SECURED
TRANSACTION
Fall
2001: Professor Zinnecker
08/13/01
·
Since 1940s
·
11 Articles at present
·
State law and is interpreted by state courts
·
Drafters of UCC (comprised of judges, lawyers from all states)
·
§1-102(1): This Act shall be liberally construed and applied to promote
its underlying purposes and policies.
·
§1-103: Supplementary General Principles of Law Applicable
·
Applies to ALL articles of the UCC (§1-101, §1-102, §1-103)
·
§1-201 Definitions apply throughout the Code
·
§1-203 Obligation of Good Faith (§1-201-19) Non-Waivable (§1-102)
Article 2 --- Sales of goods
Article 2A --- Lease of goods
Article 3 --- Negotiable Instruments
Article 4 --- Bank Deposits and Collections
Article 4A --- Funds Transfers
Article 5 --- Letters of Credit
Article 6 --- Bulk Transfers and Bulk Sales
Article 7 --- Documents of title
Article 8 --- Investment Securities
Article 10 --- Effective Date and Repealer
Article 11 --- Effective Date and Transition
Provisions
·
What we are primarily concerned with in this class.
·
Promulgated the Revised Article 9 (effective July 1, 2001):
-ALI-American Law Institute
-NCCUSL-National Conference
of Commissioners on Uniform State Laws
·
Primary source of state law regarding obligations secured by interest
in personal property and fixtures,
so-called “Asset-Base Financing”
·
Focus is on “secured financing”
·
Applies to secured transactions involving deposit accounts, commercial
tort claims and interests in certain insurance policies
·
In a secured credit transaction, the creditor’s right to payment and
ability to collect are safeguarded by an interest in property called
collaterals (cannot be realty assets); §9-102(12) and §9-105(1)9c)
·
Modern law of ST distinguishes between obligations secured by interest
in real estate and obligations secured by interest in personalty and
fixtures.
·
§9-109(a)(1) General Scope of
Article 9; a transaction, regardless of its form, that creates a security
interest in personal property or fixture by contract
Bankruptcy Code, 11 U.S.C. §101 is the principal source of
federal law governing the debtor-creditor relationship
Making Loan
Securities
·
§9-102(12) Collaterals: property subject to a
security interest or agricultural lien.
·
§9-102(28)(A) Debtor: a person having an interest,
other than a security interest or other lien, in the
collateral, whether or not the person is an
obligor or a cosignee.
·
§1-201(37) Security Interests: an interest in
personal property or fixtures which secures payment
performance of
an obligation
·
§9-102(72)(A) Secured
Party: a person in whose favor a security interest is created or provided
for
under
a security agreement, whether or not any obligation to be secured is
outstanding.
·
§9-102(73) Security Agreement: an agreement that
creates or provides for a security interest.
·
§9-102(a)(7) Authenticate: to sign; or (b) 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 or accept a record.
·
§9-102(a)(59) 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 other performance of the obligation,
(ii)
has provided property other than the collateral to secure payment or
other performance of the obligation, or
(iii)
is otherwise accountable in whole or in part for payment or other
performance of the obligation. Term does
not include issuers or nominated persons under a letter of credit.
·
§9-102(a)(69) Record: except as used in “for record”,
“of record”, “record or legal title”, and “record
owner” , means information
that is inscribed on a tangible medium or which is stored in an electronic or
other medium and is retrievable in perceivable form
Process by
which we create the enforceable security interest:
·
§9-203(a) Attachment: a security interest
attaches to collateral when it becomes enforceable
against the debtor with
respect to the collateral, unless an agreement expressly postpones the time of
attachment.
·
§9-203(b) Enforceability:
a security interest is enforceable against the debtor and third parties with
respect to the
collateral only if:
(1) Value has been given by
secured party;
(2) Debtor has rights in the
collateral to a secured party; and
(3) Debtor has authenticated a
security agreement with description of the collateral
RAV=E (mnemonic used to remember)
for attachment requirements. Must
satisfy all three in order to have an enforceable security interest.
R = Rights in collateral
(debtor’s perspective)
A = Agreement between the
parties
V = Value
E = Enforceability
Example:
Macy’s makes a loan with Chase Bank
M –debtor
CB-secured party
All of the assets: collaterals
Encumbered lien: security interests
Does it have to be written or can it be oral? Can be oral.
A is a retail seller of IBM-compatible computer systems, which it assembles from component parts. A operates five stores in the San Francisco area. It leases the premises for these five stores. Its total inventory of computer systems has a wholesale value of $300,000, which A sells at 50% mark-up. A also owns $150,000 in display cases, cash registers, tools, computers, and the like.
A currently owes its various unsecured creditors
approximately $500,000. After deducting
its monthly payments to these creditors and overhead costs, A nets $2,000 per
month. A regularly sells computer
systems to the City of San Francisco and Stanford University. A invoices both purchasers with payments due
30 days after delivery. Presently, each
customer owes $8,000.
a) A has
asked C for a $150,000 loan to expand its work force. C is inclined to make the loan but requests
advice as to whether it should demand security.
What do you advise? From a
numerical perspective, it’s better to take collateral ($650,000 debt by Ace). If we stay out of bankruptcy, the unsecured
creditor can get collateral but it would be a long court process. From the debtor’s perspective, do they care
whether the loan is secured or not?
Maybe. They would probably want an unsecured loan; it improves their
chances of being able to borrow in the future; no risk. However, they may prefer a secured loan for
interest reasons and for long term loans.
b) If C
wants a SI, what collateral would you recommend? What risks and benefits do you see with each
kind of collateral? Inventory worth
$300,000. You would want to take the
existing and future inventory. Disadvantage? It may diminish in value for a
variety of purposes. Other inventory include the business equipments. Downside would be the depreciation of such
equipments; value could go down.; including those property in the future. Also, can take their accounts receivable
($8,000); may not be payable though; including taking the future receivables.
What other property? Ground lease, good will, intellectual property, stocks and
bonds
Assume C makes the requested $150,000 loan above and takes a valid SI in A’s inventory of computer systems. After A makes the 5 month payments, C learns A has suffered a sharp decline in monthly sales and is currently losing $5,000 a month. The terms of A’s loan agreement with C require A to make monthly payments of $10,000.
a) C is very
concerned and comes to you. It wants to
know its rights. What do you tell the
client? Cannot get collateral until
statement of default—creditor could be sued for conversion. Assume there is a default—do you seize
collateral yet? You can do it.
b) Assume
the loan documents permit C to proceed against the collateral, thereby closing
A down. Should it repossess A’s
inventory? What further information
might be useful in making this decision?
If C does not foreclose immediately, should it take any other
action? Would your answer change if C
were a supplier of component parts to A?
Yes. The computers could then be sold and the proceeds would go towards
satisfying the debt. Other useful info before repossessing Ace’s inventory is,
does Ace have any other real or personal property and whether they are
non-exempt assets. If C was a supplier of component parts to A,
then C may want to not repossess the computers b/c A would no longer be able to
run its business and have money to pay its debts.
c) Based on
your discussions with C, what provisions might you, as creditor’s counsel, add
to the loan agreement? What protections
or limitations might you seek as debtor’s counsel? An upfront provision that sets out the consequences
in the event that Ace could not make its payments. Warn C of the risks of A not being able to
pay and provide and recommend strategies for avoidance.
8/15/01
§ 1-201(36): “Rights”
include remedies
§2-105(1) & (2):
Definitions; Transferability; Goods; Future Goods; Lot; Commercial Unit.
§2-501(1): Insurable
Interests In Goods; Manner of Identification of Goods
§2-509(1): Risk of Loss In
the Absence of Breach
§2-401(2): Passing of Title;
Reservation for Security; Limited Application of This Section
B2 has a SI in L’s current
and after-acquired inventory. L operates
a furniture store. If customers cannot
find appropriate merchandise on the showroom floor, they can choose items from
catalogues L keeps on the premises.
Customers place catalogue orders through L. L then purchases the item from a
supplier.
On 4/1, L orders a
custom-made sofa from A. As always, L
forwards the purchase price with the order.
On 4/15, A begins construction of the sofa.
a. On 4/4, after A has received
L’s purchase order and check, does B2 have a SI in the sofa? What about on 4/15?
b. On 5.10, A completes
construction of the sofa, designates it as the custom-made sofa ordered by L
and places it in its warehouse pending shipment to L. Does B2 have a SI in the sofa at this point?
c. On 5/12, A delivers the sofa
to a carrier and makes appropriate arrangements for shipment instructions. Does B2 have a SI in the sofa now?
4/1 mails order with check
4/4 seller receives order and payment check
4/15 seller begins work on sofa
5/10 finished sofa
5/12 seller delivers sofa to trucking company
? delivery to buyer
Earliest date debtor has rights 5/10
5/12 is also possible; seller has finished all its
duties
Under
§2-501 --- Yes, as of 5/10, we could argue that we have rights.
