Secured Transaction Cases Briefs
CHAPTER ONEINTRODUCTION TO SECURED TRANSACTION
It is understandable that someone extending credit in a sale or
loan transaction wants to be sure of repayment. Some debtors are so
solvent and/or trustworthy that the creditor demands nothing more
than the debtor's promise to pay (sometimes called a "signature"
loan); creditors doing this are said to be unsecured. In many
transactions the creditor is less sanguine about the debtor's
ability or desire to repay and may demand that the debtor either
obtain a surety (called by various names: a co-signor, a guarantor,
or, in Article 3 of the Uniform Commercial Code, an accommodation
party) or secure the debt by nominating some of the debtor's
current or future property as collateral. If the debtor defaults,
the collateral may be seized and sold and the proceeds of the sale
used to pay the debt.
Basic definitions: A lien is an interest in the debtor's
property given by the law to protect a creditor.
i.If the debtor voluntarily grants such an interest, a
consensual lien is created.
ii. If a consensual lien is taken in the debtor's real property,
the lien is called a mortgage.A consensual lien in personal
property or fixtures is called a security interest and is governed
by Article 9 of the Uniform Commercial Code.
Involuntary liens can also be imposed against the debtor's
property.
If the lien arises from judicial proceedings (the creditor sues,
recovers judgment, and sends the sheriff out to seize the
defendant's property), a judicial lien is created.
A statutory lien is one imposed by either a statute or the
common law in favor of certain creditors the law deems worthy of
protection. Examples are the liens given to landlords, to artisans
repairing personal property (the garage mechanic, for example), and
to a host of others, such as ostlers, innkeepers, and even
attorneys.
A mechanic's lien is a statutory lien in favor of those who
perform construction work. And if you do not pay your taxes, the
federal government will file the awesome federal tax lien, a
statutory lien that reaches all of the taxpayer's property, a
matter we treat at length in a later chapter.
BANKRUPTCY
PRE-CODE SECURITY DEVICES
Wallace v. Ratner (1925)1. By the law of New York, a transfer of
property, as security for a debt, which reserves to the transferor
the right to dispose of the property or to apply its proceeds for
his own uses is fraudulent and void as to creditors.
2. This rule applies to the assignment of present and future
book accounts as well as to assignment of chattels, since it does
not result from the retention of ostensible ownership by the
assignor, but from the fact that the reservation of dominion by him
is inconsistent with the effective disposition of title and
creation of a lien.
3. Held that an assignment made by a mercantile corporation,
more than four months before it was adjudged bankrupt, of its
present and future accounts receivable as security for a loan was
void under the above rule, so that delivery of a list of accounts,
and payments made within the four months, were inoperative to
perfect a lien in the assignee, but were unlawful preferences,
under the Bankruptcy Act.
secret liena lien not appearing of record and unknown to the
purchasers; a lien reserved by the vendor and kept hidden from
third parties to secure the payment of goods after
delivery.PledgeIn a pledge3 the debtor (called a pledgor) gives
physical possession of the collateral to the creditor (called the
pledgee) until the debt is paid. Possession then perfects the
creditor's interest in the collateral (even against the bankruptcy
trustee). Chattel Mortgage
The debtor could always mortgage land, so why not have something
similar for personal property (chattels)? And, as with real
property, the mortgage given by the debtor (the mortgagor) to the
creditor (the mortgagee) was recorded in a designated place and
indexed under the name of the debtor so that other potential
creditors could check and see whether the collateral was
encumbered. Thus, the debtor could have possession, but the secret
lien problem so dreaded in Benedict v. Ratner was avoided because
the mortgage was (through the recording system) witness to the
creditor's very public interest in the property.
A. Conditional Sale Conditional sale whereby the buyer got
possession of the property but the seller reserved full and
complete title to it until the buyer paid in full (the condition in
conditional sale was this payment before the buyer got any title.
In most states the seller's interest in a conditional sale had to
be filed to be perfected.B. Field Warehouse
CHAPTER TWO
THE SCOPE OF ARTICLE 9
V. EXCLUSIONS FROM ARTICLE 9A. Federal Statutes
UCC does not displace federal law, however it applies to the
extent the federal statute doesnt in personal property. Must
remember that for certain matters must be researched on federal
& state level; ship mortgages, aircraft titles, patent &
copyrights, railroad equipment & some interstate commercial
vehicles are in part governed by the federal statutes.
Further, certain federal statutes may void security interests.
E.g: Truth in Lending Act.
Philko Aviation v. Shacket (1983)Facts: Seller sold the same
airplane to two different buyers one had possession but didnt
record, the second on got the documents & recorded right away.
Who gets it? The party that recorded
Main point: transfer of title to aircraft s not valid against
innocent 3rd party w/out recorded written agreementB. LANDLORD'S
LIEN AND OTHER STATUTORY LIENSPROBLEM # 9
AS a security for rent money, lease agreement stated that he can
seize all tenant inventory in case of default. Does he have to
perfect under article 9?
YES, consensual landlord's liens are not excluded from coverage
of the Uniform Commercial Code.
C. Wage Assignments
Statutory regulations killed wage assignments; thus some states
absolutely prohibit the assignment of future wages. but some permit
them in limited circumstances if the employer consents, some states
if both employer & spouse agree.Problem # 10
Insurance sales, to secure a loan he gave the bank" all present
& future commissions earned or to be earned from company "Z"".
Article 9 cover?
NO, The UCC 9-104, exempts from the coverage of U.C.C. art. 9
any transfer of a claim for wages, salary or other compensation of
an employee.
D. Non-financing Assignmentsi. UCC article 9 doesnt apply to
some transfer of accounts, chattel paper, payment intangibles, or
promissory notes; is meant to be an exclusion of assignments of
non-financing nature.
Problem #11a) B sold his business w. all account receivables;
Need to take article 9 steps?
NO, This article shall not apply to: 4) a sale of accounts,
chattel paper, payment intangibles, or promissory notes as part of
a sale of the business out of which they arose; b)A agreed to
paint. Portrait of mayor but doesnt have time. He mandated job to
B. Must B take article 9 step?
NO, this article shall not apply to: an assignment of a right to
payment under a contract to an assignee that is also obligated to
perform under the contract;
c) A sold unpaid account to collection agency. Must collection
agency take comply w. article 9?
NO, this article shall not apply to an assignment of accounts,
chattel paper, payment intangibles, or promissory notes which is
for the purpose of collection only; d) A transferred to B the right
to money of portrait he sold. Must B comply with article 9?
NO; This article shall not apply to an assignment of a single
account, payment intangible, or promissory note to an assignee in
full or partial satisfaction of a pre-existing indebtedness; C.
REAL ESTATE
Except for fixtures, real estate security interests are not
covered by covered by article 9. What about the paperwork &
promissory not the debtor sign?Problem # 12Bank A took from bank B
as collateral real property mortgages & promissory notes of B's
borrowers. What should A do to protect its interest?
This article doesnt apply to banks B real property mortgage.
However, when Bank B Uses them as collateral to Bank A( article
9 will cover.
"if B sells the promissory note to A, or gives security interest
in the note to secure its own obligation, this article applies"
A's security interest in the note gives it a security interest
in mortgage lien that secures the note.
If security interest in the note is perfected, then SI in the
mortgage is perfected.
D. OTHER EXCLUSIONS
Problem # 13
Bank took security interest in all credit card purchases &
personal checking account .Article 9 applies to account?No, this
article doesnt apply to an assignment of a deposit account in a
consumer transaction, Article 9-109 what this article does &
doesnt cover
CHAPTER 3
THE CREATION OF A SECURITY INTEREST
I. CLASSIFYING THE COLLATERAL
Article 9 divides article 9 into many different categories
Goods:
Consumer Goods
Equipment
Farm Products
Inventory
Quasi-Tangible property (pieces of paper used as collateral)
Instruments
Investment Property (stocks & bonds and rights to accounts
containing the same)
Documents (warehouse receipts and bill of lading)
Chattel paper
Letters of credit
Intangible Property(property having no significant physical
form)
Accounts
Health-Care-Insurance Receivables (these are subcategory of
"accounts")
Deposit accounts
General Intangibles
Payment Intangibles (these are sub-categories of "general
intangibles")
Note that equipment is defined not only to have an unusual
meaning but also as a catchall category for any good that doesnt
fit into the other three goods categories.
