1 Secured Transactions Assignment 26 Priority Under State Law.

1

Secured TransactionsAssignment 26

Priority Under State Law

2

The Big Picture

Part Two: The Creditor Third Party Relationship

Chapter 6-7: Perfection

Chapter 8: Priority

Assignment 26: Priority Under State Law

3

The Big Picture

Part Two: The Creditor Third Party Relationship

Chapter 6-7: Perfection

Chapter 8: Priority

Assignment 26: Priority Under State Law

Chapter 9: Specific Priority Rules

Assignment 28: Lien Creditors against Secureds

Assignment 29: Future Advances

Assignment 31: Preferences

Assignment 32: Secureds against Secureds

Assignment 36: Buyers against Secureds

Land, Fixtures, Agriculture and Minerals

4

The Big Picture

Assignment 26 revisits three prior assignments:

5

The Big Picture


Assignments 4 and 5: Foreclosure sale

Assignment 3: Possession pending foreclosure

6

The Big Picture


Assignments 4 and 5: Foreclosure sale

Assignment 3: Possession pending foreclosure

but in the three-party context

7

The Rules Governing Foreclosure

Subordinate

Prior

Under whichsale held

8


1. Sale discharges the lien under which the sale is held and all subordinate liens, §9-617

2. The buyer takes subject to prior liens

3. The proceeds go:

1. To the expenses of sale

2. To the lien under which the sale is held

3. To subordinate liens

4. To the debtor

Subordinate

Prior

Under whichsale held

9




3. The proceeds go:




4. To the debtor

Before After

Subordinate

Prior

10




3. The proceeds go by §9-615(a)Before After

Subordinate

Prior

11




3. The proceeds go by §9-615(a)

a. To the expenses of saleBefore After

Subordinate

Prior

12





a. To the expenses of sale

b. To the lien under which the sale is held

Before After

Subordinate

Prior

13







c. To subordinate liens

Before After

Subordinate

Prior

14








d. To the debtor (ignoring unsecureds)

Before After

Subordinate

Prior

15








d. To the debtor (ignoring unsecureds)

No proceeds go to prior (“senior”) liens.

Before After

Subordinate

Prior

16

The Rules Governing Possession1. §9-609. After default, a secured party may take possession

of the collateral.

2. A judgment creditor has the right to levy on any property of the debtor

3. When rights to possession clash, the holder of the prior perfected lien has the right to possession. Grocer’s

Supply v. Intercity Investment

4. The holder of a prior perfected lien must either foreclose or stand aside so that the holder of a junior lien may do so.

Frierson v. United Farm Agency

5. The exercise of dominion and control over collateral a secured party has the right to possess is wrongful and

constitutes conversion

17


of the collateral.

2. A judgment creditor has the right to levy on encumbered or unencumbered property. The sheriff takes possession.

3. When rights to possession clash, the holder of the prior perfected lien has the right to possession. Grocer’s

Supply v. Intercity Investment





18


of the collateral.


3. The senior secured party “is entitled, by virtue of its priority, to take possession of collateral from the junior secured party.” §9-609, comment 5.





19


of the collateral.



4. Limit on 3: The prior creditor must either foreclose or stand aside so that the junior creditor can foreclose. Frierson v. United Farm Agency



20


of the collateral.




5. Wrongful exercise of dominion and control over another’s collateral constitutes conversion

21

Notification date

22

Notification dateNoticedate

Saledate

10 days

§9-612

A secured party must send notice to the debtor of disposition, §9-611(b)

23

Notification dateNotification

dateSaledate

10 days

§9-612


“Notification date” is the date on which the secured party sends that notice, §9-611(a)(1)

24

Notification dateNotification

dateSaledate

10 days

§9-612



The secured party must also send notice to other lien holders who perfected by filing or notation as of the record date

25

Notification dateRecord

dateNotification

dateSaledate

10 days

§9-612




The record date is ten days before the notification date. §9-611(c)(3)(B).

10 days,

§9-611(c)(3)(B)

26

Notification dateRecord

dateNotification

dateSaledate

10 days

§9-612




The record date is ten days before the notification date. §9-611(c)(3)(B).

Main rule: Notify easy-to-find lien holders, perfected as of the record date.

