a. Basically, you can levy on the property and get the sheriff to go collect it i. Remedy is levy under writ of execution
ii. Writ of garnishment: Requires the third party to pay the judgment creditor rather than the debtor
ii. Limitations on Compelling Payment 1. General
a. It is the judgment creditors responsibility to use discovery to locate assets, and only then will a sheriff go get it
i. If you accidentally locate a third parties property: 1. Could be liable for damages
2. Could be liable for conversion
ii. Creditors can’t conduct fishing expeditions by showing up at a debtor’s place with an officer
b. Discovery
i. Must find the debtor and have them sit through examination 1. If debtor lies: perjury
ii. May not keep assets in predictable forms
iii. Sale to bonafide purchasers exempt the property iv. Can only enforce in the state the person is in
c. Debtors can preference one debtor over another as long as the payment to that debtor is fraudulent
2. Exemption Statutes
a. Prevetn sheriff from seizing certain property under a writ of execution – this property is exempt
i. A creditor can not seize: 1. Provisions for burial
2. Business and Farm Property, not to exceed $7500 in value 3. Consumer Goods, not to exceed $5000 in aggregate value 4. Motor Vehicles, not to exceed $1200 in aggregate value 5. 75% of debtor’s income in a one week pay period 6. Depositary accounts in the aggregate value of $1000 ii. Homestead Exemption
1. Home is exempt up to $40g, except certain liens 2. Home is building and land
c. Federal law exempts a minimum of 75% of debtors earnings from personal services
i. Some states exempt all earnings (Texas, Pennsylvania) iii. Is the Law Serious About Collecting Unsecured Debts?
1. Legal Mechanisms:
a. Courts can order those subject to their jurisdiction to meet their legal obligations and imprison them if they refuse to comply
i. Do include obligations regarding: 1. Alimony or Child Support
2. Respecting the property of others by not trespassing or stealing
3. Performing under a contract to sell real property ii. Don’t include obligations regarding
1. Personal Injuries
2. The Wages of working people 3. Breaches of most kind of contracts
XIII. Security and Foreclosure a. The Nature of Security
i. The more effective collection right is known as a lien
1. “A charge against or an interest in property to secure payment of a debt or performance of an obligation.” BC § 101
2. A relationship between particular property and a particular debt or obligation 3. The general nature of the relationship is that ifthe debt is not paid when due, the
creditor can compel the application of the value of the collateral to payment of the debt
a. This is foreclosure
ii. There are two types of non-consensual liens:
1. liens obtained by statute, such as mechanic’s liens (statutory liens)
2. liens obtained by unsecured creditors through judicicial processs (judicial liens) iii. The security interest has effect only in the event of a debtor’s default
iv. Unsecured creditor’s get only what is left after provisions have been made for secured creditors
v. Why be an unsecured creditor
1. Can charge higher interest rates
2. Thrown into it without the opportunity to negotiate
3. Some agree to a contract that leaves them unsecured w/o realizing it vi. Story of the History of Security
1. Parties who wish to do so can easily construct the security relationship using the everyday conventions of sale and option to purchase
2. The story shows that in the hands of clever parties, or their clever lawyers, existing legal forms can be employed in ways unanticipated by the lawmakers 3. Third, in determining which transactions are in the nature of security and must be
foreclosed, one can’t rely on the documents.
a. A transaction is in the nature of security if the intent is to provide one party with an interest in the property of another, which interest is
contingent upon the non-payment of a debt. It is the substance of what is going on that matters, not the form.
i. Basile v. Erhal Holding Company: “The Supreme Court erred in declaring that the P waived her right of redemption in the demised premises. A deed conveying real property, although absolute on its face, will be considered a mortgage when the instrument is executed as security for debt.”
