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Secured Transactions
Villanova University School of Law
Taggart, Walter John

Outline: Secured Transactions (Taggart) Fall 2009

1) Chapter 1: Creating a SI

a) Why Secured Credit?

i) Introductory Notes

(1) reduces creditor’s risk of not being paid back & expands the volume of credit

(2) secured creditors are first in priority over unsecured creditors in bankruptcy

(3) unsecured loans are based on borrower’s projected cash flow and creditworthiness

(a) unsecured creditors reduce their risk by closely monitoring borrower’s activities against a background of covenants in the loan agreement

(b) most credit and debit card credit is unsecured

ii) Rights of Unsecured Creditors

(1) Before judgment an unsecured creditor has no rights at law or in equity in the property of his debtor

(a) Example: Seller sells wine barrels to Debtor. In exchange for barrels, Debtor makes a down payment and gives Seller a note. Debtor defaults. How can Seller collect from Debtor?

(i) Seller must sue debtor on the promissory note and obtain a money judgment against Debtor. Then it must do whatever state law requires to have the sheriff seize (levy on) Debtor’s assets and sell them in payment of the judgment (subject to some exceptions protecting certain debtor property).

1. Seizure can be physical or by the public filing of a document. Either way, seizure transfers from Debtor to Seller an interest in the seized property. The interest= a judicial lien. Seller is now a lien creditor.

(2) Disadvantages of unsecured creditors

(a) Process of obtaining judicial lien is expensive. Often more expensive than the outstanding balance is worth.

(i) However, judgment could include attorney’s fees if the promissory note provided for them

(b) Debtor may have no more assets, so Seller would be out payment and attorney’s fees.

(c) If Debtor files for bankruptcy, other creditors could obtain judicial liens against Debtor. Thus, they could deprive Seller of payment if they win the “race to the court house.”

(i) Unsecured creditors are treated as secured creditors in bankruptcy once they obtain a judicial lien

(d) After secured creditors are paid, Seller must share leftover assets with other unsecured creditors pro rata. Thus, Seller still may not obtain full payment.

iii) Rights of Secured Creditors

(1) Security Interest: consensual lien on Debtor’s property

(2) Upon Debtor’s default, Seller may retake the barrels from Debtor, usually without going to court, and resell them at auction conducted by Seller at which Seller can bid

(a) If proceeds of resale are inadequate to discharge the debt and Seller wishes to collect the amount of the deficiency, then Seller must bring suit against Debtor and obtain judgment for deficiency

(3) Secured claims trump unsecured claims unless Art. 9 provides otherwise. See 9-201(a).

(4) When Art. 9 provides otherwise

(a) Unperfected SIs are subordinate to lien creditors in bankruptcy. See 9-317(a)(2)(A).

(i) Trustee in bankruptcy acquires lien creditor status as soon as debtor files for bankruptcy (9-102(a)(52)(C)), so Seller’s unperfected SI may be avoided by trustee under BC 544(a).

(5) Advantages of secured credit

(a) Efficiency!!!

iv) Secured Credit & Equitable Remedies

(1) Except under unusual circumstances, equitable remedies such as restitution must defer to rights given a secured creditor under the UCC. See Knox v. Phoenix Leasing Inc., 35 Cal.Rptr.2d 141 (1994). That is, an unsecured seller involved with a secured creditor (lender) in the same transaction may not claim unjust enrichment against secured creditor when that creditor collects upon debtor’s default.

(a) One reason creditors obtain SIs is to relieve themselves of having to monitor debtors.

b) Introduction to Article 9

i) Definitions (9-102)

(1) Debtor: the person whose property is subject to the creditor’s SI. See 9-102(a)(28)

(2) Obligor: the person who owes payment of an unsecured debtor. See 9-102(a)(59).

(a) Usually this person is the same as the debtor

(3) Secured party: creditor in whose favor the SI is created. See 9-102(a)(72).

(4) Security agreement: agreement that creates the SI. The medium may be either tangible of electronic. See 9-102(a)(73).

(5) SI: interest in property that secures payment of the debt. Applies to all articles of UCC and is found in Art. 1. Also applies to specific transactions such as consignments and sales of accounts that do not create actual SIs but are covered by Art. 9. See 1-102(b)(35). In these cases, buyer/consignor = secured party, seller/consignee = debtor.

(6) Collateral: property subject to the SI. See 9-102(a)(12). Includes “proceeds.” 9-102(a)(12)(A).

(7) Financing Statement: record (tangible or electronic) that the secured party files in public records, usually in the state’s filing office. See 9-102(a)(39).

(8) Attachment: a SI attaches to collateral when it becomes enforceable against the debtor. This usually occurs when the debtor and secured party have entered into a SA and the secured party has given value to the debtor, either by making a loan or selling property on credit to the debtor. See 9-203(a).

(9) Perfection: SI is perfected when it has attached and the secured party has either filed a financing statement or taken possession of the collateral. In some cases, perfection occurs at the time of attachment. Perfection establishes the secured party’s priority in the collateral with respect to third parties. See 9-308(a).

(10) Proceeds: property acquired by debtor upon sale, lease, license or other disposition of the collateral. Covers money, checks, obligations to pay, and credit card receivables. See 9-102(a)(64). The SI in collateral carries over to the proceeds. See 9-315(a)(2).

(11) Record: information either in tangible or electronic form that is retrievable in perceivable form. See 9-102(a)(69).

c) Attachment:

i) The SA

(1) 9-203(b): A SI attaches when the SP gives value, the debtor has rights in the collateral (owns the collateral), and one of the conditions of 9-203(b)(3) is met.

(a) Authenticating a record that provides a description of the collateral is the most usual condition that is used.

