Secured Transactions Outline
Professor Cichon
Summer 2005
Index for Article 9
9-100s –
9-200s –
9-300s –
9-400s –
9-500s –
9-600s –
9-109 –
(a)(1) – applies to all transactions if they create a security interest in personal property or fixtures by contract
(a)(2)-(6) – other transactions that are included in article 9
1-201(35) –
Consignments
v.
w.
x.
y.
z.
aa.
bb.
i. 9-102(a)(20) –
1.
a.
b.
c.
Is not generally known by its creditors to be substantially engaged in selling the goods of others;Is not an auctioneer; andDeals in goods of that kind under a name other than the name of the person making the delivery
2.
3.
4.
The transaction does not create a security interest that secures an obligation.The goods are not consumer goods immediately before delivery; andWith respect to each delivery, the aggregate value of the goods is $1000 or more at the time of delivery;The merchant
Consignment means transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and:
cc.
dd.
ee.
ff.
Why is it necessary to distinguished between a true consignment and a credit sale disguised as a consignment – we do it because there are different remediesBut if it is a true consignment then it may fall under 9-109(a)(4) but you must decide whether or not it meets the definition because if it does not meet the definition then it is still possibly a true consignment but not the type that we deal with under article 9. If it is a true consignment but not the type we deal with under article 9, then we use state laws regarding consignments.So, if it is a security interest disguised as consignment then it is governed under 9-109(a)(1)With the definition of consignment in 9-102(a)(20), if even one of the elements is not there, then it is not an article 9 consignmentNow, 9-109(a)(4) covers a consignment under article 9. But to be under article 9, it must be covered under the definition of a consignment under 9-102(a)(20).If it is a true consignment then it is dealt with under article 2 of the UCC. (2-326) However, today there is no 2-326 so we deal with true consignments under the article 9.If the retailer must pay for the goods whether or not they are able to resell them, this is not a true consignment so article 9 governs itYou can have a true consignment or you can have a credit sale that is disguised as a consignmentThere is still a secrecy problem because other creditors may wish to extend credit with the inventory as collateral, but there is no place they can go to check whether some or all of the inventory is actually held on consignmentBecause consignors keep title until they are sold, then any risk of loss or depreciation etc. is on the consignor
Basically, it is a marketing procedure where someone gives property to another person to sell and if they sell it then each gets a percentage. And if they don’t sell, then the original person (consignor) gets it back
Consignment Analysis
Step 1 –
Step 2 –
Factors Indicating a Consignment
Step 3 –
Step 4 –
Leases
gg.
hh.
ii.
jj.
kk. 2A-103(p) –
ll. 1-203 –
i. 1-203(a)
1.
Whether a transaction in the form of a lease create a security interest is determined by the facts of each case
ii. 1-203(b)
1.
2.
3.
4.
The lessee has an option to become the owner of the goods for no additional consideration or nor nominal additional consideration upon compliance with the lease agreement.The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; orThe lessees is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;The original term of the lease is equal to or greater than the remaining economic life of the goods
– tells us that a transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and: – gives us the general rule
mm. 1-203(d) –
i.
1.
2.
When the option to become the owners of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.when the option to renew the lease is granted to the lessee, the rent is stated to be the fair market value for the use of ht goods for the term of the renewal determined at the time the option is to be performed; or
Additional consideration is nominal if it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised. Additional consideration is not nominal if:
nn.
oo.
If the purchase price is within 70% of FMV than it is not nominalIf the option to renew or the option to purchase is tied to FMV then it is not nominalDefines nominalGoverns Leasessays that a lease is a transfer of the right to possess or use a good for a certain amount of time with considerationYou must determine whether it is a true lease or a disguised sale of a security interestLeasing presents a secrecy problem because it looks like the lessee has ownership and so the lessee could put it up for collateral and no one would knowIn a lease you can write in any remedy you want. You are not limited by article 9
Leases are very common and when you lease there are certain tax benefits
Lease Analysis
Step 1 –
If there is no unilateral right to terminate then continue on to step 2
If there is a unilateral right to terminate then it is a lease
o
This is because it makes no sense to have a right to terminate a sale.
Step 2 –
(b)(1) – the term of the lease is equal to or greater than the remaining economic life of the goods
(b)(2) – lessee bound to renew lease for economic lifetime or bound to buy after lease
(b)(3) – there is an option to renew for nominal consideration
(b)(4) – there is an option to purchase for no additional consideration or nominal consideration
Step 3 –
(c) Gives us six factors which alone are not determinative of a sale
o
o
o
o
o
o
Lessee has an option to become owner for FMV or greaterLessee has option to renew for fixed rent for FMV or greaterLessee has an option to renew the lease or to become owner of the goodsLessee agrees to pay taxes, filing, etcLessee assumes risk of loss of the goodsIf the lessee is paying as much as it would cost to buy it
So….
