Secured Transactions Outline

SECURED TRANSACTIONS PICKER SPRING 2014

OVERVIEW OF A SECURITY INTEREST

I. Security Interest – “Attachment, Perfection and Priority”

An interest in personal property or fixture which secures payment OR performance of an obligation [1-201(b)(35)] Creation of Perfected Security Interest (See graphic)

4 Steps

1.Bank Lends Money to the Debtor
2. Debtor Promises to Repay the Loan

Steps 1 and 2 create an unsecured loan

3. Debtor Grants a Security Interest in a Particular Asset = Attachment

Rights have arisen

4. Secured Creditor Gives Notice to the Public of the Security Interest = Perfection

SA and FS can be done at different times – always files FS 1st!
Filing can happen before attachment BUT perfection cannot occur unless there is attachment
Before the security agreement attaches, the first creditor who filed has ultimate priority in infinite because a prospective creditor does not know how much the first loan is for until the security agreement attaches

Key Attributes of a Security Interest

Compare: positive rights in property vs. negative rights in property

Property Rights

Secured creditor has the right to repossess the collateral after default (9-609)
Secured creditor has the right to sell the property (9-610)
Secured creditor has the right to keep the property in satisfaction of the debt (9-620)

Priority Rights

Secured creditor has priority over unsecured credits (9-201)

Perfected secured creditor has priority over unperfected secured creditor

II. Article 9 Implements a Reified Priority System

= Asset reservation system for particular types of property
Key Idea

Secured creditor DOES NOT have general priority over all of the debtor’s assets
Instead, priority is tied to time in line as to particular assets
Having a special property right in one asset (ex. equipment) DOES NOT create a special property right in another asset (ex. inventory)

General Priority Rule: First to file FS wins

Priority hierarchies supposed to create same types of monitoring burdens that exist with allocation rules under other regimes

Other types of allocation rules

Pro Rata Rule (implemented by Bankruptcy Code)

Creditors receive fraction of assets that creditors hold of the claims (see slides)

Equal Asset Distribution Rule (creditors share assets equally)
Equal Loss Distribution Rule (creditors bear losses equally)

I. ATTACHMENT

Creation of Security Interest

Relevant UCC Provisions

9-203(a): Attachment

A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, UNLESS an agreement expressly postpones the time of attachment

9-203(b): Enforceability

Except as otherwise provided . . ., a security interest is enforceable against the debtor and third parties with respect to the collateral ONLY IF:

(1) value has been given (by secured party);

Ex. loan of money, line of credit, making a credit sale of collateral, or binding promise to make future loan

(2) the debtor has rights in the collateral OR the power to transfer rights in the collateral to a secured party; AND
(3) One of the following conditions is met:

(A) The debtor has authenticated a security agreement that provides a description of the collateral . . . ;
Possession; OR
Control

Legal restrictions on assignment are generally ineffective

IN RE CLARK

W.D. Pennsylvania, 1989
Debtor Clark takes out a loan from Chrysler to purchase a restaurant. To secure the loan, Clark executes a mortgage (SI in real estate) in favor of Chrysler covering the premises purchased.An Acknowledgement that states the liquor license will not be removed from the premises or transferred without Chrysler’s consent. The Acknowledgement does not contain any standard security interest language. After execution of the loan, the Pennsylvania Legislature makes liquor license = property.
An acknowledgement cannot function as a security agreement if it does not contain language indicating intent to create security interest.

Mere leverage is not enough

Chrysler doesn’t have a security interest in the liquor license.
Why didn’t Chrysler (a sophisticated party) execute a security agreement?

At the time the loan was executed, a liquor license didn’t constitute property

How could have Chrysler written the Acknowledgement better to account for uncertainty?

Included an after-acquired property clause

Covers property the debtor later acquires but also covers rights that the debtor has that later become property

CHRIS-DON

U.S. District Court of New Jersey, 2005
If a security agreement grants a security interest in “general intangibles,” is that effective to grant a security interest in a New Jersey liquor license notwithstanding the NJ Alcoholic Beverage Control Statute, which prevents using a liquor license as collateral for a loan?
Article 9 doesn’t define personal property, but looks to underlying state law

All of Article 9 is tied to an outside conception of personal property

New Jersey generally excludes liquor licenses from the status of property under New Jersey law so Article 9 doesn’t apply to this liquor license

Authenticated Security Agreement – 9-203(b)(3)(A)

Only debtor required to authenticated security agreement

Secured party not required to authenticate

Authenticate –

To sign; OR
With present intent to adopt or accept a record, to attach to or logically associate with the record an electronic sound, symbol, or process

BOLLINGER (CA3 1980)

Bollinger gets $150,000 loan from ICC which is secured by machinery and equipment and perfected in Jan 1972. Bollinger pays off $85,000 to ICC in Dec. 1974. Bollinger then enters into another loan with Z&J for $150,000 and Z&J pays off the remaining $65,000 to ICC in return for an assignment by ICC to Z&J of the original note and SA between Bollinger and ICC. Bollinger executes promissory note (PN) to Z&J that states intent to create new SA between Bollin