Secured Transactions
Prof. Barnes Fall 2010
CH. 1: INTRODUCTION
Lien- interest in property given by law (in article 9 call it a security interest)
§ 1-201(35)- a security interest is:
an interest in personal property or fixtures which secures payment or performance of an obligation.“Security interest” includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Art 9.
§-9-102: definitions
Account:
An account has nothing tangible associated with it.
Right to payment, monetary obligation for a debt owed whether or not earned by performance
Can be for property disposed of, goods sold, services rendered, etc.
§ 9-109: Scope (p. 707)
(a) consensual/contractually related interests—a transaction, regardless of its form, that creates a security interest in personal property or fixtures by K;
Benedict v. Ratner
Why do we care about SI in personal property? Bankruptcy (goal of this course is to be able to
Structure a transaction which will survive a bankruptcy filing).
Benedict is the trustee in bankruptcy suing Ratner. Carpet business has accounts receivable. Uncle agrees to provide financing to company, in return for the right to collect the A/R; uncle lets nephew continue to collect them, dispose of them as he needs to, make periodic payments as he can, but basically allows nephew to keep complete dominion & control. (at this time, no system of filing an interest in the a/r existed) Existence of the assignment was to be kept secret; fallacy of Brandeis’ opinion is that he based it on NY personal property law; concludes that there must have been a fraud b/c didn’t cure the problem of ‘ostensible ownership’
It is actually fraudulent b/c there is no public notice system
§ 9-205 changed the law of Benedict
A SI isn’t invalid solely b/c debtor has right to…
Today, there is no such thing as presumptive/conclusive fraud b/c we separate 2 things—title from ultimate ownership, so long as I have a valid SI;
-article 9 simply requires that you file publicly to solve the problems which arose in Benedict.
CH. 2: THE SCOPE OF ARTICLE 9
Article 9 covers all trans which are consensual interests in ppty for payment or performance; it also covers some borderline areas which are essential to avoid gray.
‘Ostensible ownership’—want no one to claim interest in ppty w/o putting your name in the public or having actual possession;
I. Security Interest Defined
9-109: scope of article 9
includes sales of accounts, promissory notes, consignments, intangibles, chattel paper
Presumption is “in”, if it’s an interest in ppty by K & secures payment or performance, & includes certain (1) sales of accts, chattel paper, & negotiable instruments, (2) consignments, & (3) some leases
Problem #2: state statute gives someone doing repairs a possessory lien on the ppty; can’t pay bill, & mechanic won’t return the car;
(a) Is this a 9-109 security interest? No, its one of the exceptions in 9-109(d)(2)—
‘a lien, other than an agricultural lien
(b) If you sign a K giving right to repossess if bill unpaid it creates security interest
Problem #3: farmer sells vegetables at roadside stand; sell all her A/R to financing co. Is this a loan or a sale?
is an outright sale of accounts—9-109(a)(3), so when farmer sells to Nightflyer, Nightflyer must file an article 9 interest. Becomes perfected.
Brown gets listed as a debtor in this case;
sales of accounts, chattel paper & negotiable instruments à always ‘in’ Article 9
Perfection protects you from:
1. future perfected parties
2. unperfected parties and unsecured parties
3. lien creditors who come later (including bankruptcy trustee)
II. Consignments
If transaction is a consignment you must comply with article 9
9-102(a)(20): Defines ‘consignment’
“ means a transaction, regardless of its form, in which a person delivers goods to a
merchant for the purpose of sale and:
(A) merchant:
i. deals in goods of that kind under name other than name of person making
delivery.
ii. is not auctioneer, AND
iii. is not generally known by its creditors to be substantially engaged in selling
the goods of others;
(B) w/ respect to each delivery, the aggregate value of the goods is $1K or more at time
of delivery;
(C) the goods are not consumer goods immediately before delivery; and
(D) the transaction doesn’t create a SI that secures an obligation.
Problem # 4: store holds the goods & collects the $ for the real seller; store takes out loan w/ bank; will the bank’s SI reach the items in the store that belong to the dealers if dealers haven’t taken appropriate steps under Art. 9?
Yes. if it’s a consignment, it still is a secured transaction. Must comply with Art. 9
In re Fabers
MD ships to Fabers; Fabers goes bankrupt; MD argues that the rugs were sent to Fabers on consignment & are to be returned to MD;
MD failed to establish ostensible ownership, b/c he did NOT file.
No matter how you claim the goods you are consigning are still yours, it doesn’t matter. You lose anything over $5,000 in bankruptcy if not filed under Article 9.
