Commercial Law Brittingham Fall 2016
When answering a secured transactions essay question, don’t break it down by creditors’ rights, break it down by looking at the collateral and then stating what rights each creditor has and then who wins.
Focus on the collateral à and then the creditors
Analyzing Secured Transactions (Priority) Problems
Identify the collateral
Identify who has an alleged interest
Is the interest valid?
Is the secured interest a PMSI?
Is the secured interest perfected, and if so, when was it perfected and how was it perfected?
Apply priorities rules
Which Collateral and Obligations are Covered
The value of a security interest can be no greater than the value of the collateral covered by it.
Interpreting Security Agreements
Debtor against Creditor
Security agreement is a contract between debtor and creditor
Determine the intentions of the parties as objectively expressed
Agreement ambiguous à parol evidence may be introduced
Mutual mistake à reformation
Creditor against Third Party
The effect is often that the secured party takes collateral that the other creditors were counting on for collection.
Interpreting Descriptions of Collateral
Courts generally use the definitions of the different types of collateral from Article 9
Accounts à accounts receivable
This could construe something different than the parties intent
Sufficiency of Description:Article 9 Security Agreements
Primary function is to be able to identify collateral
To identify collateral means to determine that a particular item of property is or is not included.
The described collateral must be something of value, not something that will net little at sale
Describing After-Acquired Property
After-acquired property clauses are ineffective with respect to two kinds of collateral:
Consumer goods that the debtor acquires more than 10 days after the secured party gives value
Commercial tort claims
Think of collateral as a category, especially since many businesses dispose of items and acquire others over time.
Ineffective after the filing of a bankruptcy case
Which Obligations are Secured
Any obligation can be secured if parties make their intention clear
The future obligation will come into existence as the result of an additional extension of credit by the secured creditor.
Purports to secure not only the direct obligation for which the security instrument was drafted but all other obligations of the borrower to the lender [in the future].
Think of it as a large net that drags across all the debtors land.
Real Estate Mortgages
Description must describe land sufficient to identify it.
Description may be so vague as to render the mortgage void.
If ambiguous, parol evidence may be used.
Fixtures, and future structures, are automatically included in a description that refers only to land.
Proceeds, Products, and Other Value-Tracing Concepts
Items of collateral may go through transformations that take them outside the description of collateral in the security agreement.
When such transformations are anticipated, the debtor and creditor usually choose to have the security interest continue in the collateral as it changes form or, if the debtor disposes of it to a third party, to have the security interest attach to whatever the debtor receives in return.
Ways to ensure that a security interest will follow the value:
Include express language in the description that covers all forms the value is likely to take.
Include payment from insurance company, in case of loss, will serve as collateral.
Encumber all of the debtor’s property.
§552 à Value-tracing concepts:
Terms of art that indicate that in certain kinds of transformations of the collateral the security interest should follow the value in prescribed ways.
Most commonly employed:
Copyrights, Trademarks, Etc.
Formalities for Attachment
Creditors taking security interests under Article 9 or real estate law obtain their status by contract with the debtor.
Security agreement contains description of the collateral and the obligations secured.
Three formalities required for the creation of a security interest enforceable against the debtor:
(1) Value must be given;
(2) The debtor must have rights in the collateral;
(3) Debtor authenticates/signs security agreement containing description of collateral or secured party takes possession of the collateral.
(1) Possession or Authenticated Security Agreement
Composite Document Rule:
So long as the documents express some internal connection with one another, they may be read together for purposes of including the collateral described in the second document within the security agreement’s umbrella.
(2) Value has been given
Both sides must give value
Article 9 gives a broad definition of value
(3) The Debtor has Rights in the Collateral
If debtor owns a limited interest and grants security interest, the security interest will generally attach to only that limited interest.
Some owners who acquired their rights in property by fraud have the power to transfer to bona fide purchasers ownership rights they themselves do not have, §2-403.
Such owners can also grant security interests in the rights they do not have.
Formalities for Real Estate Mortgages
Differ from state to state