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

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1 1 Secured Transactions Assignment 13 Default, Acceleration and Cure Under State Law

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

3 3 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.

4 4 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

5 5 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.

6 6 When does acceleration occur? Generally: When the contract says it occurs But: In re Crystal Properties, Ltd., 268 F.3d 743 (9 th 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.”

7 7 Problem 13.1, page 234 Truck loan made

8 8 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 misses two payments Truck loan made Problem 13.1, page 234

9 9 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 misses two payments Truck loan made Pat sends check Problem 13.1, page 234

10 10 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 misses two payments Bank rejects payment Truck loan made Pat sends check Problem 13.1, page 234

11 11 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 misses two payments Bank rejects payment Truck loan made Pat sends check Problem 13.1, page 234

12 12 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 misses two payments Bank rejects payment Truck loan made Pat sends check Problem 13.1, page 234

13 13 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 misses two payments Bank rejects payment Truck loan made Pat sends check Problem 13.1, page 234

14 14 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 misses two payments Bank rejects payment Truck loan made Pat sends check Problem 13.1, page 234

15 15 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 misses two payments Bank rejects payment Truck loan made Pat sends check Problem 13.1, page 234

16 16 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 misses two payments Bank rejects payment Truck loan made Pat sends check Problem 13.1, page 234

17 17 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 misses two payments Bank rejects payment Truck loan made Pat sends check Problem 13.1, page 234

18 18 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 misses two payments Bank rejects payment Truck loan made Pat sends check Problem 13.1, page 234

19 19 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

20 20 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

21 21 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

22 22 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

23 23 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

24 24 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 days after One pay- ment due More than one pymt due Oct 1Oct 11Nov 1 Ten days after Nov 11 Now

25 25 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 days after One pay- ment due More than one pymt due Oct 1Oct 11Nov 1 Ten days after Nov 11 Now

26 26 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 days after One pay- ment due More than one pymt due Oct 1Oct 11Nov 1 Ten days after Nov 11 Now

27 27 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 days after Accel- eration One pay- ment due More than one pymt due Oct 1Oct 11Nov 1 Ten days after Nov 11 Forc begins Now

28 28 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 days after Accel- eration One pay- ment due More than one pymt due Oct 1Oct 11Nov 1 Ten days after Nov 11 Forc begins Now

29 29 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 days after Accel- eration One pay- ment due More than one pymt due Oct 1Oct 11Nov 1 Ten days after Nov 11 Forc begins d. Different under the Illinois reinstatement statute? Now

30 30 Problem 13.3, page 235 We represent Second National. We plan to pull the plug on Walt Rebel.

31 31 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?

32 32 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?

33 33 Problem 13.3, page 235 Liquidation30-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?

34 34 Problem 13.3, page 235 Liquidation30-day risk? Inventory$240kSale 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?

35 35 Problem 13.3, page 235 Liquidation30-day risk? Inventory$240kSale 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?

36 36 Problem 13.3, page 235 Liquidation30-day risk? Inventory$240kSale and diversion Equipment$80kDestruction 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?

37 37 Problem 13.3, page 235 Liquidation30-day risk? Inventory$240kSale and diversion Equipment$80kDestruction 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?

38 38 Problem 13.3, page 235 Liquidation30-day risk? Inventory$240kSale and diversion Equipment$80kDestruction Lease$40-80kDefault Total$ 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?

39 39 Problem 13.3, page 235 Liquidation30-day risk? Inventory$240kSale and diversion Equipment$80kDestruction Lease$40-80kDefault Total$ 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?

40 40 Problem 13.3, page 235 Liquidation30-day risk? Inventory$240kSale and diversion Equipment$80kDestruction Lease$40-80kDefault Total$ 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

41 41 Problem 13.3, page 235 Liquidation30-day risk? Inventory$240kSale and diversion Equipment$80kDestruction Lease$40-80kDefault Total$ 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?

42 42 Problem 13.3, page 235 Liquidation30-day risk? Inventory$240kSale and diversion Equipment$80kDestruction Lease$40-80kDefault Total$ 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!

43 43 Problem 13.3, page 235 Liquidation30-day risk? Inventory$240kSale and diversion Equipment$80kDestruction Lease$40-80kDefault Total$ 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.

44 44 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); (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....”

45 45 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 misses two payments Bank rejects payment Truck loan made Pat sends check Problem 13.4, page 236

46 46 Basic Concepts, Good Faith § 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....”

47 47 Basic Concepts, Good Faith Comment to This section does not support an independent cause of action for failure to perform or enforce in good faith. § 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.

48 48 Basic Concepts, Good Faith 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. § 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.

49 49 Basic Concepts, Good Faith 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... § 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.

50 50 Basic Concepts, Good Faith 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 § 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.

51 51 Basic Concepts, Good Faith 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. § 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.

52 52 Basic Concepts, Good Faith § 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....”

53 53 Basic Concepts, Good Faith 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. § 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.

54 54 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?

55 55 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

56 56 Problem 13.7, page 237 Jan May Jan May Jan $300K $150K Cash needs of the business

57 57 Problem 13.7, page 237 $300K $150K Cash needs of the business Terms offered: $300K line of credit, payable on demand Jan May Jan May Jan

58 58 Problem 13.7, page 237 $300K $150K Cash needs of the business Terms offered: $300K line of credit, payable on demand a. What do you advise? Jan May Jan May Jan Cash needs of the business

59 59 Problem 13.7, page 237 $300K $150K Cash needs of the business Terms offered: $300K line of credit, payable on demand a. What do you advise? Is this reasonable? Jan May Jan May Jan Cash needs of the business

60 60 Problem 13.7, page 237 $300K $150K Cash needs of the business 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 Cash needs of the business

61 61 Problem 13.7, page 237 $300K $150K Cash needs of the business 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 Cash needs of the business

62 62 Problem 13.7, page 237 $300K $150K Cash needs of the business 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 Cash needs of the business

63 63 Problem 13.7, page 237 $300K $150K Cash needs of the business 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 Cash needs of the business

64 64 Problem 13.7, page 237 $300K $150K Cash needs of the business b. Is it reasonable to sign a note for $300K when she has not drawn that much? Jan May Jan May Jan Cash needs of the business

65 65 Problem 13.7, page 237 $300K $150K Cash needs of the business 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 Cash needs of the business

66 66 Problem 13.7, page 237 $300K $150K Cash needs of the business b. Is it reasonable to sign a note for $300K when she has not drawn that much? Maybe, J.R. Hale, page 223. Don’t be “trouble.” Jan May Jan May Jan Cash needs of the business


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