ii. The “intended as security” doctrine applies to personal property transactions as well as those involving real property. 9-109(a)(1)
1. Form does not matter b. Foreclosure Procedures
i. General
1. The procedure for real estate foreclosure differ widely from state to state
2. Article 9 provides a uniform procedure for personal property foreclosure that can be very quick and easy, but it also permits secured parties to use judicial
foreclosure methods of they prefer ii. Judicial Foreclosure
1. A foreclosure process is judicial if it is accomplished by the entry of a court order. a. In most states, a creditor holding a mortgage or security interest typically:
i. Files a civil action against the debtor
ii. In complaint, debtor details the terms of the loan and the nature of default, and requests that the equity of redemption be “foreclosed” iii. The complaint is served on the debtor and any subordinate lien-
holder, who then have a period of time in which to raise defenses iv. Only after the P has established that it is entitled to foreclose will
the court enter a final judgment of foreclosure b. Foreclosure sale:
i. Usually by statute (conducted by sheriff or county clerk) 1. Usually a particular time of day in a particular place 2. Advertised (1-6 weeks in advance)
3. Upon receipt of money, sheriff certifies a person to be the highest bidder
4. Foreclosure sale must be confirmed by the court c. Deficiency:
i. If the amount realized from the sale is less than the amount owed the foreclosing creditor, the foreclosing creditor can request a judgment for the deficiency
ii. In many jurisdictions, anti-deficiency laws prohibit the granting of deficiency judgments in particular kinds of cases or give the court discretion to deny them
d. Possession after sale:
i. Debtor usually remains on premises up to sale.
ii. If the debtor won’t surrender the premises, the purchaser is entitled to a writ of assistance, or a writ of possession, which will direct the sheriff to remove the debtor fro mthe premises and put the
purchaser in possession. 2. Wisconsin Statute, p. 724
a. Foreclosure: you have to wait 12 months to put judgment on any house that is foreclosed and owner occupied
b. Foreclosure w/o Deficiency: Plaintiff has the right to waive a deficiency judgment and consent that the mortgager can stay on the property, unless he or she abandons it, and remain entitled to all rents, etc. from the property until the confirmation of the sale by the court.
3. Cooperation from the debtor:
a. If the debtor cooperates, and there are no other liens or interest in the collateral, the debtor can simply transfer the property to the creditor by means of a deed in lieu of foreclosure.
b. Sometimes creditors do this by saying its better to lose the house now than lose it later and be liable for a deficiency
iii. Power of Sale Foreclosure 1. General
a. This is in about 25 states
c. The security agreement might be in the form of a deed of trust
i. The deed of trust states that the collateral will be held in trust by the creditor or a third party such as a bank or title company. The borrower agrees that in the event of default, the trustee can sell the property and pay the loan from the proceeds of the sale.
2. Foreclosure can be accomplished w/o a lawsuit (E.g. California):
a. California: Upon default under a mortgage or deed of trust containing a power of sale, the creditor can record in the public records a notice setting forth the nature of the debtor’s default and the creditor’s election to sell the property. If the debtor doesn’t cure the default w/in 90 days, the creditor can set a time and place for sale, advertise it for 20 days, and then sell the property at an auction
b. Still, if debtor won’t leave, you’d have to sue for ejectment, unlawful detainer, or eviction.
i. If wrongful to foreclose, the debtor can bring a tort action for wrongful sale
c. UCC Foreclosure by Sale i. Personal Property
1. UCC Art 9 governs foreclosure for security interest in personal property. 2. After default, the secured party may sell, lease, license, or otherwise dispose of
any or all of the collateral. § 9-610
3. That sale or disposition itself forecloses the debtor’s right to redeem the property. § 9-623
4. It extinguishes the creditor’s security interes in the collateral and transfers to the purchaser all of the debtor’s rights in the collateral. § 9-617(a)
5. Alternatively, if the creditor so chooses, it may foreclose by any available judicial procedure. § 9-601(a)
XIV. The importance of possession pending foreclosure a. General
i. Why the secured creditor wants it
1. A debter may have little incentive to preserve and maintain the property
2. The use of the collateral between the time the right to foreclose accrues and the time it becomes final may have substantial economic value.