Similarly "general intangibles".Problem 14
a. A professional pianist piano ? Equipment: (also when we cant
fit anywhere we pick equipment) Cattle Fattened by a farmer for
sale:? Farm Products Yes; (to be a farm product the owner must be
engaged in farming) A farmer's Tractor ? Equipment; (not a farm
product) The Farmers Chickens ? Farm Products The manor ? Farm
product A mobile home? (good, consumer good or manufactured home) A
right to sue someone under breach of contract (is a chosen action;
is the old term of art for the right to sue somebody)i. a general
intangible, or perhaps an account.
An Account is A right to sue someone from negligence arising
from automobile accident
Torts issue; excluded from the scope of article 9
A right to sue corporation for wooing away a trusted
employee
Commercial tort claim: w/in the scope of article 9
A security interest in a lawsuit P. has already won and that has
been reduced to a settlement agreement
Comment 15; once a claim arising in tort has been settled &
it doesnt matter what type of claim it was & is considered a
payment intangible(included in article 9(a) Pencils & other
stationary supplies used by Sears or a similar large retailer in
its credit offices i. inventory if its for sale A liquor license
(w/in one of the quasi-tangable, you can pass them subject to
approval)ii. general intangible A right to return of a security
deposit held by landlord.
i. payment intangible A newspaper carrier's right to payments
for papers already delivered
i. account
a newspaper carrier's right to payments for papers to be
delivered in the future
i. account
aunt augusta:
i. Payment intangible
Curtains bought by a lawyer for the new office / What if after
purchasing the curtains the lawyer decides to use them at home? Do
they become consumer goods?
If w/in 24 hours they are used 12 in the household & 12 in
the business? Primarly means 51% or greater. For personal use
primarly for family or household( in this hypo it is therefore
business
Aunt Augusta loaned her nephew $5,000 with an oral agreement he
would repay the money the following year. If she wants to use this
agreement as collateral, how would it be classified?
i. Payment intangible In Re Morton
Facts: bankrupt bought car for personal use, after a while he
was using it in connection with his employment & furthering his
employers business. whether car was a consumer goods or inventory?
Started as consumer good & became inventory.
Is it relevant? No bcz the protection afforded by article 9
precludes filing made in the proper place from being struck down
because of a change in the collateral actual use. Main Point: The
moment of the purchase of the relevant point of inquiry
Class Notes: there has to be a good faith representation at the
time of loan. Problem # 15Q: hospital needs loan. Its patient
belong to various health plans which they authorize the hospital to
bill. Hospital has many of such receivables in process collection.
Can it use as collateral??
A: YES 109 (d) (8): claim under a policy of insurance not
covered but an assignment by or to healthcare insurance receivable
is covered Hypo: What if the credit card company was selling those
accounts as assets? (not using them as collateral, they are selling
them to make some cash)? YES, still subject to article 9Problem #16
Q: merchants sends transactions to Credit card company for
reimbursement. Can CC Company use those transactions papers as
Collateral?
9-102(a)(2)
Answer: Credit card is the debtor to those merchants, I dont
think it can ???Problem #17
17(a) Milk in the hand of a farmer? Farm products
In the hands of store? Inventory
Sold to customer? Consumer product
Restaurant? Inventory
17(b) certificate of deposit issued by a bank? Instrument
air bill issued by airline as a receipt for frozen shrimp?
Document
receipt given to a farmer by a silo operator when the farmer
stored grain? Document
in a document its ownership, in instrument gives you the right
to payment
17(c) Rare coins bough by hobbyist for his collection: consumer
goods
17(d) tax refund payment intangible
17(e) davanger bond issued by corporation? (Security) investment
property
right to 100 shares of stock recorded: broad category
:investment P. smaller category: security in title
17(g) Computer program17(h) the monthly rental obligations owed
to landlord who wants to use them as collateral? Account (right to
payment)
the promissory notes signed by the tenants to pay their rent?
Instrument ( negotiable instrument or any other writing evidencing
right to pmt. ) Morgan County Feeders Inc. v. McCormick
Buyers of inventory in the course of business take free of
perfected security interest. Facts: cattle used on cattle drives
not as rodeo calves or feeder cattle.
Issue: whether they are inventory or equipment?
Main point: principal use of goods determine whether they are
inventory or equipment.
Factors to determine:
The good are for immediate or ultimate sale
They have a long period of use in the business
Equipment: when they are fixed assets, or have as identifiable
units, a relatively long period of use
Inventory: even if not held up for sale, if they are used up or
consumed in a short period of time in the production of some end
product.
Problem # 18
Q: Elvis guitar bought by a fan who doesn't play guitar? How is
the guitar classified? Not investment property cz. not securityA;
Consumer goods ( Not inventory cz. not for sale If the ct. decide
that its not cg(equipment that is a catch all)Chattel papers: e.g:
car dealership, car buyers notes promissory notes & security
agreements giving SI so dealership can repossess in the event of
default. These set of papers are called Chattel papers. Dealership
can sell those papers or use them as collateral; this is an article
9 transaction requiring article stepsProblem #19
Electronic chattel paper means chattel paper evidenced by a
record or records consisting of information stored in an electronic
median
Q: can the dealership use the electronic version of car lease Ks
as Collateral? A: Yes
Problem # 20
Q: the state enacted a statute giving debtors unpaid debtors put
a lien on farmers' crop (Statutory lien: bcz.it arises by statute
it arises by statute not by farmers consent)> is this an article
9 transaction?
A: Statutory liens are not covered by article 9 (but
agricultural liens are) II. TECHNICAL VALIDITY OF THE FORMS
The creation of article 9 security interest involves 2
documents: the security agreement and the financing statement.
Security Agreement: is a K. between the debtor & creditor by
which the debtor grants to the creditor (the secured party) a
security interest. Purpose is to create property rights between C
& D.
Financing Statement: is the notice that is filed in the place
specified by the article (& indexed under the debtor's name) in
order to give later creditor's an awareness that the collateral is
encumbered. Purpose is property rights between C & the rest of
the world.A. The Security Agreement
Where the Collateral is w/in secured party's possession no
written agreement required (although desirable)
But when it is not a security agreement must
1. be authenticated by the debtor2. describe the collateral
Problem # 21Q: F bought Compuer from A on credit. K says "
conditional sale K: title remain to the store until paid in full"
the k described the computer but didnt say the words" security
intersest". Does it qualify as a Security agreement?
A; YES, doesnt need to the magic words. The Financing Statement
: filled in public office by creditor (SP) to perfect the
creditor's right. doesnt need to be signed by anyone ( the debtor
have authenticated it by signing the security agreement)
must identify the parties
1. indicate what collateral it covered
i. if realty interest involved ( timber, fixtures minerals to be
extracted from the ground) it must describe realty,
2. indicate owner of realty (if not the same as obligor)
&
3. Indicate that it would be filed in real property records.
4. Note: if financing office take w/o these things it is
effective.
Purpose:
i. Give notice
ii. Doesnt need details of transaction like loan amt. &
monthly pmts. Interested parties can get those details from
original parties. Typically have the addresses of d & SP.
B. The debtor's Identity: FS typically indexed under debtor's
name, bcz. later creditors will search under his name. THIS IS
IMPORTANT TO BE CORRECT.
Problem # 22'Harry Fellini ran a movie theater called "Fellini's
Art Theater," but, bcz. he was sole proprietor, that was a trade
name. He gave a security interest in the business's equipment to
Sharkteeth Finance Comtatement. The financing statement calls for a
listing of the "debtor's name."
a) Should the parties use the business name or individual name?
Individual's name
b) If theater were run as a partnership, would the partnership's
name be used as debtor's name? Partnership name??Problem # 23Q: D
name name was "Michael A Erwin," but the financing as "Mike Erwin."
The rules of Article 9 excuse "minor errors unless seriously
misleading"; A; Maybe seriously misleading Parkratz Implement Co.
v. Citizens National Bank
MAIN POINT: "Minor misspelling of debtor's name on a financing
statement may render it "seriously misleading" and void the
security interest The bank argued that the misspelling of the
debtor's name as "Roger," rather than "Rodger," on the creditor's
financing statement rendered it "seriously misleading" and
ineffective if a searcher utilized the "standard search logic"
The court held that minor errors were those that would result in
the discovery of a financing statement while searching under the
debtor's correct legal name. The court found that the creditor's
financing statement was seriously misleading because the bank was
unable to find the debtor's name using the "standard search logic"
and the only search that would have produced the creditor's
interest would have been by using the temporary internet search
logic, which did not constitute an official search. The court also
placed the burden on the filing creditor to correctly list the
debtor's name.
