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

Secured Transactions (Musselman) Summer 2013
Chapter 1 Creditors’ Remedies Under State Law
Assignment 1 Remedies of Unsecured Creditors
1.      Unsecured creditor must sue and get a court judgment, get a writ of execution and have sheriff levy on Debtor’s (D’s) property.
a.      Beware levying on exempt property
b.      Can be an expensive process to identify, find, and levy on D’s property
2.      No self-help; liable for damages if do self-help.
3.      Must determine if the property is owned by D; may be difficult if D is an individual and has some kind of business entity. Does the business entity or D own the property in question?
4.      If the D has not defaulted (default is a term defined by the agreement between the parties), then there is no remedy.
a.      Article 9 does not define what a default is—it is purely a contractual issue. The parties define what constitutes a default in the agreement. (“Insecurity clause” A creditor can say default occurs if the creditor deems himself insecure (good faith unsureness about the solvency of the debtor)).
Assignment 2: Security and Foreclosure (the effect of a Scty Interest)
1.      Secured Creditor (SP is one who has a security interest SI in the collateral) remedies
a.      Can repossess the property in the hands of the D.
i.      Repo by self-help without breach of peace or
ii.     By Judicial Process
b.      A SI defeats the exemption statutes
2.      SI definition
a.      § 9-109, § 1-201 A security interest is created by a transaction, regardless of its form, that in substance creates an interest in personal property/fixtures which secures payment or performance of an obligation by contract (a voluntary interest in personal property/fixtures).
i.    Article 9 is intended to apply not just to transactions called a security interest but to all transactions whose substance is to create a security interest.
b.      § 1-203 A lease may create a SI if
i.      If the consideration LE is to pay LR is for the right to possess/use.
ii.     If it is an obligation for the term of the lease and is not subject to termination by the LE and
iii.   One of these three
A.      Original term is greater than or equal to the remaining economic life of the goods.
B.      LE is bound to renew the lease for remaining economic life or is bound to become the owner of the goods
C.      LE has an option to renew the lease for the remaining economic life of the goods for nominal/no additional consideration.
D.     LE has an option to become the owner of the goods for nominal/no additional consideration.
E.       
a.       § 9-109 Scope
i.       (a) Except as otherwise provided in subsections (c) and (d), this article applies to (1) a transaction, regardless of its form, that [in substance] creates a security interest in personal property or fixtures by contract; (as defined in 1-201) (this excludes real estate transactions)
ii.     § 9-109 + § 1-201 a transaction, regardless of its form, that [in substance] creates an interest in personal property or fixtures which secures payment or performance of an obligation by contract
b.       § 1-201. General Definitions. (b)(35),
i.       (b) (35) “Security interest” means an interest in personal property or fixtures which secures payment or performance of an obligation. “Security interest” includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Article 9. … The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under Section 2-401 is limited in effect to a reservation of a “security interest.” [just a sale with a security interest—seller does not have a possessory interest in the goods] Whether a transaction in the form of a lease creates a “security interest” is determined pursuant to Section 1-203.
c.     § 1-203. Lease Distinguished from Security Interest.
i.       (a) Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.
ii.   (b) A transaction in the form of a lease creates a security interest [THREE REQUIREMENTS] (1) if the consideration that the lessee is to pay the lessor for the right to possession and (2) use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and: (3 one of the following)
A.        (1) the original term of the lease is equal to or greater than the remaining economic life of the goods;
B.       (2) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;
C.       (3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or
D.    (4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement. (problem 2.1 falls in this section)
Assignment 3: Repossession of Collateral
1.      § 9-609(a) SP may repossess collateral after default tangible property capable of being possessed by (1) self-help without breach of peace or (2) by judicial process.
2.      SP may not use sheriff to assist with self-help repo; sheriff can only assist if SP has a writ of execution.
3.      Breach of peace is a factual determination
a.      Generally, any kind of confrontation with a person on the premises is a breach of the peace.
b.      Scale from not likely a breach to a breach
i.      Polite conversation – there may be a potential for violence, possibly a breach
ii.     Protest without threat – likely a breach
iii.   Protest with verbal threat – most likely a breach
iv.   Physical confrontation – likely

breach of peace.] Subsection (a) does not apply to the duty under § 9-609 to refrain from breaching the peace. (jurisdictionally dependent—what is a breach in your jurisdiction)
4.      When SP takes a SI in D’s accounts (accounts receivable, not bank accounts), that does not make the accounts themselves secured as between the D and the customer. Thus, the debt owed by the account debtor (the customer) is unsecured as to the SP.
a.      SP can have account debtor pay it directly to a known address of the SP or a lock box (anonymous PO box) or SP can have an agent handle the D’s accounts to ensure payment to SP.
b.      Debtor § 9-102(a)(28)
(28) “Debtor” means: (A) a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor; (B) a seller of accounts, chattel paper, payment intangibles, or promissory notes; or (C) a consignee.
c.       Account Debtor § 9-102(a)(3) – person obligated on an account (the customer of the debtor)
(3) “Account debtor” means a person obligated on an account, chattel paper, or general intangible. The term does not include persons obligated to pay a negotiable instrument, even if the instrument constitutes part of chattel paper.
d.     § 9-102. Definitions and Index of Definitions. [Account] (a) [Article 9 definitions.] In this article: (2) “Account”, except as used in “account for”, means a right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, [applicable in problem 3.5] (ii) for services rendered or to be rendered, …
e.      Right of SP with SI in accounts upon D’s default
i.      § 9-607(a) notify the account debtors (AD) of the change in payment address; AD can then only satisfy its debt by paying the SP. If AD pays D, his obligation to SP is not discharged. § 9-406(a). Once the debtor defaults, the creditor gets its obligation satisfied by the cash payments of the account debtors—no property to repossess and sell!
A.      SP has rights of an unsecured creditor against and is subject to defenses of the AD.
B.      If D is not in default, no repossession. If repo, then wrongful repo action. (e.g., D may not be in default if D has not paid but has a claim against SP about the property or sales process)