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I.
A. UCC Provisions
1. Article 1
2. Article 2
3. Article 2a
4. Article 8
5. Article 9
lunch for X. X gives you a deposit and a promissory note for the rest of
the amount due. A promissory Note is a formalized IOU [see Handout
#4]. The note isnt worth anything, it is the legal right embodied in the
note that is of value.
B. Example What if you are short of cash to put on the lunch. You can
3.
go to the bank and request a loan. However, the Bank wants collateral
we will learn that the promissory note can be used as collateral to
secure a loan transaction. Alternatively, you can also sell the note the
sale of a note is also covered under Article 9.
Pure Intangible this is all encompassing category (e.g., trademark rights,
the right of the NFL to be paid by broadcast stations, account receivables,
checking account)
introduced; or yet to introduce the new Article 9. The transition rules are in
Part 7 of Article 9. The New Article 9 can be found in Appendix Q.
D. Concepts and Definitions Involved In Secured Transactions
1. Security Agreement contract between the debtor and creditor. Its a contract
that conveys a property interest to secure a debt. Because the security
agreement is a contract, it does not go into public records; the document also
tells us the rights of the creditor.
2. Typical Questions that arise: (1) what are the creditors rights; and (2) if have
multiple creditors fighting for the same property, how do we rank the
creditors?
3. Attachment 9-203 is the main provision in Article 9 that tells us what
needs
to go into the security agreement to create a security interest under Article
9.
4. Financing Statement 9-521 talks about the national uniform form for
financing statement, which publicizes the transaction thereby giving notice to
existing or potential creditors and purchasers of the property. 9-210 tells us
how to get more information once you see the Financing Statement.
5. Perfection 9-308 (starting point)a perfected security interest means you
created a security interest that has been publicized. Perfection is sometimes
the deciding factor (but not always and not the general rule) to determine who
wins (priority) when there are multiple creditors.
6. Collateral 9-102(a)(12) means the property subject to a security interest or
agricultural lien. It includes: (A) proceeds to which a security interest
attaches; (B) accounts, chattel paper, payment intangibles, and promissory
notes that have been sold; and (C) goods that are subject of a consignment.
7. Security Interest 1-201(37) means an interest in personal property or
fixtures which secures payment or performance of an obligation. The term
also includes any interest or a consignor and a buyer of accounts, chattel
paper, a payment intangible, or a promissory note in a transaction that is
subject to Article 9. [Refer to pg. 1267 for the revised version]
8. Default not defined by the Code. So you need to look at the security
agreement. Look at Handout #3 for a definition. Part 6 of Article 9 deals with
default issues.
a. 9-609 says that if a Bank believes the debtor is in default, the Bank can
repossess the boat w/out going to court. Under 9-609(b) a secured party
(e.g., the Bank) may proceed without judicial process.
b. Example Assume debtor defaults and the creditor repossess the
collateral. What can the creditor (a.k.a. the secured party) do with the
collateral? Under 9-610, the secured party can sell it to offset the debt.
This Section mitigates loss in the situation of default and reduces
transaction cost in collection. However, if the collateral (for instance the
boat) was used for pleasure, it may be classified as a consumer good and
thus may be protected by other consumer protection laws. Thus, the bank
may be restricted by other laws. See 9-201(b) which allows consumer
protection laws to be applicable to an Art. 9 transaction.
9.
Debtor 9-102(a)(28) is the person who has interest in the collateral; sells the
collateral; and a consignee.
10. Obligor 9-102(a)(59) is the person who owes the obligation (to pay).
a. Sidenote the obligor and debtor can be the same person, but not
always.
b. Example President of a small corporation needs money and goes to bank
for a loan. However, all the assets of the corp. are encumbered in other
creditors. What if you put up personal collateral for the corporation. The
President is the debtor (the person who owns the collateral) and the
corporation is the obligor (the one that has the obligation to pay the loan.)
11. Enabling Security Interest is a purchase money security interest. 9-103
the credit extended to debtor enables the debtor to purchase the good that
serves as collateral. This is a purchase money security interest [e.g., the
boat hypothetical].
a. To determine whether its a Purchase Money Security Interest start
with 9-103(b)(1) is the boat purchase money collateral with respect to
the bank's security interest? 9-103(a)(2) defines Purchase Money
obligation as an obligation of an obligor incurred for value [what bank
gave] given to debtor to enable him to get the collateral the value was so
in fact used.
b. Article 9 favors Purchase Money Security Interests over Security
Interests Unrelated to the Credit extension.
12. Security Interest for Unrelated Debt there is no relationship between
debtors rights in the property served as collateral and the extended credit.
a. Example You want to go to Super Bowl but you need money
($10,000). What do you put up as collateral? The boat. In this case
there is no relationship to the money he receives to go to the Super
Bowl and the rights of the boat.
E. Introductory Example of Secured Transactions
1.
Example: Assume you buy a boat but you only have $10,000 in your
bank account and the boat costs $80,000. You can set the transaction
up in several ways: (1) barter swap exchangeable goods [but hard to
find an appropriate exchange]; (2) cash also difficult because hard to
come about; (3) commercial paper (e.g., certified check or travelers
check) also hard to come about; (4) defer ratification (not likely if you
want the boat now); (5) credit and borrow.
a. What does a sale mean? UCC 2-106 defines a sale as "a passage of title
for a price." UCC 2-401 tells you when title actually passes. If buyer
went to bank and put the boat as collateral, the security agreement would
not have created a security interest because he does not own the boat.
However, at moment you receive the boat, you have title under Article 2.
b. What is the Doctrine of Derivative Title Actual conveyance of property
doesn't take place until you receive it and then has a property interest.
c.
What is Shared Ownership - its limited, in the sense that its for the sole
purpose of securing a loan; and its conditional because the bank cannot
take possession unless the loaner defaults.
2.
3.
F.
2.
2.
3.
Bankruptcy the bankruptcy has a "strong arm clause" under 544(a) of the
Bankruptcy Clause to put a secured unperfected creditor at the bottom as a
general creditor. However, a creditor with a perfected security interest will not
be strong armed unless a mistake has been made.
Pre-Code Approach To Secured Transactions
A. Pledge In a pledge transaction, the Debtor (called "pledgor") gives
physical possession of the collateral to the creditor (called "pledgee") until
the debt is paid. Basically, a pledge transaction is a "possessory security
interest". Possession perfects the creditor's interest in the collateral b/c
obviously possession gives notice to others. There are 2 drawbacks to
Pledging (1) only tangible objects can be pledged; and (2) for some types
of collateral debtor needs to keep possession. This device still lives on
[better known as taking a possessory security interest]
1. Example Assume you borrow $50K and put a bracelet up for
collateral (worth $100K); So, the debt-collateral ratio is 50%, which
means they are overcollateralized. Once you sign a loan agreement [a
promise to pay], what happens to the bracelet? It goes to the bank;
that is a pledge the creditor is in possession of the collateral. But if
you haven't signed a security agreement, is this transaction (pledge)
covered in Article 9? Start with the core scope provisions 9-109(a)(1)
it applies to a transaction regardless of its form that creates a security
interest in personal property by contract. We know the bracelet is
personal property and we have a contract ("the loan agreement"). But
does the combination of an oral agreement and a written loan
agreement create a security interest? To answer this question you
have to look at 9-203 [the attachment section which governs how
to create a security interest]. Is handing the bracelet over and loan
agreement enough? Apply 9-203(b)(1), (2), (3) (A) Value yes, the
creditor gave the debtor $50K; (B) debtor has rights in collateral yes
you own the bracelet; (C) There is no signed security agreement, but
9-203(b)(3)(B) applies b/c the collateral is in possession of the
secured party pursuant to 9-313. 9-313(a) tells us what type of
goods taken in possession can be perfected tangible goods, includes
bracelets. "Pursuant to debtor's security agreement" means [see 9102(a)(73) and 1-201(3) for "agreement") It says nothing about
writing; just need an agreement to create a consensual lien. This
statement is in place b/c what if drop the bracelet, don't want that to
be an agreement. The oral agreement that delivery manifests my intent
to create a security agreement. So this is w/in the scope of Article 9
under 9-109(a)(1).
2. Remember If setting up a possessory security interest, don't rely on
an oral agreement, always get a security agreement. Satisfy both 9203(b)(3)(A) and (B) act redundant.
3. Advantages/Disadvantages of Pledging The advantages include:
(1) bank doesn't have to seize if default b/c already in possession; so
don't need 9-609; (2) best way to protect collateral. The
shortcomings are (from creditor perspective) include: (1) easy to put a
bracelet in vault but what if collateral to large to be stored; (2) it
doesn't work for all kinds of property only applies to property listed
in 9-313. From the Debtor perspective, the shortcomings are: (1)
when you make a pledge, debtor experiences a substitution of assets
(get $ but give up the bracelet) it's a swap; however, with a nonposessory security interest, you get both; so debtors frequently protest
pledges; and (2) there are some types of collateral that are good for
pledges they are passive income producing assets (e.g., treasury
bills).
the warehouse comes to the goods instead of vice versa. This mechanism
still lives on.
2.
lines
3.
Transactions that are entirely excluded from Article 9 (doesn't involve a charge
on property to secure a debt e.g., signature loan OR a transaction. Where
you put personal property for collateral but its not included Ex. fall on
steps of law school for being un-kept need money to pay medical bills what
do you have as collateral a tort claim. But under 9-109(d)(12) an
assignment of a claim arising in tort (tort claim) is excluded.
A. Remember Just because its not governed by Article 9, doesn't mean you
cannot do it. Even with transactions excluded we will learn the rights of
those parties can be effected by Article 9.
1. Example You borrow money from a bank on a signature basis. But
defaults on 2 different loans. Art. 9 tells us which creditor has priority
when debtor defaults. See 9-201(a). The secured creditor wins out the
party not governed by Art. 9. [there are some exceptions that you will
see later].
Some transactions are partially included in Article 9. The interest is not a
security interest (e.g., agricultural lien) but its brought into Article 9 for
limited purpose under 9-102(a)(2). Agricultural liens are really statutory
but they are actually included in Article 9.
Transaction conceptually has nothing to do with creating a security interest
(like the "sale of a promissory note"). Art. 9 includes some of these types of
sales even though doesn't have issues of shared ownership, etc....
B. Conditional Sale (a.k.a. "credit sale") whereby the buyer gets possession of the
property, but the seller reserved full and complete title to it until the buyer paid in
full. A conditional sale has the Benedict v. Ratner problem of the "debtor-inpossession and a secret lien in the seller's favor, and the fictitious title retention
theory has a shor life here under 2-401.
1.
Problem 1 (Text p. 11) John sold Nancy a used car for $900, to be paid off in
three payments of $300 each. The contract was oral. Nancy (the debtor)
misses the second payment and one of John's EEs repossessed the car and
returned it to the seller. Nancy sues John for conversion. Who should win?
A. Nancy Argues Nancy will argue John could have sued me for breach of
contract and collect damages. Instead, he seized my car and embarrassed
me. Nancy's theory for suit is the "theory of conversion" Nancy will
argue John intentionally and wrongfully exercised dominion over my
property. Nancy says its my car and John has no right to take it.
B. John Argues John will raise 3 defenses: (1) I didn't convert because
Common Law doctrine of fictitious retention of title; (2) I had right to take
Goods Identified to K
Physical Delivery
Full Payment
Here, the fight is about title whether Nancy had an ownership right
in the car when John repossessed it. Under 2-401 any retention by
seller of title in goods delivered to buyer is limited in effect [limiting
parties freedom of contract] to the reservation of a security interest.
There are a Number of Events in a Sale Transaction (1) agreement
of sale; (2) goods identified to the contract the basic idea is the
parties know what goods we are talking about here, it was car being
sold; (3) physical delivery; (4) full payment. Under the Doctrine of
Retention of Title from time of agreement to full payment the car is
John's. Under 2-401(1) title to goods cannot pass until goods
identified if identified they can pass but not earlier any retention
in goods shipped is limited to reservation of a security interest this
means that John doesn't have full ownership at moment of delivery.
The Code has divorced payment from the transfer of ownership
that's the effect. Subject to these provisions, title passes in any
manner explicitly agreed on; So, the first two sentences of 2-401 set
out parameters for when title can and must pass. So third sentence
says you can bargain when title passes between those 2 events
identification an delivery. 2-401(2) confirms out understanding of
2-401(1) and default rules rules we should assume if not provided
by the parties. How does this effect John's argument? John can no
longer argue that its not Nancy's car because Nancy has full
possession. We know which car it is (goods identified) and before
Nancy gets possession [that's in between the parameters 2401(1)] [See shipment contract 2-401(2)(a)]
2.
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3.
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1.
2.
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13
4.
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into the end product. [An example where "services and materials" would
apply is in the situation in Problem 2 where Mac was a car mechanic
providing services and materials.] Assuming this lien is NOT excluded by
Art. 9-109(d) it is NOT a statutory line for services and materials, is the
lien covered under Art. 9-109(c)? No, that deals with federal preemption
or where the govt. is the debtor in the transaction. Just because the lien
is not excluded under 9-109(c) and (d), does NOT mean it's w/in the
scope of Art. 9. It just means you have to look at Art. 9-109(a) to see if its
included. This is an example where the lien is not excluded but also not
included in Article 9. Why isn't the sculptor included under 9109(a)(1)? Although the sculptor is "personal property", the lien was not
created "by contract" rather by the NY statute. We know there was a sale
contract, but that did not cover the lien it is the interest that has to be
created by contract.
5.
Problem 3(A) [Priority Battle] Assume Mac's garage is in Maine and Maine
statute creates an artisan's lien in Mac's favor for repair work. To enforce the
lien, Mac must retain possession of Mr. B's car after default. The statute does
not address the priority issue of whether a statutory lien is subordinate to a
consensual lien. Mr. B defaults and Mac refuses to release the car. First
American asks Mac to turn Mr. B's car over to the Bank's "REPO" men as Mr.
B is in default. The Bank explains that it has an earlier perfected "purchase
money" security interest in the car. Mr. B has taken out a car loan from the
Bank for the purchase price of the car; the Bank's security interest is
perfected thru notation on the "certificate of title" for the car. Should Mac give
First American Bank Mr. B's car?
A. Analysis This problem has 2 liens
(1) car loan in exchange for car = purchase money security interest 9-103
certificate of title 9-311
(2) repairman has a statute lien for repairs
Because the debtor defaults, both creditors can sue for breach of contract;
however, neither creditor wants to sue because they both want the car.
So, the question is who comes first [who has priority]? We know that
under 9-109(d)(2) Mac's artisans lien is out of Art. 9 because it is a lien
created by statute for services or materials. We know the Bank has a
purchase money security interest which is within Art. 9. The starting point
is at 9-201(a) golden rule for secured parties. It says a security
agreement [the banks' agreement w/ Mr. B] is effective against creditors
(that's Mac he doesn't have an Art. 9 security interest). But there are
Exceptions According to 9-333 (which is referred to by 9-109(d)(2)],
Mac wins. 9-333(a) a possessory lien means an interest, other than a
security interest or an agricultural lien, which (1) secures payment...for
services or materials furnished w/ respect to goods by a person in the
ordinary course of person's business; (2) which is created by statute...;
AND (3) whose effectiveness depends on person's possession f goods. Mac
clearly satisfies 9-333(a). Then under, 9-333(b) a possessory lien on
goods has priority over a security interest in the goods unless the
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Problem 3(b) Assume Mr. B purchased his car for $9000; First American
Bank loaned Mr. B $7000 of the price and secured the loan with a purchase
money security interest that has been properly perfected by noting the bank's
consensual line on the certificate of title for the car. Mr. B took the car for
repair at Mac's The repairs cost $3000. After repairs, the FMV of car is $5000.
How should the $5,000 be divided between Mac and First Bank. Assume Mac
has a statutory line that the repairman has a lien on the personal property for
the just and reasonable charges therefor, including any parts, accessories,
materials or supplies furnished in connection therewith, so long as mechanic
retains possession. The statute also says that the lien is subject to the lien of
any security interest in property which is perfected prior to commencement of
work for which a line is claimed unless the work was done with the express
consent of the holder of the security interest, but only for charges in excess of
$2000.
A. Analysis The liquidation value (LV) is $5000. The Bank is owed $7000
and Mac is owed $3000. So, Mr. B's debt = $10,000, which exceeds the
value (worth) of the collateral. The challenge is to figure out what issues
are governed by the UCC and which are governed by the State statute. To
figure out what the consequences are, you have to isolate the variables.
The way you figure out the size of a lien = amount of debt secured and
value of collateral.
(1) Case I What law do we look at to determine the amount of obligation
secured? Non-UCC law. The statute says "just and reasonable
charges". Here, they are $3000. The LV of collateral is $5000. The size
of Mac's Lien is $3000. What about for the Bank? Go back and refer
to Security Agreement in Handout #3 it tells you the amount of
obligation it is the debt outstanding the parties agreed to and the LV
of the collateral. Here, the value of bank's lien is $5000. What priority
rules apply? If apply 9-333(b) Mac would get $3000. But 9-333(b)
doesn't apply because the state statute provides otherwise (its own
priority rule) "unless the work was done with express consent of the
holder of security interest" here, there is No consent Mac's line is
therefore subject to any security interest but only for charges in
excess of $2000. So, Mac gets the first $2000 regardless of whether
Bank consented. SO the Bank would get $3000. Both parties will sue
debtor for the deficiencies.
(2) Case 2 The size of Mac's lien is $3000 and the Bank's is $5000.
Here, the hypo is different because the Bank consented to the repair,
So Mac gets the full amount of charges = $3000 and the Bank will get
$2000 (the remainder). This case illustrates that the important factor
depends on to the extent the charges exceed $2000 because
without it Mac will lose unless the bank consents.
(A) How would you protect Mac under this statute? Say Mac q
says the repair will cost him $5000 (and it is reasonable). What
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should Mac do? Get permission from the bank? Why? Isn't it Mr.
B's car? Why does Bank have a right to control the debtors
behavior? Who owns the car? The security interest means "shared
ownership" the bank and Mr. B own the car. The idea is that
Mac needs consent of all owners if repair is expensive. The Bank
was the first creditor because it got the lien first but its nonpossessory interest - meaning Mr. B gets the car and can do
whatever he wants. This statute helps the bank control the
debtors future behavior because he may ver extend himself. But
isn't the banks and Mr. B's interest really the same? No, Mr. B
wants a car to drive whereas Bank wants its money back. The
repair will not increase the LV as it costs the bank. The bank
doesn't want to pump money in a way that won't enforce the value
of the car.
(B) How does Mac Know which bank? the name of the bank is on
the certificate title, which perfects the security interest. What if
we were talking about a computer as collateral? How would the
creditor perfect the security? Need to file a Financing Statement.
This is a public record which can be looked up. It is easier for Mac
to find out then for the bank to control Mr. B. That is why if cost
excess of $2000, he must contact the bank.
(3) Case 3 Mr. B agreed in a contract with Mac that repair was $3000.
But what if court determines the value of the repair is only $750. This
means that Mac's lien is only worth $750, NOT $3000. The bank's
lien is still worth $5000. Under 9-333(b) it says you have to go to
Non-UCC law second sentence. Mac will recover $750 and the rest
goes to Bank.
(4) Case 4 Same answer as in Case 3.
(5) Case 5 Mac will get $2500; and Bank will get $2500.
SUMMARY
CASE I
CASE II
CASE III
CASE IV
CASE V
Factual Assumptions
Size of
Mac's Lien
Recovery for
Mac
Size of FA
Bank Lien
$3000
$2000
$5000
Recovery
For FA
Bank
$3000
$3000
$3000
$5000
$2000
$750
$750
$5000
$4250
$750
$750
$5000
$4250
$2500
$2500
$5000
$2500
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B. Policy Why did state legislature decided that statutory lien was only to
the extent of just and reasonable charges determined by a court? Why not
base it on market? Who is the statute trying to protect? The fight is
between 2 creditors in other words, there's a third party involved. Since
Mac is subordinated by the statute he can sue Mr. B for the rest by breach
of contract.
C. Prevention To prevent Mac from being a general creditor for the rest of
money owed, Mac should get an Art. 9 security interest - he can bargain
for a consensual lien in any agreement. Mac can have more than one lien.
7.
