OVERVIEW (Week 1)
Secured Transactions: Contract where the debt of the debtor is secured by some of the debtor’s property (UCC, Article 9)
UCC Overview:
Article 1 = definitions
Article 2 = buying and selling of goods
Article 9 = involve the exchange of money (loans)
Overview of Article 9 secured transactions (this is our main focus in the course)
§ Primary interest is getting your money back
§ How you secure that interest
o i.e. collateral (commercial transactions – not usually with friends or family)
§ if debtor defaults, creditor can repossess the collateral & sell it
o unsecured transactions/loans is usually credit cards
§ creditor will have to get a judgment & then find assets to seize (i.e. FC) if creditor has no $
§ Want a return of your investment and you want some money for having lent the $
Scope of A9 is over security interest in personal prop and fixtures
· NOT transactions where an interest an interest in real prop secures an obligation
· BUT does cover some transactions that do not involve a debtor granting a security interest:
o Agricultural liens
o Consignment
o Sale of receivables
o Security interest arising under other articles of UCC
Attachment: requirement for CREATING an enforceable security interest
Perfection: acts required for PROTECTING security interest from claims of other persons to the collateral
Priority: SUPERIORITY of the security interest against claims of other persons to the collateral
Definitions from Article 1-201(b) (Week 1)
1. Agreement: Bargain of the parties, in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in 1-303. (1-201(b)(3)).
2. Good Faith: means honesty in fact in the contract or transaction concerned (1-201(b)(19))
3. Organization: A person other than an individual (1-201(b)(25)).
4. Security Interest: An interest in personal property or fixtures which secures payment or performance of an obligation. (1-201(b)(35)).
§ It includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Article 9.
§ It DOESN’T include the special property interest of a buyer of goods on identification of those goods to a contract for sale under Section 2-401, but a buyer may also acquire a “security interest” by complying with Article 9.
§ Except as otherwise provided in Section 2-505, the right a seller or lessor of goods under Article 2 or 2A to retain or acquire possession of the goods is not a “security interest”, but a seller or lessor may also acquire a “security interest” by complying w/ Article 9.
§ The retention or reservation of title by the seller of goods notwithstanding shipment or delivery to the buyer under Section 401 is limited to a reservation of a “security interest.”
§ Whether a transaction in the form of a lease creates a security interest is determined pursuant to Section 1-203. Consensual lien taken in personal property
You can only enforce a SI that has attached– “attached” means that the SI is enforceable
5. Signed: Any symbol executed or adopted with present intention to adopt or accept writing. (1-201(b)(37)).
6. Surety: A guarantor or other secondary obligor. (1-201(b)(38)).
7. Writing: Printing, typewriting, or any other intentional reduction to tangible form. “Written” has a corresponding meaning. (1-201(b)(43)).
Definitions from Article 9 Section 102(a) (Week 1)
1. Account: A right to payment of a monetary obligation, whether or not earned by performance, (right of payment examples follow) (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (ii) for services rendered or to be rendered, (iii) for a policy of insurance issued or to be issued, (iv) for a secondary obligation incurred or to be incurred, *** arising out of the use of a credit or charge card or information contained on or for use with the card, ***. This includes health care insurance receivables. It DOESN’T include: (i) payment evidenced by chattel paper or an instrument, (ii) commercial tort claim, (iii) deposit accounts, (iv) investment property, (v) letter of credit rights, (vi) rights to payment for money or funds advanced or sold, other than rights arising out of the use of credit or charge cards or information contained on or for use with the card. (9-102(a)(2)).
2. Account Debtor: means a person obligated on an account, chattel paper, or general intangible. The term doesn’t include persons obligated to pay a negotiable instrument, even if the instrument constitutes part of chattel paper. (9-102(a)(3))
3. Agricultural Lien: means an interest in farm products:
a. Which secures payment or performance of an obligation for:
i. Goods or services furnished in connection w/a debtor’s farming operation; OR
ii. Rent on real property leased by a debtor in connection w/ its farming operation
b. Which is created by statute in favor of a person that:
i. In ordinary course of its business furnished goods or services to a debtor in connection w/ a debtor’s farming operation; OR
ii. Leased real property to a debtor in connection w/the debtor’s farming operation; AND
c. Whose effectiveness doesn’t depend on the person’s possession of the personal property (9-102(a)5))
4. Authenticate: Means (1) to sign; or (2) To execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present intent of the authenticating person to identify the person and adopt a record. (9-102(a)(7)).
5. Certificate of Title: Certificate of Title with respect to which a statute provides for the security interest in question to be indicated on the certificate as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the collateral. (9-102(a)(10)).
6. Chattel Paper: A record or records that evidence both a monetary obligation an a security interest in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of software used in the goods, a lease of specific goods, or a lease of specific goods and license of software used in the goods. “Monetary obligation” means a monetary obligation secured by the goods or owed under a lease of goods and includes a monetary obligation with respect to software used in the goods. It DOESN’T include (i) charters or other contracts involving the use or hire of a vessel or (ii) records that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for the use with the card. If the transaction is evidence by records that include an instrument or series of instruments, the group of records taken together constitutes chattel paper. (Ex: Lien or Note) (9-102(a)(11)).