A mistake in the debtor's name can be seriously misleading(
voiding the security interest
Hypo: Does a name change affect the security interest? The
secured party has 4 month to amend their financing. Whatever they
secured before continue to be perfected, but the future secured
items will be affected. (the creditor will not be perfected in that
new inventory)
Problem # 24Q: Barbara A. took a loan from ONB using her
inventory & equipment as a collateral. ONB filed FS. When she
got married she changed her name to Barbara B. & then borrowed
another 50K from NFC, who didnt find the first encumbrances on her
business under her new last name. did ONB lose their SI bcz. it
failed to refile her name change??A: Need to amend their financing
statement w/in 4 month. ????Problem #25 Q: The Last National Bank
filed a financing statement in the proper place to perfect its
security interest in the accounts receivable of the American
Electronics Store. When the latter ran into financial difficulty,
its assets were sold to a new electronics concern, Voice of Japan,
which moved into the same retail location. Must Last National
refile to keep its security interest perfected in (1) the accounts
actually transferred by American Electronics to Voice of Japan or
(2) accounts thereafter acquired by Voice of Japan? See 9-507(a)
and its, Official Comment 3. A: w.r.t collateral that is sold,
exchanged, leased or licensed a financing statement remains
effective following the disposition of collateral only when the
security interest remains in the collateral. ??????Q: Do we get the
same result if American Electronics Store merges with Voice of
Japan and the new entity is called "Voice of Electronics, Inc."?
.A: is he new debtor? Person becomes bound by a previous security
agreement. The new person is bound & no new agreement is
required. Satisfy for existing & after acquired property to the
extent described in the agreement. ??????Q: What if the opposite
happens, and the debtor remains the same, but Last National assigns
its interest in the debtor's accounts to Octopus National Bank? A:
NO, If SP assigns SI filing not required to continue the perfected
statute.
Q; Is Octopus National's interest superior to that of Last
National's creditors???????Q: Consider that the transfer of the
security interest from Last National to Octopus National is itself
the transfer of an account or chattel paper; see Official Comment
4, Example 2 to 9-310. ??????Problem # 26:Q: When Robin Oakapple
found he could not get a loan unless he had collateral, he got
permission from his foster brother, Richard Dauntless, to use
Richard's yacht as collateral. Should the lender make both sign the
security agreement (only Robin signed the promissory note)? Which
of these parties is the "debtor" and which the "obligor"? Compare
9-1 02(a)(28)(A) and 9-1 02(a)(59). Under whose name should the
financing statement be filed?
Debtor: Robin Obligor: his brother Richard
Richard must sign ??????WEEK 3 Multiple Choice Answers2-1B
2-2 C
3-1 EThe issue here is that the name was not correct on the
financing statement, which is why the second party would have
superior interest.
3-2 AIf the name changes the secured party has four months from
the date to amend their financing statement. Any collateral that
they would attach after this date, if they havent amended, will not
be perfected.
There are four methods of perfection:
1)Filing
2)Perfecting through Possession
3)Perfecting through Control
We will look at priority first
4)Automatic Perfection
Attachment9-203
authenticated security agreement by debtor that accurately
describes the collateral.
Not required where possession or assigned
secured creditor has to provide value to debtor.
debtor has rights to the collateral.
D. Description of the CollateralProblem # 27 Q: P signed SA
& FS to "TFC" giving them SI "all personal property D. owns
now, will own or even hopes to own from now till he dies" does TFC
have a SI in his guitar? 9-108 (c) says a generic a super-generic
descriptions are not OK for the same thin
but for the 9-504 adequacy of description of the financing
statement you can have a super generic description
For this problem this description doesnt workout bcz. if it cant
attach it cannot be perfected. We want the K,. between the D &
C not to have any ambiguity thats why we request more specifity in
the SA.
In Re Grabowski discusses the same thing as this problem In re
GrabowskiFacts: Both lenders filed financing statements. The first
lender, the first to file, described its collateral in general
terms and listed the debtors' business address, rather than their
home address where the collateral was located. The second lender
described the collateral more specifically and included the
debtors' home address. Issue: whether the first lender's
description was ineffective to perfect its security interest in the
equipment? Holding & Reasoning: Despite the generality of the
first lender's description, it was sufficient to notify subsequent
creditors that a lien existed on the debtors' property and that
further inquiry was necessary to determine the extent of the lien.
Thus, the court found no merit in the second lender's argument that
the description of the first lender's collateral was too general to
fulfill the notice function of a financing statement under the
Uniform Commercial Code. The debtors' business, address was not
part of the lender's description of its collateral and, thus, did
not serve to limit the collateral subject to the lien. In addition,
the financing statement listed the names of the debtors, and not
the name of the debtors' business.Problem # 28 Q: bank kept her
jewelry in a vault as a collateral for her loan. Their financing
statement said "personal property" She borrowed it to wear it when
another creditor sized by judicial order. Is bank's interest
perfected by the filed financing statement? (SCAN)
A: YES, 9-504 states that all personal descriptions general
description therefore sufficient for financing statement. UCC
permits debtors to encumber current & future property as
collateral for credit; this is called floating lien. Creditor's
lien attach to new property w/o the signing of any further
paperwork. Problem # 29Q: SI & FI described collateral as
"inventory". Does this extend to replacement for original
collateral?
Makes a difference if it says " I. now owned or after acquired"
but FS only said "I"?
A: In this case, inventory would extend to replacements because
by its nature we are thinking about inventory that is constantly
overturned and replaced. Equipment on the other hand is not as
predictable, and it is not guaranteed that I will purchase more and
there is not a floating lien. The safest thing to do is to specify
that the interest is in current or after-acquired interests.
When you use the terms account receivable some court by its
nature we are thinking abt. Inventory that is constantly overturned
The safest way is to say current & after acquired inventory or
current & after acquired interest.
"U.C.C. 9-110, advised courts not to require the most exact and
detailed description possible. A majority of courts had adopted the
view that, where the security agreement covered "all" inventory or
accounts receivable, but contained no specific reference to
after-acquired property, it was reasonable to assume that
after-acquired receivables were included because of the revolving
nature of the receivables and a resulting floating lien."Problem #
30 Q: FS says "various equipment; see attached list" . No list was
attached. Is FS to perfect a SI? A; YES the word "various
equipment' would notify other creditors that there is a security
interest in place in accordance wit the financing statement. Also,
equipment is a section of the UCC so it should be fine for the
security agreement as well. Problem # 31Q: SA stated C/ "machinery,
equipment, furniture & fixtures". FS added " inventory &
accts. Receivable". The parties willing to testify to that this was
what the loan ntended. Other creditors object. Does SP I reach that
addition? A; Because the security agreement unambiguously described
the collateral in which the security interest was granted the
creditor was barred from establishing, via the loan documents,
which was parol evidence, that the property omitted from the
security agreement was intended by the parties to be covered by the
security agreement.. i.e: SA has to define w. specifity &
adequacy what SI in C are. Problem # 32Q: bank want to give loan
secured by inventory. w/in that inventory very important &
expensive equipment should SI name that equipment, say all
inventory or say "w/o limitations"?
A; All three of them are effective, it's better as a lawyer to
make sure to put the abicus-12. (including w/out limitations)
Problem # 33
Q; agreement forgot to fill to Seller name. FS stated he had SI
in the item. Is the agreement w. blank a SA? What abt. Financing
statement? What abt. Both? A: i.e: the security agreement doesnt
have the debtor's name anywhere on the doc this is not a security
agreement for lack of sufficiencyIII. ATTACHMENT OF THE SECURITY
INTEREST Attachment: is the process by which the SI in favor of the
creditors becomes effective against debtor.Perfection: is the
process by which the Creditor's SI becomes effective against the
rest of the world.
Steps to attachment:
1. SA must be signed.2. creditor must give value 3. Debtor must
have some rights in the Collateral
Border State Bank of Greenbush v. Bagley Livestock Exchange Main
point: dont need ownership for some SI to attach/ as long as debtor
has "sufficient rights" in collateral. Issue of whether caretaker
who entered a cattle sharing arrangement with owner of cattle
giving caretaker the right to receive some of the proceeds
generated when calves were sold had significant rights to grant
security interest in them was to be decide-rights includes full
ownership as well as limited rights that fall short of full
ownership.Facts: 1) J & A entered into a cattle-sharing
agreement. A. agreed to care for and breed J's cattle, and also
provided that the cattle would be considered to be owned by and
sold in the name of J's Farms. 2) Some dispute over what the profit
sharing arrangement was & percentage bcz. Contract was orally
modified.
