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Secured Transactions Assignment 13. Default, Acceleration and Cure Under State Law. The Big Picture. Chapters 1 and 2. Creditors’ Remedies Chapter 3. Creation of Security Interests Chapter 4. Default: The Gateway to Remedies. The Big Picture. Chapters 1 and 2. Creditors’ Remedies

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secured transactions assignment 13

Secured TransactionsAssignment 13

Default, Acceleration and Cure Under State Law

the big picture
The Big Picture

Chapters 1 and 2. Creditors’ Remedies

Chapter 3. Creation of Security Interests

Chapter 4. Default: The Gateway to Remedies

the big picture1
The Big Picture

Chapters 1 and 2. Creditors’ Remedies

Chapter 3. Creation of Security Interests

Chapter 4. Default: The Gateway to Remedies

Assignment 13. Default, acceleration and cure under state law.

Assignment 14. Default, acceleration and cure under bankruptcy law.

basic concepts
Basic Concepts

Installment loan. A loan repayable in more than one payment

Line of credit. An arrangement in which the creditor agrees to lend and receive payment at times elected by the debtor, up to the line amount and until the contracted due date of the line

How does this “line” differ from your Visa or Mastercard “line?”

Payable on demand. Immediately payable when the creditor requests payment

basic concepts1
Basic Concepts

Default. Breach of the loan agreement (contract principles)

Acceleration (of installment payments). Rendering a debt previously payable at some future time due and payable now.

Cure (of default). Reversing a default by tendering performance

Tender. “An unconditional offer of money or performance to satisfy a debt or obligation.” Black’s Law Dictionary

The relationship between acceleration and cure:

Old Republic Insurance v. Lee. “[A] mortgagor, prior to election of . . . accelerat[ion] . . . may tender the arrears due and thereby prevent [acceleration].”

Default triggers a race:

If acceleration is first, default can’t be cured

If cure is first, obligation can’t be accelerated.

when does acceleration occur
When does acceleration occur?

Generally: When the contract says it occurs

But: In re Crystal Properties, Ltd., 268 F.3d 743 (9th Cir. 2001)

“[A] creditor must take affirmative action to put the debtor on notice that it intends to exercise its option to accelerate.

“Both state and federal courts have made clear the unquestionable principle that, even when the terms of a note do not require notice or demand as a prerequisite to accelerating a note, the holder must take affirmative action to notify the debtor that it intends to accelerate.”

problem 13 1 page 2341
Problem 13.1, page 234

Pat misses

two payments

Truck loan

made

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

problem 13 1 page 2342

Problem 13.1, page 234

Problem 13.1, page 234

Pat sends

check

Pat misses

two payments

Truck loan

made

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

slide10

Problem 13.1, page 234

Pat sends

check

Bank rejects

payment

Pat misses

two payments

Truck loan

made

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

slide11

Problem 13.1, page 234

Pat sends

check

Bank rejects

payment

Pat misses

two payments

Truck loan

made

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this?

slide12

Problem 13.1, page 234

Pat sends

check

Bank rejects

payment

Pat misses

two payments

Truck loan

made

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this?

Not if she cured before acceleration.

slide13

Problem 13.1, page 234

Pat sends

check

Bank rejects

payment

Pat misses

two payments

Truck loan

made

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this?

Not if she cured before acceleration.

When did Pat cure?

slide14

Problem 13.1, page 234

Pat sends

check

Bank rejects

payment

Pat misses

two payments

Truck loan

made

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this?

Not if she cured before acceleration.

When did Pat cure?

slide15

Problem 13.1, page 234

Pat sends

check

Bank rejects

payment

Pat misses

two payments

Truck loan

made

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this?

Not if she cured before acceleration.

When did Pat cure? At “tender,” p.223; §1-202(f).

At option exercise.

Which happened first?

  • What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration?

Waiver? No. Waiver by estoppel? No reliance.

slide16

Problem 13.1, page 234

Pat sends

check

Bank rejects

payment

Pat misses

two payments

Truck loan

made

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this?

Not if she cured before acceleration.

When did Pat cure? At “tender,” p.223; §1-202(f).

When did Bank accelerate?At option exercise.

