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Debtor-Creditor Outline
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 Introduction to Creditors’ Rights and Debtors’ Protection
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 Non-Judicial Collection Efforts
o Intro
 Litigation is a last resort
o Debt Collection Practices
 Debt Collection Efforts by a Creditor
• Creditors usually make every effort to collect debts without
recourse to legal proceedings.
• West (5 causes of action)
o (1) Communicating with 3rd parties about debt
 You can only contact consumer, spouse,
parents/guardian (minor)
 You can try and locate information
o (2) Threats of criminal prosecution
 debt collector cannot file criminal charges
 any threats made that cannot be implemented is a
violation of the FDCPA
o (3) Failure to comply with property notice and debt
validation procedures.
 Following required to be on letter:
• Name of creditor
• Amount of debt
• Statement to the debtor that they have 30
days.
o (4) Collecting service charges is not expressly authorized
o (5) Misrepresentation of the amount of debt.
• Bentley
o Misrepresentations about threats to take action are in
violation of the FDCPA.
• Heintz
o The FDCPA applies to a lawyer who “regularly,” through
litigation, tries to collect debts for another.
o BUT, Collecting fees for your own firm is not subject to the
FDCPA; this is not debt collection.
 Peaceful Repossession on Default
• The UCC provides that “unless otherwise agreed a secured party
has on default the right to take possession of the collateral. In
taking possession a secured party may proceed without judicial
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process if this can be done without breach of the peace or may


proceed by action.”
• Secured Party: Has secured interest in property or personalty in
case of default.
• Williams
o A Repo man may not breach the peace in taking back
property.
o Creditor has right to peacefully repossess.
• Transactions
o (1) Security Agreement
 An agreement that creates or provides for an interest
in specified real property or personal property to
guarantee the performance of an obligation.
o (2) Promissory Note
 An unconditional written promise signed by the
maker to pay a sum certain either to the order of a
designated person or to bearer payable over a
specified period of time on conditions specified in
the note.
• Acceleration Clause: Upon default the creditor can ask for the
entire sum NOW, rather than over the specified period of time.
• Personal Guaranty of Payment: Officers personally put themselves
on the line in case of default.
• Typical Events of Default:
o (1) Failure to make payment
o (2) Filing of Bankruptcy
o (3) Maker adjudicated bankrupt or insolvent.
 Insolvent: More liabilities than assets.
o (4) Sale by maker of all his assets
• Boudreau
o Default, which triggers possessory rights of creditor,
occurred when debtor failed to meet monetary obligations.
 Agreements should be broad.
• Self-Help Repossession: Enables the secured party to obtain
possession of the collateral quickly and inexpensively at a time
when continued possession by the debtor could pose serious risks
for the secured party.
• Turner
o The right of self-help repossession is part of common law
of the state, and when the state legislature passed this
statute, it simply codified common law … due process not
violated.
• 9-610 - How to dispose of property after repossession:
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o (1) Lender must sell repossessed property in commercially


reasonable manner
o (2) Give borrower notice of public sale; put it in newspaper
(world on notice)
o Goal: maximize the amount of sale for repossessed
property.
o Judgment by Confession (Cognovit Judgments)
 The debtor’s waiver of the right to contest a collection suit, authorizing the
creditor to obtain judgment by consent.
 Person’s agreement to the entry of judgment upon the occurrence or
nonoccurrence of a specified event.
 Quick way for creditor to enforce their rights.
 No action taken by creditor other than filing in clerk’s office; debtor has
no opportunity to appear.
 Requirements for Confession of Judgment
• (1) Affidavit Form
o (a) signed by defendant
o (b) state sum for which judgment may be entered
o (c) authorize the entry of the judgment upon occurrence or
nonoccurrence of an event
o (d) State the county where defendant resides
o (e) Facts out of which debt arose …
 Overmyer
• Mechanic’s Lien: Lien taken by a person who improves real
property.
• Confession of Judgment is enforceable when both parties are of
equal bargaining power, and that Confession of Judgments are
useful in the commercial world.
• *If a party voluntarily, knowingly, and intelligently waives their
right to a lawsuit before a judgment is filed, then this is
permissible.
• Adhesion Contract: Standard form contract prepared by one party
to be signed by another party who is in a substantially weaker
position to negotiate the terms.
 Fiore
• Personal Guaranty of Payment: Not conditioned on the creditors
exhausting legal remedies against the principle debtor before suing
the guarantor.
• Personal Guaranty of Collection: Conditioned on the creditors
having first exhausted legal remedies against the principal debtor
before suing the guarantor.
• Where 2 parties are sophisticated and represented by counsel,
where they both know what they are doing, there is no public
policy reason to void judgment.
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 Demand Note: Payable in full immediately on date of execution at the


option of the holder.
• Versus
• Promissory Note: Has payment terms extending over period; so
long as there are no defaults, the bank cannot accelerate for the full
sum.

