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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

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Secured Transactions Assignment 13

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

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

  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. 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. 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. 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.”

  7. Problem 13.1, page 234 Truck loan made

  8. Problem 13.1, page 234 Pat misses two payments 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.”

  9. Problem 13.1, page 234 Problem 13.1, page 234 Pat sends check Pat misses two payments 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.”

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

  11. Problem 13.1, page 234 Pat sends check Bank rejects payment Pat misses two payments 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?

  12. Problem 13.1, page 234 Pat sends check Bank rejects payment Pat misses two payments 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.

  13. Problem 13.1, page 234 Pat sends check Bank rejects payment Pat misses two payments 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?

  14. Problem 13.1, page 234 Pat sends check Bank rejects payment Pat misses two payments 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?

  15. Problem 13.1, page 234 Pat sends check Bank rejects payment Pat misses two payments 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.

  16. Problem 13.1, page 234 Pat sends check Bank rejects payment Pat misses two payments 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.

  17. Problem 13.1, page 234 Pat sends check Bank rejects payment Pat misses two payments 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.

  18. Problem 13.1, page 234 Pat sends check Bank rejects payment Pat misses two payments 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, noticeeffort 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.

  19. Problem 13.2, page 235 One pay- ment due Now 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.” Oct 1

  20. Problem 13.2, page 235 One pay- ment due Now 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.” Oct 1

  21. Problem 13.2, page 235 One pay- ment due Now 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? Oct 1

  22. Problem 13.2, page 235 One pay- ment due Now 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. Oct 1

  23. Problem 13.2, page 235 One pay- ment due Now 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? Oct 1

  24. Problem 13.2, page 235 One pay- ment due Ten days after Ten days after More than one pymt due Now 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 11 Oct 1 Oct 11 Nov 1

  25. Problem 13.2, page 235 One pay- ment due Ten days after Ten days after More than one pymt due Now 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. Nov 11 Oct 1 Oct 11 Nov 1

  26. Problem 13.2, page 235 One pay- ment due Ten days after Ten days after More than one pymt due Now 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? Nov 11 Oct 1 Oct 11 Nov 1

  27. Problem 13.2, page 235 One pay- ment due Ten days after Accel- eration Forc begins Ten days after More than one pymt due Now 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? Nov 11 Oct 1 Oct 11 Nov 1

  28. Problem 13.2, page 235 One pay- ment due Ten days after Accel- eration Forc begins Ten days after More than one pymt due Now 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? Nov 11 Oct 1 Oct 11 Nov 1

  29. Problem 13.2, page 235 One pay- ment due Ten days after Accel- eration Forc begins Ten days after More than one pymt due Now 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? Nov 11 Oct 1 Oct 11 Nov 1 d. Different under the Illinois reinstatement statute?

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

  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. 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. 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?

  34. 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?

  35. 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?

  36. 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?

  37. 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?

  38. 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?

  39. 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? What should we do?

  40. 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? What should we do? Replevin

  41. 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? What should we do? Replevin With or without notice to Walt?

  42. 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? What should we do? Replevin With or without notice to Walt? Notice creates the 30-day risk!

  43. 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? What should we do? Replevin With or without notice to Walt? Notice creates the 30-day risk! JR Hale Contracting, page 225.

  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); 9-102(a)(43). Insecurity clause. A provision that the loan is in default if the secured party “deems itself insecure” or the like. §1-309. 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. Problem 13.4, page 236 Pat sends check Bank rejects payment Pat misses two payments 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. §9-623 comment. When did Bank accelerate? At option exercise, noticeeffort Which happened first? What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration? Waiver? Waiver by estoppel?

  46. Basic Concepts, Good Faith §1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. §1-304. 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 . . . .”

  47. Basic Concepts, Good Faith §1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. §1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith.

  48. Basic Concepts, Good Faith §1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. §1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. Comment to 1-304. 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.

  49. Basic Concepts, Good Faith §1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. §1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. Comment to 1-304. 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 contractswithin the commercial context in which they are created, performed, and enforced . . .

  50. Basic Concepts, Good Faith §1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing. §1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. Comment to 1-304. 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

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