What is a Secured Party Creditor: Definition, Examples, and Legal Rights

What is a Secured Party Creditor?

What is a Secured Party Creditor? In short, an entity or individual that provides credit, securing the loan against the borrower’s property, using the borrower’s as collateral. This ensures creditor protection, allowing them to recover funds by seizing or selling the collateral if the borrower defaults.

Background:

As an attorney with a focus on real estate and venture capital transactions, my experience in the legal field, including my time at notable law firms and teaching at the University of Florida’s Fredric G. Levin College of Law, has given me a deep understanding of the intricacies of financial law. This article aims to shed light on the roles, responsibilities, and rights of secured party creditors.

Secured party creditors are fundamental in maintaining financial stability and protecting investments in various transactions. They provide credit secured against a borrower’s property, using it as collateral. This arrangement ensures that creditors can recover their funds if a borrower defaults. Drawing from my legal background, I will explore the essential functions, various forms of collateral, and legal rights that define the role of secured party creditors in the financial world.

Article:

Secured party creditors are instrumental in maintaining transactional stability and robustly defending their vested interests. But who are they precisely, and how do they operate within our established legal system? Delve deeper to comprehend their pivotal role, the diverse forms of collateral they leverage, and the formidable legal rights and remedies at their disposal to ensure their investments remain secure.

Whether you’re a legal professional, a student in finance, or simply someone interested in understanding the nuances of financial law, this video is tailored to provide you with valuable insights. To help you grasp the key points quickly, we’ve also included a concise summary right after our in-depth discussion.

Now, let’s dive into the heart of this topic and unravel the complexities surrounding secured party creditors. If helpful, please see a short video below that narrates some of the key points of the blog post. Please excuse the AI narration, because I am currently on voice rest. Thank you!

Key Takeaways

  • A secured party creditor is a lender or seller who has a security interest in the debtor’s collateral.
  • The Uniform Commercial Code (UCC) governs secured transactions, outlining rules for creating and perfecting security interests.
  • Secured party creditors have various rights to protect their interests, including due diligence and regular monitoring of debtors.

Understanding the Role of a Secured Party Creditor

A secured party creditor, also known as a secured creditor, refers to a lender or seller who maintains a security interest in a debtor’s collateral, facilitating the debtor’s fulfillment of debt obligations. This relationship is based on a financial agreement that typically involves the debtor granting a security interest to the creditor, which serves as a guarantee for the repayment of the loan. In this context, secured creditors play a crucial role in ensuring the debtor’s commitment to repay their debts.

The Relationship between Secured Party Creditor and Debtor

During a secured transaction, the debtor bears the legal responsibility to repay the loan while upholding their interest in the collateral. The security interest is a legal right granted to the creditor, allowing them to seize the collateral in case the debtor fails to fulfill their secured obligation, such as debt payments or other obligations.

This relationship protects the creditor’s investment and ensures that the debtor remains compliant with the terms of the loan agreement.

Types of Collateral Involved

The collateral, which serves as a loan security, can take multiple forms like real estate, vehicles, and personal property such as equipment. A secured party creditor can perfect their secured interest by taking possession of the collateral until the debt is paid off or by filing a financing statement with the relevant public office.

The value of the collateral is often determined by the fair market value of the assets. Typically, secured transactions involve:

  • Consumer goods
  • Farm products
  • Inventory
  • Equipment
  • Fixtures
  • Accounts
  • Chattel paper
  • Other types of property accepted by the creditor to maintain a secured position.

Legal Framework: Uniform Commercial Code (UCC)

Secured transactions in the United States are governed by the legal framework, the Uniform Commercial Code (UCC). It establishes the rules and regulations for the formation and completion of security interests, including the creation and perfection of such interests.

In some cases, the UCC may also address the issue of super priority administrative expense.

Establishing a Security Interest: The Cornerstone of Secured Transactions

Creating a security interest is more than just a mere contractual formality; it’s a vital process that establishes the legal groundwork for the rights and responsibilities of both the debtor and the secured party. At its core, the security interest serves to ensure the repayment of a debt by granting the creditor a claim on the debtor’s assets.

  1. The Written Security Agreement: Typically, both the debtor and the secured party must endorse a written security agreement. This document, considered a foundational piece in the realm of secured transactions, elaborates on the intricacies of the loan, including:
    • Definition and specification of the collateral: This describes the asset(s) that the debtor offers as security for the loan.
    • Rights and obligations: This section sheds light on the duties and privileges of both parties during the loan period.
    • Default provisions: These outline the repercussions should the debtor fail to adhere to the stipulated terms and conditions.

    Source: Cornell Law School – Security Agreement

  2. Attachment of the Security Interest: The act of attachment solidifies the relationship between the collateral and the obligation it secures. For a security interest to attach, three fundamental criteria must be met:
    • Value has been given (usually the loan itself).
    • The debtor possesses rights in the collateral.
    • The debtor has authenticated the security agreement or the secured party possesses the collateral.

    This attachment procedure is quintessential as it’s the first brick in constructing the secured party’s rights in the designated collateral.

    Source: Cornell Law School – Attachment of Security Interest

Understanding the creation and attachment of a security interest is pivotal, not just for legal professionals but also for borrowers and lenders alike. It underscores the very essence of the commitment and trust between parties in secured transactions.

Perfecting a Security Interest

The establishment of a secured party’s rights in the collateral necessitates the perfecting of a security interest as the second step. This is achieved by either filing a financing statement with the relevant state agency or taking possession of the collateral.

The financing statement serves as a public record of the secured party’s interest in the collateral and is effective for a period of five years from the date of filing.

Understanding the Essentials of Secured Transactions

Secured transactions, though layered and intricate, are fundamentally built on core elements that dictate their structure and operational nuances. Let’s delve deeper into these foundational pillars:

  1. The Debtor: Typically an individual or entity, the debtor owes a specific amount or has a performance obligation, often secured against an asset.
  2. The Secured Party: Often the lender or creditor, this party stands as the beneficiary of the security interest, ensuring the debtor meets their obligation.
  3. The Security Agreement: This pivotal document details the collateral and crystallizes both the rights and duties of the parties involved.
  4. The Security Interest: A legal right granted to the secured party, it empowers them to claim the collateral should the debtor fail to meet their obligations.
  5. The Collateral: These are the debtor’s assets—tangible like real estate, or intangible like patents—pledged as security for their obligation.
  6. The Financing Statement: Filed often with a state’s designated agency, this document serves as a public declaration, cementing the secured party’s claim over the collateral and bolstering their rights’ enforceability.
  7. Purchase Money Security Interest (PMSI): A distinct type of security interest, PMSI comes into play when a lender furnishes funds specifically to acquire the collateral. This mechanism offers the secured party precedence during defaults or insolvency, ensuring they are at the forefront of the reimbursement queue.

In essence, while the domain of secured transactions may seem dense, comprehending its core components illuminates a well-structured, meticulous mechanism. By grasping these pillars, stakeholders can adeptly navigate the legal intricacies of secured transactions, safeguarding the interests of all parties involved.

Financing Statement: A Pillar of Transparency and Security

A financing statement is more than just a piece of paperwork. It is a strategically vital legal document that crystallizes the secured party’s claim over the collateral. By filing it with the appropriate state agency, it becomes a beacon in the public domain. This transparency doesn’t just convey the transaction’s nature, but also, and more importantly, offers a protective shield, defending the secured party’s rights when contentions arise.

Furthermore, its longevity is not to be underestimated. While it remains effective for a span of five years from its initial filing date, its life can be extended. With timely renewals, the financing statement’s influence can persist in additional five-year stretches, ensuring that the secured party’s interests are continuously guarded.

