Secured Transactions Outline – Warner – Spring 2010
a. General unsecured creditor – they have a legally enforceable right to bring suit
b. Hotel CA – demonstrates how difficult it is to collect once you go to court and get your judgment
i. Cumbersome clunky system
ii. if you are an unsecured general creditor you do NOT have much – you hope your debtor pays you – most of us do!
iii. C/n grab that $20 b/c you don’t have TITLE – wouldn’t it be nice if we could get property interest in the bill – that is secured transactions!
iv. fact that you have a debt against me d/n give you the right to self-help and take my property – c/n just come grab assets b/c you d/n have a property interest in it!
c. contract around it?
i. Contract says: If I don’t pay you the $100 you can take my $150 watch and I won’t sell, hide or give it away and you have first dibs on it and I will keep it in good repair
ii. What happens when I don’t pay and I say I gave the watch away? – contract law is fine for creating the debt – remedies sound good, but if someone d/n do it we are back to where we started!!! – still have to go through whole judicial process to sue and get a judgment
d. now look to the property — creditor wants to make sure that he can get the asset, that debtor c/n get rid of it in some way and need first dibs/priority
i. Sell watch to me for $100, debtor wants an option to buy back the watch in 1 yr for $110 (with interest) – you loan watch to debtor or buy back for $100 or lease watch for 1 yr for $10
1. you don’t just want an option, but a MANDATORY option
2. Is this a good security interest – really no piece missing right now – built with sticks of property so now it is a right – if I don’t pay you, now you do have a property interest in this watch
3. 1 day after I was supposed to pay you – I pay you $111 – you have the right to say no!!! – b/c the option is EXPIRED! – option right to buy something for a limited period of time.
i. Creditor goes into court and say give him his right to come in and redeem his right to the watch instead of using equitable right – I want to bring an action to foreclose redemption of the watch
ii. starting with real property we have a device where we can put together concepts to put together a mortgage
1. with property structure you are able to get to the asset – could you make sure the debtor c/n convey to someone else – YES b/c you OWNED IT, debtor only had an option
2. Debtor had an option until 2 days ago – you still OWN the property AND have first dibs!
f. Real property
i. court of appeals says that a deed conveying real property although absolute on its face, will be considered to be a mortgage when the instrument is executed as security for a debt!
1. it was intended as security – will be treated as security – NOT an outright transfer
2. LOOK AT PARTY INTENT
ii. SUBSTANCE OVER FORM
1. Long standing doctrine in real estate field that the substance governs over the form – I can call the document whatever I want – court will actually look to see what is its function!!!
2. If it is designed to secure a debt, they are going to treat it like a mortgage
3. Subject to all of the equity of redemption and foreclosure rules!
g. Real Estate – What transactions are covered by Article 9?
i. § 9-109 – SCOPE
1. transaction, regardless of its form, that creates a security interest in personal property or fixtures by K — etc.
2. 9-109 (a)(1) – “regardless of its form” – regardless of what we call it – regardless of the form we put it in, if it creates a security interest and it is a transaction then it is covered by article 9!
3. substance trumps form!
4. If the purpose is to secure an obligation then it is going to be in Article 9 anyway – doesn’t matter that everyone in the K says this is a sale, it is NOT a secured transaction – have to get down underneath the deal and what function the K is actually performing!
h. Definition of Article 9 Security interest — designed to create some kind of unity security device that will cover all sorts of things people might do to try to create a security interest where the collateral is Non-real estate stuff
i. Elements of §9-109 – this is the rule of what article 9 applies to
1. Transaction (regardless of its form; substance trumps form)
3. security interest
a. 1-201 – pg 879 – an interest in personal property or fixtures
b. statute d/n define “interest”
c. personal property – not defined in statute – personal property is NOT real estate!! – a mortgage on real estate goes somewhere else, NOT covered by Article 9
4. which secures
5. payment or performance
6. of an obligation
i. Leases v. Security interests
i. leases – at their core, lease temporary right to use the item, but lessor wants it back – secured sale is right to use item while you are paying, but purchaser will wind up with title at end of the deal
ii. problem – if you take a few extra legal obligations on top of what is foundational lease – looks liked secured sale
iii. these are NOT different things – they are part of continuum of the same things – how do we know which it is – the FACTS of the case (which are always fuzzy
iv. 1-203 says you can make sure it WILL be a security interest if you put certain things in
1. lessee is obligated to make entire number of lease payments – c/n walk away at any time AND
2. the lessee is getting ALL the value
a. nominal price rule – if there is an option to buy at the end and the option price is 0 or nominal (you’d be stupid not to do it) then it looks like parties from the beginning wanted you to be owner
b. or what if lease covers entire economic use of the item – if I am getting all economic value, even though you kept title, from an economic perspective, this should be a secured sale.
1. way of giving someone inventory that they can sell and keeping back some right to get inventory back if they c/n sell it
2. most consignments covered by Article 9
3. a few get kicked out that aren’t commercial consignments – i.e. less then 10K
4. 9-109 — sale of accounts, chattel paper, payment intangibles, or promissory notes
a. a malpractice trap
b. many lawyers may not realize that when they are selling one of those things that are covered by article 9
c. Account used here is NOT a bank account (that is called deposit account) – this is accounts receivable, stuff that is owed to
00 and we will give you a certificate and that will pay back your $100 and then some
v. Allows us to issue securities from SPV – all it owns is a bundle of mortgages with 500K stuff that is going to be paid at 10% — if mortgages collapse that will be problem, but relatively comfortable
d. asset securitzation deals are IN article 9!
j. 2-702 – narrow exception remedy when buyer discovered to be insolvent – right to reclaim
i. sub 1 — you may stop delivery
ii. sub 2 – if buyer received goods on credit while insolvent, seller may reclaim goods upon demand made within 10 days after the receipt
iii. Article 2 gives me poor man’s security interest – IF I meet the conditions
iv. What if the buyer is SOLVENT – CAN’T USE this 2-702!!!!
v. sub 3 – buyer in the ordinary course is Mrs. Jones – other good faith purchaser carries other people – my right to reclaim is going to be cut off if the goods have been sold and I won’t be able to assert by interest
vi. my client says we’d like to keep some rights to get our stuff back – any way we can claim more than 10 days – sub 2 – if misrepresentation of solvency has been made to the particular seller in writing within 3 months before delivery the 10 day limitation d/n apply!!!
1. What is the trigger for the longer period to reclaim the goods? – conditions for FINAL!!!
a. Misrepresentation of solvency
b. In writing (to a particular seller)
c. Within 3 months before delivery
1. you called me and you want me to make the first delivery and I tell buyer I need a letter representing solvency – writing you to let you know what my debts and my assets are etc. – it is in writing and I want another letter from you within 3 months of delivery!
2. When we order stuff, what do we require if we are smart? – purchase order – I want to use My form!, what word should we add to that form? – that the buyer IS SOLVENT!
a. This is a written representation of solvency
b. if you happen to become insolvent then you have a misrepresentation of solvency in writing within 3 month before the delivery and if I later discovery that you are insolvent I have an extended period of time (extended from the normal 10 days)!!
II. What good does it to us to take one of these security interests?
a. If you d/n have one your ability to collect might be difficult
b. 9-601 – DEFAULT RULES
i. once there is a default, as a secured party you get special rights