Secured Transactions Assignment 4

1
Secured TransactionsAssignment 4

• Judicial Sale and Deficiency

2
Chapter 1 Creditors Remedies Under State Law

• Assignment 1 Remedies of Unsecured Creditors
• Assignment 2 Foreclosure
• Assignment 3 Repossession
• Assignment 4 Judicial Sale Sheriff or clerk
• Assignment 5 Article 9 Sale Secured party
• Assignment 7 Bankruptcy Sale Trustee or DIP

3
Chapter 1 Creditors Remedies Under State Law

• Assignment 1 Remedies of Unsecured Creditors
• Assignment 2 Foreclosure
• Assignment 3 Repossession
• Assignment 4 Judicial Sale Sheriff or clerk
• Assignment 5 Article 9 Sale Secured party
• Assignment 7 Bankruptcy Sale Trustee or DIP

4
Chapter 1 Creditors Remedies Under State Law

• Assignment 1 Remedies of Unsecured Creditors
• Assignment 2 Foreclosure
• Assignment 3 Repossession
• Assignment 4 Judicial Sale Sheriff or clerk
• Assignment 5 Article 9 Sale Secured party
• Assignment 7 Bankruptcy Sale Trustee or DIP

5
Chapter 1 Creditors Remedies Under State Law

• Assignment 1 Remedies of Unsecured Creditors
• Assignment 2 Foreclosure
• Assignment 3 Repossession
• Assignment 4 Judicial Sale Sheriff or clerk
• Assignment 5 Article 9 Sale Secured party
• Assignment 7 Bankruptcy Sale Trustee or debtor
  in possession

6
Diagramming asset valuesand lien amounts
7
Diagramming asset valuesand lien amounts
100k Value
20k Equity
80k Lien
8
Diagramming asset valuesand lien amounts
80k Lien
30k Deficiency
50k Value
9
Judicial Sales
10
Judicial Sales

• Procedure 1.Sell collateral to highest bidder

11
Judicial Sales

• Procedure 1.Sell collateral to highest bidder
• 2. Apply proceeds to the debt

12
Judicial Sales

• Procedure 1.Sell collateral to highest bidder
• 2. Apply proceeds to the debt
• 3. Return surplus to the debtor

13
Judicial Sales

• Procedure 1.Sell collateral to highest bidder
• 2. Apply proceeds to the debt
• 3. Return surplus to the debtor
• 4. Creditor can move for deficiency

14
Judicial Sales

• Procedure 1.Sell collateral to highest bidder
• 2. Apply proceeds to the debt
• 3. Return surplus to the debtor
• 4. Creditor can move for deficiency
• Reasoning 1. Property sells for market (true)
  value

15
Judicial Sales

• Procedure 1.Sell collateral to highest bidder
• 2. Apply proceeds to the debt
• 3. Return surplus to the debtor
• 4. Creditor can move for deficiency
• Reasoning 1. Property sells for market (true)
  value
• True value
• Impossible sale price

16
Judicial Sales

• Procedure 1.Sell collateral to highest bidder
• 2. Apply proceeds to the debt
• 3. Return surplus to the debtor
• 4. Creditor can move for deficiency
• Reasoning 1. Property sells for market (true)
  value
• 2. Secured party receives full value of
  collateral (up to debt) and, with deficiency,
  full amount of debt

17
Judicial Sales

• Procedure 1.Sell collateral to highest bidder
• 2. Apply proceeds to the debt
• 3. Return surplus to the debtor
• 4. Creditor can move for deficiency
• Reasoning 1. Property sells for market (true)
  value
• 2. Secured party receives full value of
  collateral (up to debt) and, with deficiency,
  full amount of debt
• 3. Debtor pays creditor no more than debtor
  owes (no forfeiture)

18
How sales are supposed to work
100k Value
20k Equity
80k Lien
19
How sales are supposed to work
100k Value
20k Equity

• Sale is for 100K

80k Lien
20
How sales are supposed to work
100k Value
20k Equity

• Sale is for 100K
• 80 goes to secured

80k Lien
21
How sales are supposed to work
100k Value
20k Equity

• Sale is for 100K
• 80 goes to secured
• 20 goes to debtor

80k Lien
22
How sales are supposed to work
100k Value
20k Equity

• Sale is for 100K
• 80 goes to secured
• 20 goes to debtor
• Debt is paid in full

80k Lien
23
Example 2
80k Lien
30k Deficiency
50k Value
24
Example 2

• Sale is for 50K

80k Lien
30k Deficiency
50k Value
25
Example 2

• Sale is for 50K
• 50K goes to secured

80k Lien
30k Deficiency
50k Value
26
Example 2

• Sale is for 50K
• 50K goes to secured
• Creditor sues for 30K deficiency

80k Lien
30k Deficiency
50k Value
27
Example 2

• Sale is for 50K
• 50K goes to secured
• Creditor sues for 30K deficiency
• Debt paid in full?