Learn more about the Financing Statement

Purchase Money Security Interest (PMSI): Safeguarding Financiers in a Complex Landscape

Purchase Money Security Interest (PMSI) is an important concept in financial law, especially in the context of secured transactions. A PMSI is an exception to the general first-in-time rule, offering secured creditors who meet its requirements a significant advantage. This advantage allows them to jump ahead of other creditors with respect to specific collateral, even if those other creditors had perfected their interests first​​.

Under UCC Article 9, a PMSI is defined as a special type of security interest. It’s specifically designed to enable those who finance a debtor’s acquisition of goods to acquire a first-priority security interest in the purchase-money collateral. This unique position under UCC Article 9 means that if a transaction qualifies as a PMSI, the secured party can achieve a superior position in relation to other secured parties who may have perfected their security interests before them​​​​.

The typical setup for a PMSI involves a lender loaning money to a debtor, enabling the debtor to acquire rights in certain goods. These goods are then pledged to the lender as collateral security for the loan. The PMSI remains in effect as a first lien on the specific property or goods until the total payment for them is made​​​​.

Here is a funny joke for reference:

Why did the PMSI go to a party? Because it knew how to secure the best spot in line! Just like in the complex world of financial transactions, it doesn’t just mingle; it prioritizes. When the music stops and it’s time to claim chairs (or assets), the PMSI is always ahead of the game, ensuring that its investment isn’t left standing when the financial ‘musical chairs’ comes to an end.

Delve deeper into the workings of PMSI

Rights and Remedies of a Secured Party Creditor

Several rights and remedies are at the disposal of a secured party creditor to safeguard their interests in the collateral. These include the right to seize and dispose of the collateral in the event of default, as well as the right to determine priority and distribution of proceeds from the sale of collateral.

In addition, a secured party creditor may also have the right to inspect the collateral, to receive the collateral.

Seizing and Disposing of Collateral

Upon default, the secured party creditor has the authority to confiscate and sell the collateral to regain their investment. This process involves taking possession of the collateral and disposing of it through sale or auction, usually following specific legal procedures.

The proceeds from the sale of the cash collateral are then used to settle the debt.

Priority and Distribution of Proceeds

When it comes to distributing proceeds from the sale of collateral, secured party creditors enjoy precedence over unsecured creditors. The order of distribution is typically determined by the original filing or perfecting of the security interest, with lienholders taking precedence over later-perfected security interests.

The proceeds are allocated in accordance with the secured parties’ interests and used to settle the debt.

Tips for Secured Party Creditors: Protecting Your Interests

Secured party creditors, to safeguard their interests, ought to conduct due diligence, evaluate risks, and sustain regular interaction with the debtor. This proactive approach can help ensure that the debtor complies with the terms of the loan and that the secured party creditor is aware of any changes in the debtor’s financial situation.

By taking these steps, secured party creditors can protect their interests and ensure that their secured loans are secured.

Due Diligence and Risk Assessment

The act of conducting due diligence entails:

  • Thorough research and verification of the transaction-relevant information’s accuracy
  • Evaluating the debtor’s creditworthiness
  • Evaluating the debtor’s financial stability
  • Evaluating the value of the collateral

Assessing risks, such as financial, legal, and operational risks, can help identify potential liabilities associated with the transaction and protect the secured party’s interests.

Regular Monitoring and Communication

Sustaining regular interaction with the debtor is key to ensuring adherence to loan terms and staying updated about any shifts in the debtor’s financial status. Effective communication strategies include:

  • Establishing clear communication objectives
  • Creating open and consistent communication channels
  • Regularly evaluating the effectiveness of communication efforts

By keeping the lines of communication open, secured party creditors can better protect their interests and minimize potential risks when a creditor extends credit.

Summary

In conclusion, understanding the role of secured party creditors and the various aspects of secured transactions is vital for navigating the financial landscape. By familiarizing themselves with the legal framework, key elements, rights, and remedies, secured party creditors can better protect their interests and investments. Implementing due diligence, risk assessment, and regular communication will further ensure a successful and secure transaction, ultimately safeguarding the financial wellbeing of all parties involved.

Frequently Asked Questions

Who is considered a secured creditor?

A secured creditor is a lender that holds an interest in their debtor’s property, allowing them to sell the asset to satisfy a debt in case of default. These creditors typically have issued a loan backed by collateral, such as mortgages, HELOCs, and auto loans.

What is an example of a secured creditor?

An example of a secured creditor is a lender that issued a loan backed by collateral, such as mortgages, HELOCs, or auto loans.

If the borrower defaults on their loan, the lender has the right to place a lien on their property and foreclose on it if payments are still not made.

What is the difference between a preferred creditor and a secured creditor?

A preferred creditor is someone who has precedence over unsecured creditors, but still takes a backseat to those with a fixed charge.

A secured creditor is one that has obtained collateral as security for their loan, meaning they have something to fall back on if the borrower defaults.

What are the powers of a secured creditor?

Secured creditors have the power to take possession of and sell their secured property, such as vehicles, plant and machinery, and sales ledgers.

They are then required to pay any surplus from the sale to the liquidator.

How is a security interest created?

A security interest is created when a written security agreement, outlining the terms and conditions of the loan, is signed by both the debtor and the secured party.

Relevant Cases and Statutes

Cases

  • In re Parr Meadows Racing Ass’n, Inc., 880 F.2d 1540 (2d Cir. 1989)

    This case is relevant to the research request because it discusses the priority of secured creditors in relation to tax liens. However, the case is from 1989, so it may not reflect the most current law.

    “Applying this rule to the facts in this case, we conclude that the county holds valid tax liens for the first two tax years at issue. For the 1978-79 tax year, the county completed the entire taxation process before the bankruptcy petitions were filed, and the district and bankruptcy courts were therefore correct when they found a valid tax lien for that year in the amount of $327,231.45. In addition, and contrary to the holdings in the district and bankruptcy courts, the lien for the 1979-80 tax year is also valid, this time under the provisions of § 546(b). The county acquired an “interest in property” on June 1, 1979, the tax status date, twelve days before the first petition in bankruptcy was filed. As provided by state law, the lien securing the taxes levied in reliance upon that interest was perfected on December 1, 1979, and continues in effect today.”

  • Wolkowitz v. Dig. Gadgets, CV 17-04983 TJH (KSx) (C.D. Cal. Dec. 19, 2022)

    This case is relevant to the research request because it discusses the rights of a secured party creditor under California law, including the right to enforce the obligation of the account debtor. However, the case does not directly address any statutes on secured party creditors, and it is not clear whether the case has been cited or followed by other courts.

    “Pursuant to § 7.6 of the Factoring Agreement, “[Bibby], as the sole and absolute owner of the Accounts, shall have the sole and exclusive power and authority to collect each such Account, through legal action or otherwise[.]” 6. Between December 28, 2016, and January 4, 2017, Interworks issued invoices to Digital Gadgets relating to Interworks’s sale of hoverboards to Digital Gadgets [“the Invoices”]. 7.”

    “On January 12, 2017, Interworks and Cash Capital Group, LLC [“CCG”] entered into an agreement entitled “Agreement for the Purchase and Sale of Future Receipts” [“the CCG Agreement”]. 9. The CCG Agreement did not set forth which state’s law would govern.”

    “Under California law, the rights of a secured party include the right to enforce the obligation of the account debtor. Cal. Com. Code § 9607(a). 9.”