7. Collateral: The property subject to a security interest or agricultural lien. This term includes: (A) Proceeds to which a security interest attaches; (B) Accounts, chattel paper, payment intangibles, and promissory notes that have been sold; AND (C) Goods that are the subject to consignment. (9-102(a)(12)).
8. Consignee means a merchant to which goods are delivered in a consignment. (9-102(a)(19))
9. Consignment means a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and:
a. The merchant:
i. Deals in goods of that kind under a name other than the name of the person making delivery;
ii. Is not an auctioneer; AND
iii. Is not generally known by its creditors to be substantially engaged in selling the goods of others;
b. W/ respect to each delivery, the aggregate value of the goods is $1000 or more at the time of delivery;
c. The goods are not consumer goods immediately before delivery; AND
d. The transaction doesn’t create a security interest that secures an obligation. (9-102(a)(20))
10. Consignor means a person that delivers goods to a consignee in a consignment. (9-102(a)(21))
11. Consumer Goods: Goods that are used or bought for use primarily for personal, family, or household purposes. (9-102(a)(23)).
12. Debtor: Means: (A) A person having an interest, or other than a securityinterest or other lien, in the collateral, whether or not the person is an obligor; (B) A seller of accounts, chattel paper, payment intangibles, or promissory notes; or (C) A consignee. (9-102(a)(28)).
13. Deposit Accounts: A demand, time, savings, passbook, or similar account maintained with a bank. The term DOESN’T include investment property or accounts evidenced by an instrument. (Ex: Savings or Checking Account) (9-102(a)(29)).
14. Document: A document of title or a receipt of the type described in Section 7-201(b). (Ex: Shipping & Storage Receipts)(9-102(a)(30)).
15. Equipment: Goods other than inventory, farm products, or consumer goods. (Ex: Shipping & Storage Receipts)(9-102(a)(33)).
16. Farm Products: Goods, other than standing timber, with respect to which the debtor is engaged in a farming operation and which are: (A) crops grown, growing, or to be grown including: (i) crops produced on trees, vines, and bushes, and (ii) aquatic goods produced in aquacultural operations; (B) Livestock, born or unborn, including aquatic goods produced in aquacultural operation; (C) Supplies used or produced in a farming operation; or (D) Products of crops or livestock in their unmanufactured states. (9-102(a)(34)).
17. Farming Operation: Raising, cultivating, propagating, fattening, grazing, or any other farming, livestock, or aquacultural operation. (9-102(a)(35)).
18. Financing Statement: A record or records composed of an initial financing statement and any filed record relating to the initial financing statement. (9-102(a)(39)).
19. General Intangibles: Any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit, accounts, documents, goods, instruments, investment property, letter to credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software. (9-102(a)(42)).
20. Goods: All things that are moveable when a security interest attaches. The term includes: (i) Fixtures, (ii) Standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) Unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) Manufactured homes. The term also includes a computer program embedded in goods and any supporting information provided in connection with a transaction relating to the program if (i) the program is associated with the goods in such a manner that it customarily is considered part of the goods, or (ii) by becoming the owner of the goods, a person acquires a right to use the program in connection with the goods. The term DOESN’T include a computer program embedded in goods that consist solely of the medium in which the program is embedded. It also DOESN’T include accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles, instruments, investment property, letter of credit rights, letters of credit, money, or oil, gas, or other minerals before extraction. (9-102(a)(44)).
21. Instrument: A negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment. The term DOESN’T include (i) investment property, (ii) letters of credit, or (iii) writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card. (Ex: Checks or promissory note) (9-102(a)(47)).
22. Inventory: Goods, other than farm products, which: (A) Are leased by a person as lessor; (B) Are held by a person for sale or lease or to be furnished under a contract of service; (C) Are furnished by a person under a contract of service; or (D) Consist of raw materials, work in process, or materials used or consumed in a business. (9-102(a)(48)).
23. Investment Property: A security, whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account. (Ex: Stocks, bonds & the like) (9-102(a)(49)).
24. Letter-of-credit right: A right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. The term DOESN’T include the right of a beneficiary to demand payment or performance under a letter of credit. (Ex: Commercial financing mechanism) (9-102(a)(51)).
25. Lien Creditor: Means: (A) A creditor that has acquired a lien on the property involved by attachment, levy, or the like; (B) An assignee for benefit of creditors from the time of assignment; (C) A Trustee in bankruptcy from the date of the filing of the petition; or (D) A receiver in equity from the time of appointment. (9-102(a)(52)).
26. New Value: Means: (i) Money, (ii) Money’s worth in property, services, or new credit, or (iii) Release by a transferee of an interest in property previously transferred to the transferee. The term DOESN’T include an obligation substituted for another obligation. (9-102(a)(57)).
