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Secured Transactions
St. Johns University School of Law
Warner, G. Ray

Secured Transactions Outline

Professor Warner – 2011

I. Introduction

Article 9 Transactions

· 9-109 – Scope – Art. 9 applies to transactions that create security interests in personal property

o 9-109(d) – Real estate excluded from Art. 9, absent some exceptions

· Secured Transaction – 9-0102(a)(12) – in secured transaction, creditor’s right to payment and ability to collect are safeguarded by an interest in property (collateral)

· Security Interest – 1-201 – an interest in personal property or fixtures which secures payment or performance of an obligation

· Lien Creditor – 9-102(52) – person that got judgment, goes to enforce judgment under state law

o Can also docket the judgment in an county where debtor has real property to create lien

· Security Interests in Exempt Property – states generally assume that debtors that give security interests in exempt property impliedly waive their exemptions rights in the property

II. Classifying the Collateral

“Goods” – 9-102(a)(44) – all things movable when security interest attaches – Art. 9 recognizes 4 Types:

· 1) Inventory – 9-102(a)(48) – means goods, other than farm products, which are leased, held for sale, furnished under a K, or raw materials that may be used up in ordinary course of business

· 2) Farm Products – 9-102(a)(34) – incl. crops, livestock, farm supplies, products of crops/livestock

· 3) Consumer Goods – 9-102(a)(23) – goods used/bought primarily for personal, family, or household purposes

· 4) Equipment – 9-102(a)(33) – goods, other than inventory, farm products, or consumer goods

o Matter of Ripley Oil – oil tankers held to be equipment, not inventory

Pure Intangibles – may involve a writing – possession of any writing/record not important to enforce the right

· 1) Accounts – 9-102(a)(2) – right to payment of a monetary obligation, whether or not earned by performance

o Account does NOT include: right to payment by chattel paper or instrument, tort claims, deposit accounts, investment property, letter of credit rights, or rights to payment for money advanced/sold (except for rights arising out of credit card purchases (included))

o No physical embodiment of right to payment (e.g. accounts receivable)

· 2) General Intangibles – 9-102(a)(42) – any personal property, except for accounts, chattel paper…includes “payment intangibles and software”

o e.g. intellectual property, copyrights, publicity rights

· 3) Deposit Accounts – ordinary bank accounts (checking/savings accts. etc.)

Semi-Intangibles – involve record/writing (tangible) that evidences or embodies a right (intangible) à possession of writing is required to enforce the right

· 1) Documents – 9-102(a)(30) – document of title or receipt described in 7-201(b)

· 2) Chattel Paper – 9-102(a)(11) – record of monetary obligation and security interest in specific goods

o Instead of security interest, can be a reservation of title

o The document that is securing the loan w/collateral being chattel paper à an instrument

· 3) Instruments – 9-102(a)(47) – means a negotiable instrument that a) evidences a right to payment, that is not a security agreement, and b) is of type that in ordinary course of biz is transferred by delivery w/any necessary endorsement or assignment

§ Negotiable Instrument – 3-104 – unconditional promise to pay fixed amt of money, if it is payable to bearer at time issued, or is payable on demand or at a definite time

§ Negotiable Instrument Requirements:

· 1) signed document

· 2) unconditional order to pay

· 3) fixed amount of money

· 4) on a fixed schedule

§ E.g. – Promissory Note

o Does not Include: investment property, letter of credit, credit card receipt

o Knostman – whether an annuity K is a general intangible or an instrument? General intangible (therefore must be perfected before interest is secured, unlike instrument perfected on delivery)

Sui Generis (Unique)

· 1) Investment Property – 9-102(a)(49) – a security, whether certified or not (stocks, bonds, etc.)

· 2) Fixtures – 9-102(a)(41) – goods so associated w/real property, they are considered part of real property

Classifying Collateral HYPO

· Debtor buys computer from Sears for $3,000

· Debtor executes K for promise to pay in installments (“I promise to pay Sears $200/month over next 10 months, secured by a security interest in my computer”)

· Sears wants to borrow money from Bank, and use debtor’s K as collateral for the loan

· What is the installment K when Sears uses it for collateral on a loan?

o Chattel Paper – record of monetary obligation + security interest in goods

· What is document that Sears executes w/Bank, securing loan w/collateral being the chattel paper?

o Instrument – negotiable instrument that evidences a right to a monetary obligation (negotiable b/c money can be demanded at definite time)

§ Security Interest of Instruments – perfected upon possession of the K after signing it (not so w/general intangibles)

· K language Twist – “I promise to pay Sears $200/mo. only if Sears does on-site maintenance” à not a negotiable instrument (no lender would make a loan based on this), and not chattel paper (doesn’t convey a security interest) à it is an account – right to payment of monetary obligation, whether or not earned by performance

o Debtor that bought computer is an account debtor à if debtor doesn’t pay up à Bank can only go after debtor (not Sears)

o If chattel paper – if acct. debtor doesn’t pay à Bank can go after not only buyer (acct. debtor), but also original seller

What is a credit card receipt?

