Sharfman Secured Transactions Fall 2011
Security Interest: 9-201(35)
1. “Security Interest”: an interest in personal property that secures payment or performance of an obligation.
a. Creditor’s Without a SI: Groupo Mexicano
i. USC have no right to preliminary injunctive relief against a D that is dissipating assets.
ii. Getting paid back by an insolvent D, depends upon who among the USCs wins the “race to the court house.”
b. Creditor’s With a SI
i. Generally, the creditor can have priority over a particular asset of the D and get paid back, even if:
1. D is insolvent, AND
2. The creditor has not won the race to the court house.
* NOTE: A SI CANNOT exceed the value of the debt!
2. How do you Create a SI?
a. Basic Requirements are: (1) attachment AND (2) perfection.
1. 9-203(a): a SI attaches to collateral when it becomes enforceable against the D with respect to the collateral.
2. 9-203(b): A SI becomes enforceable against D, ONLY IF:
a. (1): Value Has Been Given
i. 1-201(44): anything that would be sufficient consideration to support a K.
1. Includes: (1) actual transfers, (2) conditional promises to lend money in the future, AND (3) pre-existing indebtedness to secure a loan.
b. (2): D has Rights in the Collateral OR Power to Transfer Rights
i. This requirement is construed quite broadly and is fairly easy to satisfy. E.g. In re Watley.
1. A limited interest can attach, but D CANNOT give an interest in more than he has.
a. Peoples Bank v. Bryan Bros.
i. Sole Proprietorship: individual CAN grant a SI in property owned by his sole proprietorship.
ii. Partnership: a partner CANNOT, without the consent of any other principals, encumber property owned by the Partnership.
1. NOTE: Sharf-dog says maybe he can, argue this out if there is no consent!
iii.LLC: individual owner CANNOT encumber specific LLC property in a personal loan agreement.
b. Bank of America v. Moglia
i. Rabbi Trust: assets of the trust must be subject to the claims of the settlor’s general creditors –> SCs have no claim to the rabbi trust assets.
1. HOWEVER: if a rabbit trust is funded AFTER the SA, then D’s contribution of assets to the trust is subject to the SA.
c. (3)(A): D has Authenticated a SA that provides a Description of the Collateral
i. Security Agreement
1. 9-102(a)(73): Agreement that creates or provides for a SI.
a. SA may be a writing(s), regardless of label (In re Weir-Penn), HOWEVER…
i. SAs are read strictly!
1. If they do not specifically grant a SI in a particular piece of property, such a grant will NOT be presumed. In re Clark.
2. BUT a court might infer from extrinsic documents an intention to create a SI, even in the absence of an explicit agreement. In re Bollinger Corp.
a. E.g. Financing Statement or Promissory Note
i. NOTE: a FS ALONE ≠ sufficient
ii. BUT: FS + Promissory Note = OKAY! In re Weir-Penn.
ii. Description of Collateral
1. 9-108(a): a description is sufficient if it reasonably identifies what is described.
a. Ambiguous Descriptions ≠ Sufficient!
i. Shelby County v. Van Diest: the term (all inventory) was followed by a qualifier (including all) and then another (sold to D by Van Diest). Court held that the SI extended only to the inventory Van Diest furnished.
2. 9-108(b): Examples of Reasonable Identification…
a. (1): Specific Listing
b. (2): Category
c. (3): Type of Collateral Defined in the UCC (e.g. equipment or inventory)
i. 9-108(e): description by type ONLY is NOT sufficient for:
1. Commercial Tort Claims; OR
a. Must contain a descriptive component beyond the “type” alone. Hems v. Certified Packaging.
2. In a Consumer Transaction, consumer goods, a security entitlement, a securities account or a commodity account.
ii. (4): Quantity
iii.(6): Any other method, if:
1. The identity of the collateral is objectively determinable!
3. The description may be broad so long as not misleading.
a. BUT IT MAY NOT BE SUPER-GENERIC!
i. E.g. “all the D’s assets” or “all the D’s personal property”
3. Effect of Attachment
a. General Rule: once a SI has attached, 9-203 confers upon the unperfected SC priority over General Creditors with respect to the property in which it has a SI.
i. BUT this priority is tenuous because it can be trumped by:
1. A bankruptcy trustees’ “strong arm” power under Bankruptcy Code § 544;
2. Lien Creditors (9-317); AND
3. Perfected Secured Creditors (9-322).
4. Other Methods of Attachment
i. The collateral is NOT a certificated security and SC has POSSESSION
i. The collateral IS a certificated security in registered form and the security certificate has been DELIVERED to the SC.
i. The SC has CONTROL of the collateral and the collateral is: (1) deposit accounts, (2) electronic chattel paper, (3) investment property, OR (4) letter-of-credit rights.
