42 Comprehensive Outline

Secured Transactions Outline- Kauffman 2003

Part One Debtor Creditor Relationship Chapter 1- Creditors Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Under State Law (p3) 1) Who Is an Unsecured Creditor? (p3) a) Unless a creditor contracts with the debtor for secured creditor status, or is granted it by statute, the creditor is unsecuredgeneral creditors, ordinary creditors. 2) How Do Unsecured Creditors Compel Payment? (p4) a) No self-help methods (tort of conversion, perhaps even larceny, or wrongful collection practices). b) Process: judgment writ of execution levy under writ of execution by sheriff (creditor must designate property for sheriff to execute against), pay expenses of collection. Or writ of garnishment on a third party. i) Vitale v. Hotel California, Inc (p5) (1) Creditor worked for bar and obtained judgment and writ of execution. Sheriff was hesitant to go, but went and made one levy obtaining little to offset judgment. Sheriff should have made successive levies under the writ but didnt. Amerce the Sheriff! 3) Limitations on Compelling Payment (p13) a) Creditor must discover and locate assets. Judgment creditor can ask discovery questions about debtors assets under threat of contempt/perjurybut remember debtor with $10,000 in cash in pockets. i) Debtor can use (even use up) assets until sheriff arrives, and debtor can prefer one creditor to another and dedicate all assets to one debt. b) Exemption statutes prevent seizing of statutorily protected property. i) Wisconsin Statutes Annotated 815.18 Property Exempt from Execution (p15) (1) (6)(a) no contractual waiver of exemption rights before judgment on claim. 815.20 Homestead Exemption (fairly typicalTexas has an unlimited homestead exemption) 4) Is the Law Serious About Collecting Unsecured Debts (p17) a) Enforcement of civil judgments for money damages is often ineffective. Strict enforcement mechanisms for some things (child support, etc.), but not money judgments, wages, or most contract breaches. Class notes: Fair debt collection practices: forbids starting or threatening a law suit w/out planning to go through with it. Threat letter is not worth much unless threatened is gullible. Small claims court handles about 90% debt collection, and mostly by large companies. Problem Set 1. Problem 1.1: Jeff loans neighbor $1000 to buy furniture. Neighbor Lisa signs an IOU. Jeff wants to take furniture. Jeff has to get a judgment. He has to prove that he loaned Lisa $$. He has to get a writ of execution and have Sheriff levy. It is not worth it for Jeff because law firm costs are more than value of furniture. But Jeff has union agreement for consultation. Lawyer can tell Jeff how to handle small claims court (less than small amounts like 2,500). Small claims court is an option in a jurisdiction with a streamlined process. The threat of a treble damage lawsuit is often enough to end matter. If small claims

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court is not an option, Jeffs options are really poor. To be an unsecured creditor is bad situation if debtor is unable to pay. Lots of people end up being unsecured creditors. If you go into bank to buy car, the bank is going to take security interest in car. But if business asks for 10 million, the bank will give it for unsecured credit (maybe to get business and working relationship). Problem 1.2: This is a story about some unsecured creditor who tricks the debtor into giving unsecured creditor valuable property. The creditor tricks the debtor to giving up lobster (under pretense it was going to Stephen King), but the lobster value is $11,000 short of full debt. Debtor may bring criminal charges against creditor. Creditor was convicted and fined. When creditor comes to you and says he has this lobster and wants to sue for remaining amount, what advice do you give client? You tell him to return the lobster to avoid the fine. The judges remedy was a civil remedy along with a criminal remedy. We want to avoid the criminal charges. How to avoid prosecution? You should bring prosecution for criminal charges first. There is a colorable case of fraud. So when debtor responds and brings criminal charges back at you, the prosecutor would probably not go forward with either charge. For public interests, prosecute both or none. Problem 1.3: This involves a loan in business situation. Benning gives $$ to day care center. Payment has been made and discovers that all kinds of things happen at day care center that makes loan precarious. They are not behind on payment to Benning. Look to loan agreement to see her options. She may try to negotiate for some security but she has no leverage to do it. If she is on better relations, she could exchange some credit for better security. The point of the problem is to show that unsecured creditors go down if debtor goes down. The debtor really runs the show once the money has been paid over. Problem 1.4: The daycare folds, and you have default judgment against owner. How does Benning get paid? Benning is a judgment creditor. She is going get a writ of execution and go to the Sheriff. She needs to know what assets she can levy on. These assets cannot be covered by state exemption statute or secured by another creditor. You can go to state records, personal property records. If you were not Benning the dentist, but rather the Telephone Company, you could go to a credit reporting service that would find a lot of this information for you. Benning wont be able to do that because service does not open to private people. Like Hotel California, the lawyer took deposition to discover assets. There is a problem here because depositions require hiring court reporter (very pricy). There is no incentive at all to come into depositions and show what is owned. He has every incentive to prolong deposition. As lawyer for Benning, tell her that its expensive. You may find that assets are not owned by daycare center. Problem 1.5: Assume that took deposition. WI exemption statute may apply to certain assets to allow debtor livelihood. Vehicle: 1,200 + unused car is exempt. Principle residence: exempt if less than 40 acres. Daycare Center Equipment: if daycare center is closed, its not currently being used, so its not exempt, but if it is used, then its exempt. Bank Account: only exempt up to 1,000. You need to get a writ of execution from the court to order bank to pay you as creditor. If debtor withdraws money before Sheriff serves writ, creditor is SOL. You can take a bathroom break during deposition and serve writ right away. Problem 1.6: Kinds of questions you want to ask in a deposition. The collection business requires some creative thought- last month rent, medical payments, etc. You can try to collect a lot of assets. Dont just look for cash assets. Assignment 2: Security and Foreclosure 1) The Nature of Security (p21)

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a) Lienmore effective set of collection rights. BC 101 def. of lien: charge against or aninterest in property [collateral] to secure payment of a debt or performance of an obligation. Foreclosure: creditor compels application of value of collateral to payment of debt.

b) Security Interest: lien created by contract. BC 101 (security agreement and securityinterest). Nonconsensual liens: statutory liensgranted by statute (mechanics liens); and judicial liensobtained by unsecured creditors through judicial process. Security interest only has effect in event of default. i) The Invention of Security: A Pseudo History (p23) (1) Important ideasit is the substance of what is going on, not the form. If it acts like a security agreement, it is a security agreement. ii) Basile v. Erhal Holding Corp. (p27) (1) Settlement, though not cast as security agreement, provided that if debtor did not pay, creditor could take possession of propertycreated a security agreement. 2) Foreclosure Procedure (p29) a) Foreclosure: transfer of ownership; transfer of possession is differentcan happen before, concurrently, or after foreclosure. b) Judicial Foreclosure (p29) i) Foreclosure by entry of a court orderafter all technical delays, final foreclosure judgment is entered and ownership transfers. After foreclosure, if debtor will not surrender property, creditor gets writ of assistance or writ of possession, and sheriff takes possession of property to sell. (1) See Farm Credit of St. Paul v. Stedman (foreclosure judgment entered June 1984, but by refusing to leave and filing technical challenges, the Stedmans remained in the home for 5 years and six months after foreclosure). Property is sold (never transferred directly to creditor, although often purchased by creditor at sheriffs sale), and proceeds are applied to pay sheriffs expenses, then to the debt. Any excess is returned to debtor. If sale does not make enough to cover debt, creditor gets deficiency judgment and becomes unsecured for the difference.

c) Wisconsin Statutes Annotated (p32) i) Year long wait period between judgment of foreclosure and salefairly typical. Stems fromequity of redemption

ii) If debtor cooperates, debtor can transfer property to creditor using deed in lieu of foreclosuremortgage and debt are both immediately extinguished. Creditors will sometimes pay debtors to transfer property, essentially purchasing debtors equity of redemption. d) Power of Sale Foreclosure (p35) i) A power of sale clause, used by about half of the states, allows secured creditors quicker and simpler method of foreclosure against real property. Mortgage is traditional form. Others states use deed of trustcollateral is held in trust by creditor or third party and can be sold by trustee in the event of default. Foreclosure is still necessary under power of sale, but doesnt need to be done through a law suitcan simply be recorded in public records; debtor has 90 days to cure (CA law). Debtor can still refuse to give up property, and then creditor has to sue. Debtor sometimes has wrongful sale remedies. e) U.C.C. Foreclosure by Sale

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i) Foreclosure of personal property is much easier than of real property. Policy: loss of realproperty tears at social fabric in a way that personal property does not.

