Secured Transactions – Prof. East
Exam is Closed book. 50-60% MC and 1 Essay worth 40-50% (apparently it has been open book in the past)
I. p. 1-4 à read it if you want
II. Currently, 11 articles comprise the UCC. Article 1 states general, broad principles and rules, which apply to all the succeeding articles, unless an article expressly provides otherwise.
CHAPTER 1: Overview of Secured Financing
I. Find reference: duck descending from a ceiling with money in his bill. Put it on the exam! ß I don’t know why. It is from the book.
II. Credit and Contract:
a. Credit can be short-term (electric bills) or long-term (home mortgages).
b. Although the uses of credit are many, and credit transactions occur in a variety of forms, they all share a common theme: one party desires money, goods, real estate or services without an immediate duty to pay and another party is willing to oblige—for a price (usually the interest rate).
III. The Lawyer’s Role In A Credit Transaction
a. A principal task of the commercial attorney engaged in a transactional practice then is to identify risks and opportunities, warn the client of the risks, and when possible, recommend strategies to avoid or minimize them. Focus is on planning!
IV. Secured Versus Unsecured Credit
a. The difference lies in the creditor’s legal rights in the event of debtor default and its ability to fend off other parties’ claims to be paid first.
b. § 1-201 defines “security interest” as “an interest in personal property or fixtures which secures payment or performance of an obligation.” An unsecured loan is characterized by the absence of this property interest.
c. Commercial financing involves two core legal questions: a creditor’s rights against a debtor and the debtor’s assets (“foreclosure” issues) and its rights vis-à-vis others holding claims against the debtor (“priority” issues). With respect to both, a secured creditor enjoys distinct advantages over an unsecured creditor.
d. Sample ‘Writ of Execution’ – p. 13-14 à check it out.
e. NOTE: If nonexempt assets are found, the sheriff will seize (constructively or actually) enough of them to satisfy the judgment debt and the sheriff’s collection costs. The sheriff’s seizure of assets creates a lien (a property interest) in them, typically referred to as an “execution lien.” When the lien arises, the judgment creditor becomes a “judgment lien creditor,” an “execution lien creditor,” or simply a “lien creditor.” See, e.g., § 9-102(a)(52).
f. Check out Figure 1.1 – Credit And Assets For Recovery [p. 16].
g. NOTE: Under § 2.401(a), “any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest.” So, if you enter into a deal where you receive payments for property and you keep the title to that property, you do not really have title, rather only a “security interest.”
V. Secured Versus Unsecured Credit – Repossession Rights
a. Self-help: A secured creditor may seize the collateral by themselves without any assistance from the courts if their repossession will not breach the peace or involve trespassing. § 9-609. This may not be the case for real property depending on the state à you may need to proceed through the courts.
VI. Secured Versus Unsecured Credit – Secured Creditor’s Rights To Exempt Property
a. Most people assume that exempt property is property a debtor gets to keep even if that means creditors will go unpaid. In fact, exemption laws are much more limited in their effect. They only shelter property from “creditor process,” i.e., from unsecured creditors seeking to collect their debt through the judicial process.
b. The secured creditor’s ability to obtain an enforceable property interest in exempt property represents another distinction between secured and unsecured credit.
VII. Secured Versus Unsecured Credit – Priority
a. If a debtor defaults on a secured loan, the secured creditor may not be, and typically is not, the only party with a claim to the debtor’s assets.
b. The question of priority entails three sets of issues for a potential creditor.
i. The creditor needs to determine the potential claimants against whom it can obtain priority.
ii. It then needs to determine how to achieve that priority position.
iii. The third priority issues focuses on whether, and the terms upon which, the creditor will go forward with its loan in light of the information it has collected about its potential priority position to a debtor’s assets (or lack thereof).
a. § 1.102. Purpose; Rules of Construction; Variation by Agreement:
i. liberally construed
ii. purpose and policies of simplification, clarification, and modernization
iii. custom, usage and agreement
b. § 1.103. Supplementary General Principles of Law Applicable:
i. unless displaced, typical laws apply (ex: contracts, agency, estoppel, fraud, misrepresentation, …)
c. § 1.201. General Definitions:
i. especially (37) – “Security interest”
d. § 1.203. Obligation of Good Faith:
i. Every contract or duty within this title imposes an obligation of good faith in its performance or enforcement.
