Question/Answer for Assignment 1

1. In discussing Problem 1, you suggested that a creditor in Crouch's position would effectively be choosing between being requiring the debtor to grant a security interest in certain property or being unsecured and thus being able to acquire a lien in the property only by getting a judgment and having the property levied on to satisfy the judgment.

But isn't there another possibility? If I took my car to be fixed, and I didn't pay for it, the mechanic just wouldn't return my car until I paid for it, and (I think) the law allows them to sell the car if I don't pay the bill. Isn't that a lien or property right too, and why wouldn't such a lien be available to a creditor like Crouch?

In the situation in your example, state law in every state allows an auto mechanic, or anyone else who provides service in repairing goods, to have a statutory lien on the goods to secure the owner's obligation to pay for the services. [This lien is typically called a "statutory" lien because it arises by virtue of a specific state statute.] We will talk more about statutory liens in a later assignment, but it is correct that in this situation, the mechanic could refuse to return the car to you until you paid and then could have the car sold to satisfy the statutory lien if you didn't pay.

This scenario wouldn't be available for Crouch, though, because he was just selling goods and not providing a service (the applicable lien statute that the mechanic would use in your example would not protect Crouch as a seller of goods). Crouch thus has three choices: not to part with the goods unless he is paid cash at the time of sale (i.e., to sell for cash rather than on credit), to sell on unsecured credit, or to take an Article 9 security interest.

As mentioned above, we'll talk some more about statutory liens later in the course. The most common such liens are "artisan's liens" (the common name for the lien that a car mechanic would assert for unpaid repair services) and agricultural liens (a statutory lien on crops that can arise in favor of a landlord or a supplier of seeds or other farm supplies that went into growing the crop). But as mentioned in class, there is no such statutory lien in favor of a seller of goods. Unless the parties agree otherwise, title to the goods passes when the seller delivers the goods to the buyer; the seller can only retain a security interest, and has to do so by complying with Article 9.

2. In discussing Problem 3, you suggested that a purchaser might buy the collateral at a sheriff's sale without searching the UCC records to see if there were any existing security interests held by other creditors. Is it really the case that a purchaser would be so dumb?

It shouldn't happen; anyone buying something at a sheriff's sale should always search the UCC records for financing statements that might indicate a possible security interest against the item being sold. [As we'll see later in the course, any purchaser should also search to see if the IRS has filed a federal tax lien against the debtor, because the sheriff's sale would also pass title subject to any federal tax lien of which the IRS has filed a notice --- and if the debtor is in default to creditors generally, the debtor may also be in default in payment of income or payroll taxes to the IRS too!]

However, there have been lots of situations where it has happened. When it happens, it typically happens either because the purchaser doesn't understand the risk and assumes the sheriff's sale will pass clear title, or because the purchaser is told by someone that the sale is free and clear of all liens and the purchaser doesn't bother to check to make sure that is true.

There's also another possibility --- the prospective buyer goes to check the UCC record but messes up the search and thus doesn't find the correct information. How could this happen? We'll talk more about this starting in Assignment 5 when we begin talking about perfection and the filing system. But sometimes the debtor's legal name could be one thing and the debtor might be known about another name. For example, the legal name of a company could be Ed Smith Enterprises, LLC, but the company could be doing business under the name "Crazy Ed's Fireworks" (which would be a "trade name"). The UCC filing system works on legal names, not trade names. But if there's a sheriff's sale of the fireworks inventory of Crazy Ed's Fireworks, a buyer that didn't know the correct Article 9 rules might search the UCC records under the name "Crazy Ed's Fireworks" (and might find no filings on record), and might wrongly conclude that the sale will thus deliver clear title --- when in reality, if they had searched under "Ed Smith Enterprises, LLC" they would have found a prior financing statement and thus would have discovered a prior lien on the fireworks.

So again, a sophisticated and knowledgeable prospective buyer should not mess up and "overbid" at the sheriff's sale because they didn't know about a prior lien. But it sometimes happens that buyers are not sophisticated or knowledgeable.

3. Practically, how does the debtor actually claim certain property as exempt? For example, if the debtor can claim a car as exempt, can the debtor just stop the sheriff from levying on it? How does this work, practically?

The process varies some, from state to state, depending upon applicable state statutes and practice rules. In Missouri, under RSMo. 513.445, the burden is on the debtor, practically speaking, to claim property as exempt. In other words, the sheriff goes out an seizes the debtor's property, and then the debtor has a period of time in which to give notice of its intent to claim property as exempt; if the sheriff (or in the event of a dispute, if the court) then determines the property as exempt, the sheriff must release that property back to the debtor.

By contrast, in other states, the process works differently. In North Carolina, for example, a creditor could not have a writ of execution issued without first giving the debtor notice and an opportunity to file a written claim of exemptions. If the debtor claimed property as exempt, then the sheriff could not levy on that property (if there was a disagreement over whether the property was exempt, that would be resolved by the court). Once the time period for claiming exemptions ran, then the creditor could commence levy and execution on whatever nonexempt property it could find.