Secured Transactions – Fairfield
Chapter 1 – Creating a Security Interest
A. Why Secured Credit?
Why does secured credit exist?
Reduces lenders’ risk; let’s consumers buy; builds economy; SP’s advantage over un-SP’s interest in cases of debtor insolvency (p.2)
Is Sec. Credit efficient or fair?
Jackson and Kronman (p.7)
Sec Credit is unnecessary because creditors can structure their interest rates to take risk-reducing precautions
Creditors can pick their Ds and the terms they will lend on so no compelling argument that STs are not better than letting Ds pay off creditors in the order they want
LoPucki (p.7)
Should subordinate SI to tort claims and other involuntary creditors. Debtors shouldn’t make themselves judgment-proof by granting SI in all their assets.
Why would borrowers issue secured debt when it’s costly? (p.8)
1) Efficiency with monitoring costs (creditors can monitor less assets to assure their debt),
2) Bonding (lets debtors foreclose on particular assets upon default), and
3) Signaling (lets creditor know that debtor believes he can pay back debt)
B. Introduction to Article 9 and Definitions
History of Article 9 (p. 19)
Created as a unified statute covering all STs in personal property with different rules for different transactions
Definitions (p.21):
Debtor (9-102(a)(28)) – person whose property is subject to the creditor’s SI
Obligor (9-102(a)(59)) – one who owes payment on secured debt
Secured Party (9-102(a)(72)) – the creditor in whose interest the SI is created
Security Agreement (9-102(a)(73)) – agreement that creates SI (tangible or intangible)
Security Interest (1-201(b)(35)) – interest in property that secures the debt
Collateral (9-102(a)(12)) – property subject to the SI
Tangible
Goods (9-102(a)(44)) = all things movable when SA attaches
Fixtures 9-102(a)(41)
Inventory (9-102(a)(48)) – goods held for sale or lease
Farm products (9-102(a)(34)) – crops or livestock
Consumer goods – goods for primarily personal, family or household purposes
Equipment (9-102(a)(33)) – e.g. business machines
Intangible
Accounts
Rights to Payment
General Intangibles
Financing Statement (9-102(a)(39)) – the record that the SP files in the public records/state’s filing office
Attachment (9-203(a)) – a SI attaches to collateral making it enforceable against the debtor (e.g. when SP gives something of value to debtor)
Perfection (9-308(a)) – SI is perfected when it has attached and SP files a financing statement or takes possession of the collateral—sometimes perfection is automatic
Proceeds (9-102(a)(64)) – property acquired by debtor upon sale/lease of collateral
Cash Proceeds (9-102(a)(9) – receiving money/check for sale of collateral
Account (9-102(a)(2)) – buyer’s unsecured obligation to pay for purchase
Promissory Note (9-102(a)(65)) – buyer promises to pay
9-315(a)(2) – Security interest in inventory carries over to any identifiable proceeds
Part 2: Effectiveness/Attachment (D/SP relationship)
Part 3: Perfection/Priority (SP/Challenger relationship)
Part 5: Filing (technicalities of perfecting SI)
Part 6: Remedies and Default (what SP gets if D defaults)
C. Attachment
Attachment is when D and SP create a SA (like private K)
1. The Security Agreement (p.22)
9-202 – Title to Collateral Immaterial – except as with re: to consignments or sales of accounts, chattel paper, payment intangibles, or promissory notes, the provisions of this article with regard to rights and obligations apply whether title to collateral is in SP or D
9-203 – Attachment and Enforceability of SI
(a) Attachment – SI attaches to collateral when it becomes enforceable against D with respect to the collateral, unless an agreement expressly postpones time of attachment
(b) Enforceability – SI is enforceable against the D [only if these exist at same time]:
(1) When SP gives value,
e.g. SP makes loan or a credit sale to debtor
(2) The debtor has rights in the collateral and
e.g. debtor owns the collateral
(3) One of these conditions is met:
(A) Debtor authenticates a SA that describes the collateral;
Authenticate (9-102(a)(7)) = signing a record or adopting a symbol with present intent of authenticating person to identify that he adopts the record (manifesting acceptance)
Record (9-102(a)(69)) = includes info. in tangible form & intangible form stored electronically—e.g. email is ok
Must be a record reciting terms of agreement and authenticator must manifest assent (pledge is ex of axn that authenticates)
(B) Collateral isn’t a certificated security and it’s in possession of SP;
e.g. pledge—giving collateral shows the agreement
(C) Collateral is a certificated security in registered form and the security certificate has been delivered to the SP; or
(D) Collateral is deposit accounts, electronic chattel paper, investment property or letter of credit rights, and SP has control
(g) Lien Securing Right to Payment
Problem 1 and 2 (p.23) – there must be a record reciting terms of SA and authenticator must manifest assent (e.g. through a reply email) or no enforceable SA (9-102 cmt 9a)
Other ways to authenticate record; e.g. pledge
2. The Composite Document Rule (p.23)
9-203(b)(3)(A) – SA must describe collateral—What’s an adequate description of collateral?
