BLTS 11e-IM-Ch21



Chapter 25Security Interestsand Creditors’ RightsIntroductionTo study this chapter, students should understand two major concepts. First, they should understand why secured transactions are necessary in business. Nearly every time a retailer makes a significant purchase, a wholesaler buys a large quantity of stock, or a manufacturer buys raw materials necessary for production, secured credit is involved.Second, students should understand what a security interest is—that it is not a retention of title to goods, but a lien on them. A secured transaction is a borrowing of money for a security interest in goods (the debtor’s property.Thus, a key to understanding a secured transaction is viewing it from a creditor’s perspective. From this perspective, basic questions are: (1) If a debtor defaults, does the creditor have an enforceable security interest in the debtor’s property? (2) If an enforceable security interest in a debtor’s property exists, will the creditor’s security interest take priority over other security interests and creditors’ claims? The answers to these questions form the basis for the law of secured transactions.This chapter also concerns various rights and remedies available through statutory and common law other than UCC Article 9 to assist debtors and creditors in resolving their disputes without a debtor’s having to resort to bankruptcy. For students, guaranty and suretyship is the most difficult subject in this chapter.Chapter OutlineI.Terminology of Secured TransactionsUCC terminology is used in all documents in secured transactions.?A secured party is a creditor who has a security interest in a debtor’s collateral.?A debtor is the party who owes payment or other performance of an obligation.?A security interest is an interest in a debtor’s collateral that secures payment or performance of an obligation.?A security agreement is an agreement that creates or provides for a security interest.?Collateral is the subject of the security agreement.?A financing statement is the instrument normally filed to give public notice to third parties of a secured party’s security interest.Enhancing Your Lecture—????Article 9 Security Interest?????Prior to the drafting of Article 9 of the Uniform Commercial Code and its adoption by the states, secured transactions were governed by a patchwork of security devices. The following summary of these devices will help you to understand the significance and landmark status of Article 9.Security Devices prior to Article 9The security devices in use prior to the adoption of Article 9 were replete with variations that, according to many, made no logical sense. These devices included chattel mortgages, trust receipts, conditional sales contracts, assignments of accounts, and pledges. Additionally, each device had its own jargon. Depending on the device used, for example, a debtor could be called variously a pledgor, a mortgagor, a conditional vendee, an assignor, or a borrower.One of the earliest security devices, historically, is the pledge. A pledge is a possessory security interest in which the secured party holds or controls possession of the property involved, called the collateral, to secure the payment or performance of the secured obligation. The pledge has existed since at least the fourth or fifth century. The pledge concept also gave rise to a device for obtaining a security interest in goods that could not be conveniently moved from the debtor’s property. In such a situation, the creditor would have an independent warehouser establish a warehouse on the debtor’s premises to obtain possession of the goods. This was called a field warehouse and dates from about 1900.Article 9 Streamlined the Law Governing Secured TransactionsThe pledge and many other types of security devices were all designed to protect creditors’ interests. Nonetheless, creditors still faced several legal problems. For example, in many states, a security interest could not be taken in inventory or stock in trade, such as cars for a car dealer or chocolate for a candy manufacturer. Sometimes, highly technical limitations were placed on the use of a particular security device. If a court determined that a particular security device was not appropriate for a given transaction, it might void the security interest.The drafters of Article 9 concluded that two elements were common to all security devices: (1) the objective of conferring on a creditor or secured party priority in certain property (the collateral) against the risk of the debtor’s nonpayment of the debt or the debtor’s insolvency or bankruptcy and (2) a means of notifying other creditors of this prior security interest. With these two elements in mind, the drafters created a new, simplified security device with a single set of terms to cover all situations. What is this security device called? It is called, simply, an Article 9 security interest.Application to Today’s WorldAlthough the law of secured transactions is still far from simple, it is now—thanks to the drafters of Article 9—far more rational and uniform than it was in the days prior to the UCC. The revised Article 9, which became totally effective in 2001, further streamlined secured transactions law by, among other things, simplifying the filing process and allowing secured transactions documents to be filed electronically with the appropriate government officials.II.Creating and Perfecting a Security InterestA.Requirements to Create a Security InterestWhen the requirements are met, a creditor’s rights attach to the collateral [UCC 9–203]. To have an enforceable security interest—?Unless a creditor has possession of the collateral, there must be a written or authenticated security agreement.?A creditor must give value to the debtor.?The debtor must have rights in the collateral.1.Written or Authenticated Security AgreementA written or authenticated security agreement must describe (reasonably identify) the collateral and be signed or authenticated by the debtor [UCC 9–102(a)(7), 9–203(1), 9–108(c)].Case Synopsis—Case 25.1: Royal Jewelers Inc. v. LightSteven Light bought a $55,050 wedding ring for his fiancé Sherri Light on credit from Royal Jewelers, Inc., a store in Fargo, North Dakota. The receipt granted Royal a security interest in the ring. Later, Royal assigned its interest to GRB Financial Corp. Steven and GRB signed a modification agreement changing the repayment terms. An attached exhibit listed the items pledged as security for the modification, including the ring. Steven did not separately sign the exhibit. After Steven’s death, Royal and GRB filed a suit in a North Dakota state court against Sherri, alleging that GRB had a valid security interest in the ring. Sherri cited UCC 9–203, under which there is an enforceable interest only if “the debtor has authenticated a security agreement that provides a description of the collateral.” Sherri argued that the modification agreement did not “properly authenticate” the description of the collateral, including the ring, because Steven did not sign the attached exhibit. The court issued a judgment in GRB’s favor. Sherri appealed.The North Dakota Supreme Court affirmed. “No authority [requires] a debtor to separately sign an exhibit attached to and referenced in a signed security agreement.”..................................................................................................................................................Notes and QuestionsCan the description of the collateral in the security agreement and the financing statement be the same? Yes. A security agreement’s description may be repeated in a financing statement. In fact, a security agreement may be filed as the financing statement (if it meets the criteria); or, when permitted, a combination security agreement–financing statement form may be filed.What is the effect of a financing statement that fails to perfect a creditor’s interest? Whether a party’s interest in a debtor’s collateral is perfected can have serious consequences for the creditor. A creditor with a perfected security interest will prevail over any unsecured creditors. If an interest is not perfected and the debtor defaults, the creditor with the unperfected interest will not have first rights to the collateral.How do the documents that comprise a security agreement function as a “Statute of Frauds”? A signedwriting serves as a “Statute of Frauds” to prevent enforcement of claims based on wholly oral representations.What sort of description in a written security agreement might be insufficient to create a security interest? Descriptions that have been held to be insufficient included an attempted security interest in “all of the debtor’s personal property now owned and hereafter acquired.” Why would this description be considered insufficient to create a security interest? It is too general to put third parties on notice of the possible claim of the creditor.Under what circumstances might a financing statement not be considered effective even if it does not identify the debtor correctly? (Hint: When will a computer’s search engine find a debtor’s name even when it is listed incorrectly?) There is a safe harbor under UCC 9–506(c).. If a search of the filing office's records under the debtor's correct name, using the filing office's standard search logic, if any, would nevertheless disclose that financing statement, the name provided does not make the financing statement seriously