Debtor-Creditor Final Exam

Why is the time a bankruptcy petition is filed important?

(1) Under the Bankruptcy Code, a new legal entity called the bankruptcy estate (consisting of all legal or equitable interests that the debtor has in any property) is formed upon the commencement of a case at the filing of the petition; (2) the trustee (official representative of the estate) appointed in the case's powers under the code will relate back to the exact date of the filing of the petition; and (3) an automatic stay is put into place under the Bankruptcy Code that prevents all creditors from attempting to collect on debts owed by the debtor. As soon as bankruptcy is filed, an automatic stay is created; then creditors are no longer allowed to try to collect. If any creditor wants to avoid the automatic stay, they must apply to the bankruptcy court to do so.

Who gets priority when a debtor's assets are distributed in bankruptcy?

1. Payment of administrative expenses (fees) 2. Certain claims entitled to special priority: tax, child support, alimony 3. Secured claims/creditors 4. Unsecured claims/creditors (pro rata). Any debts left unpaid after distribution are discharged.

How long are Article 9 liens good for?

5 years, then must be renewed.

General Intangible

A catch-all term for personal property excluding specifically defined terms. Often includes rights relating to intellectual property. Any personal property, including things in action. The term includes payment intangibles and software. Intellectual property rights such as a copyright or a patent have been considered general intangibles, both of which are extremely valuable rights that can be used as collateral. Also includes government issued licenses or permits as long as statute doesn't prohibit such use.

Software

A computer program and any supporting information provided in connection with a transaction relating to the program, excluding those included in the definition of goods (which primarily arises when software is embedded in a computer, making it a good).

Deposit Account

A demand, time, savings, passbook, or similar account maintained with a bank. Essentially checking and savings accounts with your bank (a bank account).

Chattel Paper

A record or records that evidence both a monetary obligation and a security interest in or a lease of specific goods. It's an asset that can be sold, and often is sold for financing purposes, so it can be collateral.

What are the exceptions to the rule that a seller of goods not paid under Article 2 of the UCC generally may not recover goods?

A seller may stop delivery (but may not stop delivery if negotiable title issued, unless surrender document to carrier); and cash sales may seek to reclaim goods.

What is NOT a general intangible?

Accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction.

Consensual liens

Article 9

How is personal property that could be subject to an Article 9 security interest classified?

By placement into one class, or type, of collateral. The type of collateral an item is depends on what the person's intended purpose/use for the item is when the person bought it. Dual purpose items are often categorized based on the debtor's word unless something raises the creditor's suspicion. Court looks to actual use of collateral to ascertain primary purpose. Classification of collateral determined at time of creation of security interest. Burden on creditor to do some investigation as to purpose, but not creditor's fault if debtor lies about purpose.

What are the types of bankruptcy?

Chapter 7 (liquidation); Chapter 11 (corporations only, reorganization); Chapter 13 (reorganization).

Account debtor

Client who owes the attorney money

How should a creditor perfect their security interest in a debtor's deposit account?

Collateral in the form of a deposit account must be perfected by control.

What are the four types of goods?

Consumer goods, farm products, inventory, and equipment.

How do you determine if collateral is a consumer good?

Court looks at how they used the collateral and how they reported it in financial documents of various types. Look at circumstances of each case. Creditor should investigate if it does not seem plausible the debtor could use the thing being purchased for the use they claim it's being purchased for.

What is the purpose of Article 9?

Created to codify commercial practice to encourage the extension of credit by protecting creditors but also preventing them from overreaching to protect the debtor's rights.

What are the four parts of a debtor-creditor analysis?

Creation of a security interest; perfection; priority; and enforcement

What does a creditor do when a debtor slips into bankruptcy?

Creditors file a claim (unless notified not to do so by the bankruptcy court)

Inventory

Generally, goods for sale or lease. Goods, other than farm products, which are leased, held for sale or lease, to be furnished as part of a services contract, raw materials, works in progress, materials used or consumed in business (e.g., fuel used in operations). Required that the sales or leases are or will be in the ordinary course of business. Goods are inventory, even though not held for sale or lease, if they are used up or consumed in a short period of time in producing a product or providing a service.