Problem 4 Mac has a garage in Main and the Main statute creates an
artisan's lien in Macs favor for repair work. The statute is silent concerning
priority rules. Mr. B brings in a leased car for $1500 tune up and minor
repairs. The lessor and owner of the car is American Luxury Co. Under the
lease, Mr. B is to contact the lessor if repairs or maintenance is required. The
lessor disclaims any responsibility for or liability for repairs ordered by the
lessee without lessor's consent. Mr. B defaults, and Mac refuses to release car,
and for the first time Mr. B tells Mac the car is leased. What should Mac do?
(A) Analysis Mac has a possessory lien, but the car is leased. The fight is
about the leased car and its between Mac and the lessor. This issue is who
has priority? How does Mac have a statutory lien when he has no property
interest? Refer back to the statute it says "legal possessor of the
property"; Based on this language, Mr. B is an agent of the owner of car;
so when Mr. B asks for repair the property interest create a statutory
interest. Article 2A deals with leases. There is NO Art. 9 secured parties.
(A) 2A-102 deals with scope
(B) 2A-104 exclusions
(C) 2A-103 defines a lease [2A-103(1)(J) = a transferor of right of
possession in use of goods for a term in return for consideration. A
sale is not a lease. The difference between a lease and a sale is that
with the latter the buyer gets physical possession and title [2-106].
With a lease, Mr. B gets NO ownership no title. However, you can
have a lease followed by a sale.
Assuming the transaction between Mr. B and lessor are within Art. 2A.
The priority rule under Art. 2A. is 2A-301 [which is similar to 9-201]. A
lease contract is effective against creditors that means that Mr. B not
authorized to get repair. So under 2A-301 Mac will lose unless 2A-306
applies. If a person in "ordinary course of business" (MAC) a lien upon
goods given by state statute takes priority over any interest of lessor
unless the statute provides otherwise [this language is parallel to 9333(b)], so under 2A-306 Mac wins.
(B) What should Lessor do to protect himself from this priority rule? The
lessor wants to get back into 2A-301. How do you plan around the
priority rule? (1) you can put a clause in the lease agreement may
improve the lessee's rights. The clause in contract that says lessee needs
consent for repair, but its not effective against Mac [put it still in because
sometimes the lessee may obey]; (2) the lessor could make Mac not qualify
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for the special priority rule how could we say that Mac was "not acting
in the ordinary course of business". What does this phrase mean? There is
no definition provided in the code. We have to analogize under 2A103(1)(A) a mechanic in the ordinary course of business means in good
faith that work he is doing is not violating ownership rights. Mac has to
know its a leased car; and thus he'll know its against the rules to repair
car without contacting the lessor for consent. How could Mac know put a
mark on the car (sticker). If Mac went ahead and repaired a marked car,
he would not be acting w/in course of business. So 2A-306 doesn't apply
and were are back in 2A-301. That means Mac loses.
(C) If Mac has priority under 2A-306, what can Mac do with the car?
Should Mac sell the car? The bill is very small ($1500); Instead of selling
the car, Mac may want to call the lessor telling them he has priority and
ask them to pay. They will pay because they don't want their car
liquidated. They'll pay and lessor will sue lessee for the payment $1500.
This initiative will lower transaction costs. Many of the priority rules are
clear that is why we don't have many Art. 2A and 9 cases. It fosters
informal dispute resolution of suits. The later creditor wins 2A-306 and
9-333(b).
8.
9.
Problem 5 Assume Mac is a LL; B is a tenant (T). Under state law, Mac has
a LL lien upon furnishings in the apt. to secure payment of the rent. B has
placed all his furnishings in Mac's apt, including the furniture subject to
Sloan's Furniture Store's purchase money and non-purchase money security
interests. [there is a purchase money s/i w/ respect to the bed and a nonpurchase money security interest in all B's HH goods. The s/i were perfected
before B moved into apt by filing a FS. B defaults on both his rent and on the
debt owed to Furniture store. Furniture store's lawyer wants Mac to allow
Sloan's agents to enter B's apt so that they can peaceably repossess the
encumbered furniture. Should Mac cooperate?
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have possession? Mac will argue he does because he owns the entire
lease space and has a key to the apt.; so mac would argue he has
possession. Remember problem 3 [where Mac was a car mechanic
distinguish the way Mac possessed the car and Mac possesses the bed], if
default, what would Mac do with the car? keeps B from getting at the car
(that's what we mean by retaining possession). The purpose of possession
under 9-333(a)(3) is that it gives notice to others. Here, there's shared
possession of the bed as long as B has access to apt. he has possession
of the bed (not true with possession of car because B cannot get a hold of
it.) Mac says I provide services with respect to B's bed security guard in
building, fire sprinklers those are all services with respect to the bed.
1. Why is the purpose of 9-333(b) limited with respect to services/
materials to the goods? Hypo Hospital lien would not fit under 9333 becuase it provides services to patients not the goods. Refer to 9310 the idea is that this subset of statute lienors who have
possession who provided services / materials that enhance the value
of collateral. The earlier creditor wants the statute lienor to provide
services because it improves the collateral. Does Mac Improve the
bed? well, maybe if on street it may depreciate faster.
(C) Policy Why is 9-333 so limited. Look at Chart A on Handout 6 pg. 16.
Based on the chart, the enhancement of value in collateral attributable to
services provided will increase not decrease. That is the empirical
assumption underlying the reason for 9-333(a)(1).
10. Hypothetical [business example] Assume Debtor is Ikea and Ikea is located t
Potomic mills far from Tysons. They move to Tysons. Ikea goes to Bank#1 to
get money to pay for the move. Bank wants an Art. 9 security interest in Ikea
equipment and inventory. But, the bank does not want to be junior to the
Tyson's mall LL. Virginia law is not clear whether 9-333(b) or 9-201 applies;
Also CL not clear. How do you prevent Bank from risk of being junior to LL as
creditor? Refer to the draft LL-Creditor Agreement. See Handout #6a. Banks
says to Ikea as a condition to get loan they have to get a "subordination
agreement" from Tyson's LL. But unlikely LL will d this. Read 9-339 -anyone with priority can subordinate to a junior creditor. Why would LL agree
it'll be bargained for look how Art. 9 affects the structure of the transaction
you can contract around the uncertainty if you know the problem is there.
Tyson LLis highly likely to have an Art. 9 security interest in Ikea inventory
and equipment and a LL statutory lien. How is it created 9-203(b). Should it
also subordinate the consensual lien the agreement in Handout #6a only
covers statutory lien. Doesn't matter. Don't have to worry because First Bank
will beat LL as to 2 art. 9 security interests because bank was first under
9-322(a)(1).
D. The Special Case of Agricultural Liens
1. Problem 6 Assume Mac owns several 1000 acres of farm land in PA. B is a
dairy farmer who is Mac's tenant. On 6/1/2002 B and Mac sign a lease
giving B the right to use 1000 acres of Mac's land for 5 years. The same day,
21
B moves his cattle, feed, and equipment onto Mac's land. Under non-ucc law,
Mac has a LLs lien for any unpaid rent; Mac's lien covers all crops grown upon
the leased acreage and/or all livestock raised upon and kept on the leased
acreaged during the term of the lease. Under PA case law, the lien is "effective"
from the time the crops are planted or the livestock is moved onto the land.
Also on 6/1/2002 Mac files an Art. 9 FS publicizing his LLs lien. On
12/1/2001 B borrowed money from FF to purchase feed for the cattle. On
12/1/2001, FF gave B the loan and created an Art. 9 security interest in B's
present dairy cattle. FF filed a financing statement publicizing and perfecting
its security interest. On 12/12/2002 B defaults on both the rent owed to
Mac an don the payments owed to FF. Which creditor is senior? Assume 2
facts: (1) all cattle on leased land on 9/1/2002, were owned by B on
12/1/2001; and (2)PA law creates Mac's lien and its silent concerning priority
rules.
(A) Analysis The fight is about the dairy cattle. How do we classify this
collateral? Its a good. What type? [equipment? Inventory? Consumer
goods? No] Its farm products under 9-102(a)(34). FF has a consensual
lien with goods. FF is an Art. 9 creditor under 9-109(a)(1). FF's security
interest attached (when was 9-203 satisfied)? 12/1/2001 value given,
debtors rights, security agreement. Is it a purchase money security
interest? Did the loan enable the buyer to purchase the collateral? No
see 9-103 definition. The loan did not enable the debtor to have rights in
the cattle. The security interest was perfected on 12/12/01 because that
is the day the financing statement was filed. [9-310]. Have to start with
9-308(a) for perfecting a security interest which requires (1) attachment,
which occurred on 12/1 and (2) all applicable requirements for perfection
have been satisfied. As to Mac, he has a statutory line there is an
agriculture lien 9-102(a)(5) (engaging in farm operation, farm
product,
and obligation to support farm operation). Is an agriculture lien in
Art. 9?
1-201(37) defines a security interest and it includes agriculture lien.
9102(a) its included in Art. 9 but it is not an Art. 9 security interest. Its a
statutory lien. Mac's lien becomes effective on 6/1 when cattle moved onto
land. Even though agriculture line in Art. 9, we don't look to 9-203, we
look to non-ucc law to tell us when its attached. The lien was perfected on
6/1 [9-308]. Although creation governed by non-UCC, perfection is
governed by Art. 9-309 [treatment of agriculture lien is All new law]. 9308(B) if effective and all requirements of 9-310 have been satisfied (filing
a financing statement).
(1) Effect of Analysis FF has a perfected SI on 12/12/01 and Mac has
a perfected agricultural lien as of 6/1/02. Art. 9-322 is the broad
provision for priority battles, it covers (1) agricultural lien v. Art. 9
creditor; (2) agricultural lien v. agricultural lien; FF wins according to
9-322(a) because a "conflicting perfected security interests and
agricultural lines rank according to priority in time of filing or
perfection." Don't feel sorry for Mac because he could have found FF
financing statement and had notice f the security interest. He could
22
Summary
(A) Rules governing possessory liens and agricultural lines are almost mere
imagery but treatment is VERY different.
(1) Possessory liens are out of Art. 9; need possession to perfect;
9-333(b) gets super priority if statute silent.
(2) Agricultural Lien are in Art. 9; need to file; 9-322 governs priority if
statute silent the default rule is "first in time" wins.
(B) Policy Why did the drafters encompass agricultural liens into Art. 9? to
provide uniformity.
23
3.
24
Problem 7C Assume the principal debtor is FB and that FB has entered into
25
a K to buy 3 heavy duty farm tractors from John for $300,000. FB paid John
the entire purchase price at the time it placed the order. The tractors have not
been delivered yet. Now FB decides it does not need the tractors; John refuses
to refund the $300,000 and allow FB back out of the deal. So FB decides to
sell its right to receive the tractors to NF. NF pays FB $250,000. Is the FB- NF
transaction within the scope of Art. 9? Why or Why not?
(A) Analysis What is FB really offering to sell NF? The right to receive (the
contract right) the tractors. Why would NF want the tractors (it may buy
the contract right and then resell it to someone who can use them, another
farmer). How do we classify the collateral not a tangible, not quasitangible. Is it a pure intangible? Start with account? No, its the debtors
right to receive money generated in the first transaction. Is it a general
intangible? Yes, it includes everything that is not everything else (it is the
most residual category). Is it a payment intangible? No, because that deals
with monetary obligation. So, this sales is outside of Art. 9. [NF could
have loaned the money and take a security interest in the general interest
rather than buy it). By doing that, it would be in Art. 9 under 9-109(a)(1).
If its a loan NF will only have the tractors if FB defaults. However, there
may be ex ante benefits that will make FB unlikely to default. Under the
this hypothetical case the creditor would have describe the collateral in the
security agreement as including general intangible and tractors because at
time of default FB may have the tractors already.
(B) 109(a)(3) The four types of collateral (which are not seen in this problem) all
require the right to receive money account, chattel paper, payment
intangibles, and promissory notes.
6.
Problem 7D Here, FB is the maker of a note. First Bank is the lead bank
providing a line of general credit of $1.5 million to FB. FB signs a loan
agreement promising to repay the money and 3 negotiable promissory for
$500,000 each. First bank sells off 2 loan participations in the amount of
$500,000 each, to Second Bank and Third Bank. First Bank gives Second
Bank one of the 3 promissory notes signed by FB with a face amount of
$500,000 and also gives Third Bank one of three notes. Second and Third
Bank pay $475,000 each for the notes. Are the transactions between First and
Second and Third Banks within Article 9?
(A) Analysis This is an example of a loan participation deal This is
an EASY case the collateral is a promissory note and it falls within 9109(a)(3) sale of promissory note within Art. 9.
7.
Problem 7D Variation Assume same facts above except that FBs obligation
to repay the money to First Bank is not embodied in promissory notes but is
created by the language of the loan agreement. In this variation, FB is the
account debtor. The sale of loan participations by First Bank to Second and
Third Banks does not involve promissory notes; instead, First transfers by K
its right to be repaid $500,000 by FB to Second and Third Banks. Second and
26
Third pay First Bank $475,000. Are the First Bank Second Bank Third
Bank sale transactions within Art. 9?
(A) Analysis This the more common case. This case illustrates First bank
trying to minimize its risk of the loan by selling an undivided interest in
the deal to the 2 banks. They share profits and risks. This is what a loan
participation deal is. What is First Bank selling to the 2 banks and how do
we classify what is being sold? The central obligation being sold is the
obligation of FB to pay the $1.5 million loan. Its a payment intangible if its
a general intangible unless its an account (Remember: general intangible
is a residual category and you must start by asking first whether its
an account). Thus, you have to exclude the collateral from the definition of
Account to conclude its a payment intangible. First Bank is not selling
goods, energy, chartering business. First Bank is the principal debtor and
is loaning money. Look at 9-102(a)(2) third sentence tells us whats
excluded rights to payments for funds in advance that is what First
Bank is doing. So it is NOT an account, its a payment intangible. [its a
future right to payment, and therefore not an account).
8.
Problem 7E The principal debtor is Browns Rural Health Clinic. The clinic
needs money to purchase better lab equipment. Clinic offers to sell to NF the
clinics outstanding claims against Blue Cross Blue Shield for services
rendered to patients over the last 3 months. The claims have a face value of
$500,000. If NF purchases these claims for $450,000 from Brown Rural is this
transaction within in Art. 9?
(A) Analysis What is Brown offering to sell to NF and how do we classify it?
The promise of Blue Cross to pay for medical services rendered under their
insurance policies up until whats allowed. Is this an account? YES, its a
right to payment for monetary obligation for services rendered. 9-102(a)
(2)(ii). Also, the term account includes health care receivables. So its an
account under Art. 9.
(B) Hypothetical What if instead of Blue Cross we have Medicare as the
payor. This hypo would cause an additional problem under 9-109(c). Art.
9 does not apply to the extent a US statute preempts. We would have to
research federal statutes to see if it preempts the sale of government
receivables (because Medicare is funded by the Government).
(C) Notice In Problem 7B is there a federal preemption problem? What is
the asset FB trying to use in its transaction with NF its the stream of
income generated from license of patent. Patent law doesnt tell you what
to do with the money you get. So its important to see what the asset FB is
selling. Had he been selling the right to patent it may be preempted by
Federal law have to always check the exclusions under 9-109(c) and (d).
9.
Problem 7F The principal debtor is Brown Rural and the clinic needs money
to purchase better lab equipment. Clinic has a claim against its LL for
negligence; the LL failed to repair a pothole in the parking lot resulting in the
27
injury of a clinic EE. The clinic offers to sell its negligence claim against LL to
NF. The clinic believes the claim is worth $300,000. Assume there is no
applicable non-UCC statutory or decisional law prohibiting the sale of clinics
claim. See 9-109(d)(12). NF purchases the clinics claim paying the clinic
$200,000. Is the NF BR transaction in Art. 9?
(A) Analysis BR wants to sell its right of cause of action to NF. How do we
classify this? They are offering to sell the claim itself. See the definition of
commercial tort claim which means a claim arising in tort w/ respect
to which the claimant is an organization; or the claimaint is an individual
and the claim: arose in the course of the claimants business or
profession; and does not include damages arising out of personal injury to
or the death of an individual. See 9-102(a)(13). What is being offered is a
commercial tort claim. Is the sale of this type of collateral in Article 9?
Commercial tort claim doesnt seem to fall in any of the categories
described under 9-109(a)(3) or in Handout #8. It is its own category
and not covered under Art. 9. Its somewhere between deposit accounts
and general intangibles in Handout #8.
(B) Notice If NF wanted to loan BR money and ask for a security interest in
the tort claim then it is covered under 9-109(a)(1)
10. Problem 7F Assume same facts above except that before the sale of the
claim to NF, the clinic and the LL resolve their dispute and enter into a
settlement agreement; the LL will pay the clinic $300,000 in three payments of
$100,000 over the next six months and the clinic will relinquish its negligence
claim. NF purchases the clinics rights under this settlement agreement,
paying the clinic $200,000. Is the NF-BR transaction in Art. 9?
(A) Analysis What is the clinic selling here the right of payments under
the settlement agreement (now its a K right). This is very different from selling
the claim itself. How do we classify the collateral? Is it an account? This is
NOT a sale of a commercial tort claim, its a sale of a contract right to
payment. It is NOT an account. So we have a general intangible; thus, its a
payment intangible and its covered under Art. 9.
F.
2.
Class Room Notes Some true consignments are in Art. 9. There are two
types of consignments: (1) true consignments and (2) phony consignments.
True consignments are marketing tools whereas phony consignments are
inventory financing.
28
Refer to Handout #6B This chart is designed to help us understand how new
Art. 9 treats true and phony consignments.
Descriptive Name of
Transaction
Row I
Row II
Row III
Economic
Reality of
Transactio
n
A marketing
Device
A marketing
device
Inventory
financing on
a secured
basis
(A) Hypothetical You tell X you need help selling goods and you hire X to
sell your goods. A boy walks into Xs store and buys a good. The boy is not
really buying it from X, but from you. X keeps a commission and then
sends the rest of the proceeds to you. This is an example of a true
consignment. EXAMPLES of TRUE CONSIGNMENTS
(I) Examples small shops, antique shops, art galleries, gun shops, etc.
(II) Benefits of Consignee They can buy a variety of inventory through
consignment. Also if they dont sell it they send it back to the
consignor. So the risk of not selling the item is on the consignor not
the consignee.
(A) Example Designers of expensive clothing when they sell their
clothes to the department stores, they sell on consignment. The
department store is a marketing agent. They do it this way
because it minimizes the risk of not selling to the good.
(B) Example Book publishing company. If no-one buys the books
its not the retailer who eats it, they are sent back to the publisher.
(C) Example Home Depot they dont own a lot of the goods they
sell. The dont bear the business risk of non-sale.
(B) Hypothetical of PHONY Consignments This type of consignment is
basically financing inventory but its mislabeled by the parties.
(I) Example X is a credit seller (C-S) when it delivers to Y (talking about
a wholesaler to retailer). It doesnt want to sell on open account; so it
takes a security interest in the inventory under 9-109(a)(1). So when
29
4.
30
bankrupts property goes into the estate under the doctrine of derivative title.
Who is right HO or the trustee in bankruptcy? [Refer to 1-201(37), 9102, 9-109(a), 9-310, 9-317, 9-319(a)].
(A) Analysis Here the fight is about the clothes that are subject to the true
consignment. What is HOs status? Is it an Art. 9 creditor? See the
definition of consignment under 9-102(a)(2) and under 9-109(a)(4) Art. 9
applies to consignments. However, you must satisfy the Art. 9 definition of
consignment. Under the definition, who is the merchant UE [the
consignee also has to be a merchant see the definition in Art. 2-104].
Under 9-102(a)(20)(c) at what point do we look at the classification of
collateral before delivery what were the clothes to HO what type
of goods? Its inventory Not consumer goods. Under 9-102(a)(20)(D)
trans does not create a SI that secures an obligation this language
means the trans. between HO and UE cannot be a phony consignment
a sale transaction. See Row III of the chart describing a phony
consignment. So, in this problem we have a TRUE consignment.
With respect to terminology, HO (the secured party) is the consignor; UE
(the debtor) is the consignee. The collateral includes consigned goods.
Status of HO
Question of Attachment: When does HO get an attached Security Interest?
