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Secured Transactions
SUNY Buffalo Law School
Zheng, Wentong

Secured Transactions
Prof. Zheng
Fall 2010

Overview, Rights of Unsecured Creditors

Commercial financing
How to interpret the relevant statutes

Commercial Law
– Governs mechanics of doing commerce, sales
– Uniformed Commercial Law, enforceable? *
(Under Erie Doctrine, substantive state laws prevail.)

Secured transactions – how to make the person who is liable pay debt
Transactions in which creditors obtain consensual liens (security interest) on personal property (both goods and intangible)

Unsecured creditors
– Unsecured creditors have no property rights in the DT’s property
èTheir remedies: first obtain a judgment against DT and obtain judgment lien through judicial process
– Creditors: who lends somebody money like bank, who brought a tort action against somebody, car dealers, landlords, employees providing labor

– Lobster case
Why not self-help? Allowing such self-help would bring complete chaos, even violence.
Needs to resolve disputes through the judicial system
– Then, file a lawsuit. Where to start? File a complaint. The other party will answer. If not, you can get a default judgment. If yes, filing a motion for summary judgment. If not making it, has to go to a trial.
èWhat is the problem with this judicial process?
This process will be very time-consuming and expensive.
Even if you win, how do you enforce the favorable judgment? How do you turn the judgment into cash? By establishing a lien on the debtor’s property

What is LIEN?
Property right that could only be utilized for the sale purpose of repaying the debt

1) Judicial lien
a) Execution lien –> Levy (tangible) / garnishment (intangible)
To execute the judgment, sheriff can execute levy (ceasing the property)
garnishment (압류) – ex) employer pays your salary to your creditor
b) Judgment lien – no need for execution lien, in some states like CA, you can have judgment lien on personal property

Then, how to make lien turn into cash?
Through “sheriff sale”
Sheriff sells the property through auction
Then you can apply, so that the debt can be paid to you.

Deficiency judgment – if there is a gap b/w the debt and the amount of money made through sheriff sale
èWhy all these legal hassles?

2) Consensual lien
On personal property -> called “security interest”
UCC Art. 9 governs security interest

3) Statutory lien
Granted by the law, don’t have to do anything to create lien

This course, we will learn LIEN over personal property – security interest

Introduction to Secured Financing

Secured creditors vs. Unsecured creditors
– SC has a security interest in a particular property of the debtor (ex. Collateral for a loan)
– SC don’t have to file a lawsuit ASAP or compete with other creditors, whereas unsecured creditors have to compete with other unsecured creditors
– Even in a bankruptcy process (a debtor declares bankruptcy), security interest tends to be protected -> major incentives that secured creditors have!

Why collateral? Incentives for debtors
(By giving security interest to creditors, allowing creditors to take a piece of property)
– To get lower interest rate / to get a larger loan (by giving a security interest)
– To be qualified for a loan that would not be available unless giving a security interest
– To prevent other property damages (just lose a certain property instead of losing other properties by creditors)

Role of Collateral / Security interest
– Likelihood that the collateral would be paid (qualification of the debtor) (making money) is more important for creditors than taking the collateral in case of default
– So, having collateral would be advantageous to some extent, but for debtors, it would not be an ultimate solution to get a necessary loan
– Collecting collateral incurs some expenses to creditors (hiring other agencies like repo). So collateral is not to be better than loan being re-paid.

Then, why having unsecured loans? Why not all the creditors demanding collaterals from debtors?
– In some situations, loan amount is not large enough to demand collateral. (relevant expenses would be higher for smaller loans)
– Because of lack of bargaining power of the creditors -> if one bank is willing to give unsecured loans, people would choose unsecured loans over secured loans
– Marketing competition for business (willing to give unsecured credit for business)

What is credit?
– Unsecured credit by being given to consumer
Ex. Credit card, personal loans, department store credit card (not given by banks, to encourage customers to buy stuffs)
– Secured credit by signing security agreement
Ex. Car loans (dealer or bank)

Unsecured credit – business
– Commercial papers (short term loans for businesses, borrowing money through commercial papers, being treated in secondary market)
– Corporate bonds (long term loans, 2-3 years)
– Either revolving credits or terminals (can be unsecured or secured credit)
Revolving c

ale contract)
– Banks set car loan interest usually higher than other transactions. Instead, bank provides lower interest rates for inventory loan for the dealer for benefits of bank as well as dealer
– How bank controls the risk of the buyer’s default?
1) By credit screening of the consumer – Bank wants to do credit screening by being forwarded the credit application of the buyer
2) Assignment and repurchase agreement (p.115)
Without recourse
Repurchase – in case of default, dealer has to repurchase the loan (not the car)
Partial guaranty
Limited repurchase
Full guaranty
=> depends on how much bargaining power the dealer has against the bank (if the dealer has strong bargaining power, it would opt to choose “without recourse” whereas the opposite case would be “full guaranty”)
– Installment sale contract – states the customer’s obligation to pay the finance + a security interest in the vehicle (an example of “charter paper”) p.117-118

5) * Perfecting the security interest (under UCC 9) – “certificate of title” (the security interest is being reflected on the certificate of title issued by a state office) => attachment + public notice

6) When consumer fails to pay
– Dealer would repurchase the loan.
– Dealer would attempt to repossess the car.
– By selling the car, the dealer would repay the repurchased loan.

Attachment of a security interest – making an enforceable security interest (p.137)

UCC 9-203(b): 3 conditions for a security interest to be enforceable
(** 3 conditions can be met in any order)

1) Value (has been given) [UCC 9-203(b)(1)] UCC 1-204: definition of “value” (usually loans);
Value doesn’t have to be concurrent, can be a pre-existing claim (ex. bank can require a security interest later for the pre-existing contract)

2) Rights in collateral [UCC 9-203(b)(2)] – the debtor must have a property interest in