3) A obtained loans from Bank, granting it a security interest
in all of his "rights title and interest" in all "livestock" then
owned or thereafter acquired. 4) A. sold all J's cattle that he had
raised pursuant to their agreement.
5) The livestock exchange was aware of the Bank's SA with A but
determined that the SI did not attach to the calves and allowed
them to be sold, and issued a check to Johnson Farms.
6) Bank sued the livestock exchange and J, contending that they
had converted the Bank's perfected SI in the calves, and J. sought
indemnity from A. in the event that the Bank's claim was
successful
Holdings: whether bank's security interest in calves attached
and was enforceable did not depend on whether debtor had ownership
interest in calves, but on whether he had rights in calves under
cattle-sharing agreement; i.e: You dont have to have ownership but
only some interest in the cattle to use them as collateral for a
security agreement.Problem#34 (SCAN)a) The interest attached on
January 6, the date the loan was made, the debtor signed the
security agreement and the debtor had rights in the pitch-pipe
guitar. The trumpets are different because they were going to be
shipped at a later date, and so the interest attaches March 15th
bcz. that is the date that was marked for the shipment. Under
2-501, once the goods are marked for shipping (identified) at that
point the buyer has an insurable interest-the debtor has rights in
the collateral at this point. Could also be March 3oth bcz. the
interest was supposed to be inventory in the store. b)Financing
statement doesnt change the attachment date, & u cannot be
perfected until u have attachment. You might want to file it early
to make your interest superior. If you are a perfected secured
party, your date off attachment is the date of filing. You cannot
file a financing statement before you get a security agreement
unless you get written permission from the debtor.
b) March 31stthe date when the value is provided. A commitment
to loan has value as long as it is a binding commitment.
CHAPTER 4
PERFECTION OF THE SECURITY INTEREST
A SI that is perfected makes it senior to most later
creditors.
Must attach before to perfect.
SI between D & C must be effective.
I. PERFECTION OF THE POESSESSION (PLEDGE)
Problem # 35Q: Museum party keeping jewel for B. A buys jewel
from B giving it a big down payment & signing an agreement to
make three more pmt. Can A perfect a SI by notifying the museum of
the sale & telling them to hold it to his benefit until she
fisnishes paying (like an escrow agreement & the museum is
escrow agent)?A: in order to rely on this section and perfect
through possession, needs to obtain an acknowledgment from the
museum in writing that they are holding it for him as a security
interest.
Section 9-313. When Possession by or Delivery to Secured Party
Perfects Security Interest without Filing 9-313 (c) (If the good
not covered by a document) a secured party takes possession of
collateral in the possession of person other than debtor. when:
(1) That party authenticates that it holding the collateral for
the secured partys benefit; or
(2) The person takes possession after authenticating that it
will hold the collateral for the secured partys benefit.
Problem # 36
a) :No, because under appropriate circumstances, even though
there is perfection under a negotiable warehouse receipt, because
the debtor is so closely related to the janitor, the goods would
not be perfected. Under 9-312, a security interest can be perfected
from a bailee through the warehouse receipt.if we didnt have the
ganitor issue would the security interest be perfect? YES, that can
be perfected by possession. Bailee here is the field house, they
can be perfected in the document. In order to b e true field
warehouse situation we need a true fieldhouse situation.???? YOU
PERFECT A WAREHOUSE RECEIPT BY POSEESSION...b) 9-312(f)(2)(e)
Temporary perfected for 20 days , i.e; interest is protected for 20
days
c) If the debtor needs temporarily he gets 20 days grace period
there .What happen if it doesnt get back to them w/in 20 days? How
can we protect ourselves against other creditors priority wise?
Financing statement.
Problem # 37
1)No. Although they are perfected on the 35 notes they have,
under 9-312(g) they lose the security interest if more than 20 days
have lapsed unless they have filed the financing statement to
protect themselves as an insurance policy.2) (a) Perfection by
filing permitted. A security interest in chattel paper, negotiable
documents, instruments, or investment property may be perfected by
filing.
I. AUTOMATIC PERFECTION 9-309Types of Security Interests that
are Automatically Attached
1)Purchase Money Security Interest Consumer Goods
Seller acts as a creditor and gives the debtor financing to
purchase from them
Bank makes loan to buyer, who makes payment to seller, who gives
title back to buyer, who gives a security interest to the bank.
NONEX: you have a rare coin, and you want cash, you lose the
coin to get security interest to get the clubs, which do not have a
security interest in them.
2)An Assignment of Accounts (treated like a security
interest)
If the assignment constitutes less than a significant amount of
the debtors interest, it is automatically perfected.
Automatic perfection: means that the SP need only make sure its
SI has attached to get perfection.
It occurs with:
a. PMSI
b. Certain accounts & other intangibles
a. Purchase money security interest (PMSI); A security interest
that is created when a buyer uses the lenders money to make the
purchase and immediately gives the lender security ([See the
Uniform Commercial Code]); a security interest that is either (1)
taken or retained by the seller of the collateral to secure all or
part of its price or (2) taken by a person who by making advances
or incurring an obligation gives value to enable the debtor to
acquire rights in or the use of collateral if that value is in fact
so used. *** If a buyer's purchase of a boat, for example, is
financed by a bank that loans the amount of the purchase price, the
bank's security interest in the boat that secures the loan is a
purchase-money security interest..."(BLACK'S LAW DICTIOANRY) II.
Automatic PerfectionA. PMSI in Consumer goodsWe give automatic
perfection to PMSI in consumer goods w/o requiring further filling
or possession bcz. consumer goods are unlikely to be used as
collateral twice, thus rarely any later creditors to protect. Not
worth it for merchants to pay to file it.
Exception: motor vehicles, SI requires perfection steps.Problem
# 38
a) That will only attach to stuff acquired w/in ten days.No.
Under 9-204, when a secured creditor tries to take a security
interest in all of debtors consumer goods, that will only attach to
stuff that is acquired within 10 days, not indefinitely. b) It is
still a security agreement whether or not they are the direct
seller or a third party securer.c) The actual cash or check that
the secured creditor is providing has to go to pay for the good
which the finance company is trying to get an interest in.d)
Finance company would get the sewing machine because they would be
automatically perfected and a perfected secured creditor would beat
out the other secured creditors who are not perfected.
In re ShortF)The debtor bought furniture from furniture co for
$2800, then he took a second loan for $3242. then he refinanced
them into one Two loans: one PMSI and one not, which are refinanced
into a 7k loan.
I) whether a PMSI when the original PM is refinanced through
renewal or consolidation with another obligation?
R)Dual Status Rule alien maybe partially PM & partially
non-PM, but the part that is not PM is not destroyed. The unpaid
part of PM still stands and attaches.Automatic Transformation
Rulethey are consolidated and the PMSI is extinguished
Case by Casehas been so transformed that it cannot be viewed as
a PMSI anymore. Sale on Approval and Sale or Return; Consignment
Sales and Rights of Creditors
(1) Unless otherwise agreed, if delivered goods may be returned
by the buyer even though they conform to the contract, the
transaction is
(a) a "sale on approval" if the goods are delivered primarily
for use, and
(b) a "sale or return" if the goods are delivered primarily for
resale.
(1) Purchase-money collateral means goods or software that
secures a purchase-money obligation incurred with respect to that
collateral; and
(2) Purchase-money obligation means an obligation of an obligor
incurred as all or part of the price of the collateral or for value
given to enable the debtor to acquire rights in or the use of the
collateral if the value is in fact so used.
Problem #39
No ,this is a sale on approval, until they accept it its not
subject to the claims.
Does NF qualify as the purchase money kind? Nightflyers security
interest qualifies because once it becomes a . . .
G.E. Capital commercial automotive finance Inc. v. Sparton
Motors, Ltd. Issue: whether by Spartan advancing the funds to
purchase vehicles after Spartan had already paid for & received
them, the D. GECC acquired a PMSI? Facts: The lender and the auto
dealer had a security agreement whereby the lender acquired a
blanket lien on the auto dealer's inventory. Thereafter, the
secured lender and the auto dealer entered into a security
agreement in which the funds loaned were secured by the vehicles
purchased by those funds. The auto dealer purchased two cars and,
within days thereafter, was reimbursed by the secured lender. When
the auto dealer's business failed, the secured lender claimed that
it had a purchase money security interest in the two cars. The
lender argued that it had the priority lien. The court agreed with
the secured lender, and held that U.C.C. 9-107(b) did not require
that the secured lender pay the funds directly to the seller of the
cars or that the loan occur prior to the sale. The secured lender
was able to show that the advance was made to enable the auto
dealer to purchase the collateral, and that the sequence of loan
first and acquisition second was not required as this practice was
common and routine between the parties. The agreement between the
secured lender and the auto dealer was adequately specific to
identify the collateral, and the lender was timely put on
notice.
