Secured Transactions – Bartell – Winter 2016
1. SCOPE – Is the transaction covered by Article 9 or some other law? (pp. 3-9)
2. CLASSIFICATION OF COLLATERAL – If covered by Art.9, what is the personal property in which a SI is being created? (pp. 10-15)
3. ATTACHMENT – How do you create a SI in that property that is good against the debtor? (pp. 15-19)
4. PERFECTION – How do you create a SI in that property that is good against other creditors and purchasers? (19-35)
5. CHOICE OF LAW – What state’s law governs these issues? (pp. 35-40)
6. PRIORITY – As between competing claims to the same property, who prevails? (pp. 40-64)
7. AVOIDING POWERS – What is the impact of bankruptcy on the secured creditor? (pp. 65-71)
8. PROCEEDS – What are the rights of the secured creditor upon disposition of collateral? (pp. 71-78)
9. RIGHTS AND DUTIES – What are the duties of secured creditors with respect to collateral, and what are the rights and duties of third parties whose obligations become collateral for another? (pp. 78-85)
10. REMEDIES – What are the secured creditor’s rights upon a default by the debtor and the debtor’s remedies for breach of the secured party’s duties? (pp. 85-93)
Intro to Secured Financing, Structure of Art.9
Ensuring creditor obligation will be met: (1) can sue under K law; (2) give creditor interest in collateral
Secured financing = party extending credit has legally enforceable interest in property of debtor/third party as a matter of contract or law. 1-201(b)(35) SI: interest in personal property or fixtures which secures payment or performance of an obligation (Can secure by interest in real property (mortgage), or both real and personal).
Benefits for secured creditor: (1) SI gives creditor special rights to property (foreclosure rights), unsecured creditor must use judicial means to obtain relief; (2) priority over other creditors
Why doesn’t every creditor receive security? Cost prohibitive (secured trans are more expensive than unsecured for borrower); competition (unwilling to give unsecured credit, debtor may want to retain autonomy over collateral)
To determine whether there is SI, must identify: (1) Debtor, (2) Secured party, (3) Underlying Obligation, (4) Collateral
Sue to get judgment (doesn’t mean you’ll get $)
Writ of execution to get judgment lien on non-exempt assets
Sale of non-exempt assets
Take possession of collateral (w/o court) w/o breach of peace and sell it 9-609 (self-help)
Dispose of collateral 9-610
First to execute prevails over other creditors and purchasers
Generally prevails over other creditors and purchasers
Unsecured: writ of execution filed 21 days after judgment (race to courthouse); sheriff can seize/”levy” non-exempt property to satisfy (personal seized first). Creditor becomes secured (now lien creditor). If debtor pays judgment, property is returned; otherwise, sheriff sells property and gives $ to creditor, excess to debtor. Sheriff must make return of writ within 90 days of receiving it; if hasn’t reached enough assets to satisfy judgment, must get another.
Note: In MI, cannot seize real property unless all personal property exhausted. (See MCL 600.5023).
MCL 600.5023: Property Exempt From Levy and Sale Under Execution
Family pictures, arms, accouterments, apparel, provisions and fuel for subsistence for 6 months
Household goods, furniture, utensils, books, appliances <$1,000
Sheep, cows for 6 months
Tools of profession for trade or business in which person is principally engaged <$1,000
Homestead of <40 acres not exceeding $3,500 in value
Mortgage to secure payment of purchase money/portion of purchase money
Mortgage recorded in register of deeds for 25 years
Retirement account and contributions to it, right to profit sharing plan
Court order pursuant to divorce judgment, child support order
Interest in trust, fund, advance tuition payment contract, education savings program.
Secured: exemption for property is waived as to SIs (action presumed to be consensual). First secured creditor who delivers writ of execution has priority, but secured creditor has priority over other competing claimants for property in which they have an interest (harms involuntary creditors of debtor (ex: tort judgment creditors)).
Purchaser acquires no less than all of rights of transferor
Purchaser acquires no more than all of rights of transferor
1-201(b)(29) Purchase: taking by sale, lease, discount, negotiation, mortgage, pledge, lien, SI, issue or reissue, gift, or any other voluntary transaction creating an interest in property. (not just a sale transaction).