Perhaps also on the date of 4/14 b/c K was made
then, but not sure
Delivery date to buyer might be ok also.
4/15 is probably not
4/1 definitely No
Draft language for B2’s SA
which would give B2 an enforceable SI as of 4/5 so as to resolve or avoid the
problems identified above.
Unless otherwise explicitly agreed, SB shall have
security interest in L’s current and after-acquired inventory, regardless of
whether the inventory is in stock, on order, or in the process of being
delivered by a third party supplier.
B contractually agrees to loan $250,000 to A in one
or more advances. J, the majority
shareholder of A, agrees to grant to B a SI in some of her assets to secure
repayment of the loan. The loan
agreement and the SA are executed on 9/1.
At A’s request, B advances $100,000 on 9/15.
1. Is the “value” requirement
satisfied? Yes When? The parties agreed 9/1.
2. Who is a “debtor” under
9-102(a)(28) and/or an “obligor” under 9-102(a)(59)? J.
Which party (parties) should authenticate the SA? A.
Value is given on the earliest date of agreement
–Sept. 1; the earlier we can find the security interest, the better for our
creditor.
Debtor: Jill
Obligor: Ace – she has to sign it b/c she has interest
in the property
Value doesn’t necessarily have to flow to debtor.
Your neighbor borrows $250
from you and promises to repay you at the end of the week. He doesn’t.
To make sure he repays the loan, you secretly remove his lawn mower from
his garage and lock it up in your tool shed, intending to replace it (with
stealth and cunning) after you get your $250.
Do you have an enforceable SI in the lawn mower? No, b/c no agreement. There must be possession by agreement.
Same scenario, but your
neighbor feels so bad about being unable to repay you, he offers his lawn mower
as collateral. You have no room for it
at your place, so you both mutually agree that the lawn mower will stay either
with the neighbor or the neighbor’s daughter who lives two blocks away. Do you have an enforceable SI in the lawn
mower? See 9-313, Official comment
3. No, debtor can’t have agency
connected to debtor. Here, it’s the
daughter of debtor.
·
Advice: place in public record; mark the collateral; provide exclusion
clause to who has interest
Issue: Whether the components were
part of Koss’ after-acquired inventory described in its security agreement with
D, and if so, whether Koss had sufficient rights in the boom assembly
components to have “rights in the collateral”.
Holding: A debtor has rights in the
collateral when it has “any interest” other than naked possession; where a
debtor gains possession of collateral pursuant to an agreement endowing him
with any interest other than naked possession, the debtor has acquired such
rights as would allow a security interest to attach.
Conclusion: D’s security interest in
Koss’ after-acquired inventory attached to plaintiff’s components.
Ways to
satisfy the requirements for ATTACHMENT: §9-203(b)(3)
1. Authenticated by the debtor; in writing and signed (old way); today as of July 1,
2001, it must be a record
2. Description of the collateral
3. Possession by SP; mere possession of the collateral
4. Control and limited to 4 types of assets:
·
deposit accounts,
·
electronic chattel paper,
·
investment property, or
·
letter-of-credit rights
In most instances, #1 is most popular.
Must satisfy all elements of attachment in order to
be enforceable; doesn’t matter what order.
Usually won’t be an issue.
In certain forms:
1. money
When a buyer buys something on credit, they do not
intend to leave it with the seller.
08/17/01
·
Must be satisfied before a security interest can attach (legal
existence/enforceable against the debtor
·
§9-203(b)3(A): AUTHENTICATION of security agreement
·
For nonposessory security interests in collateral other than investment
property, a security interest will not attach unless “the debtor has signed a
security agreement which contains a DESCRIPTION OF THE COLLATERAL (writing
on an electronic record)
·
§9-203(a)(1) condones oral agreements creating a security interest if
the creditor POSSESSES the collateral pursuant to agreement §9-203(3)(B); or
the collateral is investment property and the creditor has CONTROL pursuant to
agreement §9-203(b)(3)(D)
Example: “I, Debtor, grant you, Creditor, a security interest in my 1999 silver
Mercedes coupe.”
Security Agreement vs. Financing Statement, page 85
Both typically accompany an
Article 9 secured transaction
1.
Security Agreement
·
§9-102(a)(73) à represents the contract between the debtor and the creditor
·
Evidences the debtor’s agreement and intention to create the security
interest
2.
Financing Statement
·
It is the document intended to give public notice of the creditor’s
interest.
·
§9-501 establishes where a creditor must file the financing statement
to give proper notice of its claim.
*The writing requirement serves as an evidentiary
function; in the nature of the SOF
*Description of the collateral achieves two
important goals:
1. it provides objective proof
of the parties’ agreement to create a security interest; and
2. it is objective evidence of
the parties’ agreement to create a security interest
A SI is perfected when it has attached and “all the
applicable steps required for perfection have been taken à §9-308(a); often involves the filing of a financing statement
(doing so makes a creditor’s claim effective against third parties b/c it gives
third parties notice of the claim.
·
Relates to a creditor’s ability to enforce its security interest’s
effectiveness against a debtor
·
Security agreement is associated with the process of attachment
·
Relates to the security interest’s effectiveness against third parties
·
Financing statement is associated with the process of perfection and
public notice of the creditor’s claim
§9-502(d) Filing before security agreement or
attachment; a financing statement may be filed before a security agreement is
made or a security interest otherwise attaches
§9-502(d) Official
Comment 2: “Notice Filing”
·
Does not require the SA itself, but only a simple record providing a
limited amount of information (financing statement)
·
A FS may be filed before a SI attaches or thereafter
·
Merely indicates that a person may have a SI in the collateral
indicated.
·
Proved to be of great use in financing transactions involving
inventory, accounts, and chattel paper b/c it obviates the necessity of
refiling on each of a series of transactions in a continuing arrangement under
which the collateral changes from day to day
·
Effective also for SI not yet in existence and after-acquired property
Facts: Debtor B executed a
promissory note and signed a SA with ICC to borrow 150K and perfected the SA by
a financing statement; B paid off ICC 65K and still owed 85K; B then executed
only a PN and FS with Z&J to borrow 150K; Z&J was assigned the 85K that
B still owed CC; no formal SA was ever executed between B and Z&J; B goes
bankrupt and Z&J claims they have SI in the 150K.
Issue: Can a creditor assert a
secured claim against the debtor when no formal security agreement was ever
signed, but where various documents executed in connection with a loan evince
an intent to create a security interest?
-Court here says YES. There was an enforceable security interest
between the two parties.
-Z&J want to prove they
have a total claim for both the 65K of CC assigned to them and their 85K even
in the absence of a SA for the 85K.
-§9-203(1)(a): generally, 2
documents are needed to create a perfected SA: SA and FS
-However, the commercial
world has often neglected this requirement
-§9-402: a SA may serve as a
FS if it is signed by both parties; but here, can it be the reversed? Can a FS
satisfy a SA?
Rule: Although a standard from of
FS by itself cannot be considered a security agreement, an adequate agreement
can be found when a FS is considered together with other documents (e.g. PN)
Holding: The PN read in conjunction
with the FS was sufficient to establish a valid SA.
General rule should be that you don’t give the value
until the agreement is in place.
B borrows $500,00 from
C. B executes a PN containing the
following clause: “This PN is given in exchange for the purchase price of
certain equipment described in a bill of sale to be delivered by B to C with
this PN.” Two days later, C files a FS
that specifically describes the equipment B bought. The president of B signs both the PN and the
FS.
We don’t see any facts that mention a security
agreement. Financing statement alone
does not satisfy the SA to show intent between the parties.
a. Assuming no other writings
are involved, does C have an enforceable SI in the described equipment? Probably not b/c the facts don’t show
anything else evidencing a SA
b. Would the result above
change if B had delivered the bill of sale to C? No. It only shows an intent to buy and not
necessarily an agreement; we need to see some language in the bill of sales
that evidence intent to secure an interest
c. What if B;s Board of
Directors had passed a resolution authorizing the president of B to grant a SI
in the equipment the corporation would buy with C’s$500,000 loan? Yes. The resolution shows intent.
It’s so easy to draft a collateral description and
just have the debtor sign it to make things easier.
In a corporate context (corporate entity), make sure
that the officer’s signature binds the corporate entity and the signer is
signing on behalf of them.
Make sure all parties involved in signing the SI
signs it.
Master CODE terms in order to know which specific
rules apply.
8/20/01
§9-203(b)(3)(A):
Enforceability of Security Interest; the debtor has authenticated a
security agreement that provides a description of the collateral and, if the
security interest covers timber to be cut, a description of the land concerned
§9-108: Sufficiency of the
description
(a) Except as otherwise provided
in subsections (c), (d), and (e), a description of personal or real property is
sufficient, whether or not it is specific, if it reasonably identifies
what is described.
