William H' Widen

1
William H. Widen
Secured Transactions Comics
2
Secured TransactionsAssignment 13

• Default, Acceleration and Cure Under State Law

3
The Big Picture

• Chapters 1 and 2. Creditors Remedies
• Chapter 3. Creation of Security Interests
• Chapter 4. Default The Gateway to Remedies

4
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.

5
Basic Concepts

• Default. Breach of the loan agreement (contract
  principles)
• Acceleration. 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.
  Blacks Law Dictionary
• The relationship between acceleration and cure
• Old Republic Insurance v. Lee. A mortgagor,
  prior to election of . . . acceleration . . .
  may tender the arrears due and thereby prevent
  acceleration.
• To cure, the debtor must cure before
  acceleration
• To accelerate, the creditor must accelerate
  before cure

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
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 differ from your Visa or
  Mastercard?
• Payable on demand. Immediately payable when the
  creditor requests payment

8
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
• Comment 1. This section has no application to
  demand instruments . . . .

9
Problem 13.1, page 234
Truck loan made
10
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 partys option, the
  entire balance of the loan shall become due and
  payable.

11
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 partys option, the
  entire balance of the loan shall become due and
  payable.

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

• Contract Missing two payments is a default and
  upon default at the secured partys option, the
  entire balance of the loan shall become due and
  payable.

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

• Contract Missing two payments is a default and
  upon default at the secured partys option, the
  entire balance of the loan shall become due and
  payable.
• Pat can they get away with this?

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

• Contract Missing two payments is a default and
  upon default at the secured partys 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.

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

• Contract Missing two payments is a default and
  upon default at the secured partys 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?

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

• Contract Missing two payments is a default and
  upon default at the secured partys 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.227. 9-623
  comment.
• 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
Bank rejects payment
Pat sends check
Pat misses two payments
Truck loan made

• Contract Missing two payments is a default and
  upon default at the secured partys 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.227. 9-623
  comment.
• 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.

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

• Contract Missing two payments is a default and
  upon default at the secured partys 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.227. 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? No. Waiver by estoppel? No reliance.

19
Problem 13.1, page 234
Bank rejects payment
Pat sends check
Pat misses two payments
Truck loan made

• Contract Missing two payments is a default and
  upon default at the secured partys 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.227. 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? No. Waiver by estoppel? No reliance.

20
Problem 13.1, page 234
Bank rejects payment
Pat sends check
Pat misses two payments
Truck loan made

• Contract Missing two payments is a default and
  upon default at the secured partys 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.227. 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? No. Waiver by estoppel? No reliance.

21
Problem 13.1, page 234
Bank rejects payment
Pat sends check
Pat misses two payments
Truck loan made

• Contract Missing two payments is a default and
  upon default at the secured partys 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.227. 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? No. Waiver by estoppel? No reliance.

22
Problem 13.1, page 234
Bank rejects payment
Pat sends check
Pat misses two payments
Truck loan made

• Contract Missing two payments is a default and
  upon default at the secured partys 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.227. 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? No. Waiver by estoppel?

23
Problem 13.1, page 234
Bank rejects payment
Pat sends check
Pat misses two payments
Truck loan made

• Contract Missing two payments is a default and
  upon default at the secured partys 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.227. 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? No. Waiver by estoppel? No reliance.

24
Problem 13.2, page 235
One pay- ment 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.

25
Problem 13.2, page 235
One pay- ment 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.

26
Problem 13.2, page 235
One pay- ment 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.
• Is Art in default?

27
Problem 13.2, page 235
One pay- ment 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.
• Is Art in default? No. Just late.

28
Problem 13.2, page 235
One pay- ment 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.
• Is Art in default? No. Just late.
• When will Art be in default?

29
Problem 13.2, page 235
One pay- ment due
Ten days after
Ten days after
More than one pymt due
Now
Nov 11
Oct 1
Oct 11
Nov 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.
• Is Art in default? No. Just late.
• When will Art be in default?

30
Problem 13.2, page 235
One pay- ment due
Ten days after
Ten days after
More than one pymt due
Now
Nov 11
Oct 1
Oct 11
Nov 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.
• Is Art in default? No. Just late.
• When will Art be in default? Nov 12.

31
Problem 13.2, page 235
One pay- ment due
Ten days after
Ten days after
More than one pymt due
Now
Nov 11
Oct 1
Oct 11
Nov 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.
• Is Art in default? No. Just late.
• When will Art be in default? Nov 12.
• What happens if he doesnt pay?

32
Problem 13.2, page 235
Accel- eration
One pay- ment due
Ten days after
Forc begins
Ten days after
More than one pymt due
Now
Nov 11
Oct 1
Oct 11
Nov 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.
• Is Art in default? No. Just late.
• When will Art be in default? Nov 12.
• What happens if he doesnt pay?

33
Problem 13.2, page 235
Accel- eration
One pay- ment due
Ten days after
Forc begins
Ten days after
More than one pymt due
Now
Nov 11
Oct 1
Oct 11
Nov 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.
• Is Art in default? No. Just late.
• When will Art be in default? Nov 12.
• What happens if he doesnt pay?
• When is Arts last chance to pay without serious
  repercussions?