In re Bollinger Corp. (p.24) – D took loan from ICC executed with promissory note and SA; D took 2nd loan from Z&J, who paid off the loan with ICC for assignment by ICC of the original note and SA between D and ICC. D executed promissory note to Z&J, but never filed a SA. Z&J did file a new FS including the machinery and equipment that was originally collateral for ICC. D filed for bankruptcy and Z&J sued for the amount of the loan—D recognized that the assignment of the original SA with ICC, but wouldn’t recognize a SI in the loan between Z&J and Bollinger.
Holding – Z&J wins because evidence of the course of dealings, promissory note and filed FS, taken together, were enough to establish a valid SA
Rule – FS alone is not a SA, but PN + filed FS, with description of collateral, signed by the D can create a valid SA
Formal Rule – 2 docs are req’d to create perfected SI:
(1) Security Agreement
Elements of a valid SA – 9-203(1)(b):
(1) a writing,
(2) signed by debtor,
(3) containing a desc. of collateral or types of collateral.
(2) Financing Statement – doc signed by both parties and filed for public record—purpose is to give the public notice
Problem 1 – can financing statement include added categories of collateral? (p.30)
No, if a SA exists that is clearly intended to include certain things, then under the parole evidence rule the SI is limited to the collateral described in that document
Problem 2 – Signed credit card receipts can get incorporated into SA against bought goods (Sears v. Conry)
3. Description of Collateral
In re Grabowski – priority dispute between BofA and South Pointe over 3 items of farm equipment. BofA filed FS first, described collateral in general terms (“all inventory, cha
r a SI to attach (9-203(b))
The value must be sufficient consideration to support any K (1-204(4)) or “new value;” i.e. money, property, or new credit given up front (9-102(a)(57))
Promises to pay are enforceable—if they’re conditional promises, the conditions must be out of creditor’s control
Problem (p.45) – yes, it attached when original SA was made. Under 9-204(c), SA can make collateral include future advances/other value whether or not the advances are given pursuant to commitment.
b. Rights in Collateral
Gen’l Rule – a SI does not attach unless debtor has rights, or power to transfer rights, in collateral (9-203(b)(2)). Need not have full rights in collateral.
When does someone have the “power” to transfer rights in collateral?
look at tradt’l bodies of law in 1-103, or provisions of the code
Swets Motor Sales v. Pruisner (p.46) – D sold cars to X; C is SP for X; X wanted to retake cars but C said it had superior interest in the cars; C’s SI, acquired in good faith, attached when the cars were delivered to X
Holding – Cs interest was senior to X’s because X had enough rights in the car to let C’s SI attach
Rule – if party has some right in X, then creditor can file against collateral
Chapter 2 – Perfection
A. Introduction
Perfection is a legal conclusion indicating a SI is enforceable against 3rd party (p.51)
9-308 thru 9-316 tell how SIs are perfected
9-308 – When SI or Agr Lien is Perfected
(a) Perfection of SI – SI is perfected if it has attached and 9-310-316 are satisfied
(c) Continuous perfection – SI is perfected continuously if it’s origninally perfected by one method under the article
(d) Supporting Obligation – Perfection of a SI in collateral also perfects SI in SO
(e) Lien securing right to payment – perfection of SI in right to payment also perfects SI in SI, mortgage, or other lien on personal or real property securing the right
1) Attachment (9-309) – some SIs automatically perfect when attached:
(1) PMSI in consumer goods
(2) Assignment of accounts or payment intangibles
(3) Sale of a payment intangible
(4) Sale of promissory note
(13) SI created by assignment of beneficial interest in decedent’s estate
2) Possession (9-313(a)) – when SP takes possession of the collateral (aka “pledge”)
3) Control – ability to dispose of collateral unilaterally; control is defined specifically for different types of collateral
9-312(b)(1) – control is only way to perfect SI in bank account
9-314(a) – ltr of credit, investment property, electronic chattel paper, deposit accts
4) Compliance with other law (9-311) – SI subject to other law can only be perfected with compliance with that law; need not comply with Art 9
5) Filing (9-310(a)) – default rule is that one perfects by filing a financing statement (except in the cases mentioned above)