Problem # 5: p. 20
this is an Article 9 consignment, so Luke needs to take steps to protect himself from WOW’s creditors
9-102(a)(20)—must meet all the requirements of A-D;
III. Leases
1-203: deals w/ leases; defines leases (p. 35)
whether a transaction in the form of a lease creates a lease or SI, is determined by the facts of each case.
(b) creates a SI if the consideration that the lessee is to pay the lessor for the right to possession & use is an obligation for the term of the lease & is not subject to termination by the lessee (termination means terminate the time period & also terminate the obligation to pay—if obligation to pay isn’t terminated, then it’s not true termination); and:
(1) original term of lease is = to or > the remaining economic life of the goods—then this = a real sale (b/c no residual interest to go back to lessor)
(2) lessee is bound to renew lease for duration of economic life or to become owner of the goods (no way out, have to take the goods)
(3) lessee has option to renew for remaining economic life of goods for no add’l consideration or nominal consideration upon compliance w/ the lease agreement; (Reasonable business person has no reasonable choice but to renew lease) OR
(4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement. (Reasonable business person has no reasonable choice but to buy the property)
Problem # 6: Hypo: lease for 6 years, useful life is 10 years this has the form of a lease, but probably isn’t a lease
no termination clause; can buy for $5.00; but must know whether the $5.00 is nominal consideration (must know value of goods at that moment—whether a businessman would have no reasonable choice but to buy the ppty).
Bank wins the machine, b/c BIG didn’t file;
Problem # 7:
§ 1-203(4) has no reasonable option but to buy
Interests in Personal Property, do they secure payment or performance?
(i.e.—does article 9 apply?)
I. Sales (accounts, chattel paper, neg. inst)
-Must file, IN §1-202(35)
II. Consignments (for sale)-
that is also obligated to perform
under the K.
(d)(7): sale for full or partial satisfaction of a debt previously owed.
Problem #11:
No to all of the above—(d)(4) through (d)(7) exceptions
E. Real Estate
Except for fixtures, RE security interests are NOT covered by Art. 9.
Problem #12:
Mortgagee gets the mortgage on the ppty; debtor gets the ppty & the loan $; mortgagee is the secured creditor—this is all outside Art. 9. Mortgagee gets loan from ONB, and grants a security interest in the ppty to ONB (the right to receive the $$ from debtor).
Is this within Art. 9?
Yes—ostensible ownership problem—if there’s no way of knowing of the relationship b/t ONB & M’gee, then there’s the potential for fraud just as in Philko case;
9-109(d)(11)—doesn’t apply to RE
9-109(b)—must be compared w/ 9-109(d)(11)—B wins if we have to different tiers.
Does ONB need to do anything to protect its interest?
Yes—must comply w/ Art. 9 if they only want the promissory notes; if they want the right to the RE in default, must also file in the RE records;
Art. 3—signed writing to ‘bearer or order’
Problem 13
Consumer bank accounts not covered by article 9 §9-109(d)(13)
Ch. 3: THE CREATION OF A SECURITY INTEREST
Everything that’s not a service or a real estate interest is probably covered by article 9
I. Classifying the Collateral
§ 9-102(a): consensual interest in personal property or fixtures which secures a debt or obligation
Goods
Quasi tangible property
Intangible Property
(23)Consumer goods
(47)Instruments(debts)
(2)Accounts
(48)Inventory
(49)Investment property
(stocks/bonds)
(46)Health care insurance receivables
(34)Farm products
(30)Documents of Title
(Warehouse receipts/bills of lading)
(29)Deposit accounts
(53)Manufactured homes
(51)Letters of credit
(61)Payment intangibles
(33)Equipment (catch-all)
(11)Chattel paper
(42)General intangible (catch-all)
2 forms:
(1) Security Agreement: is the K; has 2 signatures—debtor & security party; gives you attachment—makes the K enforceable b/t the parties;
want a granting clause
must be a writing & must be authenticated (something like a statute of frauds)
test: must be sufficiently specific to resolve K disputes
(2) UCC-1: (financing statement) solves the problem of ostensible ownership of the goods; gives public notice done via filing;
Both documents require that you describe the goods—see § 9-203 (SA) & § 9-502 (UCC) & § 9-108 (sufficiency of the description); § 9-501 (tells what office to file in)
To classify the goods tells you what description must be in the documents
Purpose is to put the public on notice
§ 9-203: Attachment & Enforceability of Security Interest; Proceeds; Supporting Obligations;
Formal Requisites; p. 686
(a) attachment
security interest attaches to collateral when it becomes enforceable against the debtor w/ respect to the collateral, unless agreement expressly postpones the time of attachment;
(b) enforceability:
