Secured Transactions Outline
I. Nature of the Security Interest
a. Article 9 as an Assets Reservation System
b. The Key Attributes of Security Interests
i. Property rights good against the debtor
ii. Priority rights good against third parties
c. Article 9 as a Reified Priority System
i. Not general priority, but priority as to designated assets
d. The First-to-File Rule
i. Priority is usually, but not always, tied to the date of filing of a financing statement
e. Possible Distribution Rules for USC
1. Pro Rata – proportional
2. Equal Asset – assets paid out equally until debt is satisfied
3. Equal Loss – assets pd out to distribute losses as evenly as possible
ii. Equal Asset and Equal Loss make both total other debts and distribution of those debts matter
iii. Under Pro Rata, only total matters
iv. EA or EL would increase monitoring: good if we want to, bad if we do not
f. 9-322(a)(1) Priority Rule –
i. (ignoring perfection through possession), the first to file a FS wins
g. Ostensible Ownership Problem
i. inference of ownership from possession
h. Two Key Problems with Possession as perfection method
1. Loss of use of goods
2. Put goods in third-party hands and didn’t own, so no solution
i. Perfection through Possession
i. Holdover
ii. Adds complexity to 9-322: early of first to file or perfect
iii. Can create misleading record of priority in FS record
II. Attachment Requirements
a. Decription requirement – 9-203(b)(3)(A)
b. Interest can be limited in scope- 1-201(37) says nothing about the scope of the positive rights that are required to have an interest in property
c. After-Acquired Property:
i. Clark (the wrong way)
1. Facts: At time of transaction license is NOT property, so debtor cannot grant SI. Instead signs acknowledgement to creditor that will not sell or transfer license. Subsequently state passes law that recognize rights in license as property.
2. Issue- Could acknowledgement suffice to create security interest. And if so, when did SI attach?
3. Ct held SI failed -Court seems to suggest mere leverage not enough
ii. The Right Way – creat interest in after-acquired property in the SA.
1. SI attaches at the time property is received by the debtor, not before.
iii. The Interest in Property Requirement
1. Organize cases along lines of positive rights v. negative rights in property
a. Securing Payment or Performance
i. Court seems to suggest mere leverage not enough
ii. Why not? Accomplishes goal; secured creditor doesn’t want to grab the property and often can’t
2. Top Down v. Bottom Up Approaches
a. Top down = Assume full rights then take specifically enumerated rights away
b. Bottom up = specifically enumerate positive rights
c. Top down approach probably better, easier
3. Negative Pledges-
a. Do not grant SI, instead just contractual right
b. Why the NP? Debtor might prefer it, and if done correctly, may serve as anti-later SI commitment
c. If allowed SI to be granted, possibility of inconsistent priorities pairwise (crops up a lot)
4. Separating SA’s and FS’s
a. Key design feature
b. SA grants interest, FS reserves spot in line vis-à-visother creditors
c. consequences: file first before pursuing SA to reserve place in line
iv. When is an interest granted?
a. Two approaches Bollinger and Martin Grinding
i. Bollinger says: Sort through all of the relevant documentation and the course of dealing between the parties to see if something can be pieced together that will satisfy the written security agreement requirement
ii. Marting Grinding says:
1. Close to insisting that a single document memorialize the secured arrangements between the parties
2. Nothing in Article 9 supports this
iii. Martin Grinding is probably better because easier for 3rd parties to know when there is a security interest
1. But not clear because presumably the debtor would internalize these costs
2. No real answer
d. Formalities and Descriptions
i. 9-203’s Description Requirement
1. Implements Article 9’s reified priority system
2. Defines the collateral between the parties
ii. 9-108 Description Rules
1. Must reasonably identify collateral
2. Revised statute blesses Article 9 categories
3. Supergenerics barred, but brick-by-brick SI in all assets is OK
iii. Laminated Veneers and Worldwide Tracers
1. Lamintated Veneers – Oldsmobiles were not considered as “equipment” pledged under SA’s omnibus clause. Ct. found
a. cars not typically considered EQ
b. specific listing of truck implied exclusion of other vehicles
2. Worldwide Tracers – creditor described property as “any property”. Ct. held this did not perfect SI in intangible property because
a. creditor should have said “any property, tangible or intangible” and
b. description was found with list of tangible property
iv. 9-203 and Rights in the Collateral
1. Debtor cannot grant interest in rights it doesn’t have or control – Monalisa hypo
a. The Whatley problem – In closed corp setting, need to be sensitive to right way for creating and perfecting SI in pledged assets of owner of corp
i. SA signed by individual as such
sympathy for getting own name wrong
4. Omitting the name is fatal
5. Chemical Bank and Copper King – both cases the secured party’s name was not correct, but court held FS was valid. [could fill in more detail here if time.
e. Description of Collateral
i. The Independent Importance of the Description in the Financing Statement -Defines extent of priority over collateral
ii. Notice ala Thorp not particularly meaningful
1. Thorp – Ct held that description of collateral as “assignment of accounts receivable” was sufficient to include AR incurred after the date of the FS, because it put future creditors on notice that they should inquire.
a. Ct rejected alternative theory that description should be independently sufficient on its own terms
iii. Subsequent SP needs to negotiate to deal with scope of prior FS
f. Third-Party Possession 9-313(c)
i. Key change in 9-313(c): Move from possession occurring at time bailee receives notice of SP’s interest under F9-305 to requiring an acknowledgment by the bailee
ii. Coral Petroleum [complicated case. Ct held SI was not perfected. Fill in detail later, if necessary]
g. Control as Third Method of Perfection
i. Relevant to
1. investment property,
2. deposit accounts,
3. electronic chattel paper and
4. letter-of-credit rights
ii. Exclusive means of perfection for deposit accounts (9-312(b)(1)) and letter-of-credit right (9-312(b)(2))
iii. Priority rules give better rights if you possess or control chattel paper. See 9-330
iv. Control and Benedict v. Ratner
1. Court focuses on dominion debtor has over proceeds of AR. Finds no SI because creditor was not policing the use of funds in which it claimed an SI. This is not an ostensible ownership theory; instead, this a control theory
2. Rejected by statute generally and but see esp. 9-104(b) on deposit accounts.
IV. Priority
a. Theory: Modigliani-Miller – capital structure cannot influence firm value
i. MM Theory is wrong – Use of Assets Depends on Capital Structure
1. Debtor will choose projects with debt that it would reject in all-equity capital structure
a. Example each project requires $100 investment
Project 1
Good: 50%: worth $146
Bad: 50%:worth $84
Expected value = +15
Project 2
Good: 10%: worth $635
Bad: 90%: worth $40
Expected value = -.05
