Secured transactions - attachment
Agreements:
Security agreement - the creditor gives value
System of Perfection: relationship between one creditor and the other creditors of the one debtor
Perfection by possession: creditor takes physical possession of the collateral - attachment. Attachment and perfection are simultaneous.
2nd method of Perfection. Perfection by Filing. Financing statement (UCC-1), includes what the collateral is, name and address of both parties, and must be signed by the debtor. Creditor does not have to sign. Filed with the Secretary of State. Is time-stamped and filed under the name of the debtor. UCC-1 search is executed by any creditor. If the first creditor acquires perfection, all other creditors do not have rights to the collateral.
Scenario: The first creditor attaches only, the second creditor perfects, the debtor defaults. The second creditor has rights, the first does not.
Subordination agreement. The first creditor can subordinate his interest to the second creditor
If a creditor acquires the collateral due to default, the creditor must sell in a commercially reasonable manner.
Mezzanine lending: patient lenders, but charge a higher rate; always subordinate to first lender who has attachment or perfection
The security agreement can be filed instead of the financing statement (UCC-1), for a fee.
A financing statement expires in 5 years.
Creditor can file a continuation statement to continue the financing statement; the creditor must sign; the debtor does not have to sign.
Upon full payment of attached property, the creditor must file a termination notice.
Exceptions to filing centrally with the state.
Must file with the county: Farm products, consumer goods, timber and minerals
Can have automatic perfection: Purchase money security interest (PMSI) in consumer goods only. Filing with the state or county with a financing statement is not necessary.
21-day rule: Creditor gives back the collateral to the debtor for purposes of resale. The creditor does not lose attachment or perfection for 21 days.
4-month rule: If the collateral moves out of state, the first-in-time creditor has perfection for 4 months.
Repossess the collateral:
Can go into debtor’s property to repossess
No state involvement; constitution prohibits the state from depriving anyone of life, liberty, and property without due process. A private party can deprive the debtor of property. If there’s state involvement, the repossession is invalid. If the creditor gets a court order to repossess (replevin suit), then the sheriff’s deputy will have authority to carry out the repossession
No breach of the peace allowed to carry out the repossession.
Bona-fide purchaser for value (BFP). Bank-financed inventory purchased by a bona-fide purchaser for value (in the ordinary course of business) is not attached or perfected by the bank
Floating lean. This lean would jump from the bank-financed inventory to the proceeds (cash or accounts receivable) in the event of a default.
If the bona-fide purchaser sells his property to another person and the bona-fide purchaser defaults, the creditor, with automatic perfection, cannot recover the property from that other person. However, if the creditor files for perfection, then the creditor can recover from that other person.
PMSI inventory and PMSI consumer good
Second-in-time inventory makes a PMSI inventory loan must perfect his security interest in that collateral by the time the debtor takes possession of the inventory and gives notice to the first-in-time debtor, the second-in-time creditor is superior to the first-in-time creditor.
The same is with equipment.
Perfected security interest has more rights than bankruptcy.
Perfected secured creditor beats the trustee with regard to rights.
Trustee is a hypothetical lien creditor, appointed by Congress, can have “sub trustees”
If the debtor owes more on the collateral than what the collateral is worth, the creditor is an unsecured creditor for difference.
A creditor cannot improve their position for a period of 90 days prior to the filing of the bankruptcy.
Federal law
Same in CA, IL, and FL
Chapter 7
Liquidation process
Property, not exempt, is given to a trustee
Gives the debtor a fresh start
Chapter 11
Reorganization of a debtor’s affairs
Not a liquidation process
Debt is extinguished by future earnings
Filing a bankruptcy
Chapter 7 has the option of voluntary or involuntary filing
Voluntary
File a petition: List creditors, name, mark disputed if so, statement of affairs (how did you get into this mess)
Clerk stamps “Filed”. Order for relief is entered; this is an injunction; it prohibits creditor action against the debtor, even if the creditor is the IRS or an ex-spouse
Injunction (automatic stay provision) has limits:
Will not stop criminal actions
Will not stop an IRS audit
Anybody can file a Chapter 7 except for railroads or other entities not covered by Business Law II.
Section 341 meeting, meeting of all creditors with the debtor, trustee makes a finding of assets or no assets. If finding of assets, assets of debtor gets handed in to the trustee.