  • In re Matthews, 623 B.R. 818 (Bankr. S.D. Ga. 2020)

    In re Matthews is relevant to the research request because it discusses the proper interest rate for unsecured creditors in a chapter 13 bankruptcy case, which is an issue that may arise for secured party creditors. However, the case does not specifically mention “secured party creditors” and it is not clear from the excerpt whether the case addresses this issue directly.

    “This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L) and the Court has jurisdiction pursuant to 28 U.S.C. § 1334. For the following reasons, the Court concludes the proper interest rate is the Till formulaic approach.”

    “Pursuant to § 1325(b) the Court may not confirm a chapter 13 bankruptcy plan over the objection of the trustee unless a debtor pays unsecured creditors in full or devotes all his projected disposable income to his bankruptcy plan payments. See § 1325(b)(1)(A) and (B).”

    “There is a spilt of authority on whether interest is required under § 1325(b)(1)(A) and, for those courts requiring interest, there is a further spilt on the appropriate interest rate.”

  • Eastman v. NPL Capital, LLC, Civil Action No 17-cv-03074-RBJ (D. Colo. Apr. 15, 2019)

    This case is relevant to the research request because it discusses the applicability of the Fair Debt Collection Practices Act to a business engaged in nonjudicial foreclosure proceedings. However, the case does not directly address the question of secured party creditors, and it is not clear from the excerpt whether the defendant in the case qualifies as one.

    “I find that plaintiff’s amended complaint, ECF No. 34, fails to state a claim as a matter of law under Obduskey, 139 S. Ct. 1029.”

    “The Supreme Court affirmed the Tenth Circuit’s holding that a business engaged in no more than nonjudicial foreclosure proceedings is not a “debt collector” under the FDCPA, except for the limited purpose of 15 U.S.C. § 1692f(6). Obduskey, 139 S. Ct. at 1038; Obduskey, 879 F.3d at 1223.”

    “Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if (A) there is no present right to possession of the property claimed as collateral through an enforceable security interest; (B) there is no present intention to take possession of the property; or (C) the property is exempt by law from such dispossession or disablement. 15 U.S.C. §1692f(6).”

    “The present case arises out of NPL’s conduct in pursuing a nonjudicial foreclosure on Jason Eastman’s home.”

  • City of Chi. v. Kennedy, No. 17 CV 5945 (N.D. Ill. May. 4, 2018)

    This case is relevant to the research request because it discusses the rights of a secured creditor (the City of Chicago) in the context of a bankruptcy proceeding. However, the case does not specifically address the broader question of what cases and statutes are relevant to secured party creditors in general.

    “The city objected to the confirmation of the plan, arguing it failed to comply with 11 U.S.C. § 1325(a)(5), which requires a plan to provide that a lienholder retains its lien until the underlying debt is payed or discharged. [6] at 2:19-3:9; [10] at 4. The city argued its objection at the confirmation hearing, but the bankruptcy court ordered that the city release the vehicle. [6] at 2:19-3:9; 7:16-8:14. The order provides, “the City of Chicago shall release the Debtor’s vehicle pursuant to Thompson v. GMAC 566 F.3d 699 (7th Cir. 2009).” [10-3] at 5.”

    “Once a debtor files a bankruptcy petition, an automatic stay prevents creditors from committing “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(3).”

    “The city had a prepetition interest in the vehicle and continued to possess the vehicle postpetition (continuing perfection of its interest).”

  • Garland v. Orlans PC, CASE NO. 18-11561 (E.D. Mich. May. 19, 2020)

    “The complaint alleges that “[i]n Michigan, the vast majority of Orlans PC’s foreclosures have been pursuant to Michigan’s foreclosure by advertisement statute, M.C.L. § 600.3201, et seq.” ECF No. 1 at ¶ 40. Defendants in the Motion do not challenge this allegation or offer any contrary evidence.”

    “The Act then sets out the definition of the term “debt collector.” § 1692a(6). The first sentence of the relevant paragraph, which we shall call the primary definition, says that the term “debt collector”: “means any person … in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or asserted to be owed or due another.””

    “Ibid. The subsection to which the limited-purpose definition refers, § 1692f(6), prohibits a “debt collector” from: Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if— (A) there is no present right to possession of the property . . . ;(B) there is no present intention to take possession of the property; or(C) the property is exempt by law from such dispossession or disablement.”

  • Tuloka Affiliates, Inc. v. Security State Bank, 627 P.2d 816 (Kan. 1981)

    “The majority opinion also attempts to justify its conclusion by shifting to the secured creditor the burden of policing collateral and proceeds. Pre-Code law placed on the interest holder the duty of looking after its collateral and of seeing that the proceeds from the sale of that collateral were properly applied. See, e.g., Farmers State Bank v. Bank of Inman, 123 Kan. 238, 242, 254 P. 1038 (1927).”

    “The majority’s chastisement of the finance company’s lack of diligence in policing the collateral is therefore misplaced, especially since it is noted in the same opinion that it would be “wholly illogical” to allow the debtor to defeat a perfected security interest by depositing the proceeds in a different account.”

    “Accordingly, I dissent from the majority opinion that, under the totality of the circumstances, the bank was entitled to apply the secured proceeds to the trailer company’s antecedent indebtedness to the bank, thereby defeating the finance company’s security interest.”

    “The two trailers were placed on the sales lot of the trailer company.”

  • Montgomery v. Huntington Bank, 346 F.3d 693 (6th Cir. 2003)

    “See id. Exempted from the definition of a debt collector, however, is A debt is “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.” 15 U.S.C. § 1692a(5). any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity . . . (ii) concerns a debt which was originated by such person . . . [or] (iii) concerns a debt which was not in default at the time it was obtained by such person. 15 U.S.C. § 1692a(6)(F)(ii), (iii).”

    “First, Huntington Bank falls within the exemption contained in § 1692a(6)(F)(ii) because by retaining Silver Shadow to repossess the BMW that served as collateral for the car loan to Smith, it was collecting or attempting to collect on a debt that was owed, due, or asserted to be owed or due, and that originated with it. See, e.g., Thomasson v. Bank One, 137 F.Supp.2d 721, 724 (E.D.La. 2001) (finding that “[i]n collecting on its own debts [through use of a third party or a subsidiary agent], [the] Bank . . . does not meet the criteria of a `debt collector’ pursuant to [§ 1692a(6)(F) of] the FDCPA”); Zsamba v. Cmty.”

    “In other words, Huntington Bank was an actual, original, consumer creditor of Montgomery’s mother collecting its account, and, as such, was exempted from the statutory definition of a “debt collector.””

    “Furthermore, Huntington Bank also does not qualify as a debt collector because it falls within the provision of § 1692a(6)(F)(iii), a “person collecting or attempting to collect any debt owed or due . . . to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.””

  • United Savings Assn. v. Timbers of Inwood Forest, 484 U.S. 365 (1988)

    “Petitioner United Savings Association of Texas seeks review of an en banc decision of the United States Court of Appeals for the Fifth Circuit, holding that petitioner was not entitled to receive from respondent debtor, which is undergoing reorganization in bankruptcy, monthly payments for the use value of the loan collateral which the bankruptcy stay prevented it from possessing. In re Timbers of Inwood Forest Associates, Ltd., 808 F.2d 363 (1987). We granted certiorari, 481 U.S. 1068 (1987), to resolve a conflict in the Courts of Appeals regarding application of §§ 361 and 362(d)(1) of the Bankruptcy Code, 11 U.S.C. § 361 and 362(d)(1) (1982 ed. and Supp. IV). Compare Grundy Nat.”

    “Respondent had agreed to pay petitioner the postpetition rents from the apartment project (covered by the after-acquired property clause in the security agreement), minus operating expenses.”