How can cows be farm products?

If held to raise, graze or fatten up and have the facilities to do so.

What is NOT an instrument?

Investment property, letters of credit, or writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card.

Do liens survive bankruptcy?

Liens survive bankruptcy which only discharges in personam not in rem obligations. Also may seek relief from automatic stay and sell property.

How do you determine type of collateral?

Look to the purpose and use of collateral to determine type. Type is important because rules on how to perfect differ based on type.

Are provisions by sellers retaining title to goods until payment is complete effective?

No, because transferring goods transfers title. Article 2 indicates that in a sale of goods, title is transferred upon delivery of goods to the buyer and purported reservation of title is a mere security interest. If a seller delivers possession of goods to a buyer, then title transfers to the buyer, giving the buyer rights in the collateral. It doesn't matter if the buyer hasn't paid for it in full or if the check bounces. If a seller wants to protect themselves, they better perfect their security interest. Pawn Brokers case.

Is all collateral goods?

No, collateral may include personal property that is not a good.

May a secured creditor that executes a security agreement with a debtor that grants the creditor a security interest in the debtor's accounts receivables use that security agreement to claim a security interest in a separate company's accounts receivables?

No, there was no evidence of a voluntary lien because there was no security agreement between that creditor and the alleged separate debtor. An entity cannot go after another entity's assets without a security interest. Piercing the corporate veil is an option but only if evidence allowing it in the facts. Nursing home case.

Does the creation of a security interest require that the parties have the intent to create a security interest?

No. When a security interest is created, this Article applies regardless of the form of the transaction or the name that parties have given to it/their subjective intent. If the transaction falls within the definition of security interest (if it walks and talks like a security agreement), it doesn't matter that the parties called it a lease agreement instead, Article 9 still applies.

Unsecured Debt Collection

Outside of Article 9. A seller of goods not paid under UCC article 2 generally may not recover goods. Remedy is to bring action to get paid.

Are income taxes discoverable?

Personal income taxes aren't discoverable, but corporate tax records are. Can be used to see if the party deducted the item they claim is consumer goods as equipment on their business's taxes.

What is the main benefit of a lien?

Priority, usually first in time. If unsecured creditor sells property of debtor with liens buyer takes subject to liens.

Why does Article 9 require perfection of a security interest and what is the advantage gained from perfecting?

Public record exists so that subsequent creditors are on notice of whether the collateral being offered by the debtor as a security interest to the creditor has already been pledged as collateral to another creditor. Whichever creditor perfects their security interest by filing a lien in public record gets priority for proper compliance with Article 9. Overrules first in time rule.

judgment debtors' exam

Similar to a deposition where attorney for the judgment creditor notices exam of the judgment debtor and gets asset information

What is exempted from execution?

Some of the debtor's property, such as homestead, household goods, tools of their trade, etc.

What is a voluntary lien?

The debtor agrees to attachment of the security interest AND the debtor has authenticated the security interest (usually by signing the security agreement) that has a description of the collateral, the secured party has possession of the collateral, delivery for certificated securities to the secured party under Article 8, or control for bank accounts.

What happens to the proceeds from property seized and sold at a sheriff's sale?

The proceeds are used to pay the fees and judgment creditor, then any surplus would go to the debtor.

Are the creditor and secured party the same person?

They can be, but DO NOT have to be.

Are the debtor and obligor the same person?

They can be, but DO NOT have to be.

Statutory liens

Think mechanics lien

Creation of a security interest requires what?

To create a security interest, you need attachment. A security interest attaches to collateral only when it becomes enforceable against the debtor. A security interest is enforceable against the debtor and third parties with respect to the collateral only if: value has been given; the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and there is a voluntary lien.

Can cattle be equipment?

Yes, example is if used for your dude ranch where you have to have cattle for city slickers to come learn to herd on cattle drives.

Are goods and software mutually exclusive?

Yes. Computer programs usually constitute software, and are not goods. However, under the circumstances specified in the definition of goods, computer programs embedded in goods are part of the goods and are not software.