ii) U.C.C. 9-601(a): creditor may foreclose by available judicial procedures. U.C.C. 9610(a): secured party may also sell, lease, license, or otherwise dispose of any or all of collateral. U.C.C. 9-623: sale or other disposition constitutes foreclosure of right to redeem. U.C.C. 9-617(a): disposition extinguishes secured creditors interest in collateral and transfers to purchaser all debtors rights in property. Problem Set 2. Problem 2.1: Same fact pattern with dentist and daycare center. But there is now a security agreement taking a car, house, equipment, etc as security. What items can Benning reach through foreclosure of her security interest? All of it! An unsecured creditor does not have a lien until the sheriff seizes the property. Only in a few states can a judgment alone give you a lien on the property. The sheriff has to establish control over the property. To establish control, you need someone there 24-7 until unsecured creditor can arrange for someone to deal with it. The secured creditor under the WI statute wins because the exemption statute trumps only Unsecured not Secured creditors, on the basis that the secured creditor made a contract on the loan. The exemption would defeat the whole purpose of secured credit and the banks lending rates. The interest rate is a factor of the collateral the banks has on the loan. This is a basic difference between secured and unsecured creditor. Problem 2.2: Instead of the problems of foreclosure, the lender would rather start leasing cars. You do not have to file a public document with a lease. All the lessor has to do is repossess the property. This lease is actually a sale with a right of repossession in the event of default as the equivalent of a security interest. UCC 1-201(37): whether a transaction is a lease of security interest depends on the facts of the case. There are a number of transactions in which the form of a lease is actually a security interest. In the second paragraph of the definition of 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; if so, that takes us out of this paragraph. The second factor is that the lessee has an option of ownership for nominal consideration. This would mean that the rent payment is not really rent but rather an installment plan. The courts are concerned with the economics of the transaction. 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. The problem is supposed to be simple; however, the lease terms are exactly the same as security agreement. You cannot get out of the foreclosure requirements by doing this. Typically, you will not have such an easy fact situation. You cannot get around giving public notice by calling your document a lease when it is really a security interest. Problem 2.3: a) OHurleys does not want a foreclosure on their record and offers to give a deed in lieu of foreclosure. If they go through the foreclosure procedure, OHurleys would get the amount over their defaulted loan. If the bank avoids foreclosure, the bank saves money, so maybe they can negotiate. The banks best option is to take the deed and maybe give up some money. What about the explanation issue? Any explanation may be construed as violating ABA Model Rules of Professional Conduct (see caption). b) OHurleys wanted to give a deed in lieu of foreclosure. Suppose that works out, and H will get deed back to them if they work out payment within 60 days. This is really the equivalent of a security interest. The banks interest is contingent on nonpayment of H. If deed is effective immediately, that would not be a security interest. The difference is between giving you a book (effective now as a gift), and I will give you my book tomorrow where there is no consideration. Problem 2.4: Mr Mashimoto has an idea for a deed of trust, in event of default the creditor forecloses. If you include a power of sale within the transaction you can avoid a judicial foreclosure, which is expensive and time consuming procedure.

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Problem 2.5: There is another way to deal with collateral. Take a security interest in both real property and personal property. If there is default, foreclose on stock, not done according to judicial foreclosure. The creditor gains stock of corporation and gets company to deed real estate. The creditor takes control of debtor corporation, but the debtor corporation is probably in default to others, and the secured creditor assumes the corporations other debt. If debtor corporation spill toxic stuff on land, the secured creditor is liable for the cleanup. But is some situations its worth thinking about. A secured creditor can deal with default situations in ways that are not most time consuming. Problem 2.6: How would you change this? The issues in foreclosure cases usually involves efforts by debtors to prolong everything. Usually debtors think tomorrow will be better. Some issues of foreclosure involve overreaching by creditors too. The form most seriously considered involves trying to get state foreclosure procedures to mimic federal bankruptcy procedures, changing the debtors right to redeem, the statutory period, the actual sale of collateral. During the whole period, the debtor can stand by and do nothing. The efforts of reform try to make the redemption period run smaller. That is the time the debtor should raise defenses, creating less uncertainty. Assignment 3: Repossession of Collateral 1) The Importance of Possession Pending Foreclosure a) Who has possession of property during period of time between default and foreclosure of equity of redemption? Competing interests: Creditor wants property to preserve value of property by avoiding abuse or lack of upkeep, to benefit from value of property during the period, and to allow prospective purchaser to inspect and evaluate property. Debtor wants day in court before being dispossessed, to avoid giving creditor extra leverage by having power to dispossess debtor, and to retain leverage by having right to retain possession. b) Generally, security agreements provide that creditor gets possession in the case of defaults. However, courts may not enforce the provision, or there may be procedural steps needed for enforcement. Rules for real property and personal property differ. 2) The Right to Possession Pending ForeclosureReal Property a) The Debtors Right to Possession During Foreclosure i) Rule: mortgagees never become entitle to possession of mortgaged real property in their capacity as mortgagees. Debtor retains ownership and possession until right of redemption is foreclosed and sale is held. Purchaser at sale is entitled to dispossess debtor. Purchaser may have to sue for eviction of debtor. b) Appointment of a Receiver i) Receiver can be appointed to preserve value of property (rents in foreclosed apartment building are paid to a receiver and receiver maintains buildings, etc.). Receivers are generally only appointed if mortgages provide for them, but can be appointed if creditor can show that foreclosure alone is inadequate in preserving value. This almost never happens in family homestead situations. (1) California Code of Civil Procedure 564 (p40) (a) Appointment of receiver when it appears that property is in danger of being lost, removed, or materially injured (2) Illinois Mortgage Foreclosure Law (p40) (a) Receiver appointed when (i) mortgagee is authorized by mortgage terms, and (ii) reasonable probability that mortgagee will prevail on final hearing, except if mortgagor shows good cause.

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c) Assignments of Rent i) If debtor will rent property, mortgage will likely include terms about assignment of rents directly to mortgagee as additional security. This acts much like having a receiver so some courts are reluctant to enforce the provision. Others enforce. 3) The Right to Possession Pending ForeclosurePersonal Property a) Unless otherwise agreed, U.C.C. 9-609 gives creditor right to possession immediately on default. i) Creditor can self-help repossess if no breach of peace. If debtor resists, then creditor must get court order and sheriffs help, generally through writ of replevin, which instructs sheriff to take possession of property from debtor and give it to creditor. Creditor files civil action, and then moves for immediate possession. Creditor must generally post a bond to protect debtor in event that debtor prevails. Debtor can regain possession by posting similar bond. Most debtors dont fight it, judgment is entered by default, and creditor takes possession and sells property completing the foreclosure under 9-610.

(1) Dels Big Saver Foods, Inc. v. Carpenter Cook, Inc. (p42) (a) Creditor initiated civil suit, demanded possession under 9-609, and judge issuedorder that day granting immediate possession to collateral grocery store. The same day, the order was certified and creditor took possession of store. Debtor had no prior notice of creditors intended actions. Not a violation of due process because of procedural safeguards (bond and right to post-seizure hearing). 4) Article 9 Right to Self-Help Repossession a) 9-609: right to self-help repossession, as well as to typical judicial procedures. 9-609(a)(2) gives creditor option to leave equipment, but render it unusable. b) The Limits of Self-Help: Breach of the Peace i) 9-609(b)(2): Self-help repossession only without breach of peace.

ii) Salisbury Livestock Co. v. Colorado Central Credit Union (p48)(1) Repossessors took collateral vehicles from outdoor area adjacent to house just after dawn. Does this constitute a breach of the peace? (a) Two primary factors in deciding if trespass rises to level of breach of the peace: potential for immediate violence, and nature of premises intruded upon. Jury looks to reasonableness in deciding if actions may have triggered breach of the peace. Some trespass is privileged in self-help repossession if it does not threaten breach of the peace. iii) Examples of cases holding breach of peace: (1) Creditor brought police and debtor verbally consented to possession. Sets bad precedent of involving police in self-help repossessions. In re Walker v. Walthall. (2) Debtor verbally refused to allow repossession. Repossessors returned month later, and son told them they shouldnt take collateral, but did nothing to stop them because he was afraid of being beaten. Debtor did enough to protest so that repossession constituted breach of peace. Morris v. First Natl Bank and Trust. (3) Repossessors cut chain to lock fence and repossessed bulldozer leaving all other equipment unsecured and unprotected. Cutting chain constituted b.o.p. Laurel Coal v. Walter Heller and Co.

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iv) Examples of cases holding no breach of peace: (1) Repossessor followed debtor to daughters house and took car at 2:00 AM frightening (2)debtor and daughter. Stealthy manner calculated to avoid breach of the peace. Wallace v. Chrysler. Wrecker used to repossess car in the middle of the night. Debtor hollered at them and they stopped. They took her personal items from the car and gave them to her. She did nothing else to stop the repossession. No breach of peace. Williams v. Ford Motor Credit. Debtor had threatened use of weapon to keep repossessors from taking the car in the past. Repossessors came again at night, and retrieved vehicle while debtor slept. Although there was potential for violence there was no breach. Wade v. Ford Motor Credit. Repossessor cut lock to retrieve collateral bus from property marked no trespassing. SA permitted creditor to enter any premises without liability for trespass. No breach of peace. Wombles Charters, Inc. v. Orix Credit Alliance. Repossessor fraudulently misrepresented to equipment dealer that debtor had given permission to repossess. No breach of peace because actions did not support a potential for immediate violence. K.B. Oil v. Ford Motor Credit. Debtor admitted creditor to her office, and creditor repossessed computer collateral over debtors objections. No breach of peace because creditor did not use force or threat of force. Court said that creditor only need permission to enter premises, not permission to take collateral. Rainwater v. Rx Medical Services.

