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Secured TransactionsAssignment 13

Default, Acceleration and Cure Under State Law

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The Big Picture

Chapters 1 and 2. Creditors’ RemediesChapter 3. Creation of Security InterestsChapter 4. Default: The Gateway to Remedies

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The Big Picture

Chapters 1 and 2. Creditors’ RemediesChapter 3. Creation of Security InterestsChapter 4. Default: The Gateway to Remedies

Assignment 13. Default, acceleration and cure under state law.Assignment 14. Default, acceleration and cure under bankruptcy law.

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Basic ConceptsInstallment loan. A loan repayable in more than one paymentLine of credit. An arrangement in which the creditor agrees to

lend and receive payment at times elected by the debtor, up to the line amount and until the contracted due date of the lineHow does this “line” differ from your Visa or Mastercard “line?”

Payable on demand. Immediately payable when the creditor requests payment

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Basic ConceptsDefault. Breach of the loan agreement (contract principles)Acceleration (of installment payments). Rendering a debt

previously payable at some future time due and payable now.Cure (of default). Reversing a default by tendering performanceTender. “An unconditional offer of money or performance to

satisfy a debt or obligation.” Black’s Law DictionaryThe relationship between acceleration and cure:

Old Republic Insurance v. Lee. “[A] mortgagor, prior to election of . . . accelerat[ion] . . . may tender the arrears due and thereby prevent [acceleration].”

Default triggers a race: If acceleration is first, default can’t be curedIf cure is first, obligation can’t be accelerated.

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When does acceleration occur?Generally: When the contract says it occursBut: In re Crystal Properties, Ltd., 268 F.3d 743 (9th Cir.

2001)“[A] creditor must take affirmative action to put the debtor on notice that it intends to exercise its option to accelerate. “Both state and federal courts have made clear the unquestionable principle that, even when the terms of a note do not require notice or demand as a prerequisite to accelerating a note, the holder must take affirmative action to notify the debtor that it intends to accelerate.”

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Problem 13.1, page 234Truck loan

made

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Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat missestwo payments

Truck loanmade

Problem 13.1, page 234

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Problem 13.1, page 234

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat missestwo payments

Truck loanmade

Pat sendscheck

Problem 13.1, page 234

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Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat missestwo payments

Bank rejectspayment

Truck loanmade

Pat sendscheck

Problem 13.1, page 234

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Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this?

Pat missestwo payments

Bank rejectspayment

Truck loanmade

Pat sendscheck

Problem 13.1, page 234

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Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this? Not if she cured before acceleration.

Pat missestwo payments

Bank rejectspayment

Truck loanmade

Pat sendscheck

Problem 13.1, page 234

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Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this? Not if she cured before acceleration.

When did Pat cure?

Pat missestwo payments

Bank rejectspayment

Truck loanmade

Pat sendscheck

Problem 13.1, page 234

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Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this? Not if she cured before acceleration.

When did Pat cure?

Pat missestwo payments

Bank rejectspayment

Truck loanmade

Pat sendscheck

Problem 13.1, page 234

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Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this? Not if she cured before acceleration.

When did Pat cure? At “tender,” p.223; §1-202(f).At option exercise.Which happened first?

b. What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration?Waiver? No. Waiver by estoppel? No reliance.

Pat missestwo payments

Bank rejectspayment

Truck loanmade

Pat sendscheck

Problem 13.1, page 234

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Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this? Not if she cured before acceleration.

When did Pat cure? At “tender,” p.223; §1-202(f).When did Bank accelerate? At option exercise.Which happened first?

b. What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration?Waiver? No. Waiver by estoppel? No reliance.

Pat missestwo payments

Bank rejectspayment

Truck loanmade

Pat sendscheck

Problem 13.1, page 234

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Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this? Not if she cured before acceleration.

When did Pat cure? At “tender,” p.223; §1-202(f).When did Bank accelerate? At option exercise, notice effortWhich happened first?

b. What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration?Waiver? No. Waiver by estoppel? No reliance.

