Secured Transactions Outline
I. Introduction
Entitlements: Interests in Personal Property
i. personal property= Anything that’s not real estate and may be tangible or intangible
ii. Ownership: the rights to possess, to use, to convey, to give away
iii. Lien/security interest: interest in property that secures payment or performance of an obligation. It assumes that the holder of a property interest (debtor) owes a legal obligation (generally an obligation to pay) to the creditor. When the lien/security interest attaches to the debtor, the creditor gains right to seize the property interest and sell it so that proceeds discharge the debt.
1. voluntary liens (consumer liens) and involuntary liens (e.g. tax liens; judicial liens)
2. judicial lien: involuntary lien arising through judicial process. Most common is the creditor having a money judgment against the debtor. The creditor uses a levy (levies execution) to enforce judgment by judicial process.
Economics of credit and debt (contractual obligation to pay debt)
Promissory note= evidences the debt
Principal=amount that’s financed (not the base price of the property)
Other charges:
i. interest;
ii. “pure-time value of money”: refers to base value for the use of $ over time – economists generally assess at 3%
iii. Transaction costs; administration costs
iv. risk: any uncertainty—threat to the creditors to collect what he’s owned when he’s owed by the debtor. Risk includes inflation – a period of rapid inflation diminishes the return on the creditor’s loan.
1. Unsecured credit has a higher risk of non-payment than secured credit:
2. the purpose of secured transactions is to reduce the risk of non-payment by the debtor.
Unsecured Credit
Hypo: Company signs unsecured promissory note. Question: what happens if company doesn’t pay? (It owes $224,000 on Sept 1, 2005.)
Answer: Without more, creditor has no legal authority to take anything belonging to Company because it has no property interest in anything belonging to Company. All Creditor has is contract claim for breach and has to sue in contract action. To recover, Creditor must show: formation; enforceability; terms/breach/damages, resulting in judgment for creditor.
But how to collect judgment? Creditor is judgment creditor and Company is judgment debtor. Collecting money judgment:
1. J. creditor sues out writ of execution. The writ goes to the sheriff in the county where debtor is located. The writ orders the sheriff to levy upon (to seize the property) of debtor and to sell the property at a sheriff’s sale.
2. A judicial lien arises in favor of j. creditor attaches to seized property. (an involuntary lien).
3. 9-102(a)(54)(A): a judgment creditor w/a judicial lien= a lien creditor
4. sheriff’s sale: proceeds will go to satisfy the debt.
5. Problems:
a. process lengthy, costly, and risky.
b. If debtor fraudulently refuses to pay, the debtor may dissipate the property – there’s nothing to seize.
c. Other creditors may get there first. N.B: a secured creditor will have priority over unsecured creditors
d. If Company goes into bankruptcy, all creditor could do would be to file a claim in bankruptcy – limiting recovery.
6. In real world, there are very few lien creditors
Law of Personal Property/Sale of Goods:
1. all “goods”= personal property.
2. Sale of goods:
c. sale : 2-106(1)= passage of title for a price.
d. sale of goods on credit:
e. can seller recover the goods – can he recover in replevin if buyer defaults?
→General Rule: NO, absent highly special circumstances; seller can only recover the amount owed in a breach of contract action.
f. What happens to the title of goods? 2-401(2): title attaches to buyer at time of delivery even though the buyer hasn’t paid.
g. Exceptions to the general rule that seller can’t reclaim goods:
i. Seller’s remedies on Discovery of Buyer’s Insolvency 2-702. If seller discovers that B has rec’ed goods on credit while insolvent, seller may reclaim the goods upon demand made within a R time after Buyer’s receipt of the goods. (Rule in most states: 10 days).
ii. Seller’s remedies when buyer misrepresents his identity to purchase goods on credit. This is not treated as a misrepresentation of insolvency under 2-702 but as a form of fraud. Remedies:
iii. Recission (remedy in equity) of underlying transaction as a matter of law. This means to restore the status quo before the transaction occurred. If you wipe out the sale, the buyer has goods to which he’s no longer entitled, hence, seller gets goods back.
iv. Seller’s remedy if buyer sends check and seller sends goods but buyer’s check bounces? Seller can get the goods back. 2-507(2). If payment due and demanded on the delivery to the buyer of goods or docs of title, the seller may reclaim the goods delivered upon a demand made w/in a reasonable time after the seller discovers or should have discovered that the payment was made.
b. Conditional Sale Contract– What if seller reserves title to goods until FINAL PAYMENT by buyer? This is called a conditional sale contract. →seller’s reservation of title creates a security interest in goods under Article IX.] Purchase money security interest (PMSI)– 9-103.