(3) (4) (5) (6)

5) Self-Help Against Accounts as Collateral a) 9-102(a)(2): AP and AR constitute accounts. Creditors use different arrangements to secure accounts: i) creditor gives debtor freedom to collect and use accounts ii) creditor allows debtor to collect accounts, but requires that a portion be applied immediately to the loan. Future advances are often allowed under this structure. iii) Creditor arranges with debtor that account debtors pay secured creditor directly. iv) Account debtors pay directly to a post office box under the control of the secured creditor: a lockbox. This avoids letting account debtors know that the accounts are used as collateral. (1) 9-607 and 9-406(a) provide self-help remedy to party holding security interest in accounts: secured creditor who knows identity of account debtors can send them written notices to pay directly to the secured creditor. (a) Marine National Bank (p54): creditor sued account debtor who had received notice to pay creditor but paid debtor instead. Account debtor was required to pay secured creditor sum that debtor owed creditor. Account debtor should have had relief from the debtor, but in this case the debtor was out of business. Account debtor was forced to pay debt twice. Problem Set 3. Problem 3.1: J lends money to N. When N does not pay, J cannot just go take the lawn furniture (if unsecured creditor). He may find himself in front of criminal trial. The picture changes if J is secured creditor. He can self-help repossess if he does not breach the peace. Looking at cases, J probably wants to sneak onto the property and take furniture. The danger of confrontation is less at night. The debtor has less possibility of doing things that would increase chance of violations. In long run, maybe interest will not be served by taking furniture. The N may play load music at night. There are often good business reasons for not pushing ahead. But its also true that lenders lose more by trying to help debtor through period of financial troubles.

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Problem 3.2: Collection department and repossession policy. What are general guidelines for repo people. A) Assume no guard and no fence. If no one will start conflict or confront repo, then do it peacefully. If there is potential for immediate violence, then dont repo. If all the people are doing is objecting, the repo people can still do it. But the threshold is objection +. You can always come back later. The case law seems to favor when the people do it at night. There is a greater possibility for violence when you are mistaken for a thief. B) Suppose there is a fence but no guard. Its probably ok. C) Site with a guard? The site is a little more secure. What if you say you have a court order but you are lying? Cases differ. What about the ethics rules about professional misconduct? A lawyer may discuss the legal consequences of proposed course of conduct. Problem 3.3: What advice can we give the debtor to prevent repossession? Article 9-609, a secured creditor may proceed without judicial process if it proceeds without a breach of the peace, taking possession, rendering equipment unusable. The debtor is always going to win if both sides play it smart. Repo usually wins only against stupid debtors. Problem 3.5: Deare has a bunch of A/R from its customers. It needs financing and uses its A/R to receive a loan from First Bank. We have two financing. Deare to Customer and Deare to First Bank (using A/R as collateral). 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, etc). Deare may cheat, so have customers send checks directly and compare against Deares deposits. Doing an audit is expensive, and each level involves an extra layer of defense. You want to make sure that if Deare defaults, the money will be in there. It is not useful to have security interest in the collateral and when you need it, the collateral has already been spent. You want a security interest to back the A/Rs. Deare would assign to bank an A/R + a security interest in the farm machinery (stock in trade of retail consumers). That is more typical. There are situations that bank finance transactions backed only by A/R, but not with farm equipment and cars. This is a much more complex transaction. We want to think about this 3 party transaction to realize that typically we have 2 loans- Bank to Dear to Customers. What is Bank security? There are two kinds: it has the stream of payments made by customer to Deare. That is the A/R. It is highly liquid and available form of return. This stream of payments accounts for the figures heavily. This is why Bank needs to know something about customers of Deare, how credit worthy they are. It is a lot easier to talk about customers if we know who they are. The stream of payments is one thing. But secondly, it wants a security interest in the underlying collateral. It is thinking about the farm equipment. Is it accurate to say that Bank has security interest in farm equipment when in the hands of the customers. If Deare is in default, but the customers of Deare are not in default of Deare, what can Bank foreclose? You cannot get at the farm equipment because the Banks interest is subject to non-payment by customers. But Deare has something of value, a security interest in the farm machinery. If Deare is in default, Bank can go against Deare, foreclose on Deare, and steps into Deares shoes, and it is the secured creditor. Between Deare and Bank, they own all the sticks making up the property interest. Problem 3.7: a) Bank has mortgage on business premises. You want to know whether they have to go through judicial foreclosure or not. If you have power of sale or transfer, those go quickly. Judicial foreclosures take time. Different foreclosure rules means different leverage for debtors/creditors. b) Loan is secured by trade fixtures and equipment. Citizens repossess the trade fixtures and equipment. c) The utility people have lots of leverage, and they can turn off the lights. With any unsecured creditors, you may need them in the future. Its expensive to foreclose; it cuts off future business. If the secured creditor has security in the collateral, they would probably hold off. You probably want to deal with the utility people first.

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Problem 3.8: what do you do by way of going ahead trying to get possession when debtor claims a defense? Dont go ahead. If you repossess and there is a defense, there is the risk of conversion. Problem 3.9: Give weekly code to start car. If not up to date, no code, and cannot drive the car. It is unclear whether this is ok. An article turned up in the newspaper and circulated among commercial law teachers. People are split. The disabling rules allow a creditor in event of default to disable equipment, a classification that does not relate to consumer goods. There is no provision that allows disabling of consumer goods. Its a question of how we will interpret the default provisions. Assignment 4: Judicial Sale and Deficiency 1) Strict Foreclosure a) Foreclosure proceeding that doesnt involve a salemost common in contract for deed, of installment land contract: court confirms that title remains w/ seller when debtor doesnt pay according to contract. Not common, and usually only for real estate of small value. Debtor can lose substantial equity in property. This has prompted policy concerns and some statutory protections. 2) Foreclosure Sale Procedure a) Statutorily defined. Generally, court must review results of sale and confirm it. After confirmation, sale proceeds are disbursed first to expenses of sale, next to creditor towards debt owed, and w/ no other liens, surplus goes to debtor. If deficiency, court enters deficiency judgment, then deficiency becomes unsecured debt.

b) Mortgage debtor has right to redeem while foreclosure is in progress by paying full amount due,including interest and attorneys fees. Common law right to redeem foreclosed at time of sale. However, most states provide statutory right to redeem collateral from buyer after sale. Debtor usually retains possession during statutory right to redeem. Statutory rights to redeem are transferable. Some courts hold that right to redeem from buyer is simply price paid at sale. Others make it price subject to liens causing sale (same price as common law redemption). c) Problems with Foreclosure Sale Procedure i) Debtor can bring suit to set aside sale for inadequate sale price, but probably wont have much success. (1) Armstrong v. Csurilla (p62) (a) Property sold and brought in significantly less than fair market value leaving debtors w/ huge deficiency. To set aside judicial sale, inadequacy of price must shock the conscience, or there must be circumstances which make it inequitable to confirm sale (court doesnt specify what these are). Because the price doesnt shock conscience and there was no impropriety in the sale itself, the sale is confirmed. (i) Various factors, including poorly advertised sales, little opportunity to inspect property or get info on it, caveat emptor, and statutory redemption period, lead to low prices from foreclosure sales. d) Advertising i) Method generally fixed by statute. (1) Wisconsin Statutes Annotated 815.13 (p66) Notice of Sale of Realty (a) Notice of sale published for 3 weeks in 3 public places in city where sale will take place and city where property is located. Additionally, notice runs in a newspaper in the county for 6 weeks.

