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Secured Transactions
Washington & Lee University School of Law
Hoefling, Tricia A.

Professor Tricia Hoefling

Secured Transactions, Spring 2014

Examples of types of questions on the exam: 6-10, 4-30, 5-14, 5-8, 4-19, 4-17, 2-10

Week 1: Introduction

Basics of Bankruptcy (p. 30-33; 38-39; 451-460; 462-468)

· Petition: Debtor may voluntarily file petition for bankruptcy or creditors may force it

o Bankruptcy Estate: immediately created upon filing, contains all of debtor’s interests in property (i.e. debtor’s assets)

o Automatic Stay: automatically enjoins all efforts to collect a pre-petition debt of the debtor or to acquire possession or control of the debtor’s property or the estate’s property (*but automatic attachment continues in proceeds post-petition)

§ Chapter 7: Liquidation process

· Methods of relief from automatic stay—

o Reaffirmation: debtor keeps collateral and in exchange reaffirms the entire debt

o Redemption: debtor redeems its property by paying the loan in full

o Repossession: lender files motion for relief from automatic stay, and if granted, may repossess collateral

§ Chapter 11/13: Reorganization process

· Methods of relief from automatic stay—

o Reorganization: creditor’s generally have rights to vote on the reorganization plan

· Bankruptcy Trustee as Lien Creditor:

o Bankruptcy trustee has the status of a hypothetical lien creditor (11 USC 544(a)(1)) —see 9-317(a), (e)—giving the trustee priority over most unperfected security interests

· Preferences

o Preferences = pre-petition payments from the debtor to a secured party that have the effect of favoring that SP over other creditors

§ Preferences violate the general policy that creditors should share ratably in the debtor’s assets

§ The bankruptcy trustee will attempt to prevent preferences to ensure the largest possible pool of assets for all creditors

o When is a pre-petition payment to a secured creditor an avoidable preference?

§ Six elements of an avoidable preference—11 USC 547(b):

1. A transfer of an interest in the debtor’s property;

2. To or for the benefit of a creditor;

3. Made on account of an antecedent debt;

4. Made while the debtor was insolvent;

5. Made within 90 days preceding the bankruptcy filing (one year for an insider)

6. That enables the creditor to receive more than if the transfer had not been made and the debtor’s assets were liquidated

§ Trustee must prove all 6 to avoid a transfer

o Creditor’s Affirmative Defenses:

§ “Improvement in Position Test” (11 USC 547(c)(5))

· The trustee may not avoid a transfer “that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, of any amt. by which the debt secured by such security interest exceeded the value of all security interests for such debt on the later of [90 days or 1 year for insiders]—See examples p. 463-465

o NOTE: pre-petition payments to fully secured or over-secured creditors have no preferential effect and thus generally cannot be avoided

Creation of Liens as Preferences

· Any lien created that meets the preference criteria will be avoided as a preference like any other transfer of wealth in the 90 days prior to filing

· Safe Harbor: 11 USC 547(e)(2)—SP has 30 days after attachment to perfect its security interest. Within those 30 days the perfection of the lien will not be treated as being on behalf of an antecedent debt

Effect of Debtor’s Bankruptcy on Attachment of a Security Interest

· 11 U.S.C. 506(a): “An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property . . .”

· After-acquired property clauses are ineffective after the bankruptcy petition is filed

o BUT: the security interest may attach to any proceeds of the original collateral the debtor acquires post-petition, assuming proper attachment and tracing

· Post-petition (future) advances are unsecured even if the security agreement contains an otherwise valid future advances clause. The secured party may get court approval to secure post-petition advances

· Secured Claims: the amount of the secured party’s claim against the debtor’s property in bankruptcy is limited by the value of the collateral:

o If the value of the collateral is less than the value of the secured claim, then the claim is secured only up to the value of the property; the remainder of the claim is unsecured

· Post-petition interest: a secured creditor is entitled to post-petition interest on its secured claim only out of excess equity, meaning that an undersecured creditor is not entitled to accrue interest on either the secured or unsecured portion of its claim during the pendency of the bankruptcy case

o Oversecured creditors are allowed to accrue interest, but only to the extent the collateral can cover it. Oversecured creditors may also be entitled to “reasonable fees, costs, or charges provided for under the agreement . . . under which such claims arose (i.e. the security agreement). Post-petition interest has the same priority as the creditor’s interest in its other collateral.

· Adequate Protection: the secured party may move the court for adequate protection of the value of its security interest in the collateral (risks include depreciation through usage/lack of care, failure to maintain adequate insurance, dissipation of money/accounts, etc.). Protection may take the form of replacement liens on other collateral or periodic payments to the secured party.

· Debtor Use of Collateral: after filing of the bankruptcy petition, the debtor is entitled to use property subject to a security interest without court approval if such use is in the ordinary course of business and the property subject to the security interest is not “cash collateral” (otherwise, must be approved by court).

