Chapter 14 Secured Transactions, Creditors’ Rights, and Bankruptcy

 What is a security interest? Why and how are security interests perfected?  How are priority disputes among creditors decided?  What are the various remedies available to creditors, and how and when do creditors use these remedies?  What are the typical steps in a bankruptcy proceeding?  What is a security interest? Why and how are security interests perfected?  How are priority disputes among creditors decided?  What are the various remedies available to creditors, and how and when do creditors use these remedies?  What are the typical steps in a bankruptcy proceeding? Learning Objectives

Secured Transactions: Terminology  Secured Party: creditor who has a security interest in debtor’s collateral.  Debtor: person who owes payment of a secured obligation.  Security Interest: interest in the collateral that secures the performance.  Security Agreement: agreement that creates or provides for a security interest.  Collateral: subject of the security interest.  Financing Statement: normally filed with public notice to third parties.  Secured Party: creditor who has a security interest in debtor’s collateral.  Debtor: person who owes payment of a secured obligation.  Security Interest: interest in the collateral that secures the performance.  Security Agreement: agreement that creates or provides for a security interest.  Collateral: subject of the security interest.  Financing Statement: normally filed with public notice to third parties.

Creating and Perfecting A Security Interest  Creating a Security Interest Collateral in possession of Creditor or there must be a written agreement describing the collateral signed by Debtor. Creditor must give something of value to Debtor. Debtor must have “rights” in collateral.  Once these requirements are met Creditor’s rights “ATTACH” to the collateral, giving Creditor enforceable security interest.  Creating a Security Interest Collateral in possession of Creditor or there must be a written agreement describing the collateral signed by Debtor. Creditor must give something of value to Debtor. Debtor must have “rights” in collateral.  Once these requirements are met Creditor’s rights “ATTACH” to the collateral, giving Creditor enforceable security interest.

Collateral  Collateral is generally divided into two categories: tangible and intangible. Tangible: Consumer goods, equipment, farm products, inventory, accessions. Intangible:Chattel Paper, Instruments, Accounts, Deposit Accounts, General Intangibles.  Collateral is generally divided into two categories: tangible and intangible. Tangible: Consumer goods, equipment, farm products, inventory, accessions. Intangible:Chattel Paper, Instruments, Accounts, Deposit Accounts, General Intangibles.

Perfecting a Security Interest  Perfection is the legal process by which the secured party protects herself from third party claims against the same collateral.  Perfection by Filing a Financing Statement  Perfection Without Filing Possession--Collateral with the Secured Party Purchase Money Security Interest (financing)  Perfection is the legal process by which the secured party protects herself from third party claims against the same collateral.  Perfection by Filing a Financing Statement  Perfection Without Filing Possession--Collateral with the Secured Party Purchase Money Security Interest (financing)

Scope of Security Interest  Security Interest in Proceeds: whatever received when collateral sold or disposed of.  After-Acquired Property Security Agreement may provide for a security interest in property acquired after execution of security agreement.  Security Interest in Proceeds: whatever received when collateral sold or disposed of.  After-Acquired Property Security Agreement may provide for a security interest in property acquired after execution of security agreement.

Scope of Security Interest  Future Advances Continuing line of credit Subject to security interest  Floating Liens Security interest in proceeds in after-acquired property, or Collateral subject to future advances.  Future Advances Continuing line of credit Subject to security interest  Floating Liens Security interest in proceeds in after-acquired property, or Collateral subject to future advances.

Priorities  General Rule is that a secured party’s interest has priority over the following: Unsecured creditor Unperfected secured party Subsequent lien creditor Trustee in bankruptcy Buyers who do not purchase collateral in the course of Seller’s business.  General Rule is that a secured party’s interest has priority over the following: Unsecured creditor Unperfected secured party Subsequent lien creditor Trustee in bankruptcy Buyers who do not purchase collateral in the course of Seller’s business.

Priorities  Buyers of the Collateral Conflicts with Perfected Secured Party Buyers in the Ordinary Course of Business Buyers not in the Ordinary Course of Business of Consumer Goods Buyers of Chattel Paper Buyers of Instruments, documents or securities Buyers of Farm Products  Generally, Buyers in the ordinary course of business take goods free from security interest.  Buyers of the Collateral Conflicts with Perfected Secured Party Buyers in the Ordinary Course of Business Buyers not in the Ordinary Course of Business of Consumer Goods Buyers of Chattel Paper Buyers of Instruments, documents or securities Buyers of Farm Products  Generally, Buyers in the ordinary course of business take goods free from security interest.