Under 9-203(b): (1) Value Ho gave something of value to UE [the right
to get a commission); (2) Debtors rights in the collateral UE has rights
in the collateral or power to transfer rights in collateral; and (3) 9-203(b)
(3)(A) if there is a written consignment agreement, is it enough? A
consignment creates a security interest so if signed consignment
agreement that describes the consigned goods; its satisfied. The problem
here with attachment is presented in (2) if we go to CL, its a bust
because under CL the debtor never has rights theyre just a marketing
agent. By analogy under 2-326(2) Need a signed consignment agreement
AND the delivery of goods. If on May 1, there is a signed consignment
agreement and goods are NOT delivered till May 10, the security interest
does not attach until May 10.
Question of Perfection: Assume HO has an attached security interest, is it
perfected? Always start with 9-308. Nothing in 9-309 (which sets forth
cases where there is automatic perfection) applies here. Its perfect if
attached (under 9-203(b)) and complies with 9-310-316. There are 2
permissible modes of perfection in this case:
(1) Refer to 9-310 File a Financing Statement [Here HO failed to file]
(2) Refer to 9-313(a) Is there possession by secured party? No
Conclusion: HO has a secured but unperfected security interest.
31
32
Who Wins? 9-322 does NOT apply because there is neither 2 Article 9
security interests OR an Art. 9 security interest and agricultural lien. That
is not what we have here. We have an Art. 9 security interest v. judicial
lien. Under 9-317(e) could be applied to and the trustee wins. But the
main priority rule is 9-317(a)(2)
A security interest or agricultural lien is subordinate to the rights of:
(2) except as otherwise provided in (e), a person that becomes a
lien
creditor before the earlier of the time:
(A) the security interest or agricultural lien is perfected; OR
Conclusion The Trustee wins.
5.
6.
7.
Problem 8B This is problem 4 in the text book on pg. 17. Assume for this
problem that there is a true consignment.
(A) Analysis The fight is between OMB and the dealer and the property in
dispute are antiques. Is this transaction in Art. 9? No, because the
relevant audience Not the purchasers, but the creditors of Antique-R-US
are likely to know that the debtor is selling on consignment. So this Not in
article 9 according to 9-102(a)(20)(A)(iii). This hypothetical is Row II on
the chart on Handout #8B.
(B) Policy Under 2-326(1) some contracts for sale you get exactly what you
bargain for and give it back to seller sale on approval is that what
we have here?
(I) Example D goes to the store to buy X and he brings it home and
tries it out. This is a sale on approval.
(II) Example Selling for the first time this is not resale. This is a sale
of return. This is a true consignment, but not in Art. 9; also not in 2326.
(C) Conclusion Who Wins? Under CL, the dealer wins. When you do not
33
have the benefit of 9-319 the consignee cannot grant a security interest
in the bank because no property to convey.
8.
34
G. Leases
1.
2.
Class Notes
(A) True Leases: True Leases involve an entrepreneurial stake in the item
being leased. Also known as residual interest. How do you know if there is
residual interest at the end of the lease: there is either economic value and
returned to lessor OR alternatively the lessee buys the leased good for
35
more than a nominal price with economic value remaining. Either of these
events help establish it is a TRUE Lease.
(B) Phony Leases: Phony leases involve equipment financing on a secure
basis. B sells machine to C and C grants B a purchase money security
interest in equipment to ensure payment of the machine. The rent
payments are installment payments of the sold machine. This is a sale
with a purchase money security interest and thus a phony lease.
(C) What is the difference b/w a True and Phony Lease: The difference is
with a phony lease, at the end of the lease, the lessee buys the equipment
for a nominal price.
(D) Secrecy Problems? Both types create a secrecy problem. With a true
lease, there is secret ownership. With a phony lease, there is shared
ownership. In a true Lease, you get it today and pay rent; In a phony, you
get it today, and make installment payments [credit sale with purchase
money security interest].
Pre-Code Treatment of Leases
(A) For a phony lease, under CL, if B wants to beat out other creditors, B
would have to record to win.
(B) For a true lease, under CL, C signs a lease agreement and C has no
ownership in a true lease, by definition she has possession but No
ownership. So, under CL, if B is a true lessor it will always defeat the
creditors of the lesee. Main Difference If phony, must give Notice.
UCC Treatment
(A) Phony Leases Its a mislabeled transaction where there is a purchase
money security interest. B has to file if it wants to beat the lessees
creditors under 9-322(a)(2). Basically, if phony lease and there are 2
secured creditors but B doesnt file, the other creditor wins under 9322(a)(2). The Effect phony leases are treated the same way as Art.
9 purchase money security interest.
(B) True Leases These are NOT in Art. 9 at all. (unlike consignments). You
have to go to Article 2A.
(1) Under 2A-301 true lessor wins unless 2A-307(1) applies [this
section has been modified refer to page. 1276].
(C) Effect Under the Code, the CL rules have been brought forward (unlike
consignments). True lessors whether leasing a $1 product or $1 mil. Have
NO obligation to give notice. Therefore, it really matters what type of lease
you have because if phony you must file; if true you dont file. Notice
with consignments, you usually have to file.
Summary of Lease Treatment by Article 9 and 2A
Row IV
Descriptive Name of
Transaction
A true lease meeting
the requirements of
Economic Reality of
Transaction
A transfer of possession of
goods for a term in return
36
Art. 2A definition in
2A-103
Row V
A phony lease or
disguised lease
3.
4.
5.
37
201(37) [Para. 1 of this definition has been revised see page 1267]
Security Interest means an interest in personal property or fixtures
which secures payment or performance of an obligation. The term also
includes any interest of a consignor and a buyer of accounts, chattel
paper, a payment intangible, or a promissory note in a transaction thats
subject to Art. 9. Except as otherwise provided in 2-505, the right of a
seller or lessor of goods under Art. 2 or AA to retain or acquire
possession of the goods is not a security interest, but a seller or a
lessor may also acquire a security interest by complying with Art. 9.
The retention or reservation of title by a seller of goods
notwithstanding shipment or delivery to the buyer (2-401) is
limited in effect to a reservation of security interest.
Is this a true or phony lease? 1-201(37) Para. 2
Whether a transaction creates a lease or a security interest is
determined by the facts of each case; but a transaction creates a
security interest if the consideration the lessee is to pay the lessor for
the right to possession and use of the goods is an obligation for the term
of the lease not subject to termination by the lessee, and:
(a) the original term of the lease remaining economic life of goods
(b) lessee is bound to renew lease for remaining economic life of goods
or is bound to become owner of the goods;
(c) lessee has an option to renew the lease for remaining economic life
of goods for no additional consideration or nominal additional
consideration upon compliance with lease agreement; or
(d) lessee has an option to become owner of goods for no
additional or nominal consideration upon compliance with the
lease agreement.
A transaction does not create a security interest merely because it
provides that: [the factors above are NOT dispositive]
(A) PV of the Lease FMV of the goods at time lease was entered
(B) Lesee assumes risk of loss of goods or agrees to pay taxes,
insurance, filing, recording, or registration fees, or service or
maintenance costs
(C) Lessee has an option to renew or become owner of goods
(D) Lessee has option to renew lease for a fixed rent reasonably
predicted FMV of rent for use of goods for term of renewal at time
option is to be performed
(E) Lessee has an option to become owner of goods for a fixed price
reasonably predictable FMV of goods at time option is to be
performed.
38
39
FMV of machine at time lease entered into = PV of rent. That makes it look
like a sale because:
Assume 5 year lease and 3 years economic life left in machine at
end of lease. One would expect the FMV (what paid to buy for 8 years
life) would be greater than PV of rent (which represents the use of the
machine for machine) leaving 3 year residual interest.
This is a strong factor suggesting sale. BU then the code under 1-201(37)
(3)(a) says dont jump to conclusion that its a sale. Why? Drafters are
saying there could be a true lease still have a full pay out. See the example
above it has to do with ancillary benefits accompanied with renting rather
than buying. However, what does the extra year of economic life after the
term suggest contrast 5 year term with what parties predicted economic
life would be. 1-201(37)(2)(a). You compare predicted life with actual
term [DO NOT look at actual life]. Para. 4 of this section tells us look at
what parties anticipated. So, there is a true lease
(B) Recommendations
(1) If equipment is expensive and not sure whether its a true or phony
lease, make a 9-505 precautionary filing (called cheap
insurance) under Art. 9.
(2) If equipment mid-priced (multiple items to multiple lessees), filing
may be seen as too expensive to them. So the lawyer has to
construct the lease so that no later court will construe it as a phony
lease.
6.
Problem 9B Same facts except that the parties would reasonably predict at
the time that the lease was executed that the machine would have an
economic life of 6 years. For this subpart only, consider the following options
to purchase and decide whether the transaction is a true or phony lease:
(A) Option to purchase machine for $1200
(B) Option to purchase for its FMV at end of 5 years as determined by an
independent appraiser acceptable to both parties
(C) Option to purchase the machine for $1000. Of the $1220 yearly rent, $200
is Bs compensation for servicing the machine. The FMV of the machine at
end of leasehold is $1000.
(D) Option to purchase the machine for $650; for $250
(E) Option to purchase machine for the lesser of $200 or the FMV of the
machine at end of 5 year lease
(F) Lease agreement contains a full use clause: C must renew the lease so
long a machine has useful life remaining.
Consideration when is additional consideration nominal? See 1-201(37)(4)
(x)(i), (ii) Additional consideration is NOT nominal if (i) when the option to
renew the lease is granted to the lessee the rent is stated to be Fair Market
40
rent for the use of the goods for the term of the renewal determined at time
option is to be performed, or (ii) when option to become owner of goods is
granted to lessee the price is stated to be FMV of the goods determined at time
option is performed.
(1) Are any of the options described above in the safe harbor of 1201(37)(4)(x)(i), (ii)? Only option (B) we do not have a fixed price option
to purchase the value of machine will be determined at end of lease.
Thats a safe harbor stated is an important word for true leases.
(2) If you have fixed priced option it is more complicated. See 1201(37)(3)(e). Last sentence in Para. 4(x)(ii) deals with option to buy in the
middle of lease. One year into lease you have an option to purchase lease
during repayment schedule.
impermissible
nominal
consideration
(4)
$1,000
(5)
much > $1000
option to pay
FMV at
at actual FMV
beginning of
at end of lease
lease
[Payment of full residual value]
Paragraph 3(e) of 1-201(37) tells us that the court is to calculate the range
for permissible fixed priced options it should be based on what parties
reasonably predicted the economic life would be at end of lease. If look at (4)
on the diagram 1 year left is worth $1000. And under (3), FMV would be
60% of that = $600. If fall between $600 and higher that factor alone
doesnt mean it is phony. But if get it between $0 and $250, it is nominal. The
hard case will fall between $250 and $600 dont know what court
will do in terms of re-characterizing the lease option.
Advice Filing a finance statement is the safest way to go, but a safe way to
ensure it is a true lease and not a sale is either to (1) give the lessee an option
to terminate lease (as described in para. 2 of 1-201(37); or (2) if have an
option to purchase dont make it a fixed price option. Use safe harbor
language as described in the option examples (B). And if you have to fix the
option price you want a document showing that the fixed price represents fair
predictable price at end of the lease.
41
42
(A)
3.
4.
43
5.
7.
8.
9.
44
$
OMB (nat Bk)
O
P to P
S/A (R.P)
Creditors of LLC
45
Real Estate
Owners
Creditors of Real
Estate Owners
(A) Analysis Remember under 9-109(a)(1) Art. 9 governs personal property not
real estate property. Also see 9-109(d)(11) which expressly excludes real
property from Art. 9 coverage. This is our first example of a two tier
transaction. Here the collateral is the realty paper. Remember in the
introduction that a mortgage is a consensual lien on real property.
(1)
Low Tier Transaction This is the transaction between LLC and the Real
Estate Owners. This transaction is NOT covered under Art. 9 because it is
real estate under 9-109(d)(11).
(2) Top Tier Transaction This is the transaction between LLC and OMB.
The obligation is secured by real estate. The collateral is NOT the real
estate, it is the bundled of rights generated on the lower tier transaction.
There is no classification scheme for this collateral realty paper. So we
will classify it as a promissory note. Basically, we have a note with a back
up mortgage and Art. 9 applies. It is not real estate, it is the rights
embodied in paper that is the collateral.
(A) Assume: LLC defaults on loan from OMB but the real estate owner
pays on time. Can OMB repossess the property? NO, See Part 6 of Art.
9. Why? Based on CL property doctrines, OMB cannot grab the
property because what rights can LLC give OMB only what they
have since LLC has no right to foreclose on the real estate owner
neither does OMB. So, under what circumstance, could OMB get the
property? Only, if both LLC and the real estate owner default and OMB
would have to be the senior creditor of LLC and LLC would have to be
the senior creditor to the Real estate owner. Need double default and
both creditors must be senior. What is OMBs remedy if LLC defaults?
OMB can foreclose on realty paper by informing the real estate owner
that LLC defaulted and that the real estate owner should pay them.
(B) Assume: LLC owes OMB $200,000 and Real estate owner owes LLC $1
million, and LLC defaults. What happens to the $1 million in
payments. Does OMB have the right to collect a million from the real
estate owner? NO, only the $200,000. We are talking about shared
ownership of real estate owners obligation to pay $1 million. Theres a
surplus here. The remaining $800,000 goes back to LLC. LLC has
shared ownership. No sale, its a security interest with a loan. Look at
9-607 it contains language in subsection (c) statutory justification for
this analysis.
(1) 9-607(a) If so agreed, and in any event after default, a
secured party:
(A) may notify an account debtor or other person obligated on
46
47
Securitization Diagram
$
Sale
Trust
$
Sale
OMB
Mortgage Co.
Pool of RP
Note
P to P
Recd mtg
48
49
50
51
15. Problem 13C Assume David approaches Boulder Bank for a $50,000 loan to
help pay for her personal vacation she wants to travel the world for six
months. In addition to other personal property collateral, she offers bank her
own personal, interest bearing bank account at First Union (with a balance of
$15,000). Would this consensual lien be covered by Article 9? See UCC 9102, 9-109.
(A) Analysis This transaction is outside of Article 9 because it is a
consumer transaction under 9-109(d)(13).
(B) Policy: Why cant consumers use this asset [deposit account] in a lending
transaction? We are talking about leverage. The worry is consumers wont
understand what they are doing and will over extend themselves. Different
states want different consumer protections so Article 9 doesnt put this
type of transaction in.
(C) NOTE: 9-201(b), (c), and (d) if more protection consumer protection
law it trumps UCC law.
(D) Drafters Intention: The drafters are saying this type of collateral is new
and are worried about disclosure not knowing and no consumer
protection laws. So, the drafters want to wait till consumer protection laws
catch up and they will then address whether it should be put in Article 9.
That is why the consumer transaction described in problem 13c is outside
of Article 9.
I.
What are the Major Limitations Arising From Law Other than Art. 9?
(A) Limitation #1 there are laws that make difficult or impossible for
creditors to obtain and enforce non-possessory, nonpurchase money
security interests in consumer goods that tend to be highly personal in
nature and have little resale value. 444.2(4) of the FTC Credit Practices
Rule.
(B) Limitation #2 Most states have laws severely limiting the assignment of
future income by debtors to repay existing obligations. An assignment of
wages is, in effect, the grant of a security interest in future income. Art. 9
does not apply to such transactions. See 9-109(d)(3). Hostility to wage
assignments is based on the concern that creditors will have excessive
52
power over debtors in default. Plus, there is the concern the concern that
debtors with encumbered future wages would have reduced incentives to
continue working. Opponents of such restrictions argue that debtors know
best what their preferences are and, in a free society, should be able to
choose what obligations to undertake and what property to offer as
collateral.
(C) Limitation #3 In order for pension funds to qualify for tax benefits,
pension plans must restrict the ability of the beneficiary (debtor) to
alienate or create security interests in the pension fund. These restrictions
on debtor free choice are explained by similar policies as those advanced
to support limits on wage assignments. Those who argue for limits on the
alienation of pension funds point out that the central goal behind the
preferential tax treatment of pension. If debtors borrow against the funds
and default, this objective will not be realized. Opponents suggest that
debtors are the best judge of whether they need immediate credit for
emergency medical care or to save a failing business and that they may
not be able to solve their liquidity problems unless they can grant security
interests in their pension funds.
3.
J.
Recap of Scope
(1) 9-109 weve learned 9-109(a) is the core provisions credit extension and
personal property as collateral is the classic case. A lien created by a
contract kicks out statutory liens. Phony leases and Phony consignments
are in Art. 9-109(a)(1)
(2) 9-109(a)(2) agricultural liens in Art. Even though not created by contract.
(3) 9-109(a)(3) right to be paid money 4 items important to remember
(4) Securitization taking promises to pay and pooling them together and selling
53
(5)
(6)
(7)
(8)
(9)
A. Classification of Collateral
1. Review the list of collateral on pg. 1 of Handout #8 and applicable
definitions in 9-102(a)
(A) Is the Collateral tangible property?
(1) If so, is the collateral real estate or goods? if real estate it is
excluded under 9-109(d)(11)
(2) If the collateral is goods:
(A) Consumer goods 9-102(a)(23) means goods that are used or
bought for use primarily for personal, family, or HH purposes
(B) Equipment 9-102(a)(33) means goods other than inventory,
farm products, or consumer goods
(C) Farm Products 9-102(a)(34) means goods, other than standing
timber, with respect to which the debtor is engaged in a farming
operation and which are:
(1) crops grown, growing, or to be grown, including crops
produced on trees, vines, and bushes; and aquatic goods
produced in aquacultural operations;
(2) livestock, born or unborn, including aquatic goods produced
in aquacultural operations;
(3) supplies used or produced ina farming operation; or
(4) products of crops or livestock in their unmanufactured states
(D) Inventory 9-109(a)(48) means goods, other than farm products
which:
(1) are leased by a person as lessor;
(2) are held by a person for sale or a lease or to be furnished
under a contract of service;
(3) are furnished by a person under a contract of service; or
(4) consist of raw materials, work in process, or materials used
or consumed in a business.
(E) Manufactured Homes 9-109(a)(53) means a structure,
transportable in one or more sections, which, in the traveling mode, is
eight body feet or more in width or 40 body feet or more in length, or,
when erected on site, is 320 or more square feet, and which is built
ona permanent chassis and designed to be used as a dwelling with
or without a permanent foundation when connected to the required
54
55
56
4.
Problem 12 (text)
(A) Problem 12A
(1) Analysis
(a) Piano tangible property/ goods/ if used at home for
personal
use under 9-102(a)(23) its a consumer good goods used or
bough for personal purpose. [Is it personal purpose if professional
up for debate].
(b) Cattle tangible property/ goods/ if werent fattened for sale,
but
for dinner for family purposes its consumer goods; but, here
its for sale farmer is the debtor so the cattle is farm product.
Notice, it is NOT inventory because under 9-102(a)(48)
inventory means goods other than farm products.
(c) Farmers tractor tangible property/ goods/ equipment.
Notice,
57
58
Problem 13 (text)
(A) Analysis Another example of health care insurance receivables which
are accounts. [review your class notes from Handout #6 problem 7]
5.
Problem 14 (text)
(A) Analysis credit card receivables is the collateral. See Diagram on
Handout 8 page 3. The top diagram illustrates a loan transaction whereas
the bottom shows securitization.
Credit Card Receivables Example
Loan Diagram
Bank
S/a [cardholders
P to P passport]
Passport
Cardholders
P to P passport @ end
Of billing cycle
Slip
Slips
Goods
Immed. Pymt.
(fee)
Merchants
59
Securitization of CC Receivables
d Trust
$
Sale
Bank
$
Sale
Passport
Pool of CC
Receivables
$
CC Loans
P to P CC bill
@ end of cycle
undivided interests
Cardholders
Investors
Problem 15 (text)
(A) Problem 15A
(1) Analysis Farm products; Here, grocery store asking for a loan from
bank and asking bank to take milk as collateral that is inventory.
(2) Analysis Debtor is the customer grocery store, I buys 2 cartons of
milk and offers it as collateral for loan consumer good.
(3) Analysis I owe a restaurant and use milk to cook. If restaurant is
the debtor, it is inventory.
Moral Story: Must look @ collateral through eyes of debtor.
