Secured Transactions
Assignment 13
Default, Acceleration and Cure
Under State Law
1
The Big Picture
Chapters 1 and 2. Creditors’ Remedies
Chapter 3. Creation of Security Interests
Chapter 4. Default: The Gateway to Remedies
2
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.
3
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
4
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.
5
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.”
6
Problem 13.1, page 234
Truck loan
made
7
Problem 13.1, page 234
Truck loan
made
Pat misses
two payments
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.”
8
Problem 13.1, page 234
Truck loan
made
Pat misses
two payments
Pat sends
check
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.”
9
Problem 13.1, page 234
Truck loan
made
Pat misses
two payments
Pat sends
check
Bank rejects
payment
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.”
10
Problem 13.1, page 234
Truck loan
made
Pat misses
two payments
Pat sends
check
Bank rejects
payment
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?
11
Problem 13.1, page 234
Truck loan
made
Pat misses
two payments
Pat sends
check
Bank rejects
payment
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.
12
Problem 13.1, page 234
Truck loan
made
Pat misses
two payments
Pat sends
check
Bank rejects
payment
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?
13
Problem 13.1, page 234
Truck loan
made
Pat misses
two payments
Pat sends
check
Bank rejects
payment
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?
14
Problem 13.1, page 234
Truck loan
made
Pat misses
two payments
Pat sends
check
Bank rejects
payment
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?
b.
What effect if Bank accelerated before receiving check, then
kept the check, and continued to claim acceleration? 15
Waiver? No. Waiver by estoppel? No reliance.
Problem 13.1, page 234
Truck loan
made
Pat misses
two payments
Pat sends
check
Bank rejects
payment
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?
b.
What effect if Bank accelerated before receiving check, then
kept the check, and continued to claim acceleration? 16
Waiver? No. Waiver by estoppel? No reliance.
Problem 13.1, page 234
Truck loan
made
Pat misses
two payments
Pat sends
check
Bank rejects
payment
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?
b.
What effect if Bank accelerated before receiving check, then
kept the check, and continued to claim acceleration? 17
Waiver? No. Waiver by estoppel? No reliance.
Problem 13.1, page 234
Truck loan
made
Pat misses
two payments
Pat sends
check
Bank rejects
payment
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?
b.
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?
18
Waiver? No. Waiver by estoppel? No reliance.
Problem 13.2, page 235
One payment due Now
Oct 1
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.”
19
Problem 13.2, page 235
One payment due Now
Oct 1
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.”
20
Problem 13.2, page 235
One payment due Now
Oct 1
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?
21
Problem 13.2, page 235
One payment due Now
Oct 1
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.
22
Problem 13.2, page 235
One payment due Now
Oct 1
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?
23
Problem 13.2, page 235
One payTen days More than Ten days
ment due Now after one pymt due after
Oct 1
Oct 11
Nov 1
Nov 11
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?
24
Problem 13.2, page 235
One payTen days More than Ten days
ment due Now after one pymt due after
Oct 1
Oct 11
Nov 1
Nov 11
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.
25
Problem 13.2, page 235
One payTen days More than Ten days
ment due Now after one pymt due after
Oct 1
Oct 11
Nov 1
Nov 11
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?
26
Problem 13.2, page 235
One payTen days More than Ten days Accel- Forc
ment due Now after one pymt due after
eration begins
Oct 1
Oct 11
Nov 1
Nov 11
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?
27
Problem 13.2, page 235
One payTen days More than Ten days Accel- Forc
ment due Now after one pymt due after
eration begins
Oct 1
Oct 11
Nov 1
Nov 11
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?
28
When is Art’s last chance to pay without serious repercussions?
Problem 13.2, page 235
One payTen days More than Ten days Accel- Forc
ment due Now after one pymt due after
eration begins
Oct 1
Oct 11
Nov 1
Nov 11
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?
d. Different under the
Illinois reinstatement
statute?
29
When is Art’s last chance to pay without serious repercussions?
Problem 13.3, page 235
We represent Second National. We plan to pull the plug on Walt
Rebel.
30
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?
31
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?
32
Problem 13.3, page 235
Liquidation
30-day risk?
Inventory
$240k
Equipment
$80k
Lease
$40-80k
Total
$360-400k
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?
33
Problem 13.3, page 235
Liquidation
30-day risk?
Inventory
$240k Sale and diversion
Equipment
$80k
Lease
$40-80k
Total
$360-400k
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?
34
Problem 13.3, page 235
Liquidation
30-day risk?
Inventory
$240k Sale and diversion
Equipment
$80k
Lease
$40-80k
Total
$360-400k
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?
35
Problem 13.3, page 235
Liquidation
30-day risk?
Inventory
$240k Sale and diversion
Equipment
$80k Destruction
Lease
$40-80k
Total
$360-400k
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?
36
Problem 13.3, page 235
Liquidation
30-day risk?
Inventory
$240k Sale and diversion
Equipment
$80k Destruction
Lease
$40-80k
Total
$360-400k
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?
37
Problem 13.3, page 235
Liquidation
30-day risk?
Inventory
$240k Sale and diversion
Equipment
$80k Destruction
Lease
$40-80k Default
Total
$360-400k
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?
38
Problem 13.3, page 235
Liquidation
30-day risk?
Inventory
$240k Sale and diversion
Equipment
$80k Destruction
Lease
$40-80k Default
Total
$360-400k
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?
39
Problem 13.3, page 235
Liquidation
30-day risk?
Inventory
$240k Sale and diversion
Equipment
$80k Destruction
Lease
$40-80k Default
Total
$360-400k
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
40
Problem 13.3, page 235
Liquidation
30-day risk?
Inventory
$240k Sale and diversion
Equipment
$80k Destruction
Lease
$40-80k Default
Total
$360-400k
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?
41
Problem 13.3, page 235
Liquidation
30-day risk?
Inventory
$240k Sale and diversion
Equipment
$80k Destruction
Lease
$40-80k Default
Total
$360-400k
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!
42
Problem 13.3, page 235
Liquidation
30-day risk?
Inventory
$240k Sale and diversion
Equipment
$80k Destruction
Lease
$40-80k Default
Total
$360-400k
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!
43
JR Hale Contracting, page 225.
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); 9102(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 . . . .”
44
Problem 13.4, page 236
Truck loan
made
Pat misses
two payments
Pat sends
check
Bank rejects
payment
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, notice effort
Which happened first?
What effect if Bank accelerated before receiving check, then
kept the check, and continued to claim acceleration? Waiver?
45
Waiver by estoppel?
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 . . . .”
46
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.
47
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.
48
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 . . .
49
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
50
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 which51
can be independently breached.
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 which53
can be independently breached.
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?
54
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.
55