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Secured Transactions
University of Kansas School of Law
Ware, Stephen J.

 
I.                    INTRODUCTORY TERMS
 
A.                 Voluntary Credit Transactions
1.                  Credit Sales – purchase but no payment (pay on time)
2.                  Loans – borrow money to do something
·         All definitions are found in either 9-102 or 1-201 and 9-102 trumps in the case that there are any discrepancies between definitions in the two sections.
·         Start w/ Art. 9. Then go to other UCC provisions. If not in UCC, 1-103 says that common law controls.
·         Remember that Unsecured Parties can include those obligated through involuntary credit transactions. Such as Tortfeasor (D) and injured party (CR).
·         A defendant in a patent infringement suit. If someone gets a judgment, they are a creditor, they owe someone. 
·         If person has a positive balance in their bank account, the Bank is the D (b/c they’re borrowing your money) and you are the CR.
·         3d parties include:
(a)   Buyer #2 who buys from Buyer #1
(b)   Trustee in bankruptcy
(c)   Bank #2 who loans you money after Bank #1.
 
Credit Sale–
 
                                                                                    Bank #2 (can use good as collateral)
Bank                            Borrower-D                             TIB (trustee in bankruptcy)
                                                                                    Buyer #2 (sells good to buyer)
 
3d parties to a loan –
                                                                                    Bank #2
Bank                            Borrower-D                             TIB
                                                                                    Buyer #2
 
If there is a D-creditor relationship created, what are the rights of that creditor as against third parties. That is where almost all of the litigation is. The very same issues apply to both above.  
 
 
 
 
B.                 Difference B/W Unsecured and Secured CRs
 
Types of Credit –
 
                        UNSECURED
CREDIT                                              REAL PROPERTY
                        SECURED     
                                                            PERSONAL PROPERTY *****(this course)
            D has given a specific interest
in specific property by K to CR
to ensure performance
 
1.                  Kinds of Unsecured Credit –
·         Seller credit cards are for dealings only w/ that seller that allow D to buy on time
·         Bank Credit Cards
·         Employment
·         Services (medical, legal, dental, plumber, mechanic, etc . . .)
·         Utilities (phone, electric, gas, water, cable, etc . . .)
·         Student Loans are Signatory loans where we sign a promissory note promising to pay but no interest in D’s property is established.
 
Hypo #1: Enforcement of Judicial Lien –
 
Car
1/2/00 – CR                                        D
                        $10K Prom. Note promising to pay in 8 mos.
 
8/2/00 – D defaults
 
 
Ø      CR is a “unsecured creditor”. 
Ø      Since the PN gave CR no interest in the car, the car is no longer CR’s and CR cannot get it back upon D’s default.
Ø      CR must sue D for unpaid debt, get a judgment (normally a default judgment), get a writ of execution directing the sheriff to seize the non-exempt property of D, sell the property, and satisfy the amount of debt outstanding.
Ø      If CR would have had a security agreement, CR would have had the right to repossess the car. 
 
·         Without a Security Interest, the CR has no right to get the property back on his own.
·         K.S.A. § 60-2304(c) – Exempt property from seizure and sale. Includes transportation regularly used and costing less than $20K. The car above is exempt from seizure and sale (not all states have exact, but all states have these exempting statutes). Attachment reference in statute is not to Article 9, but rather a pre-judgment creditor’s remedy.
 
Same facts as hypo except for there was a security agreement signed. Does the exemption, like the Kansas one above, apply? NO, the exemption statute does not apply because the security agreement is created by contract.
 
Simply put, a perfected secured creditor is going to win against anyone in a claim in the property.
 
C.                 Difference B/W Security Interest, Judicial Lien, and Statutory Lien
1.                  Lien Creditor (Judicial Lien) – 9-102(a)(52)(A) – CR has acquired a lien on property involved by attachment, levy, or the like.
·         CR in above example was a lien CR when the sheriff took control of the car, but not before control over the property existed.
·         Non-consensual
2.                  Trustee in Bankruptcy – 9-102(a)(52)(C) – tib is automatically a lien CR upon the date that the petition for bankr. is filed. Exemptions don’t apply to tib
3.                  Statutory Lien – Status liens created by operation of law. Example: Mechanics have a labor lien in services provided for your car. The law says you pay for the work done, or the mechanic has the legal right to keep the car until payment is made. Non-consensual. 
4.                  Consensual Lien – Creation of SI by K pursuant to a SA.
 
D.                 Secured Creditors
1.                  9-201(a) – EFFECTIVENESS – Except as provided for elsewhere in Art. 9, Security Agreement (SA) is good b/w the parties, agst purchasers of the collateral, and agst other CRs.
2.                  Not subject to exemption rules like Unsec. CRs are
3.                  Sec. CR are usually protected in Bankruptcy
4.                  Sec. CR are protected against 3d parties
5.                  Sec. CR can obtain reimbursement easier and quicker.
 