80k Lien
30k Deficiency
50k Value
28
How sales actually work Csurilla
100k Value
29
How sales actually work Csurilla
100k Value
10
Grossly inadequate. Set aside on price alone
30
How sales actually work Csurilla
100k Value
40
Maybe grossly inadequate
10
Grossly inadequate
31
How sales actually work Csurilla
100k Value
67
Not grossly inadequate
40
Maybe grossly inadequate
10
Grossly inadequate
32
How sales actually work Csurilla
100k Value
67
Sale might be avoidable for additional
circumstances
Not grossly inadequate
40
Maybe grossly inadequate
10
Grossly inadequate
33
How sales actually work Csurilla
100k Value
67
Sale might be avoidable for additional
circumstances
Not grossly inadequate Execution sales avoidable
40
Maybe grossly inadequate
10
Grossly inadequate
34
How sales actually work Csurilla
100k Value
Sales confirmed
67
Sale might be avoidable for additional
circumstances
Not grossly inadequate Execution sales avoidable
40
Maybe grossly inadequate
10
Grossly inadequate
35
Judicial sale procedure problems
36
Judicial sale procedure problems
37
Judicial sale procedure problems
38
Judicial sale procedure problems
39
Judicial sale procedure problems
40
Judicial sale procedure problems
41
Typical bidding dynamics

• 1. Low prices. Some sales are for substantial
  bargains prices debtor suffers forfeiture
• 2. High prices. Some creditors credit bid
  without determining value losing deficiencies,
  misleading others
• 3. Strategy game.