********Closely Allied Test:
1) Temporal ProximityCloseness in Time
2) The parties had to intend that it was going to be a PMSI
If both are established, and the court thinks they were here,
and it appears that Spartan motors would not have bought these two
cars without the loan from GMAC, then the transactions were closely
aligned and they are considered PMSI.
B. Certain Accounts & other Intangibles
2 tests available " significant part" or "casual isolated
transaction"
In Re Wood (test for Significant Amount)Issue: Whether this
transaction falls w/in the exemption from filling? Facts: The
debtors, an attorney, and his law firm, assigned the rights to
contingency fee proceeds from certain litigation to the creditor,
another attorney who loaned the debtors money. The debtors
ultimately filed for bankruptcy under Chapter 11 of the Bankruptcy
Code. The bankruptcy court held that the transaction in question
did not fall within the exemptions from filing contained in U.C.C.
9-302(1)(e), and thus the creditor was an unsecured creditor. On
appeal, the court reversed and remanded, holding that the creditor
had a perfected security interest in the accounts. The court found
that the creditor had met its burden with regard to the Holding:
casual and isolated transaction test because the creditor was not a
commercial lender engaged in regularly accepting assignments from
debtors.
Reasoning: 1) the transaction was between two individuals who
maintained a personal and professional relationship. 2) creditor
was not regularly engaged in the business of taking accounts and,
therefore, he clearly fell within the exemption from filing under
9-302(1)(e). It was error for the bankruptcy court to hold
otherwise.Problem # 40 No, because under 9-304 a sale of accounts
is automatically perfected.
Problem # 41
If you have attached original collateral you are also attached
in the supporting obligation.
III PERFECTING BY FILLING
Except for the transaction listed in 9-310 , Filling of
Financing Statement is the exclusive method of perfection of the
creditor's security interest:
A. The Mechanics of Filing Before computer age was harder. Now,
most Central filing, typically in the secretary of state, for
almost all financing statements. Local County, for matters having
to do with realty.Problem # 42
Q: right name wrong place
A: E. filed first.
Whichever creditor loses should sue the state for negligence.
Hypo: what if the financing statements said Shakespeare?? Filed in
the wrong place; Financing statement is ineffective.
Note; Always make copies when you file FS. Problem # 43
Q: how long is FS affectiveA: UCC 9-515A filed financing
statement is effective for a period of five years after the date of
filing. The effectiveness of a filed fin statement lapses on the
expiration of the period of its effectiveness unless before the
lapse a continuation statement is filed.
a. It is effective for five years.
b. It is not because the continuation must be filed within the
last 6 months of the previous filings 5 years expiration, no
sooner.
c. No, it does not. AN B has priority because the effectiveness
of the statement lapsed by not being continued. The security
interest became un-perfected upon the lapse and is deemed never to
have been perfected as against a purchaser for value. A purchaser
for value CAN be a Secured Creditor, which is why ANB is
covered.
d. It still lapses and ANB is still first. The policy reason for
that type of rule is ...
Problem # 44
Q:
A: Secured creditor is a purchaser for value. secured party of
record must file a termination statement w/in 20 days of notice
Debtor could file a termination statement under
If consumer goods: Termination must be made upon earlier of (i)
1 month , or (ii) 20 days days after authenticated demand. The
company has a month to comply with the termination statement, which
is filed when no valid obligation is secured by the collateral (for
consumer goods). The amendment has to identify that the debtor is
doing it and that it is against the secured party, and puts other
creditors on notice. This also happens when the debtor did not
authorize the filing of the initial financing statement. Under
9-625 a person is liable for damages in the amount of any loss
caused by a failure to comply with this article. Loss can include
loss resulting from the debtors inability to obtain, or increased
costs of, alternative financing.
In his exams he asks one policy question. e,g: A & B went
under the code; what's the reason behind/ what's the
policy.Problem# 45
Q: divorcing man filed faux financing statements in the public
records office showing his assets were a security for various
nonexistent loans in favor of himself. What can the wife's lawyer
do to clean up those records?
A: In the case of an unauthorized financing statement, the
person named as debtor in the financing statement may file a
termination statement, effective against the bogus filings.
IV. PERFECTION BY CONTROL
10/2/2009 Week 4 Class slides MC 4-1 D
MC 4-2 Checking act can't perfect by filing onlyMC 4-3 F. feb 5;
all 3 requirements: ASI , value, debtor has rights in the
collateral.CHAPTER 5
MULTI-STATE TRANSACTION Each state has adopted a version of the
UCC, with some very small differences from state to state, and it
is very important that they have the same choice of law rules. The
code says that you file in the jurisdiction whose law governs
perfection, which is important so you know where to file and you do
not have competing interests.
When reading 9-301
Perfection means the technical steps needed for perfection.
Effect of Perfection and Priority mean the legal status given to
creditor and his rights against 3rd parties.
Under 9-301:
(1)Wherever the debtor is located, the law of that jurisdiction
governs all aspects of the transaction.
(2)When we have a possessory security interest, a pledge, it is
the collaterals location that governs all aspects of the
transaction.
(3)While tangible negotiable documents, good, instruments,
money, or tangible chattel paper is located in a jurisdiction, the
local law of that jurisdiction governs:
i. The effect of perfection or non-perfection and the priority
of a non-possessory security interest in the collateral.
ii. The debtors location is the location of perfectionwhere to
file.I. General Choice of laws
Article 9 adopts a domicile approach and looks to the law of the
debtor's location as the state in which perfection need to be
take.
However, if the C/ has a physical form, the law of the
jurisdiction in which of C/ is located will govern issues involving
priority & other article 9 matters.
So, the secured party looks for:
i. the jurisdiction in which the debtor is located is located as
the place of perfection, BUT
ii. The collateral as to the effect of perfection. Problem
46:The creditor should file the financing statement in the debtors
location, their domicile in the case of an individual, which is
Wyoming in this case and the general rules of perfection apply
though this is a good. The creditors security interest will not be
attached to the boat any longer and Ohio law governs because in the
case of goods, the effect of perfection and priority is determined
for goods by the collaterals location.
Problem 47:
place of business means a place where a debtor conducts its
affairs.
Debtors location:
(1) If Debtor is an individual (located at the individuals
principal residence.
(2) If debtor is an organization & has only 1 place of
business ( located at its place of business.
(3) if debtor that is an organization & has more than 1
place of business ( located at its chief executive office.
If non of these applies (or D in a place does not apply that
doesnt have a recording system like overseas etc.,) the debtor is
located in the District of Columbia.
Under 9-307(e) if an organization is registered in a state and
is the debtor, it is located in the state in which it is
registered. If they were an individual debtor it would be their
personal residence and if it is a common law partnership, general
partnership, which is not registered with the state, is located at
its place of business. It is not that there is one state where you
can file, but there will be one state where all of the files are
located, which makes them easier to locate.
In the case of Jahalla, you would file in Washington DC.
Problem 48:
A security interest perfected remains perfected until the
earliest of:
(1) The time perfection ceased under the law of that
jurisdiction;
(2) 4 months after a debtors re-locate to another jurisdiction;
or
(3) 1 year after a transfer of collateral another debtor who is
located in another jurisdiction.9-316 that it has 4 months after
the change in the debtors location to file in the new location.
If it merges, then under 9-316(a)(3), you have year after a
transfer of collateral to a person that thereby becomes a debtor
and is located in another jurisdiction.
Problem 49:(If the debtors fails to perfect their interest w/in
the time frame above they become unperfected & remain
unperfected against a purchaser for value )
No, they are going to lose their priority under 9-316(b), which
states that if a security interest in (a) becomes perfected under
the law of the other jurisdiction before the event in that
subsection, it remains perfected thereafter. If it does not become
perfected, it becomes unperfected and is deemed never to have been
perfected as against a purchaser of the collateral for value.
I. II. Certificate of Title
Title is alegalterm for an owner'sinterestin a piece ofproperty.
