law school outline: commercial transactions
Commercial Transactions ICourse materials
- Common law continues to govern transaction unless displaced by UCC. CL also helps define terms in UCC (1-103).
- Scope: "Transactions in goods," not just sales.
- Goods = All things movable at time of identification in the K, but also includes unborn animals, growing crops, specially manufactured goods. (2-105). Would not include IP, but Neustadter thinks it would include retail sale (licensing) of software. Services are excluded. If both goods and services, the "predominant purpose of the transaction" controls. Some jurisdictions ask what the "gravamen of the complaint" is.
- The manufacturer of all goods contains some service, but that doesn�t exclude the goods from the scope of A2. Services which are normally part of the goods are not included in this consideration. Only services which are in addition to the normal for the goods are included.
A2 can be applied to non-good situations � there is no prohibition against that.Formation
"Firm offers" are usually not binding without consideration, but if made by merchant and in writing, then it must remain open for reasonable time, but never longer than 3 months (2-205). Contract can be made in any manner sufficient to show agreement, including conduct recognizing the existence of the K. Missing terms are ok, so long as parties intended to make K and reasonable basis for giving appropriate remedy. (2-204).
- Statute of frauds (2-201) requires that contracts for sale of goods over $500 and for real estate be memorialized with quantity term, and signed by party against whom enforcement is sought. Erroneous terms doesn�t void writing. Writing need not be delivered � merely evidentiary of K (and the entire K need not be in writing).
- Oral K between merchants and followed by confirmation received containing quantity term without objection to contents of confirmation in 10 days. Merchant: Person who deals in goods of that kind or holds themselves out as having knowledge or skill peculiar to the (business) practices or goods involved in the transaction (2-104).
- If goods are specially manufactured and can�t be resold before repudiation and when substantial beginning of manufacture has begun. Argue that if the party begins manufacturer of part of the goods, this clause protects the entire K, even those goods not yet made (argument can be made both ways).
- To the extent D admits in pleadings or court that K was made.
- To the extent goods have been received and accepted or payment made and accepted.
- Some jurisdictions allow estoppell as an argument.
- SOF can be waived. Merchants often use a master agreement which waives SOF and sets out all terms and conditions of future oral/electronic sales.
- p allowed to go to some amount of discovery to determine if D has writing that satisfies SOF.
- K was still formed, even if SOF not complied with, K just can�t be enforced.
- Signature: "Any symbol executed or adopted with present intent to authenticate a writing." Cal. Civ Code �1633 Uniform Electronic Transactions Act says e-mail is a signed writing.
- K cannot be enforced beyond the quantity in the writing.
Unless K unambiguously indicates otherwise, offer can be accepted in any medium reasonable in the circumstances, including by shipment of goods if offer to buy is for prompt shipment. (2-206). If acceptance is by performance, notice must be sent within reasonable time to offeror to prevent revocation or lapse. No consideration needed for modification of K, so long as made in good faith. (2-209)Terms
- Battle of the forms: 2-207
- Common law required the acceptance to be a mirror image of the offer, and revocation of offer could nullify the deal. Acceptance which is not a mirror image is a counteroffer.
- UCC: Definite and seasonable (timely or reasonable) expression (referencing dickered terms of offer: description, quantity, price, delivery, payment) of acceptance, but with additional or different terms, is a valid acceptance, unless acceptance is conditional on additional terms, then acceptance invalid (and operates as a counter-offer under common law) unless the additional terms accepted by the original offeror, in which case it�s a counteroffer. Additional (but not different) terms are proposals for addition to the K, pending acceptance by original offeror. If they are not accepted, they die.
- If between merchants, terms become part of K unless offer precludes additional terms, terms materially alter K (surprise to a party), or objection to new terms is given within reasonable time. Different terms between merchants: Some courts use knock-out rule with UCC gap-filler, others treat as proposed additions to K.
- Terms sent after acknowledgement are mere proposals.
- When the writings of the parties are in disagreement but do form a K, and the conduct of the parties confirms the K, the terms of the K that are agreed upon survive, those that differ are kicked out, and the UCC "gap filler" terms supplied by the UCC apply as needed. (2-207(3))
Parol Evidence (2-202)
- K not in writing: Parol evidence rule not applicable.
- K written but not integrated: Parol evidence (prior written or oral agreements and contemporaneous oral agreements) are admissible for all purposes.
- K written and partially integrated (i.e. final with regard to the contained terms)
- Parol evidence not admissible to contradict writing, but consistent additional terms are allowed.
- Prior course of dealing, usage of trade, or course of performance admissible to explain or supplement (but not contradict) writing, unless clearly negated.
- K written and completely integrated (complete and exclusive with regard to all terms, those existing in the K and any that don�t exist in the K)
- Prior course of dealing, usage of trade, or course of performance admissible to explain or supplement (but not contradict) writing, unless clearly negated.
- Express parol evidence inadmissible to add any new terms.
- Complete and exclusive: Intent of parties
- Existence of merger or integration clauses (not conclusive factor)
- Whether extrinsic term is one which parties would certainly have included in the document had it been part of their agreement
- Sophistication of the parties
- Nature and scope of both prior negotiations between parties and any purported extrinsic terms.
- Evidence of collateral agreements that occurred after the writing can always be introduced.
Courts have held that there is no problem in making a K and sending the terms later on, with right for party to return goods to reject terms. Common in airline transactions, and of course computers and software.
- Magnuson-Moss Warranty Act requires companies to distribute warranty terms upon request.
Seller should state at time of sale that use of the goods beyond the return date constitute acceptance of the terms in the contract which is contained with the goods. Seller, as master of the offer, can invite acceptance by conduct, and may propose limitations on what conduct constitutes acceptance.Warranties
- Sellers want to cap length of exposure for problems
- Buyers who resell do not want warranty time limits to begin until goods leave their hands, and do not want to give warranties any longer than the manufacturer�s warranties, else seller gets stuck having to fix manufacturer�s problems.
- UCC warranties are gap-fillers, and can be expanded, excluded or modified by the K.
- Warranties are to be construed as consistent with one another, but when inconsistent, express warranties displace inconsistent implied warranties, except for implied warranty of fitness for a particular purpose.
- Warranty was made
- Warranty was breached
- Breach of warranty caused harm complained of. p must prove injuries proximately caused by breach of warranty: In the absence of the warranty, would p still have been injured?
- Loss resulted from some action or event following delivery
- Seller exercised care in manufacture, processing or selection of goods
- Action by buyer following examination of goods which ought to have indicated defect
- Extent of damages
- Fending off affirmative defenses
- Lack of notice: 2-607 requires notification within a reasonable time after buyer should have discovered breach following accepted tender. Encourages settlement, opportunity for D to remedy breach.
- If buyer fails to follow customary inspection and later learns of defect that should have been discovered during inspection, buyer may have waived right to sue. Enables seller to cure, and avoids prejudice to seller from passage of time.
- If person injured is a TP and not buyer, TP doesn�t have to give notification within reasonable time of defect, since TP has nothing to do with the purchase, but TP must notify seller/manufacturer re: injury within a "good faith" time period after TP�s injury.
Lack of privity
- Purpose is to determine who the intended beneficiaries of the warranty is.