    “The provision of the Code central to the decision of this case is § 362(d), which reads as follows: “On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay — “(1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or “(2) with respect to a stay of an act against property under subsection (a) of this section, if — “(A) the debtor does not have an equity in such property; and “(B) such property is not necessary to an effective reorganization.””

  • McCullough v. Goodrich, 373 S.C. 43 (S.C. 2007)

    “Chief Justice TOAL. This certified question asks whether South Carolina recognizes a secured creditor’s right to bring a claim against a third party for causing a reduction in the value of the secured party’s collateral. After giving the question full consideration, we answer “no.””

    “This Court accepted the following certified question from United States District Judge G. Ross Anderson, Jr.: Does South Carolina law recognize a secured creditor’s right to bring a claim for negligent/wrongful impairment of collateral where a third party’s negligence or other actions caused the erosion, destruction, or reduction in value of the secured party’s collateral?”

    “This certified question asks whether South Carolina law recognizes a secured creditor’s independent right to bring a claim against a third party for causing the reduction in value of the secured party’s collateral. We answer “no.””

    “Accordingly, we answer that South Carolina law does not recognize a secured creditor’s independent claim against a third party for negligent impairment of collateral.”

  • Obduskey v. McCarthy & Holthus LLP, 139 S. Ct. 1029 (2019)

    “In light of different views among the Circuits about application of the FDCPA to nonjudicial foreclosure proceedings, we granted the petition. Compare ibid. and Vien-Phuong Thi Ho v. ReconTrust Co., NA , 858 F.3d 568, 573 (C.A.9 2016) (holding that an entity whose only role is the enforcement of security interests is not a debt collector under the Act), with Kaymark v. Bank of America, N. A. , 783 F.3d 168, 179 (C.A.3 2015) (holding that such an entity is a debt collector for the purpose of all the Act’s requirements), Glazer v. Chase Home Fin. LLC , 704 F.3d 453, 461 (C.A.6 2013) (same), and Wilson v. Draper & Goldberg, P. L. L. C. , 443 F.3d 373, 376 (C.A.4 2006) (same). II A The FDCPA’s definitional section, 15 U.S.C. § 1692a, defines a “debt” as: “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes.””

    “The Act then sets out the definition of the term “debt collector.” § 1692a(6).”

    “Ibid. The third sentence, however, provides what we shall call the limited-purpose definition: “For the purpose of section 1692f(6) [the] term [debt collector] also includes any person … in any business the principal purpose of which is the enforcement of security interests.” Ibid . The subsection to which the limited-purpose definition refers, § 1692f(6), prohibits a “debt collector” from: “Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if— “(A) there is no present right to possession of the property … ; “(B) there is no present intention to take possession of the property; or “(C) the property is exempt by law from such dispossession or disablement.””

    “Second , we think Congress may well have chosen to treat security-interest enforcement differently from ordinary debt collection in order to avoid conflicts with state nonjudicial foreclosure schemes.”

  • Nobelman v. American Savings Bank, 508 U.S. 324 (1993)

    “JUSTICE THOMAS delivered the opinion of the Court. This case focuses on the interplay between two provisions of the Bankruptcy Code. The question is whether § 1322(b)(2) prohibits a Chapter 13 debtor from relying on § 506(a) to reduce an undersecured homestead mortgage tothe fair market value of the mortgaged residence. We conclude that it does, and therefore affirm the judgment of the Court of Appeals. In 1984, respondent American Savings Bank loaned petitioners Leonard and Harriet Nobelman $68,250 for the purchase of their principal residence, a condominium in Dallas, Texas.”

  • Matter of McElwaney, 40 B.R. 66 (Bankr. M.D. Ga. 1984)

    “The association shall then purchase a similar amount of stock in the land bank. Stock shall be retired and paid at book value not to exceed par, as determined by the association, upon the full repayment of the loan and if the loan is in default may be canceled for application on the loan, or under other circumstances, for other disposition, when approved by the bank. The aggregate capital stock of each association shall be increased from time to time as necessary to permit the securing of requested loans from the bank for the association’s members. 12 U.S.C.A. § 2034 (West 1980 Supp. 1984) provides that a Federal land bank issuing shares under section 2034(a) shall have a first lien on the stock. Several courts have addressed the disposition of stock issued by a Federal land bank. In Cooperativa Cafeteros De Puerto Rico, 19 B.R. 732 (Bkrtcy.D.P.R. 1982), a Bankruptcy Act case, the bankrupt held stock issued under The Farm Credit Act of 1971.”

  • Vien–Phuong Thi Ho v. ReconTrust Co., 858 F.3d 568 (9th Cir. 2016)

    “The FDCPA imposes liability only when an entity is attempting to collect debt. 15 U.S.C. § 1692(e). For the purposes of the FDCPA, the word “debt” is synonymous with “money.” 15 U.S.C. § 1692a(5). Thus, ReconTrust would only be liable if it attempted to collect money from Ho. And this it did not do, directly or otherwise. The object of a nonjudicial foreclosure is to retake and resell the security, not to collect money from the borrower.”

  • In re American Mariner Industries, Inc., 734 F.2d 426 (9th Cir. 1984)

    “Section 362(d) authorizes “a party in interest” to request relief from the automatic stay “for cause, including lack of adequate protection of an interest in property.” Section 361 merely illustrates several means of providing adequate protection, and the methods illustrated are not exclusive. See generally 2 Collier on Bankruptcy ¶ 361.01 (L. King 15th ed. 1983). Neither section, apparently by design, defines “adequate protection” or prescribes precisely what is to be protected. See H.R.Rep. No. 595, 95th Cong. 2d Sess. 339, reprinted in 1978 U.S.Code Cong. Ad.News 5963, 6295. Our inquiry begins with these threshold issues and requires us to construe sections 361 and 362.”

  • Dowers v. Nationstar Mortg., LLC, 852 F.3d 964 (9th Cir. 2017)

    “We agree that the claims under 15 U.S.C. §§ 1692c(a)(2), 1692d, and 1692e fail for that reason. With respect to the Section 1692f(6) claim, however, we disagree. That provision governs Defendants’ alleged conduct because it expressly applies to the enforcement of security interests such as a deed of trust. The FDCPA defines a “debt collector” in relevant part as: any person who … [engages] in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another…. For the purpose of section 1692f(6) of this title, such term also includes any person who … [engages] in any business the principal purpose of which is the enforcement of security interests. 15 U.S.C. § 1692a(6). A “debt” is “any obligation or alleged obligation of a consumer to pay money arising out of a transaction.” 15 U.S.C. § 1692a(5).”

  • Reese v. Ellis, Painter, Ratterree & Adams, LLP, 678 F.3d 1211 (11th Cir. 2012)

    “CARNES, Circuit Judge: Izell and Raven Reese defaulted on a loan that they had secured by giving the lender a mortgage on their property. A law firm representing the lender sent the Reeses a letter and documents demanding payment of the debt and threatening to foreclose on the property if they did not pay it.”

    “The Reeses currently live on a piece of property in Roswell, Georgia, that they purchased in 2004 with the help of a $650,000 loan from Provident Funding Associates, L.P. To get that loan, the Reeses signed a promissory note and executed a security deed giving Provident a mortgage on their property. A few years later, the Reeses defaulted on the promissory note.”

    “With the distinction between a promissory note and a security interest in mind, we turn to the question of whether the Reeses’ complaint states a plausible claim for relief.”