42
Judicial sale procedure problems
43
Judicial sale procedure problems
44
Judicial sale procedure problems
45
Judicial sale procedure problems
46
Judicial sale procedure problems
47
Judicial sale procedure problems
48
Credit Bidding
Secured party as creditor
Assume the debtor owes a 100K secured debt
100K secured debt
Debtor
49
Credit Bidding
Assume the debtor owes a 100K secured debt The
Secured Party forecloses and the court orders a
sale
Secured party as creditor
100K secured debt
Debtor
50
Credit Bidding
Assume the debtor owes a 100K secured debt The
Secured Party forecloses and the court orders a
sale
Secured party as creditor
100K secured debt
Sheriff
Buyer
100K
Collateral
1. Sheriff sells the collateral to the highest
bidder
51
Credit Bidding
Assume the debtor owes a 100K secured debt The
Secured Party forecloses and the court orders a
sale
Secured party as creditor
100K secured debt
Sheriff
Buyer
100K
Collateral
1. Sheriff sells the collateral to the highest
bidder 2. Sheriff pays proceeds to the secured
party.
52
Credit Bidding
Assume the debtor owes a 100K secured debt The
Secured Party forecloses and the court orders a
sale
Secured party as creditor
No debt
Sheriff
Secured party as buyer
Collateral
1. Sheriff sells the collateral to the highest
bidder 2. Sheriff pays proceeds to the secured
party. 3. Payment reduces the amount owing.
53
Credit Bidding
If the secured party is the Buyer it would pay
and receive the purchase price.
Secured party as creditor
100K secured debt
Sheriff
Secured party as buyer
100K
Collateral
54
Credit Bidding
If the secured party is the Buyer it would pay
and receive the purchase price. The money would
go in a circle.
Secured party as creditor
100K secured debt
Sheriff
Secured party as buyer
100K
Collateral
55
Credit Bidding
If the secured party is the Buyer it would pay
and receive the purchase price. The money would
go in a circle. So the law excuses both payments.
Secured party as creditor
No debt
Sheriff
Secured party as buyer
Collateral
Collateral
56
Credit Bidding
If the secured party is the Buyer it would pay
and receive the purchase price. The money would
go in a circle. So the law excuses both payments.
Secured party as creditor
Up to 100K credit bid
Sheriff
Competing bidders
Cash bids
57
Credit Bidding
If the secured party is the Buyer it would pay
and receive the purchase price. The money would
go in a circle. So the law excuses both payments.
Secured party as creditor
100K
Sheriff
Secured Party bids 100K
58
Credit Bidding
If the secured party is the Buyer it would pay
and receive the purchase price. The money would
go in a circle. So the law excuses both payments.
Secured party as creditor
Collateral
Sheriff
Secured Party bids 100K Sheriff transfers
collateral
59
Credit Bidding
Collateral
If the secured party is the Buyer it would pay
and receive the purchase price. The money would
go in a circle. So the law excuses both payments.
Secured party as creditor
Debtor
Secured Party bids 100K Sheriff transfers
collateral Debt is reduced by amount of the bid
60
Problem 4.1.a, page 75
530K
80K
450K to 400K
61
Problem 4.1.a, page 75
a. Commercial is only bidder.
530K
80K
450K to 400K
Law No deficiency Judgment possible.
62
Problem 4.1.a, page 75
a. Commercial is only bidder. How much should it
bid?
530K
80K
450K to 400K
Law No deficiency Judgment possible.
63
Problem 4.1.a, page 75
a. Commercial is only bidder. How much should it
bid?
530K
530K
80K
450K to 400K
Law No deficiency Judgment possible.
64
Problem 4.1.b, page 75
a. Commercial is only bidder. How much should it
bid? b. Third party 531K. Should Commercial go
higher?
530K
530K
80K
450K to 400K
Law No deficiency Judgment possible.
65
Problem 4.1.b, page 75
a. Commercial is only bidder. How much should it
bid? b. Third party 531K. Should Commercial go
higher?
No
530K
530K
80K
450K to 400K
Law No deficiency Judgment possible.
66
Problem 4.1.c, page 75
a. Commercial is only bidder. How much should it
bid? b. Third party 531K. Should Commercial go
higher? c. Third party 440K. Should Commercial
go higher?
530K
80K
450K to 400K
440K
Law No deficiency Judgment possible.
67
Problem 4.1.c, page 75
a. Commercial is only bidder. How much should it
bid? b. Third party 531K. Should Commercial go
higher? c. Third party 440K. Should Commercial
go higher?
Unclear
530K
80K
450K to 400K
440K
Law No deficiency Judgment possible.
68
Problem 4.2.a, page 76
530K
80K
450K ??? 400K
Sallie Hudsons house
69
Problem 4.2.a, page 76
530K
80K
450K ??? 400K
Law Deficiency judgment at the dis- cretion of
the court
Sallie Hudsons house
70
Problem 4.2.a, page 76
Should Sallie do anything to prepare for the
sale?
530K
80K
450K ??? 400K
Law Deficiency judgment at the dis- cretion of
the court
Sallie Hudsons house
71
Problem 4.2.a, page 76
Should Sallie do anything to prepare for the
sale? Yes. Encourage bidding at sale to reduce
deficiency threat
530K
80K
450K ??? 400K
Law Deficiency judgment at the dis- cretion of
the court
Sallie Hudsons house
72
Problem 4.2.b, page 76
700K
170K
530K
Law Deficiency judgment at the dis- cretion of
the court
Sallie Hudsons house
73
Problem 4.2.b, page 76
Should Sallie do anything to prepare for the sale?
700K
170K
530K
Law Deficiency judgment at the dis- cretion of
the court
Sallie Hudsons house
74
Problem 4.2.b, page 76
Should Sallie do anything to prepare for the
sale? Yes. Encourage bidding at sale to realize
surplus and reduce (small) deficiency threat.
700K
170K
530K
Law Deficiency judgment at the dis- cretion of
the court
Sallie Hudsons house
75
Problem 4.2.c, page 76
Should Sallie do anything to prepare for the
sale? Yes. Encourage bidding at sale to realize
surplus and reduce (small) deficiency threat.
700K
170K
Does brother-in-laws money change things?
530K
Law Deficiency judgment at the dis- cretion of
the court
Sallie Hudsons house
76
Problem 4.2.c, page 76
Should Sallie do anything to prepare for the
sale? Yes. Encourage bidding at sale to realize
surplus and reduce (small) deficiency threat.
700K
170K
Does brother-in-laws money change things? Yes.
Sally may wish to discourage bidding, let him buy
for 530K
530K
Law Deficiency judgment at the dis- cretion of
the court
Sallie Hudsons house
77
Problem 4.3, page 76
1st Savings
Mortgage
Sallie Hudson
78
Problem 4.3, page 76
1st Savings Jason Kovan
Mortgage
Sallie Hudson
79
Problem 4.3, page 76
1st Savings Jason Kovan
Mortgage
Foreclosure
Sallie Hudson
80
Problem 4.3, page 76
1st Savings Jason Kovan
Mortgage
Foreclosure
Sallie Hudson Sheriff
81
Problem 4.3, page 76
1st Savings Jason Kovan
Mortgage
Foreclosure
Sallie Hudson Sheriff
Us
Bid?
82
Problem 4.3, page 76
1st Savings Jason Kovan
Mortgage
Foreclosure
Sallie Hudson Sheriff
Us
Bid?
What do we need to know to bid?
83
Problem 4.3, page 76
1st Savings Jason Kovan
Mortgage
Foreclosure
Sallie Hudson Sheriff
Us
Bid?