Which happened first?

  • What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration?

Waiver? No. Waiver by estoppel? No reliance.

slide17

Problem 13.1, page 234

Pat sends

check

Bank rejects

payment

Pat misses

two payments

Truck loan

made

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this?

Not if she cured before acceleration.

When did Pat cure? At “tender,” p.223; §1-202(f).

When did Bank accelerate? At option exercise, notice effort

Which happened first?

  • What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration?

Waiver? No. Waiver by estoppel? No reliance.

slide18

Problem 13.1, page 234

Pat sends

check

Bank rejects

payment

Pat misses

two payments

Truck loan

made

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this?

Not if she cured before acceleration.

When did Pat cure? At “tender,” p.223; §1-202(f).

When did Bank accelerate? At option exercise, noticeeffort

Which happened first?

  • What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration?

Waiver? No. Waiver by estoppel? No reliance.

problem 13 2 page 235
Problem 13.2, page 235

One pay-

ment due

Now

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

Oct 1

problem 13 2 page 2351
Problem 13.2, page 235

One pay-

ment due

Now

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

Oct 1

problem 13 2 page 2352
Problem 13.2, page 235

One pay-

ment due

Now

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

Is Art in default?

Oct 1

problem 13 2 page 2353
Problem 13.2, page 235

One pay-

ment due

Now

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

Is Art in default? No. Just late.

Oct 1

problem 13 2 page 2354
Problem 13.2, page 235

One pay-

ment due

Now

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

Is Art in default? No. Just late.

a. When will Art be in default?

Oct 1

problem 13 2 page 2355
Problem 13.2, page 235

One pay-

ment due

Ten days

after

Ten days

after

More than

one pymt due

Now

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

a. Is Art in default? No. Just late.

b. When will Art be in default?

Nov 11

Oct 1

Oct 11

Nov 1

problem 13 2 page 2356
Problem 13.2, page 235

One pay-

ment due

Ten days

after

Ten days

after

More than

one pymt due

Now

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

a. Is Art in default? No. Just late.

b. When will Art be in default? Nov 12.

Nov 11

Oct 1

Oct 11

Nov 1

problem 13 2 page 2357
Problem 13.2, page 235

One pay-

ment due

Ten days

after

Ten days

after

More than

one pymt due

Now

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

a. Is Art in default? No. Just late.

b. When will Art be in default? Nov 12.

c. What happens if he doesn’t pay?

Nov 11

Oct 1

Oct 11

Nov 1

problem 13 2 page 2358
Problem 13.2, page 235

One pay-

ment due

Ten days

after

Accel-

eration

Forc

begins

Ten days

after

More than

one pymt due

Now

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

a. Is Art in default? No. Just late.

b. When will Art be in default? Nov 12.

c. What happens if he doesn’t pay?

Nov 11

Oct 1

Oct 11

Nov 1

problem 13 2 page 2359
Problem 13.2, page 235

One pay-

ment due

Ten days

after

Accel-

eration

Forc

begins

Ten days

after

More than

one pymt due

Now

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

a. Is Art in default? No. Just late.

b. When will Art be in default? Nov 12.

c. What happens if he doesn’t pay?

When is Art’s last chance to pay without serious repercussions?

Nov 11

Oct 1

Oct 11

Nov 1

problem 13 2 page 23510
Problem 13.2, page 235

One pay-

ment due

Ten days

after

Accel-

eration

Forc

begins

Ten days

after

More than

one pymt due

Now

Contract: “Upon the occurrence of any of the following events of default . . . (1) the Debtor shall have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the due dates . . . mortgagee shall have . . . the right to declare the entire outstanding balance immediately due and payable.”

a. Is Art in default? No. Just late.

b. When will Art be in default? Nov 12.

c. What happens if he doesn’t pay?

When is Art’s last chance to pay without serious repercussions?