Priorities  Creditors or Secured Parties Conflicting Perfected Security Interests First to Perfect has Priority. Conflicting Unperfected Security Interests First to Attach has Priority. Conflicting Perfected Security Interests in Commingled or Processed Goods  Creditors or Secured Parties Conflicting Perfected Security Interests First to Perfect has Priority. Conflicting Unperfected Security Interests First to Attach has Priority. Conflicting Perfected Security Interests in Commingled or Processed Goods

Rights and Duties  Information Requests  Release, Assignment and Amendment Secured party can release all or part of the interest. Secured party can assign all or part of the interest. Parties can agree to amend the financing statement.  Termination When Debtor has fully paid the debt, secured party must release security interest and file a termination statement.  Information Requests  Release, Assignment and Amendment Secured party can release all or part of the interest. Secured party can assign all or part of the interest. Parties can agree to amend the financing statement.  Termination When Debtor has fully paid the debt, secured party must release security interest and file a termination statement.

Default  Not defined by Article 9. Defined in the security agreement.  If Debtor in default, Secured Party can: Relinquish a security interest and use any judicial proceeding on the underlying debt (execution and levy). Take peaceful or judicial possession of the collateral.  Not defined by Article 9. Defined in the security agreement.  If Debtor in default, Secured Party can: Relinquish a security interest and use any judicial proceeding on the underlying debt (execution and levy). Take peaceful or judicial possession of the collateral.

Default  Disposition of Collateral Retention of Collateral by Secured Party (unless PMSI and debtor paid 60% or more) Notice Required If objection, then Secured Party must sell property. Disposition Procedures Commercially reasonable manner Public sale with notice Distribution of Proceeds Expenses  balance of debt  junior liens  then balance to secured party.  Disposition of Collateral Retention of Collateral by Secured Party (unless PMSI and debtor paid 60% or more) Notice Required If objection, then Secured Party must sell property. Disposition Procedures Commercially reasonable manner Public sale with notice Distribution of Proceeds Expenses  balance of debt  junior liens  then balance to secured party.

Laws Assisting Creditors  Liens Mechanic’s Lien (real property) Artisan’ Lien (personal property) Innkeeper’s Lien (baggage of guests) Judicial Lien Attachment: court-ordered seizure of property Writ of Execution: court-ordered sale  Garnishment Creditor permitted to collect a debt by seizing property held by third party (usually wages held by debtor’s employer)  Liens Mechanic’s Lien (real property) Artisan’ Lien (personal property) Innkeeper’s Lien (baggage of guests) Judicial Lien Attachment: court-ordered seizure of property Writ of Execution: court-ordered sale  Garnishment Creditor permitted to collect a debt by seizing property held by third party (usually wages held by debtor’s employer)

Laws Assisting Creditors  Mortgage Foreclosure Creditor (mortgagee) has the right to foreclose on property upon debtor’s (mortgagor) default.  Suretyship and Guaranty Third person promises to pay debt owed by another Surety (3 rd person is primarily liable) Guaranty (3 rd person is secondarily liable)  Mortgage Foreclosure Creditor (mortgagee) has the right to foreclose on property upon debtor’s (mortgagor) default.  Suretyship and Guaranty Third person promises to pay debt owed by another Surety (3 rd person is primarily liable) Guaranty (3 rd person is secondarily liable)

Laws Assisting Debtors  Homestead Exemption Family home free from claims of unsecured creditors or trustees in bankruptcy.  Other Exemptions: Household furniture Clothing and personal possessions Vehicle Tools of the trade  Homestead Exemption Family home free from claims of unsecured creditors or trustees in bankruptcy.  Other Exemptions: Household furniture Clothing and personal possessions Vehicle Tools of the trade

Bankruptcy and Reorganization  Bankruptcy provides different relief: Chapter 7: Liquidation (wipe out all debt) Chapter 11: Corporate Reorganizations Chapter 12: Family Farmers Chapter 13: Adjustment of Individuals’ Debts with a payment plan.  Bankruptcy provides different relief: Chapter 7: Liquidation (wipe out all debt) Chapter 11: Corporate Reorganizations Chapter 12: Family Farmers Chapter 13: Adjustment of Individuals’ Debts with a payment plan.

