Secured Transactions Assignment 13

Secured Transactions Assignment 13
Default, Acceleration and Cure Under State Law

The Big Picture Chapters 1 and 2. Creditors’ Remedies
Chapter 3. Creation of Security Interests Chapter 4. Default: The Gateway to Remedies

The Big Picture Chapters 1 and 2. Creditors’ Remedies
Chapter 3. Creation of Security Interests Chapter 4. Default: The Gateway to Remedies Assignment 13. Default, acceleration and cure under state law. Assignment 14. Default, acceleration and cure under bankruptcy law.

Basic Concepts Installment loan. A loan repayable in more than one payment Line 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 line How does this “line” differ from your Visa or Mastercard “line?” Payable on demand. Immediately payable when the creditor requests payment

Basic Concepts Default. 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 performance Tender. “An unconditional offer of money or performance to satisfy a debt or obligation.” Black’s Law Dictionary The 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 cured If cure is first, obligation can’t be accelerated.

When does acceleration occur?
Generally: When the contract says it occurs But: 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.”

Problem 13.1, page 234 Truck loan made

Problem 13.1, page 234 Pat misses Truck loan two payments made
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.”

Problem 13.1, page 234 Problem 13.1, page 234 Pat misses Pat sends
two payments Pat sends check Truck loan made 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.”

Problem 13.1, page 234 Pat misses two payments Pat sends check
Bank rejects payment Truck loan made 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.”

Bank rejects payment Truck loan made 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?

Bank rejects payment Truck loan made 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.

Bank rejects payment Truck loan made 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?

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

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

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

Problem 13.2, page 235 One payment due Now Oct 1
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.”

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?

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.

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?

Problem 13.2, page 235 One payment due Ten days after More than
one pymt due Ten days after Now Oct 1 Oct 11 Nov 1 Nov 11 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?

one pymt due Ten days after Now Oct 1 Oct 11 Nov 1 Nov 11 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.

one pymt due Ten days after Now Oct 1 Oct 11 Nov 1 Nov 11 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?

one pymt due Ten days after Accel- eration Forc begins Now Oct 1 Oct 11 Nov 1 Nov 11 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?

one pymt due Ten days after Accel- eration Forc begins Now Oct 1 Oct 11 Nov 1 Nov 11 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?

one pymt due Ten days after Accel- eration Forc begins Now Oct 1 Oct 11 Nov 1 Nov 11 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? d. Different under the Illinois reinstatement statute?

Problem 13.3, page 235 We represent Second National. We plan to pull the plug on Walt Rebel.

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?

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?

Problem 13.3, page 235 Liquidation 30-day risk? Inventory $240k
Equipment $80k Lease $40-80k Total $ k 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?

Sale and diversion Equipment $80k Lease $40-80k Total $ k 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?

Sale and diversion Equipment $80k Destruction Lease $40-80k Total $ k 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?

Sale and diversion Equipment $80k Destruction Lease $40-80k Default Total $ k 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?

Sale and diversion Equipment $80k Destruction Lease $40-80k Default Total $ k 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?

Sale and diversion Equipment $80k Destruction Lease $40-80k Default Total $ k 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

Sale and diversion Equipment $80k Destruction Lease $40-80k Default Total $ k 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 With or without notice to Walt?

Sale and diversion Equipment $80k Destruction Lease $40-80k Default Total $ k 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 With or without notice to Walt? Notice creates the 30-day risk!

Sale and diversion Equipment $80k Destruction Lease $40-80k Default Total $ k 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 With or without notice to Walt? Notice creates the 30-day risk! JR Hale Contracting, page 225.

Basic Concepts Waiver. The voluntary relinquishment of a known right
Waiver by estoppel. Misleading a debtor into the honest and reasonable belief that the creditor intended a waiver Good 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. § 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 ”

Bank rejects payment Truck loan made 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 §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?

Basic Concepts, Good Faith
§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. § Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. §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 ”

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. § Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. Comment to This section does not support an independent cause of action for failure to perform or enforce in good faith.

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. § Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. Comment to 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.

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. § Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. Comment to 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 . . .

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. § Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. Comment to 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

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. § Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. Comment to 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.

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. § Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. §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 ”

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. § Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. Comment to 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 Macklin 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?

Problem 13.6, page 236 Comment to 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 13.7, page 237 $300K $150K Cash needs of the business
Jan May Jan May Jan

Jan May Jan May Jan Terms offered: $300K line of credit, payable on demand

Jan May Jan May Jan Terms offered: $300K line of credit, payable on demand a. What do you advise?

Jan May Jan May Jan Terms offered: $300K line of credit, payable on demand a. What do you advise? Is this reasonable?

Jan May Jan May Jan Terms offered: $300K line of credit, payable on demand a. What do you advise? Is this reasonable? What if the bank calls a month after they loan?

Jan May Jan May Jan Terms offered: $300K line of credit, payable on demand a. What do you advise? Is this reasonable? What if the bank calls a month after they loan? What will Teresa do?

Jan May Jan May Jan Terms offered: $300K line of credit, payable on demand a. What do you advise? Is this reasonable? What if the bank calls a month after they loan? What will Teresa do? What terms might we seek?

Jan May Jan May Jan Terms offered: $300K line of credit, payable on demand a. What do you advise? Is this reasonable? What if the bank calls a month after they loan? What will Teresa do? What terms might we seek? “Bank may call only if reasonable”

Jan May Jan May Jan b. Is it reasonable to sign a note for $300K when she has not drawn that much?

Jan May Jan May Jan b. Is it reasonable to sign a note for $300K when she has not drawn that much? Maybe, J.R. Hale, page 223.

Jan May Jan May Jan b. Is it reasonable to sign a note for $300K when she has not drawn that much? Maybe, J.R. Hale, page Don’t be “trouble.”

Secured Transactions Assignment 13

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