· Answer: Account – right to payment arising from use of credit card

Why would lender want to know if laptop to be used for personal or business use?

· Consumer Good (don’t have to file FS) v. Equipment (must file FS to perfect)

· What if 50% personal, 50% business use? Equipment

o Consumer Goods – are used “primarily” for household, personal, family use à equipment

III. Creating a Security Interest

Attachment

· 9-203(b) – Attachment Requirements:

o 1) Value is given (credit extended)

o 2) Debtor has rights in collateral

§ Litwiller –“rights in collateral” doesn’t mean full ownership rightsàbank had security agreement for “inventory” à getting parts to make something else constituted inventory à attached

o 3) Debtor authenticated security agreement that provides a description of the collateral (unless possession/delivery/control can satisfy the attachment (i.e. possession of security))

· Thereafter, the security interest has attached to the collateral (9-203(a))

· Financing Statement–document giving public notice of creditor’s interest in collateral (perfects security interest)

o How to File – 9-501 – file in office per state law or the office where you record a mortgage

· Perfection –9-308 – security interest perfected if it attached & perfected (filed or control/possession if applicable)

· Filing before Attachment – Art. 9 allows filing of financing statement, even if no security agreement finalized (date of filing gives priority à smart move)

· Bollinger – if just a FS, w/out a security agreement à not enough to create a security interest (unless the FS creates a current intent to create a security agreement, even though not officially one à may satisfy requirements)

· 2 Requirements to Create a Perfected Security Interest:

o 1) Security Agreement – 9-203(b)(3) – giving creditor an interest in the collateral

o 2) File Financing Statement – signed by both parties, and filed for public record

· Timing for Rights Attaching – 2-105(2) – goods must be existing and identified before interest can pass

Security Agreements Description of Collateral

· 9-108 – Sufficiency of Description – description of property is adequate if it “reasonably identifies what is described”

o Category – this includes descriptions by category (“all debtor’s equipment”)

· Issue: whether omnibus clauses good enough to provide collateral description?

n a secured basis

· GM Electronics’ Collateral – installment Ks that GM generates from sales of laptops: “Law firm promises to pay GM $1,000 each month, security interest in law firm’s televisions”

o What is this agreement? Chattel paper – right to payment, w/security interest in goods

o Can Chattel paper be perfected via possession? Yes – 9-313 Perfection by filing? Yes – 9-312

o Where should Lender file to perfect? NJ

· Installment K Language twist: “Law firm promises to pay $1,000/month from now until March 2009”

o What is this agreement? Promissory Note à an instrument (3-104)

o How to perfect? By taking possession of the note (9-313) or filing (9-312)

· Language Twist 2: “law firm promises to pay as long as GM Electronics services computers”

o What is the agreement? Account – not negotiable instrument (not guaranteed payment)

§ How to perfect account? Filing? YES (where debtor is located) Possession? NO –intangible

· HYPO Twist – What if collateral is agreement where GM agreed to sell stuff to customers at discount, secured by good sold

o What if the agreement? PMSI – 9-103 – security interest that secures credit that was provided for debtor’s acquisition of collateral

§ Secured Seller w/PMSI – seller sells goods at discount + promissory note to pay, secured by good sold

§ Secured Lender w/PMSI – lender lends debtor $ to buy good, secured by good to be purchased

o How to perfect?

§ Filing – 9-310

§ Exception to Filing for PMSIs in consumer goods (9-309) à wouldn’t apply here

· HYPO Twist – GM wants to sell promissory notes to Bank at a discount

o There is a difference btw. collateralizing loan w/installment K v. selling a promissory note

§ Collateralizing Loan w/promissory note – conventional loan agreement – If GM pays off loan à lender will never seek payment from GM’s customers

· If GM defaults on loan à lender can look to GM’s customers to satisfy debt

§ Promissory Note sold as asset – not a loan – GM wouldn’t have any further obligation à lender can only go after GM’s customers if they default on payment

o How can Lender perfect its security interest in the promissory note it bought?

§ 9-309(4) – security interest in sale of promissory note is automatically perfected once it attaches (Lender doesn’t have to do anything)

§ When promissory notes were secured à had to file to perfect à don’t have to file again

· Rule of Thumb – if unclear whether a sale of promissory note (don’t have to file) v. loan secured by promissory notes (have to file) à just file anyway

· 7) HYPO Twist – Loan collateralized by tvs and stereos that Lender provides loans to purchase

o Tvs/stereos à consumer goods à auto-perfected (9-309)

· 8) Lender makes loan to GM, collateralized by GM’s stock in GM Jr., a wholly owned subsidiary

o What category of collateral? Investment Property (9-102(49))

o How to perfect? File financing statement (9-312(a)), or

· 9) Security interest in Inventory Control Software that GM developed and licenses to other businesses

o What is it? Intellectual Property

o If software not embodied on a cd, what is it? General Intangible -9-102(a)(2) – includes computer software

o How to perfect? Must file, can’t possess cd to perfect