misleading.2.Secured Party Must Give ValueValue is any consideration that supports a simple contract [UCC 1–201(44)]. Value can be security given for a preexisting (antecedent) obligation or any binding commitment to extend credit.3.Debtor Must Have Rights in the CollateralThe debtor’s rights can represent a current or future interest. Title is not a requirement.B.Perfecting a Security InterestPerfection protects a security interest against some claims of third parties who may wish to have their debts satisfied out of the same collateral. Collateral is generally considered either tangible or intangible. The text lists the types of property that fall into each category and the methods for perfecting security interests in them.1.Perfection by FilingThe most common method of perfecting a security interest under Article 9 is to file a financing statement with the appropriate public office. This may be done electronically [UCC 9–102(a)(18)]. A financing statement must (1) be signed by the debtor, (2) contain the addresses of debtor and creditor, and (3) describe collateral by type or item [UCC 9–502, 9–504].a.The Debtor’s NameA security agreement must be filed under the name of the debtor. Slight variations are not misleading if a name can be found by the filing office’s search methods. Other potential problems with this requirement discussed in the text include—?Corporations—A corporate debtor’s name on the financing statement must match its name in the “public records” [UCC 9–503(a).?Trusts—A trust’s name must be as specified in official documents. Financing statements for other organizations—unincorporated associations, joint ventures, churches, clubs, etc.—must be filed under their organizational names.?Individuals and organizations—Financing statements for other organizations—unincorporated associations, joint ventures, churches, clubs, etc.—must be filed under the names of their organizations or the names of their members.?Trade names—A debtor’s trade name alone is not sufficient [UCC 9–503(c)].A financing statement remains effective for collateral acquired before or within four months after a name change [UCC 9–507(b), (c)]. To perfect an interest in collateral acquired later, an amendment to the financing statement must be filed.b.Description of the CollateralA security agreement’s description may be repeated in a financing statement; a security agreement may be filed as the financing statement (if it meets the criteria); or, when permitted, a combination security agreement–financing statement form may be filed.c.Where to FileDepending on the classification of the collateral, a financing statement is filed in the appropriate state office of the state in which the debtor is located, or locally with a county official when the collateral consists of timber to be cut, fixtures, or collateral to be extracted (oil, coal, gas, and minerals) [UCC 9–301(3), (4); 9–502(b)]. The location of the debtor is—?For individual debtors, the state of the debtor’s principal residence.?For an organization registered with a state, the state of the registration.?For others, the state in which the business is located or, if more than one, the state in which the chief executive office is.d.Consequences of an Improper FilingThe secured party’s claim, in bankruptcy, is reduced to that of an unsecured creditor.2.Perfection without Filinga.Perfection by PossessionPerfection by possession may be impractical because it denies a debtor the right to use, sell, or derive income from property to pay off the debt. Security interests in some types of collateral (negotiable instruments, nonnegotiable transferable instruments, stocks, bonds) can only be perfected by possession.b.Perfection by Attachment—Purchase Money Security Interest in Consumer GoodsA purchase-money security interest (PMSI) can be perfected automatically when it is created under a written security agreement.c.Automatic PerfectionA PMSI can be perfected automatically when it is created under a written security agreement. The seller does not need to do more to perfect.d.Exceptions to the Rule of Automatic PerfectionExceptions include—?Security interests that are subject to other federal or state laws.?Sales to businesses or other entities that do not qualify as consumers [UCC 9–311, 9–324].Enhancing Your Lecture—????How Do You Perfect a Security Interest???????The importance of perfecting your security interest cannot be overemphasized, particularly when the debt is large and you wish to maximize the priority of your security interest in the debtor’s collateral. Failure to perfect or to perfect properly may result in your becoming the equivalent of an unsecured creditor.Perfection by FilingThe filing of a financing statement in the appropriate location, as discussed in this chapter, is the most common method of perfection. Generally, the moment the filing takes place, your priority is established over the other creditors—as well as over some purchasers of the collateral and a subsequent trustee in bankruptcy.When you create a security agreement, describe the collateral in terms that are specific enough to put third parties on notice of your security interest in that collateral. If your description is insufficient or misleading, your security interest will not be perfected.Transactions outside Normal Business RelationshipsSometimes, credit transactions occur outside normal business relationships. You may be asked, for example, to aid an associate, a relative, or a friend. At that moment, you should reflect on your need for security for any debt that will be owed to you.If there is a need for security, then you should perfect your security interest, even if you believe this action is unnecessary because the debtor is a friend or a relative. That particular friendship or blood relationship is irrelevant should he or she ever enter into bankruptcy proceedings. Bankruptcy law does not allow friends or relatives to be paid ahead of nonfriends or nonrelatives. You will end up standing in line with the other unsecured creditors if you have not perfected your security interest in the collateral. The best way to protect your security interest by perfection is to have your friend, relative, or associate transfer to your possession the collateral—stocks, bonds, jewelry, or whatever. By possessing such collateral, you can keep the transaction private but still have security for the loan.Checklist for Perfecting Your Security Interest1.File a financing statement promptly.2.Describe the collateral sufficiently—sometimes, it is better to err by giving too much detail than by giving too little.3.Even with friends, relatives, or associates, be sure to perfect your security interest, perhaps by having the debtor transfer the collateral to your possession.3.Perfection and the Classification of CollateralThe classification (tangible or intangible) or definition of collateral can determine where or how to perfect a security interest (summarized in the text).4.Effective Time Duration of PerfectionA financing statement is effective for five years from the date of filing [UCC 9–515]. A continuation statement filed within six months before the expiration date continues the effectiveness for five more years [UCC 9–515(d), (e)].Additional Background—What Happens When Collateral Is Moved to Another State?Generally, a properly perfected security interest in collateral moved into a new state continues to be perfected in the new state for a period of up to four months from the date it was moved or for the period remaining under the perfection in the original state, whichever expires first [UCC 9–103(1)(d), 9–103(3)(e)]. (Thus, for instance, if there is a properly perfected interest in harvesting equipment that a debtor takes into a neighboring state, the interest remains effective for up to four months.) Collateral moved from county to county within a state when local filing is required may not have a four-month limitation, and the original filing may have continuous priority [see UCC 9–403(3)].As for automobiles, perfection of a security interest in a motor vehicle varies according to state law, but typically occurs only when a notation of the interest appears on the vehicle’s certificate of title. If a state does not require a certificate of title as part of its perfection process, perfection automatically ends four months after a car is moved into another state. When a security interest exists in a car in a state in which title registration is required, and the interest is noted on the certificate, perfection of the interest continues after the car is moved to another state requiring a certificate until the car is registered in the new state [UCC 9–103(2)]. Because each title state requires that the old certificate be surrendered to obtain a new one, and because a secured party typically holds the certificate, the party can usually ensure that his or her interest is noted on the new certificate.III.Scope of a Security InterestA.ProceedsA secured party has an automatically perfected interest in proceeds from the sale, exchange, or other disposal of collateral [UCC 9–315]. The interest remains perfected for twenty days after the debtor’s receipt of the proceeds. When collateral is of a type that is likely to be sold, a security agreement typically provides for extended coverage.B.After-Acquired PropertyThis is property acquired after the execution of a security agreement [UCC 9–204(a)].C.Future AdvancesFuture advances against