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Secured Transactions
University of North Carolina School of Law
Jacoby, Melissa B.

Secured Transactions

Melissa Jacoby

Spring 2013


· Basic structure of the course

o I. Debtor and creditor (leading to DR v. CR)

§ In order to be secured, transaction has to be done and recorded properly.

o II. DR goes bankrupt, broke, or missing (leading to CR v. CR or 3d party)

§ Two parts:

· How to keep a security interest “perfected”

· How to assess competitions between secured party and 3d parties

o *lots of bar exam questions here

· Scope of A9 – 9-109

o Includes personal prop, both tangible and intangible

o “Except as provided in subsections (c) and (d) . . .”

§ Federal preemption

· Fed law preempts state law, e.g. fed filing systems (see below)

§ Real prop

· Each state’s scheme for creating, transferring, and filing liens on real prop is similar to A9, but each has its own Rs.

· WATCH OUT for:

o Transfers that combine real prop interest + personal prop interest

§ Each interest must be given its own treatment under the appropriate statutes.

o Fixtures (see below)

§ Liens arising by operation of law

o “a transaction, regardless of its form, that creates a SI in personal prop or fixtures by K”

§ Substance governs over form.

· It doesn’t matter ­what the parties call the transaction—what matters is its legal effect.

· E.g. seller retains title to prop in order to secure payment—this is SI b/c the substance is that the person is retaining an interest in the prop to secure payment.

· Issues frequently arise over transactions the parties call a “lease.”

o Fundamental characteristic of a lease: goods revert to the lessor at the end of the term

§ Option to buy at the end of a “lease”:

· If it’s a nominal amount such that any reasonable party would exercise the option to “buy,” it’s a secured transaction.

· If a reasonable person wouldn’t necessarily exercise the option, it’s a lease.

§ Lessor who gives option to buy at the end might want to do a precautionary filing in case the court decides it was a SI.

o NOT a lease: sale w/ retention of a SI, even if the parties call it a lease

· Importance: determines whether party should’ve complied w/ A9 to obtain priority over other CRs or the BR trustee

o “an agricultural lien”

§ Term of art—definition in 9-102(a)(5)

· Arises by statute

§ Only those parts of A9 that expressly refer to agricultural liens apply to them (since they’re not consensual SIs).

§ If the statute doesn’t provide a priority, default rule in 9-322 governs priority.

o “a sale of accounts, chattel paper, payment intangibles, or promissory notes”

§ A9 applies to a sale of these collateral, and not just to a SI in them.

· A transaction in which [accounts/chattel paper/etc.] have been sold and a transaction in which SIs in [accounts/chattel paper/etc.] have been granted may be difficult to tell apart, so they’re both treated the same under A9.

o Distinction is still important b/c it determines whether bank can seek default judgment against DR/seller if, e.g., the bank doesn’t recover as much from account DRs as it expected.

· EXCEPTION: sale of accounts as part of a sale of the business

o “a consignment”

§ Problem arises when consignee (store O) has a given a SI in inventory and the consigned goods look like inventory.

· A9 drafters tried to fix problem by limiting the definition of “consignment”:

§ Definition (9-102a20)

· A transaction is a consignment under A9 only if the merchant who receives the goods “deals in goods of that kind; . . . is not an auctioneer; and . . . is not generally known by its CRs to be substantially engaged in selling the goods of others.”

o I.e. if CRs should know from the circumstances that the goods aren’t part of the regular inventory of the merchant, NOT a “consignment” under A9.

· Aggregate value of the goods must be over $1000 at the time of delivery.

o Protects “rack stuffers”

· Goods must NOT be consumer goods immediately before delivery.

o Protects consumers who make a consignment agreement w/ a merchant

· Primary sources of secured transactions law

o Basic DR-CR relationship starts w/ a K

§ I.e. state K law is super-important

§ But BR courts also make a lot of law by interpreting state law


§ A9 is adopted into the statutory law of every state

· This means that most of the things we learn (except real estate law, which is very inconsistent between states) can be applied in any state.

· A9 has some Rs that are purposely left to the courts for resolution.