§9-102(a) Definitions:
Account (2)
Chattel Paper
(11)
Commercial Tort Claim (13)
Consumer Goods (23)
Deposit Accounts (29)
Document (30)
Electronic Chattel Paper
(31)
Equipment (33)
Farm Products (34)
Farming Operation (35)
Fixtures (41)
General Intangible (42)
Goods (44)
Health-care-insurance
Receivable (46)
Instrument (47)
Inventory (48)
Investment Property (49)
Letter-of-credit right (51)
Payment Intangible (61)
Promissory Note (65)
Software (75)
Tangible Chattel Paper (78)
You could use your own term as long as it reasonably
identifies the property. You can’t use
all of the debtor’s property §9-108(c): Supergeneric description not
sufficient. You must be specific. We want the debtor to know what he’s securing
an interest in.
Types of Article 9 Collaterals:
Tangibles “Goods”
·
Inventory
·
Farm products
·
Consumer goods
·
Equipment
To know what a good actually is will depend on what
it is used for by the debtor à e.g. refrigerator
What if something has a 50/50 use? A car used for
business and personal? Here, it’s
either a consumer good or an equipment.
Depends on the residual. Its
primary use is what dictates.
·
Documents (eg. documents of title, bill of laden, receipts)
·
Instruments (eg. checks, Article 3-type promissory note)
·
Chattel paper
·
Account
·
General intangibles
·
If it doesn’t fit anywhere else, then it’s a general intangible
·
Investment property (eg. stocks and bonds)
·
Letter-of-credit rights (will not be discussed this semester)
·
Deposit accounts
·
Commercial tort claims (does not include all tort claims)
Again, keep in mind that we don’t have to use any of
these.
Facts: The debtor is a retailer of
petroleum products who sells oil to customers and as part of the sale, lends
them oil tanks to use for storing the oil. Customers were to sign an “Equipment
Agreement” which stated that the tanks remained the personal property of the
debtor. CN loaned debtor 60K and
obtained as SI ‘all accounts receivable and inventory’ of debtor. CN claims the tanks are inventory while
debtor claims they are equipment and thus not subject to CN’ SI.
Issue: Are the tanks equipment or
inventory? Were the tanks furnished under contracts of service?
Holding: Court concludes the oil
tanks are equipment and were not furnished under contract of service.
Debtor never held the goods
for sale, either in the ordinary course of business or otherwise, since no
title was passed from a seller to a buyer for a price; customer and debtor had
intended that the title to the tanks would remain in the debtor.
Debtor should have listed the equipment in the
description of collateral. We could have
described the storage tanks.
Facts: Debtor N is bankrupt.
Creditor W had loaned N over 166K. As SI
for the loan, W had received an assignment of an annuity contract issued by
MLIC. W had failed to file a FS with the
TX Secretary of State.
Issue: Whether W had perfected its
SI in the annuity contract it received from N.
-W argued the annuity
contract was an instrument, which is automatically perfected upon delivery.
-Lower court held it was a
“general intangible” and not an instrument, therefore W did not perfect its SI.
-Instrument: (1) Evidence a right to the payment of money and (2) be of the type
which is in the ordinary course of business transferred by delivery with an endorsement
or assignment…
Holding: This court finds that the
annuity contract was a general intangible and thus W had to file a financing
statement with the secretary of state in order to perfect its SI. By not doing
so, they now held an unsecured interest in the annuity.
-Possession of the annuity
contract alone does not convey the right to receive payments.
-Notice and delivery is
required to transfer rights conferred by the annuity certificate.
-Professionals do not attach
significance to the possession of the annuity certificate itself.
Only way to perfect a general intangible is by
filing a FS. If you can’t choose with
certainty what term to use, describe it so that all parties can understand.
The UCC defines a “general intangible” merely by
stating what is not a general intangible.
A general intangible is essentially a bundle of rights such as those
inherent in a franchise, a chose in action, a copyright, or an annuity…
M purchases a laptop computer from S for $3,000. M executes an installment K for the purchase. S wants to use M’s installment K as collateral for a loan from Lender.
a. Classify M’s installment K
when S offers it to Lender as collateral.
Possible answers: instrument, account, chattel paper; appreciate the terms
are mutually exclusive. Won’t be account
if it’s one of the other two. It has to
be one of three. That’s why it won’t be
a general intangible. Instrument is very
hard to satisfy. Could be chattel paper
b/c it meets the monetary obligation component.
b. In addition to the
installment K, assume M also executes a PN payable to S. Classify M’s note and installment K when S
offers them as collateral to Lender.
Same thing: Instrument, chattel paper, or an account. We don’t know all of the terminology of the
agreement. Until we do, we can still
narrow it down to one of the three.
c. Would your answer change in
(a) or (b) if the installment K M executed reserved title to the laptop in
S? Chattel paper
d. What if M put the purchase
on her MasterCard? Account
e. Assume Lender makes the loan
to M so she can purchase the lap-top.
Lender takes a SI in the computer.
Classify the collateral. It would
depend on its use; if it’s for personal use, then it’s a consumer good. If used for business, then it’s an equipment.
H enters into a K with O to construct an office building. The K provides for periodic payments to H at various stages of the project. H has not yet performed any work.
a. If H assigns its rights to
payment under the K to Bank as security for a loan, what type of collateral is
involved? Account; does not matter if
work has not been performed yet. Maybe
also be chattel paper or instrument.
It’s easier to be classified as account.
The only way it’s not an account is writing out there that says it’s not
one of the other. Chattel paper says it
has to be a specific good, not real estate.
So any mention of real estate would exclude it as chattel paper.
b. What about H’s right to a
tax refund from the prior year? Would your answer change depending on whether H
was entitled to a tax refund? Assuming
it was entitled to a tax refund, would you classify the tax refund right
differently depending on whether H had filed its return? On whether H had received a check from the
IRS? General intangible; probably can’t
be an instrument. The tax return would
be a general intangible; a check from IRS would be an instrument under the
category of semi-intangible. Tax refund would
not be an account b/c it’s not a right receivable or monetary obligation.
Classify the following when offered as collateral:
a. Coca-Cola’s patent
infringement claim against Pepsi.
commercial tort claim
b. The charcoal that H uses to
char-broil its burgers. inventory; it’s
raw materials used up in the process
c. Buffy’s lottey ticket. account; could be argued to be general
intangible and further subcategorize it as payment intangible
d. Buffy’s lottery winnings
consisting of the right to receive $1 million a year for the next 10
years. account
e. A certificate of deposit
issued by Bank that says at the top: “NON-NEGOTIABLE.” What if it also says “NON-TRANSFERABLE?”
deposit account unless it was an instrument (non-negotiable) Official Comment 12
8/22/01
Description of collateral: Two main words the CODE
actually just wants à “reasonably identifies”
You do not have to use the terms set out in the
CODE. You can use any description you
like as long as it reasonably identifies the collateral. It’s good to know the terms b/c it helps us
read the CODE better.
DD wants to borrow money from B. Classify the following when DD offers them as collateral to B:
a. Flour, sugar and chocolate
used to make donuts: Inventory
b. Cloth aprons, DD T-shirts
and hats that all employees must wear: Equipment or inventory
c. Napkins, paper cups and
bags: Equipment or inventory; probably more an equipment
d. DD’s secret recipe for
chocolate butter crunch donuts: General intangible or equipment? It’s more a GI
b/c it’s the recipe information that is of value.
e. Cash register, oven, pans,
and trays: Equipment, but may be fixtures too; you could use both terms also
b/c they’re not mutually exclusive; anytime you have an equipment, it could be
a fixture.
AI is a genetic laboratory that grows various life forms that it sells for use in medical research. Classify the life forms if AI offers them as collateral for a loan. How would you classify its patent for life form C-256H? What about a computer program AI developed to test the performance of its products? Data reports produced by the program?
Life forms grown is inventory. It may be a farm product too when we sell
it.
The patent would be a general intangible.
Computer program would be a general intangible.
Data reports would be a general intangible. If not, it’ll have to be equipment as the
residual.
Facts: G granted a SI in its
property to C. A SA was perfected between them.
The SA described the collateral in which C took a SI as “all inventory
of lumber and logs, accounts receivable, all sawmill equipment and all rolling
stock, including, but not limited to…”
Items not specifically listed as collateral were G’s gang saw, Delta
feeder mechanism and a Detroit Allison diesel generator. These items were sold at auction. C claimed that it was entitled to the
proceeds. Bankruptcy court found the
omnibus clause describing the collateral were not sufficient to include the
latter items.
Issue 1: Whether or not omnibus
clauses are effective in Kentucky when used to describe general types of
collateral in security agreements.
Issue 2: Whether it remains effective
against certain specific collateral that is not listed on a schedule of
specific items of collateral which is also part of the security agreement.
Holding: Court here did find the
omnibus clause “all equipment” to be effective as to cover the latter items.
As for the second issue,
intent of the parties was ambiguous.