a line of credit are subject to a security interest in the same collateral without filling out and perfecting new security agreements [UCC 9–204(c)].D.The Floating-Lien ConceptAltogether, this is described as a floating lien (a lien that changes over time).1.A Floating Lien in InventoryThe concept applies to inventory as it is bought and sold.2.A Floating Lien in a Shifting Stock of GoodsThe concept applies to goods as they are processed from raw materials to finished goods and sold, turning into accounts receivable, chattel paper, or cash.IV.Priorities, Rights, and DutiesA.General Rules of PrioritiesThe first interest to be filed or perfected has priority over later filed or perfected security interests. If no interest has been perfected, the first to attach has priority.?Perfected security interests versus unsecured creditors and unperfected interests—When a security interest is perfected, it has priority over any unperfected interests, including priority to the proceeds from a sale of collateral resulting fro a bankruptcy [UCC 9–322(a)(2)].?Conflicting perfected security interests—When two or more creditors have perfected security interests in the same collateral, the interest that was the first to perfect generally has priority [UCC 9–322(a)(1)].?Conflicting unperfected security interests—When two conflicting security interests are unperfected, the first to attach has priority [UCC 9–322(a)(3)].B.Exceptions to the General Priority RulesA perfected PMSI prevails over a previously a security interest in after-acquired collateral. Also—1.Buyers in the Ordinary Course of BusinessTakes goods free of any security interest even if the buyer knows of the interest [UCC 9–320(a)].2.Buyers of the Collateral?Buyers of farm products—A buyer from a farmer has priority over a perfected security interest unless, in some states, the secured party has filed centrally an effective financing statement or the buyer has notice before the sale.?Buyers of chattel paper (instruments, documents, and securities)—A holder in due course, a holder to whom a negotiable instrument has been negotiated, and a bona fide purchaser of securities have priority over a previously perfected security interest [UCC 9–330(d), 9–331(a)].C.Rights and Duties of Debtors and CreditorsIf a security agreement does not provide to the contrary—rmation RequestsWhen filing a financing statement, a creditor can ask for a copy [UCC 9–523(a)]. A prospective creditor can ask for information on possible perfected financing statements involving a named individual [UCC 9–523(c), (d)].2.Release, Assignment, and AmendmentA secured party can release collateral and end his or her security interest [UCC 9–512], or assign the interest to another [UCC 9–514]. Both parties must sign an amendment to a financing statement [UCC 9–512].3.Confirmation or Accounting Request by DebtorA debtor can ask about the amount of a debt as of a specific date [UCC 9–210].4.Termination Statement?When consumer goods are involved, the secured party must send to the debtor or file with the officer to whom the financing statement was given a termination statement, within one month of final payment or twenty days of a debtor’s demand, whichever is earlier [UCC 9–513].?When the collateral is not consumer goods, the creditor has twenty days to act on the debtor’s demand; otherwise, a termination statement is not necessary.V.DefaultA.What Constitutes DefaultBecause Article 9 does not define default, the parties can decide for themselves what constitutes default. Default occurs most commonly when a debtor fails to make payments or goes bankrupt.B.Basic RemediesThe creditors’ remedies are cumulative.1.Repossession of the Collateral—The Self-Help RemedyA secured party can take possession of collateral on default unless the security agreement states otherwise, as long as there is no breach of the peace. Otherwise the party must resort to judicial process [UCC 9–609]. Other state law determines what constitutes breach of the peace (generally, trespass onto real property, assault, battery, or breaking and entering).Additional Background—Breach of the PeaceGeorge Salisbury III borrowed $13,000 from Colorado Central Credit Union, giving as collateral several vehicles that he owned. Salisbury defaulted on the loan, and Colorado Central hired a repossession company to repossess the vehicles. The repossession crew towed away one of the vehicles from Salisbury’s property in Slater, Colorado, near the Wyoming border. The crew found two other vehicles on a ranch just across the border, after following a private roadway with a large “Salisbury” sign near the entrance. It was early in the morning, and although the crew could hear people stirring in a nearby building, they encountered no one while towing the vehicles away. The ranch was owned by Salisbury’s father.The father, doing business as Salisbury Livestock Company, brought an action for trespass against Colorado Central. The trial court, holding that the trespass was privileged and did not result in any breach of the peace, entered a directed verdict for Colorado Central. Salisbury Livestock appealed, contending that the trespass itself—onto land owned by a third party—constituted a breach of the peace.In Salisbury Livestock Co. v. Colorado Central Credit Union, 793 P.2d 470 (Wyo. 1990), the Supreme Court of Wyoming reversed the trial court’s decision and remanded the case for trial. The state supreme court concluded that whether Colorado Central’s entry onto Salisbury Livestock’s property was reasonable or breached the peace was a question for the jury, and therefore the trial court’s directed verdict was inappropriate.The court stated that a trespass becomes a breach of the peace if certain types of premises are invaded, or immediate violence is likely, but neither confrontation nor violence is necessary. The court noted two elements of the case that could lead jurors to conclude that the trespass was a breach of the peace—there was an entry onto the premises of a third party not privy to the loan agreement and those premises were residential—”the secluded ranchyard of an isolated ranch where the vehicles sought [were] not even visible from a public place. *??*??* [T]he location and setting *??*??* is sufficiently distinct, and the privacy expectations of rural residents sufficiently different, that a jury should weigh the reasonableness of this entry, or whether the peace may have been breached by a real possibility of imminent violence, or even by mere entry into these premises.”2.Judicial RemediesA secured party’s other basic remedies include proceeding to judgment on the underlying debt (execution and levy). This is rarely used, unless the value of the collateral is considerably below the amount of the debt and the debtor has other assets to satisfy the debt [UCC 9–601(a)].C.Disposition of CollateralAfter default and repossession, a secured party can retain the collateral or sell, lease, or otherwise dispose of it in any commercially reasonable manner [UCC 9–602, 9–603, 9–610, 9–620].1.Retention of the Collateral by the Secured PartyTo retain the collateral, the creditor must—?Notify the debtor.?Notify other secured parties (if the collateral is not consumer goods).?Wait—If the debtor or secured party objects within twenty days, the collateral must be sold.2.Consumer GoodsWhen collateral is consumer goods in which a creditor has a PMSI, and a debtor has paid 60 percent of the price or loan in a non-PMSI, a secured party must dispose of the collateral within ninety days.3.Disposition Proceduresa.Notice RequirementA secured party must notify the debtor and certain others in writing before a sale or other disposition of the collateral. Notice is not required if—?The debtor has waived the right to notice.?The goods are perishable, will decline rapidly in value, or are customarily sold on a recognized market [UCC 9–611(b), (c)].mercially Reasonable MannerGenerally, for a sale to be conducted in a commercially reasonable manner, notice of the place, time, and manner of sale is required [UCC 9–602, 9–603, 9–610, 9–613].Case Synopsis—Case 25.2: Smith v. Firstbank Corp.Bradley Smith, on his own behalf and on behalf of the John J. Smith Revocable Living Trust, borrowed funds from Firstbank Corp. secured with pledges of Sparton Corp. stock and other collateral. When the loans were not paid, Firstbank sold the stock in private sales, returned the other collateral, and remitted the excess funds collected to Smith and the trust. Alleging that the sales were not commercially reasonable because a higher price might have been obtained in a public sale, Smith and the trust filed a suit in a Michigan state court against Firstbank. The court ruled in the bank’s favor. The plaintiffs appealed.A state intermediate appellate court affirmed. “The defendant had valid reasons for choosing a private sale, and made efforts to obtain a reasonable price for the shares. In fact, the method chosen by defendant allowed plaintiffs to retain over five million dollars of collateral, as well as a net surplus on the sale of [the] stock.”