for$) months Y 8 monthsarrearage.

!. ($) /hat is the minimum /illard must pay to keep the house and %hen

". (8.3) per month, as scheduled.2. $$5.$5 per month for three years.

!i. (c) 4ame situation as /illard# e+cept /inona3s mortgage $alloons t%o years from no%'

". Can she reinstate and cure in Chapter 10I 10!!($)()

/=55A /==A,4 6 AT? PA@,?5T A66?A6AE?

B?6? ACC?6?6AT=5 F(8.3) F5,$39.$5

5/ "efault 7ate All "ue Now F8,3)4.35 X F5,$39.$5

C>APT?6 10

,D==CAT=5

$;))b) unavailable

C>APT?6 10 6 ?=54TAT?

A5D C26?

No $;)) Hast payment isdue before the end of the plan.

No no

C>APT?6 10

,D==CAT=5NNN@?4

Hose the rate %ill probably cost toomuch to do this

C>APT?6 11

,D==CAT=5NNN5

$$)5*b+*(+ Not homemortgages

F(8.3) in one year F$$,$(;.; to cure$9 months

Blan is not confirmed for$) months Y 8 monthsarrearage.

C>APT?6 11

6 ?=54TAT?,?5T A5D

26?NNNN@?4

Jou can probably save itin the short term but it probably wont help her because of the balloon

1nder bankruptcy, she will probably have difficultyrefinancing.


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!ii. D) if she rented the house out: on a literal reading, since it would no longer be her principal residence, she cou probably modify. :ut it looks like a shady deal and she would pay lots of money.

!iii. ?) /illard made a deal %ith Eate%ay to repay at L#;;; and is a$out to default again'

/=A6D 4P=VA 6 AT? PA@,?5T A66?A6AE?

B?6? ACC?6?6AT=5 F(8.3) F5,$39.$5

/=A6D4 D?A $$ F84$.4 F4,333 at 4 months

C>APT?6 10,D==CAT=5 Not available Q principalresidence

C>APT?6 10 6 ?=54TAT?

A5D C26? NNN B?4T PA5

#ontract F(8.3)F$$5.$5

F5,$39.$5Bayable in reasonabletime

C>APT?6 11

,D==CAT=5

Not available Q principalresidence

1navailable$$);*b+*(+

C>APT?6 11 6 ?=54TAT?

A5D C26?

#ontract

P . 18'8 /hat ad"ice to the 5o$leman3s a$out their condoI "ont reinstate. Jou would pay F8$k for a F);k condo. Cf theyhad anti deficiency udgment statutes, you could advise them to buy it back from the bank at a lower price *the bank mighfind them less of a risk at a lower price+.

i. /hat %ould you ad"ise American 4a"ings a$out this condoI Koreclose?


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5. ssignment "%' The Protot&pical Secured Transaction

a. @ome forms are very short while others are more comple0 and lengthy. . @trategies and motivation differ from one kind of secured transaction to another and with the attitudes of different particip

to the same kind of transaction. 9 . The Parties

i. Hender and :orrowerii. "eutshe Kinancial @ervices

". #ommercial finance company2. Hends against all kinds of business assets.#. @peciali>es in /loorplanning

a. Kinancing the purchase of inventory that is on a dealers showroom floor.


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#. /0amine and copy dealers books and records. -i!. The principal inde$tedness o%ed on any collateral is due %hen any one of the follo%ing occur:

". Host, stolen, or damaged.2. Pay-as-4old terms financing6sold, transferred, rented , leased, or otherwise disposed or matured.#. Cn strict accordance with any curtailment plan.

-!. 4cheduled Payment Program financing in strict accordance with the payment schedule. -!i. %hen otherwise required by any terms in writing between the parties.

iii. If the (an) determines that the outstanding de(t o,ed e-ceeds the aggregate ,holesale in!oice price of ational structure.":. Any collateral becomes subect to a lien, claim, encumbrance or security interest prior or superior to the

banks. -ii. =n the e"ent of a default:

". At any time, at the banks election, without notice or demand to dealer do any ON/ of the following!


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2. "eclare all or any part of the debt owed immediately payable, including all costs and e0penses of colleactivity. Cncluding and without limitation all attys fees.

