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Secured Transactions
John Marshall Law School, Chicago
Hunt, Cecil J.

Secured Transactions

Prof. Hunt

Fall 2010

Exam – 2 Fact patterns and then you have to find the issues in the fact pattern

1. advise the bank of what they should do – you have to find the lien creditors, the PMSI, lien holders

2. Designed to be straightforward – completed in approximately 2 hours – but we get 3 hours – shouldn’t need anything like that

3. One question on exam that mirrors one of the problems we dealt with in the book.

Exam is 2 questions – with subparts. Reference specific code sections. Ex. 9-506 is the relevant section and then tell him in brief what it says and then apply it. The standard IRAC approach – give the rule then apply it.

· Format of Course

o Discuss Attachment – then Perfection

· Preliminary Considerations when looking at problems…

o Consider history, social, and commercial relations, and social and commercial reform

o Consider course of dealings between parties

o Good faith requires you look at course of dealing and course of performance

o Promissory Estoppel

§ Concept of estoppel is pervasive – you have done (or failed to do) something that someone will act or fail to act based on what you did/didn’t do

o Consider agency

§ Do you need to get client’s permission to serve as a dual agent? YES. Fiduciary responsibility to client – potential conflict of interest.

o Bailor/Bailee principles – bank can serve as Bailee

§ Forethought required in security agreement – you will not put collateral in hands of 3rd party

o Consider Merchant v. Consumer

· Drafting Security Agreements:

o Always draft anticipating worst case

o Agreement will control the nature of the proceedings

Summary of the Scope of Article 9

Makeup of Article 9 – Applies to “a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract.”

General principle: Parties are given great flexibility to agree as to what collateral (any combination of now-owned and after-acquired property) will secure what obligations (any combination of now-existing or later-arising debt. 9-204.

Transactions covered:

· Transactions explicitly granting a security interest in personal property

· Consignments

· “Sales” or “assignments” of accounts, chattel paper, payment intangibles, and promissory notes

· Some transactions set up as a lease of personal property

· Agricultural liens when question involves perfection or priority

PMSI’s are given favored treatment 9-317(e).

I. Definitions

a. Lien – an interest in property that gives the holder of the lien a right to possession of some of a debtor’s property in the event that the debtor fails to perform its obligations (fails to repay money when it is due.

i. Judicial liens – one that arises from a judicial proceeding.

1. A judgment is not an order to the D to pay, but is a recognition by the judicial system that the D owes P money. P must then enforce the judgment by obtaining a writ of execution.

a. Writ of execution: order by the court directing sheriff to seize property of the D necessary to satisfy the judgment.

b. Mere granting of a judgment by a court does not result in a lien on any of the debtor’s property b/c a judgment is not a lien.

ii. Statutory and common law liens – the law (usually by statute) grants to certain creditors a lien in certain property of the debtor.

1. Most states grant statutory liens to contractors and subcontractors who work on real property, for work and materials used to improve the property.

2. Lien holder must have possession of the property – common feature to many statutory and common law liens. In these cases, liens are lost if lien holder gives possession to the debtor or someone else.

iii. Consensual liens: mortgages and security interests: arises from the agreement of the owner of property to grant a lien. In real property, one who purchases a house frequently gives a “mortgage” to the person lending the money to enable the buyer to purchase it. When a consensual lien is given on personal property it is called a security interest and Article 9 applies.

b. Default – a failure to pay

c. General or unsecured creditors: those to whom an obligation is owed but who have no lien on any property of the obligor.

d. Security Interests: Article 9 defines security interest to include every interest in personal property or fixtures that secures payment or performance of an obligation.

i. Includes chattel mortgages, trust receipts, conditional sales, etc.

ii. Also includes outright sales of certain assets like accounts, promissory notes, etc b/c it can be hard to tell the difference between a security interest in these things and an outright sale of them.

e. Security Agreement: contract between a debtor and a secured party that grants or gives the secured party a security interest in certain assets.

f. Secured party: lender, seller, or other person who has been given a security interest in the collateral.

g. Collateral: the specific assets in which the secured party holds interest.