34
Problem 13.2, page 235
Accel- eration
One pay- ment due
Ten days after
Forc begins
Ten days after
More than one pymt due
Now
Nov 11
Oct 1
Oct 11
Nov 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.
• Is Art in default? No. Just late.
• When will Art be in default? Nov 12.
• What happens if he doesnt pay?
• When is Arts last chance to pay without serious
  repercussions?

b. Different under the Illinois reinstate- ment
statute?
35
Problem 13.3, page 235

• Macklin Mortgage need money. Wants to call
  Lances loan.
• 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)
• Lance Macklin waived this years proof by
  estoppel when it failed to require last years
  proof.
• But contract 13 negates that implication
• Does Macklins call have to be in good faith?

36
Problem 13.3, page 235, Good Faith

• 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 . . . .
• 1-304. Every contract or duty within this Act
  imposes an obligation of good faith in its
  performance or enforcement
• Kham Nates Shoes, page 231. When the
  contract is silent, principles of good faith . .
  . fill the gap. They do not block use of terms
  that actually appear in the contract.
• 1-201(b)(20) and 9-102(a)(43). Good faith
  means honesty in fact and the observance of
  reasonable commercial standards of fair dealing.
• Assume Macklin calls the loan and files a
  complaint for replevin. Whats the worst that
  could happen?

37
Problem 13.3, page 235, Good Faith
Comment to 1-304. This section does not
support an independent cause of action for
failure to perform or enforce in good faith.
38
Problem 13.3, page 235, Good Faith
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.
39
Problem 13.3, page 235, Good Faith
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 and
reasonableness which can be independently
breached.
40
Problem 13.3, page 235, Good Faith

• d. Are you willing to continue representing
  Harvey?

41
Problem 13.3, page 235, Good Faith

• d. Are you willing to continue representing
  Harvey?
• e. If you had to continue, what would you advise?

42
Problem 13.4, page 236
300K
150K
Cash needs of the business
Cash needs of the business
Jan May Jan
May Jan
43
Problem 13.4, page 236
300K
150K
Cash needs of the business
Jan May Jan
May Jan
Terms offered 300K line of credit, payable on
demand
44
Problem 13.4, page 236
300K
150K
Cash needs of the business
Cash needs of the business
Jan May Jan
May Jan
Terms offered 300K line of credit, payable on
demand a. What do you advise?
45
Problem 13.4, page 236
300K
150K
Cash needs of the business
Cash needs of the business
Jan May Jan
May Jan
Terms offered 300K line of credit, payable on
demand a. What do you advise? Is this
reasonable?
46
Problem 13.4, page 236
300K
150K
Cash needs of the business
Cash needs of the business
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?
47
Problem 13.4, page 236
300K
150K
Cash needs of the business
Cash needs of the business
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?
48
Problem 13.4, page 236
300K
150K
Cash needs of the business
Cash needs of the business
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?
49
Problem 13.4, page 236
300K
150K
Cash needs of the business
Cash needs of the business
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
50
Problem 13.4, page 236
300K
150K
Cash needs of the business
Cash needs of the business
Jan May Jan
May Jan
b. Is it reasonable to sign a note for 300K when
she has not drawn that much?
51
Problem 13.4, page 236
300K
150K
Cash needs of the business
Cash needs of the business
Jan May Jan
May Jan
b. Is it reasonable to sign a note for 300K when
she has not drawn that much? J.R. Hale, page
223.
52
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel.
53
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice.
54
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice. If we do,
what is the worst that could happen?
55
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice. If we do,
what is the worst that could happen?
56
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice. If we do,
what is the worst that could happen?
57
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice. If we do,
what is the worst that could happen?
58
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice. If we do,
what is the worst that could happen?
59
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice. If we do,
what is the worst that could happen?
60
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice. If we do,
what is the worst that could happen?
61
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice. If we do,
what is the worst that could happen? What should
we do?
62
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice. If we do,
what is the worst that could happen? What should
we do? Replevin
63
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice. If we do,
what is the worst that could happen? What should
we do? Replevin With or without notice to Walt?
64
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice. If we do,
what is the worst that could happen? What should
we do? Replevin With or without notice to Walt?
With notice creates the 30-day risk!
65
Problem 13.5, page 236
We represent Second National. We plan to pull
the plug on Walt Rebel. Loan officer (Art) wants
to give Walt 30 days advance notice. If we do,
what is the worst that could happen? What should
we do? Replevin With or without notice to Walt?
With notice creates the 30-day risk! JR Hale
Contracting, page 223-24.
66
Problem 13.6, page 237
Six months ago Walt wanted to increase his line
of credit. The bank refused. Walt accused the
bank of reneging on a commitment and giving false
information to First Bank on a credit reference.
67
Problem 13.6, page 237
Six months ago Walt wanted to increase his line
of credit. The bank refused. Walt accused the
bank of reneging on a commitment and giving false
information to First Bank on a credit reference.
Our client denies the accusations.
68
Problem 13.6, page 237
Six months ago Walt wanted to increase his line
of credit. The bank refused. Walt accused the
bank of reneging on a commitment and giving false
information to First Bank on a credit reference.
Our client denies the accusations. Do these facts
change your advice?
69
Problem 13.6, page 237
Six months ago Walt wanted to increase his line
of credit. The bank refused. Walt accused the
bank of reneging on a commitment and giving false
information to First Bank on a credit reference.
Our client denies the accusations. Do these facts
change your advice? Maybe. Rough foreclosure
may look very bad after we lost on the old
accusations.