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Secured Transactions
South Texas College of Law Houston
Musselman, James L.

Secured Transactions       Musselman      Spring 2012
 
Random recitation
UCC—primarily article 9; Federal bankruptcy code
Exam—open book, open notes (all multiple choice)
End of the course—hard!
Horn book—White and Summer/ Examples and Explanations, Lexis/Nexis questions and answers ST**
Beginning of course—easy
Middle of course—moderately difficult
 
1-19-05
Introduction
UCC: uniform law drafted by committees; sponsored by the ALI; adopted by all 50 states in some form.  Texas has adopted 99% of article 9 with minor modifications.
Federal bankruptcy code:
This is a statutory course (main focus on state statutes).
What is a Secured transaction? —Personal property financing; involves mostly how businesses finance their operations.  Banks want collateral; they create security interests in case you default.
Defaulting on personal property more difficult for the lender in terms of protecting his rights; personal property can be taken anywhere (lender must locate their interest).  This is even more difficult with intellectual property.
Assignment 1—Creditor’s remedies under state law
Problems (18):
1.1—creditor wants to exercise self-help.  He lent money to the debtor who used it to purchase lawn furniture and he wants to reclaim the debt by taking her furniture. 
When you loan money without a security interest then you don’t have an interest in the property.  He could have had her sign a security agreement so that if she were to default he could repossess the furniture and sell to reclaim the money.  Because he didn’t obtain security, he will be charged with theft.  She could also sue him for the tort of conversion and get the value of the furniture.  He would have to counter sue for the original debt.  She can delay creditor by filing bankruptcy or hiding her non-exempt assets.
Unsecured creditors don’t have an interest in any property.  The proper action is to sue to reclaim the debt.
1.2—Creditor wants $30k from local seafood wholesaler; couldn’t get the debt repaid, so he hired someone to make a story about stealing lobster.  This deceived the debtor into getting $19k for lobster and he tried to apply that to the $30k debt.  That is not allowed.
Creditor was convicted of lobster theft and was ordered to repay the $19k—can’t use self- help.
1.3-Karen loans Ted $10k
This all depends on what is in the agreement.  If the agreement focuses only on timely payment, she has no basis because there has been no default.  If the agreement places restrictions on Ted that prohibits these actions, she may declare Ted in breach.  Karen should have established a contract whereby Ted cannot relocate, replace employees, or sell assets.  She should also take a security interest in Ted’s assets to increase her leverage.
Most of the time assuming a lawyer drafted a loan agreementà there are usually provisions for a “default” which needs to be defined somewhere in a loan agreement.  If she could declare it in default there will most likely be an acceleration clause.  She will have to file a suit to obtain a judgment as an unsecured creditor.
1.4—Like the Vitale case, Karen needs to assure that the sheriff will collect and if the sheriff fails, Karen will have to take legal action against the sheriff to regain her debt owed.  First you need to know if Knopf has the assets to pay the judgment.  If not then there needs to be a seizure and sale of certain assets to obtain the money owed.  To obtain the information needed, you would have to go through discovery in the.  She also must establish the judgment in the state before invoking the enforcement procedures of that state (a money judgment can be enforced only in the state where rendered).  The sheriff may not be able to seize certain property if it is exempt business property (seen in the WI statute (b)).
Don’t want to jump right out and send the sheriff to levy on the equipment—he might not even own it, what if it is rented.  The loan transaction needs to be documented so you know how the daycare is being run.  If they’re not exempt then you can levy on them.
You have to do discovery to see exactly what the debtor owns. 
1.5-state laws let debtor retain some assets free of claims of unsecured creditorsà (15) humane purpose of preserving to debtors and their dependents the means of obtaining a livelihood, the enjoyment of property necessary to sustain life and the opportunity to avoid becoming public charges.
(a) Toyota worth $6kà §815.18(3)(g): debtor may exempt up to $1200 of equity in car + any unused consumer goods exemption up to $5k.
if debtor didn’t claim any other household goods as exempt, debtor could claim car as entirely exempt (creditor can’t levy on it).
If debtor can’t claim, creditor may levy and force sale, but sale proceeds first applied to debtor’s exemption
(b) House inherited from mother worth $35k—§815.20exempt through the homestead exemption up to $40k
(c) Equipment from the day care with resale value of $10k—(b) business property is exempt up to $7500
(d) Bank account with a balance of $2,265.92–(k) possibly depository accounts in aggregate value of $1k
TX has an unlimited homestead exemption; retirement and insurance policies, household goods are all exempt; and all wages are exempt.
 