Involuntary
Chapter 7 or 11 only
12 or more creditors: if 3 creditors is owed more than $10,000 collectively, those creditors can put the debtor on an involuntary bankruptcy
Less than 12 creditors: if 1 creditor is owed more than $10,000, that 1 creditor can put the debtor on an involuntary bankruptcy
Involuntary debtor has 20 days to object; debtor can turn a chapter 11 involuntary to a chapter 7 voluntary liquidation
Test for bankruptcy:
Old: Liabilities is greater than the equity
New: Is the debtor paying his bills as they become due in the ordinary course of business?
Trustee
Investigates the case, conduct the meeting of creditors
If executory contract exists, trustee can assume them or reject them
Estate of the debtor consists of everything at the time of filing
Post-petition property can be retrieved by the trustee 180 days after filing. Consists of:
inherited property, proceeds of life insurance, benefits of a divorce proceeding, income from income-producing property, such as rent
Has power of avoidance
Nothing illegal, immoral, or unethical about a debtor making a preference payment; trustee can call back preference payments
Checks back 90 days or more for preference payments
Checks if transfer of payment based in antecedent debt
Checks if transfer is made while debtor is insolvent; debtor is presumed to be insolvent within 90 days before bankruptcy filing
If transfer of payment is to an insider (a wife), debtor is presumed insolvent for 1 year prior to filing bankruptcy
The payment was made more than he normally would’ve gotten if this were a liquidation
Exempt property (exempt from being retrieved by the trustee in a bankruptcy)
(Opt-out provision, allowed states to insert their own exemptions)
Clothes
75% of equity of residence
$500 for jewelry
veteran’s benefits
certain annuity payments
Fraudulent Conveyance Act: Any attempt to hinder, delay, or defraud creditors 1 year prior to filing bankruptcy, such as transferring property to another for inadequate consideration
Creditor typically uses this against debtor.
Debtor’s assets – what happens:
Usually the creditor gets the properties
Debt’s classifications
Order of distribution of unsecured creditors
Administrative expenses – includes trustee first, lawyers, and accountants (appointed by the court, but engagements needs to be accepted by the accountant)
Gap creditors – creditors that enter after the filing of the bankruptcy
Certain employee wages owed within 90 days of filing the bankruptcy
Consumer deposits up to $900
Taxes
General and all unsecured creditors
Exceptions to discharge of debt
Taxes
Debts taken under false pretenses
Intentional or willful injury claims
Creditor not listed by the debtor
Alimony and child support
Student loans – sometimes (can become dischargeable if the loan is 7 years old AND there will be undue hardship)
Debt previously denied in a previous bankruptcy
Consumer debt for luxury goods over $500
Cash advances over $1,000 taken 90 days prior to filing of bankruptcy
Fines and penalties
Objection to discharge of bankruptcy claims – the whole claim
Falsification of records
Perjury regarding the case
Transfer of property to hinder, delay, or defraud creditors – fraudulent conveyance
Refuses to obey court orders
Cannot explain losses
Frequency of bankruptcy claims allowed, once every six years, except for Chapter 13 bankruptcies (a Chapter 13 bankruptcy commits future income to finance the bankruptcy)
Debt reaffirmation conditions
Reaffirmations are done prior to discharge
Debtor is told he does not have to reaffirm
Can change his mind within 60 days regarding reaffirming the debt
Chapter 11s can be filed by individuals, voluntarily or involuntarily, but they’re very expensive and complex. The process lasts for a very long time.
Debtor retains possession of assets
Trustee is generally not appointed
Creditors committee is formed: 7 largest unsecured creditors, or fewer, if there are fewer creditors
If the chapter 13 fails, it converts to a chapter 7
Debtor has an exclusivity period of 120 days. A reorganization plan has to be filed within 120 days by the debtor; a creditor can file a plan instead. Period of 120 days is extendable.
Creditors can accept or reject the plan, but only the court can approve the plan. 2/3 in dollar amount and half in number of creditors have to approve the plan. Creditor is deemed impaired if they get less than 100% under the plan.
Cram down provision. The court can cram the plan down the creditor’s throat – rarely done, though.
Repayment plan can be approved to 5 years.
Chapter 13 is an adjustment of debt, for an individual only, with regular income.