Hypo. #2(a) –
1/2/00 – S sells barrels on Unsecured Credit to D
2/1/00 – D borrows $ from Bank ® PSI in all D’s assets
6/1/00 – D files Bkcy petition
 
Ø      Bk’s PSI ® paid off in whole if D’s assets equal or are greater than the unpaid debt.
Ø      S will receive little or nothing at all (b/c Unsec. CR)
Ø      The absolute “safest” thing this seller could have done was make the sell a “cash sell”
Ø      The secured part of SC is the value of the collateral. 
 
Hypo. #2(b) –
1/2/00 – Bank loans money to D; D gives SI in all EQ and Inv.
1/2/00 – Bank files proper FS in proper place
2/1/00 – S sells to D on unsecured credit
7/1/00 – D files Bkcy petition
 
Ø      Bk’s wins to extent the secured collateral covers the unpaid debt. Bk’s filing of the FS put the world on notice of its PSI and S could have found out that the D was being financed
Ø      Perfection puts the world on “notice”. S could have looked and called Bk to find out about financing and security agreement. 
 
Hypo. #3 –
Bank financing D’s production of implants; Bk has PSI
D was sued in tort by thousands of woman
D files Bkcy petition
 
Ø      Bk. will be paid off first from D’s liquidated assets. The tort claimants will receive very little, they are classified as unsecured creditors. 
Ø      There are no “choices” here in terms of credit decisions. There is no way to plan around the secured creditors. Employees would also fall into the realm of unsecured creditors in such a situation.
Ø      Article 9 does not make any judgments on priority of unsecured creditors. 
Ø      How should Article 9 respond this type of situation?
 
E.                 Consumer D (9-102(a)(22)) vs. Commercial D
 
 
II.         ATTACHMENT – § 9-203, § 9-204
 
A.                 Generally – When does CR get a SI that is enforceable against D’s property? Essential for SI to be enforceable b/w CR and D.
1.                  Definitions
·         Debtor– 9-102(a)(28)(A) = Buyer
·         Secured Party – 9-102(a)(72)(A) = Seller
·         Security Agreement – 9-102(a)(73) = K creating SI
·         Security Interest – 1-201(37)(first paragraph) = granting interest to CR in property possessed by D
·         Collateral – 9-102(a)(12) = D’s property that the interest is created in
 
B.                 Three Requirements of Attachment under 9-203(b)
1.                  CR must give value (1-201(44)); includes giving the D money or allowing D to have access to a line of credit, and
2.                  D must have rights to collateral or power to transfer rights in collateral, and
3.                  A SA must exist. (1-201(3); 9-102(a)(73)) (WHAT SATISFIES AS WRITING)
(a)               D must authenticate the SA’s description of the collateral, (Authenticate = to “sign” or signature by electronic device/e-mail 9-102(a)(7)) Has to be an appropriate authentication and have a sufficient description of the collateral. 
 
EXCEPTIONS to non-authenticated security agreement which still fall under the statute in subsections (B)-(D)
(b)               CR must have possession of collateral (authentication not required);
(c)               Collateral is a certificated (8-301) security and has been delivered to CR, or
(d)               CR has control of the collateral that is a deposit acct, electronic chattel paper, etc . . .
 
¨       2 types of credit transactions –
Credit Sales – 9-203(1), (2), (3)(B) occur at time of sale
Loan – Bk won’t agree to extend credit until know whether other CR have interest in the collateral.
¨       All 3 requirements may not happen at the same time, but they must all happen for Attachment to occur.
 
 
 
 
 
 
 
Hypo. #1 –
1/1/00 FS filed – Coll. = “all widgets owned by D”
 
2/1/00 D’s manager sends letter to CR saying” I, debtor’s manager, enclose FS giving you a SI in all widgets owned by D.” Singed by D’s manager.
 
3/1/00 D signed PN and delivered to CR. PN stated that CR’s interest was secured by coll. described in 3/1/00’s SA which was never filed.
 
D has always had possession of widgets. 
 
Ø      Assume 9-203(b)(1) is satisfied and value is given
Ø      9-203(b)(2) is satisfied b/c D was always in possession of the widgets
Ø      9-203(b)(3) ® Composite Document Theory
·         FS filed (9-502 says that D need not authenticate, only authorize the filing)
·         PN signed referring to SA that never existed. PN’s strength is weak.
·         LETTER is a much stronger argument for intent if the manager had the authority to bind the D.
 
Hypo. #2 –
SA covered Mach, EQ, Furn. and Fixtures; Unintentionally omitted inventory (Inv.) and accounts receivable (A/C).
 
Parties intended all to be covered.
 
FS covered everything
 
D filed bkcy petition.
 
            Bk claimed SI in inv. And A/R
            SA and FS must be considered together
            Parties intended inv and A/R
 
Can the composite document theory be used to bring in Inv. and A/R?
 
Ø      Composite document theory does not bring Inv. and A/R into the PSI. Need more than just the FS to bring it in. (If another CR saw a FS covering everything, they would ask to see the SA and would ultimately rely on what it said was covered.) The Ct. is unlikely to let other coll. in b/c the SA was unambiguous on its face. But, if both parties admit mutual mistake, the Ct. may reform the K to what the parties swear is the correct description.
(Look to see if Sec. CR has possession. If not, then is there some record in any medium that the terms of the SA could be found in. Then look to composite document theory)
 
Ironically, compare this Illinois case to Bollinger where there was no security agreement at all and the creditor won. In this case, the creditor lost, even though a security agreement existed, but was insufficient in covering two entities. 
 