- Horizontal (2-318): Seller�s warranty (unless the warranty is disclaimed) extends to one of these categories � state must select:
- A: person in family or household or guest of buyer if reasonable to expect such person may use, consume or be affected by the goods and who is personally injured by breach of warranty. No disclaimer of this (but can disclaim warranty).
- B: Any natural person who may reasonably be expected to use, consume, or be affected by the goods and who suffers personal injury. No disclaimer of this (but can disclaim warranty).
- C: Seller�s warranty extends to any person (including corporation) who may reasonably be expected to use, consume or be affected by the goods and who is injured (physical or economic) by breach of the warranty. Can disclaim or limit, but not re: personal injury of persons to whom the warranty extends.
- State can adopt none of the above (which is what California did).
- Buyer purchasing from retailer who is injured should give notice to entire supply chain (especially manufacturer) � not clear that it is necessary, but it�s a good idea anyhow.
- If retailer is sued for something wholesaler or manufacturer did, retailer can give written notice of litigation, and if higher party refuses to defend retailer, higher party bound by findings of fact in first litigation. (2-607)
Assumption of risk Defect caused by buyer following purchaseImplied Warranty of Merchantability (2-314)
- Merchant seller promises that the goods being sold are at least as good as other similar goods in the trade, and that the goods are fit for the ordinary purposes for which such goods are used.
- This is a strict liability claim: No negligence need be shown.
- Seller�s (not just merchant) knowledge of latent defects must be disclosed.
- Disclaimer requires language mentioning merchantability, and in the case of a writing must be conspicuous (2-316). Oral ok.
Implied Warranty of Fitness for a Particular Purpose (2-315)
- Implied whenever seller knows (express or implied) that buyer: Is buying goods for particular purpose; and is relying on seller�s expertise to select or furnish the goods.
- Does not apply when the use of the goods is ordinary.
- Disclaimer must be in writing and conspicuous. General disclaimer of warranties will suffice. (2-316)
Disclaimers and limitations (2-316)
- "As is", "With all faults" and other such common language which calls to buyer�s attention to the exclusion of warranties is effective to exclude all implied warranties. But if disclaiming warranty of merchantability or fitness for particular purpose, must be conspicuous.
- When buyer has examined goods or model as fully as he desires, or refuses to examine goods upon demand by seller, no implied warranty exists re: defects he should have discovered (using subjective skills of buyer).
- Implied warranties can also be excluded by course of dealing or course of performance or usage of the trade.
- Ambiguity is construed strictly against seller. Factors:
- Relative bargaining power and sophistication of parties
- Price paid (sacrifice greater warranty protection for lower price)
- Usage of trade, course of dealing, course of performance
- Express language of K
Express Warranties (2-313)
- Affirmatively created by affirmations of fact, promises, descriptions, samples, or models, which become part of the basis of the bargain.
- Not including mere puffery, which is often vague, oral, and in light of the context, and unreasonably relied upon.
- Not including affirmation of value, or statement of seller�s opinion or commendation of the goods.
- Factors: Request or inquiry by buyer; degree of reliance; nature of product; and expertise of buyer.
- Check to see if express warranty is exclusive. If so, it replaces any otherwise applicable UCC remedies.
Implied Warranty of Title
Covenant in K that seller has good, unencumbered title to the goods being sold (2-312).
- Seller strictly liable for defective title: Ignorance is not a defense.
- Disclaimer either by circumstances which give buyer reason to know that seller does not claim title (i.e. foreclosure sale), or must use specific language signaling to buyer that seller does not claim title in himself or is selling only such title as he has. "As is" is insufficient.
- Buyer must give notice to seller within reasonable time after buyer�s discovery re: breach if seller�s breach was innocent, but not if made in bad faith. Breach occurs at time tender is made.
- Good faith purchaser: If a merchant, must observe reasonable commercial standards of fair dealing in the trade.
Allocation of burden between original owner and good faith purchaser (GFP) (2-403(1))Original owner � � Wrongdoer � � GFP
- Good faith
- Purchaser: Any voluntary transaction creating interest in property, including gift
- For value
- Who the law does not impose the risk of the transaction.
- If wrongdoer stole goods from original owner, GFP and successors do not prevail against original owner.
- If wrongdoer acquired goods under a purchase transaction (includes gift and any transaction creating an interest, but not loan), wrongdoer has title which is voidable by original owner, but wrongdoer has power to transfer good title to GFP, who prevails against original owner (as does his successors).
- Wrongdoer acquired title by tricking original owner into voluntarily transferring possession of goods by: Bounced check; cash sale; original owner deceived as to identity of purchaser (GFP�s seller); fraud punishable as larceny (bad check writing, counterfeit money).
Doctrine of entrustment (2-403(2)): Entrustment (delivery) of goods to a merchant who deals in goods of that kind gives merchant the power to transfer all rights of the entruster to a buyer in the ordinary course of business (good faith, for value or credit, without knowledge), regardless of any conditions expressed between the entruster and merchant, and even if the goods were initially stolen. Buyer holds good title; entruster has action for conversion against merchant (?).Interpretation of K (1-201)
- Language of contract (express terms controls when inconsistent with course of performance, otherwise construe as consistent)
- Implication from (hierarchy defined in 1-205 and 2-208):
- Course of performance in this K (2-208): Can waive express term.
- Previous course of dealing between the two parties (1-205)
- Usage of trade (1-205): Regular enough to justify reliance by parties who knew or should have known about usage.
- Default "gap fillers" from UCC
- Tender of delivery
In accordance with K (i.e. physical delivery to buyer, or notice of availability at seller�s business) If not specified in K, delivery is at seller�s place of business (2-308). If shipment is required or authorized by K, seller must ship by common carrier (2-504).Risk of loss (2-509)
- If destruction or damage is due to fault of a party, that party bears risk of loss.
- If goods are nonconforming, seller retains risk of loss until cure or acceptance (2-510).
- If buyer breaches K, buyer assumes risk of loss for a commercially reasonable time to the extent that seller�s insurance policy doesn�t cover the loss (even if goods were never delivered to carrier) (2-510).
- FOB location: Seller must pay all charges to get the goods to the location specified. It�s usually either the seller�s location when seller is authorized to ship the goods (shipment K) or buyer�s location (destination K). Default is shipment K.
- Shipment K: Risk of loss shifts to buyer when goods are delivered to carrier, and buyer is responsible for paying freight. Delivery: Seller must put goods in possession of carrier; make reasonable K (arrangements) for transportation; deliver any documents necessary to enable buyer to take delivery; and promptly notify buyer of shipment. Destination K: Risk of loss shifts to buyer when goods are "duly tendered" to buyer at stated destination, and seller is responsible for paying freight. Tender: Seller must put and hold goods at buyer�s disposition for period necessary for buyer to take possession; give buyer notice of tender; and give buyer any documents needed for buyer to take delivery. Third-party bailee: If shipper is using TP bailee to hold the goods, risk of loss passes to buyer when the earliest of these occurs:
- Buyer receives negotiable document of title
- Bailee acknowledges to buyer the buyer�s right to possession
- Buyer receives non-negotiable document of title or other written direction to the bailee to deliver.
Otherwise: Risk passes to buyer on receipt of goods if seller is a merchant, or when seller tenders delivery if seller is not a merchant.Reasonable period for inspection (2-513) Rejection of nonconforming goods (2-601 and 2-602)
- Nonconformity = Defect in terms, e.g. delivery time or method, quantity or method.
- If goods or tender fail in any respect to conform to the K (2-601).
- Exceptions to "perfect tender" rule:
- Installment K: Buyer can only reject installment if nonconformity substantially impairs value of installment and cannot be cured. Revoke entire K only if one or more installments substantially impairs value of the whole K (including shaken faith in product or seller). (2-612).
- When K between parties limits rejection
- When usage of trade, course of dealing or course of performance give seller greater latitude (2-106)
- Wrongful rejection (i.e. goods do conform to K) is an effective rejection if made in reasonable time, but gives seller right to remedy from buyer subject to duty to mitigate.
- Buyer can, within reasonable time after delivery, reject the whole, accept the whole, or accept part and reject part (2-601), and pay for any goods accepted at the K rate (2-607).
- Seasonable notification to seller stating specific grounds for rejection.
- Upon rejection, buyer has duty to hold goods with reasonable care for seller for sufficient time for seller to remove the goods (merchant buyers have heightened duty to follow reasonable instruction of seller re: resale or storage. If perishable goods, buyer must sell on seller�s behalf). (2-603)
- Seller can tender satisfactory cure of nonconformity where (2-508):
- Time for performance has not yet expired (seller delivered early), if seller notifies buyer of intent to cure and does so within time period for performance; or
- Seller had reasonable grounds to believe (in good faith) that its rejected tender would be acceptable to buyer with or without money allowance, in which case seller can have further reasonable time to cure.
- Exception: When goods purchased are unique and not interchangeable, such as art work.
Acceptance of goods (2-606)
- Affirmative signification that buyer has accepted, after reasonable opportunity to inspect
- Even if nonconformity.
- Acceptance with knowledge of other party is final. (2-601)
- Overrides previous rejection only if seller has indicated that he is holding the tender open. (2-601)
- Failure to reject goods following reasonable opportunity to inspect them
- Act by buyer inconsistent with seller�s ownership, even if before nonconformity discovered.
- Exercise of ownership after rejection or revocation is wrongful against seller (2-602), and is a subsequent acceptance if ratified by seller (2-606). But if buyer is using goods for personal, family or household use with no economically viable alternative other than continued use, such use is not wrongful against seller.
Revocation of acceptance (2-608)
- Nonconformity must substantially impair value of goods to buyer, and either:
- Buyer reasonably believed that problem with the goods would be cured and it has not been (the only case when buyer can revoke knowing acceptance of the nonconformity); or
- Buyer was unaware of problem because of seller�s assurances or because problem was too hard to discover before acceptance.
- Must occur within reasonable time after buyer discovered or should have discovered grounds for revocation. Time period is extended where seller has given assurances that defects would be repaired and it was not.
- Must occur before any substantial change in the goods that was not caused by their own defects. If buyer knowingly uses the defective goods, seller can recover in quantum meruit for reasonable value of the services used.
- Buyer must notify seller.
- Seller can tender satisfactory cure of nonconformity where [Note: some courts do not enforce this because there is no express language to this effect, but some do because of "rights and duties" clause. Danger of not allowing sender to cure is that court would enforce and prohibit later recovery by buyer.] (2-508):
- Time for performance has not yet expired (seller delivered early), if seller notifies buyer of intent to cure and does so within time period for performance; or
- Seller had reasonable grounds to believe (i.e. not in bad faith) that its rejected tender would be acceptable to buyer with or without money allowance, in which case seller can have further reasonable time to cure.
- Exception: When goods purchased are unique and not interchangeable, such as art work.
p must put D on notice of breach. Four year SOL from time when COA accrued (2-725). Consequential damages: Damages suffered by buyer other than to the product itself. Includes personal injury and economic loss. Not allowed under Art. 2 unless specifically provided for. Remember that the underlying purpose of remedies is to put the parties in as close to possible as where they would be if the K had been performed. (1-106) Seller�s Remedies (2-703)
- Triggered by buyer�s breach: Wrongful rejection; wrongful revocation of acceptance; failure to pay when due; or anticipatory repudiation.
- Withhold delivery. If the goods aren�t yet finished, seller must use reasonable judgment in deciding to finish. Finishing makes them available for resale, but if that is not practicable, action for price would be necessary. Seller can finish production, unless at the time of breach it is clear that would result in increased damages.
- Recover goods (2-702) � within 10 days of sale to insolvent buyer.
- Stop delivery by bailee (2-705)
- Identify goods to K (in the case of anticipatory repudiation)
- Resell and recovery damages under 2-706
- Seller reasonably identifies the goods being resold as referring to the broken K
- Seller gives buyer notice of resale (private sale: notice of intent to resell; private sale: reasonable notice of time and place of resale). Failure to give notice means seller has to follow 2-708, unless that would give seller more than 2-706, in which case seller gets nothing unless seller can demonstrate that even if seller had given notice, they wouldn�t have gotten any more on resale (or buyer can show that).
- Seller resells goods at either public or private resale in good faith and in a commercially reasonable manner.
- Seller sues buyer for difference between K price and resale price, plus incidental damages, minus expenses saved. If seller made a profit, he is not liable to buyer for that amount.
- If nonacceptance or repudiation, recover contract-market damages (lost profits) under 2-708
- Seller�s damages equals K price minus market price plus incidental damages minus expenses saved (does not include amount from resale); or
- If the above is inadequate to put seller in as good a position as performance because if not for the breach, two sales would have existed and not just one (example: new car dealer), then measure of damages is profit (including reasonable overhead) which seller would have made, together with incidental damages, [plus costs, minus credits or proceeds from resale � this language only applies when 2-704 is used and seller uses reasonable commercial judgment to stop production and resell scrap].
- Seller must show that ultimate sale of goods would have occurred even if buyer had not breached, and that seller�s ability to sell goods was greater than current buyer demand for them (supply > demand).
- Sue for price under 2-709
- Seller can sue buyer for the unpaid agreed upon price if:
- Buyer has accepted goods (does not occur if there has been an effective rejection, even if wrongful � look for other remedy);
- Conforming goods, whether or not accepted, have been lost or damaged within a commercially reasonable time after risk of their loss has passed to buyer; or
- Where seller has identified goods to the K and there is no reasonable prospect of reselling them to a TP.
- Seller must hold the goods for the buyer, and if buyer pays the judgment he is entitled to the goods. Seller may resell the goods and deduct the amount received from the judgment.
- Cancel K
- No consequential damages available
- Incidental damages (2-710): Any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after buyer�s breach, in connection with return or resale of the goods, or otherwise resulting from the breach.
Buyer�s remedies (2-711)
- If buyer has not received goods or has rejected them or revoked acceptance (2-711)
- Cancel K
- Recover price paid
- Cover (optional): Within reasonable time, buyer can purchase substitute goods for reasonable price. Damages are cost of covering in excess of K price, minus expenses saved. (2-712)
- Damages for non-delivery: Market price at time of breach minus K price, plus incidental and consequential damages, less expenses saved.