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e) Inspections i) Debtor generally retains possession of property. In mortgage, creditor generally has right to inspect property. Every other potential purchase has no right to inspect property except from adjacent public places. (1) Homebuyer Finds Remains of Owner (enough said) f) Title and Condition i) Caveat emptor still applies. Court will not make up for bidders ignorance. (1) Marino v. United Bank of Illinois, N.A. (a) Marino asked lawyer representing bank about other liens. Lawyer said that she thought there were no other liens. Marino bought and found out that there were other liens. Caveat emptor appliedno detrimental reliance claim. g) Hostile Situation i) Debtor can make life hard on the buyer by trying to prevent third parties from obtaining information about property. Bidders need to take into account the debtors ability to delay, litigate, and potential damage property. h) The Statutory Right to Redeem i) High bidder may have to wait months or maybe years for possession. Even if they get possession, they can be ousted if right of redemption is exercised. 3) Anti-deficiency Statutes a) In some states, the court cannot grant a deficiency or has limits placed on the deficiency it can grant. Most common statute: assumes property sold for fair market value and creditor can only get deficiency above that. i) California Code of Civil Procedure 580A., B., D. (p74) Deficiency Statutes (1) Deficiency limited to amount by which debt exceeds fair market value of sale. Do deficiency where loan was for purchase of domicile. No deficiency where property is sold under power of sale clause in mortgage. 4) Credit Bidding at Judicial Sales a) Creditor can buy property for all or part of secured debt. Creditor can then resale the property for real money, and, where there are no anti-deficiency statutes, collect a deficiency judgment from the debtor. A high credit bid minimizes the chances that the debtor will exercise right of redemption. Mortgage foreclosure process becomes a two-sale process whereby buyer at first sale captures debtors equity. 5) Judicial Sale Procedure: A Functional Analysis a) Judicial sale process was intended to value property but doesnt seem to do a great job of it. However, it motivates knowledgeable debtors to liquidate property before judicial sale and to negotiate with creditors. Problem 4.1: Bank has a judicial foreclosure sale. The $40,000 mortgage exceeds $45,000 FMV of house. Under state law, there is no deficiency judgment. Half the states dont allow deficiency judgments. Credit bid if only bidder. Let higher $53,000 bidder win. As for $44,000 bidder scenario, get the place appraised. Is it worth more than that? Maybe bid up to have the other match you. Think about who the third party bidder is. Is it a bonafide bid? It may indicate that the market value is more than you thought it was. If that bid is not bonafide, you may have to do it all over again. It is not a slam-dunk answer. Commercial is going to have to response by figuring it out.

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Problem 4.2: Give advice to a defaulting debtor who owes $53,000 on mortgage, and the FMV of house is worth between $40,000 to $45,000. The secured creditor may ask for a deficiency. Her danger is that she cannot count on the bank to bid that amount. She should look out for potential bidders. She can stir things up a bit. Maybe the bidding price would put her in bankruptcy, so it does not matter. What about a $70,000 FMV? She has equity of 17 grand. Maybe it would be better to look for a bidder to give closer to $70,000; she cannot count on commercial. Maybe the bank would split the equity. Maybe she can raise money on a second mortgage. If she wants the full equity, she can try to sell the house herself. When you go to the realtor, you dont want to explain the desperate situation. If the potential buyer knows this is a distress sale, then that buyer may offer less than FMV. The mechanics of how sale is conducted becomes critical. You want the potential buyer to sign a purchaser and sale agreement before they find out about title. Assume her brother is ready to buy the house and let her live in it and its worth 40 to 45 grand. You can redeem, under a statutory right to redeem, and the redemption price is the amount of the debt plus attorneys fee, or in some jurisdictions, the reasonable value of the collateral. It is a disincentive for the bank to get the property for 30 grand, because if redemption is FMV of collateral, they have given the brother a great argument that the property is only worth 30. In all these real estate foreclosure cases, there is an incentive for the bank to bid to the outstanding amount. If they bought for 30 and go for a deficiency of 23, then she can argue its not equitable, or she files for bankruptcy, she lets brother buy it and live in it. If brother pays off mortgage, she owns it free and clear, but she may be in default with other creditors. The lesson is that there are lots of different ways to proceed, depending on the jurisdiction. Problem 4.3: You are the buyer and see a house in foreclosure. What do you want to know about the house? Is it worth my time to get interested in this house? You want the value of the house to be more than mortgage, because bank will credit bid full amount. If house is worth 70, there is a possibility here. You dont assume anything about the condition of the house. The house may have serious problems. The more the sheriff talks, the more he is exposed to liability. Problem 4.4: American Insurance Company is creditor and debtor defaulted on loan. Four wealthy people guarantee the loan. The mortgage is 20 million and FMV is 18. What to bid? In theory bid low and go after guarantors for deficiency. But this strategy invites litigation. But why arent the wealthy guarantors at the sale. The Ins Co was going to bid 500,000 in FL where there is no statutory right of redemption. What happens turns up in b and c. The mystery bidder turns up and bids 20 million. Maybe he is in there to make sure that the guarantors are off the hook. Maybe the mystery bidder is a shell corporation with no assets. Its really hard to know what to do. You can let them get it. But if there is no cash, then you have to start all over again with another sale process. The Ins company has to make a judgment about the mystery bidder in a hurry. What if there are three bidders, .5, 12, and 25 million. A statute designed to protect creditors- giving property to second highest bidder if highest bidder unable to complete sale- might be used to creditors disadvantage. If cannot recover 8 million from guarantors you can always claim conspiracy. Assignment 5: Article 9 Sale and Deficiency 9-602(10), 9-620: Cannot waive or vary requirement that collateral be offered for sale as part of personal property foreclosure. Cannot have clause that creditor will retain collateral in satisfaction of debt. 1) Strict Foreclosure Under Art. 9

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a) 9-620: debtor can consent to creditor retaining collateral for full or partial satisfaction of debtsubject to restrictions: no objection from other lien holders (a)(2), consent to strict foreclosure of consumer goods only after repossession (a), and strict foreclosure is not permitted if debtor has paid 60 percent of debt. Again, debtor can waive even this right but with a writing. (a)(4) and 9-624(b). 2) Sale Procedure Under Art. 9 a) 9-610: Creditor, not public official, conducts sale of collateral in a commercially reasonable manner (b). b) 9-611(c)(1): debtor must be given notice of sale. c) 9-623: redemption by paying full amount of debt, attorneys fees, and expenses of salebut sale forecloses right to redeem. 3) Problems with Art. 9 Sale Procedure a) Failure to Sell the Collateral i) 9-610(a): secured party may sell collateral, but doesnt have to. ii) 9-620(f): narrow exception for some consumer goods. iii) 9-626(a): if secured creditors delay is commercially unreasonable, deficiency will be limited to what exceeds a commercially reasonable sale. b) The Requirement of Notice of Sale i) 9-611: notice is required ii) 9-617: failure to give notice does not invalidate sale, but may limit deficiency. iii) Federal Deposit Insurance Corp. v. Lanier (1) Notice that bank would sell property in public or private sale within 10 days and maybe immediately was adequate for sale that didnt occur for 4 months. (2) Burden to find out about details of sale is on debtor. c) The Requirement of a Commercially Reasonable Sale i) 9-610(b): every aspect of sale must be commercially reasonable. Vague to provide incentive for secured creditor to maximize value. (1) Chavers v. Frazier (a) 9-627(a): failure to get best price does not make sale commercially unreasonable. Close factual analysis of case ensuesin this case, sale was too hasty, not adequately advertised, and price wasnt reasonable. 4) Art. 9 Sale Procedure: A Functional Analysis a) Art. 9 tries to get market price for goods, but it only does where deficiency is going to be large, and really provides incentive to get double recovery by purchasing collateral for less than its value, getting deficiency and selling collateral at market value. 5) Class notes: a) 9-626 is there to figure out the deficiency when it is not commercially reasonable. W/ a consumer, the court decides what a reasonable price would have been under common law principles. 626(b). W/ commercial property, deficiency equals difference between amount owed and greater of 1) what was realized at sale, or 2) what would have been realized at commercially reasonable sale. 9-626(a)(3). b) 9-602: cant waive notice provision. c) 9-611(d): perishable collateral exception to notice requirement.

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Problem Set 5. Problem 5.1: repossession of personal property. The balance on the loan is 10 grand. The FMV of car is 8 but it sales for 7 in a commercially reasonably sale. The deficiency is 3 grand. How much is redemption amount? 10 grand. He should redeem because its 10 grand total. To buy another comparable car, he would owe a 3 grand deficiency first and then pay 8 grand for a car = 11,000. What if a friend offers 8 grand but the bank sells it for 7 grand at a private auction where the friend cannot go? UCC 9627(b)(3): you can sale at a dealers auction. Problem 5.2: If there is a surplus, the debtor gets the remaining amount before the unsecured creditor. If there is not enough money to pay for sale expenses and secured creditor, the secured creditor will get a deficiency judgment and the debtor will bear the sale expenses. But if the debtor does not pay the deficiency judgment, the creditor bears the cost of sale. If there is a surplus, the sale takes care of it. Problem 5.3: Does East Bank have to send notice to defaulting debtors of auction, where the debtor cannot participate anyways since only dealers are invited? If security agreement has a waiver, then maybe no notice required. Under UCC 9-611(a)(2): the debtor can waive notification, if sale is under recognized market (under 9-611(d)). Dealer auction is not a recognized market under comments. But comments have not been enacted by legislature. Problem 5.4: bank repossessed hull of helicopters, finding out that debtor has taken out engine and stuff. The debt is 345,000, leaving a hull with no resale value. The debt is personally guaranteed. Can the creditor throw away the hull? 9-610(a) seems to give secured creditor a choice. A secured creditor can sell collateral in present condition or following any commercially reasonable preparation. What is commercially reasonable? We would have to decide whether its commercially reasonable to reinstall old equipment or buy new stuff. But the comment is designed to make it clear that you DONT have a right to sell it in the present condition if you can make more on it by fixing it up. What if Grizzly could have spent 245,000 to get 345,000? 9-626(a)(3): LOOK at this provision. It is probably a drafting error. There is no deficiency judgment if the creditor could have spent 245,000 to get 345,000 (commercially reasonable). Again, what if guarantors hypothetically could prove that if creditors put in 245,000, they could have sold it for 345,000? If you look 9-626(a)(3), seems to reach an absurd result for determining deficiency amount. The secured party is entitled to 0 even though it would have had to spend 245 to realize 345. 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, the creditor actually spent the 245, then that amount is real and counts as an expense under 9-623(a)(3)(A) and is added to the deficiency limit. Note: proceeds means gross sales. Problem 5.5: The owner of a business wants to retire and sells store to a new party. The new party put down 50 grand and signed a promissory note for 277,000. The new party cannot run store. The old owner takes the store back and sent defaulting buyer a bill for 131 grand, which was the excess it owed after crediting him for the value of the store. 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 creditors deficiency is limited (reasonable sale provisions). Secured creditor says he is entitled to full amount of debt less value of what it was when took it back. The debtor may argue that 9-626 does not apply because there was no defective sale. The creditor just kept the property. Look to 9-617: good faith transfers.