Chapter 7-Liquidation  Most familiar.  Any person (including corporation)  All debts are discharged.  Begins with a voluntary or involuntary Filing of a Petition (Automatic Stay) Voluntary: filed by debtor Involuntary: creditors force debtor to file  Order for Relief  Most familiar.  Any person (including corporation)  All debts are discharged.  Begins with a voluntary or involuntary Filing of a Petition (Automatic Stay) Voluntary: filed by debtor Involuntary: creditors force debtor to file  Order for Relief

Chapter 7  Debtor must understand there are other chapters available.  Debtor does not have to be insolvent.  List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses.  Swear to these and sign. Federal crime to misrepresent.  Debtor must understand there are other chapters available.  Debtor does not have to be insolvent.  List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses.  Swear to these and sign. Federal crime to misrepresent.

Chapter 7  Automatic Stay upon Filing of Petition: Either voluntary or involuntary.  Creditors cannot commence or continue most legal actions.  Damages for violation of stay.  Creditors can get “adequate protection.” Periodic or one time cash payments or equivalent.  Automatic Stay upon Filing of Petition: Either voluntary or involuntary.  Creditors cannot commence or continue most legal actions.  Damages for violation of stay.  Creditors can get “adequate protection.” Periodic or one time cash payments or equivalent.

Chapter 7 – Creditors  Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets.  Within 90 days, Creditors must file “proof of claim” with court clerk.  Leases cannot be for more than one year.  Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets.  Within 90 days, Creditors must file “proof of claim” with court clerk.  Leases cannot be for more than one year.

Chapter 7 – Creditors  Allowed unless disputed.  If claim is disputed or unliquidated, court will decide value.  It is a crime to file false claim.  Employment contracts and real estate.  Allowed unless disputed.  If claim is disputed or unliquidated, court will decide value.  It is a crime to file false claim.  Employment contracts and real estate.

Chapter 7 – Property  Debtor’s Estate includes: All Debtor’s legal and equitable interests in property presently held, including community property; Property transferred in a “voidable” transaction; and Property which Debtor becomes entitled within 180 days after filing.  Debtor’s Estate includes: All Debtor’s legal and equitable interests in property presently held, including community property; Property transferred in a “voidable” transaction; and Property which Debtor becomes entitled within 180 days after filing.

Chapter 7 – Property  Estate includes (cont’d): Proceeds and profits from the property of the estate. After-acquired property such as inheritances, property settlements, and life insurance death proceeds.  Estate includes (cont’d): Proceeds and profits from the property of the estate. After-acquired property such as inheritances, property settlements, and life insurance death proceeds.

Chapter 7 – Property  Exempted Property (Federal) Up to $17,425 in home equity Up to $2,775 in car Up to $9,300 in personal possessions (up to $450 per item) Up to $1,150 in jewelry Up to $1,750 in tools Social security, alimony and support payments.  Exempted Property (Federal) Up to $17,425 in home equity Up to $2,775 in car Up to $9,300 in personal possessions (up to $450 per item) Up to $1,150 in jewelry Up to $1,750 in tools Social security, alimony and support payments.

Chapter 7 – Trustee  Court-appointed until first meeting of creditors.  Creditors elect permanent trustee  Administers estate.  Collects proceeds, liquidates assets and pay Creditors in order of priority.  Court-appointed until first meeting of creditors.  Creditors elect permanent trustee  Administers estate.  Collects proceeds, liquidates assets and pay Creditors in order of priority.

Chapter 7 – Trustee’s Powers  Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of: Debtor against the creditors. Lien creditors against the creditors. Bona fide purchaser against the creditors. Trustee still loses to the PMSI creditor who perfects within his “magic” 10-day period.  Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.  Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of: Debtor against the creditors. Lien creditors against the creditors. Bona fide purchaser against the creditors. Trustee still loses to the PMSI creditor who perfects within his “magic” 10-day period.  Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.

Trustee -- Liens  Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent.  Can avoid liens which were unperfected on date of bankruptcy.  Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent.  Can avoid liens which were unperfected on date of bankruptcy.

Fraudulent Transfers  Trustee may avoid fraudulent transfers made within one year of filing of petition.  Trustee may proceed under state law for fraud with a 3 year statute of limitations.  Trustee may avoid fraudulent transfers made within one year of filing of petition.  Trustee may proceed under state law for fraud with a 3 year statute of limitations.