o Setoff
 Claim that serves to counterbalance or compensate for another claim.
 Allied Sheet Metal
• A bank generally has the legal right to set off the amount it owes to
its customer (deposit account), against the amount owed to it by its
customer (note, loan, or other obligations in default).
o Judgments [In NY, judgment against personal property is good 20 years from day
of filing.]
 Confession of Judgment (Cognovit): The debtor’s waiver of the right to
contest a collection suit, authorizing the creditor to obtain judgment by
consent.
 Consent Judgment: Settlement that occurs during litigation and becomes a
court judgment when the judge approves it.
 Default Judgment: Judgment entered against the defendant who fails to
appear and defend. (Malpractice)
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 Enforcement Money Judgments
o Intro
 After final judicial determination results in the award of a money
judgment.
o The Judgment Creditor’s Objectives
 Property Available to Satisfy the Judgment
• State Law: Generally includes all property in which the debtor has
a property interest.
 Locating Assets
• Similar to pre-trial discovery
 Keeping Assets in Place
• Most states permit the judgment creditor to restrain the debtor’s
transfer of cash, real estate, and personal property.
 Realizing on Assets
• Judgment creditor must be able to reach the debtor’s assets.
• Ways to get your money:
o Garnish wages: 10% (creditor can ask court for 20%)
o Turnover order: Court order to turn property over to
judgment creditor.
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o Appointment of Receiver: Receiver takes control of


debtor’s assets; steps in shoes of owner.
o Property Execution: Judgment creditor issues a levy
(sheriff’s seizure or taking control of property pursuant to a
writ) to the sheriff.
o Itemization: Specific list of debtor’s assets.
o Sheriff physically goes out and gets the property
o Tactics
 Creditor’s use of procedural devices.
o Protection of the Debtor and Third Parties
 Judgment debtors are protected from abusive judgment enforcement
tactics.
o Priority Problems
 Problem arises when 2 or more judgment creditors are competing for the
same assets.
o The Spectre of Bankruptcy
 Bankruptcy is the ultimate limitation on the judgment creditor’s remedies.
 A Bankruptcy Petition operates as an automatic stay of all judgment
enforcement devices.
o Necessity of Having a Lien
 Lien: Used broadly, any charge against or interest in property to secure a
creditor’s right to payment, so that if the debt is not paid, the creditor may
have recourse to the property to satisfy the debt.
• A legal right or interest that a creditor has in another’s property,
lasting usually until a debt or duty that it secures is satisfied.
 Consensual Liens: Created by and dependant upon an agreement between
the parties.
 Judicial Liens: Arise out of judicial proceedings. (attachment lien,
garnishment lien)
 Statutory Liens: Created by statute, usually for the benefit of some
recognized economic class. (mechanic’s liens, landlord’s liens, tax liens)
o Judgment Liens
 The first step in judgment enforcement is to docket the judgment, thereby
creating a “judgment lien.”
 Jackson
• You cannot have the sheriff execute on the property unless the
judgment has been filed at the courthouse.
• Note: Always file judgments immediately.
o Finding the Assets of the Judgment Debtor
 Type of property available to a judgment creditor in NY:
• (a) Debt against which a money judgment may be enforced.
• (b) Property against which a money judgment may be enforced.
 Methods for Finding a Debtor’s Assets:
• (1) Issue a subpoena and depose the debtor or any other person
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• (2) subpoena documents


• (3) have the debtor respond to written interrogatories
o Preventing Transfer of the Judgment Debtor’s Assets
 3 ways to prevent transfer:
• (1) If a judgment lien against real property is recorded, a
subsequent transferee would take title subject to the lien.
• (2) Have the sheriff levy on the debtor’s control and physically
remove the property from the debtor’s control.
• (3) Obtain a restraining notice which freezes the debtor’s property
by enjoining the sale, assignment or transfer until the judgment is
satisfied.
o Enforcing the Judgment
 Levy and Execution
• Hicks
o A writ of execution expires within a specified limited
period if the sheriff has not successfully levied against the
property. The creditor needs to apply for another writ.
• In re Continental Midway
o A possessory lien isn’t established until and unless the
sheriff actually obtains the property.
• Keeton
o In Federal Courts you need finality; if an action is still
pending you cannot start judgment enforcement
proceedings.
o In NY S.Ct., you can start judgment enforcement unless a
bond is produced while appeal is pending.
o Preemption: Federal statute preempts state statute.
 Must be stated in federal statute.
 Alternative Devices for Enforcing Money Judgments
• Bond: If you are in NY, and you want to appeal the judgment
against you, but in the meantime you don’t want to lose everything
you own, then you can post a bond for the amount equal to the
judgment.
o Bond secures judgment creditor.
• Turnover Order
o Competing with Other Creditors: Priority Problems
 After Acquired Property
• Hulbert
o Once you file your judgment against the person who owns
property or acquires property after judgment, you are
secured in your judgment.
• Judgment Clarifications
o (1) judgment is good for 20 years
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 In terms of judgment lien, starts from the day that it