  • EmpireMediHoldings, LLC v. Bridge Funding Cap LLC, 2022 N.Y. Slip Op. 32135 (N.Y. Sup. Ct. 2022)

    “On December 31, 2020, nonparties to this action known as Resurgence California LLC, Advanced Recovery Solutions, LLC, Pearl of the Sea Retreat, LLC, A New Start Treatment & Recovery, LLC, MUSE, The Well Recovery Partners, Inc., Balboa Horizons Recovery Services Inc., Coastal Recovery Health & Wellness, Inc., A Plus C Quality Constructions LLC, Coastal Recovery, Inc., Commissions Early, LLC, Better Soul Inc., and Stephen James Fennelly (collectively, the “Resurgence Group”) entered into a Future Receivable Sale and Purchase Agreement with plaintiff’s assignor, Iruka Capital Group, LLC (“Iruka”). As security for Iruka’s Future Receivable Sale and Purchase Agreement, Resurgence Group granted Iruka a security interest in the following collateral (“Collateral”): As security for the prompt and complete payment and performance of any and all liabilities, obligations, covenants or agreements of Seller under this Agreement (and any future amendments of this Agreement, if any) (hereinafter referred to collectively as the “Obligations”), Seller [Resurgence Group] hereby pledges, assigns and hypothecates to Buyer [Iruka] (collectively, “Pledge”) and grants to Buyer [Iruka] a continuing, perfected and first priority lien upon and security interest in, to and under all of Seller’s right, title and interest in and to the following (collectively, the “Collateral”), whether now existing or hereafter from time to time acquired: a. all accounts, including without limitation, all deposit accounts, accounts-receivable, and other receivables, chattel paper, documents, equipment, general intangibles, instruments, and inventory, as those terms are defined by Article 9 of the Uniform Commercial Code (the “UCC”), now or hereafter owned or acquired by Seller; and b. all Seller’s proceeds, as such term is defined by Article 9 of the UCC.”

    “UCC § 9-601 recites: “(a) Rights of secured party after default. After default, a secured party has the rights provided in this part and, except as otherwise provided in Section 9-602, those provided by agreement of the parties.”

  • Buckskin Realty Inc. v. Windmont Homeowners Ass’n (In re Buckskin Realty Inc.), Case No. 1-13-40083-nhl (Bankr. E.D.N.Y. Mar. 26, 2021)

    “S.D. Tex. 1999)(“Although the Supreme Court decision in BFP is not directly on point, it nevertheless controls this decision because its principal rationale is applicable.”), aff’d, 244 B.R. 94 (S.D. Tex. 1999) (“If the price received at a foreclosure is reasonably equivalent to the value of the property sold, then parity of reasoning would suggest that such a foreclosure sale would not have the effect of ‘enabl[ing] such creditor to receive more than such creditor would receive’ in a chapter 7.”); Cottrell v. United States (In re Cottrell), 213 B.R. 378, 383 (Bankr. M.D. Ala.1996) (finding that BFP “is equally applicable to” avoidance under §§ 547 and 548). Other courts have held that BFP is inapplicable in the § 547 context, concluding that foreclosure sales are avoidable as preferences, even when the sale is noncollusive and otherwise compliant with state law, if it resulted in the secured creditor receiving more than it would under a chapter 7 case. See, e.g., Whittle Dev. Inc. v. Branch Banking & Tr. Co. (In re Whittle Dev., Inc.), 463 B.R. 796 (Bankr. N.D. Tex. 2011); Villarreal v. Showalter (In re Villarreal), 413 B.R. 633 (Bankr. S.D. Tex. 2009); Rambo v. Chase Manhattan Mortg. Corp. (In re Rambo), 297 B.R. 418 (Bankr.”

  • In re Briggs Transp. Co., 780 F.2d 1339 (8th Cir. 1985)

    “Whether a debtor’s proposal does or does not include interest payments for the present value of the creditor’s foreclosure rights will depend on such factors as the nature of the collateral and the proposed use of the collateral in the interim. See Martin, 761 F.2d at 476-77; In re Smithfield Estates, Inc., 48 B.R. 910, 915 (Bankr.D.R.I. 1985); see also In re Polzin, 49 B.R. 370, 372 (Bankr.D.Minn. 1985) (where debtor offered interest payments to an undersecured creditor not entitled to post-petition interest under section 506(b) as part of adequate protection, court notes that proffered interest is acceptable under reasoning in American Mariner to compensate for loss of the collateral’s use during the stay). We recognize that a rule which directs courts to approach adequate protection analyses on a case-by-case basis provides minimal guidance for future reconstruction by courts of a secured creditor’s bargain for adequate protection purposes. However, the developing case law applying the provisions of the Bankruptcy Code of 1978 has already devised a broad variety of equitable considerations which provide a guide for future cases. Obviously, situations involving a greatly oversecured claim will be quite different from cases such as this involving undersecured claims, and a value determination for automatic stay purposes is not necessarily the same as value determined for another purpose, such as confirming a plan.”

  • Knoxville TVA Emps. Credit Union v. Hill, No. E2021-01341-COA-R3-CV (Tenn. Ct. App. Sep. 15, 2022)

    “We will therefore proceed to address the substance and merits of Mr. Hill’s appeal. V. Propriety of Summary Judgment Mr. Hill contends that the trial court improperly granted summary judgment in favor of KTVA because (1) Mr. Foist obtained title to the Vehicle on March 4, 2016, by virtue of title certificate number 96927193; (2) Mr. Foist later pledged that same original title certificate to Mr. Hill as collateral on a bond to secure his release from the Roane County jail; and (3) no evidence was presented to demonstrate that this title certificate was lost, stolen, mutilated, or illegible as required by Tennessee Code Annotated § 55-3-115(a) for issuance of a replacement title certificate.”

    “Tennessee Code Annotated § 55-3-126 (a) (2020) provides that “a lien or security interest in a vehicle of the type for which a certificate is required shall be perfected and shall be valid against subsequent creditors of the owner, subsequent transferees, and the holders of security interest and liens on the vehicle by compliance with this chapter.” Tennessee Code Annotated § 55-3-126 (c) further provides that “[w]hen the security interest is perfected as provided for in this section, it shall constitute notice of all liens and encumbrances against the vehicle described in the security interest to creditors of the owner” and “notice shall date from the time of first delivery of the request for the notation of the lien or encumbrance upon the certificate of title by the county clerk.””

    “KTVA has demonstrated perfection of its lien on the Vehicle by virtue of its first lienholder notation on a valid title certificate, number 03285180.”

  • Hamilton v. Curiel (In re Curiel), 651 B.R. 548 (B.A.P. 9th Cir. 2023)

    “In response to Hamilton Trust’s objections, Curiel characterized as frivolous the argument that a matured loan could not be modified and extended as part of a proposed plan. Curiel distinguished the case law Hamilton Trust relied on and pointed to the bankruptcy court’s comments in the relief from stay proceedings indicating that such modifications were permissible.”

    “More importantly, Curiel claimed that by the time her balloon payments became due, she would have paid down the principal owed to each secured creditor in sufficient amounts that she would have sufficient equity to sell or refinance—regardless of whether the Properties appreciated in value.”

    “Curiel also disputed that the Properties were decreasing in value because of rising interest rates.”

    “Hamilton Trust’s appeal requires us to interpret the Bankruptcy Code.”

  • DISH Network Corp. v. DBSD North America Inc., 634 F.3d 79 (2d Cir. 2010)

    “The First Lien Debt: a $40 million revolving credit facility that DBSD obtained in early 2008 to support its operations, with a first-priority security interest in substantially all of DBSD’s assets.”

    “The Second Lien Debt: $650 million in 7.5% convertible senior secured notes that DISH issued in August 2005, due August 2009. These notes hold a second-priority security interest in substantially all of DBSD’s assets. At the time of filing, the Second Lien Debt had grown to approximately $740 million. It constitutes the bulk of DBSD’s indebtedness. 3.”