10 days,

§9-611(c)(3)(B)

27

Notification date

Safe harbor steps:

1. Send a search request 20-30 days before notification date

Notificationdate

Saledate

10 days

§9-612

Search request

20-30 days,

§9-611(e)(1)

28

Notification date

Safe harbor steps:


2. If no search report by notification date, notify only the debtor and requesters

Notificationdate

Saledate

10 days

§9-612

Search request

20-30 days,

§9-611(e)(1)

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Notification date

Safe harbor steps:



3. If search report, notify the creditors listed

As ofdate

Notificationdate

Saledate

10 days

§9-612

Search request

20-30 days,

§9-611(e)(1)

Searchreport

30

Notification date

Safe harbor steps:



3. If search report, notify the creditors listed

4. Record date doesn’t matter

As ofdate

Notificationdate

Saledate

10 days

§9-612

Search request

20-30 days,

§9-611(e)(1)

Searchreport

31

Problem 26.1, page 450

17K

10K

29K

25K

How much should Kinski bid?

If she is the high bid, what title does she get?

$200 sale expense

32


17K

10K

29K

Before After

17K

25K 25K



$200 sale expense

1. Sale discharges the lien under which the sale is held and all subordinate liens


33


17K

10K

29K

Before After

17K

25K 25K



$200 sale expense



34

8K




17K

10K

29K

Before After

17K

25K 25K

How much should Kinski bid? Up to $8K

$200 sale expense

35




17K

10K

29K

Before After

17K

25K 25K


Expenses of sale?

$200 sale expense

8K

36




3. The proceeds go:




4. To the debtor

17K

10K

29K

Before After

17K

25K 25K


Expenses of sale? Paid from proceeds

$200 sale expense

37




3. The proceeds go:




4. To the debtor

60K

8K

Before After

75K

How much should a buyer bid?

$200 sale expense

30K

38




3. The proceeds go:




4. To the debtor

60K

8K

Before After

75K 75K

How much should a buyer bid? Zero?

$200 sale expense

30K

60K

30K

39




3. The proceeds go:




4. To the debtor

60K

8K

Before After

75K 75K


Expenses of sale?

$200 sale expense

30K

60K

30K

40




3. The proceeds go:




4. To the debtor

60K

8K

Before After

75K 75K


Expenses of sale? Paid by levying creditor.

$200 sale expense

30K

60K

30K

41




3. The proceeds go:




4. To the debtor

Anyone want to bid $10?

60K

8K

Before After

75K 75K


Expenses of sale? Paid by levying creditor.

$200 sale expense

30K

60K

30K

42

Problem 26.3, page 450We represent Diamond Head Bank,

$270k first

270k

400k

$200 sale expense

?

43


$270k first

a. Should we be concerned about this sale?

400k

$200 sale expense

270k

?

44


$270k first

a. Should we be concerned about this sale?

Before After

400k 400k

$200 sale expense

270k270k

?

45


$270k first

a. Should we be concerned about this sale? Miami sheriff sales

Before After

400k 400k

$200 sale expense

270k

?

270k

46


$270k first


b. Can we protect ourselves by buying at the sale?

Before After

400k 400k

$200 sale expense

270k

?

270k

47


$270k first


b. Can we protect ourselves by buying at the sale? Yes, but we are bidding additional money

Before After

400k 400k

$200 sale expense

270k

?

270k

48


$270k first



c. Can we prevent the sale? Before After

400k 400k

$200 sale expense

270k

?

270k

49


$270k first



c. Can we prevent the sale? Maybe, Grocers Supply.

Before After

400k 400k

$200 sale expense

270k

?

270k

50


$270k first




Before After

400k 400k

$200 sale expense

d. Were we entitled to sale notice?

270k

?

270k

51


$270k first




Before After

400k 400k

$200 sale expense

d. Were we entitled to sale notice? Remedy? 9-625(b), -617(b)

§9-611(c)(3). The secured party shall send . . . notification to . . . any other secured party that . . . perfected by the filing of a financing statement [or in a federal or certificate of title system]

270k

?

270k

52


$270k first




Before After

400k 400k

$200 sale expense

d. Were we entitled to sale notice? Remedy? 9-625(b), -617(b)

§9-611(c)(3). The secured party shall send . . . notification to . . . any other secured party that . . . perfected by the filing of a financing statement [or in a federal or certificate of title system]

270k

?

270k

53


of the collateral.




5. Wrongful exercise of dominion and control over another’s collateral constitutes conversion

54


Friend wants to borrow $100k on a second mortgage

800k

100k

$1.2m

55



a. If friend doesn’t pay $100k mortgage, what will we do?

