Chapter 14 Secured Transactions, Creditors’ Rights, and Bankruptcy

1. Chapter 14Secured Transactions, Creditors’ Rights, and Bankruptcy

2. Learning Objectives • 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?

3. 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.

4. 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.

5. 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.

6. 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)

7. 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.

8. 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.

9. 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.

10. 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.

11. 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

12. 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.

13. 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.

14. 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.

15. 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)

16. 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 (3rd person is primarily liable) • Guaranty (3rd person is secondarily liable)

17. 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

18. 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.

19. 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

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. Chapter 7 -- Property Distribution • 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.

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

34. 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.

35. 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.

36. Chapter 11 -- 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.

37. 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).

38. 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.

39. 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.

40. 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.

41. 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)

42. 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.