Pat missestwo payments

Bank rejectspayment

Truck loanmade

Pat sendscheck

Problem 13.1, page 234

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Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this? Not if she cured before acceleration.

When did Pat cure? At “tender,” p.223; §1-202(f).When did Bank accelerate? At option exercise, notice effort Which happened first?

b. What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration?Waiver? No. Waiver by estoppel? No reliance.

Pat missestwo payments

Bank rejectspayment

Truck loanmade

Pat sendscheck

Problem 13.1, page 234

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Problem 13.2, page 235

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

One pay-ment due

Oct 1

Now

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Problem 13.2, page 235

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

One pay-ment due

Oct 1

Now

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Problem 13.2, page 235

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

Is Art in default?

One pay-ment due

Oct 1

Now

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Problem 13.2, page 235

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

Is Art in default? No. Just late.

One pay-ment due

Oct 1

Now

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Problem 13.2, page 235

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

Is Art in default? No. Just late.a. When will Art be in default?

One pay-ment due

Oct 1

Now

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Problem 13.2, page 235

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

a. Is Art in default? No. Just late.b. When will Art be in default?

Ten daysafter

One pay-ment due

More thanone pymt due

Oct 1 Oct 11 Nov 1

Ten daysafter

Nov 11

Now

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Problem 13.2, page 235

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

a. Is Art in default? No. Just late.b. When will Art be in default? Nov 12.

Ten daysafter

One pay-ment due

More thanone pymt due

Oct 1 Oct 11 Nov 1

Ten daysafter

Nov 11

Now

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Problem 13.2, page 235

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

a. Is Art in default? No. Just late.b. When will Art be in default? Nov 12.c. What happens if he doesn’t pay?

Ten daysafter

One pay-ment due

More thanone pymt due

Oct 1 Oct 11 Nov 1

Ten daysafter

Nov 11

Now

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Problem 13.2, page 235

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

a. Is Art in default? No. Just late.b. When will Art be in default? Nov 12.c. What happens if he doesn’t pay?

Ten daysafter

Accel-eration

One pay-ment due

More thanone pymt due

Oct 1 Oct 11 Nov 1

Ten daysafter

Nov 11

ForcbeginsNow

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Problem 13.2, page 235

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

a. Is Art in default? No. Just late.b. When will Art be in default? Nov 12.c. What happens if he doesn’t pay?When is Art’s last chance to pay without serious repercussions?

Ten daysafter

Accel-eration

One pay-ment due

More thanone pymt due

Oct 1 Oct 11 Nov 1

Ten daysafter

Nov 11

ForcbeginsNow

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Problem 13.2, page 235

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

a. Is Art in default? No. Just late.b. When will Art be in default? Nov 12.c. What happens if he doesn’t pay?When is Art’s last chance to pay without serious repercussions?

Ten daysafter

Accel-eration

One pay-ment due

More thanone pymt due

Oct 1 Oct 11 Nov 1

Ten daysafter

Nov 11

Forcbegins

d. Different under the Illinois reinstatement statute?

Now

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Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel.

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Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

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Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?If we do, what is the worst that could happen?

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Problem 13.3, page 235

Liquidation 30-day risk?

Inventory $240kEquipment $80kLease $40-80kTotal $360-400k

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?If we do, what is the worst that could happen?

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Problem 13.3, page 235

Liquidation 30-day risk?

Inventory $240k Sale and diversionEquipment $80kLease $40-80kTotal $360-400k

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?If we do, what is the worst that could happen?

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Problem 13.3, page 235

Liquidation 30-day risk?

Inventory $240k Sale and diversionEquipment $80kLease $40-80kTotal $360-400k

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?If we do, what is the worst that could happen?

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Problem 13.3, page 235

Liquidation 30-day risk?

Inventory $240k Sale and diversionEquipment $80k DestructionLease $40-80kTotal $360-400k

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?If we do, what is the worst that could happen?

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Problem 13.3, page 235

Liquidation 30-day risk?