5. Conveyancing–background rules:
§ 2-403. Power to Transfer; Good Faith Purchase of Goods; Entrusting
(1) A purchaser of goods acquires all title which his transferor had or had power to transfer except that a purchaser of a limited interest acquires rights only to the extent of the interest purchased. A person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though
(a) the transferor was deceived as to the identity of the purchaser, or
(b) the delivery was in exchange for a check which is later dishonored, or
(c) it was agreed that the transaction was to be a “cash sale”, or
(d) the delivery was procured through fraud punishable as larcenous under the criminal law.
1. Hence:
a. Unless otherwise agreed, transferor transfers all his interest in the property to the transferee.
b. transferor cannot transfer more interest in the property than what he has
i. E.G. Assume A leases Car to B; B cannot sell Car to C. B has a leasehold and can’t transfer an ownership interest, a greater interest than his leasehold.
2. Problem 1.3.1 – bona fide purchaser for value
a. A prevails because B never had good title. Traditional rule is that a thief has no rights or “void title.” 2-403(1)
b. A can sue C for conversion – interference with possessory right. This is so even though C is innocent and a b.f. purchaser for value. Conversion is a strict liability tort.
c. A can sue D for damages or replevin.
d. 2-312(1): Implied warranty of good title permits D to recover against C (and C has a c/a against B) “There is in a contract for sale a warranty by the seller that the title conveyed shall be good and its transfer rightful.”
3. Title:
a. Good title: basic ownership interest
b. Voidable title- frauds -holder can transfer good title to BFP for value 2-403(1)
c. Void title – thieves – no title
4. Problem 1.3.2
a. A sold to B as result of fraud. When B was a thief and broke into warehouse, A was a pure victim – he made no choice. But, in this case, A is dealing w/B and has choices – A can refuse to sell on credit. A could recover from B in recission or replevin because B has voidable title. When B defrauds A, B has voidable title.
b. When B resells to C, a BFP for value, can A get the cotton from C? No. 2-403 Now the balance of equities have tipped – a person w/voidable title (B) can transfer good title, full ownership to bfp for value (C)
c. Would following make any difference:
i. C is inb busiess – no
ii. C is in cotton business – not necessarily, without more
iii. C is a cotton dealer who never dealt w/B previously and took no measures when customary for …then there might be argument that C not acting in good faith. If C doesn’t act in g/f, then not a bfp for value and A can sue C for recission or replevin. [good faith means “honesty in fact” at a minimum; UCC adds “reasonable commercial standards of fair dealing.”] OSF are judgment creditors who get a writ of execution. Lendrum is the Sheriff, and seizes – levies upon – the goods. Judgment creditors→lien creditors.
d. What result if C paid $60k for $100K worth of cotton? There could be legitimate reasons why lower price – it’s not conclusive; but, 60% of fair market value is evidence that court may consider along w/other evidence to determine whether C a bfp for value acting in g/f.
e. 1-201(44): a promise to pay is treated as value
f. Delivery? Does C have a right to recover the cotton from B prior to delivery if A has come forward. 2-502: Buyer C has right to recover the goods from B if:
i. the goods are identified in the K, and
ii. C has paid any of the purchase price
Transferring more “title” than transferor has: Art. IX and BIOCOB
9-320. BUYER OF GOODS.
(a) [Buyer in ordinary course of business.]
Except as otherwise provided in subsection (e), a buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.
(b) [Buyer of consumer goods.]
Except as otherwise provided in subsection (e), a buyer of goods from a person who used or bought the goods for use primarily for personal, family, or household purposes takes free of a security interest, even if perfected, if the buyer buys:
(1) without knowledge of the security interest;
(2) for value;
(3) primarily for the buyer’s personal, family, or household purposes; and
(4) before the filing of a financing statement covering the goods.