1-201(b)(30) Purchaser: person that takes by purchase
1-201(b)(35) Security interest: interest in personal property or fixtures which secures payment or performance of an obligation. SI includes any interest of consignor, and buyer of accounts, chattel paper, payment intangible, or a promissory note in a Art.9 transaction. SI does NOT include special property interest of a buyer of goods on identification of those goods to a K for sale under 2-401, but a buyer may also acquire a SI by complying with Art.9. Except as provided by 2-505, right of a seller or lessor of goods under Art.2 or 2A to retain or acquire possession of goods is NOT a SI, but a seller or lessor may also acquire a SI by complying with Art.9. The retention or reservation of title by seller of goods notwithstanding shipment or delivery to the buyer under 2-401 is limited in effect to a reservation of SI. Whether a transaction in the form of a lease creates a SI is determined under 1-203.
2-403(1): Power to Transfer: Purchaser acquires all title of transfer, except purchaser of a limited interest acquires rights only to extent of interest purchased (shelter principle: applies to both real and personal prop). Person with a voidable title has power to transfer good title to a good faith purchaser for value.
Purchaser has power to transfer good title even if: (1) transferor was deceived as to identity of purchaser; (2) delivery was in exchange for a check that was later dishonored; (3) it was agreed that transaction would be a “cash sale,” or (4) delivery was procured by larcenous fraud.
Ex: O transfers to A. A doesn’t record. O transfers to B. B has no notice of A, and records. Since B recorded first, and had no notice of A, B prevails. B then sells to C. C has notice of A’s prior interest and doesn’t record. In competition between C and A, C would normally lose bc he had notice of A, but bc he takes from a winner (B), C prevails.
Derivation: title is presumed bc of possession. In early days, secured party had to take possession (pledge), now, shift to public filing (2001 UCC, Art.9 amended in 2013).
Entrusting: delivery/retaining possession of goods regardless of any condition expressed between parties to delivery or acquiescence and regardless of whether procurement of entrusting or possessor’s disposition of goods have been larcenous (Entrusting possession of goods to a merchant who deals in goods of that kind gives him the power to transfer all rights of the entruster to a BIOCOB).
9-317(b) Interests that Take Priority Over or Take Free of SI or Agricultural Lien
Buyer, other than secured party, of tangible chattel paper, docs, goods, instruments, or a certificated security takes free of SI if buyer gives value and receives delivery of collateral w/o knowledge of the SI before it’s perfected
Aircraft Trading and Services, Inc v. Braniff: Winner can convey winning interest even if person wouldn’t win otherwise
Facts: Sold aircraft engine subject to mortgage on engine securing payment to Aircraft. Aircraft failed to record mortgage (required to perfect). The buyer (Braniff) perfected interest and then leased engine to third party (C) with option to purchase. The third party (C) exercised right to purchase and filed to perfect. Aircraft sues the third party buyer for conversion.
9-320: Buyer in ordinary course takes free of SI created by his seller, even if that interest is perfected and even though buyer knows of its existence. Ordinary course of business in NY is determined by whether goods are classified as equipment or inventory. Here, equipment, so no ordinary course of business. The third party bought engine w/o knowledge of the SI and before it was perfected, so its rights were superior.
Held: Court holds for B, says third party (C) doesn’t win bc knew of B’s interest. Bartell: Holding is wrong bc it doesn’t account for shelter principle (if you’re a winner, can convey winning interest to someone even if they wouldn’t win in their own right). Since third party bought from a “winner,” (Braniff), it has priority. Nothing in UCC rejects shelter principle.
Structure of Article 9
Definitions and general provisions
Relationship of secured party to debtor
Relationship of secured party to others (perfection and priority)
Rights of third parties (not debtor or secured party)
Default and remedies
Transition provisions (not important for this course)
Note: if unsure whether falls under Art.9, comply anyway (cheap insurance bc filing fees are low)
Secured Financing Problem
Wingding Corp. sells large plasma and LCD screens to retail and business customers from five stores in the Chicago area which it leases. Its inventory of screens and other components has a total wholesale value of $500,000, which Wingding sells at a 50% markup. The stores also have display cases, cash registers, tools, computers and other similar property that belongs to Wingding, which it purchased for $300,000.
Wingding sells screens to the City of Chicago and to University of Chicago, among other customers. Each of those two customers currently owes Wingding $15,000, due in 30 days. Wingding owes its own creditors (suppliers, landlords and unsecured lenders) $1 million. After paying its obligations to these creditors every month, it nets about $10,000.
You represent Midwest Bank that has been approached by Wingding for a loan to expand its business operations. Wingding has asked for $300,000. Midwest Bank thinks the business plan looks promising, but wants to know whether the loan should be secured, and if so, by what collateral. What is your advice?