800k

100k

$1.2m

56




800k

100k

$1.2m

57




b. Will we recover our $100k?

Before After

800k

100k

$1.2m

58




b. Will we recover our $100k?

Before After

$1.2m $1.2m

800k

100k

800k

59




b. Will we recover our $100k? Yes

Before After

800k800k

100k

$1.2m $1.2m

60





c. What if friend pays on $100k mortgage, defaults on $800k? Before After

100k

800k

$1.2m

61






800k

100k

$1.2m $1.2m

62






d. Can we protect ourselves by provision in the mortgage?

800k

100k

$1.2m $1.2m

63







Cross default clause helps a little

800k

100k

$1.2m $1.2m

64







Cross default clause helps a little

“Wraparound” mortgage. She pays on $900k, we pay on $800k.

800k

100k

$1.2m $1.2m

65

1. Intercity levied on Grocery Store inventory for a $36K judgment

2. Grocers Supply sues Intercity and recovers $24K in damages from the levy

3. Grocers Supply gives the inventory back to Grocery Store

4. Intercity: What should we do now?

Pessimist: Intercity can’t collect

Optimist: Grocers Supply had right to property only for sale

5. How do we raise it? Motion to set aside earlier judgment for fraud? Declaratory

judgment action?


600K

36K

Grocer’s

Supply

66


2. Grocers Supply sued Intercity; won return of collateral plus $24K in damages. Why?

3. Grocers Supply gives the inventory back to Grocery Store





judgment action?


600K

36K

Grocer’s

Supply

67



3. Intercity released levy; Grocers Supply gave the inventory back to Grocery Store





judgment action?


600K

36K

Grocer’s

Supply

68








judgment action?


600K

36K

Grocer’s

Supply

69








judgment action?


600K

36K

Grocer’s

Supply

70








judgment action?


600K

36K

Grocer’s

Supply

71







5. How do we raise it? Motion to set aside earlier judgment for fraud? Declaratory judgment action?


600K

36K

Grocer’s

Supply

72







5. How do we raise it? Don’t levy. Motion to set aside earlier judgment for fraud? Declaratory judgment action?


600K

36K

Grocer’s

Supply

83


90K

90K

Property taxes have priority over preexisting liens

84


90K

2K

Property taxes have priority over preexisting liens 90K

85


90K

2K


a. If the state forecloses its property tax lien, what effect on Fidelity’s mortgage?

90K

86


Before After

90K

2K



Mortgage is discharged

90K 90K

87


Before After

90K

2K




b. How can Fidelity self-protect during foreclosure?

90K 90K

88


Before After

90K

2K




b. How can Fidelity self-protect during foreclosure? Bid or pay the tax

90K

90K

90K

89


Before After

90K

2K




b. How can Fidelity self-protect during foreclosure? Bid or pay the tax

90K

Amalgamated Bank v. Superior Court, 57 Cal. Rpt. 3d 686 (2007). The bank’s designated bidder got stuck in traffic on the way to the foreclosure sale. Property worth $6.5 million was sold for $2,000. The court confirmed the sale.

90K

90K

90


Before

90K

2K




b. How can Fidelity self-protect during foreclosure? Bid or pay the taxIf Fidelity pays, how get the money back?

90K

After

90K

90K

91


Before

90K

2K




b. How can Fidelity self-protect during foreclosure? Bid or pay the taxIf Fidelity pays, how get the money back? Subrogation?

90K

After

90K

90K

92


Before

90K

2K





90K

After

90K

90K

Debtor

Guarantor

CreditorDebt

Guarantee

93


Before

90K

2K





90K

After

90K

90K

Debtor CreditorDebt

PaymentGuarantor

94


Before

90K

2K





90K

After

90K

90K

Debtor Debt Guarantor

95


Before

90K

2K





c. What provisions should be in Fidelity’s mortgage?

90K

After

90K

96


Default

90K

2K






Failure to pay property taxes is a default.

90K

97


Default If tax paid

90K

2K







Secured may pay the taxes and add them to the mortgage.

90K 90K

92K

98


With escrow

90K

2K







Secured may pay the taxes and add them to the mortgage

Debtor must pay estimated taxes into escrow monthly

90K

1 Secured Transactions Assignment 26 Priority Under State Law.

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Transcript of 1 Secured Transactions Assignment 26 Priority Under State Law.