is docketed by issuing court.
o (2) Once your judgment is filed you are protected for 10
years with regards to that judgment lien, but the judgment
itself is good for 20 years.
 The lien can be extended if you get permission
within the first 10 years.
o (3) The judgment lien is used for positioning over other
lenders.
 If you don’t extend, your original 10 years
extinguishes, and you can attempt to extend, BUT
any gap in which others file will make them
superior to you.
 Priorities Between Execution and Non-Execution Creditors
• 3 ways to secure a judgment lien on property:
o (1) Get sheriff out and levy on personal property
o (2) Turnover Order
 Issued on behalf of judgment creditor
 Initiate proceeding and have judge issue turnover
order
 Advise court of rights to why judge should issue
turnover order
 Once judge issues turnover order, you now have
lien against personal property.
• Now you have priority!
o (3) Appoint a Receiver
 Receiver: A person appointed by the court to take
personal control over the judgment debtor’s
property that will be subject to sale.
• Once court appoints receiver you have a lien
on the personal property.
• Restraining Notice to Judgment Debtor
o Served upon party who is in possession of judgment
debtor’s property, including the judgment debtor himself.
o Restrains possessor from transferring the property; they
must keep the property.
 §5222 limits restraining notice to 1 year or until
judgment notice is satisfied.
• Order of delivery to sheriff will win priority fight.
• Panzirer
o Filing of a judgment means nothing; rather needs sheriff,
turnover, or receiver.
o Court focuses on issuance of the execution and levy for
priority purposes.
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• Information Subpoena
o (1) Recipient must answer questions within 7 days
o (2) Intended to make recipient disclose that they are in fact
in possession of the property.
o (3) Can serve restraining notice at the same time
o (4) Does not give you lien rights.
o Best to locate judgment debtor’s accountant!
• Clarkson
o Property in custody of the court is not subject to execution.
o Protection of Judgment Debtors
 Moskin
• A seat on the Stock Exchange was subject to levy.
• §5240 allows the court to modify, vacate, or regulate enforcement
procedures.
o This is there in case the taking of the debtor’s property will
interfere with their livelihood.
o Protection for Judgment Creditors
 Judgment: Is a determination of the rights of the parties in an action and
may be final or interlocutory (not final).
• Final Judgment: determines controversy and sets the stage for
enforcement.
• Interlocutory Judgment: Judgment lacking in finality and at the
option of the court.
 Interest on Judgment:
• Statutory rate is 9% annually.
• Straight interest as opposed to compound interest.
• Accrual:
o Property Damage or Breach of Contract – accrues from
date of damage or breach.
o Personal Injury – accrues from day judgment is entered in
the clerk’s office.
 §5205. Personal Property exempt from application to the satisfaction of
money judgments.
• Policy: Don’t want to make a pauper out of the judgment debtor.
 Overmyer
• If you know your client’s intention is to file a sham suit, then don’t
file it.
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 Attachment and Garnishment
o Introduction
 Attachment: Is the ‘pre-judgment remedy’ that enables a plaintiff to seize,
or have an enforcement officer seize, property of the defendant for
purposes of obtaining jurisdiction and/or securing an eventual judgment.
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• “Grabbing of the property by the sheriff.”


• Generally available only when money judgment is sought.
 Actions in Which Attachment is Proper
• Foreign Attachment
o The attachment of the in-state property of a nonresident
defendant for purposes of:
 (a) establishing personal jurisdiction (quasi in rem)
over the defendant, and
 (b) eventually realizing on the property in the event
of a judgment in favor of the plaintiff.
o Nonresident defendant in a quasi in rem action must decide
whether:
 (a) to default, lose the attached property, and retain
the right to defend the actions on the merits in a
subsequent proceeding, or
 (b) to make a general appearance and thereby be
exposed to the full in personam jurisdiction of the
court.
• Domestic Attachment
o The attachment of the property of a resident.
o Purpose of the attachment is not to obtain jurisdiction, but
solely to create a lien on the attached property that will
secure payment of any judgment that the plaintiff may
ultimately recover.
 Special Circumstances Requirements
• New York requires that creditor seeking to attach the debtor’s
property show at least 1 special circumstance:
o (1) defendant is a non-resident (quasi in rem)
o (2) defendant is hiding
o (3) defendant is concealing or attempting to dispose of its
assets
o (4) plaintiff is suing on unpaid judgment that is entitled to
full faith and credit.
• Attachment is a harsh remedy.
 When Attachment Is Available
• Creditor/Plaintiff may seek an order of attachment any time before
the final judgment.
o NY: The plaintiff may seek an order of attachment even
before commencing the underlying action (must serve
summons within 60 days).
 Procedural Requirements
• (1) Plaintiff files motion for an order of attachment
• (2) Affidavit indicating statutory requirements and special
circumstances exist
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• (3) Bond (undertaking) to guarantee payment of the defendant’s


damages in the event the attachment proves wrongful
• (4) Proposed order or writ of attachment
 Effect of Attachment
• Plaintiff who properly causes the defendant’s property to be
attached obtains a contingent “attachment lien” on the attached
property.
• If the plaintiff prevails, his interest will be superior to any lien or
other interest in the property arising after the attachment lien.
• In NY, the attachment lien on property arises when the order is
delivered to the sheriff, provided that the sheriff effects the levy
timely.
 Right and Remedies of the Defendant
• Demand for the Papers
o The defendant is usually entitled to review immediately the
attachment papers.
 NY, defendant serves “demand for the papers”
• Bond
o Defendant may usually obtain the release of the attached or
garnished property by posting a bond.
 Discharging Bond: Guarantees that the defendant
will pay any judgment awarded the plaintiff in the
underlying action.
 Delivery Bond: Guarantees that the defendant will
produce the attached property for application to the
plaintiff’s judgment if the plaintiff prevails.
• Motion to Vacate
o Defendant may move to vacate if:
 (1) the plaintiff’s motion papers or bond are
defective;
 (2) attached property is legally exempt
 (3) plaintiff’s claim is not one for which attachment
is proper
 (4) value of the attached property exceeds the
amount sought in the plaintiff’s complaint
 (5) attached property does not belong to the
defendant
• Attachment Discretionary
o Attachment is remedy that lies within Court’s discretion.
• Cause of Action for Wrongful Attachment
o Defendant prevails, may be entitled to damages for
wrongful attachment.
 Lis Pendens
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• Pre-judgment attachment-like remedy applicable only in actions