Chapter 7 -- Property Distribution  If Secured property: Consumer debtors. Have 30 days from filing petition or before first meeting of creditors. Debtor must tell what she intends to do with collateral-- keep or surrender. Trustee must enforce within 45 days. If surrenders: creditor can keep or sell. If creditor keeps = full satisfaction of debt. If creditor sells = can use extra for costs, or can become unsecured creditor for deficiency.  If Secured property: Consumer debtors. Have 30 days from filing petition or before first meeting of creditors. Debtor must tell what she intends to do with collateral-- keep or surrender. Trustee must enforce within 45 days. If surrenders: creditor can keep or sell. If creditor keeps = full satisfaction of debt. If creditor sells = can use extra for costs, or can become unsecured creditor for deficiency.

 Unsecured property Paid according to bankruptcy law. All of one class must be paid before moving to next. Creditor within last class receive proportionately if not enough. See Priority List in text. All creditors paid, trustee gives extra back to debtor.  Unsecured property Paid according to bankruptcy law. All of one class must be paid before moving to next. Creditor within last class receive proportionately if not enough. See Priority List in text. All creditors paid, trustee gives extra back to debtor. Chapter 7 -- Property Distribution

Chapter 7 -- Discharge  Exemptions.  Objections to Discharge.  Effect of Discharge.  Revocation of Discharge.  Reaffirmation of a Debt.  Exemptions.  Objections to Discharge.  Effect of Discharge.  Revocation of Discharge.  Reaffirmation of a Debt.

Exceptions to Discharge  Claims for back taxes.  Claims for amounts borrowed by Debtor to pay federal taxes.  Claims against property/money obtained by Debtor under false pretenses.  Claims by Creditors who did not know about bankruptcy.  Claims for back taxes.  Claims for amounts borrowed by Debtor to pay federal taxes.  Claims against property/money obtained by Debtor under false pretenses.  Claims by Creditors who did not know about bankruptcy.

Chapter 7 -- Reaffirmation  Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy.  Agreement is filed with court.  Debtor can rescind agreement at any time.  Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy.  Agreement is filed with court.  Debtor can rescind agreement at any time.

Chapter Reorganizations  Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest.  Same debtors as are eligible under Chapter 7.  Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest.  Same debtors as are eligible under Chapter 7.

Chapter 11  “Fast tract” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate.  “Workouts” (private negotiated settlements).  “Fast tract” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate.  “Workouts” (private negotiated settlements).

Chapter 11  Debtor in Possession (DIP). Trustee may be appointed. DIP has same powers as trustee in Chapter 7. Strong-arm clause.  Collective Bargaining Agreements.  Creditors Committees.  Debtor in Possession (DIP). Trustee may be appointed. DIP has same powers as trustee in Chapter 7. Strong-arm clause.  Collective Bargaining Agreements.  Creditors Committees.

Chapter 11  Reorganization Plan Rehabilitates debtor and conserves estate Plan must be equitable and: Designate classes of claims and interests. Specify treatment to be afforded the classes. Provide adequate means for execution.  Reorganization Plan Rehabilitates debtor and conserves estate Plan must be equitable and: Designate classes of claims and interests. Specify treatment to be afforded the classes. Provide adequate means for execution.

Chapter 13 – Repayment  Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$290,525 or fixed secured debts of <$871,550.  Not for partnerships, corporations.  Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$290,525 or fixed secured debts of <$871,550.  Not for partnerships, corporations.

Chapter 13 – Repayment  Repayment Plan For all or a portion of debts to be paid during a period not to exceed 3 years. Confirmation of the Plan Hearing for interested parties to object to plan. Court will confirm (order) the plan after creditors approve. Objections to the Plan  Discharge balance of debt (after completion of all payments in the plan)  Repayment Plan For all or a portion of debts to be paid during a period not to exceed 3 years. Confirmation of the Plan Hearing for interested parties to object to plan. Court will confirm (order) the plan after creditors approve. Objections to the Plan  Discharge balance of debt (after completion of all payments in the plan)

Chapter 12 – Family Farmer  Chapter 12: Family Farmer Plans “Family Farmer”: 50% of gross income comes from farming and whose debts are 80% farm related. Procedure for filing. Content of plan. Court confirmation.  Chapter 12: Family Farmer Plans “Family Farmer”: 50% of gross income comes from farming and whose debts are 80% farm related. Procedure for filing. Content of plan. Court confirmation.