• What do we need to know to bid?
• Title
• Nature and condition
• Dollar value

84
Problem 4.3, page 76
Who will help us find out?
1st Savings Jason Kovan
Mortgage
Foreclosure
Sallie Hudson Sheriff
Us
Bid?

• What do we need to know to bid?
• Title
• Nature and condition
• Dollar value

85
Problem 4.3, page 76

• Who will help us find out?
• Hudson?

1st Savings Jason Kovan
Mortgage
Foreclosure
Sallie Hudson Sheriff
Us
Bid?

• What do we need to know to bid?
• Title
• Nature and condition
• Dollar value

86
Problem 4.3, page 76

• Who will help us find out?
• Hudson?
• Kovan?

1st Savings Jason Kovan
Mortgage
Foreclosure
Sallie Hudson Sheriff
Us
Bid?

• What do we need to know to bid?
• Title
• Nature and condition
• Dollar value

87
Problem 4.3, page 76

• Who will help us find out?
• Hudson?
• Kovan?
• First Savings?

1st Savings Jason Kovan
Mortgage
Foreclosure
Sallie Hudson Sheriff
Us
Bid?

• What do we need to know to bid?
• Title
• Nature and condition
• Dollar value

88
Problem 4.3, page 76

• Who will help us find out?
• Hudson?
• Kovan?
• First Savings?
• Sheriff?

1st Savings Jason Kovan
Mortgage
Foreclosure
Sallie Hudson Sheriff
Us
Bid?

• What do we need to know to bid?
• Title
• Nature and condition
• Dollar value

89
Problem 4.4.a, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees
2M
20M
18M
Apartment building under construction
90
Problem 4.4.a, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees
20M
2M
18M
Law Probable ability to recover deficiency
Apartment building under construction
91
Problem 4.4.a, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees
20M
2M
18M
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
92
Problem 4.4.a, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees American is
the only bidder What should we bid?
20M
2M
18M
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
93
Problem 4.4.a, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees American is
the only bidder What should we bid? Weil 500K
20M
2M
18M
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
94
Problem 4.4.b, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees
20M
2M
18M
Law 1,000 deposit now ? in 4 hours
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
95
Problem 4.4.b, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees
20M
2M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, reschedule
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
96
Problem 4.4.b, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees Mysterious
stranger bids 20M.
20M
2M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, reschedule
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
97
Problem 4.4.b, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees Mysterious
stranger bids 20M. Do we go higher?
2M
20M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, reschedule
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
98
Problem 4.4.b, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees Mysterious
stranger bids 20M. Do we go higher? American
(Weil Gotshal) bid 20M
20M
2M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, reschedule
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
99
Problem 4.4.b, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees California
statutes Civil liability on the bid
20M
2M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, reschedule
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
100
Problem 4.4.b, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees California
statutes Civil liability on the bid criminal
liability for knowingly bidding beyond ability to
pay
20M
2M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, reschedule
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
101
Problem 4.4.b, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees California
statutes Civil liability on the bid criminal
liability for knowingly bidding beyond ability to
pay Do these rules solve the problem?
20M
2M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, reschedule
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
102
Problem 4.4.b, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees Is this
rule the problem?
20M
2M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, reschedule
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
103
Problem 4.4.c, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees
20M
2M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, sell to 2nd
high bidder
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
104
Problem 4.4.c, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees Does this
rule change our initial bid strategy?
20M
2M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, sell to 2nd
high bidder
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
105
Problem 4.4.c, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees Does this
rule change our initial bid strategy? What if
stranger bids 12 M another bids 25 M?
20M
2M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, sell to 2nd
high bidder
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
106
Problem 4.4.c, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees What should
the rule be?
20M
2M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, sell to 2nd
high bidder
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction
107
Problem 4.4.c, page 73
We represent American Insurance, client holds
mortgage and four personal guarantees What should
the rule be? Qualified bidder.
20M
2M
18M
Law 1,000 deposit now ? in 4 hours Law
If high bidder doesnt close, sell to 2nd
high bidder
Law Probable ability to recover
deficiency Law No statutory right to redeem
Apartment building under construction