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

Secured Transactions
 
Professor Hennigan
 
Fall 2013
Introduction
Article 9 Transactions
·         Article 9 of the UCC governs most but not all “asset-based” financing, transactions secured  by interests in personalty and fixtures—property other than real estate.
·         In a secured transaction, the creditor’s right to payment and ability to collect are safeguarded by an interest in property (collateral).
·         Unsecured loan: one which is not characterized by an interest in person property or fixtures which secures payment or performance of an obligation.
·         Judgment process
o   Judgment: necessary first step to collecting a debt through the judicial process.
o   Must take additional steps to collect/enforce the judgment and must wait a certain period of time before doing so
o   If waiting period is over and the judgment-debtor has not paid, the judgment-creditor must request the court clerk to issue a writ of execution to the sheriff
o   If non-exempt assets are found, the sheriff will seize enough of them to satisfy the judgment debt and the sheriff’s collection costs
o   If the debtor still does not pay, the sheriff will auction off the seized assets and apply the proceeds to satisfy the judgment and collection costs
o   A judgment creditor may also docket its judgment in any county or counties in which the judgment-debtor owns the real estate
o   A judgment lien attaches not only to real estate the judgment debtor owns at the time of docketing, but to real estate the debtor subsequently acquires in that county
o   If the debtor sells the property, the lien creditor is entitled to payment before the debtor receives any of the sales proceeds.
·         § 9-109- Scope: Article 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- § 9-102(a)(12): in secured transaction, creditor’s right to payment and ability to collect are safeguarded by an interest in propertyà collateral.
·         Security Interest – § 1-201(15): an interest in personal property or fixtures which secures payment or performance of an obligation.
o   Perfected when SI has attached and all requirements of perfection are satisfied.
o   Perfection often requires filing of financing statement.
·         Lien Creditor- § 9-102(52): creditor who got a judgment and seeks enforcement of the judgment under state law.
·         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.
·         Repossession Rights—§ 9-609: as a secured creditor, you can seize the television by yourself w/o any assistance from the courts if your repossession will not breach the peace or involve trespassing on the debtor’s property.
·         Priority: establishes how the value of a debtor’s assets will be distributed when that value is insufficient to satisfy all debts.
o   § 9-317(a)(2):
§  a lien creditor has priority over a secured creditor whose SI is unfiled and “unperfected.”
§  A perfected SI will have priority over a subsequent lien creditor.
Problem 1.1   
Ace is a retail seller of computer, which operates 5 stores.  It leases premises for the 5 stores.  Its total inventory of computer systems has a wholesale value of $300K, which Ace sells at 50% mark-up.  Ace also owns $150K in display cases, cash registers, tools, computers and the like.  Ace owes its unsecured creditors about $500K.  After deducting its monthly payments to these creditors and overhead costs, Ace nets $2K per month.  Ace regularly sells computers to the City of San Francisco and Stanford University.  Ace invoices both of them w/ payment due 30 days after delivery. Each customer currently owes $8K.
·         (a) Ace asked Credit, Inc. for a $150K loan to expand its work force.  Should Credit, Inc. demand security?
o   Ace’s assets= $300K (inventory) + $150K (equipment) + $16K (accounts receivables)= $466K
o   Ace’s liabilities/debts= $500K (debts to creditors)
o   Credit, Inc. should demand security. Ace has additional creditors who lent first.  If Credit, Inc. made an unsecured loan and Ace defaulted, those additional creditors would collect before Credit, and because Ace’s debts are higher than its assets, Credit would only collect once the additional creditors have received their shares.  Usually, those who lend first in time get to collect first.
·         (b) If Credit wants a security interest, what collateral would you recommend?  What risks and benefits are associated w/ each collateral?
o   Credit should take an interest in inventory. Security agreement can be drafted to include both current and after-acquired inventory.  Credit would get the wholesale/mkt value for the inventory and even less if sold at a foreclosure sale.
o   Issue with equipment is that it may be difficult to obtain a good price; mkt value may even be high, but buyers will be unwilling to pay the price simply b/c the collateral is equipment.
o   Accounts: the accounts debtors appear goodà city gov’t and Stanford U., but there is no guarantee that they will be paid entirely.
o   Credit can take an interest in all the security; it does not have to pick one.  Ace would be unwilling to give an interest in everything so as to maintain the freedom to collateralize other loans.
Problem 1.2    Assume credit makes the $150K loan and takes a SI in Ace’s inventory.  After 5 monthly payments, Ace suffered a sharp decline in sales and is losing $5K a month.  The loan agreement requires Ace to make monthly payments of $10K.
·         § 9-609: After default a secured party will take possessions of collateral.  Default creates in the creditor a right to the debtor’s property w/o resorting to the judicial process.
·         (a)  Credit is concerned—what are its rights?
o   Unless provided otherwise in the agreement, a default does not take place until the debtor fails to make payments as agreed.  Therefore, Credit does not yet have any rights against Ace.  The parties can include a provision in the agreement defining “default” as a situation where the debtor’s income has declined for 3 months consecutively.
·         (b)  Assume the loan agreement allows Credit to proceed against collateral, thereby closing down Ace. 
o   Should it possess Ace’s inventory? 
§  There is a symbiotic relationship between lender and borrower.  Borrower wants lender to function so that it can make its payments.  Repossessing the inventory may interfere with lender’s objective.  If the value of the inventory would not decrease, Credit would need not worry about letting Ace, the borrower, keep it, so that it can function.  If the inventory would be drastically affected and Credit believes that Ace could not turn its operations around, Credit would be better off repossessing. 
o   What other info may be useful in making this decision?
§   
o   If Credit does not foreclose immediately, should it take any other action?
§   
o   Would answer change if Credit were a supplier of component parts to Ace?
§  If Credit were a supplier, it would be in a better position to repossess, because it could probably resell the inventory without a problem.
·         (c)  What provisions should Credit add to the loan agreement?  What protections or limitations might you seek as debtor’s counsel?
Classifying the Collateral
·         Class of personal property consists of two basic subsets:
o   1. Goods, and
o   2

