1) Background
a) Secured transaction: a transaction in which a lender reserves an interest in something they sell you or a service they provide on credit for you
b) The security interest reserved by the seller is inchoate (it’s there, but its only important if someone doesn’t pay)
i) Recourse on non-payment:
(1) Take item back (b/c of inchoate SI)
(2) Threaten to take item back
c) Important points to discuss on exam:
i) How do you get a SI?
ii) What is the SI secured by?
iii) What is your SI’s priority?
iv) How do you enforce your SI?
d) Article 9: goes into effect July 1, 2001
2) What transactions are covered by Article 9?
a) 9-109 scope:
i) security interests:
(1) a transaction that creates a security interest
(a) “security interest” 1-201(37): interest which secures payment of an obligation
(b) lease or sale + SI? 1-201(37)
(i) if the lessee have an obligation for the termof the lease AND
no right to terminate the transaction
AND: (at lease one of the following)
1. term of lease is greater than/equal to economic life of the property (useful life) or
2. lessee is bound to (a) buy property or (b) renew lease for rest of property’s economic life or
3. can renew lease for rest of economic life for no/nominal ¢
4. can buy property for no/nominal ¢
=> secured transaction
(ii) not a security interest just because:
1. lease payments = or more than cost (just b/c you’ve paid the entire cost doesn’t mean you’ve bought it)
2. just because lessor pays taxes, insurance, repairs, maintenance doesn’t mean you own it (though those things are usually incidents of ownership) why? b/c even if lessor pays them, really the lessee is still paying them in the payment amt.
3. existence of an option to buy or renew for rest of economic life
4. lessee has option to buy/renew (at a fmv reasonably predicted at time of option); predict at end lease term (5 years from now) machine worth $3k; if actually appreciates, it’s okay as long as you had a rzbl basis to predict price
(iii) SI or lease considerations :
1. it’s a case-by-case analysis
2. if price is 20% or less of value, argue it’s a SI, not lease
3. future price: was the price based on a reasonable prediction at the time the price was set?
4. option to buy: consider whether the amount is nominal now (if lease for 5 years, how much is good worth after first 5 years??)
(iv) Morris: week to week lease held to be true lease b/c lesse
le account in satisfaction of pre-existing debts d(7)
iv) consignments
b) exceptions to 9-109 scope (not covered by art 9): 9-109c&d
i) future earnings (wages, salary) of an employee (d)3; must be of an employee, not an indy contractor
c) federal law preempts art. 9 (b/c that’s state law) if an actual conflict btwn the laws
d) real estate is not covered by art. 9
i) exception: if something is removed from the 1st tier real estate transaction
ii) ex. SI in real estate (not covered) => SI in promise to pay for real estate; this is a SI in promissory note (not real estate), so it is covered by art. 9
3) Classifying Collateral 9-102(a)(9, 12, 28, 72, 73), 9-502
a) Goods (moveable at time SI attaches)
i) Inventory
(1) Goods held for sale or lease (incl. raw materials)
(2) Provided in connection with a service
(3) Sale of type of goods that are in the ordinary course of seller’s bsns.
(4) Includes bsns. supplies if consumable
Equipment (catch all)