It may also refer to a formaldocumentthat serves as evidence
ofownership. Conveyance of the document may be required in order to
transfer ownership in the property to another person. Title is
distinct frompossession, arightthat often accompanies ownership but
is not necessarily sufficient to prove it. In many cases, both
possession and title may be transferred independently of each
other. Problem # 50
Q:
A: UCC 9-303
(a)This section applies to goods covered by a certificate of
title, even if there is no other relationship between the
jurisdiction under whose certificate of title the goods are covered
and hte goods or the debtor.
(b) goods become covered by a certificate of title when a valid
application for the certificate of title and the applicable fee are
delivered to the appropriate authority.
(c) the local law of the jurisdiction under whose certificate of
title the goods are covered governs perfection, the effect of
perfection or non-perfection, and the priority of a security
interest in goods covered by a certificate of title from the time
the goods become covered by the certificate of title until the
goods cease to be covered by the certificate of title.
HYPO 4-2:
It will remain perfected in the first jurisdiction so long as
security interest has remained perfected under the law of the first
state.
HYPO 4-3:The SI is treated as unperfected against the used car
dealer under 9-316(e)
Used car dealer will likely take free of SI under 9-317.
Hypo 4-4:The buyer takes free of the security interest in
accordance 9-337(1). THERE IS A CHART IN SLIDES for Party and
Result.
Metzger v. Americredit Financial Services
A third person purchased a car in New York. The holder financed
the purchase and the New York certificate of title issued to the
person reflected the holder's security interest in the car. The
person later moved to Georgia. He submitted an application to
convert the New York certificate of title to a Georgia one. The
state motor vehicle department processed the application, but made
a clerical error. As a result, a Georgia certificate of title was
issued that did not reflect the holder's security interest in the
car. The person later transferred the car to an automobile dealer
owner and, eventually, the buyer purchased it. After the buyer
registered the car, the holder located it, repossessed it, and sold
it at auction. On appeal, the appellate court found that the buyer
took the car free of the security interest pursuant to O.C.G.A.
11-9-337. Although the holder's security interest in the car
remained perfected at the time that the buyer purchased the car,
that security interest could not be enforced against the buyer, a
good faith purchaser as defined in O.C.G.A. 11-9-337(1), since the
security interest was not properly reflected on the Georgia
certificate of
title.http://law.scu.edu/FacWebPage/Neustadter/article9/main/commentary/71.htmlProblem
51:Question: on 5/10 Tourist buys car from NCS in OK
5/12NCS records lien on OK title
5/14Car to TX: new clean title 9 although the law requires the
lien stays in title)
5/26Tourist sells car to Innocent (GFPV)
5/28NCS repossesses car
As of May 28, Texas certificate still covers vehicle
9-303(b)
Texas law governs 9-303
NCS is still perfected when new Texas cert is issued without
notation of SI because within 4 months 9-316(d)(e)
William Innocent will take free of NCSs security interest under
9-337(1)
1st lender remains perfected w/in 4 month as above however a
buyer of the goods -other than a person in the business of selling
goods of that kind- takes free of the security interest if the
buyer gives value and receives delivery of the goods after issuance
of the certificate and without knowledge of the security
interest;
Problem 52:It should only last four months. The issue is going
from a UCC state to a CT state. Because the law of the state says
that you have to have it titled under our state, he becomes
unperfected and the bank must re-record or continue in the new
state.
When moving from title state to a UCC state, he is probably
going to continue to be perfected indefinitely in state 1 under
9-303(b) and (c)
Chapter 6PRIORITY
I. Simple disputes. Which creditor gets what? 9-317 lists the
parties prevailing over an unperfected security interest (attached
but not perfected).
Lien creditor:
(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.
Problem # 53Q: E. bookstore borrowed $10 k from Octopus National
bank (ONB), signed a SI giving ONB a floating lien over inventory.
ONB never filed. M travel services was an unpaid creditor of the E
& recovered a judgment against the store. It then had the
sheriff levy on the inventory. a) Who gets paid 1st when the
inventory is sold? b) if, instead of a judgment creditor's seizing
the goods, E had filed bankruptcy petition while ONB was still
unperfected, what result? a) Lien creditor acquires a lien on the P
by attachment, when there is a conflicting SI , a lien creditor is
entitled to priority if he is the earlier in time (except to that
is PMSI), M gets 1sProblem # 54Q: CTA used its accounts receivables
as C/ for a loan from MS bank, but MS didnt file FS. 6 month later
CTA took another loan from BNB, who searched & didnt see MS FS,
so it took an I in CTA accounts receivables. BNB filed FS. Which
bank has superior interest?
A: a perfected security interest has priority over unperfected
SI, therefore BNB has priority,
Problem # 55
Q: E went to two banks 1st NB & 2nd SB , on the same day to
borrow money using inventory as C/ & signed a SA with both. 1st
NB filed FS Sept 25 , but didnt gave him the money or make any
commitment until Nov. 10. /// 2nd SB loaned E the $ & filed FS
on Oct 2. E paid neither
a) Do both banks have a perfected SI? Can 2 creditors have SI in
the same C/? yesb) (Attachment is a prerequisite to perfection, and
attachment doesnt occur until C gives value) which bank has
superior right to the inventory?
1st has priority. Whichever party files first regardless of who
gave the loan 1st.
C) If 2nd SB had Knowledge of the transaction between E &
1st NB, does this affect its priority? Knowledge is irrelevant for
determining priority of claims
Problem # 56
A: Collateral may secure future as well as past or present
advances if the security agreement so provides.
Problem # 57
A: "Notice filling": the financing statement maybe made before
the security interest attaches. Used in financing transactions
involving inventories, accounts, & chattel paper because it
obviates the necessity on refilling on each series of transactions
in a continuing arrangement under which the collateral changes from
day to day????Problem # 58
a) CNB, dont need to file bcz. consumer goods & are
perfected by possession or filling. b) If perfection depends on
possession of C/ by SP ; perfection doesnt start b4 possession,
& continues only while the SP retains possession. Remains
perfected w/o filling for 20 days if SP borrows to d for a manner
preliminary to their sale or exchange. ????c) A security Interest
secured by one method remains secured if method changes as long as
there is no interruption (continues ) Problem # 59 Q: Cattle
Company took a loan to purchase Herd, signed SI using herd as C/
for "this and all other obligations now or hereinafter owed to the
bank. " . Bank Filed FS. 2 years later received a credit from the
same card & used it to travel to Australia for a business
reason. When he failed to pay the Credit card (although loan pmt.
Current) the bank repossessed the cattle. Did the bank interest
encompass Credit card obligation? Would it make a difference if he
had gone to Australia in search of the perfect wave for surfing?
Drag net Clause: Collateral covering several loans under a single
security agreement, also called a dragnet clause. In essence,
collateral for each loan backs the entire package of loans
The true intention of the parties is really the sole and
controlling factor in determining whether future advances were
covered by the original agreement [orl would have to be
re-perfected."); }
In Re Wollin (page 127)
Debtors disputed the enforceability of "dragnet clauses" in
security agreements that provided future advances and antecedent
debts would also be secured. The court held the future transaction
must be "so related to" the primary loan that the consent of the
debtor to its inclusion may be inferred. The court declined to
adopt a per se test based on the status of the loans as purchase
money transactions. The court could not find future advances for
credit card charges sufficiently related to vehicle loans. The
vehicle loan differed in scope and solemnity from the miscellaneous
credit card charges, and consent for vehicles to secure credit card
account would not be inferred. As to antecedent loans, the court
adopted the "specific reference" standard. The antecedent debts
were not specifically referenced, as such, the vehicles did not
secure them. Creditor's objections were overruled and the debtors'
objections to the claims were sustained.Cross-Collateral Clauses:
Common stipulation in loan agreements under which a bank has a
legal right to seize any or all assets pledged by a borrower (for
different loans with the same bank) even if only one loan goes into
default. Bankers justify this clause on the logic that a default
sours the bank-client relationship, not a just a loan agreement.
Problem # 60 Q: used one C.C for his purchases using purchased
objects as C/. From another bank he financed his ranching
operations using Cattle as C/. Both banks SA stated that debt also
encompass "any & all debts now existing or after-acquired" .
the two banks merged. Do the cattle protect his C.C debts? A: Not
according to the "so related test"
I. PMSI
A. The Basic Rule
The seller or lender who advances money has a special equity in
the eyes of the law. If the parties sign a SA, the seller/lender
gets a PMSI. Even though the goods become subject to existing SI
when they come into the buyer's possession, the PMSI is given
priority; even if PMSI is later in time.
