Secured Transactions: Outline
Definitions of Article 9 Terms:
“Account” this does not include a deposit account, and there must be a monetary obligation, NOT, a non-monetary obligation (think of parrot question from casebook)
1.Scope of Article 9: 9-109(a)(1)
2.Security Interest Defined: 1-201(b)(35)
3. Lease Distinguished From Security Interest: 1-203
-Key Sections: 1-203(b)(3) and (b)(4)
-Bright Line Test: A transaction in the form of a lease creates a security interest if 1-203(b) is met
-Contextual Analysis: A transaction in the form a lease creates a lease and not a security interest if the following 2 elements are met:
1. At the outset of the lease the parties expect the goods to retain some significant residual value at the end of the lease term, and
2. The lessor retains some entrepreneurial stake (either the possibility of gain or the risk of loss) in the value of the goods at the end of the lease term.
4. Calculating the Amount of an Unsecured Claim in Bankruptcy
-What may be included in calculating the claim:
1. If contract (K) provides for reimbursement of lawyers’ fees or collection costs, can tack this amount to amount of claim if this was accrued prior to the bankruptcy filling.
-What may not be included in calculating the claim:
1. Interest accrued on the claim after the bankruptcy filing
2. Attorneys fees accrued after the bankruptcy filing
-Formula for calculating the fees: Amount owed times % that estate can pay out.
Ex: If unsecured creditor owed $32,700, estate can pay out $59,575, and total unsecured claims against debtor amount to $1,191,500, the unsecured debtor gets $1,635. (59,575/1191500 = 5% .05 * 32,700 = 1635).
5. Calculating the Amount of a Secured Claim under Bankruptcy
-Bifurcation of Claim: 2 possible scenarios (pg. 119)
1. If collateral worth more than amount owed to creditor, entire claim is secured.
2. If collateral worth less than amount owed, only portion of claim that is covered by collateral is secured, the remainder is unsecured.
-What is allowed to be added to the claim:
Collection of attorney’s fees, interest, and costs allowed after bankruptcy is filed if three conditions are met:
1. Attorney’s fees and costs must be reasonable
2. Payment of the attorney’s fees and costs by the debtor must be provided for under the agreement or state statute under which the claim arose.
3. Interest, attorney’s fees and costs can be accrued only to the extent that the value of the collateral exceeds the amount of the claim secured by it.
Ex: If a $40,000 loan secured by $50,000 in collateral, the claim can grow as interest, attorney’s fees, and other costs accrue during the bankruptcy case up to an additional $10,000.
NOTE: A claim can accrue post filing costs only up to the point where the collateral satisfies the claim. Once it has reached this point, the claim can no longer grow. Ex: Collateral worth $40,000 to secure a $50,000 dollar loan. Claim is bifurcated with $40,000 secured and the other $10,000 unsecured. Neither claim is permitted to grow.
6. Formalities for creating an Article 9 Security Interest
-Requirements found under UCC 9-203(b)
-Definitions for this section
1. “Authenticate” under UCC 9-102(a)(7) means to sign, or to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part with the present intent of the authenticating person to identify the person and adopt or accept a record
2. “Record” under UCC 9-102(a)(69) means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form.
-There are 3 General Requirements for creating an enforceable security interest
1. Value has been given by the creditor to the debtor, 9-203(b)(1)
-Defined under UCC 1-204
-The giving of value is satisfied if the debtor grants a security interest t
quired property and future advances
-Although typically a security agreement must include “after acquired” language, if the collateral is one that is cyclically depleted and needs to be replaced regularly or is expected to be replaced regularly, it may be read into the agreement. Such collateral includes:
Note: Equipment, unlike inventory, is not normally subject to frequent turnover.
-If party wants security interest in after acquired property that is traditionally not included as after acquired property, should explicitly state so in security agreement.
-Defined under 9-102(a)(64),
-9-102(a)(64)(C), which states that “rights arising out of the collateral are proceeds” can read to argue that virtually any property linked to the collateral in any way is “proceeds”
-Even if a security agreement makes no mention of proceeds, a security interest automatically covers them. 9-203(f)
-General Rule: Unless a secured party has authorized the debtor to sell the collateral free of the security interest, the security interest continues in the original collateral and also in the proceeds. 9-315(a)
-How a security interest may not attach to proceeds of collateral:
1. The security agreement authorizes the debtor to dispose of collateral free of any security interest (9-315(a)(1)).
2. The creditor may authorize the debtor to dispose of the collateral free of a security interest at some later time after the signing of the security agreement. 9315(a)(1)
3. Authorization may be implied from the circumstances