..................................................................................................................................................Notes and QuestionsWhich of the two methods for proving that a sale was commercially reasonable is likely more difficult to apply? Showing conformity with the practices of “reputable dealers in the trade” conclusively establishes that a sale was commercially reasonable. For this reason, secured parties often use that method to prove their compliance with the UCC’s requirements. If this method is not used, a secured party must show that every aspect of a sale is “commercially reasonable.” This requires a secured party to establish considerably more than that a fair price for the collateral was obtained.What are the consequences of a party’s failure to establish that a sale of repossessed consumer collateral was commercially reasonable? In this case, the court ruled that a secured party’s failure to establish a commercially reasonable sale of repossessed consumer collateral barred it from recovering any deficiency. A consumer debtor should be able to ensure that a secured party followed procedures designed to yield the highest available sale price. If the secured party cannot show that it sold the collateral in a commercially reasonable manner, the debtor cannot make this determination.Should a court’s scrutiny of the price paid for collateral be different when the purchaser is the secured party or someone related to the secured party? Explain. Yes. When the party who acquires the collateral at a “commercially reasonable sale” is the secured party or someone related to the secured party (or even a secondary obligor), there may be no incentive to maximize the proceeds from the sale, as there might be if the debtor were selling the property. A low price on a sale to such a party does not necessarily constitute noncompliance with the requirements of Article 9. But, under UCC 9–615(f), the calculation of any deficiency is based not on the actual amount of the proceeds but on the amount that would have been received in a commercially reasonable sale to someone other than those parties. A low price on a sale to such a party does not necessarily constitute noncompliance with the requirements of Article 9.Why does UCC 9–627(b)(3) require that a sale be conducted in conformity with the reasonable commercial practices among dealers in the type of property that was the subject of the disposition? If this were not a requirement, some dealers in an industry might collude to set low standards for “commercially reasonable” sales. In such cases, debtors would be treated unfairly. Setting a higher bar establishes a more equitable legal standard and encourages creditors to act ethically.Suppose that Firstbank had argued that private sales generally yield higher prices, and because the stock was sold in private sales, they must have been commercially reasonable. Should the court have ruled in favor of the bank on this ground? Explain your answer. No. Even if private sales generally result in higher sales prices than other methods, this would not prove that the specific sale in this case resulted in a higher price. A sale for the highest price at a poorly publicized, inconveniently located, or quickly transacted private sale would not likely result in a reasonable price. The argument posited in this question, without more detail, would not establish commercial reasonableness.Additional Cases Addressing this Issue —Creditors’ Actions on a Debtor’s DefaultCases involving questions concerning creditors’ actions on a debtor’s default include the following.?New Holland Credit Co. v. Madison Creek LLC, 191 F.Supp.2d 695 (S.D.W.Va. 2002) (an unproved oral statement by a secured creditor’s agent not to pursue a deficiency judgment if the debtor surrendered a wheel loader that served as collateral for a loan did not waive the creditor’s right to seek the amount of a deficiency, when contract’s unambiguous language required that all modifications be in writing and signed by both parties; there was a question, however, as to whether the subsequent sale was commercially reasonable).?Johnson v. First Union National Bank, __ Ga.App. __, 567 S.E.2d 44 (2002) (the lack of a debtor’s knowledge or consent to a lender’s entrance onto the debtor’s premises to repossess property securing a loan does not constitute a breach of the peace unless abusive and insulting language that incites violence is used or there is some other violation of the public “peace, order, or decorum”).?Giles v. First Virginia Credit Services, Inc., 560 S.E.2d 557 (N.C.App. 2002) (a creditor had the right to repossess an automobile, which served as a security for payment of a loan by a debtor, even though the debtor sent a check to the creditor before the repossession, and the creditor cashed the check and credited it to the debtor’s account after the repossession, because their contract stated that the debtor would be in default if she “fail[ed] to make any payment within 10 days after its due date,” and she admitted that she was “one payment behind” when the vehicle was repossessed).4.Distribution of Proceeds from the DispositionProceeds from the sale must be applied in the following order—?Reasonable expense.?The balance of the debt.?Subordinate security interests.?Surplus to the debtor.5.Noncash ProceedsThe value of noncash proceeds received on a disposition of collateral must be applied in a commercially reasonable manner [UCC 9–608(a)(3), 9–615(c)].6.Deficiency JudgmentThe debtor is generally liable for any deficiency between the amount of the debt and whatever the secured party received on disposition of the collateral.7.Redemption RightsBefore the collateral is sold (or retained in satisfaction of the debt), a debtor or another secured party can redeem the collateral by satisfying the obligations it secures and paying the secured party’s expenses [UCC 9–623].VI.Other Laws Assisting CreditorsA.LiensA lien creditor has priority over an unperfected secured party. Mechanic’s and artisan’s liens also have priority over a perfected secured party unless a statute provides otherwise.1.Mechanic’s LiensUnder a mechanic’s lien, real property secures a debt for labor, services, or materials to improve the property.?A lien creditor can foreclose on the property and sell it to satisfy the debt.?Generally, a lienholder must file written notice of the lien within 60 to 120 days from the last date on which work was provided.2.Artisan’s LiensUnder an artisan’s lien, personal property secures a debt for labor, services, or materials to repair or improve the property.?Normally, a lienholder must have retained possession of the property and have agreed to provide services on a cash, not a credit, basis.?Notice must be given to the owner of the property before a foreclosure and sale.Additional Background—Artisan’s LienUnder an artisan’s lien, a creditor can recover payment from a debtor for labor and materials furnished in the repair of personal property. The following excerpts from Oregon Revised Statutes §§87.152, 87.172, and 87.182 provide an example of some of the details of a statutory artisan’s lien.1989 OREGON REVISED STATUTESTITLE 9. MORTGAGES AND LIENSCHAPTER 87. STATUTORY LIENSPOSSESSORY CHATTEL LIENS87.152. Possessory lien for labor or material expended on a chattel.A person who makes, alters, repairs, transports, stores, pastures, cares for, provides services for, supplies materials for or performs labor on a chattel at the request of the owner or lawful possessor of the chattel has a lien on that chattel in the possession of the person for the reasonable or agreed charges for labor, materials or services of the person, and the person may retain possession of the chattel until those charges are paid.(1975 c.648 § 3)87.172. Time period before foreclosure allowed.(1) Except as otherwise provided in this section, a person claiming a lien under ORS 87.152 to 87.162 must retain the chattel that is subject to the lien for at least 60 days after the lien attaches to the chattel before foreclosing the lien.(2) A person claiming a lien under ORS 87.152 for cost of care, materials and services bestowed on an animal must retain the animal for at least 30 days after the lien attaches to the animal before foreclosing the lien. If the animal is a dog or cat, the period shall be at least 15 days.(3) A person claiming a lien under ORS 87.152 for the cost of removing, towing or storage of a vehicle that is appraised at a value of $750 or less by a person who holds a permit issued under ORS 819.230 must retain the vehicle at least 30 days after the lien attaches to the vehicle before foreclosing the lien.(1975 c.648 § 7; 1979 c.401 § 1; 1981 c.861 § 1; 1983 c.338 § 881)87.182. Effect of prior security interest on method of foreclosure.(1) When a lien created by ORS 87.162 is subordinate to a prior duly perfected security interest in a chattel as provided in ORS 87.146, the lien created by ORS 87.162 shall be foreclosed by suit as provided in ORS chapter 88.(2) Except as provided in subsection (1) of this section, liens created by ORS 87.152 to 87.162 may be foreclosed by suit as provided in ORS chapter 88, or by sale of the chattel subject to the lien at public auction to the highest bidder for cash.