Where the collateral is consumer goods, no further steps is
required for PMSI to prevail over prior or later interest. All
other PMSI must be perfected w/in 20 days following the buyers
possession to take advantage of the relation-back priority to that
date. Special Rule for:
i. PMSI taken in goods that are to become part of the buyer's
inventory &
ii. PMSI taken in goods to become buyer's livestock.
PMSIs are an exception to the first-to-file-or-perfect rule.3
step to analyzing a PMSI problem:
1. Classify the collateral.
2. Does a SP have a PMSI.
3. Did the SP with a PMSI comply with 9-324 to get priority?
Problem #61
Q: Sophy signed SI for the furniture it bought for the new
apartments on june 8 & goods delivered the same day , although
However the company's equipment was under SI & FS for a bank.
This agreement contained an "after-acquired property" clause, which
stated that later similar collateral coming into the property"
clause, which stated that later similar collateral coming into the
buyer's estate would automatically fall under the bank's SI. the
policy of Sophy's Interiors was not to file financial statements
for its credit furniture sales. a) Bill had rights in the interior
stuff he bought on credit on the day he received, june8.
b) Company should perfect its SI w/in 10 days. -----------
------------------------------------------------ A security
agreement may create or provide for a security interest in
after-acquired collateral
A credit buyer acquires "rights" in the property when possession
is received from the seller.
When a buyer takes possession of property under a credit sales
contract, he acquires the property, not merely an equity interest
in the property. The seller retains only a security interest in the
property. A determination of which party holds title to the
property is immaterial.
The sufficiency of a description in a financing statement is
measured in terms of notice. The designation of "equipment now
owned or hereafter acquired" gives notice to a seller of a machine
to be installed on the premises of an operating business and used
in production that it is subject or likely to be subject to a
perfected security interest.
Code 9-202 (1940) states that each provision of this article
with regards to rights, obligations or remedies applies whether
title to collateral is in the secured party or in the debtor. If it
is the desire of the parties to effect a reservation of title until
the purchase price be paid, a secured transaction should be entered
into and a proper filing made if required to protect the creditor's
interest as against third persons. For a plaintiff to recover in
detinue he must show:a) that at the commencement of the action he
had a general or special property in the goods sued for, b) the
right to immediate possession of the goods, and c) that the
defendant had possession of the property. the first to file a
financing statement gains priority. specific exception to the rule,
by giving purchase money security interests priority over other
security interests in the same collateral, provided the purchase
money interest is perfected by filing within a designated period
after the debtor takes possession of the goods.Galleon Industries
v. Lewyn Machinery F) The financier had a security interest in all
existing and acquired factory equipment. The supplier ordered the
equipment from the manufacturer to be shipped to the supplier and
delivered to the factory after cash payment. The manufacturer
shipped the equipment to the factory. The supplier demanded cash
payment from the factory. The factory failed to pay the supplier
and the financier. The financier foreclosed under its security
interest on all of the factory's equipment. The supplier brought a
detinue action against the factory and the financier.
I)
H) The financier's security interest in later acquired factory
equipment had priority
Problem # 62Q: Video store owner has a floating lien on over
inventory & equipment. He bought a dog $1200,he got the dog
agreed to pay $100/ month but will not get the title until all
pmts. Paid. She stopped paying & the bank seized all assets
including the dog. What are the options for the dog owner? A: Since
video store owner didnt fulfill the condition precedent to make
full payment, The bank's security interest could not attach because
the video store owner had mere possession of the dog.
Problem # 63
Q: Hart farm gave Farmer a 6 month lease w. option to buy at any
time during the lease term, called "sale on approval" 3 month after
equipment delivery , farmer agreed to buy &hart filed a FS next
day claiming PMSI. Farmer already had a perfected floating lien for
another bank. Who wins the priority hart farm or the bank? A: 9-324
Comment ( c ) once a lease converted a SI , filing a FS is
necessary to protect the seller's SI.
B. Inventory & Livestock
Inventory financer will have a perfected interest in existing
& after acquired inventory, in effect a floating lien over the
mass of changing goods available for sale by the debtor' to other.
If the debtor buys new inventory & gives the seller PMSI, the
original financier is hurt if:
i. doesn't know abt. the PMSI & thinks he has propriety of
all C/
ii. PMSI is held to prevail over the already perfected interest
in after- acquired inventory.
9-324 (b) has notification procedure for the PMSI secured
creditor to follow in order to get normal priority.
Problem # 64
a. Mmadam Belinda
b. No she has 20 days
c. ..
Kunkel v. Sprague National Bank Week 6 MC 6-1 Growamerica
MC 6-2 B 1st to file or perfect. We go after 1st to file 1st
MC 7-3 C. A doesnt matter bcz. not for inventory.
To get super priority has to perfect BEFORE DELIVERY, Need to
send authenticated notification (letter) sent & received w/in 5
year period PRIOR DELIVERY . E is wrong bcz. They are perfected. MC
6-4 C .plain meaning test is the test adopted by the UCC. Plain
meaning test: business class, personal class. Same Class Plus so
related.
TRUE CONSIGNMENT:
Indicative Factors:
Consignor repossesses goods if not sold
Consignor controls the price
Consignor Control Proceeds
Consignor bears risk of loss
If Cee issues a SI, the title remains w. Cor.
DISGUISED SALE WITH SECURITY INTEREST (case law test)
Persuasive Factors:
Buyers Keeps Good if Not Sold
Buyer Controls Price.
Buyer Bears Risk of Loss
In this case the rest there will competition w. rest of secured
creditors. Article 9 says that certain Con. We will treat as a SI
Definition is in A9 -102 (a)
III. Control & Priority
Control is to "intangibles" as "possession" is to goods. Taking
steps to "Control" gives the world some notice at least that the
creditor has legal rights in intangible property that must be
respected. A. Control over Investment Property
How is SI taken in investment property? 2 ways: 1. the filling
of a financing statement and/or
2. the taking of control over the investment property.
the 2nd method trumps the 1st; a SP who has control has priority
one who has merely filed.
Generally one has control over a certified security by taking
delivery of it along with any necessary endorsements.
The same rule applies to uncertified securities, the only
difference is here delivery is artificially defined as making sure
that the secured party is registered as the stock owner in the
records of the issuing corporation. In the case of Indirect
holding, Control requires that SP takes steps to make sure that it
can reach the rights of the debtor in the event it needs to
foreclose, as shown in the next case. Number 67 To get Control of a
security under entitlement: by becoming an account holder w. your
debtor, transferring the assets to your own bank,
B. Control over Deposit Account
Similar rules apply. Article 9 allows a SI in such accounts by a
creditor obtaining control over the account. Consumer accounts may
not be used as collateral for consumer debts. (can be for
non-consumer debts)
Number 68 C. Control over Letters of Credit Rights.
If one party doesnt trust the other to make payment at an agreed
upon time, that party may require that the payment be made directly
by a reputable bank. The bank then will issue a letter of credit to
the person to whom the credit is o be made specifying the
circumstances under which the bank will honor drafts. The person
who gets the bank to grant him is called the applicant. The
beneficiary can use its rights under the letter as a C/. Problem
#69
IV. BUYERS
9-315 a buyer takes subject to the SI unless the SP authorizes
sale w/o SI Problem # 70
International Harvester Co. v. Glendenning
Page 154 Problem # 71
You can't be a buyer of ordinary goods if the possession of the
seller. Problem # 72
When you are an insider you are not a buyer in the course of
business.
Problem # 73
Once it was placed on his lot from her prospective she was a
buyer in the ordinary course of business. "Pimping both sides of
the street"???? Dont need to know who is a holder in due course; he
will tell us on the exam.
Problem # 74WEEK 7Chapter 2
II. Consignments
A true consignment is neither a sale or a security device; it is
a marketing procedure by which the owner of the goods (the
consignor) sends (consigns0 them to a retailer (the consignee) for
sale to the public.
The retailer doesnt buy the goods (so no sales take place when
the consignor deliver the goods to the consignee).
If the retailer cannot sell them, they are returned to the
consignor.The consignee is the selling agent for the consignor.
i.e: bailee with the ability to sell the bailor's goods.
The advantage to a true consignor of a true consignment over an
outright sale is that he retains control over the terms of retail
sale & at common law there is no requirement that he files a
notice that this is a consignment.
Some consignments are not true consignments but are sales of
credit (secured transactions) disguised as consignments in order to
escape the filing requirement." If the retailer must pay for the
goods whether or not able to resell them , this is not a true
consignment, it is a creation of SI in goods.
