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

Professor Jacoby
Secured Transactions
Fall 2013
Unsecured Creditors
1.    How Do Unsecured Creditors Compel Payment?
a.     No Self-Help Seizure
An unsecured creditor is prohibited from self-help seizure of debtor’s property. Can be liable civilly for conversion or criminally for trespass or larceny.
b.     Debt Collection Process
The creditor must sue the debtor and get a judgment. Then she must execute by getting a writ of execution. After she finds non-exempt property, she can have the sheriff levy (physically seize) the property and auction it. Money from the foreclosure sale goes to the creditor.
1.     Wrongful Collection Practices
If the creditor demands payment from the debtor in an unreasonable manner, she may incur liability for wrongful collection practices.
2.     Exempt Property
Exemption statutes provide for certain property to be exempt from execution so that property is exempt from an UNSECURED creditor.
Vitale v. Hotel California, Inc.
·         Successive levies possible under one writ if made before the return day.
·         Here, 9 levies within 1-2 months was unusual but not unreasonable because it was a bar, seizure of $100s at once shows reasonable.
·         Amercement: If the sheriff fails to perform any duty imposed on him by law, subject to amount of loss and damage
Ellerbee v. County of Los Angeles
·         Sheriff has discretion as to WHEN in instruction a levy is executed “ASAP” because the statutory provision for the duty of public entity doesn’t specify anything about compliance with deadline or timing requests in judgment creditor’s instructions.
2.    Limitations on Compelling Payment
a.     Using the Asset
Until the sheriff arrives to levy, the debtor can continue to transact business and use the asset.
b.     Payment Preferences
Not fraudulent for the debtor to pay one of its creditors, even if it leaves nothing for others, so long as the transaction was not fraudulent (and not in bankruptcy)
c.     Fraudulent Transfers
·         Two elements: (1) actual intent and (2) reasonably equivalent value.
·         A transfer made in good faith with no wrongful intent is fraudulent if the elements of this provision are present.
·         Issue here is by the time the creditor discovers the transfer, the transferee may have re-transferred.
Real Property
1.    Foreclosure: Real Property
·         Strict Foreclosure: Foreclosure that does not result in a sale. This cuts off the debtor’s equity of redemption, and the secured creditor becomes the owner of the collateral.
·         Contract for Deed: Contract for sale of real property that provides for the payment of purchase price installments over many years with the deed to be delivered only after last installment paid. Used primarily for real estate with small value on small down payments.
·         The debtor remains in possession until sale. After sale, the purchaser can evict the debtor if the debtor doesn’t leave voluntarily.
·         When a foreclosure case is pending, any interested party can apply for the appointment of a receive; someone who takes custody of property and preserves the value of the estate.
2.    Judicial Sale and Deficiency
·         Statues specify the manner in which foreclosure sale is held. Generally, it is (1) conducted by public official; (2) court orders the sale and has discretion over the manners such as period of advertising, the way bidders identify themselves, etc.; (3) anyone can bid, but generally the secured creditor is the highest bidder.
·         Courts review the circumstances under which the sale is held and confirm the sale before consummated.
·         Debtor or other parties can object that: (a) sale not conducted in accord with law or judgment or foreclosure; (b) sale price was inadequate; (3) if court doesn’t confirm sale; resale scheduled.
a.     Armstrong v. Csurilla
·         A price so low to shock the conscience.
Scope of Article 9
§ 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;
(2) an agricultural lien;
(3) a sale of accounts, chattel paper, payment intangibles, or promissory notes;
(4) a consignment;
1.    “Except as otherwise provided in subsections (c) and (d)”
A federal law that governs security interests preempts state law. There are a number of federal filing schemes that preempt state filing schemes.
Each state’s scheme for creating, transferring, and filing liens on real property is similar to that in Article 9, but each has its own rules.
NOTE: Watch out for transfers that include both real property and personal property. Each interest must be given its own treatment under the appropriate statutes. Also, watch out for fixtures, which occupy a grey area between real property and personal property.
c.     Liens arising by operation of law
For Article 9 purposes, we are interested only in the security interests that arise consensually, by contract. Some liens arise not by agreement but by operation of law (mechanics’ liens, for example).
2.    Article 9 Applies To:
a.     “a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract” 9-109(a)(1)
***Substance governs over form: it doesn’t matter what the parties call the transactions; what matters is its legal effect.
b.     “an agricultural lien” 9-109(A)(2)
The term “agricultural lean” is a term of art having a particular meaning in Article 9.
Article 9 applies to a sale of certain classifications of collateral, and not just a security interest in this collateral.
d.    “A Consignment” 9-104(a)(4)
In transactions described as a consignment, the owner of goods (the “consignor”) delivers them to a seller (the “consignee”) for a sale. If the consignee sells the goods, she pays the consignor a share of the proceeds. If she does not sell the goods, she returns them to the consignor. A problem arises when the consignee has given a creditor a security interest in inventory and the consigned goods look like inventory.
However, the UCC definition of consignment in 9-102(a)(2) is narrower. A transaction is a consignment only if the merchant who receives the goods “Deals in goods of that kind; … is not and auctioneer; and … is not generally known by its creditors to be substantially engaged in selling the goods of others.” Additionally, unless “the aggregate value of the goods is $1,000 or more at the time of delivery,” then it is not a consignment under Article 9. Also, the transaction is a consignment if “the goods are not consumer goods immediately before delivery.” This protects the consumer who makes a consignment agreement with a merchant.
e.      Conditional Sales 2-401; 9-109; 1-201(37)
f.      Leases Intended as Security 1-201(37)
·         Substance governs over form. If, for example, a transaction the parties called a “lease” is deemed not to be a true lease, but a sale with

n instrument.
c.     Accounts (including accounts receivable) §9-102(a)(2)
“Account” … 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…
d.    General Intangibles §9-102(a)(42)
Like “equipment,” this is a residual classification; it is defined by the exclusion of a number of other categories.
Property in this category includes software, licenses (such as liquor licenses), and intellectual property such as copyrights, trademarks, and patents.
Because of this definition, a drafter has to be careful. A grant of a security interest in “general intangibles” does not grant the creditor a security interest in categories enumerated in the exclusions from the definition.
3.    Quasi-Tangibles
Quasi-tangible property evidences a right and also embodies a right, so that a person may transfer the right to a third party by transferring the piece of paper, or by making an effective electronic transfer.
a.     Instruments §9-102(a)(47) and 3-104
“Instrument” means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation
Creating a Security Interest / Attachment § 9-203
1.      Value given?
2.      Debtor has rights in the collateral?
3.      Either:
a.       A security agreement has been authenticated by the debtor that provides a description of the collateral, OR
b.      The collateral is in the possession of the secured party pursuant to a security agreement. See § 9-313.
A security interest is attached when the last of these events below occurs.
1.    Has the Secured Party Given Value?; and
The debtor must get something in return for granting the security interest. It’s usually goods or money, like consideration in contracts. But “value” can exist even when consideration does not.
Even if a creditor has already given a debtor a loan and gives the debtor nothing new in return for promise of rights in more collateral, this qualifies as value. § 1-204(2) provides that there is value if a person acquires rights “as security for … a preexisting claim.”
a.     Value § 1-204
Except as otherwise provided in Articles 3, 4, [and] 5, [and 6], a person gives value for rights if the person acquires them:
(1) in return for a binding commitment to extend credit or for the extension of immediately available credit, whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection;
(2) as security for, or in total or partial satisfaction of, a preexisting claim;
(3) by accepting delivery under a preexisting contract for purchase; or
(4) in return for any consideration sufficient to support a simple contract.