Bill of Lading

a document evidencing the receipt of goods for shipment issued by a person engaged in the business of transporting or forwarding goods.

Document

a document of title, warehouse receipt, or bill of lading

Payment Intangible

a general intangible under which the account debtor's principal obligation is a monetary obligation as opposed to a thing in action.

Instrument

a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment. Examples: checks, promissory notes, bill of lading.

Debtor

a person having an interest in the collateral. Person who puts up the collateral.

Secured party

a person in whose favor a security interest is created or provided for under a security agreement, whether or not any obligation to be secured is outstanding. The person in whose favor the security interest is created. It's usually our creditor.

Warehouse Receipt

a receipt issued by a person engaged in the business of storing goods for hire; designates who is the owner of the goods stored in the warehouse.

Accounts receivable

a right to payment of a monetary obligation. Often used as collateral. Often used in professional/service based businesses like law. A

Commercial Tort Claim

a tort claim where the claimant is an organization or if an individual the claim relates to business and does not include personal injury.

Order

a written instruction to pay money signed by the person giving the instruction. The instruction may be addressed to any person, including the person giving the instruction, or to one or more persons jointly or in the alternative but not in succession. An authorization to pay is not an order unless the person authorized to pay is also instructed to pay.

Promise

a written undertaking to pay money signed by the person undertaking to pay. An acknowledgement of an obligation by the obligor is not a promise unless the obligor also undertakes to pay the obligation.

Goods

all things moveable when security interest attaches. Includes the four types of goods.

Chapter 11 Bankruptcy

allows a business organization to come up with some plan for reorganization of its financial situation that, once approved by the bankruptcy court, stands at least a fairly good chance of allowing it to continue on in business with a greater probability that it can make a go of it. No trustee; Creditors vote on plan; Absolute priority shareholders may not retain interest in reorganized corporation unless all creditors paid in full.

Security Agreement

an agreement that creates or provides for a security interest; a contract; NOT a notice document.

Security Interest

an interest in personal property or fixtures which secures payment or performance of an obligation.

In rem

an obligation secured by a thing (usually personal property or real property.)

Negotiable Instrument

an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder; (2) is payable on demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.

appointing a receiver

appointing a receiver to collect money at judgment debtor's place of business; gets debtor's attention

What is a writ of execution?

asking the court to have the sheriff's office seize the debtor's property

Electronic Chattel Paper

chattel paper evidenced by a record or records consisting of information stored in an electronic medium.

Tangible chattel paper

chattel paper evidenced by a record or records consisting of information that is inscribed on a tangible medium. Paper, stone tablet, etc.

Secured Creditor

creditor who can collect from debtor/obligor against collateral/property.

Unsecured creditor

creditor who only has the debtor's promise to pay (future payment)

Article 9 of the UCC

deals with security interests in personal property. It sets out a comprehensive scheme for the regulation of security interests in personal property and fixtures. There is an old version (pre-2002), a new version (post-2002), and 2010 Amendments. DOES NOT cover real property.

Bankruptcy

debtor doesn't have to be insolvent to enter bankruptcy; law is all federal governed by Title 11 of the USC (but Title 11 often defers to state law and that state law is usually the Uniform Commercial Code); petitions for bankruptcy can be filed with the bankruptcy court by the debtor (in a voluntary situation) or the debtor's creditors (in an involuntary situation).

Unsecured debt

debtor has a personal obligation to pay.

How do you enforce a judgment in an unsecured debt collection?

defendant becomes a judgment debtor; creditor gets a judicial lien; obtain a writ of execution from the court; sheriff's sale; writ of garnishment; judgment debtors' exam; appointing a receiver; investigation via checking public records and hiring an investigator to find assets.

What types of accounts are excluded from accounts receivable?

deposit accounts aka your bank accounts, chattel paper, instruments, commercial tort claims, investment property, letter-of-credit rights or letters of credit, or rights to payment for money or funds advanced or sold, other than rights arising out of the use of a credit or charge card or information contained on or for use with the card

Quasi-intangibles

do have a physical form, they occupy space, have to be present (and safely stored) somewhere, and can be lost or stolen. However, their physical form is not inherently valuable in itself. They are valuable because of what they represent, legal rights.