§ Concepts and definitions in A1 apply throughout the Code

§ Supplements to the UCC

· UCC is supplemented by CL

o 1-103(b): “Unless displaced by the particular provisions of [the UCC], the principles of law and equity, including the law merchant and the law relative to capacity to K, principle and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, BR, or other validating or invalidating cause shall supplement its provisions.”

· Some provisions may be varied by K

o But 9-602 enumerates specific Rs that DR/obligor may not agree to waive or vary.

· Supplemented by statutes

o Typically in these areas:

§ Prop exempted from execution

§ Consumer protection acts

§ Criteria for UCC searches

§ Perfection of titled goods

§ Judicial lien CRs

§ BR

o State Sec of State

· Calculating equity under DR-CR law

o DR’s “equity” = (value of property) – (amount consumed by SI)

§ “Amount consumed by SI” is another way of saying, e.g., value of the mortgage

§ Original down payment (if any) not relevant

SCR v. UCR (definitions)


o How do people end up being UCRs?

§ By not contracting for a SI

§ By being a tort victim or via statutory c/a

· Mere grant of a judgment doesn’t alter unsecured status. Must get lien via sheriff levy.

o Entitled to coerce payment of the debt only through the judicial processes specified by the state.

§ Can’t use self-help

§ UCR can take these routes:

· Lawsuit

o File a lawsuit

o Win the lawsuit

o Use the formal process for levying property (e.g. sending the sheriff to levy it)

· Small claims court

· Negotiate a deal

o E.g. give me that property and I’ll release you from your debt.

· Use a debt collection agency

o (Even though UCR has no right to self-help, can demand payment from DR as long as it doesn’t act unreasonably; could incur liab for wrongful collection practices.)

o Some agencies will buy the debt, others will just sign a K with you, work on it, and return the debt to you if they can’t collect.

· Quasi-litigation route (have a lawyer write a threatening letter, as long as you don’t say you can do something you can’t actually do)

o i.

if for some reason the description was forgotten/flawed, correction may be viewed as in g/f if corrected soon after, but may be suspected as fraud if party tries to claim correction a long time later)

§ (b) SP has possession.

· Refers to 9-313, which says pledge can be oral.


· After we decide that a SI is enforceable (see 9-203, basic rules of attachment), we then have to decide what it’s enforceable against (see 9-108, sufficiency of description).

· We’re accounting for both time of deal and changes over time.

· Sufficient description of collateral (9-108)

o Description is sufficient if it “reasonably identifies what is described.”

§ Description in FS is irrelevant to sufficiency of description in ASA (e.g. if description in FS is more specific).

o Most commonly used options are identifying collateral either by:

§ (a) specific listing OR

· Figuring out what collateral is covered can end up being an issue of K interpretation.

§ (b) type of collateral defined in the code

· This is allowed for everything but:

o (1) commercial tort claims

§ E.g. “defamation claim against Environment, Inc.”

o (2) consumer transactions where collateral is consumer goods (or some financial assets—see 9-108e)

§ E.g. “baseball cards collection and 1000 shares Cisco Inc.”

o Too-specific descriptions might cause problems.

§ E.g. “Restaurant equipment located at 123 Main Street.”

· What happens if the CR goes over to the restaurant and some of the equipment isn’t there anymore??

· This doesn’t make the description inadequate, it just might cause practical problems later on.

o You can encumber everything the DR owns, BUT you have to do it right w/out violating the UCC.

§ If you want to cover everything the DR has, you have to be more specific than “all of DR’s assets” (9-108)

· This language doesn’t invalidate the ASA if you have more specific descriptions too, but it would have no effect—SI would only attach to properly described collateral.

§ Examples

· “All of the DR’s consumer goods”

o NOT OKAY. A description only by type of collateral defined in the UCC is insufficient description of consumer goods (and certain types of accounts) in a consumer transaction.

§ Policy: we don’t want people to accidentally encumber everything they own.

· “All equipment and inventory”

o Fine. 9-108b1 tells us we can use a “type of collateral defined in [the UCC].”

· “All items purchased w/ the card”

o Might depend on the court. Shirel court says no, but other courts might not take such a hard stance.

· “All goods other than consumer goods”

o Likely too generic

o “Goods” isn’t a good descriptor.