h. Debtors and obligors: usually the same person…

i. Debtor: person who has an ownership interest in the collateral

ii. Obligor: person who owes the debt that is secured by the security interest

II. Collection of Unsecured Debts

a. Obtaining a judgment

i. Judgment is not money… but a piece of paper stating that D is indebted to P for certain amount of money.

b. Enforcing a judgment: judgments are enforced by the execution process. Once judgment is obtained, P becomes a “judgment creditor” and is entitled to a writ of execution.

i. Writ of execution: order from the court to the sheriff to seize enough property of D to satisfy the judgment.

ii. Levy: involves asking sheriff to take possession of (or control over) the property. If property is real property, sheriff will file a notice in the real property records stating that the sheriff has levied on the property.

1. When property is personal property, sheriff will physically take possession of the property if this is practical.

2. If property is large equipment, sheriff will tag it with a notice that there has been a levy. Or sheriff may lock warehouse, etc.

iii. Opportunity to discover assets of the Defendant: Judgment creditor may examine debtor/defendant under oath after judgment to determine what property D owns.

iv. Sheriff’s instructions: executing creditors must use the discovery they have gained to give exacting details to sheriff about how and where to execute on the available assets. If other creditors are also executing on the same assets, the first to actually levy on the assets, through the sheriff, often gets first priority in any proceeds realized on the sale.

v. Sale of the property: Sheriff will be directed in the instructions to sell the property on which the levy was made. Usually, the sale is by auction – often held on courthouse steps.

1. If sale doesn’t bring enough money to satisfy debt, judgment creditor may have another writ issued.

eement is for parties

· Financing Agreement is for the world

§ SUPERGENERIC – not sufficient

§ Collateral by category 108(B)(2) – uncertain if we focus on that alone whether it will be satisfactory.

· 9-201 – Effectiveness of Security Agreement; Attachment of Security Interest; Rights of Parties to Security Agreement

o 9-201: An attached security interest in collateral will be senior to conflicting claims unless a provision in UCC provides otherwise

§ Is an oral security agreement ever enforceable? Generally, you have to have a writing – BUT possession of goods – you don’t need a written security agreement.

· Ex. Art collection putting up for security – what do you as lender’s counsel say?

o If you hold onto the collateral, that is PERFECTION

o NEVER have lawyer of client hold collateral – MALPRACTICE

· Only way you can have oral agreement is if you are in possession of goods

o 9-203: Attachment and Enforceability of Security Interest; Proceeds

§ Problems arise in attachment when either credit is extended at a later date or when the debtor does not have rights in the collateral at the time the transaction occurs.

§ Attachment is important because: (1) until there is attachment, the SP cannot enforce the security interest against either the debtor or a third party, and (2) there can be no perfection until there is attachment.

§ VAR

· Rights: rule is generally that the Debtor obtains rights in something as soon as the particular thing is determined to be the one to be delivered under the contract between Retailer and Debtor. Debtor gets a special property interest in the truck upon identification of the goods to the contract. 2-501

o Debtor may have less than all of the rights in the collateral and still pledge it as collateral. Ex. If person owns truck jointly with some other person, debtor would have sufficient interest in the truck to give a security interest in it and a sufficient interest to have the security interest attach to the truck. BUT – SP would only have security interest in only the debtor’s interest in the truck.

o Power to transfer rights in the collateral – if owner gives the debtor permission to grant a security interest in it, the debtor has the power to transfer rights in the collateral and the requirement of attachment is met.

§ Need 203 for perfection and attachment

§ 203 is always the baseline requirement (ATTACHMENT IS BASELINE) – info is retrievable in perceivable form

· Should NOT be construed broadly in voicemail.

· When drafting agreement in corporate context – for attachment consider the statute of frauds – need writing(s) signed by party to be charged

§ 9-203(B) Enforceability

· 3 conditions to enforceability – met in ANY order

o VALUE must have been given

o AGREEMENT – debtor mut agree that a security interest will attach and either collateral must be in secured party’s possession or control or debtor must have signed a security agreement containing a description of the collateral