  • In re Murray Metallurgical Coal Holdings, LLC, 1:20-cv-267 (S.D. Ohio Sep. 25, 2023)

    “The act of filing a Chapter 11 bankruptcy petition instantly and by operation of law creates an estate possessing substantially all the property of the debtor. 11 U.S.C. § 541. Once the estate is created, the debtor needs court approval before obtaining credit or executing most asset transfers. 11 U.S.C. §§ 363-364.”

    “The Bankruptcy Code establishes a hierarchy for the repayment of debts applicable to all bankruptcy cases: secured interests get priority over unsecured interests. 11 U.S.C. § 507(b). And when a business goes through a Chapter 11 restructuring, the plan must treat similar creditor interests equally. 11 U.S.C. § 1123(a)(4). But as already mentioned, the Bankruptcy Code also authorizes bankruptcy courts to approve prerestructuring asset transfers-even transfers of the entire estate. 11 U.S.C. 363(b); Stephens Indus., Inc. v. McClung, 789 F.2d 386, 390 (6th Cir. 1986).”

  • White-Lett v. The Bank of N.Y. Mellon, Corp. (In re Lett), No. 10-61451-BEM (Bankr. N.D. Ga. Oct. 22, 2021)

    “Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 1675 (1994). As a federal court the bankruptcy court is subject to these limitations and further jurisdictional limitations set forth in 28 U.S.C. § 1334 .”

    “BANA moves to dismiss this claim arguing that Plaintiff fails to state a claim upon which relief can be granted and further, that she waited too long to bring the claim such that it should be barred by laches and dismissed. 1. Whether Plaintiff Has Stated a Claim Upon Which Relief Can Be Granted The central purpose of the bankruptcy process is to provide honest but unfortunate debtors with a “fresh start.” Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 659 (1991).”

    “Id. The discharge “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any [discharged] debt as a personal liability of the debtor, whether or not discharge of such debt is waived[.]”

Relevant Statutes

  • Section 810 ILCS 5/9-110 – Security interests arising under Article 2 or 2A, 810 ILCS 5/9-110

    810 ILCS 5/9-110 is relevant to the research request because it outlines the rights and priorities of secured party creditors in Illinois. However, we don’t know whether the statute has been amended or repealed since the citation was provided.

    “(1) the security interest is enforceable, even if Section 9-203(b)(3) has not been satisfied;(2) filing is not required to perfect the security interest;(3) the rights of the secured party after default by the debtor are governed by Article 2 or 2A; and(4) the security interest has priority over a conflicting security interest created by the debtor.”

  • Section 32.33 – Hindering Secured Creditors, Tex. Pen. Code § 32.33

    This statute is relevant to the research request because it defines “security interest” and outlines the penalties for hindering secured creditors. However, it is not clear whether this statute has been amended or superseded since 2015.

    “(a) For purposes of this section: (1) “Remove” means transport, without the effective consent of the secured party, from the state in which the property was located when the security interest or lien attached. (2) “Security interest” means an interest in personal property or fixtures that secures payment or performance of an obligation. (b) A person who has signed a security agreement creating a security interest in property or a mortgage or deed of trust creating a lien on property commits an offense if, with intent to hinder enforcement of that interest or lien, he destroys, removes, conceals, encumbers, or otherwise harms or reduces the value of the property. (c) For purposes of this section, a person is presumed to have intended to hinder enforcement of the security interest or lien if, when any part of the debt secured by the security interest or lien was due, he failed: (1) to pay the part then due; and (2) if the secured party had made demand, to deliver possession of the secured property to the secured party. (d)”

    “(e) A person who is a debtor under a security agreement, and who does not have a right to sell or dispose of the secured property or is required to account to the secured party for the proceeds of a permitted sale or disposition, commits an offense if the person sells or otherwise disposes of the secured property, or does not account to the secured party for the proceeds of a sale or other disposition as required, with intent to appropriate (as defined in Chapter 31) the proceeds or value of the secured property. A person is presumed to have intended to appropriate proceeds if the person does not deliver the proceeds to the secured party or account to the secured party for the proceeds before the 11th day after the day that the secured party makes a lawful demand for the proceeds or account.”

  • Section 28-9-110 – SECURITY INTERESTS ARISING UNDER CHAPTER 2 OR 12, TITLE 28, IDAHO CODE, Idaho Code § 28-9-110

    This statute is relevant to the research request because it addresses the enforceability, perfection, and priority of security interests, which are all key aspects of the rights of secured party creditors. However, the statute is specific to Idaho, and it is not clear from the research request whether the query is limited to a particular jurisdiction.

    “(1) The security interest is enforceable, even if section 28-9-203(b)(3) has not been satisfied;(2) Filing is not required to perfect the security interest;(3) The rights of the secured party after default by the debtor are governed by chapter 2 or 12, title 28, Idaho Code; and(4) The security interest has priority over a conflicting security interest created by the debtor.”

  • Section 62A.9A-601 – [Effective 1/1/2024] Rights after default; judicial enforcement; consignor or buyer of accounts, chattel paper, payment intangibles, or promissory notes, Wash. Rev. Code § 62A.9A-601

    This statute is relevant to the research request because it outlines the rights of a secured party after default, including the ability to enforce a claim or security interest through judicial procedures. However, the statute is not effective until 1/1/2024, so it may not be relevant for cases arising before that date.

    “A secured party: (1) May reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure; and(2) If the collateral is documents, may proceed either as to the documents or as to the goods they cover.(b)Rights and duties of secured party in possession or control.”

  • Section 810 ILCS 5/9-601 – Rights after default; judicial enforcement; consignor or buyer of accounts, chattel paper, payment intangibles, or promissory notes, 810 ILCS 5/9-601

    “(a) Rights of secured party after default. After default, a secured party has the rights provided in this Part and, except as otherwise provided in Section 9-602, those provided by agreement of the parties. A secured party: (1) may reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure; and (2) if the collateral is documents, may proceed either as to the documents or as to the goods they cover. (b) Rights and duties of secured party in possession or control. A secured party in possession of collateral or control of collateral under Section 7-106, 9-104, 9-105, 9-106, or 9-107 has the rights and duties provided in Section 9-207. (c) Rights cumulative; simultaneous exercise. The rights under subsections (a) and (b) are cumulative and may be exercised simultaneously. (d) Rights of debtor and obligor.”

  • Section 15-12-809 – Secured claims, Colo. Rev. Stat. § 15-12-809

    “(1) Payment of a secured claim is upon the basis of the amount allowed if the creditor surrenders his security; otherwise payment is upon the basis of one of the following: (a) If the creditor exhausts his security before receiving payment, (unless precluded by other law) upon the amount of the claim allowed less the fair value of the security; or (b) If the creditor does not have the right to exhaust his security or has not done so, upon the amount of the claim allowed less the value of the security determined by converting it into money according to the terms of the agreement pursuant to which the security was delivered to the creditor, or by the creditor and personal representative by agreement, arbitration, compromise, or litigation. (2) A claim for a decedent’s proportionate share of liability for a secured debt, made by a third party who is jointly liable with the decedent to the secured creditor, based on the third party’s right to contribution from the decedent, shall be reduced by the fair market value, as of the date of death, of the decedent’s interest in the property securing the debt, if the property securing the debt is owned by the decedent and not subject to disposition by will or intestate succession at the time of death, and if the decedent’s interest passed to the third party on decedent’s death. C.R.S. § 15-12-809 L. 73: R&RE, p. 1595, § 1. C.R.S. 1963: § 153-3-809.”