- If buyer has not received goods, buyer may qualify for specific performance if goods are unique.
- If buyer has accepted goods and can no longer revoke: Buyer must sue on action for breach of warranty under 2-714.
- Damages = K price minus FMV of goods as received, or cost of repair (usually the same amount under either formula).
- Scope of damages is those losses resulting in the ordinary course of events from seller�s breach as determined in a reasonable manner.
- Incidental and consequential damages.
- Consequential damages (2-715)
- Economic loss: Where seller had reason to know at the time of K (foreseeable) of general or particular requirements and needs, breach of which were caused in fact by seller�s breach, and which could not have been prevented by cover or otherwise (mitigation).
- Personal injury or property damage: Proximately caused by seller�s breach.
- Incidental damages: Expenses incurred by buyer in inspecting, transporting, storing, or reselling rejected goods, or in effecting cover as a result of seller�s breach, or any other reasonable expense incident to delay or other breach.
- If an express or implied warranty applies, deduction of damages from amount still owing to seller upon notification to seller of reason for withholding (2-717). But in a consumer case, judge may give buyer more leeway and let him give notice after withholding.
- Upon rejection or revocation, buyer can hold goods, with a security interest in them, until refund of purchase price, or sell and sue for difference (or refund excess per 2-706) (2-711).
Limitation on remedies (2-719)
- If remedy agreed upon is exclusive, that is the only remedy available. Otherwise, buyer has remedies per agreement plus others not in agreement.
- Remedies can be limited to:
- Return of goods and repayment of price; or
- Repair and replacement of non-conforming goods or parts
- Consequential damages can be limited or excluded (express or implied), unless unconscionable. Limitation of damages for personal injury is prima facie unconscionable in consumer cases, but not commercial. Of course, seller can disclaim all warranties, and this becomes moot.
- At least minimum adequate remedies, defined in 2-719, must exist. K clauses to the contrary may be struck.
- When express remedies fail of their essential purpose and deprive the parties of the substantial value of the bargain, UCC kicks in.
- Creation of security interest
- Consent: K between parties creating security interest (aka collateral or lien) in personal property or fixtures. Judicial
Debt is unsecured, but becomes secured through judicial process (self help unavailable except for seller of goods has right to reclaim goods which buyer has not paid for). Example: Debt owed, p gets judgment, and then has 10 years (renewable) to record abstract of judgment against D �s real property located in the county. Or have sheriff put lien on personal or real property and force a sale, if amount owed is more than $500. Consumer debt collection must follow Fair Debt Collection Practices Act. Bankruptcy offers protection if filed within 90 days of lien. Lien on all of debtor�s property through service upon judgment debtor of Order of Examination. Lasts for 1 year. If debtor conveys properties to TPs seeking to protect them from lien, those conveyances may be fraudulent if intent is to defraud creditor, or if made while debtor is insolvent and made for less than reasonably equivalent value. Exemptions: Homestead exemption, clothing, appliances, furnishings, an automobile, tools of the trade, health aids, jewelry, life insurance benefits, unpaid wages. Consensual lien trumps exemptions.Statutory: Examples include IRS, mechanic�s liens. A9 does not apply.Forms
- Possessory vs. Nonpossessory:
If secured party has possession of the collateral, it�s possessory.
- Security interest is enforceable in absence of authenticated record if secured party has possession pursuant to agreement between the parties. Possession thought to be sufficient confirming evidence of existence of security agreement.
- Governing law is the law where the collateral is located.
If secured party doesn�t have possession, it�s nonpossessory.
- Enforceable only if evidenced by recorded language, authenticated by debtor, reflecting agreement by debtor to grant security interest and sufficiently describing collateral.
- Governing law is the law where the debtor is located (principle residence, PPB, or chief executive office).
Purchase money obligation
Buying something on loan where the item purchased is used as collateral for the loan. Limited to goods, fixtures, and software.Collateral
- Another security interest
Secured party may get a loan from a bank secured with the first security interest K (which is secured by whatever item was sold). A9 applies to any security interest in a security interest (2) even if the underlying security interest isn�t within the scope of A9, such as a mechanic�s lien.Personal property
FTC Credit Practices Rule prohibits non-possessory, non-purchase money security interests in household goods (but no private right of action). California has a similar law with a private right of action (1799.100). Federal Truth In Lending Law requires certain clear disclosures. Description in security instrument is sufficient if it reasonably identifies what is described. Generic description such as "all of debtor�s assets" is insufficient.Fixtures on real property
Requires 3-day right of rescission if consumer debtor is the homeowner, and disclosures. Fixture is defined by state�s real property law.Equipment
Secured party would want to make sure that the loan is paid off before the value of the equipment depreciates beyond the loan amount.Accounts (i.e. where debtor uses accounts receivable or deposit accounts as collateral)
- Secured party has control if the secured party is the bank at which the account is maintained, or if an agreement exists between the secured party, bank and debtor that bank will follow instructions of secured party without debtor�s consent.
- A9 prohibits assignment of deposit account in a consumer transaction.
- For control of security, see 8-106.
- For control of commodities, see 9-106.
Chattel paper (record evidencing monetary obligation combined with a security interest in specific goods)
- Secured party has control of electronic chattel paper if the records consist of a single authoritative copy which is unique and identifiable, the record identifies the secured party as the assignee of the record, the copy is maintained by secured party or designated custodian, copies can only be made by secured party, each copy is identifiable as a copy, and any revision is identifiable as an authorized revision.
Negotiable instrument, including promissory notes ("retail installment contracts" in the retail context, which is not an "instrument", because state and federal laws often prohibit promissory notes in consumer transactions; promissory notes are governed by A3)
- Fixed sum of money
- Unconditional promise
- Payable either to bearer or identified person
- Payable on demand or at time specified
- Doesn�t state any promise other than to pay
General intangible Assignment of right to payment (K terms prohibiting assignment generally ineffective under A9) Consignment Insurance receivable Commercial tort claim Unborn animals Crops (agricultural lien) Manufactured homes Software, but not if licensed (1-201(37) precludes licenses) Oil, gas, minerals Inventory
Would include after-acquired property clause because the inventory would be sold, and secured party would want an interest in the new incoming inventory as well as the cash received from the sale of inventory.Does not include
Assignment or sale of accounts, chattel paper, payment intangibles or promissory notes which are for the purpose of collection only or as part of a sale of the business out of which they arose Transfer of interest or assignment of claim from insurance [?] Right represented by a judgment� real property lien Assignment of deposit account in consumer transaction Real property.Creation of enforceable security interest (9-203(b))
- A2 Security interest under 2-711:
- 2-711: When buyer rightfully rejects or revokes acceptance, he has a security interest in the goods in his possession for any payments he has made on their price, and reasonable expenses. He has the right to resell.
- Security interest is valid, and until SP gets possession:
- Interest is enforceable even if other A9 requirements for enforceability are not met
- Filing not required to perfect
- Rights after default are governed by A2
- Security interest has priority over any other security interest in the goods, even a prior security interest.
- All other security interests require:
- Value (1-201(44)) given from secured party to debtor Debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and
- Debtor: Person with interest other than security interest [unsure how this affects ability of A to use his security agreement with B as collateral with C].
- Bailment is insufficient.