(1975 c.648 § 9)3.Judicial LiensThese liens help ensure that a judgment is collectible.a.Writ of AttachmentPrejudgment attachment requires notice to the debtor and a hearing (under the Fourteenth Amendment’s due process clause). The creditor must have an enforceable right to payment, file an affidavit, and post a bond. The court issues a writ of attachment. The sheriff seizes the debtor’s property, which can be sold to satisfy the judgment.b.Writ of ExecutionIf a debtor does not or cannot pay an adverse judgment, the creditor can go back to court for a writ of execution. The sheriff seizes the debtor’s property, which can be sold to satisfy the judgment. Before the property is sold, the debtor can pay the judgment and redeem the property.Additional Background—Writ of ExecutionIf a creditor is successful in a suit against a debtor, the court awards the creditor a judgment against the debtor (usually for the amount of the debt plus interest and costs incurred in obtaining the judgment). If the debtor does not pay the judgment, the creditor can go back to court and obtain a writ of execution under which some of the debtor’s property can be seized and sold. The following excerpts from Nevada Revised Statutes §§21.010, 21.020, 21.080, and 21.110 provide an example of some of the details of a writ of execution.NEVADA REVISED STATUTESTITLE 2. CIVIL PRACTICE.CHAPTER 21. ENFORCEMENT OF JUDGMENTS.21.010. Writ of execution: Limitations of time.Except as otherwise provided in NRS 125B.050 for enforcement of a judgment for support of a child, the party in whose favor judgment is given may, at any time before the judgment expires, obtain the issuance of a writ of execution for its enforcement as prescribed in this chapter. The writ ceases to be effective when the judgment expires.(CPA 1911, § 338; RL 1912, § 5280; CL 1929, § 8836; 1979, p. 1172; 1987, ch. 808, § 32, p. 2249; 1989, ch. 282, § 2, p. 586.)21.020. Writ of execution: Issuance; contents.The writ of execution must be issued in the name of the State of Nevada, sealed with the seal of the court, and subscribed by the clerk, and must be directed to the sheriff; and must intelligibly refer to the judgment, stating the court, the county where the judgment roll is filed, the names of the parties, the judgment, and if it is for money, the amount thereof, and the amount actually due thereon; and if made payable in a specified kind of money or currency, as provided in NRS 17.120, the writ must also state the kind of money or currency in which the judgment is payable, and must require the sheriff substantially as follows:1. If it is against the property of the judgment debtor, it must require the sheriff to satisfy the judgment, with interest, out of the personal property of the debtor, and, if sufficient personal property cannot be found, then out of his real property; or if the judgment is a lien upon real property, then out of the real property belonging to him on the day when the abstract or certified copy of the judgment or decree was recorded in the office of the county recorder of the particular county to whose sheriff the writ was issued, stating the day, or out of the real property afterward acquired by him before the lien expires.2. If it is against real or personal property in the hands of the personal representatives, heirs, devisees, legatees, tenants of real property, or trustees, it must require the sheriff to satisfy the judgment, with interest, out of the property.3. If it is against the person of the judgment debtor, it must require the sheriff to arrest the debtor and commit him to the jail of the county until he pays the judgment, with interest, or it is discharged according to law.4. If it is issued on a judgment made payable in a specified kind of money or currency, as provided in NRS 17.120, the writ must also require the sheriff to satisfy it in the kind of money or currency in which the judgment is made payable, and the sheriff shall refuse payment in any other kind of money or currency; and in case of levy and sale of the property of the judgment debtor, he shall refuse payment from any purchaser at the sale in any other kind of money or currency than that specified in the writ; the sheriff collecting money or currency in the manner required by this chapter shall pay to the person entitled thereto, the same kind of money or currency received by him, and in case of neglect or refusal so to do, he is liable on his official bond to the judgment creditor in three times the amount of money so collected.5. If it is for the delivery of the possession of real or personal property, it must require the sheriff to deliver the possession of the property, particularly describing it, to the person entitled thereto, and may at the same time require the sheriff to satisfy any costs, damages, rents or profits, recovered by the same judgment out of the personal property of the party against whom it was rendered, and the value of the property for which the judgment was recovered to be specified therein; if a delivery thereof cannot be had, and if sufficient personal property cannot be found, then out of real property, as provided in subsection 1 of this section.(CPA 1911, § 339; RL 1912, § 5281; CL 1929, § 8837; 1965, p. 649; 1967, p. 949; 1985, p. 224.)21.080. Property liable to execution; property not affected by execution until levy; exemption of spendthrift trusts.1. All goods, chattels, moneys and other property, real and personal, of the judgment debtor, or any interest therein of the judgment debtor not exempt by law, and all property and rights of property seized and held under attachment in the action, shall be liable to execution. Subject to the provisions of chapter 104 of NRS, shares and interests in any corporation or company, and debts and credits and other property not capable of manual delivery, may be attached in execution in like manner as upon writs of attachments. Gold dust and bullion shall be returned by the officer as so much money collected, at its current value, without exposing the same to sale. Until a levy, property shall not be affected by the execution.2. This chapter does not authorize the seizure of, or other interference with, any money, thing in action, lands or other property held in spendthrift trust for a judgment debtor, or held in such trust for any beneficiary, pursuant to any judgment, order or process of any bankruptcy or other court directed against any such beneficiary or his trustee, where the trust has been created by, or the fund so held in trust has proceeded from, any person other than the judgment debtor or beneficiary himself.(CPA 1911, § 345; 1939, p. 60; CL 1929 (1941 Supp.), § 8843; 1965, p. 913.)21.110. Execution of writ by sheriff.The sheriff shall, in the manner provided for writs of attachments in NRS 31.060, execute the writ against the property of the judgment debtor by levying on a sufficient amount of property, if there is sufficient, collecting or selling the things in action and selling the other property, and paying to the plaintiff or his attorneys so much of the proceeds as will satisfy the judgment, or depositing the amount with the clerk of the court. Any excess in the proceeds over the judgment and the sheriff’s fees must be returned to the judgment debtor. When there is more property of the judgment debtor than is sufficient to satisfy the judgment and the sheriff’s fees within the view of the sheriff, he shall levy only on such part of the property as the judgment debtor may indicate; provided:1. That the judgment debtor may indicate at the time of the levy such part.2. That the property indicated be amply sufficient to satisfy such judgment and fees.(CPA 1911, § 347; RL 1912, § 5289; CL 1929, § 8845; 1989, ch. 208, § 3, p. 463.)B.GarnishmentGarnishment is a collection remedy directed at a debtor’s property or rights held by a third person (typically, an employer or a bank).1.ProceduresGarnishment is a state law remedy and the procedures differ from state to state. In some states, a separate order may be required for, for example, each pay period to garnish wages.2.LimitationsFederal and state laws limit the amount that can be garnished from wages. State laws often provide for larger exemptions, and state and federal statutes can be applied together to reduce the amount that may be garnished.Additional Background—Garnishment LimitsFederal law limits the amount that can be taken from a debtor’s weekly pay through garnishment. For example, under the Consumer Credit Protection Act (CCPA) of 1968, a debtor can retain either 75 percent of disposable earnings per week or a sum equivalent to thirty hours of work paid at federal-minimum wage rates, whichever is greater. The following is 15 U.S.C.A. Section 1673—that is, Section 1673 of Title 15 of the United States Code, which sets out that specific restriction within the CCPA, as it appears in United States Code Annotated.UNITED STATES CODE ANNOTATEDTITLE 15. COMMERCE AND TRADECHAPTER 41—CONSUMER CREDIT PROTECTIONSUBCHAPTER II—RESTRICTIONS ON GARNISHMENT§ 1673. Restriction on garnishment(a) Maximum allowable garnishmentExcept as provided in subsection (b) of this section and in section 1675 of this title, the maximum part of the aggregate disposable earnings of an individual for any workweek which is subjected to garnishment may not exceed(1) 25 per centum of his disposable earnings for that week, or(2) the amount by which his disposable earnings for that week exceed thirty times the Federal minimum hourly wage prescribed by section 206(a)(1) of Title 29 in effect at the time the earnings are payable,whichever is less. In the case of earnings for any pay period other than a week, the Secretary of Labor shall by regulation prescribe a multiple of the Federal minimum hourly wage equivalent in effect to that set forth in paragraph (2).(b) Exceptions(1) The restrictions of subsection (a) of this section do not apply in the case of(A) any order for the support of any person issued by a court of competent jurisdiction or in accordance with an administrative procedure, which is established by State law, which affords substantial due process, and which is subject to judicial review.