(B) Problem 15B
(C) Problem 15C
(1) Analysis Rare coins are tangible property. If its goods, its consumer
60
61
Direct
Ownership
Accounts
Accounts
Investment
accounts
Gabriel
Other
Customers
AGE
Investment
Accounts
Customers
Accounts
Rushmore
Investment
Accounts
Customers
Problem 16 (text)
62
(A) Analysis collateral Elvis Presley guitar held for investment its
tangible but Not an instrument it is either inventory (holding it so it
will appreciate when he sells it) or equipment. Here, it is equipment.
Under comment 4a if it is inventory it has to be held for sale in ordinary
course of business. Since Sam doesnt sell instrument, it is equipment.
8.
Problem 17 (text)
(A) Analysis This is a true lease. DAM goes to bank and gives leasing
agreements as collateral. Is the lower transaction (the true lease) in Art. 9?
No, it is in Art. 2A. If it is a phony lease, it is in Art. 9. But we are
assuming it is a true lease. What is the collateral in the top tier
transaction? Chattel paper under 9-102(a)(11) there is a monetary
obligation (bottom tier rights generated in the lower transaction) and
lease of specific goods (rental cars).
9.
expensive red viola from Alex Antique (AAI) on credit). The purchase
price is $400,000; NN makes a $100,000 down payment and grants AAI
purchase money security interest in the viola to secure the $300,000
balance outstanding on the installment sales K. NN indicates to AAI
that she intends to play the viola at home and with a group of her
friends who play string quartets for pleasure. NN uses the viola
consistently w/ her representations to AAI for three months following
the credit purchase. In part b/c of the wonderful sound of the red viola,
NN practices long hours and resigns from her regular job in order to
pursue her dream to play professionally w/ the National Symphony
at the Kennedy Center. NN needs more $ to maintain her lifestyle
professional musicians make less than computer programmers. NN
applies for and obtains a $150,000 loan from First American Bank.
Without informing the Bank about AAIs earlier interest in the viola, NN
gives the bank a nonpurchase money security interest in the red viola.
NN tells the bank she is using the viola in her work as a professional
musician. Bank promptly files a financing statement. Several years
later, N misses payments owed both to AAI and to the Bank, thereby
defaulting on both obligations. Both creditors want to repossess the red
viola. Which creditor has the senior interest in the viola?
In answering this question, assume that if the viola is classified as consumer
goods, then AAIs purchase money security interest is automatically perfected
when the security interest attaches. See 9-309(1). Accordingly, if the viola is
consumer goods, AAI wins. See 9-324(a). Otherwise, Bank wins. 9-322(a)
(2).
63
(A) Analysis As suggested in In Re Morton (decided under the old Art. 9 and
in the text), the viola is consumer goods as to the earlier credit seller AAI
and is equipment as to the later outside lender, First American Bank.
Thus, AAI wins the priority battle. Where there is a change in use of the
collateral by the debtor, in order to figure out how to classify the collateral,
you should ask:
What was the best evidence available to the particular creditor, at
the time the security interest was created (attached under 9-203(a),
(b)), concerning the debtors primary use of the personal property?
Extrinsic circumstances as well as the debtors stated intent should be
taken into account.
Both creditors face practical difficulties where there is a change in use of
collateral. As illustrated by this problem, the initial creditor does not want
to have to monitor the buyer/debtor (NN) after the sale to ascertain how
she will use the viola (a large ticket consumer good) in the future.
On the other hand, the subsequent creditor has no objective source of
information concerning how NN used the viola in the past. The debtor has
every incentive to not disclose the existence of the earlier security interest;
if she is acting in good faith, she may believe that she will repay both
creditors and may accordingly have no qualms about exaggerating the
size of her pool of unencumbered assets. Under the approach followed by
cases under the old Ar. 9, and not likely to change under the new Art. 9,
the entire risk of a post attachment change in the use of multipurpose
collateral is allocated to subsequent searchers here first American
bank.
In terms of precautionary behavior, it is a good idea on large ticket items,
for the initial creditor (often a credit seller as in the problem) to get a
written statement from the debtor (NN) about how she plans to use the
collateral in the future; such a statement provides useful evidence should
there be a priority battle following a default. As for later creditors relying
upon used multipurpose collateral, they should question the debtor
thoroughly about her earlier uses of the collateral.
10. Problem 5 (handout #8) Refer back to problem 17 in the text (p. 58).
Assume as shown on the diagram that during the month of July 2001, GMAC,
the originating institution, makes 500 car loans to individuals to enable these
500 customers to buy GMAX cars from various car dealerships. In each case,
the GMAC car buyer written agreement includes: (1) the car buyers promise
to repay GMAC (the balance outstanding on the car loan w/ interest over
time); and (2) language conveying to GMAC an Art. 9 purchase money security
interest in the new GMAC car bought with the GMAC credit. GMAC takes all
necessary steps under Art. 9 so that it obtains attached and perfected Art. 9
security interests in the 500 new GMAC vehicles. On Aug. 1, 2001 GMAC
borrows 2 million dollars from Bank. GMAC signs a security agreement
conveying a security interest to Bank in GMACs rights based on the 500
64
transactions with the 500 buyers of new GM cars. How would you classify the
collateral in each of the transactions between GMAC and the car buyers? Are
those 500 transactions w/in the scope of Art. 9? How would you classify the
collateral in the Bank GMAC loan transaction? Is that transaction w/in the
scope of Art. 9? Under what circumstances can Bank foreclose on the new
cars?
Example of Automobile Paper
Loan
Principal debtor
Bank
GMAC
P to P s/a in chattel
Paper [the bundle of
Rights generated in
Bottom tier chattel
Paper]
Creditors of GMAC
Bottom Transaction
P to P s/a (cars),
certificate of title
Creditors of Buyers
500 Buyers GM
Account Debtor
(A) Analysis How do you perfect a security interest in a car? Start at 9-308
and sift through to 9-311(a), which says filing a financing statement is NOT
good enough. Need notation on certificate of title. 9-311(d) limits the rule, but
that limit does not apply here. The bottom tier transaction is in Art. 9. The top
tier transaction collateral is chattel paper (9-102(a)(11)), which is in Art. 9, 9109(a)(1). Attachment is satisfied under 9-203(b). Also notice under 9-203(g)
there is carry over attachment to the cars a security interest in a security
interest. Perfection for top tier transaction can be done with a financing
statement because the collateral is not the cars it is the chattel paper. Notice
under 9-308(e) there is carry over perfection of a security interest in the
underlying security interest. The collateral in the bottom transaction is cars
goods in Art. 9. In top tier transaction, collateral is chattel paper, which means
a record of a monetary obligation (here the lower tier obligation) and a security
interest is specific goods (namely here the cars). If GMAC defaults and I own a
GMAC car can Bank repossess my cars? Under 9-607 how can the bank
repossess need default in both transactions (both tiers) and bank has to be
senior to GMACs creditors, and GMAC has to be senior creditor to the senior
buyers.
Trust
Securitization
Bank
GMAC
65
Sale
Pool of Auto paper
Sale
Pool of Auto paper
Undivided Interests
investors
P to P
s/a cars
certificate title
(A) Analysis In the bottom tier, GMAC sells auto paper to bank, and then bank
sells auto paper to the trust, a bankruptcy remote entity under 9-318(a) and
(b). Under 9-109(a)(3) this is a sale of chattel paper, the top tier of the bottom
transaction is in Art. 9. How will trust perfect have to file a financing
statement. There is NO automatic perfection under 9-309.
66
9-506
(a)
(b)
67
(A) Analysis Most courts hold that the security agreement expressly
provides that it covers replacement inventory. Some courts have been
willing to read financing statements more generously to cover
replacement collateral of the type that turns over frequently even if the
words after acquired are omitted. A careful attorney when drafting
descriptions of collateral for the security agreement or the financing
statement always should include the words now owned and after
acquired for all types of collateral described unless the intent of the
parties is to exclude after acquired collateral from the coverage of the
consensuallien.
(9) Problem 28 (text)
(A) Analysis Although the description equipment would be adequate,
various equipment or various equipment, see attached list (with not list
attached) are not adequate. Why?
(10) Problem 29 (text)
(A) Analysis The secured party will argue that no one is hurt by allowing
the broader definition in the f/s to control, so the court should reform the
security agreement to conform to the intent of the parties as expressed in
the testimony of the debtor and the secured party. In the case cited, the
court rejected this argument and the secured party lost over $200,000
because of this scriveners error. Several policies support the courts
decisions (1) a later searcher would be hurt who only saw a copy of the s/a
provided by the debtor and thus never searched the Art.9 files; (2 ) a later
searcher, if not hurt, could be inconvenienced because once it discovers
that the two documents contain different descriptions of collateral, the
subsequent searcher must make further inquiries to determine the scope
of the first creditors consensual lien; and (3) allowing discrepancies in
collateral descriptions to be retroactively repaired by the courts could
diminish confidence in the integrity of the filing system.
(13) Problem 7 (handout #8) Barbara Song is a sole proprietor who owns a
residential construction company called Songs Homes. She borrows
$400,000 from Octopus National Bank (ONB) in order to purchase new heavy
equipment, including a crane, bachoe, and tractor with box grader and
bushhog attachments. Song sings a written security agreement describing the
collateral as present and after acquired equipment. ONB completes and files a
written financing statement, using a form identical to the model one found in
9-521. The filed financing statement describes the collateral as present and
after acquired equipment, accounts, and general intangibles. ONB never asks
Song to review the financing statement it later files nor does ONB ask Song to
sign or otherwise authenticate the f/s.
(A) 7A Is it necessary for song to sign the f/s in order for the f/s to be
effective? No, see 9-502(a)(1) [provides the name of the debtor] and 9-516
(b) [filing does not occur w/ respect to a record that a filing office refuses to
68
69
70
overbroad f/s? It creates a cloud over Songs title but can dissipate
because all Song has to do is show the security agreement.
(C) 7D What remedies does Art.9 afford Song? Under old Art. 9, Song was
required to sign the f/s. Why is revised Art. 9 different, eliminating the
requirement of the debtors signature on the f/s? Do you think this
revision is an improvement? What prophylactic steps should a debtors
lawyer take to avoid some of the new risks under revised Art.9? What steps
should careful creditors take in order to avoid litigation? See UCC 9-502,
9-509, 9-510, 9-513, 9-518.
(1) 9-513 this is most appropriate here termination
(2) 9-518(a) correction statement
(3) 9-625(b) if OMB doesnt cooperate Songs has a claim for statutory
damages.
(4) Best Remedy: Is not to let this happen because there are transaction
costs for dissipating the cloud. Prevention Debtor can require
in security agreement that he has right to review final form of F/S and
must sign off on It as part of deal of the security interest. [thats the
old Art. 9 method] The secured party can include in provisions in
security agreement bringing into 9-509(a)(1) giving broad
authorization from debtor to file F/S. Look at handout #3 security
agreement Para. N this is a pro-creditor clause. How would you
revise if represented the debtor?
Debtor hereby authorizes secured party to file such f/s as secured
party deems necessary to perfect its security interest in the collateral,
including a copy of this agreement (and authorizes the secured party to
adopt on debtors behalf any symbol required for authenticating any
electronic filings.
(14) Problem 8 (handout #8) 1/1 Song borrows $50,000 from ONB to start her
business; she is a sole proprietor. ONB retains a floating lien on Songs
inventory and equipment. On 1/1 ONB files a properly completed f/s. On 2/1,
Song marries Dancer; they both change their last names to Song-Dancer. On
4/1 Song incorporates and names her business Barb. Song owns most of the
corps stock. As of 4/1 Barbs assumes all of Songs prior business obligations
including ONB loan; moreover, on 4/1 virtually all of the earlier businesss
assets are transferred to the new corp. On 7/1 Barb purchases a large forklift
to use in the business; assume that forklift is not governed by applicable
certificate of title status. On 7/15, Barb borrows an additional $50,000 from
FFC, granting FFC a security interest in present and after acquired inventory
and equipment. FFC files a f/s the same day.
(A) What is a Floating Lien?
After acquired
Future adv. ($100K)
inventory
71
Wholesalers of inventory
Song
ONB
(creditor)
Debtor
$ or P to P
P to P; floating lien
[inv.], f/s
Inventory
proceeds
Customers
Analysis 3 Building Blocks of Floating Liens
(1) After Acquired Property 9-204(a)
(2) Proceeds 9-203(f)
9-102(a)(64)
9-315(a)(2)
(3) Future Advances 9-204(c)
(B) Does the original security agreement, signed by Song on 1/1 in her
capacity as sole proprietor, give ONB an attached security interest in the
forklift purchased by the successor corp. Barbs? Is the original f/s filed by
ONB effective giving ONB a senior interest in the forklift, despite Sons
name changes. [See 9-203, 9-507, 9-508]
(1) Analysis The problem presented here is that there is a post filing
name change of debtor (see 9-519) and f/s is under debtors name.
There is a secrecy problem. They would check for corp. name, not
the debtors name for f/s. So search under corp. is unlikely to
discover the filing under the individual name. So who gets stuck
with secrecy problem? Where does burden line? (1) Does OMB have
to catch post name changes? Or (2) does FFC have to grill debtor
and get all her names and then search?
(2) Rules 9-503 all the rules what name you use
9-503(a)(4) individual name of debtor used
9-503(c) trade names do not work
9-503(a)(1) corp. charter name of corp.
(3) Attachment Song signs security agreement. Barb never signed
ONB security agreement and Song buys new equipment. Does ONB
have an attached security interest in new equipment the forklift?
Under 9-203(d)92) corp. is a separate entity from Song. This
section was satisfied because the corp. took on the obligations of
Song (not always the case), the sole proprietor original debtor,
corp. new debtor. See 9-203(d). Also see 9-203(e) if new debtor
(corp.) becomes bound to the original security agreement. See 9204(a) for after acquired equipment.
(A) Hypo : Assume no name changes, when did the security
interest attach as to after acquired collateral. See 9-203(b)
rights of the after acquired property clause doesnt vie secured
party interest until Barb gets it. 7/1 9-204(a).
72
(B)
73
(2) Advice: Make sure you check your debtors name every 4 month. Its
worse for ONB under new Art. 9 you want effect f/s for priority
battle and you dont know how much resources to put in to
monitor f/s because dont know if theyll be a priority battle. The
difficulty under new Art. 9 is that a f/s rescued under 9-508
works for some priority battles and not for others. Under 9326 priority rule tells you which ones work.
(3) Priority Battle Scenarios on Handout 8A whether 9-508
rescues work for priority under 9-326 ;
(A) Scenario 1
(B) Scenario 2
(C) Scenario 3
(D) Scenario 4
(4) Given this uncertainty what do you tell your client ONB will get
stuck if post name file change w/ sometimes a 4 month grace
period. How do you monitor subsequent name changes by your
debtor? Suggestions
(A) Tell the debtor to inform creditor if she changes her name if
read s/a in Handout #3 included is a clause stating debtor
must inform creditor of either (1) structural or (2) name
change immediately and if fails to do its a default event. So
when you get information, immediately file a new f/s in the
new name.
(B) If debtor fails to report, ONB gets stuck because the agreement
only between ONB and debtor; FFC not a party to it and
doesnt effect 9-326.
(C) Who is likely to pick up a name change? The accounting
department? Since the name on check. So have accounting
inform counsel of name change. Stationary may give you a
clue to a name change.
(D) You could set up a billing stub you send to debtors and require
the debtor to write here name on paper make it a part of
payment routine so you are notified every month if subsequent
name change.
(E) Business Reason for ONB to closely monitor the debtor
and you may not need to take extra steps like the ones
described in A D.
(1) Example Floating Lien [see diagram
After acquired
inventory
ONB
(creditor)
Song
Debtor
P to P; floating lien
[inv.], f/s
74
Wholesalers of
Inventory
$ or P to P
Inventory
proceeds
Customers
(A) Analysis A floating lien where the debtor is receiving inventory
financing this is a case where youd have close monitoring. Say B owns
a hardware store and there is a constant stream of goods moving in and
out of store. She gets proceeds (9-315). ONB wants to give B all money at
once its a way of controlling the debtors spending (it controls risk). So
ONB will make advancements every span period. If Bs collateral is
inventory you can get a floating lien.
(B) Three Blocks of Floating Lien
(1) After acquired property 9-204(a) security interest in present
and after acquired inventory (after the act which authenticates
the s/a). How does that work?
(A) Example assume ONB made the loan on 1/1 and got s/a on
1/1. And on 2/1 B gets new inventory. When does ONB
get an attached security interest to the new inventory. On 1/1
who owns the inventory? The wholesaler, so security interest
cant attach on 1/1. See 9-203(b)(3) requirements for Art. 9
attachment: (a) Value 1/1; (b) s/a 1/1; (c) debtors rights
in collateral in new inventory 2/1 (under 2-401 title passes
when goods are delivered). So security interest does not attach
until 2/1 and cant perfect until 2/1. ONB does not have to
create a new s/a. What ONB has to do @ instant B gets rights
in the new inventory its s/a expands to treat collateral ONB
security interest attaches.
(2) Proceeds 9-203(f), 9-102(a)(64), 9-315(a)(2)
(A) Example Assume B sells new inventory and on 3/1 she gets
a check from customer (its proceeds under 9-315(a)(2) its
identifiable proceeds). Security interest doesnt attach until 3/1.
The benefit is that one s/a doesnt need to be renegotiated at any
time; she sells and gets proceeds. The security interest expands. So
w/ one s/a you create a charge that floats on present and after
acquired inventory and proceeds with one document.
(3) Future Advances 9-204(c) the effect when does security
interest attach?
(A) Example Assume on 4/1 ONB makes a future advance, when
does security interest attach. On 4/1 because under 9203(b)91) you need value. The benefit is not renegotiating on
4/1.
(C) Business Reason for Monitoring: With a floating lien the debt collateral
ratio fluctuates. So ONB will monitor the debtor. So because they have to
monitor the ration, they can simultaneously monitor the name change.
This event usually occurs with large loans. Dont have post name problems
when have post deals like this one.
(15) Problem 9 (handout #8) This problem deal with land. The Easterbrooks
75
need help. They are farmers in MD who raise tobacco. 4 years ago (1997) they
borrowed $200,000 from MNB, and granted a security interest in crops
growing on debtors farm in St. Marys County, and all farm equipment located
on the farm. For the purpose of this problem , you should assume that MNB
took all necessary steps to perfect its security interest and that its consensual
lien will be senior to the lien of subsequent Art. 9 secured creditors with nonpurchase money security interests. The Easterbrooks have paid down the MNB
loan to $25,000. The Es are short on funds this year, theyd dont have enough
money to bring in this years crop of tobacco, to make necessary repairs on
their farm equipment, and to repair the roof on their farm house. They also
need funds to prepare the fields for next years planting. They would like to
borrow against their current, unharvested, year 2001 crop, but MNB has
severely curtailed its lending to tobacco farmers. Given the increasingly
burdensome taxation of tobacco products, MNB believes that tobacco farms
can no longer operate profitably. MNB, accordingly, refuses to give Es any
additional financing. The Es have approached a second lender, FF which
continues to finance tobacco growers. But FF refuses to give the Es a loan b/c
FF will not make a crop loan when its lawyers advise that FF would be junior
to another creditor in the event of default. The Es explain that they always
assumed that MNB security interest encumbered only the 1997 crop, that
crop was harvested and sold years ago.
(A) Analysis Is MNB or FF right? What should Es do?
FF wont loan against 2001 crop because dont want to be second creditor
because under 9-322(a)(1) conflict Art. 9 security interest. FFC would be
second in time if MNB s/a covers the 2001 crop. Assume E says the s/a
was only for the 1997 crop. Could you put E on the stand to testify to
that? No, its a parol evidence issue. You can only submit oral evidence
if the K clause is ambiguous. MNB will argue crops growing is not
ambiguous thus parol evidence rule applies. If arguing for E, its
ambiguous because of doctrine because you construe the document in
four corners. Assume E can testify? Whats the problem? Who will MNB
bring to the stand the loan officer hell rebut testimony we never
make loans with 5 payment reschedule with one year of crops. This a long
shot so how do we deal with construing language crops growing. E
could argue ambiguity is construed against the drafter. What about
construing the K with custom (1-205) should have used the term
hereinafter. None of these arguments are a slam dunk and unlikely
will put E on the stand. This is a problem because E cant get credit.