involving title to, or the right to possession of real property.
 Attachments in Federal Court
o Jurisdiction
 Personal – Person served in NY.
 In Rem – Property is subject to litigation.
 Quasi In Rem – Attachment used.
• Choice – Do nothing and give up property or make appearance and
give full jurisdiction.
 Res Judicata – After something already decided in my favor and the issue
arises again, I have already won that issue since it has already been
decided.
 International Shoe
• Sufficient minimum contacts were enough to establish jurisdiction.
o What is Subject to Attachment?
• Any property of the debtor’s that a judgment creditor could reach
to satisfy a judgment.
• Harris
o The garnishee's debt owed to defendant followed the
garnishee everywhere. Since Maryland had a law that
would allow defendant to pursue the debt owed by the
garnishee to defendant, plaintiff could attach the debt
owed by the garnishee to defendant, even though the
garnishee was not a Maryland resident.
• Shaffer
o Overruled Harris.
o Sets forth the standard for establishing quasi in rem
jurisdiction.
o Test: Examine the relationship between defendant, forum,
and the type of litigation to see if they were purposeful
minimum contacts.
 The Rise and Fall of the Seider-Roth Doctrine
• Seider
o The order denying defendant's motion to vacate was
affirmed because the insurer's obligation to defend and
indemnify defendant was a debt owed to defendant by
the insurer and was subject to attachment.
• Rush
o The Court reversed the decision of the state supreme
court in favor of plaintiff claimant that quasi in rem
jurisdiction existed over defendant insured because
defendant had no contacts with the forum, and the due
process clause did not contemplate that a state may
make binding a judgment against an individual
defendant with which the state had no contacts, ties, or
relations.
o Constitutional Issues in Domestic Attachment (See Text 213)
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Case Sniadach Fuentes Mitchell N. Georgia Conn. v. Doehr


Finishing
Category Wages Consumer Goods Consumer Corp. Bank Lien on House
Goods Account
Clerk/Judge issuing Clerk Clerk Judge Clerk Judge
writ?
Affidavit Conclusory Conclusory On Direct Atty./Conclusory Personal
Knowledge Knowledge
(Non-
Lawyer/Party in
Interest)
Immediate Post- NO Fla. – YES YES NO YES
Seizure Hearing Penn. – NO
Exigent NO NO- [but it was YES NO NO
Circumstances argued that
devaluation
(depreciation) of
property through
use and abuse]
{Court believes
that due process is
more important
that ordinary wear
and tear}
Bond NO YES YES YES NO
Holding Unconstitutional Unconstitutional Constitutional Unconstitutional Unconstitutional
o Cases
 Sniadach
• the United States Supreme Court found that the prejudgment
garnishment procedure violated the fundamental principles of
due process. The question was whether the interim freezing of
wages violated procedural due process. The Court concluded
that a prejudgment garnishment could impose tremendous
hardship on wage earners with families to support. Further, the
statutory exemption granted the debtor was insufficient to
support her for any one week. Because the taking of the
debtor's property was so obvious, the Court needed no
extended argument to conclude that, absent a prior hearing,
the garnishment violated the due process requirements of the
Fourteenth Amendment.
 Fuentes
• the Supreme Court found that the statutes' prejudgment
replevin provisions deprived petitioners of their property
without due process insofar as they denied the right to prior
notice and hearing before property was taken. The Court noted
that states had the power to seize goods prior to a final
judgment in order to protect creditor's security interests, but
only after the creditor tested their claim to the goods through
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the process of a fair prior hearing. The Court rejected any


argument that petitioners waived their basic procedural rights
due to general terms of default adhesion contracts.
 Mitchell
• Reverse everything from Fuentes.
 N. Georgia Finishing
• petitioner's due process rights were violated where the
statutory garnishment procedure allowed respondent to obtain
a writ issuable on an affidavit containing only conclusory
allegations and issuable by a court clerk without participation
by a judge. Further, upon issuance of the writ, petitioner was
deprived of the use of his property without notice or hearing at
which respondent would be required to demonstrate at least
probable cause for the garnishment. The Court explained that
the probability of irreparable injury was sufficiently great so as
to require some procedures to guard against the risk of initial
error in issuing the writ.
 Doehr
• Burden to put cloud on House, biggest asset.
• You should be able to sell your house during pending legislation,
BUT it is what you do with the proceeds that matter.
 Intermeat
• Pulls together all quasi in rem cases!
• Court analyzed minimum contacts and fairness.
 §302. Personal Jurisdiction by acts of non-domicilaries
• Bottom Line: NY Courts have more stringent standard than Int.
Shoe
o NY requires more than just minimum contacts.
 NY Attachment Law [2 Statutes]
• (1) CPLR Art. 62. General Attachment Statute (everything but
consumer goods)
o (1) Personal knowledge to a judge (not from lawyer but
direct)
o (2) Show some sort of exigent circumstance
 Property may be: assigned, disposed of,
encumbered by other liens of other creditors, or
secreted (hidden) or removed from the state.
o (3) Bond Requirement
o (4) Plaintiff has burden of proving that he will succeed on
the merits of the case.
o (5) If P meets all of the requirements, the D can post a bond
to protect the P and get his property back.
• (2) CPLR Art. 71. Separate Replevin Statute (Consumer Goods
Context)
o (1) Show concerns that property will be devalued or
destroyed.
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o (2) Specific Exigency:


 probable that the chattel will become unavailable
for seizure or will become substantially impaired in
value.
• *Statutes flow from Mitchell reasoning!!!
 Lis Pendens (Notice of Pendency) – CPLR Art. 65
• (1) Puts world on notice that title of property is subject of dispute.
• (2) filed in clerk’s office
• (3) effective for (3 or 6) years?
• (4) If you don’t file summons within 30 days you must withdraw
notice of pendency.
• (5) D, whose property is subject to this litigation, can post a bond.
 Garnishment: A creditor’s (garnishor’s) levy on property of the debtor in
the possession of a 3rd party (garnishee), or on a debt or obligation due by
the garnishee to the debtor.
• Get a debt owed to you paid from a certain percentage of the
judgment debtor’s earnings.
• NY: you can only obtain garnishment of wages AFTER you have
obtained a judgment. (10% limit)
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 Claims of the Federal Government
o The Federal Priority
 (1) USC §3713: Grants the federal government an unsecured, but
absolute, priority over other creditors in non-bankruptcy insolvency cases.
• Secured creditors have priority over government.
• Government paid first, pursuant to §3713 when:
o (A) Insolvent and
 (i) debtor without enough property to pay all debts
makes a voluntary assignment of property;
 (ii) the property of the debtor, if absent, is attached;
or
 (iii) an act of bankruptcy is committed; or
o (B) estate of deceased debtor, in the custody of the executor
or administrator, is not enough to pay all debts of the
debtor.
o *Any of 3 is enough to give creditor concern that they
won’t be able to enforce rights.
 (2) Fed. Tax Lien Act: U.S. is a secured creditor with a broad general lien
against “all property and rights to property” of a taxpayer who neglects or
refuses to pay tax liability after assessment and demand.
 Emory
• Difficult to defeat federal priority.
 Texas
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• In order to figure out who has second priority, the court first has to
figure out whether the lien was choate or inchoate.
o Choate: Complete in and of itself; specified amount.
o Inchoate: Partially completed or imperfectly formed;
amount not yet been determined.
• Choateness Test (3 Prongs) – Test for state to trump federal
priority:
o (1) Identity of the lienor must be known
o (2) The amount of the lien must be known (choate)
o (3) Some attempts to “perfect” the lien have been taken
 There must be a seizure, distraint, or other
proceeding to divest.
 Bank of Wrangell
• NY is a “lien state”: Title to the property is the owner’s
possession.
• Do Not apply 3 pronged test when dealing with a mortgage.
• Statute positions:
o (1) Town
o (2) Mortgagee
o (3) government
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 Fraudulent Transfers
o Intro
 Common Law: “roughly defined as an infringement of the creditor’s right
to realize upon the available assets of his debtor.”
 Uniform Fraudulent Transfer Act (NY)
 A “fraudulent transfer” may take on many forms.
• Debtor forms a 1-man corporation;
• Arranges for a friend to purchase his property at an execution sale
for a price substantially below its true value;
• Agree to rescind a profitable contract.
o The Elements of a Fraudulent Transfer (UFTA)
 (1) Fair Consideration
• “reasonably equivalent value”
 (2) Insolvency
• A debtor is insolvent if the sum of its debts is greater than that of
its assets “at a fair valuation.”
o Debtor not paying debts as they become due is insolvent.
 (3) Transfer
• Broader than a “conveyance.”
 (4) Relevance of Transferor’s Intent
• Requires a subjective inquiry into the transferor’s intent.
o Statutes, Cases, Notes, and Questions
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 2 Types of Fraud:
• (1) Actual: You must prove the intent. Is found when a transfer is
made with the intent to hinder, delay, or defraud creditors.
o get a person on the witness stand
o very difficult to prove
• (2) Constructive: allows the court to infer intent from certain
actions taken by the debtor.
o Found where there is a transfer of assets of an insolvent
debtor.
 Uniform Fraudulent Conveyance Act (UFCA)
• (1) Transfer is Voidable?
o Can reverse as if it never happened.
o Otherwise considered a tort.
• (3) Fair consideration
o (a) if the judgment debtor conveys property and the
transferee pays the fair equivalent and in good faith, then
that is considered “fair consideration.”
 Rights of creditors after debt matured:
• If conveyance was made and transferee was good faith purchaser,
then the transferee gets to keep the property, and sole remedy is
against the judgment debtor.
• BUT, if transferee pays less than value, judgment creditor can sue
the transferee for the difference.
 Twyne’s Case
• In a constructive fraud case you must look at the “indicia of fraud.”
o You must look at all the circumstances surrounding the
transfer.
• 4 indicia of fraud:
o (1) The debtor transferred title to satisfy debt, but he
remained in possession of the actual property.
o (2) The transfer was made in secret, without an appraisal.
o (3) Transfer was made while suit was pending with another
creditor.
o (4) tried to get prior valuation to look as if transfer was
anticipated
• All of these together showed that there was fraud.
• You need a Neutral Appraisal when transferring property.
• Transfers to family and friends looked upon with weary eye!
 Shapiro
• to avoid collection of debts by his creditors, debtor formed a
corporation, conveyed all of his assets to it, in return for
substantially all its stock and its covenant to assume the
payment of debtor's debts, and then instituted suit against the
company to have respondents appointed as receivers. Such
conduct, the Court ruled, was intended to hinder a delay
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collection of debts, and petitioner was improperly denied


permission to execute a levy against debtor's property held by
respondents.
• A conveyance is illegal is made with an intent to defraud the
creditors of the grantor, but equally it is illegal if made with an
intent to hinder and delay them.
 Flushing Saving Bank
• Appellant bank alleged that respondents' conveyance of a
racetrack to one respondent personally was a fraudulent
conveyance, in that it was made with the actual intent to hinder
and delay appellant from foreclosing on the mortgage.
• The court found that he record clearly showed that the
conveyance was for the purpose of avoiding foreclosure by
appellant by keeping the subject property within a bankruptcy
estate. Such activity necessarily hindered and delayed
appellant.
• You do not need to show intent!
 West (“All in the Family”)
• Note: Avoid clients giving a personal guaranty.
• (1) fraudulent transfer when made insolvent by transfer.
• (2) fraudulent transfer when amount paid for is not up to fair
consideration.
• In NY, Burden of Proof on the government.
 Marine v. Murkoff
• (1) fraudulent because conveyance by person who will be rendered
insolvent by the transfer.
• (2) fraudulent because conveyance was made by a person on which
an action was pending.
• Factors:
o (1) litigation pending
o (2) transferred to family
o (3) no ignorance
o (4) still act like he owned property after conveyance
(collected rent)
• If you have a tenancy by the entirety of 2 spouses, you cannot
force a sale, you only get a judgment lien on husband’s half. Must
wait then until wife dies.
 Firm / Execujet  judgment against Dragon Air
o Firm owed money by Execujet
o X gets judgment against Execujet
o Execujet transfers money into Firm’s bank account.
• Although there was an antecedent debt, it still must be in good
faith.
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 Exemptions
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o Intro
 Policy: Avoidance of pauperism and the consequent burden on society,
the “preservation” of family, and the promotion of debtor self-help and
rehabilitation have finally gained greater importance than punishing the
debtor.
o Sources of Exemption Law
 Federal Law
• Social security benefits
• Veterans’ benefits
• Civil service retirement benefits
• Savings deposits of servicemen
• Longshoremen’s benefits
• Seamen’s wages
• Railroad employee benefits
• Disposable earnings
 State Law
• Personal Property Exemption
o §5205.
 Stoves, 60 days of fuel
 Sewing machine
 Family bible, family pictures, school books
 Other books (not exceeding $50 in value)
 Food for 60 days
 All wearing apparel, furniture, refrigerator, radio
receiver, tv, crockery, tableware, cooking utensils
 Wedding ring
 Watch (not exceeding $35)
 Necessary working tools ($600)
• §5206. Homestead Exemption
o Certain amount of equity in home is free from judgment.
 NY = $50,000
• CA and FL = Liberal view of debt
o Homestead Exemption
 Prince
• A home used for an illegal purpose is still allowed the Homestead
exemption.
o Even criminals can have a home.
• 2 Keys to Exemption:
o (1) Ownership
o (2) Occupancy
 Harlan
• Immorality has no affect on Homestead exemption.
• Home doesn’t have to be “ideal” just a place to live.
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 Most States
• Homestead can also be used for business activity and still
exemption applies.
 O’Brien
• In NY, you may have 2 homesteads.
 Swayne v. Chase (1895) (491)
• Facts:
o Chase and Wife occupied and owned homestead in Ft.
Worth, Texas.
o They had insurance policies in amount of $60,000.
o The property was destroyed by fire.
o One of policies was issued by Phoenix Ins. Co.
o Chase was indebted to Swayne for $22,000, upon which a
judgment had been rendered.
o Swayne sued for garnishment against Phoenix.
• Issues (3)
o (1) There is no limit on the value of improvements which
are permitted to be made on one’s homestead.
o (2) Money due from an insurance company upon a policy
of insurance issued upon the homestead is not subject to
garnishment at the suit of a creditor.
o (3) There is no limitation upon their value, and the courts of
this state have no power to say that only a reasonable
portion of such a fund shall be exempt. It is all exempt
when derived from a policy on the homestead
improvements.
o Personal Property
 In Re Mullen (1905) (495)
o Facts:
 Trustee in bankruptcy filed a petition praying for authority
to sell a portion of the bankrupt’s estate at private sale,
including a canoe and rifle.
 Bankrupt claims they are exempt.
• Statute: “the tools necessary for his trade or
occupation … not exceeding $50 in value.”
o Held
 Bankrupt is a guide, the instrumentalities in fishing and
hunting.
 The canoe is necessary for the guide in performing his
work and assuming under $50 in value is exempt.
 Rifle cannot be exempt as being an implement necessary in
the business of guiding.
 Bankruptcy Petition
• Ch. 7: Individual and Business can use
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o Debtor usually has no more than home and personal


property.
o Debt is discharged.
• Schedules list exempt property.
o You must list all exemptions!
 Independence Bank v. Heller (1969) (497)
o Facts:
 Independence Bank recovered a judgment of $80,000+
against John and Paul Heller; execution issued and levied upon
furniture of Paul Heller contained in his apartment.
 Heller is son of wealthy parents and accustomed to an
atmosphere of affluence and elegance.
o Held:
 In deciding whether furniture or apparel is necessary and
should be exempted the court will consider the station in life of
the owner and the manner of comfortable living to which he
has become accustomed.
• Necessary is not indispensable.
 Exemptions to be liberally construed in favor of debtor.
 Considering Heller’s background the furniture should be
exempt.
 In Re DeMartini (1976) (499)
o Facts:
 $600 television set was argued to be exempt as “necessary”
furniture.
o Issue:
 Is a used color television set exempt property of a
householder bankrupt pursuant to §5205(a), NY CPLR,
applicable here by 11 U.S.C. §24?
o Held:
 This is an unduly expansive construction of the NY Statute.
 Since the statute does not exempt television sets, they are
not exempt.
 Reform is for legislature, and not the courts.
 [legislature later amended and added TVs to exemption]
 Wikle v. Westhem (1981) (500)
o Facts:
 Emily Westhem’s original engagement ring had belonged
to Andrew Westhem’s grandmother and was stolen.
 The proceeds from the insurance were used to purchase the
ring in question.
o Issue:
 Whether under the circumstances of this case a diamond
ring having a fair market value of more than $3,000 and
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described as “one emerald cut diamond of approximately four


carats in weight with two side diamonds” is exempt property
pursuant to 11 U.S.C. §24 (now 11 U.S.C. §522(b)) and Cal.
Civ. Proc. Code §690.1.
o Held:
 It is exempt since it is linked to a former ring of great
sentimental value and not merely an ornament.
 Holding restricted to facts of this case.
 NY: Only wedding ring is exempt; in NY a ring is NOT apparel!
 Western Dis. of NY (1998)
• Engagement ring is not part of wedding ring.
• Exemption only applies to wedding ring.
 In Re Richards (1946) (502)
o Facts:
 Bankrupt, Charles Richards, was married and head of
family. He had ring in 1929 and constantly wore it on his
finger and worth $1,500. Ring acquired after indebtedness to
Jones.
 Was directed to give his ring to Trustee.
 Ring listed on amended schedules, and indebtedness to
West secured by chattel mortgage was shown.
 Trustee refused to exempt ring.
o Held:
 In following the reasoning of First National Bank of Eagle
Lake v. Robinson, the ring in question is exempt.
 In Re Gemmell (1907) (507)
o Facts:
 Bankrupt owned and wore diamond ring ($400-$1,000).
o Issue:
 Whether ring is properly included within the provisions of
the exemption law of Pennsylvania of 1849 as wearing apparel.
o Held:
 Diamond ring not worthy of being “wearing apparel”
 Financial condition did not warrant such extravagances
 To permit persons in straightened financial circumstances
to invest large sums of money in articles of value only for mere
personal adornment at the expense of their creditors would be
rank injustice.
 The ring of such value should not be included under
exemption law.
 Phillips v. C. Palomo & Sons (1959) (509)
o Facts:
 Palomo and 3 sons organized a partnership in Nov. 1954.
 Palamo furnished entire capital.
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 May, 1958, Palomos and Partnership filed for voluntary


petitions of bankruptcy.
 Scheduled assets including 4 truck-trailers claimed as
exempt
 Each partner took possession of 1 truck.
o Issue:
 When a partnership in bankruptcy owns four truck-trailers,
is one truck-trailer exempt to each of four partners under an
exemption statute allowing “every family” two horses and a
wagon?
o Held:
 In light of the unusual liberality of construction applied to
exemptions by Texas courts and in view of the Pagel Case and
St. Louis Foundry Case, it was held that each Palomo partner
was entitled to a truck and trailer combination as exempt
property.
 Young v. Wright (1955) (513)
o Issue:
 Whether the motor driven truck was exempt from
attachment and execution under the provisions which exempt
basically 2 draft animals, their harness and 1 vehicle, with food
for the animals for 6 months.
o Held:
 A motor driven truck is not a “truck” which the legislation
refers to, to be propelled by the muscular power of any of the
draft animals mentioned in such exemption statute.
 The legislature has not yet declared a motor vehicle as is
involved in this action to be exempt from attachment or
execution; nor any motor vehicle to be so exempt except as its
value shall not exceed $200.
 In Re Johnson (1981) (514)
o Facts:
 Johnson claimed as exempt his 1969 Dodge Bus.
 Bus has seating capacity of 60 and occasionally used for
church congregation.
o Issue:
 Is a bus a bus, or is it a car?
o Held:
 It is a car.
 Edwards v. Henry (1980) (516)
o Facts:
 D was evicted from the apartment she rented from the
plaintiff, leaving the rent in arrears in the amount of $177.10.
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 P sought garnishment of D’s checking account and the


bank removed $103.96.
o Issue:
 Whether subchapter II of the CCPA shelters from
garnishment that portion of a worker’s checking account funds
attributable to her wages and falling within the statute’s
maximum.
o Held:
 It does not.
 Porter v. Aetna Casualty & Surety Co. (1962) (521)
o Facts:
 Petitioner, an incompetent Air Force veteran, had suffered a
judgment at the hands of respondent.
 The respondent attached a checking account and two
accounts in local federal savings and loan associations.
 All of these funds were received from the Veterans’
Administration as disability compensation due the petitioner.
o Issue:
 Whether benefits paid by the United States Veterans’
Administration retain their exempt status under 30 U.S.C.
§301(a) after being deposited in an account in a federal savings
and loan association.
o Held:
 Yes, the funds involved in this case are exempt under the
statute.
 Congress intended that veterans should be able to utilize
normal modes of safekeeping – provided the benefit funds are
readily available as needed for support and maintenance,
actually retain the qualities of moneys, and have not been
converted into permanent investments.
 Ross v. Simser (1935) (523)
o Facts:
 First & Farmers’ National Bank of Blue Earth and First
National Bank of St. Paul were garnished.
 The 2 bonds impounded by the garnishment, each for
$1,000, had been purchased by D with the proceeds of an
insurance policy on her husband’s life wherein she was the
beneficiary.
o Issue:
 Whether the bonds, having been purchased with insurance
money, are exempt; that is that the exemption extends beyond
the insurance money to anything purchased therewith.
o Held:
 In taking the statute as it is found, the bonds are not
exempt.
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 Reynolds v. Haines (1891) (524)


o Issue:
 Are the avails of insurance upon personal property which is
exempt under the statute from debts of the assured also
exempt?
o Held:
 Proper use of books and instruments is the preservation
from injury and destruction.
 The fact that they are insured would not make them subject
to debts.
 The money paid by the insurance company stands in the
place of the destroyed items and is exempt from execution.
 State v. Avco Financial Service Inc. (1980) (526)
o Facts:
 Attorney-General, acting on a consumer complaint,
instituted a special proceeding under subdivision 12 of §63 of
the Executive Law to enjoin respondent Avco’s use of a
security clause [see book] in a loan agreement form.
 Alleged that the clause was illegal and void as against
public policy on the theory that it constituted an impermissible
waiver of the personal property exemption afforded a judgment
debtor under CPLR 5205 (sub[s]).
o Held:
 The clause is not illegal and the determination of
unconscionability was improperly made without any
opportunity for an evidentiary presentation as to the
commercial and bargaining context in which the clause
appears.
 Beneficial Consumer Discount Co. v. Hamlin (1977) (529)
o Facts:
 March 27, 1975: Beneficial Consumer Discount Co.,
extended a loan to appellees; in return appellees executed a
personal not payable to appellant in the amount of $912.00 and
a security agreement granting security interest in household
furnishings.
 Jan. 23, 1976: appellees filed voluntary petitions in
bankruptcy in the U.S. District Court and claimed furnishings
as exempt.
 Jan. 30, 1976: Notice of first meeting of creditors mailed
to appellant.
 April 19, 1976: judge entered order awarding household
furnishings as exemption.
o Issue: Can debtor waive exemption?
o Held:
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 The implied waiver previously found in the pledge of


personal property is inconsistent with the Mayhugh
pronouncement. Court interprets Mayhugh to prohibit
appellant from enforcing its security interest in appellee’s
personal property, pledged as security for a debt, when that
personal property has been set aside as appellee’s exemption.
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 Collective Insolvency Remedies
o Out-of-Court Settlements
 Workouts: Financially distressed debtor wants to work out debts short of
bankruptcy or receivership
• The more creditors, the more difficult the process.
• Workouts are essentially contracts
 Composition: An agreement providing for the debtor’s partial payment in
full satisfaction of the accepting creditor’s claims.
 Moratorium Agreement: Provides for the creditor’s postponing
enforcement of their claims in order to get paid in full over a period of
time.
• Creditors not obligated to enter into this agreement.
• Putting somebody into bankruptcy could kill the business, the
debtor wants to say that the composition will give you some sum
on the $1 and the moratorium will give you the money just over a
period of time.
 Subordination: Agreement by which the subordinating party agrees that
his interest in property should have a lower priority than the interest of
other creditors.
 In Re Plaza Music Co. (1935) (610)
• Composition Agreement
o General Rule: If the entire composition amount is not paid,
the entire amount due in owing gets revived.
 The creditor wants the cash in payment not the
promise.
 Creditor will have right to sue for the remaining
owed less what was already paid.
o BUT
o This case held, that the parties were not necessarily
bargaining for 50% in pocket rather the mere agreement
was sufficient in this case.
o Promise to pay 50% was what parties intended in this
composition agreement.
• YOU SHOULD: put down parties intentions plainly in the
agreement.
o Assignments for the benefit of Creditors
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 Voluntary transfer of all the debtor’s assets to an assignee who has the
duty of promptly liquidating the assets, distributing the proceeds to
creditors on pro rata basis and any surplus reverts to the debtor.
 Steps to be taken:
• (1) Must be recorded in county clerks office to put world on notice,
• (2) creditors must be notified,
• (3) list of debtors assets and liabilities must be filed in clerk’s
office,
• (4) assignee must post a bond to ensure creditors get paid from
liquidation,
• (5) assignee must account to the court for the disposition of the
assets.
 If company wants to reorganize and pay off its debts it can file a chapter
11 bankruptcy petition.
 If the company is done they do the ABC, and there will be no survival of
the company.
o In Re Maine State Raceways
 Not bankruptcy because intent was not to liquidate.
o Int. Shoe v. Pinkus
 The court found that enforcement of state insolvency systems would
conflict with the national purpose to have uniform bankruptcy laws.
o Involuntary Bankruptcy
 Generally is where a group of creditors (usually min of 3) are owed money
that is passed due and they are trying to force the liquidation of the debtor
who will not pay them.
 If 12 or more creditors, you need 3 with aggregate claims of more than
$5,000.

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