Here, the use of both a schedule listing specific items of collateral
and an omnibus clause describing a general type of collateral creates ambiguity
when a specific item fails to appear on the schedule but is ostensibly covered
by the omnibus clause.
Rule: If a SA contains an omnibus clause and a
schedule of specific collateral which does not list all that the omnibus clause
ostensibly describes, then the initial creditor has failed to provide adequate
notice to subsequent creditors and the ambiguity shall be construed against the
initial creditor.
The drafter should have decided whether he wanted to
be general or specific in describing the collateral. Rely either on a specific least or the
omnibus clause.
Let’s assume that Zinnecker borrows 3K from
you. He wants to secure a SI in his
TV.
Could Z say “all assets”? Too broad
“TV” or “television”? We don’t know which one; he may have more
than one.
RCA XL-100 19 SN #456AZ? Yes. Specific
Can you get too particular? Yes.
It depends on how court sees it.
Standard to follow: It has to reasonably identify
the collateral
Let’s assume on Friday, X goes out and buys another
TV?
Would I get it? Debtor would say “all” means all as
of “now”, not in the future.
Generally, if you want to grant a SI in assets not
yet acquired, you must include language describing so.
Creditors, however, can include after-acquired
assets à §9-204
Account receivable and inventory are usually what
creditors would want to include in after-acquired SI.
Not only assets of today, but also in the future.
Exceptions:
§9-204(b)
Other than that, creditor can obtain after-acquired
property in anything else.
*If you wanted to circumvent the after-acquired
clause, you could always execute another security agreement. Do this to avoid worrying about the creditor
every time you acquire new property.
§9-204 After-acquired Property; Future Advances
(a)
After-acquired collateral:
(b) When after-acquired clause is not effective: A SI does not attach under
a term constituting an after-acquired property clause to:
1. consumer goods, other than
an accession when given as additional security, unless the debtor acquires
rights in them within 10 days after the secured party gives value; or
2. a commercial tort claim
(c) Future advances and other value:
On 9/1, TRZ borrows $6,000 from WFB. TRZ executes a SA that creates a SI in “(i)
Steinway piano w/bench and (ii) all electronic entertainment equipment
(including, w/o limitation, stereo equipment, TVs, and VCRs), whether now owned
or hereafter acquired.” TRZ makes the
following acquisitions during the month of September:
9/5 Borrows $6,000
9/5 Compact disk player ($150)
9/8 Personal computer ($3,000 – using WFB’s
money)
9/12 TV ($400)
Which of the three purchases are part of the
collateral? All of them (it’s within 10
days).
Has WFB committed “an unfair act or practice” under
the Federal Trade Commission Act? See
FTC Credit Practices Rules §444.2(a)(4) and §444.1(i) [pp. 1907-1909 0f 2001
statutes book.] Yes, see §444.2(4)
Ask who or what is the debtor?
Ask what are the goods used for?
Assume here that they are consumer goods.
No timing problem (it’s within 10 days)
We have a description problem. It’s possible that the PC is not part of the
collateral.
“Without limitation” is the tricky language here.
Unless we specifically mention PC, there’s a danger
it may not be included.
What about FTC issue?
When the statute refers to a nonpossessory, we ask
is the secured party in possession. If
not, it’s a nonpossessory interest.
Next, ask if it is household goods?
If it is a household good, there will be a FTC violation. Piano is furniture. Compact disk player? Probably not b/c it’s under exclusion
clause. TV? Yes, especially if it’s the
only one you own. CP? We don’t care b/c facts tells you whose money
you used to buy it (Wells Fargo). This
makes it a purchase money security interest and therefore will not violate FTC
rules. Anytime that a creditor lends you
money to buy something and turns around and takes a secured interest in the
very collateral that you’re obtaining, it is a purchase money security interest
(PMSI §9-103). We’ll discuss this more
later on in the semester b/c it is important.
§9-204(c)
means basically that you don’t have to promise to make the loan; just
acknowledge that there is future debt.
2 components of SI:
-Debt
-Collateral
8/24/00
Paulman v.Gateway Venture Partners III, L.P., page 101
Facts: F was a corporation which
developed and distributed carbonated pads used in the food industry. In November 1991 F took out a series of loans
from P. The loans were short term and executed by promissory notes. The note in dispute was the final 3-months
note executed in June 1992 and due September 1992. The note secured 75,000 shares of Filter
Corp., stocks, and the accounts receivable and inventory of Filter Corp with a
“see UCC-1 filing and attached inventory listing”. The parties never executed a separate
security agreement. P perfected his SI
by filing a UCC-1 financing statement on October 1992. The FS identified the collaterals as 1)
accounts receivable and 2) materials inventory.
Despite the note’s reference to an inventory listing, none was ever
attached to the note or the financing statement. There was no evidence whether the parties
intended to secure after-acquired inventory or accounts receivable for the June
1992 note. F defaulted on the note and P
brought suit to enforce it.
Issue: Whether a security agreement
that grants an interest in inventory or accounts receivable, w/o more,
presumptively includes after-acquired inventory or accounts receivable.
Holding: P had a SI in
after-acquired accounts receivable, but not in after-acquired inventory b/c the
SA demonstrated an intent to limit the inventory collateral by referencing an
attached inventory listing.
Rule: There is a presumption that
security interests in inventory and accounts receivable includes after-acquired
property, absent evidence of intent to the contrary.
Notes:
1. It is better to be simple
than sorry and less can be more. If your
client wants a security interest in after-acquired property, use clear,
unambiguous words to express that intention. à ex. “all debtor’s current and after-acquired
trucks”
2. Judicial inquiry regarding
the existence and scope of a creditor’s security interest focuses on two
legally distinct issues: a) the legal sufficiency of the description; and b)
the parties’ intentions to encumber the property
S processes peanuts which it markets in the form of peanut oil, peanut butter and unsalted peanuts. It also processes other food commodities for the wholesale market. B1 lends $900,000 to S. S signs an agreement which grants B1 a SI in:
Peanut processors, and packers, and all equipment
used or useful in the conduct of its business; all accounts, contract rights,
instruments and inventory; all general intangibles including Debtor’s
trademarks, goodwill and patents, current and after-acquired.
a. Is the language in the SA
sufficient to cover processed peanuts held for sale by S on the date of the
agreement? Would the language cover
peanuts obtained after the SA is executed?
If you were drafting the agreement, would you elaborate on the
description to make sure processed peanuts are covered? On the date of the agreement: Yes. You can
assume processed peanuts are included in inventory. After SA was executed: Not sure. Is inventory presumed to be an after-acquired
property? Argument that it does not
modify after-acquired property. I would
not elaborate on the description.
b. Does the agreement cover a
delivery truck which S acquires after it signs the SA? Does something in the description pick up the
delivery truck? It would have to be
under equipment. But here again, it says
the equipment is before the after-acquired clause. So, no.
c. Is the language sufficient
to describe a conditional sales K and PN which S receives from G in connection
with G’s credit purchase of peanut oil from S?
It mentions contract rights. Do
we know when the K was executed? We’re
not sure. We then have an issue of
whether after-acquired language modifies it.
Therefore, no. It might fit in as
chattel paper.
d. Does the agreement cover S’s
rights to a tax refund? No. We see a general intangible in the
description. What’s another concern? We
don’t see a “but not limited to” clause.
What does the phrase “after-acquired” modify?
Place the “after-acquired” clause somewhere where
it’ll includes all of what you want; not at the end.
You get everything up to and on the day the
agreement is signed.
S filled out a “SearsCharge Credit Account
Application.” In a blocked out portion
containing a line for the applicant’s signature, the form stated:
I agree to pay Sears in accordance with the credit terms disclosed to
me and to comply with all the terms of the SearsCharge Agreement. A copy of the SearsCharge Agreement will be
given to me when my application is approved.
Sears will retain a SI where permitted by law on all merchanise charged
to the account…
S filled out the other requested information and
then signed and returned it. Four weeks
later, she received a SearCharge card and a copy of the agreement. The back of the card stated:
By signing this card I acknowledge that I have read and agreed to the
terms and conditions of my credit agreement with Sears.
S signed the card and one week later, used it to
purchase a television set, lawnmower and some jewelry. She signed a sales slip which stated:
24” STEO TRAD CNSLE
4 HP SD MOWER
14K CHARM ORO PUFFHRT
ARTW121
Does Sears have a SI in any of the items S purchased
on credit?
We could probably look at this stuff and figure it
out what they are, therefore description is reasonable. Are we worried about the 10-day rule? No, the agreements were contemporaneously
executed. Are we worried about the FTC
violation? No, b/c it’s all PMSI.