Assignment 2—Security and Foreclosure
Usefulness of property as collateral depends on:
How much value the creditor can extract from it after default
How much leverage the creditor can derive from the creditor’s ability to deprive the debtor of the property
Problems:
2.1—now there is a security agreement—the exemption statute applies to unsecured creditors.  But in this problem Knopf has given the property as security.  Assuming this is all property you can take a security interest in then you could use self-help repossession—no need to file a suit (you can but do not need to) because it was given as securityà he already signed it away in case of default.  You can then sell the property in a commercially reasonable manner to regain expenses.
§815.18 (12) exemptions don’t apply; debtor has agreed that nothing will be exempt.
(a) Toyota worth $6k
(b) House inherited from mother worth $35k
(c) Equipment from the day care with resale value of $10k
(d) Bank account with a balance of $2,265.92
Example: mortgage will never be exempt—you’ve given you’re homestead as security; it can be foreclosed on.
2.2—Article 9 still applies
Bonnie’s proposed “lease” creates a security interest governed by Article 9.  If “lessee” defaulted, Bonnie could repossess the car (even by self-help), but would have to put the car up for sale.  If sale price >> remaining balance of lease payments + option price, surplus (“equity”)
      must be returned to “lessee” [§ 9-608(a)(4)] ·         The buyer is the owner of the car and Bonnie is the secured party and they have entered into a security agreement (Same as example on (28) with Smyrna and Brodsky).
o   This is a sale disguised as a lease; conditional sale.  By keeping title she is just keeping an interest in the car to insure payment of the debt (a security interest in the car).
o   How do you decide if the transaction form is a sale under Article 9? 
§  Article 1—definitions that apply all the way through the UCC
§  §9-109(a)(1)—Scope: a transaction, regardless of its form, that creates a security interest in personal property or fixtures by K.  (Substance over form).
§  Comment 2—regardless of the form of the transaction or the name the parties have given it.
§  Retention of title is a retention of a security interest.
§  Article 1 sends you to §1-203à transaction purporting to be a lease
·         If the transaction falls within (b) then it’s not really a lease, it is a sale.
·         Bonnie is suggesting the situation in §1-203(b)(4).
 
o   Assignment 3—Repossession of Collateral
o   PROBLEMS (56)
§ 3.1—now he could repossess the property and sell it to regain the money owed to him because he is a secured creditor.
·         UCC 9-102 (a)(72) & (73)
·         UCC 9-609—he must do so without breach of peace
·         He has an interest in the lawn furniture so has rights under article 9 (§9-609)à after default a secured party may take possession of the collateral with or without judicial process as long as it is done without a breach of peace.
 
§ Collateral—property in which the secured creditor has the secured interest §9-102(a)(12). 
§ 3.2— Self-help repossession general guidelines to assist the repossession people;

ess with successful, safe, credit worthy corporations.  OR warranty claims could come in and the customers wouldn’t have to pay the entire amount due, again leaving the bank deficient.
§ §9-406—discharge of account Debt. Sometimes the secured party can ask that the account debtors pay directly to the bank.  Deare could set up a lockbox situation, so the customers don’t know that Deare is under a secured agreement with the bank.
§ 3.6—
·         (a) §9-406(a)(1) Firstbank can collect from Feed and Seed.  It would be helpful to look into the paperwork to insure that Deare wasn’t pocketing some of the funds it was paid. Until account debtor (Horne) receives notification to pay assignee (First—secured party), it can pay the assignor (Deare–debtor) and still satisfy the account.
·          (b)  §9-404—First can collect only $23,000 assuming Wilson’s can establish its breach of warranty claim.  Firstbank takes its rights in the account subject to all terms of the agreement b/t the debtor and assignor and any defense arising from the transaction that gave rise to the K.–§9-404 (a)(1)
§ 3.7—It is important to first read the agreement to see what the parties contracted for in terms of the repossession in case of default.  Who is the senior secured party entitled to possession as against a junior claimant.  Pay the important creditors first—try to negotiate with others.
·         (a) Because the business premises, this cannot be repossessed and you would have some time before the court or party could actually foreclose.  Even a non-judicial foreclosure will take some time.
·         (b) Loan secured by trade fixtures and equipment—these items could actually be repossessed so you want to avoid repossession.  Be concerned about the possibility of replevinà that can be done pretty quickly.
·         (c) Utility Bill—They could cut off utilitiesà he can negotiate; they’re an unsecured creditor, BUT they can cut you off immediately.
·         (d) Pay up the secured creditor to avoid repossession, the unsecured creditor would have to take you to court which will buy you time.  Unless you can get inventory elsewhere—no need to worry about payment.
·         It’s important to pay the secured parties.  And the real estate guy should be paid depending on how long you think it will take for that to turnaround and really threaten your business.   With the real estate there might be the appointment of a receiver to worry about, depending on the jurisdiction.
·         Is there a good purpose other than delay—if there is a substantial purposeà keeping the business afloat, which will ultimately assist others too (creditors, etc.)
§  3.8—it is legal to interrupt the use of collateral as a means of preventing damage by the debtor before repossession is achieved, but it is important that the customers are aware of this feature and that it is part of the agreement.  While self help can be done without the debtor’s knowledge.  If a creditor can repossess a car, this should be fine
·         9-609(a)(2)—after default a secured party (1) may take possession of the collateral; and (2) without removal, may render equipment unusable and dispose of collateral on a debtor’s premises under 9-610
·         first try self help (repossession)—BUT if the claims by Evans are valid, there may be no default; Zabriskie could be liable.
·         Under 9-609à you don’t have the right to repossess unless the debtor is in default.