(1) Suggestions: Say you talk to creditors on behalf of E who would
you talk to first FF or NMB? Need to look at the benefits and
negatives:
(A) NMB if talk to NMB, what is the upside? What would you
get out of the talk? Youll be asking them to redraft the s/a to
re-describe the collateral highly unlikely. Whats the
downside? insecurity clause (or acceleration clause look at
default clause on Handout #3) If creditor is unsecure of the
good faith repayment of loan, they can recall the debt early. So
76
77
Ruckersville, VA. That address does not appear on any of the f/s and there are
not other public records revealing any lien against the inventory, fixtures and
equipment at N. King St. site. Later you speak w/ LL at N. King St.; she tells
you NC installed only new fixtures and equipment at the N. King St. plant.
(A) In order for f/s to be effective, is it necessary for VA Bank f/s to show all
addresses where debtor is conducting business? Must the f/s at least
provide a mailing address for the debtor? [See 9-338, 9-502(a), 9-516,
and 9-520] First thing to do, is to hire an investigator to see what assets
are available. Assume no insurance against trademark liability. No real
estate owned (they rent). You check Art. 9 files 3 f/s all filed by VA Bk
cover all past, present, and future you discover its an order of levy
jurisdiction (judicial lien arises when sheriff seizes property) You discover
9-317 governs battles between judicial lienors and Art. 9 secured creditors.
What do you do? Is it necessary for VA Bk. To contain the addresses where
debtor doing business? No, not necessary. See 9-502, 9-504, 9-516
nothing says to include where debtor does business.
Maybe
Sometimes
Seriously
De
fec
tiv
e
F/
S
Does not satisfy
requirements in
9-502(A)
No
No
78
79
(B)
(C)
(D)
80
(C) Recommendations:
(1) Dont include superfluous language in s/a
(2) Dont believe adversary if debtor says all property encumbered
(3) If judicial lienor, use Art. 9 files and priority rules to shake
collection efforts
(4) When doing pre-trial discovery think about collection and copies of
s/a early. But problem with tip off after judgment given then
looked for s/a May get in discovery without tipping off.
(17) Problem 11 (handout #8)
C. Attachment of the Security Interest
(1) Read text pgs. 66-75
(2) Problem 2 consider when the banks security interest will attach to Gabriels
accounts receivables in the following cases:
(A) 2A 1/10, FVB agrees to loan G $500,000 and the money is deposited
the same day in his business account at FVB. G signs a loan agreement
and a security agreement on 1/10; the collateral is Gs present accounts
receivables. The G-FVB s/a includes the following language:
in the event G shall be in default in payment of principal or interest under
the loan agreement and s/aand if said default shall not be cured w/in 5
days after receipt by G of notice thereof from FVB, then at the end of the five
day period, FVBs rights and obligations with respect to the collateral shall
be those of a secured party holding collateral under the provisions of Art. 9
of the UCC as in effect in VA.
On 1/11, FVB files a properly completed f/s. On 9/1 G, whose business
has expanded too rapidly, defaults on the FVB loan. On 9/2, FVB sends G
a notice of default which he receives on the same day. G does not make
any further payments to FVB. When does FVB first obtain a perfected
security interest in Gs accounts receivable? [9-203, 9-308(a), 9-310(a)]
(1) Analysis Does VA bank get a perfected article 9 security interest?
Remember secured creditors want to perfect as soon as possible to win
priority battles. When is there attachment? (a) Value 1/10; (b)
debtors rights in collateral 1/10 (says present accounts what he
has now); (c) s/a w/ adequate description 1/10. When is there
perfection? 9-310(a), 9-312 financing statement. 9-308 need
attachment and perfection to have perfected security interest.
(A) Words Matter Look at indent quotation what does it mean?
Sounds like parties postponed attachment of security interest. 9203(a) enforceable and 9-203(b) unless agreement expressly
postpones time of attachment. It postpones attachment (dont do
this because it will make your client VA bank a general
creditor. It puts FVB in position of judicial lienor. The clause tried
81
82
Boeing
Jet
p to p rent
83
GA
oil
p to p; s/a
Texaco
(A) 3A Question If GA agrees to sign a s/a for Texaco that describes the
collateral as Boeing jet, leased by GA from Boeing on 9/1/2000, will
Texaco have an enforceable lien against the jet to secure GAs obligation to
pay for the Texaco fuel. Will 9-203 be satisfied?
(1) Analysis There is a true lease which means Boeing has a stake in
the jet because itll get it back at end of lease. Texaco does NOT
have an Art. 9 security interest on the jet because GA doesnt have
rights in the jet (GA has no ownership interest). Look at definition to
see what rights GA has under a lease. 2A-103(J) the right to use the
jet no property interest. So what happens it Texaco assumes it has
a security interest in the jet. Say GA defaults and Texaco grabs the jet
and Boeing sues Texaco for conversion. Who wins? Boeing. Look at
2A-301, 2A-307(1) clearly Boeing wins.
(B) 3B Question If Texaco s/a prepared for GAs signature describes the
collateral as Gs interest under the B-G lease agreement of 9/1/2000
for 5 year lease of Boeing jet, will Texaco have an enforceable lien? If so,
against what collateral? How ould the collateral be classified under Art. 9?
IF GA defaults on its fuel bill can Texaco seize and sell the jet? 9-609, 9610. If GA defaults on its fuel bill, can Texaco use the jet for the remainder
ot the term of the lease? Would it make a difference if the lease agreement
b/w G and B requires G to take out insurance for the jet and to certify
that any pilot flying the jet has a minimum of 500 hours flying time on a
jet during the last year? Is the analysis different if B-G lease agreement
prohibits G from assigning its interest under the lease? If the lease
agreement makes such an assignment an event of default? Does it make a
difference if GA defaults on the Texaco obligation? See UCC 2A-303, 9407.
(1) Analysis How do we classify the collateral? It isnt chattel paper?
9-102(a)(11) theres no monetary obligation GA is not the
lessor (remember: that DA was lessor and owed the right to payment)
Here, the debtor is the lessee and doesnt have a right to payment. The
collateral here is a general intangible. Does Texaco have an Art. 9
security interest?
(A) Assume I: the lease is silent on question whether GA can grant an
Art. 9 security interest?
(1) Under this scenario, GA can create an Art. 9 security interest
because there is nothing in Art. 9 or 2A from prohibiting
this. But Texaco can seize the jet but not sell it. It can
foreclose on collateral, but the collateral is not the jet, the
collateral is the use of the jet the rights of the lessee.
Assume Texaco seizes, does Texaco have to pay rent to Boeing?
Yes. Texaco will have to also follow all conditions of the lease.
84
(B) Assume II: leases says its an event of default if GA tries to grant a
security interest;
(1) Analysis B anticipates the problem above an puts in lease
saying a security assignment of rights is an event of
default. Assume GA breaches Lease K by signing a S/A with
Texaco, but GA continues paying Texaco. GA hasnt defaulted
on Texaco. B says GA defaulted and can kick lessee out.
Whats the consequence of this language whats the
consequence of signig the s/a? you would think if GA
breached the lease, B could grab the plane under 2A-525,
but thats not the case. See 9-407(a). Why are we in 9-407
restrictions in creating a s/a. A term in lease agreement
is ineffective if creating security interest clauses default _
thus this case makes no difference as long as GA is paying
the words mean nothing B cant grab the plane. But
9-407(b) says if GA does not pay Texaco and then texaco
repossesses the jet (uses the jet and captures the
difference b/w FMV rent and rent of lease) the language of
default is EFFECTIVE this is bad for Texaco. See 2A303 whats the consequence of this language being effective
this has been amended. See page 1272 subsection (2) a
provision is lease agreement makes default effective taking
you to (4) takes you to remedies 2A-501(2) and 2A-525 and
523.
85
86
87
FVB take to obtain art. 9 security interest in each of these two accounts? See
9-102, 9-203.
(A) Analysis the collateral is both deposit accounts. Is a credit union a
bank? Generally no, but art. 9 uses the definition of bank to include credit
union. See 9-109(d)(13) not a consumer transaction; 9-203(b)(1) value
given; debtor has rights; whats the banks options of setting (1) to use
9-203(b)(3)(A) authenticated s/a describing the collateral; and (2)
better choice is under 9-203(b)(3)(d) how does a secured party get
control of a deposit account. 9-104 gives 3 ways to get control:
(1) FVB has to do nothing 9-104(a)- because deposit account
maintained there. Does that mean every time GA gets a loan from
FVB hell create an security interest Art. 9 automatically in his deposit
account w/ bank that maintains account? 9-203(b)(3)(d)
pursuant to debtor s/a dont need to be in writing or signed but G
must manifest consent.
(2) Credit Union control of deposit account: 9-104(a)(1) doesnt work
because account not maintained there. 9-104(a)(2) whos
instructions? FVB what does that mean? S/a b/w FVB, G, and
CU depository bank will comply. See Handout 11 (pg. 1) control
agreement for deposit account. Para. 1 agreement for control.
Assuming tripart s/a signed FVB can call CU and tell them to wire
funds to FVB? Control means a lot of power. Does FVB have a legal
right to demand CU transfer money to its deposit account? If G hasnt
defaulted. No legal right to empty account unless debtor defaults but
they have power to dispose debtors property serving as collateral
(emptying the account). 9-104(a)93) new agreement saying FVB
is the customer. In all three cases think about the power of the
secured party FVB has the power to dispose account without
consent of debtor. However, control does not = possession.
(B) Notice: The code specified way to dispose intangible property its similar
to possessory security interest. Core idea control is surrendered over
the asset.
(6) Problem 4C For this subpart, assume that G wants the $300,000 FVB loan
to pay for college expenses for his son (who is a junior in college) and his twin
daughters (both of whom are freshmen). FVB wants an Art. 9 security interest
on Gs personal checking account at Crestar Bank. What steps must FVB take
to obtain an Art. 9 security interest on this personal account? 9-102, 9-109,
9-203.
(A) Analysis Cant do it under Art. 9 its a consumer transaction; see 9102(a)(26) and 9-109(d)(13).
88
(3) 8-102(a)(7)
(4) 8-102(a)(9)
(5) 8-102(a)(14)
(6) 8-102(a)(15)
(7) 8-102(a)(17)
(8) 8-102(a)(18)
(9) 8-301
(10) 8-501(a)
(11) 9-102(a)(49)
(12) 9-102(b)
(13) 9-203
(B) Problem 5a 1/10, FVB agrees to loan G $500,000 to purchase new
inventory for his business; the loan proceeds are deposited the same day
in his business account at FVB. G signs a loan agreement and a security
agreement, also on 1/10; the collateral is described, in pertinent part, as
Gs 100 shares of Ceridian stock. The stock is represented by stock
certificates. The stock certificates indicate on their face that they are
owned by G as sole proprietor of the music store. The certificates are kept
in Gs business safe. How is this collateral classified under Arts. 8 and 9?
When does FVB first obtain an attached security interest in this collateral?
What other options are available to FVB if it wants an attached security
interest in this collateral?
(1) Analysis The collateral is registered certificated securities (registered
because Gs name is on it rather than saying bearer). What are
the options for satisfying 9-203(b) (1) sign a s/a under 9-109 so
you know how to describe collateral; (2) 9-203(b)(3)(c) see 8-301
purchase broad enough to include secured creditor under 1-201;
(3) 9-203(b)(3)(d) collateral investment property and secured
party has control whats control 9-106 takes us to 8-106 (pg.
1280) because stock had Gs name whereas 8-106(b) deals with
registered form. What is required in addition to delivery has to be
endorsed.
(A) Notice difference is that certificates have to be endorsed in
9-203(b)(3)(d) and delivered under 9-203(b)(3)(c). But
have to comply with 8-106. This difference will make a big
difference for priority battles.
(2) Class Notes we classified the stock as registered certificate
securities. You can have a signed s/a; the secured party can take
possession under 9-203(b)(3)(c) (does not require endorsement of
stock under 8-106); or the secured party could get control of stock by
getting possession or delivery (8-301; 8-106) plus endorsement. Which
of the three options is the best for debtor signing a s/a because you
want to keep and control your collateral. Why dont you want to
surrender control (the most extreme option) the secured party has
the power to dispose of stock. Why not trust the secured creditor? We
are not always talking about a bank (creditor could be a friend, or
family member). Also there can be disputes about whether default has
89
occurred (so the secured party can be disposed based on his view of
default). Thos of the concerns of the debtor. What is the best option for
the secured party you want control. Why? Exactly the same right
power dichotomy. If the debtor is left with the stock (the classic nonpossessory security interest), the debtor does not have the legal right
to sell the stock without secured partys consent; but debtor can
(because he has possession).
(C) Problem 5b 1/10, FBV agrees to loan G $500,000 to purchase new
inventory for his business; the loan proceeds are deposited the same day
in Gs business account at FVB. G signs a loan agreement a security
agreement, also on 1/10; the collateral is described, in pertinent part, as
Gs 100 shares of Intel stock in First Union Securities. Gs investment
account at First Union Securities is a business account. How is this
collateral classified under Art. 8 and 9? When does FVB first obtain an
attached security interest in this collateral? What other options are
available to FVB if it wants an attached security interest in this collateral?
(1) How do you classify collateral? Its a securities entitlement
(subcategory of what Art. 9 calls investment property stock held
in the indirect holding system diagram pg. 8) The creditor will get
an attached security interest on 1/10. The only issue as to adequacy
is the description of the collateral in the s/a check under [9-108(d)].
What are the debtors other alternatives for attachment the only
possible alternative is 9-203(b)(3)(d) collateral is investment property
and secured party has control. How does secured party get control of a
security entitlement (start with Art. 9-106(a) tells us that a person
has control of a security entitlement as provided in 8-106 (need to
look at revised 8-106 on page. 1280] what has to be done to get
control of a security entitlement [put aside subsection (3)]:
8-106(d)(1) [because we are talking about security entitlement] if
purchaser [ the bank] becomes the entitlement holder. [purchaser
defined in Art. 1 how would the purchaser become the entitlement
holder the core idea of security entitlement is its just an electronic
credit in Gs account so what theyll do is that they will have an
investment account also at that bank and the debit Gs account and
credit the banks account OR the bank may have an account at
another brokerage house and just conduct an electronic credit and
debit.
The second alternative is 8-106(d)(2) securities intermediaries (first
union) has agreed to comply originated by purchaser (the bank)
without further consent of entitlement holder. [same with respect to
deposit account]. Get a tripartite agreement. [Look at last page of
Handout 11] Also make sure you read 8-106(f) [like 9-104(b)] allows
the debtor to have some access to the collateral
90
(E) Problem 5d Everything is the same as in 5(c) except FVB describes the
collateral, in pertinent part, as all securities accounts. How is this
collateral classified under Arts. 8 and 9? When does FVB first obtain an
attached security interest in the stocks and bonds in Gs sole business
investment account which is maintained at First Union Securities?
(1) Analysis What is an adequate description of collateral to satisfy 9203(b)(3)(a) is it good enough? See 9-108 if have a consumer
91
IV.
A. Perfection by Possession
(1) Read text pg. 78-80
(2) Class Notes
A. Modes of Perfection:
1.
2.
3.
Secured party can take control 9-314, 9-104-107 (which spell out
what you do for control under art. 9) How does this mode give notice?
W/ control the secured party in position to sell the asset without debtor
92
giving prior consent. How does it help subsequent searcher [control will
only work for deposit account and investment property]. How do you give
notice: if you know control works for collateral need to ask more questions
assume collateral is a deposit account in a bank who do you ask if
control the depository bank check to see whos name is in the deposit
account; is there a tripartite agreement.
4.
5.
Notation of the lien on the certificate of title (for cars) 9-311; how does it
give notice you ask the debtor to show the certificate of title and check.
B. Notice: with respect to deposit account you can only perfect with control
(see 9-312(b)). But with all other types of collateral can be perfected with one or
more modes. It depends on factors of the case because some modes win priority
battles. Trust is also a factor.
Perfection by possession (problem 32 and problem 1, 2) 9-313(a) [in hard cases the
secured party does not have physical possession, an agent of secured party does] All
three problems deal with the issue whether a person other than the secured party
can satisfy the requirement of possession in order for the secured party to get
attachment (and perfection).
(3) Problem 32 (text pg. 78)A museum (not secured creditor) has possession of
collateral (diamond). MB promises to pay G the balance of purchase price and
signs a s/a covering the diamond. Assume there is an adequate description of
collateral, and MB wants the diamond for investment purposes. Also assume
under s/a its an event of default if MB were to sell the diamond and parties
agree MB gets title before possession (parties can bargain for title to pass after
identification of diamond but before delivery 2-401). Can G perfect a security
interest in diamond but simply calling the museum tell them to hold the
diamond for his benefit until MB pays in full; thus creating an escrow
arrangement.
Before we can answer this question we must look at the easier cases:
A. Case 1 11 A.M. MB-G sign sales and s/a and makes down payment. At
12 P.M. G calls museum and tells them he is going to pick up diamond at
1:00 P.M. G arrives and gets the diamond. When does G have a perfected
security interest? When he is actually handed the diamond look at 9313(a) classify the diamond as equipment and goods a secured party
may perfect security interest in goods if gets possession. If G has got it in
his hands, thats possession.
B. Case 2 G has a personal secretary, James. 11 A.M. closing on the sale
and at noon G phones the museum and tells them his secretary James
going to pick up diamond at 1:00. Say James gets diamond and doesnt get
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back till 3:00 P.M. When does G have a perfected security interest? Under
9-313(a) if James is an actual agent of G, then perfection is when
James received the diamond. [an agent is someone that has the power to
bind their principal by their acts in deed]. Clearly, here James is an agent.
The comments of new Art. 9 suggest that possession by an agent is the
same as possession of secured party.
D. Compare Case 2 and Case 3 Why does agent have possession, but the
bailee does not under 9-313(a). What is the policy reason? Here, the store
could have the diamond for one reason only to fix it for G. There is no
necessary explanation of the stores possession as a collateral agent as
someone who is holding it on behalf of G for purpose of giving notice and
maintaining perfection. Idea is we dont want litigation why the store is
holding the diamond. This why we require a signed record to prevent
litigation the signed record is also likely to give notice to others.
E. Museum Case (Problem 32) Is this case more like Case 2 or Case 3. Its
closer to Case 3 (the jewelry store case). What a museum might be willing
to do, its unlikely they are willingly to become an agent much more
likely to become a bailee. If they are a bailee (and documents are
consistent) then again under 9-313(C) its not enough for G to call, you
need an authenticated record showing museum is holding the diamond on
behalf of G.
94
F.
95
same day, pursuant to the sales and s/a, B indorses the stock in blank and
delivers the the stock certificates to escrow agent. The escrow agent is
instructed to return stock if B pays in full and on time and if B fails to pay, the
bearer stock is to be delivered to AG. By 7/30/01 B is in default on her pmts
to G and other creditors. She files for bankruptcy on 7/31/01. The escrow
agent is still in possession of the stock certificates. In a battle b/w the trustee
in bankruptcy (asserting strong arm under 544(a)(1)) and G who wins? Why?
(1) Analysis Here G wants to sell stock in the form of stock certificates. This
stock is a certificated security and at the outset what G does is G gets the
corp. issuer to issue the stock in the buyers name (MB) so we would say
its registered certificated securities (because it has MBs name not
bearer). G gets MB to sign a s/a, but that is not enough. SO he sets up
an escrow agent ( a lawyer not on retainer to either party). So on Feb. 1, G
and MB sign a sales agreement; MB signs s/a; MB makes a down
payment; and then all three sign the escrow agreement which is always in
writing. G is suppose to indorse the stock and give to the escrow agent.
Escrow is to hold the stock during the loan repayment period if pays full
give to MB; if default give to G.
Assume Feb. 2, G files a f/s; July 30 MB defaults and July 31 MB files for
bankruptcy. The question is who wins? (we could have thrown the
trustee of bankruptcy into problem 32).
What is the status of the trustee in bankruptcy? At time MB files
bankruptcy, he has a judicial lien (541(a)(1) this the strong arm
power).
