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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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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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• 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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• 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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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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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.