Problem #2-4 Handout: After-acquired property
clause; future advance clause: 9-204
CB agrees to make periodic loans to a construction company. Repayment will be secured by collateral consisting of the debtor’s heavy-duty construction equipment. The debtor executes the SA on 3/1, when CB makes a $250,000 loan. On 3/1, the debtor owns one piece of construction equipment, a bulldozer. Through the year, the following transactions occur:
4/1 CB
loans another $300,000
5/1 Debtor
acquires a road grader
6/1 Debtor
acquires another bulldozer
7/1 CB
loans another $200,000
What constitutes “secured debt” and “collateral” if
the only SA executed by the parties has:
1. no after-acquired property
clause; no future advance clause
2. after-acquired property
clause; no future advance clause
3. no after-acquired property
clause; future advance clause
4. after-acquired property
clause; future advance clause
Assuming that the SA includes an after-acquired
property clause; on what date does CB first have an enforceable SI in any
collateral? In the road grader?
Transaction 3/1 4/1 5/1 6/1 7/1
Collateral BDZR - RGDR 2nd BDZR
Secured Debt 250K 300K - - 200k
What constitutes “secured debt” and “collateral” if
the only security agreement executed by the parties has:
Secured
Debt Collateral
1. No AAPC; No FAC 250K BDZR
2. AAPC; No FAC 250K RGDR, 2nd
BDZR
3. No AAPC; FAC 250K, 300K, 200K BDZR
4. AAPC; FAC 250K, 300K,
200K BDZR, RGDR, 2nd
BDZR
BDZR covers all debt.
Assuming SA includes AAPC:
On March 1, Chase Bank will have SI in any
collateral.
On May 1, Chase Bank will have SI for the road
grader.
Note: Must still satisfy RAV=E; We’re not worried
about the 10-day limitation b/c these are not consumer goods. #4 is the best position for the creditor to
be in; creditor has a choice to liquidate any one first. Total debt of $750K.
8/27/01
MB issued commitment letter
at 9% interest for 6 years secured by 3/11
B’s “equipment, general intangibles and accounts whenever acquired.”
MB loans B $2 million at 9%
interest and B signs a promissory note secured by 7/1
B’s“equipment, general intangibles and inventory.”
B also signs security agreement which covered “all B’s equipment, 7/1
including three tape editors in the FL office
and all accounts,
chattel paper and
inventory.”
B also signed a financing
statement which covered 7/1
“equipment, inventory, chattel paper, accounts and general
intangibles.”
B has fallen on hard times
and desires to sell some property that are not subject to MB’s security
interest. Advise as to B’s ability to
sell the following:
B/c there are a wide range of description mentioned
and discrepancies in them for each document, we would probably concern
ourselves mostly with the SA b/c it’s binding.
We would not worry about the FS.
FS is for perfection.
Now, we need to determine what is considered part of
the collateral package.
a) A camera acquired on 6/15
and a similar camera on 7/19 used in FL.
Probably not b/c we don’t know where the camera is being used or is
located. What does the geographical
limitation mean to modify? But maybe so b/c no after-acquired clause. Or argue for
creditor that B can’t sell it b/c
the SA says “all” means all times when it’s acquired.
b) K’s with several Michigan
companies allowing them to use B’s logo which is a registered trademark. B’s logo would probably be classified as an
account and therefore he can’t sell it b/c it is subject to MB’s SI. Also, what if this is a type of account that
does not change on a daily basis, in which an after-acquired clause is not
needed, would the court infer it?
Probably though. Timing might be an issue. Then again, it might not even be an account. It might be an instrument or inventory.
c) Obligations ranging from 1K
to 50K which various merchants owe for ads aired on FL or NJ stations during
the past several months. Such
obligations may be classified as an account, assuming it’s not evidenced by
instrument or chattel paper, and therefor B can’t sell them.
d) B licenses for its FL and NJ
stations. Note: FCC regulations
prohibits the transfer of licenses w/o FCC approval. The licenses are classified as general
intangibles and can be sold. If the SA
did include general intangibles, we may run into FCC issues. FCC would probably like to know who’s in
control of the air waives.
We’ve discussed the four forms of agreement in
attachment; keep in mind that they are not mutually exclusive.
Control will trump anything else from an attachment
perspective; although the other forms may work.
Handout Problem #2-5: Creating an Enforceable SI in Investment Property
§9-203(b) Enforceability
§9-102(a)(49) Investment
property
§9-106(a) Control
of Investment property: Control under §8-106
§9-106(c) Control of Investment
property: Effect of control of securities account or commodity account
§9-108 Sufficiency
of description; reasonably identification
§9-308(f) When security interest or
agricultural lien is perfected; continuity of perfection: Security entitlement
carried in securities account.
§8-102(a) Definitions:
(4) Certificated
security
(7) Entitlement
holder
(14) Securities
Intermediary
(15) Security
(17) Security
Entitlement
(18) Uncertificated
security
§8-106 Control
§8-301 Delivery
§8-501(a) Securities
account; acquisition of security entitlement from securities intermediary
§1-201 General definitions
(32) Purchase
(33) Purchaser
Article 8 Evolution of the indirect
holding system, page 533
Indirect
Holding System, page 537
Security
Interests, page 538
BU intends to loan $1 million to MG. Repayment of loan will be secured by a SI in
the following investments owned by MG:
·
100 shares of Shell Oil stock (MG holds the actual certificates
registered in her name)
·
100 shares of Intel stock (no certificates have been issued but MG’s
ownership is reflected in book-entry form on the corporate books of Intel)
·
100 shares in the Fidelity Magellan Fund (a stock mutual fund that does
not issue certificates but provides MG with periodic performance statements)
·
$250K U.S. Treasury Bill (purchases by MG’s investment broker,
Prudential Securities, for her account; MG holds other investments in her PS
account, but these will not serve as collateral for the loan)
All investments in MG’s account are managed by her
investment broker, Goldman Sachs. How
would you label the above investments?
·
Certificated security: 100
shares of Shell Oil stock
·
Uncertificated security: 100
shares of Intel stock; 100 shares of Fidelity Magellan Fund
·
Security entitlement: $250K
U.S. Treasury Bill by PS
·
Securities account: Goldman
Sachs portfolio (has everything)
If you have a broker (security intermediary)
involved, you will always have either a security entitlement or a security
account. It’s important to figure out
how to label these stuff b/c of the “control” issue.
How can BU create an enforceable SI in these various
investments?
§8-106 Control
We use §8-106(b): registered form; means it’s issued
to a particular person.
Is a secured party a purchaser? Yes. A
purchase can be taken by a security interests
Must also satisfy §8-301 Delivery. But appreciate that we also need more than
delivery.
8-106(b)(1) certificated security must be indorsed
or registered in the name of purchaser.
Most securities today are uncertificated securities
or part of a security attachment.
8-106(c) for uncertificated security; concept of
purchaser control
We don’t have to have exclusive control by the
creditor; but you want to be in a position to liquidate the debt w/o debtor’s
consent.
8-106(d) for security entitlement; agreement
Where does it mention about the creditor obtaining
the debtor’s account? Look at
§9-106(c). Automatic control if a
secured party has control of all security entitlements or commodity contracts.
Only worry about description concern if it’s not in
writing.
If executing a SA is an option, how would you
describe the collateral? (don’t concern with this question)
·
$250K U.S. Treasury Bill by PS; document
·
100 shares of Shell Oil stock; general intangibles
·
100 shares of Intel stock; general intangibles
·
100 shares of Fidelity Magellan Fund; general intangible
8/29/01
You cannot take a SI in a deposit or primary savings
account under the old code. Article 9
Rev. says you can now.
Under old article 9, such accounts were still used
as collateral.
§9-203(b)(A), (D) Enforceability:
description of the collateral; control
§9-104 Control
of deposit account
§9-102(a)(29),(8) Definitions:
deposit account; bank
§9-109(a)(1) Scope
of Article 9
§9-109(d)(13) Inapplicability
of article 9; an assignment of a deposit account in a consumer transaction
§9-102(a)(26) Definition:
consumer transaction
Problem:
Bill Smith buys a piano on credit from Bank One so
his 3 children can take piano lessons.
Bill has offered as collateral not only the piano, but also a
non-negotiable, non-transferable certificate of deposit issued by Bank One.
a) Can Bank One take a UCC
Article 9 SI in the CD? First you might want to define what the CD is --- could
be a deposit account b/c it says non-transferable or non-negotiable. Assumption that the CD is a promise to pay at
a later date. Now, we ask is it a form
of proper collateral? Look at
§9-109(13). Next, is this a consumer
transaction? If so, we can’t take an
article 9 interests. We now go to
§9-102(a)(26) to define consumer transaction.
We satisfy (i) for the piano but not for CD under (ii). Therefore, we cannot take an interest in the
CD under article 9. Courts say people
need to be able to make deposits and write checks to pay their bills.
There is a way around this
for the creditor. What could the debtor
tell the bank to do to make a SI in the CD?
