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

Secured Transactions – Class Notes: Lacy Fall 2010
·         Secured Transactions
o    Two types of Transactions
·         Debtor borrows money and encourages a credit obligation and by contract grants the creditor a lien on his personal property (Primary type)
§  Ex. Transaction with a car dealership
·         Sign a K in which you buy a car and promise to pay for it in installments over time
·         Installments include finance charges, etc.
·         Obligation to pay installments is going to be secured by security interest in the automobile
·         The significance of having the security interest as a car dealer or assignee, is if the buyer defaults the secured party (creditor) has the right to take possession of the car, sell it, and apply the proceeds of the sale to paying off the debt (Historical, archetype secured transaction)
·         Sale of rights to payment (non-loan type)
§  Ex. A retailer sells goods on unsecured credit
·         He generates accounts-receivable and what the UCC defines as Accounts
·         Retailer then sells his right to receive these payments from the buyer (Acct. Receive) to a financial entity (buys debtor's right to receive these payments) and this transaction is within the scope of 9A and is a very important transaction as it is a linchpin to asset securitization
·         So there are loans, or extensions of credit secured by personal property; the other type is the sale of rights to receive things
o    Extensions of credits secured by security interest in personal property
·         Casebook addresses these by the Wine barrel hypo
§  Hypo: Winery to produce wine and the winery needs barrels to age the wine
·         Winery enters into K with an entity that will supply the barrels
·         K calls for the Winery (buyer) to pay for the barrels at some point in the future
·         So this is a credit transaction, not a cash transaction
§  First Situation
·         Seller delivers them to buyer, but buyer fails to pay for those barrels when the purchase price falls due.  What are the rights of the seller with respect to this situation?  Question: Does our seller have the right to take possession of the barrels? 
·         It seems just that seller should get its barrels back; however, the law is clear that unsecured creditor has no property rights in debtor
·         So what to do?
·         As an unsecured creditor, you have a right to payment of the purchase price.  You would file a lawsuit if you cannot persuade the buyer to pay up. 
·         File lawsuit that there was a K, goods were delivered, Buyer didn't pay
·         Request a money judgment for buyer of barrels
·         If buyer defaults on notice, then you'll get a judgment for the amount of the purchase price of the barrels
·         Here, do you have a lien?  No.  To recover a money judgment, you enter that judgment and get a lien on the debtor's REAL property, but not on PERSONAL property
·         So what do you do to establish a property interest?
·         Writ of execution must be issued to a sheriff then the sheriff has to levy against the assets of the debtor (take possession of)
·         Then, seller has a judgment, writ of exec. is issued, sheriff levies, and then seizes the barrels.  At that point, you have a lien on the barrels.  Then sheriff will sell barrels to pay off debt and satisfy judgment of seller of barrels
·         How to improve the situation?
·         If the seller entered into K at the time of sale with buyer, and prepared a security agreement (which is a K) which included that the Winery grants the seller (the secured party) a lien (a security interest) on the barrels
·         This is significant b/c parties have entered into an enforceable security agreement and creates a security interest on the barrel to secure payment on the purchase price
·         Buyer again defaults, so what are the rights of the seller now?
·         Under 9A, when the debtor defaults under the terms of the security agreement, the secured party has the right to immediate possession of the collateral
·         The seller, with his security interest, has the legal right to immediate possession of the barrels
·         Another issue:  Process of obtaining a judgment and levy of execution is time consuming. 
·         If debtor didn't pay the purchase price, then the debtor probably has other financial problems.  Then the problem is not just the seller's right against the buyer, but the barrel maker's rights against other creditors of the winery who are unpaid and in default and they also want the debtor's assets
·         These creditors might be secured, unsecured, or trustees in bankruptcy
·         A security interest enforceable against the debtor frequently is not enough to ensure that a conflicting creditor does not get priority
·         The barrel seller must perfect the interest (give some form of public notice)
·         So to perfect there is the K of the security interest, and a statement of financing that says the creditor may have a security interest in the property of the debtor
·         General rule: Perfected interest may prevail, but an unperfected interest almost always will lose
·         Priority Issues
·         At the date of bankruptcy commencement, a trustee is appointed, and has the rights of a creditor of the debtor.
·         Everything turns on perfection – if secured party is perfected, it will beat the trustee; However, if unperfected, the trustee will be entitled to priority.
·         Questions to ask about priority: Does the creditor have a security interest attached?  Is it perfected?  Who has priority?
o    In the Marriage problem, the debtor is in default
·         If you have a security interest which is perfected, and you have priority over other conflicting clients
·         If debtor goes into bankruptcy, secured creditor gets paid unsecured doesn't
·         Shadowy-concept: If you are making a loan to a business and debtor wants to take actions/involves itself in behavior that could hurt the creditor.  How does the creditor limit the debtor's desires? 
§  Through K, the creditor can specify what the debtor may/may not do
§  Also, the presence of an 9A security interest gives the creditor a viable threat to put the debtor out of business – this induces the debtor to make payments it would've otherwise deferred 
o    Definitions
·         For Monday: Start with the security agreement: Whether you get a security interest?  Whether the security interest attaches?
o    Bollinger case for Monday.  Important, not b/c of the issue facing the Ct., but the critical part is UNDERSTANDING why Z and G did what they did.   