3. If the debtor is in possession of the property in the period leading up to the sale, it may be difficult or impossible for prospective purchasers to evaluate the property, thereby depressing the resale price
ii. Why the debtor wants it
1. Needs a place to live, sentimentality, functionality, etc.
iii. The creditor who can make a credible threat to dispossess the debtor has extraordinary leverage over the debtor
1. Interest, etc.
iv. Many security Agreements provide that the creditor has the right to possession
immediately upon default, but such a provision is only the starting point of legal analysis b. The Debtor’s right to possession during foreclosure
i. General
1. Only the purchaser at the foreclosure sale is entitled to dispossess the mortgagee 2. By receiving a writ of assistance, or writ of possession after filing an ejection or eviction action, the purchaser can have the sheriff on the scene in 10 to 20 days. c. Appointment of a receiver
i. Interested party can apply for the appointment of a receiver
ii. Receiver is officer of the court with fiduciary obligations to all interested parties
iii. He has the right to collect the rents and use the money to maintain the building, as well as the authority to rent them out as necessary
iv. The receiver will retain any rents collected in excess of the amounts necessary to maintain the property, pending the outcome of the foreclosure action
v. Usefulness
1. Debtor and mortgager don’t get access to the cash flow
2. However, cash flow will be used to maintain the building, so it helps the mortgager
vi. Courts are reluctant to appoint receivers
1. Only in rare circumstances will the court appoint a receiver to take care of owner occupied real estate
2. a debtor can nearly always be sure he will retain possession of a family homestead 3. Receivers are appointed for owner-occupied commercial real estate more often,
but if someone’s business is being run out of it, this is unlikely vii. Check out the code provisions for appointment of receivers on 732 d. Assignment of Rents
i. If the parties contemplate that the debtor will rent the collateral to others during the term of the mortgage, the mortgage is likely to include a provision by which the debtor assigns the rents from the property to the mortgagee as additional security
ii. Because collecting the rents from mortgaged property that has been rented to third parties, like appointing a receiver, is functionally the equivalent of taking possession, some courts are reluctant to give effect to the assignment of rents clause
e. The right to possession pending foreclosure – Personal Property
i. Article 9 governs nearly all security interests in personal property ii. Article 9 favors the secured creditor in very strong terms
iii. The secured party has a right to take possession immediately upon default. § 9-609 iv. Need not involve courts or officials if they can get possession without a breach of the
peace
1. If debtor resists repossession, the secured party must obtain a writ of replevin. a. Does this by filing an action for replevin
b. Any party entitled to possession of tangible personal property is entitled to the writ
c. Writ directs sheriff to take possession of the property
2. Immediately upon filing, the creditor can move for an order granting immediate possession pending the outcome of the case.
a. Typically takes no more than 10 days to accomplish 3. Most states require P to give notice of the hearing to the debtor
4. If the secured creditor proves it is likely to prevail in the action, the creditor gets the writ of replevin
a. Usually also has to post a bond in case the debtor wins in the action 5. The debtor can post a bond to retain the property
6. Typically, a creditor can get ahold of personal property through the court in a matter of weeks
f. The Article 9 right to self-help possession
i. The right is derived from § 9-609, providing that fafter default a secured party may take possession
ii. There are collection repossession agencies, etc.
iii. § 9-609(2) gives the creditor the option to leave “equipment” temporarily in the possession of the debtor but render it un-useable
1. Take the engine out, etc. g. The Limits of self-help – breach of the peace
i. § 9-609(b)(2) prevents the creditor from doing a breach of the peace ii. For examples, look at cases on 742-744
h. Self-Help against accounts as collateral
i. This just means you collateral the persons incoming accounts 1. Examples of typical arrangements on 745
ii. In the event of default, § 9-607 and § 9-406 proved a self-help remedy to the party holding a security interest in the accounts
1. § 9-607 allows the secured creditor who knows the identity of the accocunt debtors to send them written notices to pay directly to the secured creditor
XV. Judicial Sale and Deficiency a. General
i. Keep in mind that Article 9 security interests can be foreclosed judicially. UCC § 9- 601(a)(1).