Inventory $240k Sale and diversionEquipment $80k DestructionLease $40-80kTotal $360-400k

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?If we do, what is the worst that could happen?

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Problem 13.3, page 235

Liquidation 30-day risk?

Inventory $240k Sale and diversionEquipment $80k DestructionLease $40-80k DefaultTotal $360-400k

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?If we do, what is the worst that could happen?

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Problem 13.3, page 235

Liquidation 30-day risk?

Inventory $240k Sale and diversionEquipment $80k DestructionLease $40-80k DefaultTotal $360-400k

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?If we do, what is the worst that could happen?

What should we do?

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Problem 13.3, page 235

Liquidation 30-day risk?

Inventory $240k Sale and diversionEquipment $80k DestructionLease $40-80k DefaultTotal $360-400k

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?If we do, what is the worst that could happen?

What should we do? Replevin

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Problem 13.3, page 235

Liquidation 30-day risk?

Inventory $240k Sale and diversionEquipment $80k DestructionLease $40-80k DefaultTotal $360-400k

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?If we do, what is the worst that could happen?What should we do? ReplevinWith or without notice to Walt?

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Problem 13.3, page 235

Liquidation 30-day risk?

Inventory $240k Sale and diversionEquipment $80k DestructionLease $40-80k DefaultTotal $360-400k

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?If we do, what is the worst that could happen?What should we do? ReplevinWith or without notice to Walt? Notice creates the 30-day risk!

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Problem 13.3, page 235

Liquidation 30-day risk?

Inventory $240k Sale and diversionEquipment $80k DestructionLease $40-80k DefaultTotal $360-400k

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?If we do, what is the worst that could happen?What should we do? ReplevinWith or without notice to Walt? Notice creates the 30-day risk! JR Hale Contracting, page 225.

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Basic ConceptsWaiver. The voluntary relinquishment of a known rightWaiver by estoppel. Misleading a debtor into the honest and

reasonable belief that the creditor intended a waiverGood faith. Honesty in fact and the observance of reasonable

commercial standards of fair dealing. §1-201(b)(20); 9-102(a)(43).

Insecurity clause. A provision that the loan is in default if the secured party “deems itself insecure” or the like.

§1-309. A creditor can exercise an insecurity clause only if the creditor in good faith believes the prospect for payment impaired.Comment 1. “This section has no application to demand instruments . . . .”

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Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this? Not if she cured before acceleration.

When did Pat cure? At “tender,” p.223. §9-623 comment.When did Bank accelerate? At option exercise, notice effort Which happened first?

What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration? Waiver? Waiver by estoppel?

Pat missestwo payments

Bank rejectspayment

Truck loanmade

Pat sendscheck

Problem 13.4, page 236

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Basic Concepts, Good Faith

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

§1-309: “A term providing that one party . . . may accelerate payment . . . ‘at will’ or ‘when he deems himself insecure’ or in words of similar import shall be construed to mean that he shall have the power to do so only if he is in good faith . . . .”

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Basic Concepts, Good Faith

Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith.

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

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Basic Concepts, Good Faith

Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power.

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

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Basic Concepts, Good Faith

Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. ■ This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced . . .

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

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Basic Concepts, Good Faith

Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. ■ This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

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Basic Concepts, Good Faith

Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. ■ This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

53

Basic Concepts, Good Faith

Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. ■ This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

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Problem 13.6, page 236Macklin Mortgage needs money. Wants to call Lance’s loan.a. Does Macklin have right to call it for:

1. Failure to furnish proof of insurance last year?No. Probably waived

2. Failure to furnish proof of insurance 23 days ago?Yes? Too soon to imply waiver (J.R. Hale case)

b. Lance: “Macklin waived this year’s proof by estoppel when it failed to require last year’s proof.” Good argument?Contract ¶13 negates that implication

c. Is Harvey risking a damage judgment by calling the loan?d. Are you willing to continue representing Macklin?e. If you had to continue, what would you advise?

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Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.

Problem 13.6, page 236