If a security interest is intended, then it must not be true
consignment at all & article 9 requirements must be complied
with. Article 9 adopted some kinds of true consignments & treat
them as article 9 matters, therefore needs the usual steps of
perfecting "a SI in someone else's inventory" but leaving some true
consignments outside the Code, thus protected by common law. Class
Notes: If we have a true consignment, the consignor keeps title,
therefore the creditor cannot attach to that C// (that can create
secret liens). Once we separate true consignment what is left over?
Remaining disguised sales, we true them as true sales
Consignments can be article 9 Consignment which are a sub-group
of True consignments.
In order to protect themselves they need to file FS. How do we
give them strategic advantage : they are providing a PMSI to the
buyer, therefore if they follow the steps in 9-24(b) they will have
super priority. How do you know that it is a true consignmet?
True Consignment Indicative Factors:
Consignor keeps good if Not Sold
Consignor controls Price
Consignor controls Proceeds
Consignor bears Risk of LossDisguised sale with security
interest:Persuasive Factors:
Buyer keeps Good if Not Sold
Buyer Controls Price
Buyer Bears Risk of LossFollow this not outline bcz. Outline is
wrong & pple. Lost points. (he was ( )
Hypo # 7-1:New hybrid automotive company hopes to avoid the
claims of its dealers creditors by providing cars under a
Consignment Agreement. Under the agreement automotive company keeps
title, but transfers possession to the dealer. The dealer is
obligated to sell the vehicles within one year of delivery by
automotive company or otherwise pay the wholesale price as
determined by automotive company.
True consignment or disguised sale?
This is a disguised sale bcz. they were required to buy it, they
bear the risk of loss. If they want to keep priority the company
needs to file a financing statement.
Hypo 7-2
GreenMachines sells computers that are refurbished and assembled
from used parts to the maximum extent possible. GreenMachines
enters into a Contract for Selling Services with the businesses
that provide computers for refurbishing. The Contract for Selling
Services sets GreenMachines eventual sale price for the refurbished
computers and requires that the businesses take back the computers
that GreenMachines doesnt sell, at which point GreenMachines gets a
refund of the money that it originally paid for the computers. A
normal observer would likely believe that GreenMachines actually
bought the used computers.
Is this a true consignment or a disguised sale?
True Consignment, the fact that they set the price together is a
little weird as is the refund money though. As it is a true
consignment, is it also an A9 Consignment?9-102 (20) 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) with respect to each delivery, the aggregate value of the
goods is $1,000 or more at the time of delivery;
(C) the goods are not consumer goods immediately before
delivery; and
(D) the transaction does not create a security interest that
secures an obligation.
If they want to protect themselves from green machine creditors
they need to file a financing statement.
For to be an article 9 consignment: pple dont need to know its a
consignment; which meansarticle 9 is designed to protect creditors,
if they know its a Problem # 4 No the SI would not reach that of a
dealer's because this is not going to meet the article 9 definition
largely because it appears thet pple. Know that this store sells
good for others.
In Re Fabers: Problem # 5 Is this an article 9 consignment? He
would have to do a filling. If most pple, believe that he makes
them himself then pple dont believ he does consignments, its worth
>$1000, he is not an auctioneer, & ,,,.
Problem # 66
Barbara Shipek was pleased and flattered when Tim Isle, owner of
Isle's Fine Art Works, asked her if he could exhibit and sell some
of her poetry. She gave him five of her favorite pieces. The next
day she took a party of friends down to the store to see the
display and was astounded to learn that Octopus Nationnl Bank
(ONU), which had a perfected floating lien on the store's
inventory, had foreclosed and seized everything in the store,
including Barb's pottery. Can ONB do this to her? She has to file
before delivery & give notice to other credits( she will have a
PMSI
Under 9-103(d) an article 9 consignment is treated like a PMSI
Leases ; a problem similar to the applicability of article 9 to
consignments occurs when the parties disguise a secured sale as a
lease
Problem # 6
Notes Page 23
Each lease must be evaluated on its own.
It doesnt necessary answer the central question if the lessee
pays consideration equal to or even greater than the fair market
value (FMV) of the leased goods.
Nor does the lessee's assumption of major duties (taxes, risk of
loss, etc) necessarily indicate a lease or a sale of goods.
As long as the lease doesnt cover the total economic life of the
goods.
In Re Winston
Does the transaction fall into one of the brigt line rules of
1-203(b)? (insert graph, its not w. last years) Graph 2 for the
second
1. did the lesee give value & receive delivery w/o knowledge
of the SI & prior to the perfection of SI? (9-317 c)
Yes? The secured creditor takes SUBJECT to the interest of lesee
b. NO? Is the lesee a lessee in the ordinary course of business
9-321?
YES( go back to a NO( Does the leased item secure future
advances by the secured creditor made more the 45 days after (i)
the secured creditor had knowledge of the lease or (ii) the lease
became enforceable (9-323f) ?
YES( a
NO( the secured creditor takes FREE of the interest of the
lessee
Problem # 7
What is missing in this is the present market vale. We need that
to know whether it was nominal or not. 10 years implies that it was
nominal value, however doesn't cut it clear.
In re Architectural Millwork of Virginia, Inc.
F) Debtor entered a "truck lease agreement," which provided for
debtor's lease of a semi-tractor from creditor. Debtor and a third
party entered a "conditional sales agreement" for a forklift. The
third party assigned all of its rights to creditor. Debtor
subsequently filed a Chapter 11 petition, but continued to operate
its business as a debtor-in-possession under chapter 11. Creditor
asserted that the agreements were leases and sought to compel their
assumption or rejection under chapter 11. Creditor further sought
to require payment on the leases. Debtor argued that Chapter 11 did
not apply because the transactions were not true leases. The court
found against creditor as to the forklift transaction and in favor
of creditor as to the semi-tractor transaction. H) The court held
that the forklift transaction was a security agreement rather than
a lease. However, the semi-tractor agreement was a true lease
because the option to purchase the semi-tractor was for more than
just nominal consideration.LeasesLease" means a transfer of the
right to possession . . . , but a sale, including a sale on
approval or a sale or return, is not a lease. . .It should be noted
that according to 2A" unless the context clearly indicates
otherwise, the term includes a sublease." Lesee's Benefit
Tax Benefits Lease Payment -- business expense deduction.
Purchase Payment depreciation deduction.
Avoid personal-property taxes.
The lessor risks that a goods Future money value will
decline.
Doesnt impact ability to borrow.
Balance Sheets some arent listed as liabilities; giving up a SI
for a loan appears as a debt.
Lessor's Benefit
Tax deductions for accelerated depreciation.
Remedies -- the lessor can exercise lease remedies, not just
Article 9 remedies.
Bankruptcy Rights -- often better. The lessor can cram-down
against a PSP.
You can charge high interest rates and not violate state usury
laws.
A Sale or A lease? Goods residual value after the lease term.
The goods true owner takes the risk that the residual value is
different than the parties expected at the outset.
There is strong evidence of:
Sale w/SI -- if the residual value passes to the lessee for no
or a nominal payment. Lease if (i) lessor gets the residual value,
or (ii) lessee pays FMV for it.Ressidual Value/ Payment
Calculation: Value of Good = $20,000
Lease Term = 5 years
Residual Value = Expected value of good after 5 years =
$5,000
Lease Payment = $15,000 amortized over 5 years.
What is Nominal Value?
1-203(d) guides us on nominal consideration:
Nominal -- if its less than the lessees cost of not exercising
the option.
Not nominal -- if the rent was the FMR when the lessee has to
exercise the option.
There is no universally-accepted definition of nominal.
45 days
After Federal Tax Lien 6323(d)Advances made without knowledge
are secured by the item levied against.Advances are subordinate to
tax lien.
After Buyer9-323(d)Advances made without knowledge (or pursuant
to a commitment made w/o knowledge) are secured by the purchased
item.Buyer takes free of future advance.
After Judicial Lien9-323(b)Advances in this period remain
secured by property levied against.Advances are subordinate unless
made W/O knowledge or pursuant to binding commitment made w/o
knowledge.
*
_1317813989.ppt
True Consignment or Disguised Sale? See Caselaw
factors
If TRUE CONSIGNMENT, analyze under 9-102(a)(20) to determine if
meets definition of A9 Consignment?
If DISGUISED SALE. . .
If A9 CONSIGNMENT. . .
Then A9 applies and the seller/consignor must comply with A9 to
have priority against other secured creditors.
If NOT A9 CONSIGNMENT title has been retained by the Consignor,
who will win against the secured creditors of the
consignee
_1315941242.ppt
Perfection of the Security Interest