  • Section 440.9601 – Rights after default; judicial enforcement; consignor or buyer of accounts, chattel paper, payment intangibles, or promissory notes, Mich. Comp. Laws § 440.9601

    “(1) After default, a secured party has the rights provided in this part and, except as otherwise provided in section 9602, those provided by agreement of the parties. A secured party may do 1 or more of the following: (a) May reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure. (b) If the collateral is documents, may proceed either as to the documents or as to the goods they cover. (2) A secured party in possession of collateral or control of collateral under section 7106, 9104, 9105, 9106, or 9107 has the rights and duties provided in section 9207. (3)”

    “A sale pursuant to an execution is a foreclosure of the security interest or agricultural lien by judicial procedure within the meaning of this section.”

    “Except as otherwise provided in section 9607(3), this part imposes no duties upon a secured party that is a consignor or is a buyer of accounts, chattel paper, payment intangibles, or promissory notes.”

  • Section 104.9407 – Restrictions on assignment, transfer, creation or enforcement of security interest in leasehold interest or in lessor’s residual interest, Nev. Rev. Stat. § 104.9407

    “1. Except as otherwise provided in subsection 2, a term in a lease agreement is ineffective to the extent that it: (a) Prohibits, restricts, or requires the consent of a party to the lease to the assignment or transfer, or the creation, attachment, perfection, or enforcement of a security interest in an interest of a party under the lease contract or in the lessor’s residual interest in the goods; or (b) Provides that the assignment or transfer, or the creation, attachment, perfection, or enforcement of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination or remedy under the lease. 2. Except as otherwise provided in subsection 7 of NRS 104A.2303, a term described in paragraph (b) of subsection 1 is effective to the extent that there is: (a) A transfer by the lessee of the lessee’s right of possession or use of the goods in violation of the term; or (b) A delegation of a material performance of either party to the lease contract in violation of the term. 3. The creation, attachment, perfection, or enforcement of a security interest in the lessor’s interest under the lease contract or the lessor’s residual interest in the goods is not a transfer that materially impairs the lessee’s prospect of obtaining return performance or materially changes the duty of or materially increases the burden or risk imposed on the lessee within the purview of subsection 4 of NRS 104A.2303 unless, and then only to the extent that, enforcement results in a delegation of a material performance of the lessor.”

  • Section 9-407 – Restrictions on creation or enforcement of security interest in leasehold interest or in lessor’s residual interest, Vt. Stat. tit. 9A § 9-407

    “(a) Except as otherwise provided in subsection (b) of this section, a term in a lease agreement is ineffective to the extent that it: (1) prohibits, restricts, or requires the consent of a party to the lease to the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in, an interest of a party under the lease contract or in the lessor’s residual interest in the goods; or (2) provides that the assignment or transfer or the creation, attachment, perfection, or enforcement of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the lease. (b) Except as otherwise provided in subsection 2A-303(7) of this title, a term described in subdivision (a)(2) of this section is effective to the extent that there is: (1) a transfer by the lessee of the lessee’s right of possession or use of the goods in violation of the term; or (2) a delegation of a material performance of either party to the lease contract in violation of the term. (c) The creation, attachment, perfection, or enforcement of a security interest in the lessor’s interest under the lease contract or the lessor’s residual interest in the goods is not a transfer that materially impairs the lessee’s prospect of obtaining return performance or materially changes the duty of or materially increases the burden or risk imposed on the lessee within the purview of subsection 2A-303(4) of this title unless, and then only to the extent that, enforcement actually results in a delegation of material performance of the seller. Even in that event, the creation, attachment, perfection, and enforcement of the security interest remain effective. 9A V.S.A. § 9-407 Added 1999, No. 106 (Adj. Sess.), § 2, eff. 7/1/2001.”

  • Section 47-9407 – Restrictions on creation or enforcement of security interest in leasehold interest or in lessor’s residual interest, Ariz. Rev. Stat. § 47-9407

    “A. Except as otherwise provided in subsection B of this section, a term in a lease agreement is ineffective to the extent that it: 1. Prohibits, restricts or requires the consent of a party to the lease to the assignment or transfer of, or the creation, attachment, perfection or enforcement of a security interest in, an interest of a party under the lease contract or in the lessor’s residual interest in the goods; or 2. Provides that the assignment or transfer or the creation, attachment, perfection or enforcement of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination or remedy under the lease. B. Except as otherwise provided in section 47-2A 303, subsection G, a term described in subsection A, paragraph 2 of this section is effective to the extent that there is: 1.”

    “C. The creation, attachment, perfection or enforcement of a security interest in the lessor’s interest under the lease contract or the lessor’s residual interest in the goods is not a transfer that materially impairs the lessee’s prospect of obtaining return performance or materially changes the duty of or materially increases the burden or risk imposed on the lessee within the purview of section 47-2A 303, subsection D unless, and then only to the extent that, enforcement actually results in a delegation of material performance of the lessor. Even in that event, the creation, attachment, perfection and enforcement of the security interest remain effective. A.R.S. § 47-9407”

  • Section 10:9-109 – Scope, La. Stat. tit. 10 § 9-109

    “(a) General scope of Chapter. Except as otherwise provided in Subsections (c) and (d), this Chapter applies to: (1) a transaction, regardless of its form, that creates by contract a security interest in any type of personal property, standing timber that constitutes goods, or fixtures, but as to fixtures only if the security interest has been perfected by a fixture filing when the goods become fixtures; (2) an agricultural lien; (3) a sale of accounts, chattel paper, payment intangibles, or promissory notes; (4) a consignment; and (5) Reserved. (6) a security interest arising under R.S. 10:4-210 or 5-118. (b) Security interest in secured obligation. The application of this Chapter to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this Chapter does not apply. (c) Extent to which Chapter does not apply.”

    “The application of this Chapter to the sale of accounts, chattel paper, payment intangibles, or promissory notes is not intended and shall not be used to recharacterize that sale as a transaction to secure indebtedness, but is intended to protect purchasers of those assets by providing a notice filing system. For all purposes, in the absence of fraud or intentional misrepresentation, the parties’ characterization of a transaction as a sale of accounts, chattel paper, payment intangibles, or promissory notes shall be conclusive that the transaction is a true sale and is not a secured transaction and that title has passed to the party characterized as the purchaser, regardless of whether the purchaser (secured party) has any recourse against the seller (debtor), whether the seller is entitled to any surplus, whether the purchaser has possession of the note, contract, account agreement, invoice, or other evidence of indebtedness, or any other term of the parties’ agreement.”

  • Section 55-9-601 – [Effective Until 1/1/2024] Rights after default; judicial enforcement; consignor or buyer of accounts, chattel paper, payment intangibles or promissory notes, N.M. Stat. § 55-9-601

    “A secured party: (1) may reduce a claim to judgment, foreclose or otherwise enforce the claim, security interest or agricultural lien by any available judicial procedure; and(2) if the collateral is documents, may proceed either as to the documents or as to the goods they cover.”

  • Section 28-9-601 – RIGHTS AFTER DEFAULT – JUDICIAL ENFORCEMENT – CONSIGNOR OR BUYER OF ACCOUNTS, CHATTEL PAPER, PAYMENT INTANGIBLES OR PROMISSORY NOTES, Idaho Code § 28-9-601

    “A secured party:(1) May reduce a claim to judgment, foreclose or otherwise enforce the claim, security interest or agricultural lien by any available judicial procedure; and(2) If the collateral is documents, may proceed either as to the documents or as to the goods they cover.”