Nov 11

Oct 1

Oct 11

Nov 1

d. Different under the Illinois reinstatement statute?

problem 13 3 page 235
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel.

problem 13 3 page 2351
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

problem 13 3 page 2352
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

If we do, what is the worst that could happen?

problem 13 3 page 2353
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

If we do, what is the worst that could happen?

problem 13 3 page 2354
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

If we do, what is the worst that could happen?

problem 13 3 page 2355
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

If we do, what is the worst that could happen?

problem 13 3 page 2356
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

If we do, what is the worst that could happen?

problem 13 3 page 2357
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

If we do, what is the worst that could happen?

problem 13 3 page 2358
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

If we do, what is the worst that could happen?

problem 13 3 page 2359
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

If we do, what is the worst that could happen?

What should we do?

problem 13 3 page 23510
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

If we do, what is the worst that could happen?

What should we do? Replevin

problem 13 3 page 23511
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

If we do, what is the worst that could happen?

What should we do? Replevin

With or without notice to Walt?

problem 13 3 page 23512
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

If we do, what is the worst that could happen?

What should we do? Replevin

With or without notice to Walt? Notice creates the 30-day risk!

problem 13 3 page 23513
Problem 13.3, page 235

We represent Second National. We plan to pull the plug on Walt Rebel. Loan officer (Art) wants to give Walt 30 days advance notice. Is that OK?

If we do, what is the worst that could happen?

What should we do? Replevin

With or without notice to Walt? Notice creates the 30-day risk! JR Hale Contracting, page 225.

basic concepts2
Basic Concepts

Waiver. The voluntary relinquishment of a known right

Waiver by estoppel. Misleading a debtor into the honest and reasonable belief that the creditor intended a waiver

Good faith. Honesty in fact and the observance of reasonable commercial standards of fair dealing. §1-201(b)(20); 9-102(a)(43).

Insecurity clause. A provision that the loan is in default if the secured party “deems itself insecure” or the like.

§1-309. A creditor can exercise an insecurity clause only if the creditor in good faith believes the prospect for payment impaired.

Comment 1. “This section has no application to demand instruments . . . .”

slide45

Problem 13.4, page 236

Pat sends

check

Bank rejects

payment

Pat misses

two payments

Truck loan

made

Contract: Missing two payments is a default and “upon default at the secured party’s option, the entire balance of the loan shall become due and payable.”

Pat: can they get away with this?

Not if she cured before acceleration.

When did Pat cure? At “tender,” p.223. §9-623 comment.

When did Bank accelerate? At option exercise, noticeeffort

Which happened first?

What effect if Bank accelerated before receiving check, then kept the check, and continued to claim acceleration? Waiver? Waiver by estoppel?

basic concepts good faith
Basic Concepts, Good Faith

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

§1-309: “A term providing that one party . . . may accelerate payment . . . ‘at will’ or ‘when he deems himself insecure’ or in words of similar import shall be construed to mean that he shall have the power to do so only if he is in good faith . . . .”

basic concepts good faith1
Basic Concepts, Good Faith

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith.

basic concepts good faith2
Basic Concepts, Good Faith

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power.

basic concepts good faith3
Basic Concepts, Good Faith

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. ■ This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contractswithin the commercial context in which they are created, performed, and enforced . . .

basic concepts good faith4
Basic Concepts, Good Faith

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. ■ This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness

basic concepts good faith5
Basic Concepts, Good Faith

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. ■ This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.

basic concepts good faith6
Basic Concepts, Good Faith

§1-201(b)(20). “‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.

§1-304. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

Comment to 1-304. This section does not support an independent cause of action for failure to perform or enforce in good faith. ■ Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. ■ This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.

problem 13 6 page 236
Problem 13.6, page 236

Macklin Mortgage needs money. Wants to call Lance’s loan.

a. Does Macklin have right to call it for:

1. Failure to furnish proof of insurance last year?

No. Probably waived

2. Failure to furnish proof of insurance 23 days ago?

Yes? Too soon to imply waiver (J.R. Hale case)

b. Lance: “Macklin waived this year’s proof by estoppel when it failed to require last year’s proof.” Good argument?

Contract ¶13 negates that implication

c. Is Harvey risking a damage judgment by calling the loan?

d. Are you willing to continue representing Macklin?

e. If you had to continue, what would you advise?

problem 13 6 page 2361
Problem 13.6, page 236

Comment to 1-304.This section does not support an independent cause of action for failure to perform or enforce in good faith. Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.