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Secured Transactions
Wayne State University Law School
Dolan, John

-John Dolan: Secured Transactions, Fall 2010
-Security Of Property: Nemo Dat – The First Rule of Conveyance
-What is a Secured Transaction?
-A secured transaction is a transaction that creates a security interest. They are property interests in assets of a business or person that are NOT real estate assets.
EXs: Cars, inventory, equipment, accounts receivable, household goods.
-You put some money down and the bank has a security interest.
-§1-201(b)(35) – A Secured Interest means an interest in personal property or fixtures which secures payment or performance of an obligation.
-Types of Security Interests –
-Our creditors either have no interest in our property or they have an attached interest in our property and they are a secured party.
-EX: No Security Interest – Credit Card companies do not have a security interest in the things that you buy. They cannot repossess the washing machine that you bought on credit, they can only sue for the amount owed.
1. A secured party.
-In article 9, these are called purchasers.
2. Involuntary Conveyances
-Others can get an interest in property by putting a lien on it. It is involuntary.
-A Lien is an interest in property that gives the holder of the lien a right to possession of some of a debtor’s property in the event that a debtor fails to perform its obligations.
3. Perfected Interests
-These are the parties that have notified the world of their security interests.
-In Michigan, they have filed with the Secretary of State
-Conveyancing – This is not a contract. It is a grant. It is saying, in effect, “this property goes form A to B.”
-The law recognizes conveyances. It will sometimes be the final act of the sale, sometimes the only act.
-There are 3 Rules of Conveyance:
1. Nemo Dat – The Default Rule or The Equal Rule (=)
-If we have a nemo dat conveyance from A to B, B gets whatever A had. If A has nothing, B gets nothing. If A has all, B gets all. If both A and B agree to give B less, B gets what was agreed upon.
2. Bona Fide Purchaser – Good Faith Purchaser or the More Than Rule – (A < B)
-B gets a greater interest than A has.
-This doesn’t make sense from a logical standpoint. But in commercial transactions the notion of a good faith purchase is extraordinarily strong. We protect B because we want to ensure that B has a better title.
-EX: If you go to a hardware store and buy a rake you take free of all security interests in the rake.
3. Fraudulent Conveyance – The Less Than Rule
-B gets less than A had
-Shelter Principle – If you take from a winner, you are a winner.
-§2-403 (First Sentence) – Nemo Dat – Power to Transfer, Good Faith Purchase of Goods – A purchaser of goods acquires all title that the seller had the power to transfer.
-However, a purchaser of a limited interest acquires only limited interest
-A person with voidable title has the power to transfer full title to a good faith purchaser for value. Voidable title is title obtained by a purchaser when the owner willingly parts with the goods but the transaction is flawed in some way.
-EX: The purchaser pays for the goods with a check that is later dishonored.
-In order to get voidable title, there must be a delivery of possession of goods from a seller to a buyer, with the intent that the buyer become the owner of the goods. It is obtained by a wrongdoer when a victim VOLUNTARILY turns property over to the wrongdoer, and the rightful owner assents to the transfer.
-§1-201(b)(29) and (30) – A purchase means taking by voluntary transaction creating an interest in property.
-EX: When GM gave Galaraga a car, he was a purchaser. He took, voluntary, an interest in property.
-EX: If you go to a car dealer and buy a car you are a purchaser.
-If you then subsequently grant GMAC a security interest they are also a purchaser.
-Bailee Fraud: Fawcett v. Osborne (p3, IL – 1863) – A bailee who has no rights to goods cannot convey any interest to anyone
-Fawcett entrusted hides to Stevens to get tanned in New York. However a principal of Stevens took the hides to Chicago and sold them to Osborne.
-ISSUE: Can Fawcett recover from Osborne?
-HELD: Yes. Fawcett wins because, even if Osborne purchases the hides in good faith, that rule does not apply. Stevens did not have title in the hides, he was a mere possessor so he does not have the power to convey interest to a third party.
-NOTE: There is an emphasis in this case on consent. There was a lot of lawlessness in Civil War Chicago.
-Therefore, the rule is that no man can be divested of his property without his own consent. This is nemo dat captured in a single sentence.
-We want the person with title to win. This is particularly important in the 19th Century when people were going around stealing horses and cows.
-Note: Sometimes in old cases you will see the word “property” used as a synonym for “title.”
-NOTE: There is a suggestion that somehow if Fawcett consented to a sale to Stevens (rather than a mere bailment) he can give good title to Osborne.
-But when Stevens is a fraud he does not get good title.
-EX: lying about identity (credit fraud), giving a check that bounces, or accepting credit when insolvent.
-These are all frauds even if you do not know that the check will bounce or are insolvent.
-NOTE: The case notes mention the concept of market overt – that is the idea that the true owner deprived of his goods by a thief should go to the fair or market to make sure that the thief did not sell the stolen goods to a buyer. This rule both sought to protect honest buyers and put the burden on the innocent owner.
-This is an English rule that never transferred to this country.
-International Harvester v. American National Bank (p7, FL – 1974) – The two important teaching points are the “after acquired property

ne to IAL with an option to buy.
-Prior to IAL buying, ATASCO perfected.
-IAL exercised option to buy and filed FS with FAA.
-ISSUE: Who Prevails—IAL (buyer not in ordinary course—airlines are not in the business of selling engines) or ATASCO (creditor)?
-CORRECT ANSWER (not holding): According to §9-317(b), both B and C bought 1) without actual knowledge of ATASCO’s SI and 2) before it was perfected and 3) for value.
-Therefore, as buyers not in the ordinary course of business, their rights are superior according to 9-317(b).
-Then, when IAL buys from C, he should fall into the shelter provision of §2-403.
-All succeeding buyers take free of the security interest.
-COURT (wrong): B defeats ATASCO but had to get ATASCO’s permission to sell to C free of ATASCO’s claim.
-NOTE: §9-317 incorporates the shelter principle so that a member of a protected class who prevails can transfer what he has, even though the SI which was unperfected when the transferor acquired his rights has since been perfected.
-HDC Closeness: Vitols v. Citizen’s Bank (p16, 6th Cir – 1993) – If a party is a holder in due course (anyone who takes a check as a payment), they can convey the HDC rights to anyone else, who becomes the new HDC
-Limited partners in a venture gave the partnership negotiable promissory notes. They did so with the understanding that the venture would use the notes as security for a loan to finance the project.
-The partnership endorsed the notes to Fleet Bank.
-Fleet Bank assigned them to Citizen’s Bank.
-The Partnership defaulted on the loan. The claim that they were defrauded because Citizen’s was too close to the transaction.
-ISSUE: Since Citizen’s took from Fleet, and Fleet can cut off this defense, does Citizen’s also cut off the defense?
-HELD: Yes. Fleet is a holder in due course. §3-203(b). They satisfy the rules. We don’t look to Citizen’s because it’s a nemo dat transaction.
-Good Faith Purchasers (GFP) – The Second Rule of Conveyance
-Good Faith Purchase – This is an exception to nemo dat. In this instance, the GFP is getting more rights than what the seller had. In commercial law this applies in 4 settings:
1. Sale of Goods – §2-403(1)
2. True Leases of Goods – §2A-301
3. Transfers of Negotiable Paper
-Instruments – §3-306
-Negotiable Documents
-Warehouse Receipts