b. Strict Foreclosures
i. Strict foreclosures do not require a sale of the collateral
ii. Most common is the foreclosure of a contract for deed, or installment land contract 1. This is a contract for the sale of real property that provides for the payment of the
purchase price in installments over many years, with the deed to be delivered only after the last installment has been paid
iii. In most states, if the debtor does not pay the full purchase price in accord with the contract or at least by the end of a statutory grace period, the debtor’s interest in the property is forfeited and the the court confirms that the title remains with the seller. c. Foreclosure sale procedures
i. In most states, statutes specify
ii. The high bidder wins, must usually place a deposit, and pay the rest in a set amount of time (hours or days). If he doesn’t, he may lose his deposit and be liable for any damages in contract
iii. Sale Proceeds
1. The money goes first to reimburse the foreclosing creditor for the expenses of sale.
2. Next, the proceeds are distributed to the foreclosing creditor up to the amount of the debt secured by the foreclose lien
3. Any remaining surplus goes to the debtor
iv. While the foreclosure is in progress, the mortgage debtor has the right to redeem the property from the mortgage by paying the full amount due under the mortgage, including interest and attorney’s fees.
v. In more htna half the states, the debtor also has a statutory right to redeem the collateral from the buyer after the sale
vi. Statutory redeeming rights usually ranger from 6 months to 3 years, with one year being the most common
vii. Statutory rights of redemption are freely transferable. d. Problems with Foreclosure Sale Procedures
i. Sometimes the debtor is sufficiently outraged to bring a lawsuit asking the court to set aside the sale b/c of the inadequate sale price.
1. Armstrong v. Csurilla: Two instances when it can be set aside: (1)When the disparity is so great as to shock the court’s conscience; (2) When, in addition to the inadequate price, there are circumstances which would make it inequitable to allow the sale to stand. The judge in this case looks to a 10-40% of market value range
e. Advertising
i. Forclosure sale advertising may be fixed by statute
1. See Wisconsin Statute on 758 and Advertisement on 759 for example ii. Advertising is usually in small circulation magazine in order to keep costs down
iii. The legal notices rarely attract buyers interested in owning the property. To the extent they bring in bidders at all, the bidders are usually professional bargain hunters who plan to resell the property at a profit.
f. Inspection
i. The mortgage contract usually grants the foreclosing creditor the right to inspect the collateral in preparation for bidding at the sale. Such a provision ordinarily will be specifically enforced.
ii. Others who wish to bid at the sale can observe the property from adjacent public places, but they have no right to enter the property to inspect.
iii. Buyers who want the property for their own use are unlikely to be willing to purchase without looking inside the building
g. Title and condition
i. Buyers take subject to any defects in the title that they could have discovered through a search of the public records or an inspection of the property.
1. Marino v. United Bank of Illinois: Guy buys property, has several outstanding liens, he is screwed. “Generally the doctrine of caveat emptor applies in judicial sales, and the risk of a mistake or defect of title is to be borne by the purchaser unless there is fraud, misrepresentation, or mistake of fact.
h. Hostile Situations
i. In foreclosure sales, often there is no one with either a motive or an obligation to furnish information to prospective purchasers.
ii. In fact, a debtor’s strategy for retaining its property often calls for preventing third parties from obtaining the information they need to bid
iii. Foreclosing creditors may not be able to furnish information b/c they don’t themselves have access to it.
iv. Typically the officer has no obligation or incentive to furnish information, but the officer may have liability for furnishing incorrect information
i. Antideficiency Statutes
i. Typical problem is that very low buying price reflects all the problems with foreclosure mentioned above, and then the debtor also has to pay the deficiency costs
ii. Antideficiency statutes either prohibit the court from granting deficiency judgments in particular circumstances, give the court the discretion to refuse to grant them, or limit the amount of the deficiencies to be granted
1. See good example on p. 765
2. California Antideficiency statute on 766 j. Credit Bidding at Judicial Sales
i. The creditor will know of the sale even though it is poorly advertised, may be familiar with the title and condition of the property already, and may have an enforceable contractual right to inspect it.
ii. The creditor can bid on credit up to the amount of the debt. Such a bid is called a credit bid.
1. Typically, the creditor has no incentive not to bid this high.
a. Minimizes the likelihood that the sale will be set aside for inadequacy of price.
b. Minimizes the likelihood that debtor will exercise his right to redeem