What is the status of G? Does he have an attached security and if so
when? Under 9-203(b) Yes, on Feb. 1.; What about perfection? 9-308(a)
there are two modes: (1) possession (9-313(a) second sentence
describes this collateral by taking delivery under 8-301) dont need to
worry about 9-313(c) because doesnt apply to certificated securities or
goods secured Look 8-301 (pg. 1285) defines delivery [what delivery
are we looking at? Be careful with the word purchaser here we are
looking to see if G through the escrow agent has possession (the
purchaser here is G). Again we have the problem of deciding whether we
are in 8-301(a)(1) or (a)(2) here the escrow agent is closer to an agent
than a bailee so we are in (a)(1). But pay attention to (a)(2) it does not
say the acknowledgment has to be in writing or authenticated (so it is
different from 9-313(c). So what do you do if you represent G get a
signed writing (most likely the escrow agreement will work).
A. Assume the escrow agent happens to be MBs son in law,
and the agent does all legal work for MB. Does G have a
perfected security interest by possession? Does it matter
that agent is related to MB? What will trustee in bankruptcy
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(2) What would be the result if G had filed a properly completed f/s on
2/2/01? [in resolving this priority battle, consider all 3 permissive modes
of perfecting a s/a in this collateral, namely possession, control and
filing)? See 9-312(a) Yes she would have a perfected security interest.
(3) See the following Sections:
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
(J)
(K)
544(a)(1)
8-102
8-106
8-301
9-106
9-203
9-312
9-313
9-314
9-317(A)
9-328
Problem 1(b)(ii) Assume that AG does not set up an escrow arrangment nor
does he sell the C stock to MB. Instead, B has owned the C stock for years.
The stock certificates, on their face, show MB as owner; the certificates are in
her possession. G is a venture capatilist. He agrees to loan B $100K for the
opera co. she owns and operates. On 2/1/01 G and B sign a loan agreement
97
and a security agreement and agree on the lang. In the form financing
statement; all 3 docs contain an adequate description of the C stock as
collateral. G gives B the $100K loan proceeds on the same day. G files the f/s
on 2/2/01. On 3/28/01, B , who cannot meet her current business expenses
persuades ONB to make her a short term, $50,000 secured loan, to enable her
to meet opera payroll. On 3/28, ONB gives B $50,000 loan proceeds; at the
same time, B signs an ONB s/a describing collateral as 100 shares of C stock
and delivers the C stock certificates to ONB to serve as collateral for loan. By
7/31/01 B is in default on her obligations to both G and ONB. Which creditor
has a senior claim to the C stock? Why ? Does the answer to this question
depend on whether B indorses the stock to bearer before delivering the
certificates to ONB? See 9-322(a), 9-328.
(A) Which Creditor has a senior claim to the C stock? Why? Here we have
registered certificated securities held in the direct holding system.
What is the status of G? When does she get an attached security
interest? Feb. 1 (value, s/a w/ adequate description under 9-108, rights
in collateral). When if any is there perfection? G got a perfected security
interest in 2/1 even though filed on 2/2/01. Look at 9-312(e) temporary
automatic perfection a security interest in certificated securities is
perfected without filing or the taking of possession for a period of 20 days
from the time it attaches to the extent it arises for new value given and an
authenticated security agreement. So from 2/1 to 2/20 without doing
anything G is automatically perfected is there a secrecy problem; yes,
what is the countervailing policy read the comments for the
convenience of the secured creditor because getting possession takes time.
Look at 9-312(h) after 20 day period expires perfection depends on Art. 9
G filed a f/s so he is perfected under 9-308(c).
What is the status of OMB? They get an attached security interest 3/28. It
also has the benefit of automatic perfection, but does it do enough to get
permanent perfection? They took possession under 9-318(a) taking
physical delivery of certificated securities will work whether or not you
indorse. So if they wanted control, what would OMB have to do on 3/28?
Possession doesnt require indorsement, but for control on these facts,
they would need MB indorsement (8-106(b)(1)). Both modes serve to
perfect the security interest on 3/28.
What is the Priority Rule? Start with residual rule of 9-322(a)(1) (this is
the rule you go to when have 2 conflicting security interests) when
applying this section, start with second sentence and generate a priority
date Start w/ G Feb. 1 because of automatic perfection; OMB 3/28
do you feel sorry for OMB? Couldnt they find out. They should have
checked the files and adjusted this behavior. If this were the right priority
rule, but under 9-322(f)(1) subsection (a) is subject to the other
provisions of Part 3 of Article 9 is there a specific priority rule that
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governs this battle that might give a different result. Look at 9-328
(priority of security interests in investment property which covers
certificated securities) under subsection (5) if OMB relies on possession,
it wins. But what if OMB got control as its mode of perfection, under 8106(b)(1) OMB also wins. What if OMB had filed a f/s, who would win? G
would win under 9-322(a)(1) because its who filed first. Remember, some
modes of perfection win other priority battles even though all 3 modes are
permissible and will beat the trustee under 9-317. But if G relies on f/s,
it is the least preferred mode of perfection when talking about priority
battles with investment property.
Policy: Whats the reason for the result above. The drafter suggest 2
reasons: (1) first, they say this is a transition rule weve been
transitioning from 1994 before 1994 people who dealt with securities
were not use to checking the art. 9 files, so filing a f/s and checking for a
f/s is irrelevant because most people will take control; (2) second, (slightly
more persuasive) they say it gives the system more flexibility. The idea is if
you have a credit worthy debtor you may perfect only with a f/s. Debtor
doesnt mind because debtor gets to keep control and possession of
property. Alternatively, if worried about the status of debtor, you would
insist on taking control or possssion, which might mean you might have to
charge a slightly lower interest rate to give the debtor an economic interest
to agree to surrender control and possession. The idea is you have
different levels of perfection, which provides more flexibility. The cost is
that if you have 3 modes of perfection, the subsequent creditor has to
search all 3 modes.
(B) Does the answer to this question depend on whether B indorses the stock
to bearer before delivering the certificates to ONB? [See 9-322(a), 9-328]
Analysis Endorsement of the stock may in this case because if the
stock is not indorsed, but delivered ONB has possession and beats the
other creditor under 9-328(5). If ONB gets the stock indorsed and meets
the other requirements of control 8-106(b)(1), and still under 9-328
ONB will win. Therefore endorsement is not a factor.
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Problem 1(c) Please read 9-312(b)(1) which describes the only effective way
to perfect a security interest in deposit account collateral, namely by control
under 9-104. Review your analysis and class notes on how to obtain control
of a deposit account in connection with Handout #9, problem 4 (refer to page
76 of outline).
(A) Analysis Basically 9-104 tells us how a secured creditor can get control
of a deposit account; there are basically three ways: (a) where the account
resides in the bank of the secured creditor; tripartite agreement between
debtor, secured party, and institution holding the account (e.g., credit
union); and (c) see 9-104(c).
(6) Problem 2 (handout #10) In addition to problem 33 (p.78) work the following
problems, making the assumption that Fred is in charge of the day to day
operation of the field warehouse. Consider 9-312, 9-313, 9-322.
(A) Problem 2(a) 1/10, MSB and KD sign a s/a covering KDs inventory of
toys. On the same day, MSB gives KD loan proceeds of $50,000 and files a
f/s covering the inventory. On 1/20, KD, w/out MSBs knowledge, stores
100
101
102
103
104
they perfect so that would be the instant before you give the
debtor money (because earlier wont protect MSB from being
trumped). Remember there are two modes of perfection
(there is a preference for perfecting in the document when
goods are in the warehouse.
(G) 9-312(c)(1) if perfected in the receipt, then perfected in the
toys.
(C) Problem 2c MSB and KD sign a s/a on 1/10 describing the negotiable
warehouse receipt. KD tells MSB that it will take 7 days to get the receipt
from KDs safe deposit box. MSB agrees to the delay and gives KD the loan
proceeds. 1/18 passes but no receipt is delivered. ON 2/1 KD borrows
money from SF; a s/a is signed describing the toys (which are now in
Freds warehouse). SF files a f/s describing the toys the same day. On 2/3,
MSB realizes that it never received the receipt. KD explains to MSB that
KD could not locate the receipt. MSB asks KD to sign a f/s which descries
the negotiable warehouse receipt. MSB files that f/s the same day.
(1) If KD defaults on both loans, who will get the toys? In this case, the
collateral is described as a receipt. You dont need the debtors
signature to file f/s (because of ipso facto because the debtor signed
the s/a).
(A) Status of MSB attachment on 1/10; perfection on (remember
temporary perfection 9-312(e) it applies) 1/30. So, perfection
lapses, and 9-312(h) perfection depends on compliance with the
article. And on 2/3 MSB re-perfects. (Notice the gap between 1/31
and 2/2).
(B) Status of SF attachment and perfection both on 2/1
(C) Priority Rule start with the residual rule of 9-322(a)(1)
MSBs priority dates (there is a period when there is neither filing
nor perfection theres a gap had they acted with in the 20
day period their priority date would be 1/10; so there date is 2/3.)
and SF priority date is 2/1. If this is the right priority rule, SF
wins.
Is 9-322(a)(1) the right priority rule or should we apply 9-312(c)
(2) did either of these creditors perfect by another method? Yes,
SF perfected in the toys not in the document. Did SF perfect by
another method during that time? Yes, because during that time
means when the toys were in the warehouse (and theyve been in
the warehouse the whole time). So, 9-312(c)(2) applies and MSB
wins. Both creditors made mistakes:
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(7) Problem 4 (handout #10) Sally Student owns a $5000 car. She needs $9000
for tuition. SF makes the loan but requires Sally to surrender the car as
collateral. Sally signs a standard form s/a which contains no provision
concerning insurance for the car. SFs insurance policy covers all collateral in
its possession against destruction by fire up to $2500. There is a fire and
Sallys car is destroyed (her insurance does not cover the loss.) Sally has not
repaid any of the loan and is in default. SF sues Sally for the $9000 balance
outstanding and wins. What will Sally have to pay? See UCC 9-207.
(A) Analysis Sally will argue that she should pay no more than $4000.
Why? Spurwink Finance will argue that Sally should pay $9000; it does
not want to file a claim under its insurance policy because it fears a rate
increase. See 9-207() indicates Spurwink can collect only $6500. Why? If
you represent a debtor in a pledge transaction, remember to bargain about
who is to provide insurance for the collateral.
(8) Problem 34 Assume that the s/a was signed by Karate on 3/1 and that NF
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took possession of the notes on 3/10. In this problem, consider whether the
trustee in bankruptcy can strong arm aside NFs security interest under
544(a)(1). Here NF makes a loan to Karate (debtor); the collateral is
36 notes ( Karate provides lessons to its customers and they give him
notes for promises to pay for the lessons). On 3/1 NF gets s/a and 3/10
Karate delivers the notes to 3/10; and 4/6 Karate requests NF to give
them one note back and on 10/12 Karate folds and files for bankruptcy;
and the bankruptcy trustee comes into the problem and they want to
try to strong arm aside NFs security interest.
(A) Analysis Does NF have a good enough position to beat the bankruptcy
in trustee. Separate the 35 notes from the other note.
a. Analysis for 35 Notes the promissory notes is under quasi tangible
property and its part of instruments. When does attachment occur
in the 35 notes? Under 9-203(b) [Value 3/1; rights in collateral
3/1 (Karate owned the notes); 3/1 s/a) attachment occurred on 3/1.
What about perfection? 3/10 (how do you know taking possession is
a permissible mode of perfection in taking notes see 9-313(a)
notes fall under instruments). But NF really perfected on 3/1
because of temporary perfection 9-312(e) a security interest in
instruments is automatically perfected for 20 days. So as to the 35
notes, NF was perfected from 3/1 to 3/20 and it took possession
within that 20 day period, which is permanent perfection under 9313(a); So it was permanently perfected until 10/12 when K filed for
bankruptcy. The status of bankruptcy of trustee got a judicial lien
on 10/12. Who wins the priority battle (9-308(c) NF was
continuously perfected up until the bankruptcy filing). Which
priority rule applies? (9-322 applies only conflicting security
interests here it doesnt apply because one of the creditors has a
judicial lien). 9-317(a)(2) applies a security interest (NF) is
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c. Counting Days Do not carry the first day of the period, but count
the second day. Dont count holidays. For instance, when
attachment on 3/1, the twenty day period lasts until 3/21 (not 3/20
because we dont count the first day).
B. Automatic Perfection
(1) Read text pages 80-105
(2) Class Notes 9-309 most important provision for automatic perfection
(focus on 9-309(1) ) Whenever there is automatic perfection, there is a
secrecy problem; therefore there is a countervailing policy argument for 9309(1) it would be too expensive to file a f/s for consumer goods every time;
also it is thought there werent be that many subsequent searchers because
used consumer goods arent very useful collateral because their arent effective
resale markets, depreciation great. If you think about this rationale, it is not
necessarily true. What about ebay and all those auction sites which create
effective resale markets for used consumer goods. Some states have taken this
into account and have modified 9-309(1) and have put a monetary cap on it
[e.g., in Maryland they put a cap on certain consumer goods).
(3) Problem 35 (p.81) 8/4 Bilko enters into an agreement with Browns. S/a
covers the currently owened consumer goods plus those acquired in the
future, and 9/1 the siding put up. Browns go to FF on 9/25 to get money to
purchase a sewing machine and they sign a s/a that signs the sewing
machine. On 10/11 Browns get sewing machine, and 10/12 Browns file for
bankruptcy.
(A) Analysis The fight is about the sewing machine [classified as goods and
consumer goods]. The trustee has a judicial lien under 544(a)(1) on the
day of filing for bankruptcy. What is Bilkos status? Is he a general creditor
or secured creditor? Does he have an attached security interest in the
sewing machine? Start with 9-203(b) [Value given on 8/4 promise to put
up siding under 1-201(44); s/a 8/4; debtor has rights incollateral on
10/11 (2-401]; So it looks like there is an attached security interest; but
look at 9-204(a), but there are limitations in 9-204(b) clearly since the
Browns did not own the machine on 8/4, Bilko has to rely on the after
acquired property clause to consumer goods when given as additional
security unless the debtor acquires rights in 10 days after secured party
gives value here, secured party gave value on 8/4 that is when the 10
day period begins to run, since rights not given until 10/11; there is no
attachment. This is one of the few consumer protection clauses. The
drafters are limiting the bargaining of the parties, even though Browns
agreed that agreement is ineffective under 9-204(b)(1). Thus, Bilko is a
general creditor.
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What about FF? Do they have a security interest in the machine? 9203(b) [Value on 9/25; rights in collateral 10/11; s/a 9/25] Now, 10/11 is
more than 10 days after 9/25, do we need to worry about 9-204(b)(1) as to
FFs security interest? Is FF also a general creditor. No, 9-204(b)(1) does
not apply because the sewing machine was not given as additional
security the sewing machine is the only security. We are not talking
about attachment about an after acquired property clause; its the only
collateral; So, 9-204(b) doesnt apply. Does FF have a perfected security
interest? Yes, we have a purchase money security interest and under 9301(1) its automatically perfected because its consumer goods. So, who
wins FF (10/11 attachment) and Trustee (10/12)? FF wins under 9317(a) thats the priority rule that tells us that a perfected secured creditor
beats a judicial leinor. As to Bilko, he loses because he is a general
creditor.
(B) Policy What is the policy reason for 9-204? The author tells us that
the reason that the clauses are not enforced because they have inter
rorum effects. Whats the interrorum effect on an after acquired property
clause on consumer goods? If the repossess the debtors goods and the
debtor still owes money, and the debtor goes out and gets more goods to
replace those taken, the secured party can keep coming back and
repossess those goods because there was a s/a signed on after acquired
goods. That is the interrorum effect.
Hypo: Assume we are talking about X, who is a carpenter, who does work
for a wealthy couple and they consumer luxury consumer goods (e.g.,
cases of wine, paintings), and X does work on credit. Shouldnt X be able
to get a security interest in this couples after acquired luxury consumer
goods. Debtors and creditors come in all sizes and shapes and if you have
a friend like X, there is a lot of rich debtors who dont pay their bills while
they are consuming. So the issue is do we like 9-204(b)(1) its too
broad and too narrow: To narrow because it doesnt protect Ms. Browns
present consumer goods (she should have more protection); its too broad
because it doesnt cover luxury consumer goods. This provision is a
subcategory of consumer protection provisions.
What are the Arguments On the Issue of Whether we Should Have
Consumer Credit Protection:
(1) Best Argument for Creditors as to why debtors ought to grant s/I in
their consumer goods: Creditors would start out by reminding us that
debtors have a legal obligation to pay their debts; and that the
obligations dont mean anything unless there are effective remedy.
Theyll say let us take s/I in consumer goods because if not it will
lower (or limit) their bad-debt losses. How? We talked about ex-anti
effects [e.g., Texaco and Global talking about leverage to get them to
pay their debts] or interrorum effect which lower bad debt losses. The
ex-poste benefits can offset bad debt losses. Taking security helps
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110
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purchase money events]. Look at 9-103 there are two issues here:
(1) did NF make the loan to enable the debtor (look a NFs purpose] to
buy the rug; (2) was the money so in fact used? In the comments to 9103, there is a flat statement that says this can never be [if you have
an inverted purchase money chronology] the idea is that this loan
enables Faade to pay off any debts it wants to pay off. There are two
separate transactions there is a sale on general credit and then a
later loan to the buyer of the loan. But there is a lot of case law under
old Art. 9 which suggests it can be a purchase money security interest
if you have certain info. That suggests that there was reliance on the
money to help Faade to make the payments [the closer in time the
loan the more it looks like a loan; did TOP know that debtor would
turn around and get a loan; had NF made a commitment to Faade
that said if they buy the rug theyll advance the loan]
C. Assuming it is a purchase money security interest does NF get
automatic perfection if it doesnt file a financing statement? Yes,
under 9-309 a purchase money security interest in consumer
goods. Faade is a car dealer and is going to use it in his dealer. Here,
the rug is classified as equipment. So there is no automatic perfection.
So why do we care if NF has a purchase money security interest.
Under 9-322(a), who would win the priority battle between OMB and
NF (assuming NF files a f/s on 5/3). Both are art. 9 secured creditors
they can use the earlier of the time of a filing is first made or s/I is
first perfected. So OMB priority date is 3/1/98 [thats importance of
anticipatory filing] and NF priority date is 5/3/01. So, NF will lose
unless it has a purchase money security interest. [we will learn under
9-324(a) which would apply because we have equipment NF will win if
it has a purchase money security interest, but will lose if it doesnt]
That is why its important to know if the direct loan is a purchase
money security interest.
(7) Problem 7 (Handout #10)In connection with problem 36 and GECC v.
Spartan Motors (p.91) consider how ONB could distinguish the facts in
problem 36 from the facts in Spartan Motors. Also contrast UCC 9-322(a)(1)
with UCC 9-324(a).
(A) Analysis
C. Perfection by Filing
(1) Review UCC Sections: These sections deal with filing a financing statement
and perfection.
A.
B.
C.
D.
9-201
9-501
9-502
9-503
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D.
E.
E.
F.
G.
9-504
9-516
9-521
9-210
9-501 [tells us where you file a f/s] filing will take place in a single
central location in the state [probably in the secretary of states office][the
idea is that when combined with electronic filing and searching, it will
reduce transaction costs]
(A) Analysis Elsinore Finance Co. is not responsible for clerk Ophelia
Nunnerys mistake in indexing the financing statement.
(4) Problem 40 ONB has a security interest in the equipment of the WCC for
which it filed a f/s on 5/1/02. ANB took a security interest in the same
collateral and filed a f/s on 5/2/01, in the same place.
(A) Problem 40A How long is the financing statement effective?
(1) Analysis 9-515(a) it is effective for 5 years. If you have a loan
with a repayment period of more than 5 years, you need to worry
about the f/s lapsing. See 9-515(c).
(B) Problem 40B If ONB files a continuation statement on 5/1/06 is its
perfected position continued. No, See 9-515(d) and 9-510(c). This problem
illustrates the problem of premature renewal.
(1) Analysis The filing of a continuous statement 5/1/06 does not
sustain its perfection position because it must be done 6 months prior
to the lapse. This is a premature renewal. It has to be renewed 6
months before lapse. See 9-515(c). Also 9-510(c) confirms f/s wont
work. But if OMB filed its continuation statement on 3/1/07 it would
work because within 6 month of the 5 year period proscribed in 9515(c).