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Chapter 2. Creditors Remedies in Bankruptcy Assignment 6: Bankruptcy and the Automatic Stay 1) The Federal Bankruptcy System a) Compared to state collection systems that can take a long time, bankruptcy system provides quick, efficient resolution of debtors financial problems (anyone notice a bias here?). Bankruptcy offers permanent discharge of debt and/or extension and debt adjustment and creditors collect at least as much as they would w/ an uncooperative debtor. Bankruptcy supersedes state collection law (supremacy doctrine). Lending is structured in the shadow of bankruptcy. 2) Filing a Bankruptcy Case a) Bankruptcy chapters generally: Chapter 7 (liquidation); Chapter 11 (reorganization for businesses); Chapter 12 (reorganization for family farms); Chapter 13 (reorganization for individuals) i) 362 Automatic Stay against all collection activities at filing. ii) 541(a) Bankruptcy estate (all property of the debtor) created at filing. iii) Under Chapter 7, trustee administers estate. Under Chapters 11, 12, and 13, debtors remain in control of estate and administer according to bankruptcy law (in 12 and 13, trustee is appointed to assistin 11, DIP: debtor in possession). iv) 552(b) Chapter 7 debtor keeps property exempt under state law (552(d) lists federal bankruptcy exemptions that are an option for debtor). v) 704 debtors assets are liquidated and distributed pro rata to general creditors. If debtor is an individual, all remaining debts are discharged. vi) 727(a)(1) If debtor is a corporation, then after discharge, corporate shell remains w/ no assets but still owing all debts. vii) Under Chapters 11 and 13 debtor must promise creditors at least as much as they would receive under chapter 7. They then restructure payment plans according to various code sections and adjust debt. 3) Stopping Creditors Collection Activities a) General creditors have very few specific rights once debtor enters bankruptcythe process is streamlined, they participate collectively w/ other unsecureds and receive pro rata. Any violation of stay is void or voidable, and the violator may be liable for damages. 362(h). The stay freezes the relative rights of the creditors at the moment of the bankruptcy filing. The stay applies to all entities and any act to collect prepetition debt. 362(a). The stay does not halt criminal proceedings against debtor. 362(b)(1). Unsecured creditors generally cannot lift the stay. 362(c). b) Lifting the Automatic Stay i) Secured creditors have a right to get paid at least the value of the collateral. They can participate individually in bankruptcy case. ii) 362(d) grounds for lifting the stay: adequate protection (cushion of equity alone can provide adequate protection) or if collateral 1) has no equity for unsecureds, and 2) is not necessary for reorganization (these two reasons referred to as bankruptcy purposes). These are factual questions for the bankruptcy court. (1) In re Craddock-Terry Shoe Corp. (p105) (a) Customer lists necessary for effective reorganization, therefore automatic stay will not be lifted for that reason. They were concerned about adequate protection of lists,

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so court order security interest in all other assets to protect value of lists (notice what this does to all other unsecureds that were looking to other assets for some payment its now tied up in SA w/ secured creditor). c) Strategic Uses of Stay Litigation i) Debtor and creditor end up negotiating solutions in the face of automatic stay. Problem Set 6. Problem 6.1: CEO says a bunch of their clients are in bankruptcy. She wants to do serious collection efforts. What do you say? Under 363a6: when under stay, cannot act to collect, assess, or recover. If do it, then may get fined or be held in contempt. Dont send notices. Problem 6.2: Kansas savings trying to collect from defaulting debtor secured by equipment. The debtor filed bankruptcy. You have a judgment. You cannot go after debtor once in bankruptcy. But can the sheriff? No, the only applicable provision for government agency is under 362b4 and that provision applies to things like environmental safety. Problem 6.3: The bank wants to foreclose after restaurant goes into bankruptcy. You cannot foreclose under 362a3 because you cannot take possession. But you can ask the court o lift the stay if debtor has no equity and the property is not necessary to an effective reorganization (363d2). Problem 6.4: the bank wants to foreclose on a chapter 11 restaurant owing 210 grand. But the restaurant is worth about 600 grand. There is still adequate protection because there is a 390 grand cushion. Also, the property is necessary for effective reorganization, so the court probably wont lift the stay. Problem 6.5: If the boat is destroyed by a storm, there would be total loss for the bank. So the equity cushion may not be meaningful. Problem 6.6: you are helping out a debtor food processor. The company files for chapter 11. a) The first irate creditor calls and says he wants his loan amount of 126 grand. Problem unsecured creditor. So he is SOL, and has to wait along with the rest of the unsecured creditors. b) The next creditor has a secured interest in equipment. However, the defaulting amount of 50 grand is less than the value of the equipment (40 grand). They are not going to win under 363d(2) because property is crucial to reorganization. But under 363d(1), there is lack of adequate protection. The debt is 50 but the secured collateral is worth only 40 grand. Most courts say you dont get additional adequate protection from the date the debtor filed bankruptcy protection. You only get adequate protection from the time you took efforts to protect yourself, such as filing relief from stay. Assignment 7: The Treatment of Secured Creditors in Bankruptcy 1) The Vocabulary of Bankruptcy Claims a) Debt: sum of money owing. b) Discharge: debt remains, but creditor enjoined from attempting to collect c) Nonrecourse: only collect value of sale of collateralno deficiency d) Security Interest (Art. 9): special collection rights of personal property e) Lien: special collection rights of unsecured that has levied against property f) Mortgage: credit consensually secured by an interest in real estate g) Deed of trust: different form than mortgage, but much the same effect

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h) Security Interest (bankr and IRS): Art. 9 SIs, mortgages, and deeds of trust i) Allowed claims (or claims): governed by 502(b)(lists claims not allowed)j) *Claims are not equal to debt owed in bankrsee p116 2) The Claims Process a) 502:amounts debtor owed each creditor under state law at time of filing b) 501: proof of claim describes debt and states that it is outstanding and if no one objects, then it is allowed under 502. i) Under chapter 11, debtor files list of creditors and what is owedcreditor doesnt have to file anything unless something is incorrect. c) 502(b)(1): claims against estate are accelerated. d) 502(c): disputed claims can be estimated if they threaten to delay process e) 558: bankr estate has defenses available to debtor had outside bankr. f) 507(a): some groups (e.g. tax authorities and employees) get priority over other unsecureds 3) Calculating the Amount of an Unsecured Claim a) 502(b): unsecured claim is amount owed under nonbankruptcy law at filing, plus legal fees and other fees included in contract. Unsecureds do not get interest (no unmatured interest 502(b) (2)). b) Payments on Unsecured Claims i) Empirical studies show that the vast majority of unsecureds dont get anything under bankruptcy (no assets left to be distributed). 4) Calculating the Amount of a Secured Claim a) 506(a): secured claim only to the extent of the value of the collateral; the rest is unsecured. Secured creditors total claim is calculated the same as unsecureds. 506(b) governs payment of postpetition interest and fees (only when costs are reasonable, provided for in the agreement, and when claim is oversecured ). 5) Selling the Collateral a) Trustee sells in the manner that he thinks will bring the greatest value to the estate. 541(a): trustee can only sell debtors equity in secured collateral. Sale terminates automatic stay for collateral 362(c)(1). 554: trustee can abandon property (terminates automatic stay). 363(f): trustee can sell collateral free and clear of liens in certain circumstances (see assignment 27). 6) Who Pays the Expenses of Sale by the Trustee? a) If trustees sale benefits creditor, then expenses of sale come out of purchase price. Benefit to creditor generally only happens when creditor is unsecuredif creditor is oversecured, they dont benefit particularly from having collateral leave the estate. 7) Chapters 11 and 13 Reorganizations a) 1141(d)(1)(A): confirmation of chapter 11 plan discharges old secured debts and payment schedules and substitutes new ones. b) 1129(b)(2)(A)(i)(I): plan must specify that creditor retains lien in bankruptcy c) Cramdown: confirmation of plan when creditor has not agreed. d) These provisions encourage negotiation b/t creditor and trustee. e) Valuing Future Payments i) Payments must have value, not just amount (time value of money).