 
C.        Security Agreement
1.                  Description
(a)   Sufficient if it reasonably identifies what is described. 9-108(a)
(b)   Examples of reas. identification. 9-108(b)
·         Category = all furniture
·         Types of Collateral = Accounts, Chattel Paper, Documents, Instruments, General Intangibles, Goods (Consumer Goods, Equipment, Farm Products, Inventory) (See Old 9-102 for the list)
(c)   “All D’s assets/personal property” does NOT reas. identify for SA purposes (although it is ac

‘92K                    Assigned ’91 K
 
                        $
            Bk                                            Min-Go
                        SI – ’92 Crop
 
            The Ct found for the Bank and not for C who was the superior Sec. CR.
1-103 Common Law provision allowed the court to estop C from defeating Bk’s claim b/c C allowed Min-Go to hold itself out as if it owned the crop. C failed to act in good faith as a reas. business person.
 
Ø      Can’t go after Collateral until D defaults!!!!! 9-601(a) and 9-609
 
 
 
Hypo #1 –
P gives S a check and defaults on the check. 
 
Ø      B/c it was a check given, this is a cash transaction and not a credit transaction
Ø      3-408 – Bank only has to pay S if the check is a properly payable check
Ø      2-507(2) – When ck is dishonored, S has right to get goods back so long as there’s no 3d party. He doesn’t need a SI b/c he can reclaim the goods within a reas. time. 
Ø      2-702(2) – Applies to credit transactions where Buyer says pay in 5 days (for ex.) Can reclaim goods if within 10 days w/o suing Buyer.
Ø      S has a right to the specific property of P if either of these two statutes apply. Otherwise, he must get a judgment.
 
Owner à watch à Jeweler
 
 
 
III.                PERFECTION – 9-308
 
A.                 Generally – Puts world on notice that there may be a SI in the particular property. (9-502 Cmt 2) Essential for CR to be protected agst 3d parties.
1.                  9-308(a)® SI is Perfected if Attached and Steps for Perfection are completed.
 
B.                 Five Ways to Perfect
1.                  Filing – works for almost all goods except those that require cert. of title. It is usually an alternative way to perfect.
·         Filing is only way to perfect for Accts and Gen. Intangibles
·         Filing is permissible for goods, chattel paper, documents, and instruments
·         Filing not permissible for money 9-312(b)(3), Deposit Accts 9-312(b)(1), goods subject to certificate of title 9-311(a)(1) & (d)
2.                  Possession by the secured party
3.                  Automatic upon attachment (limited)
4.                  Notation of security interest on certificate of title
5.                  Control
 
BASIC PERFECTION RULES
            Start with 9-310
(a)   says that must file unless (b) exceptions apply. 
(b)   exceptions include
(b)(2) ®perfected upon attachment (includes PMSI in consumer goods)
(b)(3) ® property subject to other statutes such as cars subject to cert. of title
(b)(5) ®certificated securities (stock certificates), securities, documents, goods or documents that can be perfected w/o filing or possession
(b)(6) ®collateral in the possession of the secured party
(b)(8) ®personal property such as deposit accts, and investment property which is perfected by control
(b)(10) ®proceeds
(c)   doesn’t require filing when a PSI is assigned to another CR.
Go to 9-501 to determine where to file
Go to 9-502 to determine what FS must include
 
C.                 Filing
1.                  D need only Authorize, NOT Sign (requirement Dropped from 9-502; 9-509(a)(1) requires D Authorization.) 
·         Now there is no argument about whether a FS can stand alone without a SA since D need not sign FS.
·         A CR can file a FS and a SA may never be reached. No SA may ever attach. And this is perfectly acceptable.
2.                  What to File – 9-310 When filing is required and when it’s not
3.                  Where to File – 9-501 Where to file financing Statement
4.                  Contents of Financing Statement
(a)               Need to look at two places: 9-502(a)(1-3) – Minimum Identification Requirements. Also see 9-516(b) for additional requirements including the “right to reject” without the mailing address of the secured party (4) or mailing address of the debtor (5)(a). 
(b)               The filing officer cannot practice discretion if the requirements (see below) are met. 9-520(a). If the filing officer wrongfully rejects, 9-516(d) provides that the filing is effective as a filed record EXCEPT as against a purchaser (includes a secured party under 1-201(32)-(33) (does not include TIB because lien creditors do not get an interest in property voluntarily) of the collateral which gives value (1-201(44)) in reasonable reliance (must show that they reasonably searched) upon the absence of the record from the files. There has been a bill introduced in Congress to change the rule in effect to a trustee in bankruptcy. 
 
Filing Office’s Rejection of FS
(a)               9-520(a)® Shall refuse for reasons set forth in 9-516(b) and only for those reasons.
(b)               Proper Refusal Reasons 9-516(b)
·         Incorrect communication or incorrect medium (b)(1); 
·         Incorrect filing amount (b)(2);