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Secured Transactions
St. Johns University School of Law
Hennigan, John

SecTrans
Professor Hennigan (2011)
 
Classifying Article 9 Collateral
A.    Goods.  There are four mutually exclusive categories of tangible collateral (i.e., goods).
1.      Inventory.  Goods that are held for sale or lease to others in the ordinary course of business OR are raw materials used or consumed in a business.  § 9-102(a)(48).  Arrangements in inventory:
                                                             a.      Floor Plan.
i.        Definition.  A creditor finances a dealer’s inventory of hard goods, and, with each sale the dealer either pays the creditor back plus interest (for a cash sale) OR assigns the chattel paper it got from the buyer to th creditor in exchange for some extra cash (for a credit sale).
(1)   For the length of the agreement, the creditor commits to finance the dealer’s new inventory, and the debtor’s continued sale of such inventory is vital for its ability to repay.
(2)   e.g., a car dealership; Fargo.
ii.      Extent and scope of use.  Typically, debtors who stock thousands of items of inventory (e.g., department stores vs. car dealerships) would not use floor plan financing. 
(1)   A security agreement for a transaction that is not appropriate for a floor planning transaction should not be construed to describe a floor planning transaction.
                                                            b.      Term Loan.
i.        Definition.  Lender takes security interest in the inventory after making one lump-sum loan with which the debtor acquires that inventory, and then the creditor requires the debtor to make periodic, fixed schedule payments in the security agreement.
ii.      Example.  Bank lends merchant $100k based on monthly installment payments, which is collateralized by his receivables or inventory
                                                             c.      Revolving Line of Credit.
i.        Definition.  Debtor grants a security interest in its entire mass of inventory to obtain a line of credit.
ii.      Example.  Macy’s retail of 1000 red swing line staplers.
2.      Farm Products.  Goods that are used or produced in farming operations and in the possession of the farmer, including crops, livestock, unmanufactured products of those (such as syrup, milk, and manure), and supplies used in farming operations. 
3.      Consumer Goods.  Goods that are used of bought for use primarily for personal, family, or household purposes.  § 9-102(a)(23).
4.      Equipment.  Goods other than inventory, farm products, or consumer goods, including long-lasting goods such as machinery.  § 9-102(33). 
                                                             a.      Issue.  Whether a “lease” in equipment is actually an SI with the equipment as collateral. 
                                                            b.      Note on the Definition of a Lease.  A lease leaves title in the lessor, who retains a reversionary interest.
                                                             c.      Factors to differentiate leases from security agreements.  § 1‑201(37).  A “lease” will be held to give rise to a security interest if:
i.        The “lease” is non-terminable by the lessee AND
ii.      ANY of the following
(1)   The term of the lease is greater than or equal to the life of the goods.
(2)   The lessee has to renew the lease for the remaining life of the goods or has to later become the owner of the goods.
                                                                                                                                      i.      Note.  The equipment’s “remaining life” is judged from the time the transaction is entered into.  § 1‑201(37)(y).
(3)   The lessee has an option to renew for the remaining life for nothing or for nominal consideration.
                                                                                                                                      i.      Note.  Some ways in which consideration is decisively not nominal are mentioned in § 1‑201(37)(x).
(4)   The lessee has an option to buy for nothing or for nominal consideration.
B.     Semi-intangibles.  Legal rights usually represented by pieces of paper. 
1.      Documents.  Documents of title, such as bills or warehouse receipts.  § 9‑102(a)(30); § 1-201(15).
2.      Chattel Papers. 
                                                             a.      Requirements.  The CP must be a record that evidences both
i.        A right to payment AND
ii.      A right (e.g. a security interest, a lease) in specific goods.  § 9‑102(a)(11).
                                                            b.      Examples. 
i.        A record evidencing a right to payment and an SI in the goods.
ii.      A lease.
                                                             c.      Two Uses for Chattel Paper.  Chattel paper can be:
i.        Collateralized in exchange for a loan OR
ii.      Sold to a financing agency for cash.
(1)   The financing agent no longer has a claim against the merchant.
3.      Instruments.  § 9-102(a)(47).
                                                             a.      Definition.  Any writing that
i.        Evidences a right to the payment of a monetary obligation,
ii.      Is not itself a security agreement or lease,
iii.    Is transferred in the ordinary course of business AND
iv.    Is endorsed or assigned.
                                                            b.      e.g., checks, promissory notes, and certificates of deposit that DO NOT also contain security agreements. 
                                                             c.      Limits.  Investment property, letters of credit, or writings that evidence a right to payment associated with a credit card are not included.
                                                            d.      Note.  An annuity contract is not an instrument because it includes other provisions that need to be fulfilled, whereas an instrument is perfected upon possession alone.  An annuity contract is a general intangible, so filing is required, not just possession (Knostman). 
C.     Pure intangibles. 
1.      Accounts.  A right to payment of a monetary obligation, whether or not earned by performance for property, services, etc.  § 9-102(a)(2).
                                                             a.      i.e., accounts receivable
                                                            b.      e.g. an invoice to pay, like a debtor’s unsecured credit to a buyer of goods, with the price due months later.
                                                             c.      Note.  An oral agreement to pay is still an account.
                                                            d.      Does NOT include (i) a right to payment evidenced by chattel paper, (ii) commercial tort claims, (iii) deposit accounts, (iv) investment property, etc.
2.      General Intangibles.  Any personal property other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, or investment property.  It includes payment intangibles, intellectual property, copyrights, rights to public, rights to a tax refund, and software.  § 9‑102(a)(42).
3.      Deposit Accounts.  An account maintained with a bank, but NOT an investment property or accounts evidenced by an instrument.  § 9-102(a)(29).
4.      Commercial Tort Claims.
5.      Letter of Credit Rights.
D.    Sui generis.
1.      Investment properties.  A security, whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account.  § 9-102(a)(49).
                                                             a.      e.g., abstract right to own a corporation, if you didn’t have a stock certificate
2.      Fixtures.  Goods that have become so related to particular real property that an interest in them arises under real property law.
                                                             a.      Definition.  “Goods that have become so related to particular real property that an interest in them arises under real property law,” e.g. elevators, a furnace, central air.  § 9‑102(a)(41).
                                                            b.      Applicability to Article 9.  Article 9 applies to fixtures as described in § 9‑334.  § 9‑109(d)(11).
                                                             c.      Filing.  Creditors can file fixtures in special fixture filings.
i.        A fixture filing is only effective if the fixtures are or are to be fixtures.  § 9‑501(a)(1)(B).
ii.      A filing with Secretary of State is effective for both fixtures and non-fixtures.
 