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(1) In re E.I. Parks No. 1 Ltd. Partnership (a) Court agreed w/ debtors calculation of interest ratenot coerced loan rate, but treasury bond rate plus a little bit for risk. Problem Set 7. Problem 7.1: The creditor claim would be limited to 30 grand plus interest until the debtor filed bankruptcy. The total before petition is 32,700. After the petition is filed, under 502b2, it says you cannot get unmatured interest. Attorney fees can only be claimed if agreed upon before hand. Problem 7.2: Every unsecured creditor gets 5%, and our client get around 1600 and writes off the excess of 30,000, more than their original loan. That is what happens to unsecured creditors. Our client was probably lucky to get anything with 59,000 kicking around there. There is lots of temptation to jack up the attorney fees. Nobody will have a big enough stake to make a claim. Problem 7.3: Our client CI is a secured creditor, owed 340,000 plus 6 months of interest at 12%, secured by equipment worth 400,000. The debtor filed Chapter 11. 6 months interest is 20,400. b) If plan was confirmed today, you can add an additional 12%. The debtor would have to propose payments with a value of 371,212. This figure is a present value figure, so the plan would probably not involve the payout of 371,212 today. The debtor would probably propose a payout structure of more over 5 years. You do post filing interest on the 360,400 (the claim at the filing date). c) If the reorganization plan is not confirmed for another year, then what? You can keep piling on the interest of the year, but only up to the amount of the secured collateral, of 400,000. If the contract provided for collection expenses, and had prefiling collection expenses, that lowers your cushion even more. After your secured claim is capped at 400,000, you may end up with an unsecured claim as well. But the interest does not go past the 400,000 mark. After that, the debt goes up, but the claim is not allowed. As a secured creditor you want to push for approval of the plan. Problem 7.4: The secured claim is capped at 325,000. The remaining amount is unsecured. You dont get post petition interest on any claim because the collateral cannot handle it. The creditor becomes an unsecured creditor after that amount and cannot charge unmatured interest. The creditor could only get post petition interest if the collateral exceeded the debt. Since it does not, the creditor cannot charge post petition interest because it acts as an unsecured creditor. Problem 7.5: Her company is an unsecured creditor for 340,000 + 20,400 interest = 360,240. The scheme of payment under the bankruptcy code has some unsecured creditors getting payment before others. b) 507 priorities. These are all priorities in the group of unsecured creditors. Secured creditors get paid first up to the value of their collateral in the estate. Problem 7.6: You are appointed to act as TIB in chapter 7. Perez summer house is in estate. The house is encumbered by mortgage to first capital. The mortgage is 85,000, which includes interest accrued to date at the contract rate of 10% per annum. If sold after 6 months, the house will produce 100,000 6,000 (Real Estate Commission) 85,000 (Mortgage) 1,000 (interest for 6 months on mortgage i.e. 4,250) = 3,750. If the house is sold a year later, another 4,250 of mortgage interest is added because the bank has a secured interest in that collateral. Sometime between 6 months and one year, the trustee may want to look out for unsecured creditors, and abandon it. This way, the bank could get the mortgage on the house. It allows the bank to go ahead with its foreclosure procedure. Problem 7.7: the secured creditor gets its money and the unsecured get the rest pro rata. For the coin collection, the secured creditor gets the 26,00, but the rest is unsecured and they all get it pro rata.

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Chapter 3: Creation of Security Interests Assignment 8: Formalities for Attachment 1) A Prototypical Secured Transaction a) Creditor lends money or sells property and takes an interest in property. i) Fishermans Pier: A Prototypical Secured Transaction (1) A cute story about Pablo and his restaurant. Important: financing statement is not necessary for security interest to be enforceable against Pablo, but it is necessary for priority over other secured creditors.

2) Formalities for Article 9 Security Interests a) 9-203(a) and (b): attachment and enforceability of security interest happens when 1) either collateral in possession of secured creditor, or security agreement with description of collateral; 2) value given; 3) debtor has rights in collateral. b) Possession or Authenticated Security Agreement i) Security agreement w/out writing if possession (think pawnshop). Field warehousing allows creditors to maintain possession while allowing debtors to use it. Prototypical security agreement is based on a writing that contains description of collateral, provisions defining default, rights of creditor on default, obligations of debtorwhen debtor signs, 9-203(b)(3) (A) requirement of authentication is met. Also provisions for electronic security agreements 9-203(b)(3) (1) In re Ace Lumber Supply, Inc. (a) Composite documents rule where various documents can be read together to create security agreement. In this case, however, signed financing statement and unsigned notes that security interest was intended was not enough to be authenticated agreement, even when both parties agreed that they had intended to create a security interest. (b) Other courts have been more liberal w/ this (p145). (c) Reasons for the stringent requirement: (i) preventing fraud (ii) minimizing litigation (iii) cautioning debtors (iv) channeling transactions (v) discouraging secured credit (d) Compare w/ real property doctrine of equitable mortgages (basically unwritten mortgages); impliedly repudiated in 9-203(b)(3). (e) 9-203(b)(3)(A): deals w/ idea of fill-in-the-blank-later agreements c) Value Has Been Given i) 1-201(44): value defined so broadly that requirement is virtually always met. Assumed that creditor has to be the one to give value. Value under Art. 9 includes all contractual notions of consideration and, in addition, past consideration (allows change from unsecured to secured) d) The Debtor Has Rights in the Collateral i) 9-203(b)(2): you can only grant a security interest in your property. If you have a limited interest in property, security interest only attaches to limited interest (nemo dat non habet).

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3) Formalities for Real Estate Mortgages a) Subject to peculiarities of the state. Generally more formalities than Art. 9. i) Ohio Revised Code Ann. (1) Mortgage signed in presence of witnesses and notarized and acknowledged judge or clerk or other public official. (2) Real estate is known for obsessive adherence to details of conveyances, although every once in a while a judge will do something equitable (e.g. oral mortgage enforced because of partial performance). 4) Class notes: Under composite document rule intent is necessary, but not sufficient. This moves away from contract lawcontract exists independent of writing. Problem Set 8. Problem 8.1: One example, Promissory note for 50 grand that was signed by debtor, reciting that secured by collateral described in security agreement bearing same date. There is no description of the collateral. The third example, a lawyer cannot sign for debtor. 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? 9-102(a) (7). There may be something in there that will take you out of the composite document agreement. The rule says that debtor must authenticate the agreement (who cares if security did not sign). Problem 8.2: Was there a security agreement when the financing statement was filed in the Fishermans 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. But the date of the financial statement is the date when notice was given to third parties. Also, there were some famous cases where there was a closing and the debtor rushed in to file, and in between that time, another person rushed in and got priority. The value is given with the first check or 38,000 not the promissory note. The bill of sale is the time in which the debtor had rights in collateral. Problem 8.3: You cannot have a security interest without a description of the collateral. 9-203(a). The description is later mailed and stapled to security agreement. Is this sufficient? 2 cases say yes and 2 cases say no (page 148). If Pablo is in bankruptcy then what? The bankruptcy court says you cannot create security agreement while in stay. 363a4. Problem 8.4: After debtor goes into bankruptcy, you forgot to attach the description to the blank spot. The client sent it to you and you stuck it in your desk but forgot to staple it together. You cannot prove it after stay. What about the composite document doctrine? Its not signed by debtor but in some of these composite document doctrine the debtor does not sign everything. The composite document doctrine makes reference to each document internally. If we read the documents, they should refer to each other. If you know that the client will commit perjury, can you still withdraw without telling trustee? Client is willing to fix mistake and then lawyer will turn you in? Problem 8.5: Do you turn your ex client into the court? This is confidential information. Mr Meastre is not a present client; he is a former client. You need to keep confidences of former clients. What about 3.3? Maybe it wont be assisting fraud to keep silent, especially considering that there is an argument that the composite document rule covers this whole thing and it meets 9. MRPR: a lawyer is required to keep confidences of a former client. Does 3.3a2 required you to turn in a prior client (it clearly requires you to turn in a present client). Assisting does not mean aiding and abetting in the criminal law sense.