We could take the money out
of the bank’s deposit account and into another account that is outside article
9 restriction. B/c as long as it remains
in the bank, then you would have to worry b/c it’s a consumer transaction.
b) Would your analysis change
if BS is a professional musician and buys the piano for his studio where he
gives lessons? Yes, we can take an
interest in it b/c no longer for consumer transaction. We can now satisfy RAVE. One way is by controlà§9-203(b)(3)(D). Or we can secure it by control of deposit
account à §9-104. For our case, (a)(1)
does not apply. We can under (a)(2) as
long as the secured party can liquidate the property w/o debtor’s
permission. Under (a)(3) probably won’t
be used since it’s a bit scary from the debtor’s perspective. Or all together, we could authenticate a
written agreement. Does it matter for
attachment? Not much. But once we talk about perfection, we must
get control.
BizCorp maintains its checking/savings account with
Bank One. It also has a non-negotiable,
non-transferable CD issued by Bank Two.
a) BizCorp desires to borrow
50K from Bank One and offers his checking/savings account and CD as
collateral.
How will BizCorp and Bank
One create an enforceable interest in the collateral? Under §9-104, Bank One
will have control of the checking/savings account since it maintains the
account for Bill. Bank One will not have
control of the CD /c it’s non-negotiable and non-transferable.
Is the secured party the
bank where the deposit was made?
No. We would have to try and
satisfy the (a)(2) or (a)(3) test of
§9-104.
PERFECTION AND NOTICE
So far we have only focused on two parties involved
in the secured transactions à the creditor and debtor.
There are other parties out there:
·
Other creditors (eg. statutory, unsecured, lien, relatives, trustees in
situations of bankruptcy)
What about from collateral perspective? They might liquidate, buy, sale, or lease the
collateral.
Article 9 came up with perfection to solve such
issues. Let’s start by creating a chart
of the collaterals we’ve mention:
|
Type |
Control |
Possession |
Filing |
Federal Law |
Method of
Perfection |
|
Inventory |
|
X |
X |
|
|
|
Equipment |
|
X |
X |
|
|
|
Consumer Goods |
|
X |
X |
|
[PMSI] X COT |
|
Farm Products |
|
X |
X |
|
|
|
Fixtures |
|
X |
X |
|
|
|
Documents |
|
X |
X |
|
|
|
Instruments |
|
X |
X (new law) |
|
|
|
Tangible Chattel Paper |
|
X |
X |
|
|
|
Electronic Chattel Paper |
X |
|
X |
|
|
|
Accounts |
|
|
X |
|
|
|
General Intangibles |
|
|
X |
|
|
|
Deposit Accounts |
X (only way) |
|
|
|
|
|
Commercial Tort Claims |
|
|
X |
|
|
|
Letter-of-Credit |
X (only way) |
|
|
|
|
|
Investment Property (C) |
X |
X (delivery) |
X |
|
|
|
Investment Property |
X |
|
X |
|
|
Possession: if it’s tangible, grab it; if not, then
it doesn’t apply.
Money: Only by possession (rare)
Automatic perfection only applies to 2 prong test:
1. purchase money in consumer
goods (PMSI)
2. but still have to comply
with COT law §9-103
A. Requirement
of Notice, page 135
§-308(a) attempts to define
perfection. Says you must first have attachment
in order to even have perfection.
As a general rule, when notice is relevant at all, Article 9 focuses on the “giving aspect” – what steps are adequate to give notice.
·
Body of law dealing with “fraudulent conveyances”
·
Focus is on the transferor’s creditors and the transfers made with
actual or constructive intent to defraud them
·
Law seeks to recapture assets that should have been available to
satisfy creditor claims against the transferor
·
Remedy lies in “setting aside” the transfer (no punitive or criminal
sanctions involved)
·
Common law initially responded to the problem by recognizing only possessory security interests; a secured transaction in which the
creditor took possession of the collateral
·
Such possession gave third parties notice of the creditor’s claim
·
Such a “possession only” rule had enormous indirect costs
Article 9 authorized an alternative form of public
notice:
·
A secured creditor need not take possession of the collateral, but if
he does not, he must make a public filing in a designated place before he can
shift the risk of competing claims to other property claimants
·
A filing system places fewer restrictions on the use of collateral than
does a possession-based solution to the ostensible ownership problem, yet it
stills provides information that allows a creditor to avoid the uncertainty
caused by the possibility of debtor misbehavior
·
A secured creditor can determine if there are competing claims to his
collateral by examining both the property that the debtor possesses and the
public filings.
·
However, it has been suggested that modern techniques for the
collection of communication of credit have made filing systems unnecessary and
obsolete; such information could be obtained just as well through financial
statements.
§9-309(1) Security
interests that are perfected upon attachment
§9-310 When filing required
to perfect SI or agricultural lien; SI and agricultural liens to which filing
provisions do not apply
(a) General rule: Perfection by
filing
(b) Exceptions: Filing not
necessary
§3-111 Perfection of security
interests in property subject to certain statutes, regulations, and treaties
(a) (1) and (2) Security
interest subject to other law
(d) Inapplicability to certain inventory
§9-312 Perfection of SI in
chattel paper, deposit accounts, documents, instruments, investment property,
letter-of-credit rights, and money; perfection by permissive filing; temporary
perfection w/o filing or transfer of possession
(a) Perfection by filing
permitted
(b) Control or possession of
certain collateral
§9-313 When
possession by or delivery to secured party perfects security interest w/o
filing
(a) Perfection by possession or
delivery
(b) Goods covered by certificate
of title
(c) Collateral in possession of
person other than debtor
1. person in possession must
authenticate a record acknowledging that it holds possession of the collateral
for the secured party’s benefit. ---NEW LAW
(f) Acknowledgment not required
§9-314 Perfection
by Control
(a) A SI in investment property,
deposit accounts, letter-of-credit rights, or electronic chattel paper may be
perfected by control of the collateral
08/31/01
An Article 9 SI is enforceable against the debtor
when it attaches. Perfection gives the
SI optimal effect against third parties.
Applicable steps for perfection differ depending on the types of
collateral.
Possible methods of perfection:
a) Filing a financing statement(s)
in a designated place(s) – it includes everything except for deposit accounts
and letter-of-credits; generally dealing with a financing statement; mostly for
automobiles and other vehicles
b) Notice by possession (the
“pledge transaction”)
c) Control
·
an all-purpose device b/c it creates as well as perfects the creditor’s
interest
·
the first creditor to obtain control has priority over other
conflicting claimants (investment property, deposit accounts, letter-of-credit
rights)
d) Automatic perfection
·
Must be both a PMSI and a consumer goods; exception in COT – cannot use
automatic perfection
·
The SI perfects automatically upon attachment; no act of public notice
is required
When Article 9 perfection rules will NOT apply:
a) Federal statute will
sometimes state its own rules regarding public notice (e.g. Federal Aviation
Act)
b) If a separate state statute
establishes its own public notice scheme (eg. State Certificate of Title for
automobiles–COT)
In re Pipes, page 154
Facts: MI had a dual-filing system for financing
statements pertaining to business property.
It requires the filing both with the Secretary of State and the Recorder
of Deeds of the obligor’s county of business location if business property is
the claimed collateral. However, if the
claimed collateral is consumer goods, farm products, or farm equipment, filing
is required in the county of the obligor’s residence only. Trustee asserts mechanic’s tool should be
classified as business equipment. ITT
says it’s consumer goods and therefor it only had to be filed its collateral
claim in the county of obligor’s residence only.
Issue: How is the collateral defined or
characterized?
Rule: The nature of a collateral
depends on its use by the owner.
Holding: Such tools were expensive and extensive hand tools
used in the debtor’s business of repairing motor vehicles at the debtor’s place
of business for financial reward; therefor it is labeled as a business
equipment. ITT secured claim is denied
since ITT did not file UCC-1’s with the Secretary of State to perfect a SI in
the business equipment
Fitzgerald v. American General Finance, Inc., page 156
Facts: Debtor MP, who lives in Idaho, purchased a
snowmobile in Wyoming. No COT was ever
issued for it. Subsequently, Debtor MP
borrowed money from D and granted it a SI in the snowmobile to secure a
loan. D attempted to perfect its SI by
filing a UCC-1 financing statement with the Idaho Secretary of State. MP later filed a bankruptcy petition. P is the trustee in the bankruptcy case. Debtor MP surrendered the snowmobile to
P. P bought this action to avoid
defendant’s SI in the snowmobile.
Issues: P claims that D’s lien is not properly
perfected under Idaho law, and is therefor avoidable under a trustee’s
hypothetical lien creditor status bestowed by the “strong-arm provisions of the
Bankruptcy Code”.
Rule: Exception to the general rule is made for the
Idaho motor vehicle title statutes.
Issuance of a COT and the notation of the creditor’s lien on that
certificate is the exclusive method of perfection.
Holding: P is correct.
D failed to insure that a proper certificate of title to the snowmobile
was issued and that its lien was noted on the certificate. D’s SI is therefor avoidable by P. It doesn’t matter that the vehicle was
purchased in another state that does not require COT; it is D’s burden to
follow Idaho law to properly perfect its SI.