- Licensing of public rights: License itself cannot be used as collateral because only the government can approve transfer, but can use as collateral the right to receive remuneration for a transfer of the license.
- Satisfied by receiving goods under a K of purchase, even if purchase price hasn�t been paid.
One of the following:
- Debtor has authenticated (signed - electronic ok) (written) security agreement which describes collateral (agreement can consist of more than one document).
- Collateral is not a certificated security (stock certificate) and is in possession of secured party (or SP�s agent) pursuant to debtor�s security agreement or the bargain between the parties.
- No written security agreement needed when secured party has possession � possession alone is enough evidence of the agreement.
- The collateral is a certificated security in registered form and the security certificate has been delivered to the secured party per the security agreement
- The collateral is deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights, and the secured party has control pursuant to security agreement.
What is it
- "Asset securitization": [ account debtor � debtor/original secured party � secured party ]
- Retail establishments usually can�t afford to "carry their own paper" so they sell or assign their K�s (which are secured by whatever was purchased, and therefore chattel paper) to a finance institution in exchange for a discounted amount of money (discount analogous to the interest that would be received). A9 applies to these sales and assignments.
A9 favors transferability, and largely overrides K provisions trying to prohibit transferability or assignment (9-406, 407, 408, 409). Notice to original debtor not required, unless TP wants to collect directly from debtor.
- 9-408 gives certain protections to account debtors in case of assignment
Account debtor must continue to pay debtor until receives notice form secured party to pay SP directly, at which time acct debtor must pay SP (unless assignment is only a partial assignment of the account). Acct debtor can request proof of assignment. Notice of transfer of receivables (perfection) should (but isn�t required) be given to the world so that secured party will be protected against subsequent (fraudulent) transfers of the debt, and protection of interest in bankruptcy (9-401).
- Unless agreement provides for earlier notification, secured party can notify account debtor to pay secured party directly only if debtor defaults on its obligation to repay the debt to the secured party.
- Seller of security interest doesn�t retain any legal interest in the collateral, unless the buyer fails to perfect the interest. In that case, seller can resell to buyer2, and buyer2 can perfect and have priority over buyer1 (who failed to perfect). Therefore, buyer of security interest should perfect ASAP. (9-318)
Modification of original K by original parties is effective against secured party if made in good faith, if secured party hasn�t fully earned the right tot payment from account debtor. (9-405) Breach
Debtor breach: SP should notify AD to pay SP directly.
- Unless agreement provides for earlier notification, secured party can notify account debtor to pay secured party directly only if debtor defaults on its obligation to repay the debt to the secured party.
- Account debtor has right to verification
- Upon receipt of notice, account debtor must pay directly to secured party. If account debtor continues paying debtor, the debt to secured party won�t be discharged, and secured party can enforce against account debtor.
- If the amount that the secured party receives from account debtor is insufficient to cover debtor�s liability, secured party can sue debtor for deficiency.
AD default: Secured party can sue debtor for deficiency only if K allows for recourse. If no recourse, then secured party bears risk.
- If K is recourse, account debtor may have the right to withhold payment in event of warranty problem, in which case secured party may have the right to charge back defective receivables to debtor, or charge against a reserve withheld from price paid for assignment.
- If secured party has recourse, they must conduct collection in a commercially reasonable fashion, and may deduct from collections made reasonable expenses of collection and enforcement, including attorney�s fees. Entitled to deficiency to the extent that collection is insufficient to satisfy debt, unless parties have agreed otherwise.
Claims and Defenses
Secured party takes assignment subject to defenses and claims of an account debtor, regardless of when claim accrued. (9-404) Waiver of defenses clause (9-403): States that account debtor cannot assert against secured party any defenses he may have against debtor. Enforceable by secured party so long as assignment was made for value, in good faith, without notice of a claim to the property assigned, and without notice of a defense.
- Real defenses are not covered by waiver (incapacity)
- Personal defenses are covered by waiver (breach of warranty, fraud)
- FTC Holder in due course notice rule: Waiver of defenses are invalid in consumer K�s, and assignment requires notice of that fact. Failure to notify secured party of that fact, however, does not waive defenses.
- Promissory note is a negotiable instrument, and takes free of all defenses.
- Future advances (9-204)
- Security agreement may provide that the collateral secures both a loan mentioned in the security agreement, as well as future advances.
- These clauses are not favored by the courts. Before the revision to A9, courts held that absent a clear supportive intention, this clause would only cover future advances of the same kind and quality or related to the same transaction or series of transactions as the principal obligation.
- May make the security agreement unconscionable if gross inequality of bargaining power and terms unreasonably favorable to powerful party, and terms not understood by unpowerful party.
- Secured party with first priority (first to perfect) takes over subsequent SP�s regardless of the order in which the advances take place (9-323). Exception: When security interest is perfected automatically or attachment was temporary. See 9-323 for details.
After-acquired collateral (9-204)
- Security agreement may provide that security interest secures both present collateral and property which debtor acquires rights to after creation of security interest.
- Clause can�t be applied to commercial tort claim nor consumer goods, except an item purchased within 10 days after secured party gives value.
- Clause is very important when secured party takes interest in inventory or accounts generated by sale of inventory, but extremely limited in cases of consumer financing.
- FTC Credit Practices Rule prohibits non-possessory, non-purchase money security interests in household goods (but no private right of action). California has a similar law with a private right of action (1799.100).
- TP creditor is not entitled to restitution for the value of goods furnished to debtor which end up in the hands of secured party under an after-acquired property clause. A9 supersedes equity, and unsecured creditor should have perfected the interest. Exception is when secured creditor was involved in the transaction with the unsecured creditor, or in cases of fraud, estoppell, mistake, misrepresentation.
May be done by an after-acquired collateral clause Security agreement "A" secures one item, and security agreement "B" secures another item. Both items are collateral to both security interests, and if debtor defaults on one agreement, creditor can get at equity in either or both items.
- Payments may be credited to first item first (UCCC), or pro-rata to each item (in which case none of the items would be paid off until they all are).
UCCC 3.302: Allows cross-collateral in consumer transactions. Payments received are credited to first item, then second. Once first item has been paid off, security interest terminates and creditor can�t reach that item in event of default on second security interest.Proceeds
Security interest automatically attaches to any identifiable proceeds of the collateral. Secured party has the burden of tracing the funds. If commingled amounts in a bank account, p can get lowest intermediate balance between time of commingling and time of suit, even if debtor replenishes the bank account. Perfection: Security interest continues in the identifiable proceeds of the property, but the filing doesn�t automatically serve as public notice, therefore secured party must take additional steps to perfect interest in proceeds.Sale or Transfer of Collateral to TP
- General rule: Security interest continues in collateral and proceeds (9-315)
- Secured party has 12 months (or until expiration of security interest, if sooner) to file new financing statement (9-316).
- Buyer in the ordinary course of business (1-201(9)) takes free of security interest created by his buyer's seller, even if perfected and with knowledge. (9-320). Mainly applies to purchase of inventory.
- Buyer of consumer goods from seller who used them for consumer purpose takes items free of security interest, if he pays value, and is without knowledge, and purchases before a financing statement is filed (9-320).