#. /0ercise any rights under applicable law including and without limitation the right to possess, transfer,dispose of collateral and the right to cease e0tending credit shall not be construed as limiting theseremedies.

$. Dust segregate and keep the collateral in trust for the bank and cannot dispose of it *sell, rent, lease, fuencumber+ and must keep it in good repair.

%. 1pon oral or written demand, will immediately deliver collateral to the bank in good order and repair owithout notice or demand the bank may take the property, together with all related documents.

6. Day without notice apply a default finance charge to "ealers outstanding indebtedness equal toe thedefault rate specified in the agreement, or at the lesser of ; per annum above the rate in effectimmediately prior to the default, or the highest lawful T rate of interest permitted under applicable law

-iii. All banks rights and remedies are cumulative. Kailure to e0ercise any of them will not waive any of the rights anremedies available for past, current, or future default.

-i!. Cf the bank conducts a private sale of the collateral, to $3 or more distributors of the type of collateral, any sale i bulk or in parcels within $)3 days is a commercially reasonable sale.

". 8 or more days prior written notice will be commercially reasonable notice of any public or private sale2. Cf the bank disposes of other collateral not contemplated, its commercial reasonableness will be udged

state law. -!. Iive bank an irrevocable power of attorney to do any of the following

". e0ecute or endorse checks, financing statements, instruments, #ertificates of itle and @tatements of Or pertaining to the collateral.

2. supply any omitted information and correct errors in any documents between the parties#. do anything dealer is obligated to do$. initiate and settle any insurance claim%. do anything to preserve and protect collateral and the banks rights and interests therein

-!i. Day provide dealers credit information to any third party. -!ii. Agreement may be terminated at any time by written notice received by the other party.

-!iii. Cf the bank terminates, the dealer agrees that". if they are not in default6;3 days prior notice of termination is reasonable and sufficient *although in s

instances shorter periods can be reasonable and sufficient.+2. if they are in default, no notice is required.#. %ill not be relieved of any obligation prior to the termination by the termination .

$. :ank will retain all rights until the debt is paid. -i-. "ealer cannot assign his interest in this agreement without prior written notice of the bank. --. Brotects and binds all heirs, representatives, successors and assigns.

--i. All agreements or commitments to e0tend or renew credit or refrain from enforcing payment of a debt, must be%7CCNI.

--ii. Oral agreements are null and void and have no force whatsoever. --iii. An invalid provision in the contract still leaves all other provisions in tact and valid. --i!. his agreement will only supplement and amend previous security agreements with the bank. --!. Cn the case of conflict in terms, the terms of this agreement govern.

--!i. "ealer agrees to pay all of the banks reasonable attys fees and e0penses incurred by the bank in enforcing righereunder.

--!ii. :inding Arbitration6provided that the parties would submit all disputes between them to binding arbitrationthrough the National Arbitration Korum or the American Arbitration Association.

--!iii. Cf the arbitration clause is invalid or unenforceable, any legal proceeding with respect to any "ispute will be triea court of competent urisdiction by a udge without a ury. -!ii. The (an) distri(uted no mone& at the closing; and there is no Statement of Transaction for 9onnie to appro!

/ . The inancing 4tatement

i. Kor filing in the 1niform #ommercial #ode filing system of the state.ii. Iives public notice that the bank claims a security interest in inventory.

G . The Personal Euarantee

i. hough loans were made to the business, the bank required that the owner make personal guarantee of the paymii. 7ationale!

". Cf borrower cannot repay, the owners might.


27/33

2. Iives the lender a right to obtain a udgment against the owner and proceed against their assets ust asthough they had borrowed the money.

#. @ometimes secured by property owned by the owner.$. o insure cooperation from the owners in the event of default.

a. Cnterest in business becomes worthless so there is no incentive if they cant be held personallyliable.

(. Avoid or minimi>e the udgments that can be taken against them.c. On the side of the creditor if there is competition for the assets.d. "esire to avoid any stigma with bankruptcy may motivate him.

H . Purchase of =n"entoryi. #hooses a manufacture who deals with the same bank as the buyer.

ii. The /loorplan greement

". he bank has a deal that if it purchases for the dealer from the manufacturer and has to repossess them,manufacturer will buy the product back at full price from the bank.