 
 
 
 
There are three requirements for creating enforceabl

(a)(64), is whatever is acquired through the disposition of the collateral.
 
 
Requirements for Perfection:
(1) Attachment AND
(2) EITHER
·         Filing of financial statement
·         Taking of possession OR
·         Automatic perfection
Perfection
 
A.    Def.  The process by which Article 9 security interests obtain priority over lien creditors and others with claims to the collateral. 
B.     Purpose.  Perfecting the security interest is required or else the collateral is fair game for other creditors who have obtained a judgment.
C.     Requirements. A security interest is perfected (§ 9-308) if:
1.      It has attached AND
2.      EITHER
                                                             a.      A financial statement has been filed (§ 9-310).  Financing statements must be filed as public records to put other persons on inquiry notice of the creditor’s interest in the collateral.  A proper filing requires:
i.       
 
Note on Scope.  A financing statement can perfect an interest in any kind of collateral.
Debtor’s full legal name.
 
(1)   The filing offices index the financing statements according to the debtor’s name.  § 9-519(c)(1).
(2)   Errors.  Generally, a minor error in the debtor’s name will not affect the sufficiency of the filing unless it is seriously misleading.  § 9-506(a).
                                                                                                                                  (a)     
 
Two forms provide an authenticated record sufficient to create the security interest, providing objective proof of (1) the parties’ agreement to create the interest and (2) the property subject to the interest.
 
Insufficiently providing the name under § 9-503(a) constitutes seriously misleading.
 
                                                                                                                                 (b)      “Search logic” test.  If, in light of the way searches are performed in the filing office, the mistake would not allow someone to find the debtor’s name, then it is seriously misleading.
(i)     e.g., ITT Comm. Finance Corp.
(ii)   e.g., an omission of LLP might be fatal, but an omission of Inc. usually will not.
ii.      Debtor’s full address.  A financial statement with a missing or inadequate address will still be effective so long as it is accepted by the filing office.
iii.    Secured party’s name and address. 
(1)   The correct name is required.
(2)   The address must be “reasonable under the circumstances” (§ 9‑516, Comment 5), but if it will be effective with an inadequate or missing name if the filing office accepts it.
iv.    Indication of the Collateral.
(1)   Requirements under § 9‑504.
                                                                                                                                  (a)      A description that reasonably identifies the collateral under section 9‑108 OR
(i)     e.g., identifying the category of the collateral, specific listings, quantities.
                                                                                                                                 (b)      An indication that the financing statement covers all assets or all personal property.
(2)   Notice Filing.  The description of the collateral need only give inquiry notice to any potential lender that the creditor has an interest in the collateral—so a simple description suffices.  § 9‑502.