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Secured Transactions
SUNY Buffalo Law School
Zheng, Wentong

Secured Transactions
Fall 2009
Professor Wentong Zheng

1) Unless a creditor acquires a S/I via a K with the debtor or is granted a S/I via a statute, the creditor is unsecured.

A) Unsecured Creditors – Enforcement of Rights:
1) An unsecured creditor must first receive a judgment in court.
2) Execution: In order to satisfy the judgment, the unsecured creditor seizes and sells the debtor’s property:
a) Obtain a Writ of Execution.
b) Levy upon a Debtor’s property.
i) Levy is simply the seizure of property.
ii) The Sheriff levies and must do so in accordance with the unsecured creditor’s instructions.
iii) The Sheriff must take physical possession of property capable of being delivered.
iv) Unsecured creditors can be held liable for improper levies.
v) NY CPLR § 5232 sets forth the guidelines for levying in New York.
c) Sale of property.
d) Apply the proceeds to the debt.

B) Discovery Regarding a Debtor’s Property:
1) Sometimes, a debtor will not be forthcoming regarding its property.
2) Therefore, the unsecured creditor can force the debtor to sit for an examination.
3) Debtor may not tell the truth; and if it does, the debtor may move or dispose of assets.

Vitale v. Hotel of California:

Facts: After one levy, Sheriff would not execute additional levies arguing danger and late hours. Creditor sues Sheriff.

Holding: The Court held that the Sheriff had to pay Creditor an ammercement; however, this case is designed to demonstrate the difficulties of levying, such as:
1) Creditor may think money is in account; however, when Sheriff levies, it may be gone.
2) Sheriff may not follow instructions.
3) Sheriff may levy upon the wrong property.
4) Sheriff may refuse to levy.
5) Debtor may hide assets.

C) Exemptions on an Unsecured Creditors Right to Levy:
1) Pursuant to NY CPLR § 5205, there is some property upon which there can be no levy, such as:
a) “Necessities.”
2) An unsecured creditor may also NOT HELP ITSELF to the debtor’s property; the courts don’t want a vigilante society.

D) Protections for Unsecured Creditors:
1) Prejudgment Attachment:
a) If an unsecured creditor believes the collateral will be disposed of before judgment, it may obtain a pre-judgment attachment, at which point the Sheriff seizes the property just as it would via execution.
b) This is a heavy burden and may only be done in “extraordinary circumstances.”
2) Set-Off:
a) An unsecured creditor can set-off a debt it owes to the debtor against a debt the debtor owes to the unsecured creditor.
b) Should examine K terms; some states do not permit set-off K clauses.
3) An unsecured creditor may set aside a transfer pursuant to the Uniform Fraudulent Transfer Act:
a) § 4(a)(1): A transfer is fraudulent if debtor made transfer with intent to hinder, delay, or defraud creditor.
i) Difficult standard because hard to prove “intent.”
b) § 5(a): A transfer is fraudulent if debtor made transfer without receiving reasonably equivalent value and debtor was insolvent or became insolvent as a result of the transfer.

1) A creditor can enhance its position by taking a security interest in the debtor’s property.
2) This allows the creditor to foreclosure on chattel upon default without having to go through the courts.
3) This ensures that interest rates stay low.
4) Personal property is governed by UCC Article 9; real property is governed by state law.

A) UCC Article 9 Scope:
1) What is covered under UCC Article 9:
a) § 9-109(a)(1): Consensual security interests in PERSONAL PROPERTY or FIXTURES created via a K.
b) § 9-100(a)(2)-(4): Agricultural liens; sales of accounts, chattel paper, payment intangibles, or promissory notes; and consignments.
i) It is important to note that certain sales, which are not security interests, are still within the scope of Article 9.
c) Intended as Security Doctrine: Will look at substance of transaction to see if there is a S/I.
i) Sometimes parties disguise S/Is as a lease for tax purposes.
ii) In such cases, Article 9 looks past the K terms and at the economic reality of the transactions.
iii) The economic reality of a lease is the lessor retains a residual interest in the chattel.
iv) The economic reality of a sale is the lessor DOES NOT retain a residual interest in the chattel.
v) It is not a lease if at the end of the K, the lessee pays the remaining economic life of the chattel.
d) § 1-203(b): A transaction called a lease creates a S/I if (bright-line test for sale disguised as lease):
i) The lessee does not have the right to terminate the lease before its expiration; AND ONE OF THE FOLLOWING:
ii) Lease term is greater than remaining economic life; or
iii) Lessee is bound to renew

Although filing is permitted, possession is preferred and therefore, possession has priority over filing.
c) Choice of Law:
i) § 9-301(3): Partial Exception for Tangible Properties. While tangible chattel papers are located in a jurisdiction, the local law of that jurisdiction governs the effect of perfection and priority. Still file in debtor’s jurisdiction.
d) Priority:
i) Chattel paper not merely as proceeds: Retailer gives person loan for inventory, for which it receives chattel paper indicating S/I and monetary obligation. Retailer then grants Bank a S/I in chattel paper to get its own loan. Retailer then grants Chattel Paper Financer (who takes possession of chattel paper) a S/I in chattel paper to get another loan. Bank claims chattel paper as original proceeds. § 9-330(b) priority rules will come into effect.
ii) Chatter paper merely as proceeds: Bank gives loan to retailer for its inventory. Inventory included couch. Buyer buys couch and gives S/I, in form of chattel paper. Retailer sells chattel paper to Chattel Paper Financer. Now both Chattel Paper Financer and Bank have interest in Chattel Paper. But Bank claims interest in chattel paper MERELY AS PROCEEDS OF INVENTORY. § 9-330(a) priority rules come into effect.
iii) § 9-317(b): Other Buyers. A buyer of tangible chattel paper takes free of a S/I if the buyer (see elements below, includes there being no perfection by S/P):
f) Examples:
i) Retail installment Ks.
ii) Leases.
iii) § 9-102(a)(78): Tangible Chattel Paper: Chattel paper evidenced by a record or records inscribed on a tangible document.
iv) § 9-102(a)(32): Electronic Chattel Paper: Chattel paper evidenced by records stored in an electronic medium, such as e-mail.
v) Promissory Note w/ S/I is chattel paper.
vi) Usually arises from secured sale/lease of inventory.
viii) Retail Sales K: Buy couch on credit; document obligates payment and grants S/I.