· Value of Collateral: valuation methods provided by the bankruptcy code:

o Going concern value: value of the asset to an ongoing business

o Liquidation value: amount the asset would yield in a forced sale

o Replacement value: cost of replacing the asset

Structural Subordination vs. Contractual Subordination

· Contractual Subordination = agreement to be subordinated

· Structural Subordination = claims of creditor to parent company subordinate to creditors of the subsidiary

Setoff Rights

· Available when two parties each owe money to the other – allows a creditor to apply one mutual debt against another

o Requirements:

§ Mature: both debts must be due and owing

§ Mutual: debts must owed in the same capacity (i.e. not mutual if bank deposit held in customer A’s individual name, but loan made to a close corporation of which A is sole shareholder)

Elements of a Security Interest

· Attachment

o Process by which the creditor obtains security interests in the assets of a debtor that will be legally enforceable against the debtor

· Perfection

o Process by which the creditor ensures that its security interest will be legally enforceable against other creditors (i.e. (a) certain other creditors of the debtor outside of the bankruptcy and (b) those creditors and the bankruptcy trustee in bankruptcy).

· Priority

o The relative rights of one creditor with a security interest in an asset vis-à-vis other creditors with a security interest in the same asset

Collateral Classifications (9-102)

1. Goods

a. Consumer Goods

b. Equipment

c. Farm Products

d. Inventory

e. Accessions

f. As-extracted collateral

g. Fixtures

h. Manufactured homes

2. Intangibles

a. Account (right to payment of a monetary obligation)

b. Chattel Paper (writing that evidences both monetary obligation and sec. interest)

c. Commercial Tort Claims

d. Deposit Accounts

e. Documents (of title)

f. Instruments

g. Investment Property

h. Financial Assets

i. General Intangibles (e.g. liquor license, partnership interest, patent/copyright)

j. Letter-of-Credit Rights (right to payment under a letter of credit)

k. Money


The basic principles of attachment, p. 47-53

· 9-203: Attachment and Enforceability of Security Interests; Proceeds

o (a) A security interest attaches to collateral when it becomes enforceable against the debtor w/r/t the collateral, unless an agreement expressly postpones the time of attachment

o (b) A security interest is enforceable only if:

§ (1) Value has been given

§ (2) The debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party

§ (3) One of the following “evidentiary requirements” is met:

· (A) The debtor has authenticated a security agreement that provides an adequate description of the collateral

· (B) The collateral is not a certificated security and is in the possession of the secur

First In First Out (FIFO)

o Last In First Out (LIFO)

· 9-315: Secured Party’s Rights on Disposition of Collateral and in Proceeds

o (a)(1): The secured interest in collateral continues in the hands of the transferee notwithstanding sale, lease, license, exchange or other disposition of the collateral, unless the secured party authorized the disposition free of the security interest

o (a)(2): A security interest attaches to any identifiable proceeds of collateral

§ *The authorization may be either express or implied from the circumstances

§ *Because the security interest may also attach to the proceeds, this may effectively increase the amount of collateral that is available to satisfy the obligation, although the secured party is entitled to only one satisfaction of the debt owed (Ex: farmer sells tractor in which bank has security interest—bank now has security interest in both the tractor and the cash from the sale)

o (b) Proceeds that are commingled with other property are identifiable proceeds:

§ (1) if the proceeds are goods, to the extent provided by Section 9-336; and

§ (2) if the proceeds are not goods, to the extent that the secured party identifies the proceeds by a method of tracing, including application of equitable principles, that is permitted under law other than this article w/r/t commingled property of the type involved

· Limit on the Proceeds Rule:

o If the proceeds are property outside the scope of Article 9, UCC 9-315 probably would not apply

Commingled Goods vs. Accessions (9-335/9-336)

· Accessions: goods that are attached to other goods in such a manner that the identity of the original goods is NOT lost.

o 9-335:

§ (a) a security interest continues in collateral that becomes an accession.

§ (b) if a security interest is perfected when the collateral becomes an accession, it remains perfected

§ (c) except as otherwise provided in (d), the normal priority rules govern priority of a security interest in an accession.

§ (d) a security interest in an accession is subordinate to a security interest in the whole which is perfected by compliance with a certificate of title statute.

· Commingled Goods: Goods that are physically united with other goods in such manner that their identity is lost in a product or mass

o 9-336:

§ (b) A security interest does not exist in commingled goods as such – the security interest in the specific original collateral alone is lost once the collateral becomes commingled goods

§ (c) If collateral becomes commingled goods, a security interest attaches to the product or mass (e.g. flour in baked goods or ball bearings)

Automatic Attachment (other examples)

· Proceeds

· Commingled goods

· Certain investment property

o 9-203 (h): The attachment of a security interest in a securities account is also attachment of a security interest in the security entitlements carried in the securities account

o 9-203(i): The attachment of a security interest in a commodity account is also attachment of a security interest in the commodity contracts carried in the commodity account

· Rights in secured obligations

o 9-203(g): The attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien

· Supporting obligations

o 9-203(f): The attachment of a security interest in collateral gives the secured party the rights to proceeds provided by Section 9-315 and is also attachment of a security interest in a supporting obligation for the collateral (ex: guarantee)