Plan must be feasible
If a debtor has unsecured debt of $100,000 unsecured or $350,000 secured (indexed to inflation)
Trustee is appointed
Debtor retains property
Voluntary only
Anti-trust legislation
Sherman Act prohibits monopolies that affect interstate commerce
Penalties are criminal, beyond a reasonable doubt is required, go to jail, hard for government to win
Clayton Act is basically the same as the Sherman Act, except it provides for civil remedies for the government; simpler to win; No jail time if convicted.
Federal Trade Commission enforces Clayton Act
Justice department enforces Sherman Act
Rule of reason test for restraint of trade
Illegal per se (criminal)
Horizontal or vertical price-fixing
Territorial price-fixing
Monopoly under Sherman Act
Rule of reason test; court looks at the entire market. Is corporation squeezing out others in the industry?
2 April 2002
Tortious Interference with a Contract: Some third party interferes with a contract, which can result in civil liability. Punitive damages are available
Defamation
Slander - spoken
Libel - written
Defense - truth is an absolute defense
New York Times v. Sullivan. Public figure plaintiff must prove that the newspaper defamed the plaintiff with actual malice. Actual malice is greater than gross negligence. Malice is “wanton disregard for the truth”.
Disparaging a professional is not require that the plaintiff was not harmed.
Trade secret - a secret that is not in the common domain, not common knowledge in the industry, and protected and guarded
Industrial sabotage - one company tries to steal the technology/trade secrets of another
Accountant’s liability
Tort liability
Negligence - plaintiff must show that the defendant had a duty to perform, breached the duty, and as a proximate cause, there were damages
Standard of care
Ordinary care - accountant must exercise the care that an ordinary reasonable accountant would have exercised. An honest mistake is not negligence.
Expert’s standard of care - if an accountant holds himself as an expert, he is held to a higher standard
Fraud
Punitive damages apply
Gross negligence is dealt with the same as fraud
Knowingly and willfully falsify documents
Section 11 liability. A mistake will cause liability even if innocent
Federal law: Attorney/client privilege, husband/wife privilege, priest/ penitent privilege
Some states recognize a limited accountant/client privilege.
Suretyship. One who promises to be held liable for the debts of another.
Absolute or strict surety. Creditor can demand the co-maker (cosigner) for payment even though the maker has not defaulted.
Guarantor surety. There must be a default by the maker before the guarantor can be held liable.
Guarantor of collection/collectibility. There must be a default by the maker and creditor must exhaust all legal remedies to collect before he can go after the guarantor.
Gratuitous sureties. The co-maker is a parent.
Compensating surety (bonding company). The company pays consideration. If the compensating surety can show that an agreement modification will put the surety in a greater risk. Then there’s a discharge of surety ship
Must be in writing to be enforceable
Surety’s rights
Right of reimbursement
Exoneration can be brought prior to the surety’s payment for the maker. The surety sues the debtor to compel him to pay the creditor before the surety has to pay. Hard to prove by the surety
Subrogation. Surety has to pay
Surety’s rights against the creditor
Surrender the collateral to the surety
Surety’s defenses to payment
Forgery
Fraud perpetrated by the debtor to the creditor
Non-performance of the creditor
No defenses
Debtor filed for bankruptcy is not a defense
Fraud, misrepresentation cannot discharge
Incapacitation of the debtor
If the creditor refuses payment, the surety is discharged
Co-sureties
Contribution is a right between co-sureties
Reimbursement is not a right against a co-suretor
Bailments. Title does not transfer if the bailor transfers property to the bailee. Ie. A person transfers a coat to the coat-checker. A package is transferred to FedEx for shipment. Standard care to property is expected of the bailee
Benefit test.
Bailment solely for the benefit of the bailee. Extraordinary care is expected of the bailee
Bailment solely for the benefit of the bailor (gratuitous bailment). Minimum care is expected of the bailee.
Bailment for mutual benefit. Standard of care required is ordinary care.
Bailee is required to perform under agreement of the bailment. Ie. Missed delivery makes the bailee liable.
Earthquakes and extraordinary events can prevent the bailee from being liable.
Documents of Title. ie. Title to the car. Conveys ownership interest to the property
Creditor is not required to hold the title.