ude investment property, letter of credit, credit card receipt
·         Knotsman v. West Loop Savings: West loaned Newman some money and Newman gave it an assignment of an annuity contract issued by an insurance company (MLIC).  West failed to file a FS.  Newman went bankrupt, and West sought to enforce the rights to the contract.  Knotsman, the trustee, sought to keep the rights to the contract, claiming that its rights trumped those of West, because West’s interest was unperfected.  West argued that its interest in the contract was perfected on delivery b/c the contract constituted an instrument (semi-intangible) and not a general intangible.
·         Issue: Whether an annuity K is a general intangible (pure intangible) or an instrument (semi-intangible)?
·         Held: the annuity contract was a general intangible, and therefore, a FS was required to be filed with the secretary of state in order to complete perfection.   Annuity contracts must (i) evidence a right to the payment of money and (ii) be of the type which is in the ordinary course of business transferred by delivery with an endorsement or assignment.  Professionals do not attach significance to the possession of the annuity certificate itself. Additionally, there is no indication that this or any other annuity is transferred in the regular course of business by endorsement. There is also no indication that they are regularly traded by delivery or that possession of the annuity certificate confers the right to payment.
o   Sui Generis (Unique):
§  Investment Property, § 9-102(a)(49): a security, whether certificated or not (stocks, bonds, etc.).
§  Fixtures, § 9-102(a)(41): goods so associated w/ real property that they are considered part of the real property.
Problem 2.1    Maxine buys a laptop from Seers for $3K.  She executes an installment K for the purchase.  Seers wants to use her installment K as collateral for a loan from Lender.
·         (a) Classify Maxine’s installment K when Seers offers it to Lender as collateral.
o   Installment K is a promissory note from Maxine to Seers.
o   Seers would be the debtor and Lender the creditor. 
o   This would be a chattel paper (semi intangible): record of monetary obligation + security interest in goods.
·         (b) Assume Maxine also executes a promissory note payable to Seers.  Classify Maxine’s note and installment K when Seers offers them to Lender as collateral.
o   Seers would be the debtor and Lender the creditor.
o   This would be an instrument: a negotiable instrument that evidences a right to monetary obligation
§  Negotiable b/c money can be demanded at a definite time.
o   Security interest of instruments: perfected upon possession of the K after signing it (not so w/ general intangibles.).
·         (c) Would answers to (a) or (b) change if the installment K Maxine executed reserved title to the laptop in Seers?
o   This now becomes chattel paper because it embodies both a right to payment and reserves a security interest (title) in a particular good.