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Secured Transactions
Wayne State University Law School
Dolan, John

Secured Transactions Ace Outline-Dolan
2-201(b)(35): A security interest is an interest in property which secures payment or performance of an obligation (Article 9 doesn’t adopt a title or lien theory of security interests and rights)
CHAPTERS 1-3=Conveyancing Rules
–          Article 9 is a conveyancing statute: debtor that seeks to secure a loan w/ personal property (collateral) “conveys” an interest in that property to the lender (this is attachment of security interest onto that property)
–          Commercial Transfers (not gifts and bequests)=sale of goods, negotiation of certain kinds of paper, and the secured transaction
–          3 rules of conveyance law:
o   1) Nemo Dat: default ruleàequal sign (Transferor=Transferee) §2-401. transferee gets what the transferor had & owner may transfer property w/out permission from king or anyone else. Owner can convey everything he owns, & assumption in any transfer is that he has transferred all of his interest. To transfer less, the owner must limit the transfer to a part interest
§ Derivation principle: interests of the transferee are derived from the interests of the transferor.
§ §2-403àPurchaser is somebody who takes by voluntary conveyance (not a thief/trustee in bankruptcy-these take by operation of law)
§ nemo dat (no more): cant give what you don’t have, transferee gets “no more” than transferee had
o   2) : Fraudulent conveyanceà transferee gets less than transferor had.
–          Fawcett v Osborne
–          Fawcett v Osborn p.3
o   Facts: F bailed hides to S to be tanned and returned, S sold to O. S had no right to sell, but unlawfully sold to O. S sues in trover and coversion (get hides back)
o   Default rule: a person who has no title to property can convey none
o   Exception-Rule-BFP (voidable title): BFP for valuable consideration rule (BFP must have given value for the property, & purchase w/out notice of fraud)
§ Gives a 3rd person better title and superior equity to true owner
§ Reasoning is that the vendor who has been defrauded and BFP from fraudulent vendee are both innocent-one of the 2 parties must suffer from fraud of 3rd, loss falls on him who enabled him to commit fraudà”possession of personal property is prima facie evidence of property”
o   Analysis: if default rule applies, S recovers hide…but there are exceptions to the ruleàif O gives value, he is a good faith purchases, & has no notice.
§ GFP rule: if requirements met, O keeps it.
§ Rule doesn’t apply if bought from thief
o   Decision: O wins if F intended to convey an interest to S (clothed with indicia of ownership), & S fraudulently sold, but instead F only bailed, so F wins.
o   Voidable title doctrine: not enough to simply give possession for BFP rule to kick in
o   Must be possession + some indication of ownership for O to win by GFP rule (i.e. S didn’t own the title, but F clothed him w/ apparent ownership)
o   If S gives a bad check/misreps identity/receives goods on credit while insolvent (fraud) to S, then sells to O: under voidable title doctrine Osborne wins (Stevens had voidable title) S loses to O
§ §2-403àa person w/ voidable title has power to transfer good title to a GFP for value
o   **no longer market overt (put burden on true owner to check at fair grounds if thief was selling his goods, protected purchasers)
–          NEMO DAT QUOD NON HABET (cant give what you don’t have): p.5
–          After Acquired Collateral & the Purchase money concept:
o   2 notions critical to secured lending:
§ 1) After acquired property concept: lender can take a security interest today in collateral the debtor acquires tomorrow (critical when borrowing “working capital”)
§ 2) Purchase money concept: idea that some loans are different from others in that some of them help the debtor acquire collateral (purchase money loans afforded priority over non purchase money loans)
–          International Harvester p.7
o   Facts: Machek Farms granted Bank a security interest in all of Machek’s equipment, including after-acquired equipment.
§ Subsequently, Machek acquired equipment from a farm implement dealer and granted the dealer a purchase money security interest in the equipment.
§ Dealer assigned its interest to International Harvester Credit Co.
§ Machek defaulted on Bank loan & both creditors claim equipment.
§ Correct Holding: UCC Article 9 validates security agreements covering after acquired collateral and grants it priority over a purchase money secured party unless the purchase money lender complied w/ former 9-312(4) (now 9-324(a))
·         IH could have one if purchase money security interest was perfected (file financing statement) w/in 10 days after debtor took possession of the collateral.
§ Actual Holding: decided on “contractual constitutional requirements and equitable principles”àUCC only applies where equitableàTHIS IS WRONG
·         This court also tries to make the argument that a debtor cant transfer an interest in something they don’t own yet (UCC says you CAN!!)
o   Takeaway: When conflict between a working capital lender who takes security interest in all equipment now & hereafter acquired and a purchase-money lender (they claim same collateral)àresolved by 20 day ruleà9-324(a)
o   ***Soon after IH decision, the FL legislature amended FL version of UCC making it crystal clear that in order to achieve priority over an after acquired collateral provision in a security agreement, a purchase money lender had to comply w/ the provisions of 9-324
–          Shelter Rule (Flip side of Nemo Dat): transferor can convey everything he has and will convey everything he has unless he crafts the transaction as a partial transfer
–          Aircraft Trading Co. p.11
o   Facts: Northeast Airlines grants sec. int. in an aircraft’s engine to Atasco, who failed to perfect its interest by filing w/ FAA
§ NE later sold engine to B, which sold it to C (if B wins, C wins)
§ Both B & C filed bills of sale (financing statements) w/ FAA

ty of sales & trade)
–          Gilmoreà”good faith purchase rule serves a commercial function: he is protected not because of his praiseworthy character, but to the end that commercial transactions may be engaged in without elaborate investigation of property rights and in reliance on the possession of property by one who offers it for sale or to secure a loan”
–          JUSTIFICATION: when the reason for the rule ends, the rule itself ends
o   Difficulty is knowing when the GFP wins, & when they lose
o   Must balance the needs of commerce v value of ownership
–          Sales of Goods:
o   UCC §2-403(1): A person w/ voidable title has power to transfer a good title to a good faith purchaser for value
–          Cundy v Lindsay p.20àtries to link a gfp rule to intent and to the logic of ownership, but fails
–          Carlsen v Rivera p.23àsale of goods GFP rule
o   Facts: Rivera leased car to James (an auto dealer). Through fraud, James obtained a certificate of title for the vehicle and he used that cert. in a contract to sell the car to Expo, who sold it to M, who sold it to CàC was in possession of the car when James defaulted on the lease
o   Rule: UCC 2-403: which provides: Power to transfer; good faith purchase of goods; “entrusting”…(2) Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business. (3) “Entrusting” includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting or the possessor’s disposition of the goods have been such as to be larcenous under the criminal law.
o   Cant convey good title or voidable title if car was stolen
o   However, in this case James acquired the car legally by virtue of the lease agreement-he then committed larceny by forging the title docs. And selling it
o   Distinction is that he obtained possession lawfully and could therefore convey a voidable title which could be perfected upon a sale to a buyer in the ordinary course of business.
§ ***statute makes it clear that any delivery of possession and any acquiescence in retention of possession constitutes entrustment under the statuteàthis includes a lease agreement
o   Process for exam: