54 posts categorized "Secured Lending"

Life Imitates Art (or at Least My Final Exam)

posted by Bob Lawless

From the San Jose Mercury News, the headline says it all: "Repo man takes San Jose mom's car with 2-year old in back seat" (courtesy of The Consumerist). Now, a short essay from my Secured Credit final exam:

Cletus and Brandine Spuckler are in your law office and tell you the following tale of woe. They had borrowed money from the Burns Finance Company to pay for their 2007 Ford Expedition but have recently fell behind on their payments. Burns Finance Company has a valid, perfected security interest in the 2007 Ford Expedition. One morning, Brandine found that Cletus’s tractor was blocking the driveway when she needed to take two of their kids to preschool. Consequently, Brandine loaded the two kids in the Expedition, got the tractor keys from Cletus, backed the tractor out, then backed out the Expedition, and then returned the tractor to its place on their driveway. She left the Expedition running in the street, with the keys in the ignition and the kids in the backseat. While Brandine went back inside to return the keys to Cletus, an employee of Burns Finance repossessed the automobile, driving off in it with the kids in the back seat. The employee got about three blocks when he saw the kids, and he promptly returned the Expedition to Brandine, who was emotionally distraught having seen a stranger drive off with her kids. Since that time, both Brandine and the two children have been unable to sleep and are emotionally upset. Putting aside the question of any tort claims, do you think the Spucklers have any valid claims under the Uniform Commercial Code?

I based the question on Chapa v. Traciers & Associates, 267 S.W.3d 386 (Tex. App. 2008). Still, I thought I was making this up. Who knew?

Continue reading "Life Imitates Art (or at Least My Final Exam)" »

Proposals for Haircuts at the FDIC

posted by Bob Lawless

FDIC-sponsored haircuts have become a hot item in the blogosphere. My wife used to work for the FDIC, and I smile every time I hear the term as I think about the building on F Street with a big barber pole in front of it. Here, the term is not being used in its hirsuted sense but as part of the colorful vernacular that surrounds insolvency work. A "haircut" describes a situation where a creditor is paid less than that to which they are entitled.

The FDIC proposal comes from Representatives Brad Miller and Dennis Moore and would limit the recovery of secured creditors to 80% of the value of their collateral in FDIC takeovers of failed banks. (I can't seem to locate the original text of the proposal on the Internet, but it has been widely reported.) Academic types will remember a similar proposal from Professor Elizabeth Warren back in the 1990s that would have limited recovery to 80% of the collateral's value. While Warren's proposal would have applied to many types of secured lending (at that covered by Article 9 of the Uniform Commercial Code, the current proposal is limited to failed financial institutions taken over by the FDIC.

The usual criticism has arisen in the usual places, namely that the latest proposal will discourage capital formation in banks. In turn, it is said that banks will lend less. Growth will be deterred. And we'll see even more gruesome scenarios involving the cross-breeding of dogs and cats. All of that might be true--well the dogs-and-cats part is less likely--but these criticisms miss the point. The question is not whether we like capital formation and economic growth but whether the costs are worth the benefits. The costs here come from the moral hazard that is created by asset partitioning.

Continue reading "Proposals for Haircuts at the FDIC" »

How to Fail My Secured Credit Exam Two Different Ways

posted by Bob Lawless

By way of Underbelly comes this story from the Seattle Times chronicling the many failures at the now defunct WaMu. Among the stories was that a WaMu banker gave O.J. Simpson a second mortgage on his Florida home despite the existence of a huge judgment lien against Simpson arising out of his civil trial for killing his wife and her friend. Why did WaMu think it could collect the second mortgage? According to the news story, Simpson had put a note in the file saying he did not do it, and therefore the judgment was "no good." OK, that's pretty dumb and, for my students who read the blog, would not be a passing answer in my secured credit class.

What the reporter (but hopefully not my students) missed is that the second mortgage was likely collectible anyway. Florida has an unlimited homestead exemption that would prevent enforcement of the judgment lien against the home, assuming it otherwise met the definition of a homestead. Voluntary transfers, like a second mortgage, are not protected by the homestead statute. (If you're wondering why that is, consider how much mortgage lending there would be if the mortgage could not be enforced because of a homestead statute.) A comment on the Daily Weekly blog (hosted by the Seattle Times) picked up on the point about the homestead exemption and the role it should have played in this lending decision.

The "note in the file" story sounds too funny to be true, and in this case, I think it probably is. Florida (and every other state) law is the reason some WaMu Florida banker thought they could enforce the second mortgage. Of course, this is just the legal part of the lending decision. As the Daily Weekly blog story asked, why was WaMu so willing to give Simpson the benefit of the doubt and extend a loan?

Help Me Decide -- Is a "Replacement" New Collateral

posted by Bob Lawless

This semester, I have been teaching secured credit from Lynn LoPucki and Elizabeth Warren's wonderful textbook. One of the problems from the book was, I believe, inspired by my former colleague at UNLV and current bankruptcy judge, Bruce Markell, who requires his students to draft a security agreement taking a security interest in an object he brought to class. A student's agreement has presented an interpretive issue with the problem, and I told him I would get the input of our readership on Credit Slips. One thing the assignment allowed me to do is to talk about boilerplate. There is nothing necessarily wrong with boilerplate, but we should understand what it is doing when we use it.

The object I brought to class was a baseball signed by the great Lou Brock, a Hall of Fame outfielder for the St. Louis Cardinals. The instructions specifically state that the students are to draft a security agreement taking a security interest in this object--the baseball--and nothing else. If the students comply with the instructions, they get a pass on the assignment, and if not, they get a fail. As Markell always said to me--in the real world there is no such thing as a security agreement that is almost valid.

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