(c) [Effectiveness of filing for subsection (b).]
To the extent that it affects the priority of a security interest over a buyer of goods under subsection (b), the period of effectiveness of a filing made in the jurisdiction in which the seller is located is governed by Section 9-316(a) and (b).
(d) [Buyer in ordinary
n possession of collateral owns that collateral. The apparent/ostensible ownership problem arises when person who is in possession doesn’t actually own collateral, that person has the capacity to mislead a creditor or buyer who presumes ownership.
o Perfection under Art. IX is one of the set of processes by which a secured creditor makes public an interest in a property belonging to the debtor
o 9-310(a)(b): financing statement: a statement of the existence of a security interest in the property of the debtor that is filed at a public office, e.g. w/Secretary of State.
6. Bankruptcy
· A separate set of federal law applicable when debtor goes bankrupt
Related Code Provision – filing statement:
§ 9-310. WHEN FILING REQUIRED TO PERFECT SECURITY INTEREST OR AGRICULTURAL LIEN; SECURITY INTERESTS AND AGRICULTURAL LIENS TO WHICH FILING PROVISIONS DO NOT APPLY.
(a) [General rule: perfection by filing.]
Except as otherwise provided in subsection (b) and Section 9-312(b), a financing statement must be filed to perfect all security interests and agricultural liens.
(b) [Exceptions: filing not necessary.]
The filing of a financing statement is not necessary to perfect a security interest:
(1) that is perfected under Section 9-308(d), (e), (f), or (g);
(2) that is perfected under Section 9-309 when it attaches;
(3) in property subject to a statute, regulation, or treaty described in Section 9-311(a);
(4) in goods in possession of a bailee which is perfected under Section 9-312(d)(1) or (2);
(5) in certificated securities, documents, goods, or instruments which is perfected without filing, control, or possession under Section 9-312(e), (f), or (g);
(6) in collateral in the secured party’s possession under Section 9-313;
(7) in a certificated security which is perfected by delivery of the security certificate to the secured party under Section 9-313;
(8) in deposit accounts, electronic chattel paper, electronic documents, investment property, or letter-of-credit rights which is perfected by control under Section 9-314;
(9) in proceeds which is perfected under Section 9-315; or
(10) that is perfected under Section 9-316.
(c) [Assignment of perfected security interest.]
If a secured party assigns a perfected security interest or agricultural lien, a filing under this article is not required to continue the perfected status of the security interest against creditors of and transferees from the original debtor.
Hypo (p. 5 of handout): secured transaction between Amer Whistle and Bank One. Bank One loans $ to Amer W on a secured basis to secure AW’s promise to repay borrowed amount. Components of security agreement:
· Secured party and debtor
· Secured obligations
· Security interest and collateral (N.B: one security agreement can create an after-acquiring property clause. 9-204)
· Events of Default – defined as failure to pay or perform any secured obligation when due to secured party
· Remedies: If debtor defaults, secured party gets to seize property, sell them, and apply proceeds to discharge the obligations.
Without a security agreement, a loan or obligation is unsecured. There are 2 functions of security interests:
reduces risk to bank of non-payment
gives collateral as hostage to Bank One, which further increases the likelihood that Bank One will be paid over unsecured debts.
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Perfection:
about half the states have financing statements online.
Often, filed with the Secretary of State.
A continuation statement is an amendment to the original financing statement. Timing: You can file a continuation anytime before 6 months of the lapse of the original financing statement. A continuation statement requires a reference number (the original file number) to the original financing statement. Besides the file number, you must get the name of the debtor to locate the original financing statement.
1. Perfection: not relevant as between the original creditor and the original debtor. The security interest is created by the original security agreement. The debtor needs no more notice than that of his own agreement. So why should the secured creditor get publicity? Priority — The purpose of perfection is to establish priority over other creditors.
2. perfection is a necessary condition to to a creditor to have over other claimants of the collateral of the debtor. an unperfected security interest (one w/out public notice) is almost always subordinate to a rival claimant. The perfected one will win almost every time.
3. A bankruptcy trustee will have priority over an unperfected security interest.
4. Examples:
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