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Secured Transactions
St. Johns University School of Law
Sharfman, Keith

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.

Attachment

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

a. 9-203(b)(3)(B)

i. The collateral is NOT a certificated security and SC has POSSESSION

b. 9-203(b)(3)(C)

i. The collateral IS a certificated security in registered form and the security certificate has been DELIVERED to the SC.

c. 9-203(b)(3)(D)

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.

Perfection

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

a. Tangibles

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.

b. Intangibles

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

ounts

yes

no

no

no unless assignment of small portion (§ 9-309) or sale of lottery winnings (§ 9-309(14))

Agricultural Lien

yes (only

§ 9-310 Filing)

no

no

no

General Intangibles

yes

no

no

no

Payment Intangibles

yes

no

no

yes if its a true sale

Money

NO

YES § 9-313(a)

NO

NO

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.