Security Interests in Personal Property
Introduction
I. Enterprise Organizations
a. Sole proprietorship – business owned by one individual.
i. Sole proprietor’s personal property can be held as security for business debts.
b. Unlimited liability – privately organized, not required to be “licensed”.
i. Joint venture – two or more people do something together informally. Each person is liable for debts of the venture.
ii. General partnership – If partnership property is exhausted, then personal property of each partner is taken.
c. Limited Liability Corporation – specifically “licensed” or “registered” by govt.
i. Owners are not liable for debts of the org..
II. Unsecured Transaction
a. Default rule: Transaction is unsecured (sale of goods on credit, loan, etc.)
b. Hypo: American Whistle (AWI) needs operating capital, so borrows $200k at 12% for a year, unsecured, from Bank. Note promises $224k repayment at end of year. What happens if AWI doesn’t repay?
i. Bank may sue AWI for breach of K damages. (judgment for Bank for $224k)
ii. How does Bank enforce the judgment?
1. Bank identifies AWI property for seizure (e.g., inventory, equip., etc)
2. Writ of execution from court to sheriff of county where property resides.
3. Levy of Execution – Bank seizes equipment and inventory
4. Result is a Judicial Lien to judgment creditor on the levied property
a. Lien creates in Bank a property interest in the property seized
5. Execution Sale – sheriff sells attached AWI property at auction
III. Basics of Personal Property Law
a. What is effect of passage of title of goods to buyer if sale is on credit?
i. Title to goods passes to B at time of delivery, with future promise to pay.
ii. If B refuses to pay at later date, title does not re-vest in seller.
1. July 1 sale & delivery of goods in return for promise to pay on Oct 1.
a. Title to goods transfers from S to B on July 1. However, S can reserve legal title to goods until final payment by B, which is treated as creating a security interest (PM) in goods. (final Q)
b. If B fails to pay on Oct 1, S has no legal right to seize the goods.
c. S’s remedy is a breach of K action.
d. Can create a security agreement (creating security interest).
b. Exceptions where S of goods on credit can recover goods from B:
i. Replevin: S has superior possessory right to goods if:
1. S discovers B’s insolvency w/in 10 days of delivery
2. B misrepresents his solvency on a credit application
3. B pays by check, S gets lien on goods. S forecloses if check bounces.
ii. S may rescind underlying transaction + replevin goods if B misrepresents his identity when buying on credit (fraud).
1. B has no right to goods after rescission b/c underlying sale doesn’t exist.
c. Transferability
i. Basic Rules
1. Interests in property are transferable.
2. Person w/interest in property can transfer all or some of his interest.
3. Generally, one cannot transfer more than he owns.
4. Unless otherwise agreed, transferor of interest of personal property transfers all his property interest to the transferee.
ii. Types of Title
1. Good title – full entitlement to interest.
2. Voidable title – fraud, holder can transfer good title to BFP.
3. Void title – no title
iii. Examples
1. A owns car. When A sells car to B, B gets A’s full ownership interest.
2. A owns car. A leases car to B for 1 year. B gets leasehold interest, and A retains residual ownership interest.
3. If B “sells” car to C, C only gets B’s leasehold interest.
a. B can only transfer his lease or sublet car to C
d. Cast of characters
i. Lien Creditor
1. Judgment creditor who gets lien executed (attachment, etc.)
ii. Merchant Seller of Goods
1. Merchantà professional seller of goods
2. Inventoryà goods merchant seller sells
iii. Buyer in ordinary course of [seller’s] bus
rfected secured creditor (see perfection prob. 3.3.2).
2. So, if lien creditor beats security interest at state law, then bankruptcy trustee wipes out security interest in federal bankruptcy.
VI. Automobile Financing
a. Consumer, Lee Able, buys new car from Main Motors lot. $18,000 sale is financed by Main Motors via 48 mo. “retail installment sale K”.
i. Lee Able does not take car subject to 1st Bank’s security interest in Main Motors inventory, b/c he’s a BIOCOB (takes free of sec. interest created by S).
ii. However, Lee doesn’t have the car free of any security interest.
1. In the retail installment K, Lee grants PMSI in car to Main Motors to secure the payment of the purchase price (bought on credit).
b. Main Motors can’t afford to do this, needs cash flow now, so assigns (sells) chattel paper (installment K) to 1st Bank for cash.
i. Chattel Paper = promise to pay + security interest in identified property
ii. Sale of chattel paper creates a security interest in the chattel paper.
c. Cars are subject to Certificates of Title issued by the State
i. Certificate states who owns car + who has security interest in it.
1. Once issued, it’s automatically perfected (no other means required).
Creation of Security Interest
I. Attachment
a. Establishes secured party’s rights in the collateral as against the debtor.
b. 3 req.: 9-203 (sec. interest attaches when last of 3 takes place.)
i. Security Agreement
1. Doesn’t need to be contained in one document.
2. Cross-Security/Cross-Collateral Arrangements:
By terms of security agrmt., all
