Secured Transactions Outline

Secured Transactions

PROBLEMS AND CASES ON SECURED TRANSACTIONS

Brook, Third Edition

PROFESSOR DEES

Fall 2016

THE UNSECURED CREDITOR

The person who has the obligation to pay is called the debtor. The person who is owed the money is called the creditor.
If the creditor has extended itself in exchange for the debtor’s promise of payment in the future but has done no more to enhance the probability of its being paid by the debtor when the time is right, the creditor—the party owed money—is an unsecured creditor.

Therefore the debtor has taken on some measure of unsecured debt.

In the case of an unsecured debt, an unsecured creditor may have to jump through hoops to get its money back.

In a case where the debtor won’t pay, left town, or can’t pay, the creditor can get a satisfaction of its judgment.

The legal process by which this is accomplished is referred to as execution against specific property.

However, the creditor cannot engage in any type of “self-help execution.”

The creditor will have to obtain a writ of execution from a court in the correct state.

If the property is real property, the creditor may be able to file a notice of its judgment lien in the property in the land records.
If the property is personal property, the creditor will have to take the writ of execution to the local sheriff.

The sheriff may execute the writ by either levying on the property or taking actual physical possession.

Some of a debtor’s property—homestead, household goods, tools of the trade, etc.—will be exempt under the laws of the state.

If the sheriff does gain actual physical possession then it is auctioned off at a sheriff’s sale.

Any surplus in proceeds from the sheriff’s sale after the judgment creditor has been fully paid goes to the debtor.

DIAGRAM: unsecured credit à judicial process à judgment à execution à levy à sheriff’s sale à surplus
Alternatively, the creditor may agree to lend money to, deliver property to, or perform services for the debtor in exchange for a promise that it be paid in the future on what we term secured credit.

The creditor will, by making sure the transaction is carried out in a specific way, make sure that it can qualify as a secured creditor, with special rights against some particular property—personal or fixtures—owed by the debtor.
If the debtor does not pay its debt when due, the secured creditor will have the right to enforce the SI.

THE TYPICAL SECURED TRANSACTION

Promisor/obligor v. promissee/obligee
The basic idea behind secured credit is that the debtor put up something of value as collateral to back up the otherwise naked promise to pay.
§ 9-109. Scope.

(a) [General scope of article.] Except as otherwise provided in (c) and (d), this article applies to:

(1) a transaction, regardless of its form, that creates a SI in personal property or fixtures by contract;

When a SI is created, this Article applies regardless of the form of the transaction or the name that parties have given to it.
The subjective intention of the parties with respect to the legal characterization of their transaction is irrelevant to whether the Article applies.

§ 1-201. General Definitions.

(b) Subject to definitions contained in other articles of the UCC that apply to particular articles of parts thereof:

(35) “SI” means an interest in personal property or fixtures, which secures payment or performance of an obligation. “SI” includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction subject to Article 9. “SI” does not include the special property interest of a buyer of goods on identification of those goods to a contract for sale under § 2-401, but a buyer may also acquire a “SI” by complying with Article 9. Except as otherwise provided in § 2-505, the right of a seller or lessor of goods under Article 2 or 2A to retain or acquire possession of the goods is not a “SI”, but a seller or lessor may also acquire a “SI” by complying with Article 9. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under § 2-401 is limited in effect to a reservation of a “SI.” Whether a transaction in the form of a lease creates a “SI” is determined pursuant to § 1-203.

§ 9-102. Definitions and Index of Definitions.

(a) [Article 9 definitions.] In this article:

(12)
(28) “Debtor” means:

(A) a person having an interest, other than a SI or other lien, in the collateral, whether or not the person is an obligor;

(59) “Obligor” means a person that, with respect to an obligation secured by a SI in or an agricultural lien on the collateral, (i) owes payment or other performance of the obligation,
(73) “SP” means:

(A) a person in whose favor a SI is created or provided for under a SA, whether or not any obligation to be secured is outstanding;

(74) “SA” means an agreement that creates or provides for a SI.

Whether an agreement creates a SI depends not on whether the parties intend that the law characterize the transaction as a SI but rather on whether the transaction falls within the definition of “SI” in §1-201.

LEASES OF GOODS AND ARTICLE 9

Under the UCC a transaction is characterized by what it accomplishes in substance, not by its form.
If a transaction is a “true lease” then Article 2A governs. If the transaction is documented to appear as a lease and is in fact NOT a “true lease,” then Article 2 will govern the sales aspect and Article 9 will govern the secured transaction that the parties have entered into.

What is a “true lease”?

Governed by Article 2A;
There will be a lessor and lessee; and
There will be residual value left at the end of the lease.

What

§ 2-106. Definitions.

(1) A “sale” consists in the passing of title from the seller to the buyer for a price.

§ 2A-103. Definitions and Index of Definitions.

(1) In this Article unless the context otherwise requires:

(j) “Lease” means a transfer of the right to possession and use of goods for a term in return for consideration, but a sale or r