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Secured Transactions
University of South Carolina School of Law
Lacy, Philip T.

Secured Transactions
Professor Lacy
Fall 2011
Two basic types of transactions:
1.) Secured credit secured by a consensual lien on personal property.
2.) Transfer, including the sale of certain rights to payment. (Sale of a receivable)
·       Sale of promissory note, accounts, chattel paper, intangibles. (within the scope of Article 9).
Three types of disputes:
1.) Attachment: the creditor has a security interest enforceable against the debtor.
Requirements for attachment: (9-203(b))
§  Ask: did the parties go through all of the requirements of this provision?
§  Security agreement
2.) Perfection: an act that gives public notice that the C may have a security interest, lien on the D's property.
3.) Priority: When there are two Article 9 secured creditors, both have security interests that have attached, and both have perfected.
§  Who gets the collateral?
Example: Dealer is in the business of selling new cars (GM).
Bank———-makes loan to ———->Dealer (dealer then uses that loan to pay GM). Bank then has a security interest in the car to secure the dealer's obligation to repay the loan that allows them to acquire the car from GM. Bank will perfect security interest by filing financing statement, indexed against the name of the dealer.
·       Typically dealer must repay loan made by bank in short period of time after dealer has sold the new cars.
Next transaction is:
Dealer————>Consumer buyer (typically buyer will make down payment) but will agree to pay in installments over time (conditional sales contract). The dealer agrees to extend credit to buyer to pay in future installments, the extension of credit is secured by a lien (security interest on car). If B defaults, D can repossess vehicle.
·       D has to pay off loan to bank within a very short amount of time after D sells car to buyer. Where does cash come from? Typically the dealer sells the conditional sales contract (chattel paper) to finance company for cash.
·       Where does the finance company get the money to buy chattel paper from dealer. Its possible that they will be sufficiently financed so that they have cash to buy conditional sales contracts, but if the finance company is GMAC, they will sell the conditional sales contracts to an entity to a special purpose vehicle (all they do is buy receivables from the finance company), SPV will pay cash for receivables to  GMAC.  Usually a second SPV (usually a trust) buys the pool of conditional sales contracts from the first one. The second SPV usually issues securities (they are debt securities to investors).
·       Usually that SPV #2 would collect all of the payments and the payments are used first to pay the investors holding the AAA, AA, etc. The final person to get paid, would be the holders of the equity tranche. The interest rates from the buyers of these securities are pretty low. (They are pretty safe). The people in the bottom of the equity tranche would take the first loss, and therefore have the highest rates.
Rights of an unsecured creditor:
·         Before judgment or its equivalent, an unsecured creditor has no rights at law or in equity in the property of his debtor. For seller to collect, must hire lawyer to sue D on promissory note and obtain money judgment against D.
·         Then must authorize sheriff to seize (levy on) D's assets and sell them. Seizure results in transfer from D to C of interest in the seized property, called judicial lien. Seller becomes lien creditor and has rights akin to a C holding a security interest.
§ 9-317(a). Interests That Take Priority Over or Take Free of Security Interest or Agricultural Lien.
(a) [Conflicting security interests and rights of lien creditors.] A security interest or agricultural lien is subordinate to the rights of:
(1) a person entitled to priority under Section 9-322; and
(2) except as otherwise provided in subsection (e), a person that becomes a lien creditor before the earlier of the time:
(A) the security interest or agricultural lien is perfected; or
(B) one of the conditions specified in Section 9-203(b)(3) is met and a financing statement covering the collateral is filed
Rights of Secured creditor:
·         Property right is a lien and a typical consensual lien is a security interest.
·         When parties agree the security interest attaches and becomes enforceable against D in respect to the property.
·         When debtor defaults, the creditor has immediate security interest in whatever property it is.
·         Security interest gives the creditor a preference in the insolvency of the debtor. Gives the C leverage.
·         Attachment:
§ 9-203. Attachment and Enforceability of Security Interest; Proceeds; Supporting Obligations; Formal Requisites.
(a) [Attachment.] A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.
S.O.F.—       (b) [Enforceability.] Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with
respect to the collateral only if :
(1) value has been given; (usually a party gives value either by making a loan or a credit sale to the debtor)
(2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; (The debtor meets the rights-in-collateral test bc its owns the collateral)
(3) one of the following conditions is met:
(A) the debtor has authenticated a security agreement that provides a description of the collateral (Grabowski)and, if the security interest covers timber to be cut, a description of the land concerned; (Statute of Frauds)
·         A security agreement means an agreement that creates or provides for a security interest. (9-102(a)(73).  By signing the agreement the debtor authenticates it (9-102)(a)(7).
·         “Authenticate” is defined in(9-102(a)(7) to include either signing a record or adopting a symbol or encrypt with a present intent of the authenticating person to identify the person or adopt or accept the record. (So if on paper, then authenticates by signing, if on electronic medium then authenticates by identifying himself and manifesting acceptance of terms of agreement).
·         9-201(b)(37): “to sign” means to use any symbol executed or adopted with present intent to adopt/accept a writing.
·         9-201(b)(43): “writing” includes printing, typewriting, any other intention reduction to tangible form.
·         1-201(b)(31): “record” is information that is stored in an electronic medium that is retrievable in perceivable form.
·         A writing arises from the definition of “authenticate”, it’s an indirect definition.