- Buyer of goods and documents takes free of security interest if buyer gave value and receives delivery, and was without knowledge of security interest, and purchase occurs before perfection.
- Prospective purchaser of collateral, including a lender, should inquire where debtor obtained the collateral from, and do a search to see if the collateral is subject to a prior security interest
Perfection secures your right versus other p �s and in bankruptcy (most important reason to perfect) by giving constructive public notice. Best to perfect at time of creation of security agreement. (9-401) Lack of perfection is not a defense to suit against the debtor: Even if unperfected, still can enforce against D and grab the collateral, but has no priority against other perfected parties. Attachment (automatic perfection)
- Purchase-money security interest in consumer goods (unless other statute requires compliance � cars, planes)
- Assignment of accounts
- Payment intangibles
- Promissory note
- Health care insurance receivable
- A2 security interest
- Other minor interests listed in 9-310
Filing of a financing statement
- Non-purchase-money security interest in consumer goods
- Chattel paper (tangible or electronic)
- Negotiable documents and instruments (9-312), but possessor for value and without knowledge has priority because they are negotiable.
- Any other types of collateral which isn�t otherwise precluded.
- Name of debtor (records are indexed by name of debtor): Individual�s or corporation�s name. Fictitious business name alone is insufficient.
- Name of secured party
- Indicate collateral
- (Code provides safe-harbor form)
Authorized by debtor (9-501(a)) � usually by becoming bound under terms of a security agreement or separate authorization. Debtor need not sign security agreement. Accepted by filing office. If wrongfully rejected, it�s effective except against purchaser for value in reasonable reliance upon absence of record from the office. Expires 5 years after date of filing, but may be renewed for successive 5-year periods by filing continuation statement during last 6 mos of the 5-year period, which commences on day the prior period expires (9-515).
- SP can file after lapse, effectively re-perfecting.
- Once interest expires upon lapse, it is deemed never to have been perfected as against a BFP of the collateral or SP2, who then has priority against SP1.
Errors or omissions: Render statement ineffective if the error makes the statement seriously misleading. This occurs if the filing office�s standard search logic would not disclose the statement. Subsequent events
Security agreement generally places burden on debtor to notify secured party about these events. If SP sells security interest, new SP does not have to file a new financing statement just because of that transaction. Security interest continues. If debtor changes names (including incorporation in same jurisdiction) such that the filed financing statement is now seriously misleading (searcher wouldn�t be able to find with standard search logic or process), the statement is still effective for collateral acquired prior to or 4 months after name change. Filing not effective for collateral acquired more than 4 mos after change (i.e. after-acquired collateral), unless amendment re: name change is filed within 4 mos after change. It may be that part of the claim is secured, and part is unsecured, if part was acquired prior to the 4 mos and part after. (9-507, 508). If debtor moves to a different jurisdiction, perfection remains valid until earliest of expiration of security agreement or 4 months after debtor moves. (9-316) Secured party should file new financing statement in debtor�s new jurisdiction before interest lapses (expiration or 4 mos). If debtor sells collateral (and the security interest is one that continues in the collateral - see above) to purchaser in a different jurisdiction (including incorporation of debtor in different jurisdiction), the perfection remains valid until earliest of expiration of security instrument or 12 months after collateral is transferred to person in another jurisdiction (9-316). Re: after-acquired collateral, SP has to file in new jurisdiction immediately to perfect. Prospective lender to buyer should inquire where buyer acquired collateral, and do a thorough search of security records. Searching: The timeline sets up burdens for searching. If the time during which the security interest continues has expired, a prospective lender need only search the records for the current owner of the collateral. If time has not yet expired, prospective lender needs to search under current owner and previous security holder. Once interest expires upon lapse, it is deemed never to have been perfected as against a BFP of the collateral or SP2, who then has priority against SP1.Correct location for filing and governing law
- Secretary of state [each state can specify � in CA it�s the SoS] in jurisdiction of (9-301):
- General rule: Residence of individual debtor; a corporation�s place of business, or chief executive office if multiple places of business � 9-307). That state�s law governs perfection and priority.
- Possessory collateral: State of location of collateral determines perfection and priority.
- Negotiable documents, goods (including inventory), instruments, money, or tangible chattel paper: State of location governs perfection by fixture filing; timber to be cut; and the limited issue of effect of non/perfection and priority of a nonpossessory security interest in the collateral.
- As a last ditch effort, file in all of the possible states.
- Location of filing mortgages on real property (applicable for fixtures) is where the fixture is located.
Possession by agent of secured party is ok also, but possession by bailees is sufficient only with additional requirements of 9-312, 313. Goods Personal property Money (only way to perfect against cash) Negotiable documents and instrumentsControl
Definition: Control exists if secured party can have the securities sold without further action by owner. Deposit account (but not in consumer transactions, except to the extent the account includes proceeds of disposition of collateral � 9-109). Control by:
- SP is the bank;
- SP authorized by debtor and bank to dispose of funds without further consent by debtor; or
- SP is a customer with respect to the account (i.e. added as a signatory)
Negotiable instruments Tangible chattel paper Electronic chattel paper Certificated securities Letter of credit rights Investment property (8-106, 9-106)Compliance with statute
Traditional perfection isn�t practical because this collateral can move great distances, and that is the purpose of the item. SP may also retain possession of the title. Prior to purchase, purchaser should inspect the title to verify ownership and non-existence of prior liens. Where statute requires compliance, filing of financial statement is ineffective. (9-311) Vehicles on dealer�s lots serve as collateral for the floor plan loan the dealer has � at that time, the property is inventory, which is not governed by certificate of title. (9-311) Certificate-of-title covering automobiles and vehicles which require security interest to be indicated on the title certificate. Security interests in airplanes and parts must be registered with the FCC. (49 USC 44107) Security interests in waterborne vessels is perfected by certificate-of-title registered with the Secretary of Transportation. (46 USC 31321)Fixtures
In some jurisdictions, equipment remains personal property even after installation on real property, in which cases the real property secured lender has no property interest in the equipment, and no priority dispute arises. In other jurisdictions, where personal property becomes a fixture once attached, priority dispute between lenders (real property and personal property) can result. First to file (perfect) wins. If collateral is equipment in more than one jurisdiction, you just file in the location of the business incorporation, and that covers the collateral no matter what state it�s in. If collateral is equipment in some jurisdiction but fixtures in another jurisdiction, you file financing statement in the state of the company�s incorporation, and fixture filing in the state of the fixture location. Best to CYA and file both with Sect�y of State and county recorder. Filing: Fixture is defined by state�s real property law. The law of the jurisdiction where the fixture (goods) is located applies for determining where to file (9-501). In CA, fixture filing takes place at the county recorder�s office in the county where the real property is located.Priority (only relevant if there is a conflict)
- Order of priority, subject to subordination agreement by parties
- First in time to file, or otherwise perfect (carries over to proceeds and after-acquired collateral, but if collateral is non-filing, see 9-322 and 323)
- Purchase money security interest (goods and software) takes priority if perfected when debtor receives possession of collateral or within 20 days thereafter (9-324). If collateral is inventory, SP must perfect when debtor takes possession.
- Perfected secured creditor, and between two perfected SP�s, first in time wins.