·         We will discuss In re Bollinger Corp. in class on Monday, August 23 and Tuesday, August 24. The issues arising in the case that we will address include the following:
·         (1) The identity of the parties and their objectives in the litigation;
·         ICC: Original creditor to Bollinger that wanted secured interest in Bollinger's equipment
·         Bollinger: Debtor who needed financing to support its business
·         Z&J: Secondary creditor who financed Bollinger by gaining assets granted in the agreement with ICC regarding a security interest in the Bollinger's equipment
·         (2) Why did the bankruptcy trustee concede that Z&J had an enforceable in Bollinger's equipment to the extent of $65,000;
·          He did not view the promissory note as a security agreement because of the financing statement's apparent purpose of creating a security agreement and viewed it as an assign. and did not consider the communication subsequent to the execution of the promissory note 
·         (3) Why didn't the trustee's concession result in the court holding that Z&J had an enforceable security interest to the extent of $150,000? See section 9-204(c) and footnote 3 on page 27;
·         The DC held that the assignment of the 1972 Bollinger-ICC agreement was sufficient to act as a secured claim
·         (4) What is equitable subrogation and could Z&J have invoked the doctrine to support its assertion that it held a security interest in Bollinger's equipment? See section 1-103(b) and French Lumber Co. v. Commercial Realty & Finance Co., 195 N.E.2d 507 (Mass. 1964);
·         If Z&J can make an argument that they stand in ICC's shoes pursuant to the doctrine of Equitable Subrogation.  In essence, ES could protect Z&J the same way that the assignment would protect Z&J at law.  Normally when a creditor pays of a debtor's lien, the court allows the creditor making that payment subrogated to the lien. 
·         (5) The 1972 Official Text of the UCC governed the dispute in In re Bollinger Corp. Under section 9-402(1) of the 1972 Official Text a financing statement was sufficient if it was (1) signed by the debtor, (2) signed by the secured party, (3) gave the mailing address of the secured party, (4) gave the mailing address of the debtor, and (5) contained a statement indicating the type

security” as adopted by Shelton
·         Based on precedent, no secured claim w/o granting language
·         Amex: As long as statement contains description of collateral and signed by debtor, it serves as a security agreement
·         Other courts: financing statement when read in conjunction with other documents related to the transaction satisfy requirements of 9-203(1)(b)
·         Numeric: Adequate agreement when financing statement coupled with other documents evincing a security interest was agreed upon (COMPOSITE DOCUMENTS)
·         Casco Bank: Allowed financing statement joined w/promissory note to determine whether there was an adequate description of collateral
§  Result was that a  promissory note and financing statement were adequate as security agreement
·         This court disagrees w/Circuit ruling that promissory note alone is adequate as a SA
·         Court agrees with the COMPOSITE DOCUMENT ruling from Casco/Numeric
·         Overall: Better to look at transaction as a whole to determine if writing signed by debtor demonstrates an intent to create a security interest in the collateral
·         Agreed w/bankruptcy judge that intention to create a separate security agreement negates inference that Prom Note constitutes security agreement
·         Financing statement only an inferential basis
·         Intention of parties demonstrated by future intent to create one in the promissory note
·         Such a clarification of whether Bollinger could sub or replace equipment w/o Z&J's consent demonstrates that Z&G had an interest and that such an interest was intended and agreed to by both parties
·         Course of dealing provides evidence that parties intended SA created separate from assigned ICC agreement with Bollinger
·         B/c the detailed list within the financing statement adequately describes the collateral and was signed by Bollinger and the promissory note, the agreement conforms to an Article 9 (9-203(1)(b)'s formal requirements) security agreement under Penn law
·         Pro-secured-creditor: Creditor gives money to debtor, debtor signs Promissory note and financing statement describes the collateral
·         Pro-trustee-in-bankruptcy: Must conform strictly due to the lenient requirements and strong power a secured creditor has to collect debt (don't protect negligent creditor)
o    Creation of a security interest on the personal property of a debtor
o    Creditor retains interest to have a recognized lien on debtor's property unlike an unsecured creditor
o    Gives creditor leverage to get repayment under threat of repossession
o    Attachment when it becomes enforceable against the debtor w/respect to the collateral
o    So when does a security interest become enforceable against the debtor?
·         9-203(b): Three requirements
§  Value must be given by creditor to debtor
§  Debtor must have rights in the collateral
§  SoF: K that grants the creditor a security interest must satisfy one of the subsections of 9-203(b)
·         (B, C, D): Deal w/possessor security interest
§  Where secured party has possession or control of the collateral
§  Code views secured party's possession of collateral as a significant indication of a security agreement so that no other writing/record is required
·         In most cases, secured party doesn't have control, however
§  This is 9-203(b)(3)(A) – secured party must meet requirement of this
·         Debtor has authenticated a SA that describes the description of collateral
·         Must have a security agreement
·         Must be authenticated