(i) When record is tangible, it is authenticated when debtor signs it. See 9-102(a)(7).

(ii) A record may be electronic. See Comment 9a to 9-102 for what constitutes a record. When it electronic, a signature need not be used for authentication. Other authentication methods are acceptable. See 9-102(a)(7).

(2)See problems pg. 23

ii) Composite document rule: See In re: Bollinger Corp., 614 F.2d 924 (3d Cir. 1980).

(1) Rule: a “SA” is not the only way to satisfy 9-203(b). Other signed documents combined with UCC-1 that describes the collateral may create a SI if they show a debtor’s intent to create a SI

(a) These “composite” documents must be authenticated (either by signature or e-signature) in order to create a SI; without authentication, they are not enough to evidence intent

(i) This could constitute the “authenticated record” requirement in lieu of the SA

(2) Example: Bollinger

(a) Signed promissory note, UCC-1 describing collateral, and debtor’s own correspondence collectively satisfied § 9-203(b) to constitute a sufficient “SA”

(b) Letters from Bollinger (Debtor) to Z&J asked about ability to substitute collateral w/out Z&J’s prior approval

(c) Court: letters wouldn’t make sense if Debtor had not agreed to create a SI

(3) Minority view: the article 9 requirements for creating a SI are so minimal and the benefits conferred by secured creditor status are so great that we should demand that the creditor to comply fully with the requirements

(4)See problems pg. 30

iii) Description of Collateral

(1) For a SI to be enforceable under 9-203(b)(3)(A), the SA must describe the collateral

(2) Under 9-108(a), a description is sufficient if it “reasonably identifies what is described”

(3) Comment 2 to 9-108: sufficiency of description is whether it “make[s] possible the identification of the collateral described.”

(4) Under 9-108(b), a description reasonable identifies the collateral if it does so either specifically, or by category, type, or “any other method if the identify of the collateral is objectively determinable.” 9-108(b)(6).

(a) The article does not indicate what constitutes “category”

(b) “Type” presumably means those set out in 9-102(a) (accounts, inventory, etc.)

(i) “Type” descriptions are most common

(ii) 9-108(e) states description by type is not sufficient re: commercial tort claims, and (in consumer transactions) consumer goods, security entitlements, securities accounts, and commodities accounts

(5) Under 9-108(c), super generic descriptions like “all the debtor’s personal property” are not sufficient descriptions

(a) In contrast, 9-504(2) approves a description of collateral in a financing statement if it “covers all assets or all personal property”

(6) Synthesis of above rules: a description is sufficient

creditor, and must share the assets of the estate pro rata with other unsecured creditors.

(1) Trustee represents the unsecured creditors.

ii) 9-308-9-316 offer detailed guidelines for how SI’s are perfected:

(1) Automatic: some SI’s are automatically perfected upon attachment. 9-309 (outlining instances where perfection occurs at attachment).

(a) Example: PMSI’s are automatically perfected upon attachment and are good against other SPs and trustees in bankruptcy, but not against a subsequent consumer who buys the property from the first consumer (bona fide purchaser). 9-320(b). SI’s in proceeds are also perfected upon attachment of the SI to the original collateral. 9-315(a).

(b) Temporary perfection: automatic perfection that endures for only a limited time; 9-310((b)(5), (9). It is possible with instruments, certified securities, negotiable documents, and goods in the possession of a bailee other than one who has issued a negotiable document for them. 9-312(e)-(g). It is also available with respect to proceeds. 9-315(d)(3).

(2) Possession: possession of the collateral by the SP constitutes perfection with respect to goods, instruments, negotiable documents, chattel paper, money, and certified securities. 9-313(a).

(a) Only applies to types of collateral that may be possessed (see above).

(b) In most cases where perfection by possession is sufficient, perfection could also be achieved by filing.

(i) Applies to: goods, instruments, negotiable documents, chattel paper, and certifies securities. 9-312(a).

(ii) Does not apply to money, which can be perfected only by possession. 9-312(b)(3).

(3) Control: ability to dispose of collateral unilaterally, without cooperation of the debtor. Comment 1 & 7 to 8-106.

(a) When perfection by control is permitted, the methods of control are enumerated.

(i) When permitted: for letter of credit rights, investment property, electronic chattel paper, deposit accounts. 9-314(a).

1. for deposit accounts, only way to perfect as original collateral is by control. 9-312(b)(1).

a. Deposit account: checking or savings account at a bank

b. See Comment 5 to 9-312.

c. if funds added to a deposit account are proceeds, a SI perfected in those proceeds follows into the account only to the extent the proceeds are traceable. 9-315.

(4) Compliance with other law: SI’s subject to other law can be perfected only by compliance with that other law. 9-311. Filing under art. 9 is not effective. Compliance with the law is equivalent to filing under art. 9.

(5) Filing: under 9-310(a), perfection must be by a filing a financing statement. 9-310(b) sets out exceptions listed above.

(a) SI’s in accounts and payment intangibles can be perfected only by filing.

(6)See problem p. 53.

b) Perfection by filing

i) Notice filing: the only record filed is a financing statement that merely gives notice that a SI may exist in the debtor’s collateral.

(1) See 9-521(a) to view the UCC financing statement form (UCC 1)

(2) Central filing: must file the financing statement in one central location (usually in the state filing office). 9-501(a)(2).

(3) Only the financing statement is available to searchers—they may not see the SA without the creditor’s permission. 9-210 (addressing problems a searcher faces in trying to figure out exactly what collateral the SI is in).

(a) See problems p. 55.

ii) Sufficiency of Financing Statement

9-502(a): a financing statement is “sufficient” only if it provides the names of the debtor and SP (or SP’s representative) (9-503), and indicates