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(5) Problem 41 Portia Moot pays her debt of $3000K to LNB for a computer she
bought for her law office [and taken a purchase money security interest
therein, for which a proper f/s was filed]. Does PM have the right to demand
LNB correct the records at the filing office. See 9-513. What if they ignore her
written demands for a termination statement? See 9-615(b) and (e)(4).
A. Analysis Portia has the right to get the financing statement out of the
file by demanding the bank file a termination statement. UCC 9-513(c),
9-5133(d). If the bank fails to comply with her legitimate request, Portia
can also file a termination statement herself under 9-509(d)(2). Moreover,
she can recover actual damages and $500 in statutory damages from the
recalcitrant secured creditor. Se UCC 9-625(b), 9-625(e)(4).
B. Note: Open Drawer Concept of file searches this means that later
searches are given absolutely everything related to the original f/s
(amendments, assignments, deletions, continuation, and terminations
statements, etc) when they do a search, so that they have complete info
as to the current status of the filed transaction. Note the definition of a f/s
includes an original filing and all related amendments; 9-102(a)(39). 9519(c) requires the filing office to index the filing under the debtors name
and the file number, and associate all related filings to the original filing.
Thus, when a later searcher request the f/s per 9-523(c), the entire file
will be forthcoming. 9-522(a) requires the filing office to maintain all
filings until at least one year after the filing has lapsed w/ respect to all
secured parties of record; 9-519(g) prohibits the removal of a debtor name
from the index until one year after lapse. When you put all this together,
you have the open drawer system where a drawer is created for each
new f/s into which all related filings are deposited.
(6) Problem 42 When lawyer SA handled a divorce for a client, he incurred the
wrath of her ex-husband, AA, president of FCLM, a group that does not
recognize the authority of the state or federal govt. The irate ex-spouse filed 42
phony financing statements in the public records showing that all of Sams
assets were security for various non-existent loan in favor of AA, the secured
party of record. What can Sam do to clear up these clouds on his title to his
property? See 9-513, its Official Comment 3, 9-518, and 9-615(b) and (e)(4).
A. Analysis Using the same sections as cited above in the answer to
problem 41, Sam can remove the cloud on his title and get these bogus
filings terminated.
(7) Problem 8 (Handout #10) The transactions involved in this problem are
similar to those described and diagramed in problem 5, Handout 8.
Specifically, on July 1, 01 GMAC, the originating institution, makes 500 car
114
loans to individuals to enable the customers to buy GM cars from various car
dealerships. 80% of these car loans (400), those to higher risk borrowers, are
secured. Each of these 400 GMAC car buyers sign written agreements
including the buyers promises to repay GMAC (the balance outstanding with
interest over time) and language conveying (to GMAC) Art. 9 purchase money
security interests in the new cars purchased with GMAC credit. Plus, these
400 borrowers execute negotiable promissory notes payable to the order of
bearer which are delivered to GMAC. GMAC and these 400 high risk car
buyers follow all required formalities under Art. 9 for attachment and
perfection. The other 20% of the GMAC car loans (100) are made to blue chip
borrower/ buyers. In these transactions, GMA makes purchase money loans
on general credit. The buyers sign sales contracts but do not sign promissory
notes or security agreements. On Aug. 1, 2001, GMA borrows two million
dollars from First Bank. GMAC signs a s/a conveying a security interest to
First Bank in GMACs rights arising from the 500 transactions with both high
risk and blue chip car buyers.
(A) Problem 8A What steps should First Bank take to ensure that it has a
perfected Art. 9 security interest in this collateral?
(1) Analysis The collateral is chattel paper; There are two modes of
perfection for the high risk borrowers: (1) possession; and (2) filing
a financing statement. For the low risk borrowers, the collateral is
payment intangible and the only mode of perfection is to file a
financing statement.
(B) Problem 8B Would your advice for First Bank be different if the First
Bank agreement with GMAC contained the following language:
First Bank does hereby deposit to GMACs bank account #3333 2
million dollars. In consideration, GMAC does hereby assign and transfer
to said bank all of GMACs rights arising from the 500 car loans
described in attachment A, including GMACs rights to receive all
payments on said loans.
(1) Analysis Here, the sale in the top tier transaction is not a loan. If
its a sale, nothing has changed with respect to the high risk
borrowers. But for low risk borrowers you may be able to rely on
automatic perfection under 9-309.
(C) Problem 8C Would your advice for First Bank be different if the First
Bank agreement with GMAC contained, in addition to the language in
problem 8(b) the following language:
Should any of the 500 obligors (the car buyers) on the 500 car loans
default w/in 6 months from the execution of this agreement, GMAC
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agrees, in further consideration for the 2 million dollars, to buy back any
such car loan at the same price paid earlier by First Bank to GMAC.
(1) Analysis These facts suggest that maybe there isnt really a sale;
if not a sale, the answers to problem 8a governs.
(8) Problem 11 (Handout #10) You are an associate in a law firm and a partner,
who specializes in real estate financing but not asset based financing, asks for
your help in setting up the following transaction for First Bank. First Bank
wants to make a $500,000 loan to LEZ so she can expand her health food
store to include both a pharmacy and a juice bar/restaurant. Part of the
collateral for the loan will be LEZs equipment and inventory. Because of the
vacation schedule of the principals, it will take several weeks for the parties to
negotiate the final terms of the security agreement and the loan agreement.
First Bank is concerned that while negotiations are on-going, LEZ might
encumber some of her property. The partner wants to know whether it is
possible for First Bank to file the f/s before the s/a is authenticated. If the
anser is yes, she also wants to know whether the UCC record search should be
done before or after the filing of the f/s. What do you think and why? See 9502, 9-519(a), 9-519(h), 9-523(c), 9-523(e).
(A) Analysis The financing statement can and should be filed in advance
of the signing of the s/a, thereby giving the bank an earlier
priority date (based on the time of filing) in some priority battles. See
UCC 9-322(a). It is usually a good idea to file the Banks financing
statement before the Bank orders the search of the index of filings.
The only way for the Bank to be sure that the search will reveal all
filings before the Banks filing is if the search reveals the Banks own
filing. This problem arises because the code gives the filing office
several days to enter an effective filing into the index. The Bank does
not want its search to miss earlier filings still in the basket awaiting
indexing. To be exact, the Banks search should not be ordered until
the third business day after the Banks own financing statement is
accepted for filing.
D. Perfection by Control
(1) Read text page 109
(2) Read Handout #11
(3) Review Problems in Handout #10
V.
A. Simple Disputes
(1) Read text pg. 117-119
116
9-326; 9-508
2-326(2)
2A-301
2A-301(7)
2A-306
Battles Between
Golden rule that says Art.9 secured creditors beat out other creditors
Deals with Art.9 secured creditor and a judicial lienor
Deals with Art.9 secured creditor and a statutory lienor with a
possessory lien
Deals with Art.9 secured creditor and agricultural lienor
The residual rule dealing with 2 Art.9 secured creditors
Deals with two Art.9 secured creditors where collateral is investment
property
Deals with 2 Art. 9 secured creditors and the collateral is a negotiable
document [the KD problem where one creditor perfects in the document
and the other in underlying goods)
Deals with 2 Art.9 secured creditors where one relies on a financing
statement that is seriously misleading but rescued under 9-508
Deals with sale on approval or sale on return
Golden rule that says the lessor wins [counterpart to 9-201]
Governs battle between true lessor and creditors of lessee
Deals with lessor and statutory lienor [remember the Mac hypothetical
in Handout #6]
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sold? If, instead, of a judgment creditors seizing the goods, Epstein files a
bankruptcy petition while ONB was still unperfected, what result?
(A) Anlaysis: Under 9-102(a)(52) a lien creditor is a creditor that has
acquired a lien on the property involved by levy. Therefore, MT is a lien
creditor. ONB is has a secured attached, but unperfected security interest.
Under 203(b): a) value was given ($10K), b) s/a; and c) debtor had rights
in the collateral (inventory). It is not perfected under 9-308 b/c ONB fails
to file a f/s. Based on the priority rules, MT wins under 9-317(a)(2)
because a security interest is subordinate to the rights of a person that
becomes a lien creditor before the earlier of the time the security interest or
agricultural lien is perfected. Here, ONB loses because it did not perfect.
(B) Alternative Hypo: If there is a bankruptcy proceeding, then another
creditor enters into the equation, and that is the trustee in bankruptcy and
under 544 of the bankruptcy code, the trustee can strong arm an art. 9
creditor if un-perfected and make them into a general creditor. Therefore, ONB
would be subordinate to MT. As between MT and the trustee in bankruptcy, it
looks like we have to lien creditors MT acquired its lien upon the levy (if
order of levy jurisdiction) and the Trustee acquired its lien upon
commencement of the bankruptcy proceeding.
(A) Problem 1(a) Does ONB or MT get paid first out of proceeds from sale of
inventory. Assume events take place in an order of levy jurisdiction
(judicial lien acquired when levy is accomplished).
(1) Analysis Octopus National Bank wins under 9-317. 9-317(a)(2)
says a security interest is subordinate to the rights of a person that
becomes a lien creditor before the earlier of the time: (A) the security
interest is perfected or (B) one of the conditions specified in 9-203(b)
(3) is met and f/s covering the collateral is filed. Here, MT gets a
judicial on 3/1/2001. Whereas, ONB gets an attached security
interest under 9-203(b) on 2/15/2001 [value and s/a on 1/3/2001;
rights in collateral 12/15/2000;], OR ONB satisfied 9-203(b)(3)
condition by getting s/a and f/s covering collateral filed on 2/15. So
under (A) or (B) the priority date is 2/15/2001 which beats out MTs
judicial lien. Therefore, ONB wins.
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make it a fairer fight if you dont allow the bear financing statement
to suffice for OMB to beat a later judicial lienor.
(C) Problem 1(c) Assume on 1/3 ONB gives Epstein money and Epstein
signs s/a covering present and after acquired inventory. On 1/10, MT
performs services on credit; 2 days later on 1/12, Epstein defaults. ON
1/15, MT files a complain. On 2/1 MT obtains judgment. The next day a
writ of execution is issued, and on 2/15 ONB files a f/s. On 3/1, the
sheriff levies on Epsteins books and sells them. All of the books seized
were in the store since 12/15/2000. These events take place in an order
of issue jurisdiction. Assume that MT knew about ONBs security interest
in the books on 1/10. Does ONB or MT get paid first after judicial sale?
(1) Analysis Martin wins; his knowledge is irrelevant in this pure
race statute. The statute was designed to avoid litigation on the
issue of knowledge. MT is still a judicial lienor and ONB is a art.9
creditor. MT becomes a judicial lienor on the date the writ was
issued 2/2. Under 9-317(a)(2)(A), ONB gets an attached security
interest on 1/3, but doesnt perfect until 2/15; and under 9-317(a)
(2)(B), ONB meets the 9-203(b)(3) condition (s/a) on 1/3 but files
on 2/15. Either way, ONB loses.
(D) Problem 1(d) This is a more realistic case than in problem 1(b).
Everything is the same as in problem 1(b) except that on 1/3/2001,
Epstein signs a s/a, but ONB does not give Epstein the loan proceeds or
even make a commitment to extend money; instead, the loan proposal and
docs are sent to ONBs Loan Approval Committee for further review. On
32/2001, the loan is approved (ONB does not know about MTs levy) and
Epstein receives the money. Does NOB or MT have the senior claim to
inventory in the hands of sheriff?
(1) Analysis The collateral is still Es inventory. When does MT get
its judicial lien on 3/1 (upon the levy). No art. 9 security interest.
What about OMB [notice a s/a is signed before the loan is
extended] it gets an attached security interest on 3/2 [Rights in
collateral 12/15; s/a 1/3; value 3/2]. When did they perfect? For
perfection, you need not just the notice giving act but also
attachment, so not until 3/2. Who wins? 9-317(a)(2) what is the
earlier of the two dates? (a)(2)(A) perfection 3/2 or (a)(2)(B) 9-203(b)
(3) one of those conditions met and filing done [9-203(b)(3)
satisfied 1/3 b/c s/a signed and filing done on 2/15] so the earlier
of two dates is 2/15. Therefore, OMB wins. Notice opposite result
from problem 1(b).
(2) New Addition: 9-317(a)(2)(B) is the new provision. And it makes it
easier for the Art. 9 secured creditor to win. It is a very Art. 9 pro
secured creditor rule. Do you think the new Art. 9 priority rule is
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(A)
(B)
(C)
(D)
(2) Policy Is it fair to Harriet (the tort victim). She is not a voluntary
creditor like MT. She is an involuntary creditor (we should have
more empathy for Harriet than MT since she is an involuntary
creditor and has no choice in getting the security agreement]. Look
what happens to Harriet, she first becomes an involuntary creditor,
and then the debtor Epstein enters into two voluntary transactions
which diminishes her opportunity of recovering on her claim. Here
is Epstein giving ONB a floating lien on all present and after
acquired inventory; moreover, he takes money from his account and
converts it into rare books and these rare books are covered under
ONBs security interest. Harriet doesnt get a say in those
transactions, and Epstein has every motive to favor OMB. Is this
rule really favor? How can we make a better rule?
(3) What about super priority for tort victims with judicial liens will
beat out Art. 9 secured creditors. So what will you as a creditor do
before you loan money to Epstein ensure there are safe working
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consignments are in Art. 9, they are swept in. How do you know if
the there is a purchase money security interest [if there is no
purchase money security interest they lose under 9-317(a)(2)].
But, under 9-103(d) it tells us that it is a purchase money
security interest. Therefore, under 9-317(e), HS wins because
there is a 20 day grace period for filing for purchase money
security interests.
(4) Problem 51 (p. 118) CTA used its accounts receivables as collateral for a
loan from the MSB, but the bank failed to file a f/s. 6 months later, CTA
needed another loan and applied for one from BNB, which searched the files,
discovered there was no f/s recorded for CTA as debtor, and took a security
interest in their accounts receivable. BNB did not file a f/s in the proper place.
Which Bank has the superior interest in the collateral?
(A) Analysis Bentham National Bank wins. The author refers you to an 9317 official comment 3 to answer this question. Where is the statutory
support for this conclusion?
9-322 states general rules for determining priority among conflicting
security interests and refers to other sections that state special rules of
priority in a variety of situations. The security interests given priority under
9-322 and other to which it refers take priority in general even over a
perfected security interest. A fortiori they take priority over an unperfected
security interest. Paragraph of (a)(1) of 9-317 so states.
Under 9-317(a)(1) a security interest is subordinate to the rights of a
person [here BNB] entitled to priority under 9-322. 9-322(a)(2) A perfected
security interest or agricultural lien has priority over a conflicting
unperfected security interest.
(5) Problem 2 (Handout #12) Security interest in promissory notes [quasi
intangible property, which is part of subcategory of instruments]. Various
large commercial customers of CTA give them promissory notes in payment for
services; the notes are negotiable. See 3-104. On 1/3, CTA gives MSB a
security interest in the notes in exchange for a loan. As part of the loan deal,
CTA promises to deliver the notes to MSB w/in one week after the CTAs
receipt of the MSB loan proceeds on 1/3; CTA explains it needs time to collect
the notes from the safe deposit boxes at a number of branches of FUB. CTA
never delivers the notes to MSB. On 1/8,CTA engages in double financing and
gives BNB a security interest in the same notes in exchange for a loan. BNB
also insists on delivery of the notes and CTA promises to deliver the notes
w/in 1 week of receipt after receipt of BNB loan proceeds. CTA also does not
satisfy this delivery development. On 2/1, CTA defaults on both loans. Which
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creditor has the senior lien on the notes, which remain in CTAs safe deposit
boxes on at various branches of FUB at time of default?
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creditors. The filing for FNB is 9/25 so they beat out SSB. This is a
case where anticipatory filing works.
(2) Policy Do you like this priority rule (is there secrecy)? From SSB
standpoint, is there notice? It will find the f/s. If you represent SSB,
what more would you like to know whether to extend the credit
[what can you find out on 10/2]? You call FNB and want to know
how much they are going to loan the debtor; all you know is there is
a potential relationship that may occur that may involve the
collateral you are looking. Because you are unsure about this other
relationship, SSB will charge a high interest rate close to general
creditor rate because of the possibility that there may be an earlier
lien on the collateral? Some think this is a bad result because in
effect it gives FNB a situational monopoly on the opportunity to
extend credit in the future; no one can compete with FNB because
no one has the information; thus they will have to charge a higher
rate. There are a lot of reasons why the debtor may want to have an
exclusive relationship with one bank; but should the law require no
choice. Assume the exclusive bank starts putting more honerous
provisions on the debtor, at that point SSB may be able to compete;
but SSB will require the debtor to pay off the debt; Thus, the result,
is the debtor now has an exclusive relationship with another
problem. These are the problems with anticipatory filing it gives
a bank situational monopoly. It makes no sense because it gives no
notice.
(B) Problem 3(b) Everything is the same as above except that on 9/25,
FNB takes possession of JEs encumbered inventory. Which bank has the
senior lien? Why?
(1) Analysis Second State Bank wins. Early bird taking of possession
has NO impact on the application of the second sentence of UCC 9322(a)(1).
(C) Variation of Problem 3(b) Everything is the same as in 3(a) except before
Nov. 10, FNB receives a copy of SSBs s/a and f/s. Which bank has the
senior lien?
(1) Analysis Although First National Bank has the last clear chance to
avoid the priority battle, actual knowledge is not taken into account
under 9-322(a)(1) and, accordingly, First National Bank wins. Why is
knowledge ignored?
(D) Problem 3(d) Everything the same in problem 3(A) except there is a
third creditor and some of the dates are different. JE signs only the SSB
s/a on 9/1; JE signs the FNB s/a on Nov. 10, immediately before he
receives the loan proceeds; and on 10/15, Walmart, which has won a
judgment against JE for failure to pay for a $15K credit purchases, has the
sheriff levy on JEs inventory. These events occur in an order of levy
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jurisdiction. The inventory is not worth enough to pay all three creditors in
full. The sheriff sells the inventory. In what order should the sheriff
distribute the sale proceeds?
(1) Analysis:
a.
SSB v. Walmart: Walmart has a judicial lien on 10/15; SSB
has an art. 9 security interest that attaches under 9-203(b)
[s/a 9/1; value 10/2; rights in collateral ?] assume 10/2 and
perfection occurs on 10/2. Under 9-317(a)(2), SSB wins
because it perfected before OR met 9-203(b)(3) condition and
filed before Walmart.
b.
c.
(A) Problem 4(a) Everything is the same as in problem (3)(a) except that
when JE goes to the banks he offers as collateral the 100 shares of stock
that he keeps in his account at AGE. Both banks describe the collateral in
their s/a and filing statements as 100 shares of Intel stock in the Debtors
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entitlement holder; but MR. Astors lawyer may seem more neutral
(like a bailee) if that is the case, then under 8-106(d)(3) to see if
there is control another person has control of the security
entitlement on behalf of SSB and acknowledges that it has control
[need to know if the lawyer acknowledges control]. So there will be
control either under 8-106(d)(1) or (3). The outcome of priority is
(D) Problem 4(c) Everything is the same as in (4)(a) above except that SSB
does not file a f/s. JE does not like the idea of transferring the stock into
SSBs brokerage account at AGE. Instead, JE proposes that SSB send a
letter to AGE, consigned by JE, notifying AGE that SSB holds a security
interest covering the 100 shares of the Intel stock out of JEs brokerage
account during the loan repayment period w/out the written consent of
SSB. IF his procedure is followed, who wins after JEs default?
a.
Analysis Does SSB have a perfected security interest? No, under 8106(d)(2) is the only possibility, but they have not become the
entitlement holder, and no other person with in the meaning of (d)(3),
so the only possibility is a tripartite agreement, but what is missing
[who has to agree? The securities intermediary has to agree here the
debtor, SSB agreed but not AGE and that is a fatal mistake for SSB,
which means they have an unperfected attached security interest,
which means they will lose against FNB and the trustee in
bankruptcy. Why does the intermediary have to agree? They handle a
lot of buy/sell orders and they need time to enter the system to punch
in instructions to obey SSB orders not FNB.