Property
Real property (land, everything else is personal property)
Personal property
Tangible and intangible (patents, trademarks)
Patent: government grants exclusive rights
Utility patent, good for 20 years
Design patents, good for 14 years
Trademark (trade name): words, name, or symbol that any manufacturer uses to identify the goods. If the trademark is not protected and becomes a common term, like Xerox, the trademark becomes worthless. Trademark holders MUST make a great attempt to protect the trademark, such as filing a lawsuit. Trademarks are good for 10 years, but can be renewable without limits.
Service marks: AT&T, FedEx
Copyright
Length of right: Life of the author plus 50 years
Fair-use exceptions (as long as you give credit, through footnotes and works cited): news reporting, teaching
Common law copyright: just have a © and you have a common law copyright
Acquiring Property
Inheritance
Purchase
Gifts: Tax definition: that transference of property made in the spirit of disinterested generosity
Law definition requires three elements: donative intent, actual or constructive delivery of the gift property, and acceptance of the donee
A gift is a transference without consideration. A promise for a gift is unenforceable. A gift, once made, is not revocable.
An engagement ring: Some jurisdictions, consider it a completed gift, and irrevocable. Some consider a condition precedent. Some look to who broke it off to determine whether or not it should be given back to the donor.
Lost and found:
Lost property. Finder has superior right to the property, unless the original owner shows up
Mislaid property: Property laid by a person who subsequently forgot he laid it there. Original owner has highest rights. If property is in a hotel, the hotel owner has a higher right to the property than the finder.
Assession: value added to personal property
Confusion: fungible goods (wheat, corn)
Fixture: A once personal property that has become so affixed and attached to the real estate, that it has become part of the real estate. ie. gas stove, furnace
Factors to consider: Was there intent to affix? Was it annexed to the property, and how securely? Would it put considerable harm to the property if removed?
Trade fixtures do not become property of the landlord in a commercial lease.
Land: Legal title to land.
“In fee simple absolute” or “In fee”: It is freely alienable, divisible, and leviable. Owner owns it all, owner can sell it, owner can will it to anybody.
“Fee simple determinable”. Has the possibly of riverter. Property can be transferred back to the grantor. Look at the language “so long as”, “during”, “while”. If reverted, it happens automatically.
“Fee simple conditional”. Has words like “on condition that”, “provided that”. Grantor has to definitively take legal action to take back the property. Transfer back to grantor is not automatic.
Life estate: a present possessory interest / right to land for a period of time, a life. Cannot be transferable. In the event of death of the grantee, the land would revert back to the grantor or the grantor’s heirs.
Life estate pour outré vie. Grantor can transfer possession to grantee as long as another person is living.
Future interest: non-present possessory interest in land, but there’s a future interest
Reversionary interest: If the grantee dies, the land reverts back to the grantor.
Remainder interest: If the grantee dies, it goes to another grantee
Contingent remainderment interest: Remainderment not in existence or not known at the time of the grant. If no remainderment, it reverts back to the grantor, unless somebody else is named
Vested remainderment interest: Second grantee is in existence at the time of grant
Doctrine of Fertile octogenarian: A person who reaches fertility is presumed to father or mother a child regardless of biological and created limitations, and age.
Doctrine of Precocious toddler: A baby / toddler is assumed to be able to father or mother a child
Joint Tenancy - each tenant has 100% of the right to use 100% of the property, 100% of the time with right of survivorship
Requirements for unity of joint tenancy
Possession – each tenant has the right to possess the joint property
Interest – each joint tenant has the same legal interest to the joint property
Time – each joint tenant possesses the property at the same time
Title – each takes title to the same property
To break the unity of possession, one of the tenants sells his interest to the joint property
Tenancy in common – each tenant has 100% of the right to use 100% of the property, 100% of the time (no right of survivorship)
Unity of possession is the only requirement
Tenancy by the entirety - each tenant has 100% of the right to use 100% of the property, 100% of the time with right of survivorship, but an individual tenant cannot convey his interest without the consent of both parties. In the state of Illinois, both parties must be husband and wife.
Landlord-tenant Law
Lease is an estate in land. Law recognizes joint ownership.
Combination of property and contract law
Term lease (an estate for years): a lease has a start and end date. No notices required that the lease is going to end
Periodic tenancy: period, may be agreed upon, month to month. There’s no end date specified. Landlord can throw a tenant out with notice equal to the period, usually a month
Tenant at will: landlord allows tenant to be there (without compensation). There is no notice required, usually, to throw the tenant out. However, 30 days notice is required in the state of Illinois
A tenant at sufferance: the tenant is a trespasser. The landlord doesn’t have to give notice.