(B) any order of any court of the United States having jurisdiction over cases under chapter 13 of Title 11.(C) any debt due for any State or Federal tax.(2) The maximum part of the aggregate disposable earnings of an individual for any workweek which is subject to garnishment to enforce any order for the support of any person shall not exceed—(A) where such individual is supporting his spouse or dependent child (other than a spouse or child with respect to whose support such order is used), 50 per centum of such individual’s disposable earnings for that week; and(B) where such individual is not supporting such a spouse or dependent child described in clause (A), 60 per centum of such individual’s disposable earnings for that week;except that, with respect to the disposable earnings of any individual for any workweek, the 50 per centum specified in clause (A) shall be deemed to be 55 per centum and the 60 per centum specified in clause (B) shall be deemed to be 65 per centum, if and to the extent that such earnings are subject to garnishment to enforce a support order with respect to a period which is prior to the twelve-week period which ends with the beginning of such workweek.(c) Execution or enforcement of garnishment order or process prohibitedNo court of the United States or any State, and no State (or officer or agency thereof), may make, execute, or enforce any order or process in violation of this section.(Pub.L. 90-321, Title III, § 303, May 29, 1968, 82 Stat. 163; Pub.L. 95-30, Title V, § 501(e)(1)-(3), May 23, 1977, 91 Stat. 161, 162; Pub.L. 95-598, Title III, § 312(a), Nov. 6, 1978, 92 Stat. 2676.)HISTORICAL NOTESHISTORICAL AND STATUTORY NOTESReferences in Text. Chapter 13 of Title 11, referred to in subsec. (b)(1)(B), is § 1301 et seq. of Title 11, Bankruptcy.1978 Amendment. Subsec. (b)(1)(B). Pub.L. 95-598 substituted “court of the United States having jurisdiction over cases under chapter 13 of Title 11” for “court of bankruptcy under chapter XIII of the Bankruptcy Act”.1977 Amendment. Subsec. (b). Pub.L. 95-30, § 501(e)(1), (2), designated existing provisions as par. (1) and existing pars. (1), (2), and (3) as subpars. (A), (B), and (C) thereof, substituted “for the support of any person issued by a court of competent jurisdiction or in accordance with an administrative procedure, which is established by State law, which affords substantial due process, and which is subject to judicial review” for “of any court for the support of any person” in subpar. (A) as so redesignated, and added par. (2).Subsec. (c). Pub.L. 95-30, § 501(e)(3), inserted “, and no State (or officer or agency thereof),” following “or any State”.Effective Date of 1978 Amendment. Amendment by Pub.L. 95-598 effective Oct. 1, 1979, see § 402(a) of Pub.L. 95-598, set out as an Effective Date note preceding § 101 of Title 11, Bankruptcy.Effective Date of 1977 Amendment. Section 501(e)(5) of Pub.L. 95-30 provided that: “The amendments made by this subsection [amending this section and section 1675 of this title] shall take effect on the first day of the first calendar month which begins after the date of enactment of this Act [May 23, 1977].”Effective Date. Section effective July 1, 1970, see § 504(c) of Pub.L. 90-321, set out as an Effective Date note under § 1671 of this title.Legislative History. For legislative history and purpose of Pub.L. 90-321, see 1968 U.S. Code Cong. and Adm. News, p. 1962. See, also, Pub.L. 95-30, 1977 U.S. Code Cong. and Adm. News, p. 185.C.Creditors’ Composition AgreementsA composition agreement discharges only those debts of creditors who agree.D.Suretyship and Guaranty1.SuretyA surety is primarily liable: the creditor can hold the surety responsible for payment of the debt when the debt is due, without first exhausting all remedies against the debtor. A surety agreement does not have to be in writing to be enforceable (but it usually is).2.GuarantyA guarantor is secondarily liable—the principal must first default.Case Synopsis—Case 25.3: HSBC Realty Credit Corp. (USA) v. O’NeillTo buy and develop a piece of property in Delaware, Brandywine Partners, LLC, borrowed $15.9 million from HSBC Realty Credit Corp. (USA). As part of the deal, Brian O’Neill, principal for Brandywine, signed a guaranty that designated him the “primary obligor” for $8.1 million of the loan. Brandywine defaulted, and HSBC filed a suit in a federal district court against O’Neill to recover on the guaranty. From a judgment in HSBC’s favor, O’Neill appealed.The U.S. Court of Appeals for the First Circuit affirmed. O’Neill argued that HSBC induced him to sign the guaranty by misrepresenting the value of the property. But the guaranty expressly stated that O’Neil was familiar with the value, that he was not relying on the property as an inducement to sign the guaranty, and that HSBC made no representations to induce him to sign. The guaranty also provided that HSBC could enforce its rights against the primary obligor without trying to recover on the property first...................................................................................................................................................Notes and QuestionsIn the HSBC case, the court enforced a guaranty that set out precisely the rights and obligations of the parties over one party’s claim of fraud. Does this result provide undue protection against fraud claims? No, the result in the HSBC case does not condone misrepresentation in contract negotiations or provide undue protection against fraud claims. The decision supports the principle that a court should not rewrite a fully negotiated agreement that spells out precisely the rights and obligations of two sophisticated parties. And, perhaps more importantly, it means that a knowledgeable buyer—or guarantor, like O’Neill—should not sign a contract that conflicts with his understanding of the terms.Suppose that O’Neill had alleged a history of performance with HSBC that would have made his reliance on the complained-of fraud reasonable. Could this have changed the result? In the HSBC case, the court upheld a fully negotiated and voluntarily signed guaranty agreement, determining that its provisions “put the kibosh” on the fraud claim of the “primary obligor.” But if a creditor fraudulently induces a party to act as a guarantor on a debt, the guarantor may successfully assert fraud as a defense. Thus if O’Neill had alleged a history of performance with HSBC that would have made his reliance on the complained-of fraud reasonable, and O’Neill could have proved the fraud, the result would likely have been different.Are there any circumstances in which a collateral document signed by a corporate officer to secure a corporate debt might not create personal liability? Explain. Under normal circumstances, a written collateral undertaking given to secure a corporate debt would be rendered meaningless if the primary debtor were found to be the sole party liable. If the guarantor’s signature were obtained by fraud, or if the document was not clearly a guaranty, however, a court might hold that the corporation was the sole liable party.Why would a landlord, a lender, or any creditor require a guaranty? A guaranty represents an assurance or at least a promise of payment from a third party in the event of default by a principal debtor on a debt. In the Wilson case, the principal debtor was a corporation. The guaranty was signed by the firm’s founder and president. When the corporation defaulted on its lease, the guarantor argued that he had signed the document only as a representative of the firm. But a court ruled that the guarantor was personally liable—to hold otherwise would have had the “absurd” result of making the corporation the guarantor of its own lease.Additional Cases Addressing this Issue —Suretyship and GuarantyCases involving sureties or guarantors include the following.?Mercantile Bank, N.A. v. Loy, 77 S.W.3d 93 (Mo.App. S.D. 2002) (under the express terms of the parties’ contract, the guarantors assumed primary liability for the debts of a now-bankrupt corporation, and thus, the creditor bank’s failure to perfect its security interest in the corporation’s vehicles, equipment, and other assets, did not constitute a lack of good faith and fair dealing).?Mule-Hide Products Co. v. White, 2002 UT App 1,40 P.3d 1155 (2002) (a manufacturer of construction materials was entitled to collect, for goods shipped and received, from a proprietor of a construction materials distributorship for material obtained using distributor’s purchasing order).3.Writing or Record RequiredA guaranty can cover a single transaction or a series of transactions.. The contract between guarantor and creditor must be in writing to be enforceable unless the “main purpose” exception applies.4.Actions That Release the Surety and the Guarantor?Material modification—Any material change in the contract between principal and creditor without prior consent of the surety (or guarantor) may discharge the surety, even if the change does not affect the risk.?Surrender of property—If a creditor surrenders the collateral to the debtor or impairs the collateral without the surety’s consent, the surety’s obligation may be reduced.?Payment or tender of payment—If the debt is paid, or tender of payment is made and