e. § 9.101. Short Title:
i. This chapter may be cited as Uniform Commercial Code – Secured Transactions.
f. § 9.102. Definitions and Index of Definitions:
CHAPTER 2: Creating Security:
I. History of Modern Security Law
a. Read this section for your own benefit.
b. “Pledge”: the debtor transfers possession of property to the creditor in pledge to secure its payment obligation (ex: pawn something). This is a possessory security device.
c. Then came the “Chattel Mortgage” security device as one of the first nonpossessory security devices.
d. Next, came the “Conditional Sales Contract” and then the “Trust Receipt” arrangement and then the “factor’s lien” statutes.
e. All this came with different laws and became unworkable and confusing.
f. Art. 9 was the saving grace.
g. The motivating impulse behind Art. 9: Integrate and unify personal property security law. Art. 9 represents ultimate synthesis. Art. 9 replaced the existing legal compartmentalizations of security devices with a single, unitary concept, “secured transaction.”
II. Collateral Classification
a. According to Art. 9, any “transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract,” is a secured transaction. § 9-109(a)(1).
b. Personal property consists of two basic subsets: goods and intangibles.
i. Goods: equipment, farm products, consumer goods and inventory. § 9-102(a).
1. semi-intangibles (involve a record or writing [something tangible] that evidences or embodies a right [something intangible]); physical possession of the piece of paper is generally indispensable to enforcement of the rights it embodies (owed money by boss, need a check to get money from bank)
2. pure intangibles like accounts and general intangibles (represent rights that have no physical embodiment, no corporeal existence that is legally significant). (stocks/bonds maybe)
3. see page 59: § 9-102(a): 42, 13, 31, 29, 51, 6, 53, 61, 2
c. Matter of Ripley Oil Co.: Goods in question are oil tanks and pumps. Are they inventory and subject to the security interest or equipment and not sub
rials, work in process, or materials used or consumed in a business. “Inventory” is classified as a “Good” à § 9.102(a)(44).
iii. (b) – Either Inventory or Equipment à look to Comment 4(a) to § 9.102. Seems more like Equipment, but a jury may go either way. If you are entering a transaction and you have items like these that are somewhat indeterminable, then structure and document the transaction so that it does not matter whether the items are deemed inventory or equipment. Planning ahead and identifying risks!
iv. (c) – definitely Inventory
v. (d) – The formula itself is not really a tangible, even though it may be recorded on a tangible medium à so it is an Intangible à “General Intangible” under § 9.102(a)(42). Comment 5(d) provides guidance for general intangibles.
a. § 9.102. Definitions and Index of Definitions:
i. (a)(74) – Security Agreement means an agreement that creates or provides for a security interest.
IV. Attachment, pg 74
a. Very little is required to create an authenticated security agreement: “I, debtor, grant you, Creditor, a security interest in my 1999 silver Mercedes coupe.”
b. Under § 9.203, a debtor’s agreement to create a security interest is one of several requirements that must be satisfied before a security interest can attach, that is, come into legal existence—be enforceable against the debtor. A security interest will not attach unless “the debtor has authenticated a security agreement that provides a description of the collateral.” § 9.203(b)(3)(A).
c. Two documents to create a perfected SI. The security agreement (§ 9.102(a)(73)) represents the contract between the debtor and the creditor. For evidence and SoF. Note the sample security agreement on p. 547. The financing statement is the document intended to give public notice of the creditor’s interest. The financing statement is designed to be filed in the filing record (like filing deeds, etc.) and to give constructive notice to the rest of the world.
d. An authenticated security agreement describing the collateral achieves two important goals: (1) it provides objective proof of the parties’ agreement to create a security interest; and (2) it is objective evidence of the property subject to the creditor’s interest.
e. A security interest is perfected when it has attached and all the applicable requirements for perfection have been satisfied. § 9.308(a). Often, the applicable requirement for perfection is the filing of a financing statement. Filing a financing statement makes a creditor’s claim effective against third parties b/c it gives third parties notice of the claim.
f. In any event, the concept of attachment relates to a creditor’s ability to enforce its security interest against a debtor. The concept of perfection relates to the security interest’s effectiveness against third parties. The security agreement is associated with the process of attachment. The financing statement is associated with the process of perfection and public notice of the creditor’s claims.