Lease less than one year: an oral lease is acceptable if the term is less than 12 months
Lease more than one year: has to be in writing as stated in the Statute of Frauds
Holdover tenant: If lessee fails to turn over the key at the end of the lease, the landlord can extend the term of the lease to the same length of time as the previous lease agreement.
“Normal wear and tear” should be in the contract if the lessee wants to get his security deposit back
Landlord-tenant: “quiet enjoyment” is a right
In Illinois, if the premises is destroyed, or uninhabitable, and the landlord does not repair the property in a reasonable amount of time, the lease obligation is discharged, but generally, the lessee has the obligation to pay rent.
Implied warranty of habitability (generally in residential): If uninhabitable, there is a constructive eviction upon the tenant. Ie. excessive building code violations
Assignments and subleases: (To remember: Assign all, Sublease some)
Assignment: (Primary) tenant assigns the lease to another (secondary) tenant. The landlord has privity of estate. Landlord can go after the first (through contract law) or second tenant (through privity of estate) for lack of payment. Landlord cannot collect in excess of the agreed payment from either or both tenants.
Sublease: If primary tenant retains some rights to the property, it is deemed a sublease to secondary tenant regardless of what’s in writing. In a sublease, landlord cannot go after the second tenant for payment. Ie. If primary tenant leaves the country for three months and (sub)leases the property to another tenant with the expectation that the secondary tenant will leave upon the arrival of the primary tenant, this is a great example what a sublease is.
A nonassignment clause in a contract is acceptable
Exculpation clause from contract law is unenforceable. If a landlord gets a tenant to sign an agreement absolving the landlord from liability if the tenant is hurt due to landlord’s negligence, the agreement is unenforceable.
A lease will survive a sale. If the property owner sells a lease property, the new owner is still obligated to the lease.
Decedent’s estate:
When a person dies with a will, that person died in testate. There has to be a corpse.
The executor carries out the terms of the will. All debts are to be paid first, then the executor splits all property according to the terms of the will
An administrator, assigned by the state, functions as an executor. After debts are paid, then the property is distributed in accordance to Illinois probate law.
Wills must be in writing, signed by the testator and witnessed by at least two credible witnesses.
The creator of the will must be at least 18 years of age and in sound mind and memory.
Devise: used to transfer legal property
Legacy: used to transfer money
Bequest: used to transfer of personal property that isn’t money
Will revocance: Rip it, tear it, write “revoke” on it, write a new will, saying that the prior-in-time document is revoked.
Will can be revoked by operation of law, such as divorce.
Lapse of a gift; beneficiary dies before the testate
Anti-lapse statute: If beneficiary dies before the testate, the property will go to the beneficiary’s heirs
Ademption: once adeemed, always adeemed
Abatement: Creditor’s stake a claim on a gift
No will: Spouse gets ½ and the children get ½
Trust: splitting title; trustee is legal owner, beneficiary has rights to use or do most things with the property
Settlor: creator of the trust
Trust property: also known as trust corpus or trust res
Inter vivos trust: created during the lifetime of the settlor
Testamentary trust: only takes place upon the death of the settlor
Express trust: look at the language
Spend thrift clause: This can be inserted. Beneficiary cannot spend all the money on a Ferrari. The beneficiary cannot get the money until certain conditions are met (18 yrs of age). If the beneficiary purchases excessive goods on credit, knowing it will be backed by a trust, the creditors cannot go after the money in the trust.
Implied trust: The law imposes this
Constructive trust: The law imposes this. When a trust is contested, the court can assign a constructive trust to someone until the matter is settled or ruled upon.
Trust must be in writing if there’s conveyance of land in accordance with the Statute of Frauds
An unfunded trust is invalid
Trustee can be a corporation or institution
Once a trust is created, only “language” in the trust can allow a settlor to modify it
Trust administration: hours are defined in the statement and the law
Trustee has a fiduciary duty to follow the trust, such as make money for the trust in the way that a prudent person will.
Ordinary expenses can be charged against trust income
Extraordinary expenses can be charged against trust principal