- First to attach
- Lien creditor without knowledge of security interest
- Lien acquired when p obtains a writ of attachment and instruct the sheriff to levy the writ on the collateral. Levy is what occurs when sheriff goes out and controls the property.
- Unperfected secured creditor
- Secured creditor
- Non-secured creditors
- Party with priority satisfies his debt before any less-priority creditor takes any residual.
- BFP of chattel paper or instrument has priority by filing or possession over other SI if no notice of prior SI (9-330).
- SI in fixtures is generally subordinate to conflicting interest of the related real property.
- Perfected SI in fixtures has priority over encumbrancer or owner of real property if fixture SI is perfected "first in time" and has priority over any conflicting interest of predecessor in title of encumbrancer; fixtures are readily removable and SI was perfected before goods became fixtures; or conflicting interest is a lien that was obtained after SI was perfected.
- Perfected purchase-money SI in fixtures has priority over conflicting interest of real property if the interest of owner arises before goods became fixtures, and the SI is perfected by fixture filing within 20 days of the goods becoming fixtures. (9-334)
When a breach occurs is a term of the K.
- Unless overridden by statute, i.e. 2-717 allows purchaser to withhold payment (a breach in itself) to the amount necessary to offset defect to goods when warranty exists, upon notification to seller of reason for withholding, so long as purchaser doesn�t exceed amount permitted.
- Has creditor waived breach?
- If an unreasonable time has passed, waiver may exist.
- Past waivers, but creditor can revoke waiver with notice that they will enforce future breaches.
- Breach accelerates of entire sum due
Ways debtor can solve problem
- Reinstate the debt (along with costs and interest)
- With real property, debtor may have statutory right to reinstate.
- A9 does not permit debtor to reinstate debt secured by personal property or fixtures.
- In CA, debtor defaulting on debts secured by vehicle can reinstate in some circumstances.
- Chapter 13 and 11 create a de-facto reinstatement when debtor sets up payment plan.
Redeem collateral from lien by paying full debt owed, plus any pre-payment penalty.
- If done prior to default, then it�s simply pre-payment.
- If done after default but before foreclosure, the lien is extinguished.
- Usually can�t be done after foreclosure, but there is a state right to redeem real property after judicial foreclosure sale.
- Cal. Civil Code 1812.2 says that buyer can redeem goods at any time prior to SP�s sale of the goods by paying or tendering the amount due under the K plus reasonable expenses.
Mixed collateral: Article 9 conflicts with real property law in several areas:
- Right to reinstate: None for A9, yes for real property
- Right to redeem: Yes for both
- Real property secured creditor must foreclose prior to suing on the debt.
- Deficiency is limited for real property, none for A9 unless commercially unreasonable sale
- Deficiency is limited to fair value in real property, no limits in A9.
Remedies of secured party
Waivers of secured party�s duties and obligations under A9 are generally ineffective (9-602). Includes:
- Right to reinstate, if applicable (real property)
- Right to redeem prior to foreclosure
- Duty of secured party to notify of disposition
- Prohibitions or limitations on recovery of deficiency
- FMV limits on amount of deficiency (real property)
Upon default, creditor has a choice of foreclosure on collateral, suing on underlying obligation, or both, in any order. (9-601, Cal. Civil Code 1812.2) Repossession of collateral
Requires valid security interest Self-help repo of tangible collateral is authorized by 9-609, so long as it is done either without breach of the peace, or through judicial process.
- Usually occurs with automobiles.
- Prohibited in consumer goods with FMV of less than $1k at time of purchase, other than vehicles.
- Liability for breach of peace occurs by entering residence without authorization, or anyone causing or likely to cause an immediate disturbance of public order. Any physical resistance by debtor would require repo to retreat to avoid breach. Verbal resistance is usually considered breach of peace. Intimidation by pretence of authority is a breach because it amounts to force. No breach by taking vehicle from street or driveway. Remedy is conversion or intentional tort (trespass, IIED). Cannot be waived.
- If self-help repo was unlawful, debtor can get actual and consequential damages. UCC, but not in CA, says that if the goods were consumer goods, debtor can get all service charges (interest) plus 10% of principle amount as minimum damages.
- If collateral is not movable (i.e. a factory), secured party may render it inoperable, although this may be against SP�s interest.
Cause of action seeking to obtain possession and foreclose on collateral, and cause of action seeking judgment for debtor�s personal liability on the debt.
- Creditor can enforce money judgment before obtaining collateral � particularly if collateral has been destroyed or can�t be located.
Writ of possession authorizes levying officer to seize collateral from debtor and deliver it to secured party. Deficiency is an unsecured debt.Secured party may choose to retain possession of collateral, or may sell under 9-610. Either way, within 10 days after retaking the goods, he must give notice to buyer of intent stating amount of overdue payments, and if buyer paying amount due under the K within 10 days of the notice, in order to redeem goods. (Cal Civil 1812.2 � Retail installment sales K). Sale of collateral ("foreclosure by disposition")
- To interested parties (9-611)
- Subordinate secured parties who aren�t given notice are SOL if transfer of collateral is made to BFP.
- Before sale
- Notification in non-consumer transaction must be at least 10 days before disposition (9-612).
- Consumer case requires reasonable time, probably at least 10 days.
- Unless goods are perishable (9-611).
- Should include debtor, collateral (commercially reasonable description), method of disposition, right to accounting, time, place of public sale (or earliest date of private disposition) (9-613 � provides safe harbor form).
- Consumer transaction: Must include the above general notification plus description of liability for deficiency, phone number from which the amount that must be paid for redemption is available, and phone number or address for more information (9-614 � provides safe harbor form).
- Failure to notify
- CA: Creditor absolutely barred from collecting on deficiency.
- Some jurisdictions (not CA) impose rebuttable presumption rule: If no notice, creditor can collect deficiency only if sale was fair and for a reasonable value.
- Debtor can offset deficiency for amount of loss on unreasonable sale. (9-626)
- See Deficiency section below for further details.
- Cal Civil Code (Retail installment sales K)
- 1812.2 says that buyer can redeem goods at any time prior to SP�s sale of the goods by paying or tendering the amount due under the K plus reasonable expenses.
- 1812.3 says that SP must given debtor notice of time and place of sale at least 10 days before sale.
- Commercially reasonable manner
- Manner: Sale must ordinarily be done in a public sale during business hours, under conditions reasonably calculated to bring fair market price. Private sale ok so long as that is commercially reasonable given the subject matter and the sale is reasonable.
- Price received: An obviously low sale price is an indicator that sale was unreasonable, and rebuttable presumption that the FMV would have been enough to pay off the total amount of the obligation.
- Collateral should be grouped and identified in a commercially reasonable manner. Example: Don�t advertise a grape harvesting truck as a truck. If you�re selling goods of different types, segregate them.
- Secured party may purchase collateral at public disposition, or at private disposition if customarily sold on recognized market or subject to widely distributed standard price quotes.
- Goods sold include warranty of title unless disclaimed.
- Applied to expenses of collection and enforcement (including attorneys fees), and then satisfaction of obligations (primary then secondary). (Cal Civil 1812.4 � Retail installment sales K)
- Refund any excess recovery (debtor liable for deficiency, unless waived). No refund or deficiency for sale of accounts, chattel paper, payment intangibles or promissory notes. (Cal Civil 1812.4 � Retail installment sales K)
- Upon request, accounting is to be provided to debtor.