1-203(a) – gives us the general rule
1-203(b) – gives us the two step test for if it is a sale or a lease
1-203(c) – gives us six factors to look at when you are using (a)
1-203(d) – defines nominal consideration
1-203(e) – defines economic life of the goods
pp. Is it a true lease or is it a sale that is disguised?
i.
ii.
iii.
If the lease is for the entire economic life of the leased goods, with our without renewal, a disguised sale has occurred.If the contract contains a clause that permits the lessee to terminate the lease at any time and return the leased goods, then it is a true lease.
These are three situations when it is always going to be this way. With every other scenario it must be evaluated on its own.
Surety
qq.
rr.
ss.
tt.
uu.
Subrogation protects suretiesIf the debtor does not pay and the surety gets to step into the shoes of the creditor and exercise the creditor’s rights against the debtorSureties get an equitable right of subrogationThe common law gives surety some protection
Scope of Article 9
vv. 9-109(a) –
i.
ii.
iii.
iv.
A consignment – if it meets the definition in 9-102(a)(20)A sale of accounts, chattel paper, payment intangibles, or promissory notesAn agricultural lienA transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract
ww. 9-109(b) –
xx. 9-109(c) –
yy. 9-109(d) –
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
1.
2.
3.
4.
Security agreements covering personal and real property under section 9-604Fixture filings in sections 9-501, 9-502, 9-512, 9-516, and 9-519Fixtures in section 9-334Liens on real property in section 9-203 and 9-308
xii.
xiii.
An assignment of a deposit account in a consumer transaction, but sections 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds.an assignment of a claim arising in tort other than a commercial tort claim, but sec
iii.
iv. Art. 9-205 –
v. There are multiple ways to give notice
1. Pledge –
2. Chattel mortgage –
3. Conditional Sale – the buyer holds possession but the seller holds title. In most state the filing gives notice and perfection. The seller can take back the property if the buyer defaults on the sale
4. Trust Receipt
5. Field Warehouse –
a pledge of property that is too big, so creditor goes to the property and secures itjust like the mortgage with real property. The notice is a public filing of the mortgage
debtor gives actual physical possession of the collateral to the creditor. There is no real notice problem but pledges can be impracticalsays that they disagree with Ratner but that they provide for notice by filing and perfectionThe court said that unfettered control makes a security agreement void. But the court suggested a way to still use the accounts receivable financing. They said it is okay if there is notice to the rest of the world of the security interestOstensible ownership problem because it ostensibly looks to the world like Hobb owned accounts free and clear
p.
q.
r.
s.
t.
u.
definitionsSo, once you have the legally valid attachment and have given notice to the world (perfected) you are a perfected creditor.What if you have an attachment to the property but there are other creditors? You need to have superiority or priority. To get this you have to take one more step under Article 9. You must give notice to the world that you have this attachment. Article 9 tells us how to do thisOnce attachment happens a creditor has remedies under article 9. And one of the things that they can do is just go back and take back the property – repossess it.Article 9 term for a security agreement becoming legally valid is attachmentNow, a debtor and creditor enter a security agreement which gives rise to a legally enforceable security interest under Article 9All of these led to a very confusing system because of all the different filing systems. So now, article 9 governs all of these types of transactions so there is a more uniform filing systemThe problem was that Hobb and unfettered control of the money in the accounts receivable. The court was worried about protecting other creditor because it looked to the world like they had all this moneyArticle 9 governs the security interest when there is personal property (NOT REAL PROPERTY)What do you have to do to become a secured creditor?So, you do not want to be a general creditor you want to be a secured creditorGeneral creditors are unsecured creditorsAn “I owe you.” Is nothing more than evidence that there was a contract. Same with a promissory note. They do not mean anything elseYou can have oral contracts as long as they do not violate the statute of fraudThere are two definition sectionsUCC 1-304 – in every transaction there must be an obligation of good faithPrinciples of fairness and justice still apply unless the code displaces it.UCC 1-103(b) – most important, says that the principles of law and equity still apply unless displaced by the UCC.UCC 1-302 – can be varied by the parties agreement unless the code says it can’tUCC 1-103(a) – is the policy section, which emphasizes the party’s agreement. It wants to promote expansion of commercial transactionsSecurity interest defines the relationship between the debtor and creditor
Primarily looking at article 9 of the UCC. It governs security interests in personal property
