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Bankruptcy
St. Johns University School of Law
Warner, G. Ray

SECURED TRANSACTIONS IN BANKRUPTCY

PROFESSOR WARNER

SPRING 2011

Introduction and Scope to Article 9

A. Scope and Policy of Article 9

a. General Scope: applies to consensual liens and basically everything else that is NOT real property

i. EXCEPTION: some agricultural stuff

b. § 9-109 Scope of Article 9

i. (a) Article 9 applies to:

1. (1) Personal Property or Fixtures by contract

2. (2) Agricultural Liens

3. (3) True Sales of Payment (sale of accounts, chattel paper, payment intangibles, or promissory notes)

a. Chattel paper (9-102(11))

4. (4) Intangible Property

c. Article 9 v. Bankruptcy Code

i. Art. 9: encourages security interests in personal property, thereby facilitated loans.

ii. Code: encourages reorganization and equity of distribution

B. Types of Collateral Governed by Article 9

a. Tangible Property

i. Consumer Goods: items used for personal or familial purpose

ii. Equipment: items used in business

iii. Inventory: goods held for sale or lease

iv. Farm Products: crops, livestock and supplied used in farming operations

v. Fixtures: personal property that becomes part of real property when affixed (PP that is so affixed to the property it is part of the real estate.)

1. Basic Test whether it’s a Fixture: when someone bought the property, did they expect that it would be included with the building?

a. IE: not lamps or drapes, but a furnace

b. BL: very hard to define and Article 9 doesn’t even try.

b. Intangible Property

i. Categories of Intangibles

1. Instruments

2. Chattel Paper

a. IE: interest in ford’s finance statement

3. Accounts receivable

4. Healthcare insurance receivable

5. General Intangible (catch all): everything else that doesn’t fit into a category

a. IE: (1) copyrights; (3) customer lists; (4) patents; (5) trademarks; (6) tax return, (7) a non-negotiable promise to pay, tuition obligation.

c. Extracted Collateral: does not become personal property until it is extracted.

i. IE: oil and gas

ii. If not extracted: it is real property and not governed by Art. 9

d. Timber: becomes personal property if it’s under a K to be cut or extracted

e. True Sale of Payment Rights

i. Includes:

1. (1) Account; (2) Chattel Paper; (3) payment intangible; and (4) promissory Notes

ii. Account: means a right to payment whether or not earned by performance

1. IE: accounts receivable or rights under a K

iii. Chattel Paper: an obligation to pay money that is secured by collateral

1. BL: taking an interest in creditors finance agreement w/ a debtor.

iv. Payment Intangible (IOUs): basically all income streams

C. Leases under Article 2A

a. General Rule: leases are NOT covered by Art. 9 and are governed by § 365 and Art. 2A

i. Problem: it is hard to tell the difference b/w a sale and a lease at times.

ii. Why would you want to sound like a lease? Tax purposes

b. 1-203

i. Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of the case

ii. There is a specific rule in (b) “a transaction in the form of a lease creates a security interest”

c. Per Se Test

i. A Per Se Art. 9 Security Transaction exists if:

1. No option to terminate early; and

2. Either:

a. Option to buy for no or nominal consideration; or

b. Lease term equals or extends beyond its economic life.

d. IMPORTANT: even if it doesn’t meet the test, it can still be argued that it is a sale.

e. BL: seller would have to file and have security agreement b/c technically if no payments, then he could take back.

D. H

d simply by clicking? What is a “similar process” under the definition of authenticating?

iii. Record? Maybe – Was it saved to disk?

1. BL: always make the argument

d. Voicemail

i. Arguable that it is recorded and authenticated

ii. What if the person answer and you say it?

1. Is a person’s memory “retrievable” under the definition of record? Comment 4 says it is NOT enough

3. (ii) Sufficiency of Description (§ 9-108)

a. (a) Required: does NOT have to be specific, but must “reasonably identify what it describes”

b. Cant say all property

c. (b) Description reasonably identifies collateral by:

i. Specific Listing

ii. Category

iii. Type of Collateral defined by UCC à some EXAMPLES:

1. “Inventory” à “I hereby grant security interest in all inventory”

a. Inventory 9-102(48): includes toilet paper, chalk, printer cartridges

2. “Equipment”

3. “General Intangibles” (42)

4. “Farm Products”

d. Best way is “inventory and equipment currently and hereafter in possession”

E. Rights to Future Assets as Debtor Acquires Them

a. § 9-203(f) Proceeds: attachment of collateral gives the creditor rights to proceeds

i. § 9-102(64) Proceeds:

1. (A) Replacement: anything acquired upon sale, lease, license, or exchange of collateral

a. IE: proceeds from sale

2. (B) Income Generated: whatever is collected on distributed on account of collateral

a. IE: rent payment

b. IE: dividends from Stock.