“Belt-suspenders approach” to protect yourself in
the situation of bankruptcy.
Problem 3.2, page 157
You represent Unitex Corporation. U desires to engage in secured financing relying on the following types of collateral:
1. Installment contracts GM
stores generates from its sale of office equipment to various law firms. U is making its loan to GM.
2. The office equipment
described in (a) above assuming U is lending to GM. Would your advice change if U were lending to
the various law firms purchasing the office equipment from GM?
3. Promissory note GM’s
customers execute which GM wishes to sell to U at a discount.
4. Credit card receivables GM
generates from sales.
5. Television sets and stereos
various private individuals will purchase with loans from U. Would your advice to U change if its loans to
these individuals were not in any way connected to their purchase of the
televisions and stereos?
6. A delivery truck GM purchases
to make furniture deliveries.
7. GM’s stock in GM Jr., a
wholly owned subsidiary.
8. Software which GM uses in
its accounting system and which it holds under license from Micro-SW.
Set up chart:
|
Items |
Type of
Collateral |
Statute |
Method of
Perfection |
|
Installment contracts |
Accounts, Instrument, Chattel Paper |
§9-309(2) |
Filing, for CP and I, you would prefer to have
Possession under §9-330 |
|
Office Equipment |
Inventory, Equipment, PMSI |
§9-309 |
Filing by FS (more practical), possession, no
Automatic Perfection for PMSI b/c not a consumer good in the hands of the
buyer |
|
Promissory note |
Instrument, Tangible Chattel Paper, Accounts |
§9-109(a)(3), §309(4), §9-312, §9-313, §9-309(4)* |
Filing (may be better), Possession, Automatic
perfection when we’re dealing with promissory notes |
|
Credit card receivables |
Accounts |
§9-309(2), §9-102(2)(vii), §9-310(2) |
Filing a FS |
|
Television sets and stereos |
Consumer Goods (depends on debtor’s use), may be
Equipment |
§9-309 PMSI |
Possession (not practical), Filing (may actually
be better than automatic perfection under §9-320(b), Automatic (only if it’s a consumer
goods) |
|
Delivery truck |
Equipment |
§9-310(b)(3), §9-311 for vehicle -COT |
Possession (not so sure it’ll work b/c you need a
first lien on COT, therefore, you mind as well file a COT), Filing a COT |
|
GM’s stock |
Instrument, Investment Property -- Certificated
Security or Uncertificated Security |
|
Control (will trump filing and everything else
under §9-328), Filing |
|
Software (holds it under a license) |
General Intangible |
§9-312, §9-314, §9-310(8) |
Filing only |
The president of U wants answers to the following questions:
1. What are the perfection
requirements regarding each type of listed collateral?
2. If options are available,
which method of perfection do you recommend and why?
3. If filing is an available
option, where must U file assuming the jurisdiction in question has enacted
Revised Article 9?
4. If U desires to determine
the ownership and existence of any claims against the foregoing collateral, how
can it do so?
Through financing statement
or check file in secretary of state’s office.
In filing, you might ask yourself:
Where do we file?
Two choices for state filing – within a central location or at a county
level.
How do you even know which state law controls?
09/5/01
U increases your retainer and requests a similar memo with respect to the following:
|
Items |
Type of
Collaterals |
Statute |
Method of
Perfection |
|
10 non-transferable, non-negotiable certificates
of deposit for 10K each issued to SF and redeemable 90 days from date of
issue. U will lend to SF, Inc. |
Deposit accounts; perhaps also an instrument but
b/c they’re marked non-transferable and non-negotiable, they wouldn’t be |
|
Control (only way) |
|
Supplies of machine replacement parts stored by SF
for use in repairing its machines |
Equipment; could be inventory |
|
Possession, Filing (more practicable) |
|
Cash which SF originally places in its register
but ultimately deposits in its account at Bank of Boston |
While in the register, it’s money; when it’s in
the bank, it’s a deposit account (the better choice) |
|
Possession (when it’s money), Filing, for DA, it
would have to be control |
|
SF’s Patent infringement claim against Trigger
Happy Company |
Commercial tort claim |
|
Filing (only way) |
|
SF’s Child-proof trigger patent |
General intangibles |
|
Filing (only way); with respect to patent, you
don’t have to comply with federal law; you can go by UCC guidelines. In re Cybernetic Services: 252 F3rd. 1039, 9th
Circuit 2001 |
Problem 3.6, page 159
G sells new and used cars. It also provides repair and body shop service and leases a fleet of taxi cabs to the city. G has asked Bank of Harrington for a loan. B wants to know how to perfect its interest in the following, assuming the state in which G is located, has enacted alternative 2 of §9-401(1) or has enacted Revised Article 9. It also wants to know how it can determine (confirm) title in the following property and the existence of any prior claims against it.
|
Items |
Type of
Collaterals |
Statutes |
Method of
Perfection |
|
G’s new cars |
Inventory |
|
Possession, Filing a FS (more practicable than
filing with the DMV) |
|
Used cars G receives on trade-in |
Inventory |
|
Possession, Filing a FS is more practicable if
it’s in the dealer’s hand; but if it’s in the consumer’s hands, file COT |
|
G’s rights to payment for body shop and repairs
services |
Chattel paper (probably not though), Accounts (the
better choice if you don’t want to commit malpractice) |
|
Possession (the better choice), Filing (for
accounts only) |
|
G’s tow truck |
Equipment |
|
Possession (don’t think so), Filing with DMV
(better choice,) |
|
G’s fleet of leased taxi cabs |
Inventory |
|
Possession (might work since it’s just inventory),
Filing a FS is the better choice though |
|
The large computer system and network that G uses
in its various business locations |
Equipment |
|
Possession (not likely), Filing (better choice) |
|
Software developed by G and used in maintaining
inventory control |
General intangible (if it’s an article 9
software); may be an equipment but most likely not |
|
Filing (only) |
Note: When
you think of accounts, you better be thinking about chattel paper or instrument
as well.
Why would you worry about a lien search? You want to know where you are in line as the
creditor in relation to other creditors.
What did TRZ leave out in the FS?
Here, there’s no way to determine control or possession.
How do you order a UCC lien search?
How do we get a copy if this report? Secretary of State office at the state level or sometimes, at the county level (for consumer goods or fixtures). What information do you have to give them? Name of the debtor. Today, some of these request are online or on paper. What would you have received 10 years ago from the filing office: name of debtor, secured party, collateral description, termination statement. You also would want to get a copy of the FS in issue.
§9-523 Information
from filing office; Sale or license of Records
(c) Communication of
requested information
(d) Medium for communicating
information
(e) Timeliness of filing
office performance
§9-102(a)(18) Definition
of “communication”
What will you receive from the Texas Secretary of
State? Refer to TRZ handout.
Assume that the search reveals a “bogus filing”
against S? What should S do? TRZ will
discuss.
§9-518 Claim
Concerning Inaccurate or wrongfully filed record
(a) Correction statement
(b) [Alt. A], Sufficiency of
correction statement
(c). Record not affected by
correction statement
You may be able to get actual DAS if you can prove
it up. Otherwise, you may get 5K at
minimum. This has been a problem in
TX. Don’t worry about this for exam.
TNB wants to perfect its SI. For most of the collateral, TNB can perfect
its SI by filing a FS. The Bank ask you
to prepare a FS. What information do you
need to prepare the FS?
§9-502 Contents
of FS; Record of Mortgage as FS; Time of filing FS
(a) Sufficiency of financing
statement
(b) Real property-related
financing statement
In reading this section,
keep in mind §9-516.
§9-503 Name
of Debtor and Secured Party
and
§9-102 Definitions
(a)(50) Jurisdiction of
organization
(a)(70) Registered
organization
§1-201 Definitions
(28)organization
§9-504 Indication
of Collateral
§9-509 Persons
entitled to file a record
(a)(1) Persons entitled to
file record; the debtor authorizes the filing in an authenticated record
(b) Security agreement as
authorization
§9-510 Effectiveness
of filed record
(a)
Filed record effective if authorized by person that may file it under §9-509
§9-516 What
constitutes filing; effectiveness of filing
(b) Refusal to accept record; filing does not occur b/c:
(4) record does
not provide name and mailing address of secured party of record
(5) record does not provide
mailing address of debtor, indicate whether D is an organization or individual,
and if organization, the type of organization, a jurisdiction of organization,
and organizational identification number for the debtor or indicate that debtor
has none.
§9-520 Acceptance
and Refusal to Accept Record
(a) Mandatory refusal to accept
record
(c) Communication concerning refusal
§9-521 Uniform
form of written financing statement and amendment
(a) Initial financing statement
form
Basic component of FS: name of debtor, secured
party, description of collateral. Are
you surprised there’s no requirement of signature? The former Article 9 version required it.
A fixture is something so tangible that it could be subject to real estate laws. Anytime you take a security interest in an equipment, make sure to check if it could be a fixture and therefor you must file a fixture filing. How is it different from a generic filing? There are some specific that you must file.