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Assignment 9: What Collateral and Obligations Are Covered? 1) Interpreting Security Agreements 2) Debtor Against Creditor a) 9-102(a)(73): security interest is contract between creditor and debtor so general contract interpretation rules apply. See 9-201, 1-203, 1-205. 3) Creditor Against Third Party a) 9-201(a): contract between two parties binds third party as well. 4) Interpreting Descriptions of Collateral a) Court usually uses Art. 9 definitions of collateral when parties use them in security agreements. (e.g. SI in accounts may have been intended to cover bank accounts, but bank accounts are expressly excluded from accounts under 9-102(a)(2)). 5) Sufficiency of Description: Article 9 Security Agreements a) Description is primarily to enable interested parties to identify collateral. i) In re Shirel (1) Merchandise did not sufficiently describe an interest in a fridge. (2) 9-108(c): all debtors assets or equivalent does not sufficiently describe collateral. However, all inventory, equipment, and accounts, is ok. 6) Describing After-Acquired Property a) 9-204(a) allows security interest in after-acquired property (although descriptions can use other words and sometimes even be simply implied in description and be enforceable). i) Stoumbos v. Kilimnik (1) Description of equipment does not imply after-acquired property, although inventory does. (a) Use of after-acquired is to allow security interest to float on collateral that constantly changes. Collateral is often the category rather than the individual items contained in it. After-acquired clauses become ineffective after filing bankruptcy 552(a). 7) Sufficiency of Description: Real Estate Mortgages a) Similar to Art. 9 in purpose (identify collateral), although will often use references to maps or public records, and parole evidence is also often used. Not much use for after-acquired property clauses, although they are allowed. Mortgage typically applies to all current and future fixtures. 8) What Obligations Are Secured? a) 9-204(c): allows for security agreement in future advances. i) Security agreements can include dragnet clauses where every obligation of any kind that comes into existence in the future is secured, although some states disfavor them and will require strict proof that later advance was one that parties contemplated when they made the contract. ii) Security agreements also generally include nonadvance provisions where attorneys fees and collection expenses are included in total debt. 9) Class notes:

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a) On an ambiguous security agreement, 2nd lender wont loan unless they are prepared to be secondin line.

b) 9-108(b): categories are acceptableuse to get all debtors propertyProblem Set 9. Problem 9.1: The farmer gives security interest in crops growing on farm in Osprey, County, about 14 miles from Tilanook and most of their farm equipment. With crops growing on land, you have to describe the land too. The land description seems ok. The farmers want to borrow more money from another lender but that lender wont go because the crops are already encumbered by first national. The security description is ambiguous. Suppose repayment is one year, then current crops may be the only crops encumbered. But if at the time the loan is taken out, and there is no current crops, maybe the security interest is for the future crops growing on the land, meaning that whatever grows on land becomes a security interest. This would apply to future crops. You want to know more details. What should the farmers do? Litigation takes time. They want a security interest in crops because crops means cash. Equipment sits in fields. What about the land itself? The land is probably encumbered already. They could always sue their lawyer. The lawyer that left them in this fix is a perfect target. With malpractice insurance, if there is a plausible claim, the lawyers will settle and not fight it. 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, meat, and milk. The wool is a crop in Websters dictionary. The security agreement says crops growing on farm. Maybe the sheep are on land and not on farm. What is the difference? An opinion letter leaves great potential for malpractice. You cannot give an opinion letter in absolute affirmation that the sheeps wool is not covered. There is a small risk but the odds are in their favor. Problem 9.3: The security agreement says all of debtors equipment, including replacement parts, additions, repairs, and accessories incorporated therein or affixed thereto. Without limitation the term equipment includes all items used in recording, etc. Does this include new equipment? Does the word additions sufficiently describe after acquired property? It might, but its not clear? This description comes out of a case, in which the court granted summary judgment against the secured creditor. It is an example of the court. You can define it at one level of generality such as equipment, etc (but cannot use all consumer goods under 9-108c), as long as it is not supergeneric under 9-108c, such as all assets or all property (to protect the mom and pop stores). If you want to include everything, you need to list the types of property, such as inventory, equipment, A/Rs, farm products, etc, and state after acquired property too (look at 9-108). You could create a standardized form and check off what does not apply. The purpose of this section was to protect the consumer. Problem 9.4: Walter should outfit their ash register with a documentation database that will give a computerized security agreement at the point of sale. Problem 9.7: client executed a security agreement in 1997 in accounts. The creditor is now claiming that accounts include the proceeds owing from the sale of real estate. Accounts did not include real estate proceeds in 97, but became accounts upon adoption of revised Article 9. Did the expansion in article 9 definitions of accounts expand the scope of First Banks security interest? If you use an Article 9 definition, you are stuck with an Article 9 category over time. You have to tell your client that he cannot ignore First Bank. There is no way to handle this problem without dealing with First Bank. ASSIGNMENT 10: PROCEEDS, PRODUCTS, AND OTHER VALUE-TRACING CONCEPTS

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1) Proceeds a) UCC 9-102(a)(64) gives broad definition i) Proceeds includes: (1) Whatever is acquired upon the sale, lease, license, or exchange or other disposition of the collateral (a) NOTE: gives rights into the entire value of the exchanged despite value that might me added from wholesale to retail. (b) McLemore, Tustee v. Mid-South Agri-Chemical Corp. Held that a cash payment for not planting crops under a federal subsidy program was proceeds acquired from the disposition of crops. (2) Whatever is collected on, or distributed on account of collateral (3) Rights arising out of collateral (a) Nobody has any idea what this means (b) Can be used to give rights in anything connected in any way with the collateral. (4) The value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defect or infringement of rights in, or damage to, the collateral (a) Insurance payable by reason of the collateral, to the extent of the value of the collateral and to the extent it is payable to the debtor (5) If proceeds become collateral 9-102(a)(12), then the proceeds of proceeds come under the security agreement. ii) Value Tracing is the policy reason behind including proceeds. iii) Rights to proceeds attaches automatically. UCC 9-203(f), 9-315(a)(2). 2) BUT the security interest in the property continues notwithstanding sale unless authorized. UCC 9315(a)(1). a) NOTE the multiplication of value for the creditor contrary to the value tracing principle. b) Authorization can be explicit or implicit. i) If the creditor allows sale and later tries to enforce the provision, courts will deem the provision waived. (but these are mostly livestock cases and sales resulting in waiver are fairly continuous.) c) Lack of authorization to sell the collateral will require a closing if the debtor wants to sell, but will require that the debtor have at the time of closing the difference between the outstanding balance on the secured debt and the sale price. d) Many states have criminal statutes against the unauthorized sale of collateral e) UCC 9-401 agreement which prohibits transfer does not prevent transfer. i) The result is that the buyer may unwittingly take subject to the prior security agreement (But see buyers in the ordinary course of business in assignment 36) 3) Limitations on the Secured Creditors Ability to Trace Collateral a) Only identifiable proceeds are covered. UCC 9-315(a)(2) i) Commingled collateral is still identifiable (1) Grain in a storage silo (2) Cash in a bank account (a) Lowest intermediate balance test amount collateral in the account will be equal to the lowest intermediate balance between the time the collateral was deposited and the time the rule is applied. (i) In re Oriental Rug Warehouse Club, Inc Proceeds from the sale of collateral (oriental rugs) went into a bank account. Funds from account were used to buy new inventory. Held that if the creditor wanted new inventory to secure the old debt he should have required a separate bank account. [or presumably put in an after acquired clause.]

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(3) UCC 9-332(b) transferee of funds from a bank account takes free and clear unless he acts in collusion to defraud the secured party. 4) Other Value-Tracing Concepts: Products, Profits, Rents, Offspring a) Profits are most often seen in the case of agriculture: wool is the product of sheep, milk the product of cows, etc. b) Note they may also be proceeds since they arise out of the collateralbut nobody is sure. c) Become more important in bankruptcy where the definition of proceeds is narrower. 5) Non-Value-Tracing Concepts: After-acquired Property, Replacements, Additions, Substitutions a) The distinction between after acquired property and proceeds can a fine one. So include both. 6) Class Notes: Unless it qualifies as a BP in OCB, the third party, although innocent, is liable for the collateral because of conversion. The tort of conversion does not require any kind of scienter. The innocent converter is liable for exercising dominion over anothers property and has to pay. a) Materials talk about two kinds of situations: value tracing kinds of ways of following collateral and non value tracing. This means that in the first category you have to be able to identify the additional, new collateral as something that the old collateral was used to generate. The old collateral was sold for money, trace those exact dollars from the old collateral into the new collateral. Its not enough to show that old collateral was disposed. The non-value tracing is not limited by value. It is best seen as after acquired property. It is new collateral not traced to old collateral. Problem Set 10. Problem 10.1: First Bank has secured interest in equipment, inventory, and accounts without mention proceeds, products, offspring, substitutions, additions, or replacements. 9-203(f) the attachment of a security interest in collateral gives the secured party the rights to proceeds provided by 9-315, and is also attachment of a security interest in a supporting obligation for the collateral. 9-315a2, a security interest attaches to any identifiable proceeds of collateral. Any manufacturer selling to retailer does not expect that security interest will follow into car itself. Of course, it wants security interest in proceeds. Problem 10.2: What of the following are collateral of FB under secured interest in equipment, inventory, and accounts? a) $ is now in Pollys bank account. Accounts is defined in 102(a)(2). The term means a right to payment of a monetary obligation, whether or not entered by performance. Account does not mean deposit account. The money in deposit account could, however, be proceeds from inventory sold or equipment sold. The most likely scenario is that they got paid on their A/R. b) The parrot that Polly took in payment of an overdue account. The text suggest that after acquired property is inferred when you take a security interest in inventory and accounts (since they are constantly changing). You should include the magic words of after acquired accounts. But in this case, the courts would probably infer intent. The parrot falls under the definition of proceeds. 9-102a64: proceeds whatever is acquired upon sale, lease, license, exchange, or other disposition of collateral, etc. c) New computer to replace the old one? She would have to use the proceeds to buy it. Replacements are not mentioned in security agreement. 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). The secured creditor is the enemy in the bankruptcy proceeding. The whole system is geared towards producing money for unsecured creditors. d) Myna Bird: is it not an account because a Myna Bird is not a monetary obligation. The bird is not part of the business because its kept as a pet its not equipment or inventory.