- Primary secured parties are protected in case of sale by subordinate secured parties, and retains a lien in the collateral purchased by BFP. Alternatively, SP can go after the proceeds received by subordinate secured party.
- None if improper notice or if commercially unreasonable sale, unless secured party can prove that even if he followed the rules, there still would have been a deficiency (i.e. show what a commercially reasonable sale would have gotten) (9-626).
- If consumer transaction, the above does not apply and judge has discretion to fashion remedy. Consumer transaction: Debtor incurred obligation primarily for personal, family or household purpose; SI secures obligation; and collateral is held or acquired primarily for personal, family or household purposes.
- If SP breached this section and debtor can prove that commercially reasonable sale would have netted more than the amount owing (i.e. there would have been more residual money available), debtor can sue to recover the loss.
- In retail installment sales K, Cal Civil 1812.5 bars SP from pursuing deficiency against debtor or anyone who succeeded to the obligations of debtor.
- CA: No deficiency in consumer transactions other than automobiles.
- TP who supplies collateral to debtor is not liable for deficiency. Only debtor is.
If secured party violates a rule in this section, debtor has statutory damages available, but not in consumer transactions (9-626).Retention ("strict foreclosure")
- 9-621 covers what notice is required: Any person known to SP who has an interest in the collateral must be sent a proposal.
- Debtor sacrifices any surplus
- A9 gives debtor the right to insist on sale of collateral with surplus going to debtor.
- In most cases of consumer goods, 9-620 precludes strict foreclosure.
- Chapter 7: Discharge of individual�s debts
- Overwhelmingly individuals, who have no non-exempt assets.
- Surrender nonexempt assets to trustee (in over 90% of consumer cases, all assets are exempt)
- Future earnings are exempt
- Unsecured creditors are paid pro rata from the surrendered assets (if any)
- Secured creditors: Unavoided liens pass through bankruptcy (in personam liability discharged, but not in rem), and creditor can satisfy its claim from the collateral following a brief delay imposed by the automatic stay.
- Has first priority on nonexempt assets. Trustee liquidates, and if value exceeds amount of secured debt, that extra money goes to pay unsecured creditors pro rata.
- Creditor entitled to the smaller value of debt or value of collateral (with unsecured claim for deficiency).
- Debtor must make a choice:
- Surrender the property
- Redeem personal property from lien by paying off debt in lump sum
- Reaffirm the discharged debt (agreement must be filed with bankruptcy court, and in CA cannot be for debts secured by residences due to anti-deficiency legislation).
- Continue making payments on the loan, which presumably will appease creditors.
Chapter 11: Restructure
- Primarily corporations � and frequently used by public or private corporations. Individuals can use, but unusual.
- Once bankruptcy is filed, the business continues to operate as normal, but a new legal entity replaces the debtor, called the Debtor In Possession.
- Written disclosure statement, approved by bankruptcy court, which must be approved by creditors and holders of ownership interest. Seeks to repay creditors either in full or in part.
- If there are unsecured creditors, the plan will need to propose payment to them as well as secured creditors, otherwise the unsecured creditors could vote no to the plan.
- Usually takes months to years to get a plan confirmed once bankruptcy is filed.
- If no feasible plan is approved or proposed, case converts to Ch. 7 or dismissed.
- Discharge of debts is effective on confirmation of plan to repay, and thus the plan is in effect a new K between creditors and debtor and debtor is treated as a new entity with relation to the creditors.
- Secured creditor is guaranteed stream of payments totaling amount which will have the same value to the creditor as would a lump sum payment of the claim at the time the plan is confirmed by the bankruptcy court; and secured creditor must retain a lien to secure the stream of payments.
- Undersecured creditor doesn�t get any more than the lesser of the lien, or the value of the collateral. Disadvantage for creditors where collateral appreciates in value beyond the higher value of the lien after the plan is instituted, because they�re stuck with the plan.
- There are some ways that a secured debt can become unsecured.
Chapter 13: Restructure
- Available for individuals with regular income whose debts don�t exceed prescribed limits.
- Debtor proposes a payment plan, and may keep all of his property. Creditors have no input into formulation of the plan. If debtor completes the plan, any remaining debts are discharged, including secured debts. If debtor fails to meet plan (>50% of cases), case can be converted to Ch. 7.
- Secured creditors must receive a stream of payments totaling the value of a lump-sum payment at time plan is approved; and secured creditor can retain a lien on the collateral to secure the stream of payments.
- Debtor may not alter payment terms of claim secured by mortgage or deed of trust on debtor�s principal residence. Exception: If debtor defaulted prior to filing Ch. 13, if debtor can henceforth timely pay the mortgage, debtor may prevent foreclosure by proposing plan to cure default within reasonable time. Debtor must pay any interest and expenses payable under the note.
Applies to all bankruptcy cases, and stops all creditor activity that might have the effect of advancing the creditor�s interest at the expense of the debtor. Stops all collection efforts, all harassment, and all foreclosure actions. Creditor cannot contact debtor requesting or demanding payment. Effective even if creditor is unaware of stay. Relief: Secured creditor can seek relief of the stay, and usually would if the collateral is of significant value and uninsured or subject to unacceptable risk, or if it is depreciating rapidly, or on real property if the debtor appears unable to maintain mortgage payments.
- In chapter 11, there are lengthy delays, and courts will often make a condition to continuation of the stay that debtor must make interim payments to secured creditor, to protect against depreciation or erosion of equity by accumulation of interest. Court will deny relief if collateral will not immediately be jeopardized by delay necessary to confirm the plan.
- In chapter 13, cost of seeking relief may not justify the action unless collateral has significant value or secured party doubts likelihood of prompt confirmation of the plan. It is difficult to get relief from a Ch. 13 stay. If the only asset is real property, a plan must promptly be filed with reasonable possibility of confirmation, or interest must promptly be paid.
In general, unsecured and unperfected collateral can be avoided in bankruptcy, and perfected secured collateral usually may not be avoided (i.e. purchase money liens on automobiles and residences). Liens that impair exemptions
- In personam liability is discharged but in rem liability of property subject to a lien generally survives.
- If the property is a household good, the FTC restricts non-possessory, non-purchase money security interests and debtors can avoid some of these liens on exempt property.
- Property being executed upon from judicial lien: Some of the value of the residence is exempt from execution, which precludes creditor from forced executions sale until value of residence exceeds amount of exemption plus amount of secured debt. Creditor still gets money when debtor sells or refinances.
Liens that are preferential
- Creditor first to obtain interest in debtors property is entitled to satisfy as much of his claim as the value of the property permits before any other creditor may satisfy a different claim.
- This does not apply to a creditor who gets an interest in the 90 days prior to filing of bankruptcy, who must forfeit winnings which will then be distributed pro rata to all creditors.
Liens that are secret or secret for too long
- Lien must be publicly recorded by the time of filing of bankruptcy. Otherwise, it�s avoided.
- Similarly, unrecorded lien has lower priority than recorded lien or BFP.
- Lien perfected within 90 days of filing of bankruptcy petition may be avoided.