After requests from several students, I have decided to use the same format for the Final as for the Midterm. That is, a short essay question will be given out on Monday 8/13, to be completed outside class and turned in at the start of class on Wednesday, 8/15. The in-class part of the Final will be 40 multiple choice questions selected to cover all chapters since the Midterm. (And I hope to choose questions to avoid some of the problems with the midterm!) The multiple choice part of the Final will *not* be cumulative.
For those who chose the short paper alternative, the class will resume at 2:30 on Wednesday the 15th. The short papers are due in the Accounting Department office by 5 PM, or may be sent to me as e-mail attachments by 5 PM on 8/15.
Types of Credit
Unsecured
Creditor has only the character and capacity of the debtor to ensure payment
Secured
Creditor also has collateral -- the right to take property of the debtor and have it sold, with the proceeds applied towards the debt
"Purchase Money"
Secured debt where the creditor is also the seller -- no 3rd party money is used for the purchase by debtor
"Recourse" or "non-recourse"
Can the creditor recover more than the proceeds from selling the collateral -- a "deficiency judgment"? If so, "recourse", if not, "non-recourse"
Security interests in personal property
"Moveables", as opposed to land
The “lien”
Means to "tie up" property, before taking it away from debtor. Is followed by a legal taking and a sale w/ proceeds applied towards debt
The judgment lien
Is filed by person with a lawsuit judgment as an aid to collection. Public filing puts the world on notice there is a claim against the asset. Debtor can't sell clear title.
Statutory liens
hotel, common carriers, warehouse operators, and mechanics' liens against real property
Purpose is to make sure providers of goods and services will be paid
Statutory Lien Procedure
File notice of lien with county recorder w/in limited time period. Give notice to owner.
When lienholder paid, should get and file release of lien
Other security interests in personal property: UCC Art IX
Security interests in real estate
California practice (differs, state to state)
Borrower gives a promissory note secured by deed of trust. (A legal fiction that trustee holds property for "true" owner). On default, lender instructs trustee to sell property at a public sale. On repayment, borrower should get the deed of trust "reconveyed"
Trustees sales are heavily regulated (See Civil Code Secs. 2924 ff.), and most CA real estate debt is non-recourse (all purchase money, and all 1-4 unit owner occupied)
Guarantees
Guarantee and Suretyship the same in California
One person stands behind the debt of another
Secondary liability normally must be in writing
Creditor must disclose known risks to surety/guarantor
Insurance often a form of guaranty: eg. a Fidelity bond
Effect of guarantee
Guarantor is secondarily liable so creditor must go against primary first, unless this is waived
Guarantor has generally same defenses as primary debtor. Payment, tender of payment or release as to primary debtor frees up guarantor
Guarantor's rights
Subrogation: pay creditor and take over creditor's rights to payment/reimbursement from primary debtor
Right of contribution among multiple guarantors
Creditors' collection remedies
prejudgment attachment
Tie up debtor's property to prevent it from disappearing during law suit
Must have notice and hearing to get court order for sheriff to attach and hold debtor's property
Collecting on judgments: judgment creditor
The judgment lien (CA is 10 yrs., can extend)
Writ of execution
Tells sheriff to seize property and sell it at judicial sale to pay creditor
Number of items exempt from execution
Garnishment is taking of third party items owed to debtor
Examples: bank accounts and wages
Limited by consumer credit law to 75% of after tax earnings in total, except for tax and child support debts
Creditor's composition and assignment for benefit of creditors: rarely found. Bankruptcy instead.
UCC Article 9 applies to "personal property" = moveables. Very structured, with many defined terms of art
Some special terms
Security agreement: the written contract which describes the collateral and creates a security interest
For example, promissory note that describes security or cross references security agreement
Collateral
May be goods, including consumer equipment, farm, inventory, fixtures, or may be paper rights, like receiveables, or other intangibles
Collateral may secure future loans as well as present ones, and proceeds from sale of collateral may themselves be collateral
"Floating lien": lien that attaches to after-acquired property
Example inventory financing: as old is sold, new inventory becomes collateral
Note: Special rules for automobiles and other certificate of title property
Creating security interests
- Need written security agreement, if creditor doesn't possess the collateral
- Secured party must give value (consideration) to debtor
- Debtor must have current or future rights to own or possess the collateral
If these requirements met, the security interest "attaches" to the collateral
"Perfecting" security interests
Attachment creates secured rights against the debtor. Perfection creates rights against the world
Commonly perfected with a "financing statement"
Filed in state secretary of state's office UCC 1 effective five years.
Must have name and address of debtor, secured party, and description of collateral
Secured party can *transfer* financing statement rights by filing a statement of assignment
Alternately creditor may perfect by physical possession -- a "pawn" or pledge
For consumer goods, purchase money credit creates & perfects a security interest when it attaches.
Secured priorities: why "attach" and "perfect" matter
Perfected trumps attached beats none
If equal priorities, first in time, first in right
if security is fungible and commingled, proportional to cost
Exceptions to the priority of perfection
After acquired property
Purchase money security interest may prevail over prior perfected non-purchase money security interest. This means: Seller of this item has priority over general secured creditor. (Note policy favoring sales on credit)
After Acquired Inventory
Seller of item that will be in buyer's inventory has priority iff Seller notifies other creditor before buyer/debtor receives inventory
Practical signifcance: Know your customers in distribution chain, and who their UCC creditors are: UCC statements are public record
After Acquired non-inventory
seller has ten days to perfect lien over prior creditors by filing
Buyer in ordinary course of business
Takes goods free of security interests in inventory
Buyers of secondhand consumer goods
Take free of security interests if they do not have actual/constructive knowledge of security interest
Note relation of this rule to the "perfection w/o filing" rule for consumer goods -- filing gives constructive notice
Mechanic's liens prevail over other security interests, even earlier ones
Significance of security interests: rights on default
Typically failure to pay when due
If provided by agreement, creditor may take possession of collateral if no breach of the peace
Example automobile repossession
Secured party may sell the collateral or retain it
Retaining satisfies the entire debt
Sale must be commercially reasonable with notice to debtor. Proceeds applied to (1) sale expenses, (2) the debt, (3) junior debts secured by this collateral, with (4) any surplus to debtor
After sale creditor may, by contract have right to deficiency judgment against debtor
notes and arrangement (c) 2001 Robert H. Daniels