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

Secured Transactions Outline – Fall 2013 – Jacoby – Secured Credit (7 Ed.) Lopucki
       I.            Creation of Enforceable Security Interests
a.       Lien – relationship between particular property (the collateral) and a particular debt or obligation (“a charge against an interest in property to secure payment of a debt or performance of an obligation”)
                                                              i.      Types (Also the 3 forms of Secured Status)
1.      Security Interest – encompasses any lien created by K between debtor and creditor
a.       i.e., real estate mortgages, deeds of trust, personal property under Article 9
b.      a right in the property that is contingent upon the occurrence of a default
2.      Statutory Liens or Common Law Liens
a.       i.e., mechanic liens
3.      Judicial Liens – liens obtained by UCs through judicial process
b.      Collateral – nearly anything of value, real or personal, tangible or intangible
c.       Security interest or line – the right, in the event the debt is not paid when due, to force a sale of the collateral and have the proceeds applied to pay the debt
                                                              i.      SI is the right to apply to value of the collateral to the holder’s debt
d.      Priority – the right to be paid from the value of the collateral, up to the full amount of the debt, in preference to competing interests
                                                              i.      SCs have priority over UCs
e.       Security Ks – private Ks that establish the legal rights of the debtor and C and bind the parties who sign them
f.       Creditor – anyone who is owed a legal obligation that can be reduced to a money judgment
                                                              i.      Unsecured Creditor – general creditors or ordinary creditors
1.      Unsecured unless creditor Ks with debtor for secured status or is granted it by statute
2.      Judgment Creditor – already obtained judgment to establish liability; unsecured
                                                            ii.      Secured Creditor
g.      Attachment (UCC §9-203)
                                                              i.      Requirements under UCC §9-203(b)(1)-(3):
1.      Value has to be given
a.       Broad definition in UCC §1-204—virtually always met in a commercial transaction
                                                                                                                                      i.      Encompasses all forms of consideration that would support an ordinary K AND past consideration
b.      Assumption C must give value (section doesn’t say who)
c.       If C hasn’t made a loan, D’s defense to any collection effort—whether or not a SI exists—is that D doesn’t owe anything to C
2.      D must have rights in the collateral
a.       A person cannot grant a SI in someone else’s property (UCC §9-203(b)(2))
b.      Three subtexts in rule:
                                                                                                                                      i.      If D owns a limited interest in property and grants a SI in the property, the SI will generally attach to only that limited interest.
                                                                                                                                    ii.      Some “owners” who acquired their rights in property by fraud have the power to transfer to bona fide purchasers ownership rights they themselves do not have. (UCC §2-403)
                                                                                                                                  iii.      Time at which SI becomes enforceable
1.      No rights until X owns collateral
3.      And either:
a.       D has authenticated a SA that provides a description of the collateral, or
                                                                                                                                      i.      Authenticated Records (UCC §9-102(a)(69))
1.      Usually a signed writing.
2.      Typically SA contains a description of the collateral, a description of the obligations secured, and provisions defining default, specifying the rights of SC on default, requiring that D care for the collateral and keep it insured, and imposing other obligations on D.
a.       Fulfills UCC §9-203(b)(3)(A) requirement of an authenticated SA. See UCC §9-102(a)(7)
3.      Composite Documents Approach
a.       Examines all the documents executed between D and C to determine if taken together, whether the writing or writings, regardless of label, adequately describes the collateral, carries the signature of D, and establishes that in fact a SI was agreed upon
b.      The extent to which more than one document may qualify as a SA, when one document contains D’s signature (and perhaps a description of some collateral) and another contains a description of additional collateral
                                                                                                                                                                                                              i.      MAJORITY RULE: So long as the documents express some internal connection with one another, they may be read together for purposes of including the collateral described in the second document within the SA’s umbrella
4.      SOME COURTS: Require more than mere internal consistency of connection, instead demand that there be a reference w/in one document to the other
b.      SP possesses the collateral pursuant to a SA
                                                                                                                                      i.      SC my create SA by taking possession of the goods pursuant to an oral agreement to create a SI (UCC §9-203(b)(3)(B))
c.       “Third Kind” of SA that is neither oral nor written can also fulfill requirement of UCC §9-203(b)(3)
                                                                                                                                      i.      Must be inscribed on some “medium” on which it can be stored and from which it can be retrieved. (UCC §9-102(a)(69))
1.      Ex. SA typed on computer and saved to disk, not printed or signed by hand Record
                                                                                                                                    ii.      To constitute a SA, the record must be authenticated by processing it with the intention to identify the authenticator and adopt or accept the record. (UCC §9-102(a)(7)(B)
d.      Failing to obtain an authenticated SA results in C not having a SI, making C an UC (Ace Lumber Supply)
                                                                                                                                      i.      When SP completes the description of collateral after D signs the SA, courts are split:
1.      1st Approach: UCC does not allow SC to complete the SA or FS whether authorized or not, after D has signed the instruments
2.      2nd Approach: Sequence of events is immaterial so long as the resulting document meets the statutory requirements.
                                                            ii.      Only when all 3 requirements have been met does SI attach to the collateral and become enforceable against D. (UCC §§9-293(a) and (b))
h.      Official form for FS (UCC §9-521)
i.        Security Agreement
                                                              i.      Most STs will have at least two descriptions of collateral – one in SA other in FS
                                                            ii.      SA = a K between D and C (UCC §9-102(a)(73))
1.      “an agreement which creates or provides for a security interest.”