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Problem 10.3: What about security interest in race horse and proceeds, products, and profits. The horse wins 50 grand purse. Maybe the purse is a profit. You cannot get the purse in 102(a)(64) because you did not get the purse in disposition of the collateral. What about 102(a)(64)(c)? It could be rights arising out of collateral. Problem 10.4: J contracted to buy Toy Shop. Can inventory become A/R? Inventory could transform into an A/R, and then that money could come in and become furniture, equipment, fixtures, etc. The description in the security agreement is a starting point but that description does not limit the coverage. It gives the creditor an interest in lots of other property. If the debtor has already given a security interest, it makes the job of a lawyer very difficult. We want to get rid of the inventory loan that B took out. Once this loan is paid off, the security interest will be gone. It goes with the debt. Problem 10.5: ELP loaned Golan money to buy copier (35 grand), Golan gets loan, and signs a security agreement. The security agreement list copier with serial number. The copier gets destroyed. Under 9102(a)(64)(e), proceeds includes insurance proceeds of collateral. a) the insurance company paid proceeds to debtor. It would be a mistake for ELP to be named loss payee. There are two ways for ELP to get protected: 1) have itself named loss payee, as their interest may appear. But if ELP is named as loss payee, and the debtor in applying for insurance has misstated certain facts, the insurance company can assert that defense to the creditor. 2) The secured creditor can make sure that it is named in standard mortgagee clause, and if named, you get first dibs, and you are not subject to insurance companys defenses. It has not cost anymore to get a standard mortgagee clause. The lawyer who lets the debtor get insurance but does not get the creditor a standard mortgagee clause is an idiot. Lawyers dont do it for some reason. The debtor deposits the check in bank account. The proceeds are commingled with debtors funds. We can trace it by using lowest intermediate balance rule: up to extent of collateral value, but the lowest intermediate balance rule says you get the lowest amount in the account. The collateral is 35 grand. When Golan rights a check for 2,000, there is 38 grand left, so its enough to cover the 35,000 grand. The lowest intermediate balance says that the 2,000 that was paid out was paid from the extra 5 grand and not your 35,000 value. Those funds are paid from debtors funds first. Then G writes a check to the IRS for 32000, with 6 grand left in the account. Once the check is written, the creditor is screwed and has only 6,000 claim on that account. The 38 grand was 3 grand debtor cash and 35 grand of secured creditor collateral left. Can you get money back from the 2,000 creditor or the IRS? 9-332b, you cannot trace funds out of bank accounts to the transferee, unless the transferee acts in collusion with the debtor, violating the rights of a secured creditor. A transferee take free and clear. Problem 10.6: 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. You trace the old machine, to insurance, to deposit in account, to new machine. There is 6 grand in account that is still proceeds of old collateral. This is still proceeds. This new machine cost 32 grand. Is this new machine collateral? There are several possibilities. 1) Following Gilmore theory, you could say that the secured creditor security interest is lost. The new copier is not entirely related to secured creditors old collateral interest. Since it is not entirely proceeds, its not proceeds at all. 2) Since if you can trace most of the proceeds, say 29 grand worth, you can trace all the proceeds to the new copier. The collateral grew. But that happens in many types of situations. This is not unheard of in article 9. OR 3) You can identify the bank account. 29/32 of the copier is yours. The authors think that the last suggestion is bizarre. That there is no such proceed interest left in article 9. ASSIGNMENT 11: TRACING COLLATERAL VALUE DURING BANKRUPTCY 1) Differences in bankruptcy under Bankruptcy Code 552 a) Interest proceeds, products, profits, rents and offspring will continue.

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b) But interest in after-acquired property will notSince the value of after acquired property cannot be traced to original collateral, allowing the security interest to attach would take value that could be distributed among the unsecureds at the benefit of the secured party. ii) It would also allow debtors to covert unencumbered collateral into collateral that would attach to a security interest thereby avoiding their obligations to other creditors. 2) Value tracing in reorganization cases: Courts have used their equity discretion under Bankruptcy Code 552(b) to apportion only part of the value of products to the creditor to allow for reorganization. a) Delbridge lender is entitled to the same percentage of the proceeds that his capital contribution represents to total inputs in production. (See formula on page 188) b) Hotel Sierra Vista (In the case of hotels) lender is entitled to the portion of the room rates that are attributable as rents from room occupancy, but not those attributable to services such as check-in, check-out, room cleaning, bell-hop, telephone, ice making, etc. 3) Are all proceeds under the definition in article 9 proceeds in bankruptcy? a) 5th and 9th circuits have said yes b) 11th Circuit says no because that would give state law makers the ability to define terms in the federal bankruptcy statute i) If this rule prevails, the definition is probably that under article 9 at the time the bankruptcy code was adopted: (1) Proceeds includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds. Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than a party to the security agreement. 4) 4 interpretations of proceeds under article 9 are possible: a) new article 9, b) 1978 article 9, c) Delbridge and d) Hotel Sierra Vista 5) Cash Collateral in Bankruptcy a) Review Adequate Protection b) Because cash collateral is liquid, Bank. Code 363(c)(2) requires notice to a secured creditor and the opportunity for a hearing before a trustee or a DIP may use cash collateral. i) Must arrange adequate protection ii) Immediate nature of the need to use cash collateral means such hearing happen over the phone at uncivilized hours. Problem Set 11. Problem 11.1: What about the racehorse example, winning a 50 grand purse, where the security agreement said proceeds and profits? The debtor filed bankruptcy. The horse won the purse. Does filing petition change situation? Its either proceeds or its not. If that security interest is good, and gets resolved in favor of secured creditor, one looks at bankruptcy act 552, and the dollar bills are proceeds of track promise, then the situation is unchanged, and the proceeds serve as collateral to secured creditor. Problem 11.2: the security interest includes all equipment, accounts, and inventory. Does the later work, creating a new account, create a security interest for First Bank? Thats an after acquired property clause, i)

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and you cannot do that in bankruptcy. The other argument is that this is just proceeds. The account arises out of her services. Suppose she uses inventory and equipment to produce this account receivable. Then you can argue that the account is a right arising out of the collateral. Proceeds include accounts received upon the disposition of the inventory. There is nothing in there that says proceeds have to come entirely from the disposition. The court probably wont buy this argument. The court is likely to say that the equipment and value of inventory used up was negligible. Somewhere half way in between where some inventory was used would probably go half way. It is not at all clear that a court would say it was not proceeds. The proceeds cases have been pretty generous. Problem 11.3: The copy fire problem. After fire but before insurance, Golan filed for bankruptcy. Golan got the check for 35 grand, deposited it, and then started to write checks. The thing that is different is that under automatic stay provision, there is a chapter 11 reorganization, operating under bankruptcy rules, the debtor in possession was acting in possession, and the secured creditor had as proceeds 35 grand in bank account. Under 363, the debtor before it used that money was suppose to get permission of the court and it did not do so. The debtor used the money wrongfully because of a lack of permission. The creditor may be entitled to adequate protection here. The trustee could probably void the transaction. There is an argument under 549, that the trustee could upset that transaction and forcing the third party transferee to give the money back on tendering the new copier. Problem 11.4: Security interest in Hotel Sierra Vista. What does the secured creditor get under Sierra Vista? You have to distinguish the revenues generated by room rental from services. If you do it that way, there is a loss. The cash collateral would be 0. Under Delbridge, there is no depreciation, so the cash collateral would be 0. Under 552, it applies to revenues and not net revenues, so all $510,000 from room revenues goes to cash collateral and proceeds. All authors of article 9 are trying to expand definition of proceeds. If you think reorganization should be carried out, then read net into revenues, but if read literally then read just revenues. Problem 11.5: the secured claim is 700,000. The 10,000 rent is received after filing. Is that collateral? Yes, it is under 552b. The statute does not say anything about net rents. So it probably means gross rents. You would argue that you need adequate protection against apartment house and

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