Secured Transactions Outline

Secured Transactions – Levengood Spring 2016

General Introduction

Secured Transactions, Article 9 and the Bankruptcy Code

Article 9 and the Bankruptcy code necessarily work in connection with each other
Most times when a person borrows money, they pay it back voluntarily – if there is a default, it is often b/c the party is in a weak financial position
If a party defaults, federal bankruptcy law rather than state law under Article 9 may determine what happens to the secured party – however, security interests are often given much protection under the Bankruptcy Code
Note: Many of the decisions interpreting Article 9 are written by federal bankruptcy judges

he Unsecured Creditor: creditor has loaned money but nothing more to ensure the probability of being paid by the debtor. They have taken on unsecured debt.

Security interest: can be enforced by the secured creditor
collection Agency; limited by Fair Debt Collection Practices Act of 1968.
Can claim status of judgment creditor by seeking legal enforcement.

Legal process of satisfying a judgment is execution against specific property. Needs to obtain a writ of execution from the court. Sheriff my do so by either levying the property or taking physical possession of it to be auctioned off at a sheriff’s sale.
Bankruptcy Process- federal law

Chapter 7: allowing liquidation of any debtor’s estate for his coming out of bankruptcy proceeding with most of his debts forgiven by law, giving him a fresh start. “straight bankruptcy”
Chapter 11: business organization is allowed to come up with some plan for reorganization of its financial situation.
Chapter 13: procedure where an individual wage earning debtor can formulate a new plan for eventual repayment on a doable schedule of the debts
Begins with a voluntary or involuntary petition to the bankruptcy court. The exact moment of filing is important

Under §541(a), upon the commencement of a case the bankruptcy estate comes into being. Exemptions: all legal or equitable interests that the debtor has in any property make up the estate
A person is elected as trustee for the case and acts as the representative of the estate and can sue and be sued. Her powers related back to the date of filing
An automatic stay is put in place upon the date of filing.

Schedules are made of all the debtors assets and of their creditors. Trustee must collect all of the assets and sell them off to pay their creditors. Or to formulate a plan for repayment. Trustee may never bee appointed for chapter 11 proceedings.

Debtor in Possession: if the current management of the business is allowed to stay in place during a Ch11 creates a plan of reorganization.
General creditors assert unsecured claims
Priority claimants with secured claims have to be paid first

UCC:

Article 1: general provisions largely non-substantive by cross cuts all the other articles.
Article 2: sales of goods
2A: leases
3: negotiable instruments
4: bank deposits and collection

Chapter 1: The Typical Secured Transaction

§ 9-109. Scope.

(a) [General scope of article.] Except as otherwise provided in subsections (c) and (d), this article applies to:

(1) a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;

creating a SI is covered by article 9 regardless of whether is written or under CL. Cannot contract around Applicability of Article 9 governing SI. Contract makes it legally binding under K law

1-201(b)(35) “Security interest” means an interest in personal property or fixtures which secures payment or performance of an obligation. (Must be consensual) The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer (Section 2-401) is limited in effect to a reservation of a “security interest”. The term also includes any interest of a buyer of accounts or chattel paper which is subject to Article 9. The special property interest of a buyer of goods on identification of those goods to a contract for sale under Section 2-401 is not a “security interest”, but a buyer may also acquire a “security interest” by complying with Article 9. Unless a consignment is intended as security, reservation of title thereunder is not a “security interest”, but a consignment in any event is subject to the provisions on consignment sales (Section 2-326).

For example, a lender could take a security interest in the borrower’s watch to secure the performance of the repayment of the loan
The obligation secured is that the borrower will repay the loan to the lender, and the obligation is legally binding b/c there is a consideration for the promise to repay the loan, i.e., the loan was bargained for (note that its not Article 9 which makes the obligation legally binding, but general contract law)

UCC 9-102(a)(28) “Debtor” means: (provides the collateral)

A) a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor;
(B) a seller of accounts, chattel paper, payment intangibles, or promissory notes; or
(C) a consignee.

UCC 9-102(a)(59) “Obligor”(owes the repayment) means a person that, with respect to an obligation secured by a security interest in or an agricultural lien on the collateral, (i) owes payment or other performance of the obligation, (ii) has provided property other than the collateral to secure payment or other performance of the obligation, or (iii) is otherwise accountable in whole or in part for payment or other performance of the obligation. The term does not include issuers or nominated persons under a letter of credit.
Security Agreement- 9-102(73)- agmt that creates/provides SI
9-102(a)(12)- personal property that secures payment or obligation (gold watch)
Secured Party 9-102(a)(72)
Pledge Transaction: SP is given a writing granting her a SI in the collateral. – do not have to have possession

If Joes owns the watch and puts it up as collateral for his cousin Bobs debt then he is the debtor and bob is the obligor. If they both get on the line for personal payment then they both become obligors and Joe becomes a Guarantor. Joe is now liable under general common law regardless of whether there was a written K
If airplane is stolen and neighbor says he is holding it as collateral- SI or lien must be consensual.The obligor can agree at this point to allow it to be collateral- there is no problem with past consideration. Neighbor may have good pretense that there was invasion of air space
Title Retention by Seller of TV: Seller is the debtor and SP bc she holds present title (9-102(a)(28)). Ben is the obligor (9-102(a)(59). (in this case she needs to make sure Ben has all the obligations of a person having title like taxes. Perhaps more profitable to be able to point to K saying she has title rather than to go to court and point to UCC- Profitable Interim Effect.
109- article 9 applies regardless of form or title if a SI is created. Cannot contract around scope of Article 9.

Brown v. Indiana National Bank: INB loaned money to the Indiana Racers Hockey team and took security interests in some of the players contracts. When the loans were called, they requested copies of the contracts with players. Business man offered to buy Andrew Brown’s contract from INB, but never followed through on purchase. His contract was returned to the Racers and INB paid his salary for the following three years but then not further pmts were made. Brown sued INB for fraud in failing to notify him of the security agreement taking his contract as collateral, and INBs possession of his contract when they defaulted, and their intention to sell his contract at a private sale. Found INB had no duty to inform him of these events

Article 9 does not require such disclosure
There was no contractual duty to disclose: this was a security interest not an assignment. This was not an unconditional transfer of ownership right- the transfer only occurred if the Racer’s defaulted. Therefore governed by Article 9 which does not place any duties of disclosure.
The secured lender should always make sure that the contracts are included some contracts may be worth more than other bc of the nature of the athlete.

Chapter 2: Types of Goods

Article 9 Collateral 9-102(a)(12)- the property subject to a SI- includes proceeds, accounts, chattel paper, payment intangibles, promissory notes, goods.
9-102(a)(44): mutually exclusive, can be different things at different times. “movable”  means all things that are movable when a security interest attaches. The term includes (i) fixtures, (ii) standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) the unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes. The term also includes a computer program embedded in goods and any sup