2. %e will deliver an invoice to you of what was purchased.a. Deaning we transfer all rights to the dealer contingent upon your financing the deal.(. Our title is free and clear of all liens and encumbrancesc. Derchandise is in salable conditiond. @ubect of a bona fide order by the dealer and that the dealer has requested that it be financed b

you.

e.


28/33

O . Assignment 1 Pro$lems

P . $(.$. As atty for bank, you have been asked to comment on floor-checking procedures for loan of F$(DD against $43D pounds of soybean oil stored in outdoor tanks. Kloor checker goes to outdoor storage tanks and sticks a 53 ft. pole into thtank to determine depth and then calculates volume. "o you see any problems?


29/33

5I. Assignment 1: The Personal Property iling 4ystems

a. Competition for the 4ecured Creditor3s Collateral

i. his regulates the relationship between a secured creditor and others who may claim the same collateral.ii. %hat must the secured creditor do to prevail over these new adversaries? And how effective will they be? And h

e0pensive is it to enforce it?iii. @ometimes debtor participates and sometimes not.

(. 6ssue* %hich creditor prevails against others who also have rights superior to those of the debtor?c. uestions of Priority

i. Berfection is giving the public notice of the claim by a proper method.ii. Ieneral 7ule is that priority goes to first to file or perfect.

iii. 7ationale is that later lenders will know of the first lender and adust Mhow much X at what rate they lendi!. Dethods of Berfecting!

". Kiling2. Bossession#. #ontrol$. Automatic perfection

!. Because possession is a method of perfecting, ust checking the filing system does not ensure that you are first.

must also make sure that another creditor does not have possession.!i. Cf there is more than one lien against collateral, each will have a priority #ommonly labeled &first, second, or th

!ii. ; lien with priority higher than another is referred to as the senior or prior lien and the other is referred to as th

subordinate or unior lien.!iii. =f the "alue of the collateral is insufficient to pay all of the liens against an item of collateral the Junior lien

yield to the senior ones'

i-. /ach creditors lien is a relationship between an obligation and an item of collateral= priority is the relationship between these relationships.

-. Briority can e0ist between creditors who do not have liens. *1nsecured #reditors get priority by T amongst oneanother.+

-i. #ontracts establishing priority among unsecured creditors are rare because most debtors encumber all their propwith liens, which have priority over all unsecured debt.

-ii. Only one way to resolve6could be resolved by pro rata share, status of the competing creditors, or permittingcreditors to trace and recover value that they supplied to the debtor.

-iii. Hien6a relationship between a debt and property that serves as collateral.d. emed& for efault' Cf debtor fails to pay the debt, the creditor can foreclose on the lien, force a sale of the collateral, an

have the proceeds of the sale applied to payment of the debt.e. Peerless Pac)ing


30/33

!i. ationale' he purpose and effectiveness of the 1## would be substantially impaired if interests created incompliance with 1## procedure could be defeated by application of the equitable doctrine of unust enrichmen

!ii. ationale' Although the result of disallowing an equitable unust enrichment claim in such a case may appear hthe unsatisfied creditors, could have protected themselves either by demanding cash payment or by taking a purchase money security interest in the goods they delivered.

f. >o% do Creditors Eet PriorityI

i. Hiens rank in the chronological order in which they were created.ii. /0ceptions are in favor of liens such as property ta0es.

iii. Once the priority of a lien is established, any lien created thereafter will be subordinate.i!. Dakes it possible for a creditor to know how it will fare in later competitions.!. Hiens it will rank behind are already in e0istence, so the prospective lender can obtain information about them a

contract with the holder regarding their disposition.!i. (o insure that the prospective lender can discover a lien that will have priority over its own, the laws under whic

liens are created almost invariably condition priority on the holder ta)ing steps to ma)e e-istence of the lien

pu(lic and easil& disco!era(le'

!ii. a&s to PB/B


31/33

!. All states maintain certificate of title systems for the filing of security interests in automobiles, and some haveseparate ones for boats and mobile homes.