Can TNB file its FS before TNB and S execute the SA? Yes, code says so. What if we file a FS w/o signature? Urge
debtor to sign the FS as a form of authorization. The elimination of this signature requirement was to foster the electronic filing method. Does not require location.
§9-502 Contents
of FS; Record of Mortgage as FS; Time of filing FS
(d) Filing before security
agreement or attachment
What can you do in a FS that you can’t do in a
SA? Use supergeneric term in describing
the collateral à “includes all…”
If TNB does so, does perfection occur upon filing?
§9-308 When
security interest or agricultural lien is perfected; continuity of perfection
(a) Perfection of Security
Interest: When it attaches and all applicable requirements for perfection
(§9-310 to §9-316) are
satisfied.
9/7/01
Assume TNB has filed a FS. Two weeks later, TNB decides that it wants to
make specific reference to several valuable pieces of equipment. Can TNB unilaterally file an amendment to
accomplish its desired purpose? Yes
Aren’t they really no different than the original
filing. Only requires authorization and
place of filing.
§9-509 Persons
entitled to file a record
§9-512 Amendment
of financing statement
(a) [Alt. A] Amendment of
information in financing statement
(c) Effectiveness of amendment adding collateral
§9-521 Uniform
form of written financing statement form
(b) Amendment form
Two weeks after the FS is filed, you note that your
paralegal who prepared the FS transposed two digits in the ZIP Code of the
debtor’s address. Is this a
problem? What if the collateral box on
the FS says “See description of collateral on Attachment A” -- and the
paralegal forgot to attach the attachment?
What if the paralegal described the debtor as “Star Furniture Company”
instead of “Star Furniture Corp.”?
The standard we use is whether it is “seriously
misleading”. We must also determine if
the error is major. Here, it is a major
error b/c collateral description is an essential element of FS.
Whether a mistake in the debtor’s name is seriously
misleading depends if the search system picks up the name. May be or may not be.
§9-506 Effects
if error or omissions
(a) Minor
errors and omissions: A FS substantially satisfying the requirements of this
part is effective,even if it has minor errors or omissions, unless the errors
or omissions are make the FS seriously misleading.
S has just signed a standard form FS, also known as UCC-1
(see §9-521). Assume that all of the
collateral is located in TX. Where does
TNB file its FS? Any authorized office unless local laws state otherwise.
In TX, you file the FS centrally in the secretary of
state’s office with the person who’s the UCC officer. You may file in other places when the SI
concerns fixtures à fixture office in the county level.
§9-501 Filing
Office
(a) Filing Offices
Does your answer suggest that you should have
ordered UCC lien searches from anyone other than the TX Secretary of State?
Yes, but also should have searched at the county clerk’s office where the
fixtures are located.
You submit the FS to the TXSOS. Does filing occur when the secretary indexes
the filing, or at an earlier point in time?
When you pay the proper fee after sending in your
information. Express filing is
permissible in TX.
§9-516 What
constitutes filing; effectiveness of filing
(a) what constitutes filing:
communication of a record to a filing office and tender of the filing fee or
acceptance of the record by the filing office
By what piece of information does the filing officer
index the FS? Does the filing officer do
anything other than index the FS? Name of the debtor. Filing officer also provides a unique number
and records it.
§9-519 Numbering,
Maintaining, and Indexing records; Communicating information provided in
records
(a) Filing Office Duties
(c) Indexing: General
What if the filing officer erroneously switches the
names of the debtor and secured party and the FS is erroneously indexed against
TNB? The searcher bears the risk b/c
it’s still effective.
§9-517 Effect of Indexing Errors: The
failure of the filing office to index a record correctly does not affect the
effectiveness of the filed record.
Two years into the loan, S decides that it can get
better pricing terms from AB. AB agrees
to make a 50K loan to S. Some of the
loan proceeds will be used to pay off TNB.
The loan will be secured by the same assets. The AB loan officer thinks he has two
options: either ask TNB to terminate its liens and file new FS’s or ask TNB to
assign its liens to AB as part of the payoff.
Do you favor one option over the other?
As a lawyer, you sure do. You
care about the older date and you want to take an assignment. Also, go back and check over the FS to make
sure it’s correct. Why?
§9-310 When filing required to perfect SI
or Agricultural lien; SI’s and Agricultural liens to which filing provisions do
not apply
(c) Assignment of perfected
SI: If a secured party assigns a
perfected SI or agricultural lien, a filing under this article is not required to continue the perfected
status of the SI against creditors of and transferees from the original debtor.
AB decides to take an assignment of TNB’s liens and
wants to file something in the UCC records to indicate that AB is now the
secured party of record. What are the elements of an effective assignment? You need to cross-reference back to the
original filer.
§9-514 Assignment
of Powers of Secured Party of Record
(b) Assignment of filed
financing statement:
1. identifies, by its file
number, the initial FS to which it relates;
2. provides the name of the
assignor; and
3. provides the name and
mailing address of the assignee.
§9-521 Uniform
form of written FAS and Amendment
(b) Amendment form: A filing
office that accepts written records may not refuse to accept a written record
in the following form and format except for a reason set forth in §9-516(b)
The loan officer at AB calls you up and ask how
frequently, if at all, it has to refile to continue the effectiveness of its
FS. What do you tell the loan officer?
Most loans on average last about five years that’s why the code chose the
number.
§9-515 Duration
and effectiveness of FS; Effect of lapsed FS
(a) Five-Year effectiveness
after the date of filing.
Does the effective period run from the filing date
of TNB’s original FS, or from the date when AB filed its assignment?
§9-512 Amendment
of financing statement
(b) Period of effectiveness not
affected
What information is required on a continuation
statement? Make the continuation
statement reference back to the original FS.
Make sure to include file number and date so that you can later trace
back by using such information.
When can you file the continuation statement? Within 6 months. Does the additional period of effectiveness
run from when (i) the original FS would lapse or (ii) the continuation
statement is filed? If lapsed, the FS is not perfected and then you would have
to worry about the next creditor behind you.
Lien creditors (involuntary) are not protected by retroactive
perfection. You want continuous and
uninterrupted perfection. If you file
the continuation statement late, you go to the back of the line behind the
people you were ahead of.
§9-515 Duration
and effectiveness of FS; effect of lapsed FS
(d) When continuation
statement may be filed: only within 6 months before the expiration of the
5-year period specified in subsection (a) or the 30-year period specified in subsection
(b), whichever is applicable.
§9-512(a) [Alt. A] Amendment
of information in FS:
1. identifies, by its file
number, the initial FS to which the amendment relates; and
2. if the amendment relates to
an initial FS filed [or recorded] in a filing office described in §9-501(a)(1),
provides the information specified in § 9-502(b).
§9-521 Uniform
form of written FAS and Amendment
(c) Amendment form: A filing
office that accepts written records may not refuse to accept a written record
in the following form and format except for a reason set forth in §9-516
Assume you’re eager
to please the loan officer at AB so you file a continuation statement 6
months and two days before the 5-year effectiveness period. What result?
§9-510 Effectiveness
of filed record
(c) Continuation statement not
timely filed: A continuation statement
not filed within the 6-month period prescribed by §9-515(d) is ineffective
You discover your error after the 6-month period has
expired. The original filing by the TNB
has lapsed. What is the effect on AB’s
SI?
§9-515 Duration
and effectiveness of FS; effect of lapsed FS
(d) Lapse and continuation of
FS: on the expiration of the period of
its effectiveness unless before the lapse a continuation statement is filed
pursuant to subsection (d).
Now you need to file a new FS. Can AB unilaterally file a new FS covering
the same collateral described in the SA?
§9-509 Persons
entitled to file a record.
(a) Person entitle to file
record: a person may file an initial FS,
amendment that adds collateral covered by a FS, or amendment that adds a debtor
to a FS only if:
1. Debtor authorizes the filing
in an authenticated record or
2. The person hold an
agricultural lien that has become effective at the time of filing and the FS
covers only collateral in which the person holds an agricultural lien.
(b) Security Agreement as
authorization: By authenticating or
becoming bound as debtor by a SA, a debtor or new debtor authorizes the filing
of an initial FS, and an amendment covering:
1. the collateral described in
the SA; and
2. property that becomes
collateral under §9-315(a)(2), whether or not the SA expressly covers proceeds
S informs AB that S wants to borrow 500K from CB,
but CB demands a perfected SI in unencumbered collateral worth at least
750K. AB, in a cooperative mood, agrees
to permit S to borrow the 500K and agrees to release its SI in two specific
pieces of equipment worth approximately 750K.
Does Article 9 require AB to file a release document in the UCC records
to reflect that the two specific pieces of equipment are no longer part of its
collateral package? No. You could , but
don’t have to.
§9-512(a) [Alt. A] Amendment
of information in FS:
3. identifies, by its file number, the initial FS to which the amendment rela