Other helpful Resources

  • The Vendor’s Lender: Secured Creditor’s Rights in Receivables Are Paramount

    This analysis is relevant to the research request because it discusses a recent New York case that ruled in favor of the secured creditor, and also provides an overview of the relevant UCC sections. However, the analysis is not a legal authority and only has persuasive value.

    “A number of courts have misinterpreted Article 9 to preclude a secured party from commencing suit against its debtor’s customers to collect amounts owed to the debtor.2 The premise behind this rationale is rooted in the language of the statute and the nature of the various relationships: “to hold that an account debtor is obligated to pay the secured creditor and not the debtor would be tantamount to creating a duty owed by the account debtor to the secured creditor that was separate and distinct from the duty it owed to the debtor.”3”

    “A recent decision by the highest court in New York ruled in favor of the secured creditor and correctly found that a holder of a presently exercisable security interest in a debtor’s receivables is entitled to receive and collect payment directly from the account debtor after furnishing the customer notice of its interest.”

    “This form of asset may, unlike inventory and equipment for example, be collected without interruption of the debtor’s operations.”

    “The decision required resolution by the highest court in the State of New York, which reversed the lower courts and answered the question in the affirmative.”

    “In a unanimous opinion, the court found that the language of UCC §§ 9-607 and 9-406, together with the “clear commentary” by the drafters with respect to those sections, make no distinction between a security interest and an assignment and the definition section of the UCC contains no separate definition of “assignment,” “assignor” or “assignee.””

  • Entities Engaged Solely In The Enforcement of Security Interests Are Not “Debt Collectors” Under The Fair Debt Collection Practices Act

    “The United States Supreme Court recently issued a unanimous decision in Obduskey v. McCarthy & Holthus LLP holding that entities engaged in the principal purpose of enforcing security interests are not, with limited exceptions, subject to the general regulations of the federal Fair Debt Collection Practices Act (FDCPA).”

    “Although narrowly tailored, the Obduskey decision finds that entities engaged in the enforcement of security interests are not debt collectors and, therefore, are not generally subject to FDCPA regulations, with certain exceptions.”

    “As explained in Obduskey, in providing a limited-purpose definition (and accompanying restrictions) for entities that engage in the “enforcement of security interests,” Congress intended to exclude these entities from the broader definition of “debt collectors” under the statute.”

    “As a result, the Supreme Court concluded that entities whose principal purpose is the enforcement of security interests and, specifically, non-judicial foreclosure, are not “debt collectors” under the FDCPA, and, therefore, such entities are not subject to the FDCPA’s general regulations, other than those specifically applicable to such entities.”

    “CONSIDERATIONS FOR LENDERS For lenders, loan servicers, and others involved in the mortgage industry, the Obduskey decision provides much needed guidance regarding the applicability of FDCPA regulations to law firms and other lender and servicer representatives assisting with non-judical foreclosures, and may ultimately reduce the number of lawsuits filed by defaulting borrowers in an attempt to delay or avoid foreclosure.”

  • Third Circuit Favors Cramdown’s ‘Flexibility’ and ‘Rough Justice’ Over Strict Enforcement of Subordination Agreements

    “Eight years after the Delaware bankruptcy court confirmed the chapter 11 plan of Tribune Company and its affiliates, the United States Court of Appeals for the Third Circuit (the Court) affirmed the bankruptcy court’s holdings that (a) the Bankruptcy Code’s “cramdown” provision effectively supplants strict enforcement of prepetition subordination agreements and (b) the Tribute plan did not “unfairly discriminate” against a dissenting class of unsecured senior noteholders who received only 0.9% less than it would have under a plan that strictly enforced the prepetition subordination agreements.”

    “Second, did the Plan “unfairly discriminate” against the Senior Noteholders by allocating a portion of subordinated payments to other unsecured creditors?The appeals court’s answer was, again, “no.””

    “Section 510(a) provides “[a] subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law.””

    “While the Senior Noteholders contended that section 1129(b)(1) cannot be read to interfere with section 510(a)’s enforcement of subordination agreements, the Court agreed with the lower courts and rejected this argument as running contrary to the plain language of section 1129(b)(1).”

    “The Plan Did Not Unfairly Discriminate Against the Senior Noteholders by Allocating a “Small Portion” of their Contractual Subordination Payments to Other Unsecured Creditors When the Delaware bankruptcy court considered the Senior Noteholders’ unfair discrimination objection, it compared their actual Plan recovery of 33.6% to their recovery had the subordination agreements been strictly enforced – 34.5% – and concluded the 0.9% difference was not sufficiently material to be considered unfair discrimination.”

  • The Ongoing Solvent Debtor Debate: Divided Ninth Circuit Panel Holds that PG&E Creditors Are Entitled to Contract Rate of Interest

    “On August 29, 2022, the Court of Appeals for the Ninth Circuit held in Ad Hoc Comm. of Holders of Trade Claims vs. Pacific Gas and Elec. Co. (In re PG&E Corp.) that when a debtor is solvent, a creditor may be entitled to receive interest at the contract rate (subject to equitable considerations), rather than at the federal judgment rate.”

    “The Ninth Circuit’s Majority Decision On appeal, a majority on the Ninth Circuit panel reversed the lower courts’ decisions, and held that, subject to equitable considerations, solvent debtors may be required to pay unsecured creditors at the rates of interest under their contracts to render such creditors unimpaired for purposes of Section1124 of the Bankruptcy Code.”

    “A. The Solvent Debtor Exception At the heart of the PG&E dispute is the common law “solvent debtor exception,” a doctrine that has been recently litigated in other bankruptcy cases.”

    “While Section502(b)(2) did terminate the Objectors’ legal rights to post‑petition interest, the Objectors’ claims may include “an equitable right to receive post‑petition interest under the solvent‑debtor exception.””

    “Key Take-Aways The Ninth Circuit now has joined other circuits in concluding that the solvent-debtor exception survived the enactment of the Bankruptcy Code, including the First, Fifth, and Sixth Circuits.”

  • Warning: Don’t Ignore Your Customers’ Secured Lenders, You Could be Required to Pay Twice!

    “New York State’s highest court recently dealt a big win for secured lenders holding accounts receivable as collateral. In Worthy Lending LLC v. New Style Contractors, Inc., the Court of Appeals of New York held that, pursuant to Article 9 of the Uniform Commercial Code (the “UCC”), a secured party may directly collect on the proceeds of accounts receivable owed to the borrower from third parties (so called “account debtors” in UCC parlance), even if an event of default has not occurred.”

    “Case Background: The Court of Appeals held: “UnderUCC 9-406, a security interest is an assignment and the UCC is purposefully structured to permit a debtor to grant creditors security interests in a debtor’s receivables so that the secured creditor can direct account debtors to pay it directly.””

    “The Court rejected this argument based on a plain reading of the statute and commentary thereto, and found that Section 9-607(a)(3) expressly states that a secured party may obtain collateral directly from an account debtor and the parties may contractually agree that the secured party may do so without regard to an event of default.”

    “If you have leverage with your lender and do not want your lender to directly collect from your customers, make sure your security agreements do not give away this right unless an event of default has occurred.”

Legal Disclaimer

The information provided in this article is for general informational purposes only and should not be construed as legal or tax advice. The content presented is not intended to be a substitute for professional legal, tax, or financial advice, nor should it be relied upon as such. Readers are encouraged to consult with their own attorney, CPA, and tax advisors to obtain specific guidance and advice tailored to their individual circumstances. No responsibility is assumed for any inaccuracies or errors in the information contained herein, and John Montague and Montague Law expressly disclaim any liability for any actions taken or not taken based on the information provided in this article.

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