If bank is unsecured, risk? There are other creditors, so bank wouldn’t have priority. Depends on who files with sheriff first.
What assets are available? Equipment, inventory, store leases, earnings ($10k/month).
ho owns goods) physically delivers goods (consigns them) to third party/merchant (consignee), and has SI in goods. Merchant is supposed to sell goods on behalf of consignor to the public. If goods aren’t sold, returned to consignor. If consignor doesn’t perfect SI in the consigned goods, then a creditor of the consignee may be able to acquire rights in collateral superior to those of the consignor. If labeled as consignment, but actually a disguised SI, Art.9 will apply! (ex: if consignee must pay for goods even if he can’t sell).
Note: Consignments are treated like PMSI in inventory.
Sale on approval: seller takes risk; goods are delivered to purchaser but remain property of seller until buyer accepts (not subject to buyer’s creditors until acceptance)
Sale or return: Present sale (can be undone at buyer’s option) seller takes goods back if not resold, goods are subject to buyer’s creditors while in his possession. If purchaser goes bankrupt, seller can protect self by taking SI in goods.
In re Haley & Steele: CL bailment
Facts: Art dealership received consigned artwork from customers, pursuant to consignment agreements. Agreements gave dealership right to keep and sell artwork, and also care for and insure it. Dealership failed to sell art, and a bank that was its secured creditor seized it. Issues: (1) Is this a consignment? (2) Is this a sale or return under 2-326? Held: (1) Not consignment bc customers who gave artwork were consumers, whose artwork was used or bought primarily for personal use, not commercial. (2) Not a sale, because the agreement specifically says that title passes from consumer to the ultimate third party buyer, not dealership itself. Sale requires title to be delivered to a buyer (not the case when goods pass from a consignor to a consignee). Bc neither a consignment nor a sale, consumers get artwork back under CL bailment. Reasoning: Ordinary consumer shouldn’t be expected to comply w/ Art.9 to be protected from dealership’s creditors.
What if person delivering artwork to gallery is the artist? Assuming they transfer artwork to gallery and it is valued at >$1k, is this a consignment? Yes, bc paintings produced by artist are NOT consumer goods, they’re the artist’s inventory, work product. All 5 reqs satisfied. Problem bc of policy reason for excluding consumer goods. Are artists more sophisticated? No. Some states, including MI, CO, AL have enacted non-uniform provisions in Art.2 (MCL 440.2326: Whenever art is delivered to art dealer for purpose of sale or exhibition and sale, art is not subject to the claims of the art dealer’s creditors).
Fine Rugs, Inc. is a retail seller of antique rugs, some of them imported and others consigned by owners (both consumer and business). Antique Looms consigned rug to Fine Rugs under a consignment agreement that stated Antique Looms retained ownership of rug until it was sold, and if it was sold Fine Rugs was to pay Antique Looms the purchase price less commission. The rug was worth $7,500. Before rug was sold, Fine Rugs filed for BK. Its creditors included:
(1) A commercial bank (to whom Fine Rugs owed $1 million), who knew Fine Rugs dealt in consigned rugs;
True consignment? No, bc bank knew it was engaged in selling goods of others. Probably CL bailment.
(2) Six trade creditors (to which Fine Rugs owed $75,000 in total), of whom four knew Fine Rugs engaged in consignments; and
Consignment? (1) Met, (2) met, (3) Met for 2 of the creditors, (4) Probably met bc owed $75k total, and (5) not consumer goods bc in retailer’s hands (inventory). (6) No SI created. Consignment for 2 of the 6 creditors.
Since consignment, can Antique receive the rugs? If consignor perfected, would be treated as a secured creditor, receive priority. But since it doesn’t look like Antique filed, unperfected, creditors may acquire rights to rug.
(3) Ten general unsecured creditors, none of whom knew that Fine Rugs engaged in consignments (owed total $25,000).
At the time of BK filing, 40% of rugs on floor were consigned by others. Assuming Antique Looms did not make an Art.9 filing, can it get the rug back? If Antique perfected, yes. But if Fine Rugs was generally known to be substantially engaged in consignment, then it wouldn’t meet all 5 reqs, and Antique could get rug back (sale or return). If didn’t know, Antique can’t get it back. If not generally known, since they didn’t file, couldn’t get the rug back. You could argue that 40% of rugs is not substantially engaged – unclear