Secured credit

extend credit collateralized by property.

Judicial Lien

good for ten years after recorded, then must be renewed.

Equipment

goods other than inventory, farm products, or consumer goods. Good are this type if they do not fall into another category. Goods used in a business are equipment if they are fixed assets or have, as identifiable units, a relatively long period of use.

Consumer goods

goods that are used or bought primarily for personal, family or household purposes. What the thing is doesn't matter, what matters is primary purpose at the time the thing was bought.

Farm Products

goods, other than standing timber, where debtor is engaged in farming operation and which are crops, livestock, supplies, products of crops or livestock (unmanufactured state). Animals in a herd of livestock are covered whether the debtor acquires them by purchase or as a result of natural increase. Products of crops or livestock remain farm products as long as they have not been subjected to a manufacturing process. Some processes are so closely connected with farming - s/a pasteurizing milk or boiling sap to produce maple syrup or sugar - that they would not constitute manufacturing. However, an extensive canning operation would be manufacturing. Once farm products have been subjected to a manufacturing operation, they normally become inventory.

Document of Title

includes bill of lading, dock warrant, dock receipt, warehouse receipt or order for the delivery of goods, and also any other document which in the regular course of business or financing is treated as adequately evidencing that the person in possession of it is entitled to receive, hold, and dispose of the document and the goods it covers. To be a document of title, a document must purport to be issued by or addressed to a bailee and purport to cover goods in the bailee's possession which are either identified or are fungible portions of an identified mass. A document may be in either negotiable or non-negotiable form.

Promissory Note

instrument that is a promise

Draft

instrument that is an order

Real estate

mortgage or deed of trust

Chapter 7 Bankruptcy

most bankruptcies are straight bankruptcies; allows for the liquidation of any debtor's estate and for the debtor to come out of the bankruptcy proceeding with most of its debt forgiven by law; trustee appointed who collect all assets except exempt assets (by statute).

Creditor

person who is owed the obligation.

Obligor

person who owes the obligation; promisor with a legal obligation to make good on their promise; owes performance of obligation to repay.

promisor

person/entity making the promise

promisee

person/entity promise is made to

In personam

personal obligation

personal property

primarily UCC Article 9

obligee

promisee with a legal right to receive what was promised to them

Farming operation

raising, cultivating, propagating, fattening, grazing, or any other farming, livestock, or aquacultural operation.

Security interest

secured creditor's interest in subject property; an interest in personal property or fixtures which secures payment or performance of an obligation.

Chapter 13 Bankruptcy

sets out a procedure under which an individual wage-earning debtor can formulate a new plan for the eventual repayment on a more feasible schedule of the debts with which they had previously been overwhelmed. Trustee collects assets but does not manage; Creditors DO NOT vote on plan.

Judgment debtor

the liable defendant

Collateral

the personal property subject to a security interest.

Execution

the process of turning some valuable real or personal property into money in order to satisfy the judgement/debt owed.

Judgment creditor

the successful plaintiff

Can an unsecured creditor engage in self-help execution?

the unsecured creditor has no unilateral right to engage in any "self-help" execution, they cannot go and seize the discovered property. They must return to the courts to obtain a writ of execution to collect the desired property.

unpaid unsecured (general creditor)

the unsecured creditor who has not been paid by the debtor as was promised

Sheriff's sale

usually judgment creditor bids, obtains judgment debtor's property and resells. Notice must be served in a newspaper of general publication prior to sale.

Intangibles

valuable types of personal property that often serve as collateral but that take no material form.

How is an assignment distinguishable from a security interest?

w/ a security interest, there is no requirement to notify the collateral that it is collateral. Difference is intent and requirement of default. If a party does not have possessory rights in the collateral until the debtor defaults, then the party has a security interest. An unconditional, immediate transfer of possessory rights is probably an assignment or sale. Contract that transfers conditional rights is not an assignment, it's a security interest. A security interest doesn't grant the secured party the right to possess/own the secured property, it grants a lien on the property in case of default.