1. General Rule: 9-308(a)
a. A SI is perfected if:
i. It has attached and all of the applicable requirements for perfection have been satisfied; OR
ii. When it attaches if the applicable requirements are satisfied before the SI attaches.
2. Classify the Collateral
i. Goods: 9-102(a)(44): all things movable when a SI attaches; 4 mutually exclusive types, determined by their principle use:
1. Consumer Goods: 9-102(a)(23)
a. Good used/bought for: (1) personal, (2) family, or (3) household purposes.
2. Equipment: 9-102(a)(33)
a. Goods other than inventory, consumer goods or farm products.
i. Catch All –> if you cannot determine the principle use, the good is equipment.
3. Inventory: 9-102(a)(48)
a. Goods other than Farm Products, that are held by a person: (1) for sale, (2) lease, or (3) to be furnished under a K of service.
i. Includes –> raw materials, work in process, or materials used or consumed in a business.
4. Farm Products: 9-102(a)(48)
a. Goods, other than standing timber, with respect to which the D is engaged in a farming operation and which are:
i. Crops grown, growing, or to be grown, including:
1. Crops produced on trees, vines, and bushes; and
2. Aquatic goods produced in aqua-cultural operations
ii. Livestock, born or unborn, including aquatic goods produced in aqua-cultural operations
iii.Supplies used or produced in a farming operation
iv.Products of crops or livestock in their unmanufactured states.
ii. Fixtures: 9-102(a)(41)
1. Personal property that is so related to real property. Generally, either:
a. Equipment, if D is a business, OR
b. Consumer Goods, if D is an individual.
i. Money: 9-102(b)(24)
1. Medium of exchange currently authorized or adopted by a: (1) domestic or (2) foreign government.
a. K’ual right to obtain money in the future
no unless assignment of small portion (§ 9-309) or sale of lottery winnings (§ 9-309(14))
§ 9-310 Filing)
yes if its a true sale
YES § 9-313(a)
4. Perfection by Filing: By authenticating a SA, the D authorizes the filing of a FS. 9-509(b).
a. Where to File
i. 9-301: perfection is accomplished by the SC filing an appropriate, debtor-authorized FS in the jurisdiction where the debtor is located.
1. 9-307(b): Debtor’s Location
a. Individuals: located at the individual’s principal residence. (b)(1).
b. Unincorporated Organizations
i. Organization that has ONLY 1 place of business is located at that place of business. (b)(2).
ii. Organization that has MORE than 1 place of business is located at its chief executive office. (b)(3).
1. Where D manages the main part of its business operations
2. Where creditors would reasonably be expected to search for creditor information.
c. Registered Organizations: located in the stated where it is organized. (e).
b. What to File: 9-502(a) –> FS must contain:
i. (1): The Name of the Debtor
1. 9-503: FS must provide D’s full legal name.
a. Registered Organizations: name of D indicated on the public record where D was organized. (a)(1).
b. Individual: name of D on driver’s license, etc.. (a)(4).
c. (a)(4)(6): In other cases:
i. (A): If D has a name, FS must provided the individual OR organizational name of D; AND
ii. (B): If D does not have a name, it must provide the names of the partners, members, associates, etc.. (e.g. General Partnership).
2. 9-503(c): D’s Trade Name = NOT SUFFICIENT!
ii. (2): The Name of the Secured Party OR Representative Thereof
1. FS must provide the SC’s correct legal name.
iii.(3): Indication of the Collateral Covered by the FS
1. 9-504: the indication of collateral is sufficient, if:
a. It complies with 9-108 descriptions; OR
b. Indicates that it covers all D’s personal property.
i. ProGrowth v. Wells Fargo
* NOTE: FS differs from SA because: (1) FS does NOT have to indicate after-acquired property and (2) the FS can state “all D’s personal property” and still be valid.