!i. @ome states have filing systems for special types of collateral such as liquor licenses.!ii. he federal go"ernment maintains additional filing systems for patents# trademarks# copyrights# aircraft# an

ship mortgages.!iii. Cnternational negotiations are under way for a %orld filing system'i-. @eparate offices have little or no communication between each other. -. 6f the secured creditor leaves the message in the wrong message center, the message almost certainly will be

ineffective.

-i. Cf the later lender searches only in the wrong office, it will miss whatever messages were left in the right office. -ii. @tatutes specify which message center is required. %ith both state and national filing systems, uncertainties and

overlaps are inevitable.i. 4ational Peregrine; Inc. !.


32/33

n. ,ethods and Costs of 4earching

i. Cn many filing offices, only employees are permitted access to records.". he lender or lawyer must fill out forms precisely specifying the search requested and send it to the fili

officer.2. Cn other offices, a member of the public can come in and do the search.#. Dost lenders and lawyers do not deal directly with the filing officer= they hire a &service' company to o

or conduct the search for them.a. @erve as Cntermediaries between the lender and the lawyer. b. %ill accept search requests by telephonec. A company employee may either go to the office and conduct the search or order it over the

counter.d. Day also use a local correspondent. Qtitle or escrow company.e. he party ordering the search pays two fees, that of the filing officer and that of the search

company. Kiling officer fees are set by state statute. @ervice company fee is determined by theservice company or its correspondent.

f. An additional name, or variation will likely double the fee. #opies of the filing will increase thcost.

g. Kiling is usually a little cheaper than searching, but not much. @ometimes if a lawyer does thefiling, the fee is even more increased.

h. ed you to have the sheriff sei>e the car. Cn investigating the car, you learn that ; months ago Heonard signed asecurity agreement granting :ernie an interest in the car to secure another debt. Heonard and :ernie immediately recordenotice of :ernies lien on the certificate of title for the car. a. Now where does Kelicia stand? She is unsecured because

Bernie has perfected his lien. b. #an you go ahead with the e0ecution levy? @hould you? Jes and -o. 6f Sheriff seies thcar and sells it, Bernie gets the first 21k of proceeds.

r. $4.). @ergio bought a street vending cart from %inchell, paying F$k cash and signing a promissory note for F$k. %inchfiled for bankruptcy and IK#, who had perfected a lien against the cart when it loaned %inchell F),(33, demanded

possession of the cart from @ergio. a. %hat do you tell @ergio? :an argue that )inchell did not make the sale to Sergio good faith if he did not disclose the lien, could argue )inchell defrauded Sergio knowing he was going to file bankruptcy

Determine how much )inchell still owed >5:, maybe you can negotiate that Sergio pay the 21k he owed )inchell to >5

instead. $I+!1%&a'. ; security interest continues in collateral notwithstanding sale unless the secured party authoried

disposition free of the security interest. ven though Sergio is a bona fide purchaser for value, the cart is still subect to tlien. b. %ould it help your case if you discovered that IK# repossessed ; vending carts in the past $) months, each timefrom a defrauded buyer? 0robably not.

s. $4.;. Jou have been assigned to order 1.#.#. filings and searches in anticipation of client lending against the followingcollateral. Cn what filing system or systems will you make the filings and conduct the searches?a. ools used at debtorsservice station. Secretary of State or as provided by state law. b. Batent. >overned by state law, file with Secretary of Staor as provided by state law Article 9 does not apply to the e0tent tat a statute, regulation or treaty of the united @tates preempts the article. Kile in the secretary of states and the 1@ patent office. Cf you are unsure at all file everywhere you chere is no penalty to file in more than one place. Cts actually a good policy. d. 7are auto dealers inventory of automobi

some autos that are not for sale, accounts receivable, and all of the dealers rights to its &American Originals' trademark.i. 6nventory J file financing statement with Secretary of Stateii. ;utos not for sale J indicate on certificates of title

iii. ;ccounts receivable J file financing statement with Secretary of State

i!. (rademark J file financing statement with Secretary of State

t. $4.5. Hawyer is concerned that debtor might encumber property at any time, even while debtor is negotiating loan. @houhe do 1.#.#. filings or searches first? 5ilings &notice filing' 5ile 5irst, then dont disburse funds until after you search aweek later, by which time any filings before yours should show up in your search..


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secured transactions outline second half

Documents