                                                          iii.      Rules that govern the interpretation of Ks generally apply to SAs (UCC §§9-201(a), 1-201(b)(3), and 1-303)
                                                          iv.      Court will try to determine the intention of the parties as objectively expressed in the written SA
1.      Where the agreement is ambiguous, parol evidence may be introduced; where the writing results from mutual mistake, the SA can be reformed
                                                            v.      Binds third parties (UCC §9-201(a))
                                                          vi.      Descriptions of Collateral
1.      Types of collateral
a.       Accounts (UCC §9-102(a)(2))
                                                                                                                                      i.       “means a right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (ii) for services rendered or to be rendered, (iii) for a policy of insurance issued or to be issued, (iv) for a secondary obligation incurred or to be incurred, . . . (vi) for the use or hire of a vessel under a charter or other contract, (vii) arising out of the use of a credit or charge card or information contained on or for use with the card . . . .”
                                                                                                                                    ii.       Does not include deposit accounts (bank accounts)
b.      Equipment (UCC §9-102(a)(33))
                                                                                                                                      i.      “goods other than inventory, farm products, or consumer goods.”
c.       Inventory (UCC §9-102(a)(48))
                                                                                                                                      i.      “goods other than farm products, which: (A) are leased by a person as lessor; (B) are held by a person for sale or lease or to be furnished under a K of service; (C) are furnished by a person under a K of service; or (D) consist of raw materials, work in process, or materials used or consumed in a business.”
d.      Instruments (UCC §9-102(a)(47))
                                                                                                                                      i.      “a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a SA or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment.”
e.       Consumer Goods (UCC §9-102(a)(23))
                                                                                                                                      i.      “goods that are used or bought for use primarily for personal, family, or household purposes.”
f.       General Intangibles (UCC §9-102(a)(42))
                                                                                                                                      i.      “any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money , and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.”
2.      Some definitions are not in accord with common meanings.
a.       Courts usually give the term its Article 9 rather than its common meaning.
3.      Sufficiency of Description
a.       Primary function is to enable interested parties to identify collateral and determine whether a particular item of property is or is not included.
b.      “a SI is not enforcea

  Lowest intermediate balance rule (most commonly employed equitable principle): the amount of the SC’s collateral remaining in a bank account after the deposit of proceeds and subsequent transactions is the lowest balance of all funds in the account from the time of the deposit to the completion of the transactions.
1.      I.e., in calculating the amount of proceeds remaining in the account, D is presumed to spend first from the D’s own funds; whatever remains is proceeds.
c.       When a comingled fund contains the property of multiple [SCs], their interests in the fund and any product thereof are determined in the proportion that each claimant’s traceable contribution bears to the balance of the fund at the relevant time. (Rest. Of the Law Third: Restitution and Unjust Enrichment, Tentative Draft No. 6 (March 12,2008)).
d.      To win application of any of the rules, SC must be able to trace the money with specificity
                                                                                                                                      i.      SC must argue that it can trace D’s inventory to the sale of its collateral to have secured claim, otherwise unsecured claim (In re Oriental Rug Warehouse Club, Inc. [p.174])
                                                                                                                                    ii.      Solution to tracing problemàsegregated bank account
1.      Segregated bank account is a bank account that contains only the SC’s collateral
2.      Once D is in bankruptcy, D is required by law to maintain such segregated accounts for each of its SCs. (Bankr. Code. §363(c)(4))
6.      Concepts such as “after-acquired property,” “replacements,” “additions,” and “substitutions” in a description of collateral are non-value-tracing in that they an pick up property acquired by the debtor with value that is not derived from the previously-existing collateral.
7.      IF SI continues in collateral, buyer takes “subject to” SI.
a.       SP has right to foreclose against the collateral if the secured debt is not paid.
b.      Buyer not liable for the secured debt unless the buyer “assumes” the debt
c.       If buyer chooses to assume D’s debt and become bound by D’s SA, he becomes known as a “new debtor.” (UCC §§9-102(a)(56) and 9-203(d))
                                                                                                                                      i.      New D is bound by the existing SA, including provisions creating SIs in after-acquired property. (UCC §9-203(e))
    II.            Obtaining and Maintaining Perfection (UCC §9-308)
a.       Priority
                                                              i.      Senior or prior lien has a higher priority over a subordinate or junior lien
                                                            ii.      If the value of the collateral is insufficient to pay all of the liens against an item of collateral, the junior liens yield to the senior ones.
                                                          iii.      Can exist between Cs who don’t have liens—UCs get priority by K amongst one another.
                                                          iv.      Every kind of lien has priority over all unsecured debts.
                                                            v.      Other ways to resolve are (1) pro rata share of limited assets, (2) status of the competing Cs, or (3) permitting Cs to trace and recover value that they supplied to D.
                                                          vi.      How do Cs get priority?
1.      Liens rank in the chronological order in which they were created. Once priority established, any lien created thereafter will be subordinate.
                                                        vii.      UC receives an execution lien by reducing its claim to a judgment, obtaining a writ of execution, and having the sheriff levy on the assets.
1.      Levy both crates the lien and perfects it by sheriff’s possession.
                                                      viii.      Time: Because priority is based on time, it is important to document that time.
1.      When officers receive notice, they immediately stamp and date the form with the time received.
2.      The sheriff who seizes property pursuant to a writ of execution will immediately record the date and time of seizure.
3.      Records can be used to prove these dates and times when disputes arise.
4.      However, perfection can be achieved at times in a way that precludes recording the time and date, in which case the time and date can be proven with other evidence.
5.      Dates and times will determine the priority of liens.