27. Obligor: A person, that, with respect to an obligation secured by a security interest in or an agricultural lien on the collateral, (i) owes payment or othe
nd shortened. No change in meaning is intended. Under subsection (a)(1), all consensual security interests in personal property and fixtures are covered by this Article, except for transactions excluded by subsections (c) and (d). As to which transactions give rise to a “security interest,” the definition of that term in Section 1-201 must be consulted. When a security interest is created, this Article applies regardless of the form of the transaction or the name that parties have given to it.
Right to payment / Sale of account = RECEIVABLES
Example: owner of receivable might not want to wait to get $ so sells right so can get $ sooner
A9 governs the sale of receivables AND when owner of receivables uses it as collateral to secure a loan
Buyer of prop = secured party 9-102(a)(72)
Seller = debtor 9-102(a)(28)
Prop sold = collateral 9-102(a)(12)
Comment 2, 9-318 states that seller of acct or chattel paper retains NO interest in prop sold
9-318(a) seller (debtor) retains NO legal or equitable rights in prop sold
9-318(b) seller has rights and title to the prop identifiable to rights and title it sold AS LONG AS buyer’s security interest is unperfected
So seller can sell or create security interest in prop already sold IF buyer hasn’t perfected security interest
This section doesn’t apply to sale of payment intangible or promissory notes b/c these are automatically perfected upon attachment 9-309(3) and (4)
Most security interests in article 9 are the credit in exchange for collateral type
Debtor borrows $ and grants a SI in rights to personal prop or debtor buys personal prop on credit and grants a SI in prop purchase
Note: person is NOT precluded from creating an interest in rights prop to secure an obligation simply b/c A9 doesn’t apply
Problem 1.1 (p.20)
Ed asks his friend Alex to loan him $20K for a year at 7% interest. Ed tells Alex she can hold his antique watch (worth well over $20K) until Ed fully repays her. They sign an agreement and she cuts Ed a check.
(a) Is this transaction governed by Article 9? Yes, under 9-109(a)(1) that says any transaction intended to create a security interest in personal prop or fixtures – here, the watch is personal prop
What is the obligation being secured and what makes the obligation legally binding? The obligation being secured is Ed’s promise to pay the loan back within a year. It is made enforceable by the consideration given by Alex (the check for $20K).
Who would be deemed the debtor, the obligor, and the secured party with respect to the security interest created? Under Section 9-102(a). Ed is the “debtor” and the “obligor.” Alex is the “secured party” b/c he has an ownership interest in the collateral.
(b) What if instead of giving the watch, Ed gives Alex a signed note granting Alex a security interest in the watch? Does this change any of your answers to question (a)? No, this has no effect on the classifications of the transactions or parities under the previous question.
(c) Suppose Ed doesn’t have the watch, but his cousin, John does. If John offers Alex the watch until Ed plays the debt and Alex has Ed sign the agreement, does this create an Article 9 transaction? Yes it’s the same deal b/c it’s still using this interest in personal prop but what is different is who is the debtor & obligor. Here, John is the “debtor” and Ed is the “obligor.”
PERFECTION OF AN A9 SECURITY INTEREST
“attachment” is all that is required to enforce an A9 SI against the debtor
like delivering a legally enforceable deed
“perfection” is required, however, to enforce an A9 SI against third parties
like recording a deed or mortgage
Bankruptcy – The Big Picture
Assets = $1 million
Liabilities = $4 million
Section 362 of BKCY code places an automatic stay on all activities relating to the debtor’s prop
once that petition is filed, you cannot collect any money from the debtor or enforce any security interests against them
Who gets what in bkcy?
All creditors get $.25 on the $1
Perfected Secured Creditors get first dibs (this is why perfection is such a big deal)
General (Unsecured) Creditors get shorter – usually wiped out; get pennies on the dollar at most
Problem 1.2 (p.21)
Bucks loans Winger $300 on a Friday and Winger fails to repay the loan. Winger flies his remote control airplane into Bucks’s backyard. Winger asks for Bucks plane, but Bucks says pay up first.
(a) Can Bucks claim an Article 9 security interest in the plane and thus legally refuse to return Winger’s airplane? No, an article 9 security interest generally must be created “by contract.” The debtor must grant an interest in that property to the secured party. Bucks can’t assert a security interest just because he happens to have possession of Winger’s stuff. It’s an unsecured interest.
Conditional Sales (Week 1)
Article 9 governs interests arising under ARTICLE 2 (sales and leases of goods) WHEN:
(1) Seller of goods RESERVES TITLE to goods sold 2-401
(2) Seller of goods procures a negotiable BILL OF LADING to its owner OR a non-negotiable bill of lading to herself or her nominee 2-505
(3) Buyer of goods RIGHTFULLY REJECTS tendered goods or justifiably REVOKES acceptance of goods 2-711(3)
§ Buyer/lessee = secured party (opposite of A9 transaction where seller is secured party)
Article 9 POSTPONES its attachment and perfection requirements for security interests under article 2/2A until debtor obtains POSS’N of goods
9-110: these SI are enforceable regardless of secured party’s compliance w/ attachment requirements of 9-203(b)(3) = these SI automatically attach