rejected, the surety is discharged.5.Defenses of the Surety and the GuarantorA surety can assert his or her own defenses or use any defenses available to the principal (except personal defenses). This is the most important concept in suretyship, because most defenses available to a surety are those of the principal.?Incapacity and bankruptcy—As a defense, a surety or guarantor can assert his or her incapacity or bankruptcy, but not the principal debtor’s.?Statute of limitations—A statute of limitations is a defense to payment for the principal debtor, but not for a surety or guarantor.?Fraud—A surety or guarantor can assert fraud as a defense.6.Rights of the Surety and the GuarantorWhen the surety pays the debt, the surety is entitled to the following rights:a.The Right of SubrogationAny right the creditor had against the debtor becomes the right of the surety—creditor rights in bankruptcy, rights to collateral possessed by the creditor, and rights to judgments secured by the creditor.b.The Right of ReimbursementThe surety is entitled to receive from the debtor all outlays made on behalf of the suretyship arrangement.c.The Right of ContributionA surety who pays more than his or her proportionate share on a debtor’s default is entitled to recover from the co-sureties the amount paid above the surety’s obligation.Teaching Suggestions1.An important point for students’ understanding of which rules apply in a given secured transaction is that the method of perfection depends on the type of collateral. Emphasize that the UCC categorizes collateral according to the nature of the collateral or its use. You might have students list and explain the various kinds of goods in class, or you might give them examples of financing arrangements that involve various kinds of goods and ask them to state which perfection method would be appropriate.2.From the discussion of security agreements and financing statements, students may misunderstand that although a security agreement may be filed as a financing statement—if it otherwise meets the criteria—this does not mean that the UCC does not have strict filing requirements. Explain that good business practice dictates exact compliance with these requirements.3.The steps in insuring that a security interest was properly perfected might be outlined as follows:(1) Classify the collateral.(2) Determine whether the interest was a PMSI.(3) Determine whether a financing statement must be filed to perfect the security interest.(4) If filing is not required, determine whether perfection can be accomplished without taking possession of the collateral.(5) Determine whether possession is the required means of possession or whether it is simply a permitted means.(6) If filing is required, determine what the financing statement must state.(7) Determine where to file.(8) Once the security interest is perfected, consider the changes that might occur that could affect the priority of the security interest.4.To distinguish for students among the various creditors’ remedies discussed in this chapter, use a timeline representing litigation on a debt and place each remedy at the point on the line when it might be used.5.It may help students to understand how this material fits into the general scheme of creditors’ rights and remedies by briefly defining and classifying liens, and noting the priority of a lien creditor. For example, a lien is a claim against a debtor’s property that must be satisfied before the property (or its proceeds) is available to satisfy other creditors’ claims. Consensual liens—those based on the parties’ agreement—include perfected security interests, in the case of personal property, and mortgages, in the case of real estate. A lien may also arise under a statute or the common law or through a judicial proceeding. Statutory liens include mechanic’s liens. Liens created at common law include artisan’s liens and innkeeper’s liens. Judicial liens include those that represent a creditor’s efforts to collect on a debt before a judgment (for example, through prejudgment attachment) or after it (for example, through a writ of execution). A lien creditor has priority only to the extent of the value of his or her collateral. Generally, a lien creditor has priority over an unperfected security interest but not over a perfected security interest. Mechanic’s and artisan’s liens, however, have priority over perfected security interests unless a statute provides otherwise.6.Sometimes, students confuse prejudgment attachment with the concept of attachment in the context of a secured transaction. For that reason, it can be important to explain the difference. Prejudgment attachment occurs at the time of or immediately after commencement of a suit but before entry of a final judgment. Attachment in the context of a secured transaction occurs when all of the requirements for an enforceable security interest are satisfied and before the interest is perfected.Cyberlaw LinkWhat changes might the adoption of electronic filing methods, pursuant to the provisions of revised Article 9, have to the business deals underlying secured transactions? Could software or a database serve as collateral and if so, should there be any additional limits on the electronic repossession of the software or database? Could electronic repossession be done without first asking a court for assistance?How might the availability of personal financial information on the Internet affect the debt and credit arrangements outlined in this chapter?Discussion Questions1.What is required for an enforceable security interest? To have an enforceable security interest: (1) unless a creditor has possession of the collateral, there must be an agreement in writing; (2) a creditor must give value to the debtor; and (3) the debtor must have rights in the collateral. When these requirements are met, a creditor’s rights attach to the collateral2.What sort of description in a written security agreement might be insufficient to create a security interest? Descriptions that have been held to be insufficient included an attempted security interest in “all of the debtor’s personal property now owned and hereafter acquired.” Why would this description be considered insufficient to create a security interest? It is too general to put third parties on notice of the possible claim of the creditor.3.What is perfection? Perfection is the process by which a secured party protects his or her interest against some claims of third parties (other secured creditors, general creditors, trustees in bankruptcy, and purchasers of collateral that is subject to a security agreement) who may wish to have their debts satisfied out of the same collateral.4.What are the methods of perfection and what determines which method is appropriate? Perfection may occur by filing, by possession, or automatically. Which method of perfection is appropriate depends on how the collateral is classified.5.What happens when a secured party and an unsecured party claim security interests in the same collateral? Secured creditors generally prevail over unsecured creditors and over creditors who have obtained judgments against the debtor but who have not begun the legal process to collect. An attached security interest (whether or not it has been perfected) has priority over the claims of creditors who do not have a security interest. Any perfected security interest has priority over a lien creditor who acquired his or her lien after perfection, but a lien creditor has priority over any unperfected interest (except: if a secured party files with respect to a purchase-money security interest within ten days—twenty days in some states—after a debtor receives possession of the collateral, the secured party has priority over a lien creditor’s rights that arise between the time the interest attaches and the time of filing).6.How does a mechanic’s lien work? A creditor (a roofer, a painter) can file a mechanic’s lien on real property when he or she contracted to do labor, services, or materials to improve the property but is not paid as promised. Generally, the creditor must file written notice of the lien within 60 to 120 days from the last date on which work was provided (state law determines the procedure). Failure to pay the debt entitles the creditor to foreclose on the property (after notice to the owner) and sell it to satisfy the debt.7.How does an artisan’s lien work? Through an artisan’s lien, a creditor (a jeweler with whom a customer leaves jewelry to be repaired, for instance) can recover payment for labor and materials furnished to repair personal property. Normally, the creditor must have possession of the property and have agreed to provide services on a cash, not credit, basis. The lien exists as long as the creditor has possession and terminates when possession is voluntarily, permanently surrendered. The lien is lost if a third party obtains rights in the property while it is out of the creditor’s possession. (To protect the lien and surrender possession at the same time, a creditor must record notice of the lien under state lien law.) The creditor may foreclose on the property (after notice to the owner) and sell it to satisfy the debt.8.How does attachment work? The creditor files with the court an affidavit stating that the debtor is in default and providing the grounds under which attachment is sought. The creditor posts a bond to cover court costs, the value of the loss of use of the goods that the debtor suffers, and the value of the property attached. The court issues a writ of attachment, directing the sheriff or other officer to seize the property. If the creditor succeeds at trial, the property can be sold to satisfy the judgment.9.How does a writ of execution work? The court enters a judgment against the debtor (normally for the amount of the debt plus interest and costs). If the debtor does not or cannot pay, a creditor goes back to court and obtains a writ of execution. The writ, usually issued by the clerk of the court, directs the sheriff or other officer to seize and sell any of the debtor’s nonexempt property that is within the court’s geographic jurisdiction (usually the county in which the courthouse is located). Sale proceeds are used to pay the judgment and the costs of the sale. Any excess is paid to the debtor.10.What are the differences between contracts of suretyship and guaranty contracts? Contracts of suretyship and guaranty contracts involve third parties’ promises to be responsible for principals’ obligations. Under a contract of suretyship, the third party—the surety—is primarily liable. When a debt is due, the creditor can hold the surety liable for its payment without first exhausting remedies against the debtor. (A suretyship agreement does not have to be in writing to be enforceable.) Under a guaranty contract, the third party—the guarantor—is secondarily liable. The creditor cannot hold the guarantor liable until the principal defaults (and usually a creditor must have attempted to collect from the principal, because usually a debtor would not otherwise be declared to be in default). (A guaranty contract must be in writing to be enforceable unless the “main purpose” exception applies.)Activity and Research Assignments1.A secured party can repossess collateral on a debtor’s default, unless the security agreement states otherwise, as long as there is no breach of the peace. State law other than the UCC determines what constitutes breach of the peace. Have students research what constitutes a breach of the peace in their state. Have a repossession company representative talk to the class about repossession.2.Ask students to research their state’s variations from Article 9.3.Ask a lender to discuss with the class what criteria the lender uses in deciding whether to lend to a particular borrower and what, in practical terms, the lender does on debtors’ defaults in transactions involving different kinds of collateral.4.Before sorting out priorities among creditors, ask students to read the applicable UCC provisions and attempt to sort out the priorities themselves.5.Have students research local cases concerning the creditors’ remedies discussed in this chapter. Specific remedies or cases could be assigned to students individually, in small groups, or to the class as a whole. Once they have looked at some of the cases, ask students under what common fact situations issues involving these remedies tend to arise.6.Ask students to find and read their state’s garnishment statutes to identify dollar exemptions and local garnishment procedure, and to determine whether a creditor has to return to court for separate orders to garnish, for example, an employee’s paychecks.Explanations of Selected Footnotes in the TextFootnote 11: While federal and state laws generally limit the amount of money that can be garnished from an employee’s paycheck, a few states, including Texas, do not permit garnishment of wages at all, except under a child-support order. The following is Article 16, Section 28 of the Texas state constitution—the provision that prohibits most garnishments—as it appears in Vernon’s Texas Statutes and Codes Annotated.VERNON’S TEXAS STATUTES AND CODES ANNOTATEDCONSTITUTION OF THE STATE OF TEXAS 1876ARTICLE XVI. GENERAL PROVISIONS§ 28. Garnishment of wagesSec. 28. No current wages for personal service shall ever be subject to garnishment, except for the enforcement of court-ordered child support payments.1991 Pocket Part Credit(s)Amended Nov. 8, 1983.HISTORICAL NOTES1991 Pocket Part Historical NotesAmendment adopted in 1983 was proposed by H.J.R. No. 1, Acts 1983, 68th Leg., p. 6693.Footnote 12: Federal law provides a minimal framework to protect debtors from losing all their income to the payment of debts through garnishment. Under the Consumer Credit Protection Act, for example, a debtor can retain a certain amount of income. The following is 15 U.S.C.A. Section 1673—that is, Section 1673 of Title 15 of the United States Code (which sets out that specific restriction) as it appears in United States Code Annotated.UNITED STATES CODE ANNOTATEDTITLE 15. COMMERCE AND TRADECHAPTER 41—CONSUMER CREDIT PROTECTIONSUBCHAPTER II—RESTRICTIONS ON GARNISHMENT§ 1673. Restriction on garnishment(a) Maximum allowable garnishmentExcept as provided in subsection (b) of this section and in section 1675 of this title, the maximum part of the aggregate disposable earnings of an individual for any workweek which is subjected to garnishment may not exceed(1) 25 per centum of his disposable earnings for that week, or(2) the amount by which his disposable earnings for that week exceed thirty times the Federal minimum hourly wage prescribed by section 206(a)(1) of Title 29 in effect at the time the earnings are payable,whichever is less. In the case of earnings for any pay period other than a week, the Secretary of Labor shall by regulation prescribe a multiple of the Federal minimum hourly wage equivalent in effect to that set forth in paragraph (2).(b) Exceptions(1) The restrictions of subsection (a) of this section do not apply in the case of(A) any order for the support of any person issued by a court of competent jurisdiction or in accordance with an administrative procedure, which is established by State law, which affords substantial due process, and which is subject to judicial review.(B) any order of any court of the United States having jurisdiction over cases under chapter 13 of Title 11.(C) any debt due for any State or Federal tax.(2) The maximum part of the aggregate disposable earnings of an individual for any workweek which is subject to garnishment to enforce any order for the support of any person shall not exceed—(A) where such individual is supporting his spouse or dependent child (other than a spouse or child with respect to whose support such order is used), 50 per centum of such individual’s disposable earnings for that week; and(B) where such individual is not supporting such a spouse or dependent child described in clause (A), 60 per centum of such individual’s disposable earnings for that week;except that, with respect to the disposable earnings of any individual for any workweek, the 50 per centum specified in clause (A) shall be deemed to be 55 per centum and the 60 per centum specified in clause (B) shall be deemed to be 65 per centum, if and to the extent that such earnings are subject to garnishment to enforce a support order with respect to a period which is prior to the twelve-week period which ends with the beginning of such workweek.(c) Execution or enforcement of garnishment order or process prohibitedNo court of the United States or any State, and no State (or officer or agency thereof), may make, execute, or enforce any order or process in violation of this section.(Pub.L. 90-321, Title III, § 303, May 29, 1968, 82 Stat. 163; Pub.L. 95-30, Title V, § 501(e)(1)-(3), May 23, 1977, 91 Stat. 161, 162; Pub.L. 95-598, Title III, § 312(a), Nov. 6, 1978, 92 Stat. 2676.)HISTORICAL NOTESHISTORICAL AND STATUTORY NOTESReferences in Text. Chapter 13 of Title 11, referred to in subsec. (b)(1)(B), is § 1301 et seq. of Title 11, Bankruptcy.1978 Amendment. Subsec. (b)(1)(B). Pub.L. 95-598 substituted “court of the United States having jurisdiction over cases under chapter 13 of Title 11” for “court of bankruptcy under chapter XIII of the Bankruptcy Act”.1977 Amendment. Subsec. (b). Pub.L. 95-30, § 501(e)(1), (2), designated existing provisions as par. (1) and existing pars. (1), (2), and (3) as subpars. (A), (B), and (C) thereof, substituted “for the support of any person issued by a court of competent jurisdiction or in accordance with an administrative procedure, which is established by State law, which affords substantial due process, and which is subject to judicial review” for “of any court for the support of any person” in subpar. (A) as so redesignated, and added par. (2).Subsec. (c). Pub.L. 95-30, § 501(e)(3), inserted “, and no State (or officer or agency thereof),” following “or any State”.Effective Date of 1978 Amendment. Amendment by Pub.L. 95-598 effective Oct. 1, 1979, see § 402(a) of Pub.L. 95-598, set out as an Effective Date note preceding § 101 of Title 11, Bankruptcy.Effective Date of 1977 Amendment. Section 501(e)(5) of Pub.L. 95-30 provided that: “The amendments made by this subsection [amending this section and section 1675 of this title] shall take effect on the first day of the first calendar month which begins after the date of enactment of this Act [May 23, 1977].”Effective Date. Section effective July 1, 1970, see § 504(c) of Pub.L. 90-321, set out as an Effective Date note under § 1671 of this title.Legislative History. For legislative history and purpose of Pub.L. 90-321, see 1968 U.S. Code Cong. and Adm. News, p. 1962. See, also, Pub.L. 95-30, 1977 U.S. Code Cong. and Adm. News, p. 185. ................
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