·         Example: Wire transfer from P, who gets a payment order from Chicago Bank to NY Bank, who then issues the transfer to Seller. P grants the Chicago Bank a security interest in collateral sufficient to secure his obligation to repay a loan. Typically the bank won't make a loan for the benefit of P without security. Over the phone, P agrees to give Chicago Bank security interest in collateral.
·         If P defaults on obligation to repay loan, the phone convo doesn’t grant a security interest to Chicago Bank. P didn't authenticate, there was no written or electronically stored record that he signed or authenticated. If bank tape recorded the convo, then cmt 9a to 9-102 would allow that to authenticate. An email would also work as well.
·         Example: A has engagement ring and grants security interest to Uncle in it. 9-203(b)(3)(B) says if the secured party has possession of the tangible property, then an oral agreement is enforceable.
(B) the collateral is not a certificated security and is in the possession of the secured party under Section 9-313 pursuant to the debtor's security agreement;
(C) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under Section 8-301 pursuant to the debtor's security agreement; or
(D) the collateral is deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights, and the secured party has control under Section 9-104, 9-105, 9-106, or 9-107 pursuant to the debtor's security agreement.
·         “Record” includes info in a tangible form on paper as well as in an intangible form that is stored in  an electronic or other medium and is retrievable in perceivable form. (9-102(a)(69)
·         “record” might include magnetic media, optical discs, digital voice messaging systems, electronic mail, audio tapes, photographic media, paper.
·         The second  document is a financing statement which is signed by both parties and filed for public notice.  Bollinger discusses whether a financing statement may serve as a security agreement if signed by both parties? (9-402 says that a security agreement can serve as a financing statement if signed by both parties.)
·         Composite Document Rule/ Attachment:
·         In Re Bollinger (Pro-secured creditor view)
·         Can a C assert a secured claim against a debtor when no formal security agreement was ever signed, but where various documents executed in connection with a loan evince an intent to create a security interest?
·         Facts: ICC made loan to Bollinger for 150k. As evidence of loan B signs promissory note and security agreement, ICC perfected security interest by filing financing statement. B repaid most of loan (reduced debt to 65k) but entered into new loan agreement with Z & J later where they were lent more.
·         Z &J paid off the rest of what was owed to ICC (65k used to satisfy debt and paid Bollinger 85k left over) in return for an assignment by ICC to Z&J of the original note and security agreement bt Bollinger and ICC. However, no formal agreement made bt Bollinger and Z&J, Z&J did execute a promissory note, record a new financing statement signed by B containing detailed list of collateral.  B later filed

J had just bought promissory note and not filed FS, etc…what would Z&J's rights be against Bollinger?
§  9-109(a)(3): sale of security interest.
§  9-203(g): person who has security interest in right to receive payment automatically gets security interest in underlying mortgage/security
§  9-310: if you take assignment of security interest, you need do nothing to perfect.
·         9-322(a). Priorities Among Conflicting Security Interests in and Agricultural Liens on Same Collateral.
(a) [General priority rules.] Except as otherwise provided in this section, priority among conflicting security interests and agricultural liens in the same collateral is determined according to the following rules:
(1) Conflicting perfected security interests and agricultural liens rank according to priority in time of filing or perfection. Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest or agricultural lien is first perfected, if there is no period thereafter when there is neither filing nor perfection.
(2) A perfected security interest or agricultural lien has priority over a conflicting unperfected security interest or agricultural lien.
(3) The first security interest or agricultural lien to attach or become effective has priority if conflicting security interests and agricultural liens are unperfected.
·       The secured party can rely upon the earlier date of filing for perfection. If you file first you will be accorded priority even if at that point you have not entered into a security agreement.
·       9-308:
(a): must attach, perfect, complete all the steps necessary to complete.
·       Ex: Debtor says for Bank to file FS for equipment. However, this takes a while. If the FS was filed on 7/1 and by 8/1 Bank has completed due dilligence, it decides to grant loan and enters into security agreement with D for loan. When did the banks security interest attach?
§  Attachment wont occur until S.A. describing collateral, bank gives value, and D has rights in collateral.
§  Perfected security interest won't occur until all steps taken on 7/1, but security interest didn’t attach until 8/1 so bank did have perfected interest until 8/1.
§  What if on 7/15 the Debtor borrows funds from finance company pursuant to written security agreement and finco files financing statement on 7/15. Finance company's security interest is perfect as of 7/15 bc its attached under 9-203 and steps for perfection completed.
§  Priority? 9-322 tells us that the bank for priority purposes can rely upon the earlier date of filing (7/1), rather than later date of perfection.
·         A CL rule would tell us we must rely on the date in which the bank got a property interest in the property (First in Time rule)– Bank would have to use the 8/1 date. But bank would win under Article 9.
·       9-502(d): secured party can file financing statement before security agreement is executed or security agreement attaches. 9-502 would validate the Bank's filing in the previous hypo.
·       Lacy says that courts should hold that a filed financing statement not sufficient as S.A. bc its good and common practice for creditor to file financing statement before decision made to enter into secured transaction.  Also not every negotiation results in a secured agreement. There is no proof that bc F.S. filed that creditor actually made the loan and got security interest in collateral.
·         Current Article 9 (revised): Security Agreement MUST be signed by D, F.S. DOES NOT fulfill requirements. This doesn't mean Bollinger issue goes away. Many parties don't get a formal security agreement bc they get sloppy. A secured party may be able to est security interest through analysis of composite documents. Court will look to see if composite docs= security agreement.
·         9-502(a): debtor not required to sign financing statement. The code seeks to protect debtors from unauthorized filings by requiring secured party to get authenticated writing/record.