1-5. Secured Transaction
A secured transaction is created when a buyer or borrower (debtor) grants a seller or lender (creditor or secured party) a security interest in personal property (collateral). A security interest allows a creditor to repossess and sell the collateral if a debtor fails to pay a secured debt.
A secured transaction involves a sale on credit or lending money where a creditor is unwilling to accept the promise of a debtor to pay an obligation without some sort of collateral. The creditor (the secured party) requires the debtor to secure the obligation with collateral so that if the debtor does not pay as promised, the creditor can take the collateral, sell it, and apply the proceeds against the unpaid obligation of the debtor.
A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. Personal property is basically anything that is not real property. A fixture is personal property that has become so attached or adapted to real estate that it has lost its character as personal property and is deemed to be part of the real estate. An example would be a central air conditioning unit within a commercial building.
1-5-1. Debt Collection
Debtor-creditor law governs situations where one party is unable to pay a monetary debt to another. There are three types of creditors. First are those who acquire a lien through statute, agreement between the parties, or judicial proceedings against a particular piece of property. This property (or proceeds from its sale) must be used to satisfy the debt to the lien-creditor before it can be used to satisfy debts to other creditors. Once a lien has been created state statutory law governs how the lien is executed against the debtor's property. The sale of property subject to a lien to satisfy the debt is also governed by state statutory law. The type of property that may be used to satisfy a debt is governed by state and federal legislation, such as the Consumer Credit Protection Act. Secondly, a creditor may have a priority interest. A priority arises through statutory law. If a creditor has a priority his debt must be paid ahead of other creditors when the debtor becomes insolvent. The third type of creditor is one who has neither a lien against the debtor's property or holds a statutory priority.
Non-bankruptcy debtor-creditor law is governed mainly by state statutory and common law. Harassment, defamation, or other unfair practices in attempts at debt collection may be curbed by tort claims in state court. States also regulate debt collection through statute. Congress has enacted the Fair Debt Collection Practices Act to regulate some debt collectors.
Creditors use judicial and statutory processes to have debts satisfied. Attachment is a limited statutory remedy whereby a creditor has the property of a debtor seized to satisfy a debt. Garnishment allows a creditor to collect part of a debt (for example wages) to satisfy the obligation. Replevin allows a creditor to seize goods, such as a security interest, that he or she has a property interest in, to satisfy the debt. Receivership involves the appointing of a third party by a court to dispose of the debtor's property in order to satisfy the debt.
A debtor may attempt to fraudulently convey a piece of property to keep it out of the creditos' hands. State laws seek to prevent this type of property transfer. Many states have adopted the Uniform Fraudulent Conveyances Act or its successor, the Uniform Fraudulent Transfer Act.
1-5-2. Lien Priority Litigation
A lien is an encumbrance on one person’s property, real or personal, to secure a debt the property owner owes to another person. A lien is a formal document signed by the party to whom money is owed, and sometimes by the debtor who agrees to the amount due. The right of lien generally arises by operation of law, but in some cases it is created by express contract. A lien carries with it the right to sell property, if necessary, to obtain the money. A mortgage or a deed of trust is a form of lien.
The types of liens that are generally recognized are common-law liens, equitable liens, and statutory liens. An equitable lien differs essentially from a common-law lien. A common law lien is the mere right to retain the possession of some chattel until a debt or demand due the person thus retaining it is satisfied. Possession of the property is an essential necessary element and if it is voluntarily surrendered by the creditor, the lien is at once extinguished. In equitable lien, possession remains with the debtor, who holds the proprietary interest.
There are numerous types of liens including: a mechanic’s lien against the real property upon which a workman, contractor or supplier has provided work or materials, an attorney’s lien for fees to be paid from funds recovered by his/her efforts, a medical lien for medical bills to be paid from funds recovered for an injury, a landlord’s lien against a tenant’s property for unpaid rent or damages, a tax lien to enforce the government’s claim of unpaid taxes, or the security agreement authorized by the Uniform Commercial Code. Most liens are enforceable in the order in which they were recorded or filed (in the case of security agreements), except tax liens which have priority over the private citizen’s claim.
To create a valid lien, the party to whom or by whom it is acquired should have the absolute property or ownership of the thing, or a right to vest it. The party claiming the lien should have an actual or constructive, possession, with the assent of the party against whom the claim is made. A lien may be waived or lost by any act or agreement between the parties, by which it is surrendered, or becomes inapplicable. A lien may also be lost by voluntarily parting with the possession of the goods.
The current rule of priority is first in time first in right. The priority of liens generally depends upon the time that they attach or become specific and perfected. Usually, a prior lien gives a prior legal right that is entitled to prior satisfaction unless the lien is intrinsically defective or is displaced by some act of the party holding it or unless the priority of liens is regulated by a statute that provides a different priority rule. Notice of a prior lien is necessary to render it superior to another lien.
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