(E) Problem 4(d) Everything is the same as in (4)(a) above except that SSB
does not file a f/s. JE does not like the idea of transferring the stock into
SSBs brokerage account at AGE. Instead, on 10/2, a 3 party agreement is
executed by JE and representatives of AGE and SSB which provides, in
pertinent part: (1) that the stock will not at this time be transferred out of
JEs brokerage account; (2) that AGE will comply with all entitlement
orders originated by SSB w/out further consent by JE; (3) that so long as
the Stock remains in JEs brokerage account, JE (as well as SSB) will
receive monthly statements from AGE and AGE will send all dividends and
proxy statements to JE; and (4) that during the loan repayment period,
JE, with the consent of AGE but w/out consulting SSB, may substitute a
security entitlement of IBM stock (of equal market value at time of
substitution) for the 100 shares of Intel stock. Which bank wins the
priority battle when JE defaults on both obligations in December?
(1) Analysis: The collateral is classified as investment property under
Art.9, more specifically [100 shares of stock in AGE] and under
Art. 8 its a security entitlement. FNB gets an attached security
interest under Art. 9-203(b) [value 11/10, rights collateral 9/1; s/a
9/1] on 11/0. Did FNB perfect the right mode of perfecting a
security entitlement filing will work under 9-312; so its perfected
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(2) Policy: It seems contradictory to have two parties have control of the
security interest. Clearly FNB is first on the fault of AGE not
carefully checking. FNB will not only sue J, but also AGE on the
theory that they should check. But the court suggests that this isnt
AGEs problem its not per se negligence. So if you represent SSB or
FNB and want to protect against this result when get the tripartite
agreement you bargain for protections against this result (e.g., AGE
has searched his files and doesnt know of any earlier third party claim
to this security entitlement; AGE has not signed an earlier tripartite
agreement; and AGE will not sign any future control agreement to this
account]. W/ this language, then FNB could sue AGE.
(9) Handout 12A: Why Allow Secured Transactions?
(a) Why do we allow secured transactions?
(1) Hypo: Assume J is the debtor, and in effect, by entering a secured
transaction, has entered into a K with Creditor #1. That K is
embodied in the s/a and f/s. Its a private deal and the effect of J
entering into this secured transaction w/ Creditor #1, is that J and
Creditor #1 demote the claims of Creditor 2, 3 , and so on all these
future contestants. They are not parties to the deal, but the effect of
the transaction is to demote the claim of strangers to the deal. Why do
we let people do this? Or is this the wrong question Should we
disallow secured transactions? Is there a principal basis for
saying we dont want J and creditor #1 by private agreement to
demote claims of strangers to the deal?
a.
b.
3 Rationales:
1. Secured transactions are unfair this deals with the question
of whether you feel sorry for the other creditor. Its not
unfair if you have an adequate notice system. Dont feel sorry
if there is an opportunity of notice. But there are deficiencies
in notice in Art. 9. We saw when there is a change in the name
of the debtor, theres a problem with notice; Anticipatory filing
little notice given; true lessors dont give good notice; 9-309
(automatic perfection) dont provide notice. But all these
problems could be fixed if we had the will. Do you feel sorry if
there is notice? NO, there are lots of strangers to Ks who are
hurt by the fact that 2 parties make a deal. Example I want
to sell my horse, and you offer $10K and sister offers $15K.
You sell it to me, my sister is hurt because she offered a better
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2.
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c.
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(A) Problem 3A: Bill buys 1 $2,000 sofa and puts it into the apt. he will live in
as manager.
(1) Analysis: The sofa is consumer goods and if the contest is joined on
6/30, Sophy wins.
(B) Problem 3B: Bill buys 10 identical $200 sofas and tells Sophys sales clerk
he intends to place them in furnished rental units.
(1) Analysis: The sofas are inventory and if the contest is joined on
6/30, Sophy loses.
(C) Problem 3C: Bill buys 1 $2,000 sofa and places it in the clubhouse for the
apt. complex.
(1) Analysis: The sofa is equipment and if the contest is joined on 6/30,
Sophy loses.
(4)
Problem 4 (handout #14): On 9/1 MI borrows $100K from VSB to expand its
dining facilities. MI gives VSB a perfected security interest in all of its present
and after acquired equipment on 9/1. On 9/30, MIs agent, C, locates a
computer (to keep track of accounts) at Track. She explains to the salesperson
that although MI wants to purchase a computer, it first wants to use the
computer for a trial period before making a final purchase decision. Track
agrees. On 9/30, an agreement is executed giving MI temporary possession of
the computer selected by C, but reserving title in Track. MI is given an option
to purchase the computer at the end of a 30 day trial period. During the trial
period, MI is to pay a reasonable rental per day for the use of the computer.
The computer is delivered to MI on 10/1. ON 10/30, MI decides to purchase
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(C) Problem 4C: Assume on 9/30, MI signs a lease for the computer but the
transaction is in fact a disguised installment sale. On 10/30 MI decides to
exercise its option to purchase the computer. On 10/30, C executes s/a
(describing the computer as collateral) and a f/s prepared by Track. If
Track wants to be senior to competing creditors including VSB, how much
time does it have, if any , to file a f/s?
(1)
Analysis: Tack wins if it files w/in 20 days after 9/30. 1-201(37), 9324(a).
(5) Handout 14A: Margin Loans talking about the events on 6/8 when L goes
to AGE and requests a margin loan. How does a margin loan work? The first
thing you need to know is that AGE cannot loan more than of the purchase
price because (federal law says so) of the stock crash where stock lost its value
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very quickly [L is trying to use her stock to buy more stock]. So, L will have to
put forth half the purchase price. Under the Margin Loan Agreement (see
Handout 11 for e.g.) there is a margin maintenance requirement (a.k.a. debt
collateral ratio). The debt collateral ratio required is 65%. When she gets the
100 shares her debt collateral ration is 20%, but that changes quickly when
the market drops and the interest accrues daily. Now, Ls Debt collateral ratio
is 98.2%. And under the agreement, AGE can make a margin call, which
means that L has to contribute cash or stock to bring the account back in the
margin. Realistically, AGE would make a margin call way before this happened.
But, what does L have to do? Get back into the margin, she has to come up
with $1825 to get into the maximum. But that doesnt solve her problem
because the interest is accruing everyday. So its highly unlikely that she will
be able to meet the margin call. This is what happens when you borrow
against stock and the stock falls. If L cant meet the margin call, there is a
default event and she has to repay the loan. AGE is a secured creditor and
thus under 9-609, 610 foreclose and sell the stock at a bargain basement
price that created the problem; So L would have to liquidate virtually her
entire portfolio locking in her losses because of the drop to pay back the loan.
Critics of Margin Lending: This result floods the market with supply, forcing
the price of stock even lower [the same thing happens on the way up if
collateral becomes more valuable and prices are inflated, she can borrow more
on the margin and buy more stock at a higher price, driving prices higher].
This is how margin lending exacerbates market fluctuation.
Why Does AGE Make Money on Purchases of Stock on the Margin: Profit
from the interest rate, commissions on the purchase of stock (when L buys it),
if L sells it, they get a commission on sale; also, under Art. 9 AGE can buy the
stock themselves in the foreclosure sale under (9-609(c)). So, AGE can hold it
until the market improves. This is why AGE makes the margin loans and this
is why it is the most common form of secured purchases of common stock.
This is high risk purchasing for borrowers.
(6)
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security interest
MCA replies to Bs email and objects
12/12/00 Delivery [H receives clothes]
(2)
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(4)
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1/1/02
Clothes delivered to H
12/31/05
1/1/06
Clothes delivered to H
(7)
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VB
HO owes $500K
Holds a perfected floating lien covering all past, present, after
acquired inventory and accounts of HO
Value of collateral is 400K
Notes: Notice the security interest is under collateralized (the debt is worth
more than the value of the collateral). Assume these dates:
3/00 VB f/s; s/a; value
3/10/01 paperwork
3/15/01 HO purchase
4/1 HO
Notes: To get into 9-324(b), SLFG needs a purchase money security
interest. So start with 9-301 how can you be sure you have a
purchase money security interest. Look at 9-103(g), SLFG will have the
burden of showing it is a purchase money security interest. Also need to
look at 9-103(a)(2) looking at the purpose of the lender in making the
loan (if value so in fact used). Need to worry about two issues with respect
to making it clear that you have a purchase money security interest (1)
spell purpose out in the S/A and Loan agreement (that the $ is for
purchasing these goods) and (2) [how do you ensure the $ is used for that
purpose] you could do a joint proceeds check (with the debtor and
sellers names).
Now you go to 9-324(b). How do you satisfy this with respect to the
clothes? Look at (b)(1) the term when means before or when (advice: file
before attachment at an earlier time; before debtor receives possession; of
course notification has to be received before same moment under 9324(b)(2)). You want to have all the requirements done in 9-324 before HO
purchases the clothes. How will you know when HO will purchase the
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clothes and get possession. How do you control timing? Dont give HO the
money until all the paper work is done (the filing, the notices, etc). This
will prevent SLFG messing up on the timing. Say you do all this, is there
still a problem created by the acts just suggested above? What about VB
when they get the notice? If there is an acceleration or default clause in
the S/A, VB will declare default and this is a real problem for SFLG
because they have to deal with the debtors collateral in bankruptcy
proceeding.
Look: (1) SLFG can follow the code and end up w/ the situation above; (2)
It can say to HO, VB needs to be at the table (maybe no loan made); OR (3)
dont send the notice to VA bank. If you really think HO is Ok for the short
term, you dont need priority over VA Bank (you are taking a risk that you
will be second in time (problem 5(B)), but if you think they can repay, VA
bank will never know). The cost of getting priority (notification to earlier
creditor) may be too great. That is exactly the result the drafters wanted
because they wanted to break up the mini monopoly the earlier creditor
had, but imposing minimal protections.
(8)
Problem 8A: MDNB gets attached and perfect on 4/2; Std. Auto gets attached
and perfected on 4/2. They both have attached perfected pmsi, under 9324(g)(1), the vendor is favored over the outside lender. Std. Auto wins.
Notes for 8A: Does it matter who wins, because the collateral is worth
$30,000, and the 2 creditors should be able to get their money in default; but
what about the issue of bargain sales at foreclosure, expenses, interest,
depreciation. So, priority does matter. 9-324(b) does not govern this battle
because it deals with cases you have a purchase money security interest v.
another type of creditor. 9-324(g) deals where you have 2 purchase money
secured creditors that have super-priority under (a), (b), etc Std. Auto wins
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under (g)(1). This section is referred to as the vendor preference rule; The
seller gets preference over the outside lender.
Problem 8B
3/28 MDNB loans $15,000 (11:00)
No notification sent
F/S filed (11:30)
H borrows $15,000 from CF (2:00 PM)
S/A and F/s (2:30)
CF sends notification to MDNB, which is received that day
H signs sales agreement with Std. Auto purchasing $30K of inventor
(4:00 PM)
No security interest, because H paid in full
4/2 Inventory delivered
Problem 8B Analysis: Under 9-324(c), subsections (b)(2) through (4) do NOT
apply to MDNB because they perfected by filing before CF. This means to
satisfy 9-324(b), MDNB only has have a perfected purchase money security
interest when H receives the collateral, which is true. As for CF they also meet
9-324(b) requirements for priority. So we go to 9-324(g) 9-324(g)(1) does
not apply because both security interests secure enabling loans [No vendor in
this problem] But 9-324(g)(2) applies, which brings us back to the residual
rule of 9-322(a)(1); therefore MDNB wins because the filed before CF.
Problem 8C: MDNB wins because there is no conflicting purchase money
security interest that qualifies for super priority under 9-324(b)(1). Only
MDNB satisfies (b), so they win. Under 9-322(a)(1), MDNB would also win.
But the better priority rule is 9-324(b).
Std Auto: Attaches on 4/2, but perfects 4/3. Under 9-324(C)(1), (b)(2)
through (4) applies because MDNB filed before Std. Auto. But Std. Auto does
not meet (1), which means they dont qualify for super priority, which means
9-324(g) doesnt apply.
MDNB: Attached and perfected on 4/2. Under 9-324(c)(1), (b)(2) through (4)
does NOT apply because MDNB filed before Std. Auto. This means that they
only have to satisfy (b)(1), which is met.
Policy Reason for the Chart: Notice that these three rules were employed under
old Art. 9 depending on the jurisdiction you were in. Notice the vendor
approach rule is the rule adopted by the new Art. 9. Look, the most neutral
rule is the equitable rule; the residual rule favors the outside lender whereas
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the vendor preference rule favors the seller. Which approach do you like the
best in terms of policy?
Equitable Rule: Its the best rule. If you agree there ought to be super
priority for purchase money secured creditors, the equitable rule is the
fairest. It doesnt matter whether the creditor is an outside lender or
seller. They are both critical players for H being able to buy auto parts. If
you dont like its pro rata formula, since each creditor will know of their
existence, they can bargain for another rule. So this is a good starting
point.
Vendor Rule: Look at page 1138. The quote the Restatement of Real
Property. So the vendors hazard of losing real estate previously owned is
greater than the lenders hazard of being unable to collect from its
property interest in real estate. In other words, the hazard faced by Std.
Auto (its risk) they risk losing property (e.g., auto parts) if the debtor
defaults, and that loss is different from MDNBs loss their loss is
money (it risks not getting the money back). The Drafters distinguish it,
but common sense makes it hard to distinguish. Maybe it works well in
the real estate world loses real property (b/c of the uniqueness of the
property) v. money. But when you are talking about auto parts, the
rationale doesnt translate. Under this rule, you need two priority rules.
Because there may be a situation where both creditors are outside
lenders, which sends them back to the residual rule. If you are serious
about encouraging purchase money security interest, there is a problem
with 9-324(g)(1) and (2).
3 Possible Approaches to Resolving the Priority Battle Involving 2
Purchase Money Secured Creditors In Compliance w/ 9-324(b)
[The Table Explores the Policy Reason for 9-324(b)]
Case I
$20,000
Liquidity Value of the Collateral
M Bank: Loan Balance Outstanding $15,000
Standard Auto: Credit Balance
$15,000
Outstanding
Residual Rule: 9-322(a)(1)
(a) Recovery of M Bank
$15,000
(b) Recovery of Standard Auto
$5,000
Equitable Rule:
(a) Recovery of M Bank
$10,000
(b) Recovery of Standard Auto
$10,000
Vendor Preference Rule: 9-324(g)
(1)
Case II
$10,000
$16,000
$4,000
$10,000
$0
$8,000
$2,000
149
I.
$5,000
$15,000
$6,000
$4,000
Residual Rule: 9-322(a)(1) governs, and MDNB because first in time to file
3/28 (11:30).
Status of MDNB: MDNB obtains an attached purchase money security interest on 4/2
because debtor does not have rights in collateral until 4/2. MDNB perfects not until
4/2 because under 9-308 you need attachment to perfect.
Under 9-322(a)(1) MDNB relevant dates are 3/28 (11:30) filing and 4/2 (perfection)
Status of Std. Auto: Std. Auto obtains an attached purchase money security
interest on 4/2; And perfects on 4/2
Value is given on 3/28 [K right] (2:00 P.M)
Debtors Rights in Collateral on 3/28 (2:00) [if goods identifiable in sales K]
S/A on 3/28 (2:00 PM)
Perfection [Filing] on 3/28 (2:30)
Under 9-322(a)(1) Std. Auto relevant dates are 3/28 [filing] (2:30) and [perfection]
(2:00)
II.
C1 = $15,000
$30,000 (15 +15) = ($20,000) = $10,000
C1 = $16,000
$20,000 (16 +4) = 4/5 ($10,000) = $8,000
C2 = $15,000
$30,000 (15 +15) = ($20,000) = $10,000
C2 = $4,000
$20,000 (16 +4) = 1/5 ($10,000) = $2,000
III.
150
Recap on Policy: In most of the cases where you have 2 purchase money secured
creditors, they will know about each other and bargain. So the priority rules will rarely
come up. The vendor rule makes sense because the vendor is not in the business of
loaning money; it means that it is less likely to gage the risk in the transaction, protect
themselves, and spread the risk if it suffers the loss as contrasted to the OUTSIDE
lender, which tends to be an institutional creditor. SO it makes sense to put the loss,
the default rule, on the one who can better protect themselves the institutional
lender. But the teacher says the equitable rule is the better rule.
(9)
151
to the instructions, but they can make mistakes. Option 1 is in the middle
because you trust your tellers better than LNB.
Future Priority Battles: Handout 14B provides hypothetical.
D. Priority Battles Involving Deposit Accounts As Original Collateral
1.
2.
152
their customers just like securities intermediaries to their customers. So, the
outcome suggests the tripartite method is the worst option because will lose in
priority battles.
3.
Case III IB becomes the customer on the LNB bank account method of
control. 9-104(a)(3).
D. Priority Battles Where One Claimant Purchased the Collateral From the Debtor
This is an entire new subject [these our battles between Art. 9 secured
creditors and buyers of collateral on the other side]. Previously we focused
on 2 secured creditors.
1.
2.
153
you warranted I was getting a good title to the TV, but in fact it is
encumbered in a prior security interest].
Methodology for Battles between Buyers and Creditors:
1. Classify the collateral
2. Status of both contestants
a. Secured Creditor: attachment and perfection
b. Buyer: make sure the person is a buyer [sometimes not clear she
may be a general creditor a financing purchaser]
3. Priority Rules Start with 9-315(a)(1)
a. 9-315(a)(1) a security interest (here ONB) continues in the
collateral (the TV) notwithstanding sale [so the security interest
continues in the original collateral as it goes from the debtor to the
buyer] unless the secured party authorizes the disposition free of the
security interest. If ONB authorized the sale free of the security
interest, end of story. Betty owns the TV free and clear. There is no
priority battle and Betty has no personal liability to ONB [she doesnt
become bound like under 9-203(e). ONB cannot go after purchasers
of collateral or individuals getting it as a gift if they authorize the sale
or transfer. The security interest is extinguished when the secured
creditor authorizes the sale or transfer.
b.
c.
There are buyer protection priority rules that are triggered if the
secured party did not perfect the security interest [NO notice
given]. 9-317(B) is a good example of this type of buyer protection
priority rule [but it must be a sale out of trust].
2.
There are buyer protection priority rules that are triggered even
though the secured party did everything right. For example, focus
on the nature of the collateral [different rules for stock,
instruments, consumer goods]. We look at expectation of buyers;
the ability of the secured party to prevent the unauthorized sale.
These factors are relevant in the analysis.
a. 9-320 buyer of goods
b. 9-330 buyer of instruments (plus Art. 3)
154
a.
155
the amount of the money you would like the consumer not to have
a burden of inquiry because of the consumers expectation of
getting the goods free and clear.
b. Case II [Handout 15a] this is a case about a sale out of trust. ONB
might be nervous about the debtors business practice you can sell TVs
on credit only if the customers pay 50% down. It is a way of monitoring
risk improving the debtors business practice. [This explains how a
retailer can sell out of trust]. Say Debtor sells the TV to Betty with only 5%
down this is a sale out of trust. ONB can also establish a debt-collateral
ratio. This time how does ONB collect. Under 9-315(a)(1) ONB has a
security interest in Bettys TV and the proceeds, the money in debtors
hand. So it can collect from two sources. This is assuming there is no
special buyer protection priority rule.
1.
c.
Hypo: Betty hangs out at a bar and there is a TV in the Bar. Betty
asks what happen to the old TV? The bar asks Betty if she wants
to buy it. She buys it and brings it home. Later she gets a letter
from ONB and it states that they have an attached and perfected
security interest on the TV and the Bar defaulted on its loan; and
we want the TV. Assume this is a sale out of trust. Also assume
under 9-201(a) ONB will win UNLESS otherwise provided. So the
issue remaining is whether Betty can get protection under 9-320?
Bettys expectation is the same as the hypo above. To qualify
under 9-320(a) Betty must be a buyer in ordinary in the course
of business [1-201(9) on page 1267 which defines this
term as the buyer in good faith and doesnt check the Art. 9
files and in the ordinary course, not a pawn broker, and in the
business of selling that good. Here, the bar is not in the
business of selling TVs, rather they sell beer and food. Here the
seller is not in the business of selling these goods. [Controversial
Cases Rent-a-Cars who sell some of their cars rather than rent
courts split on whether they qualify as a person in the business
of selling the cars rather than only leasing. Bottom-line: Should
Betty win in this case? If Betty loses, she is left with a law suit
against the bad actor, the bar.
Case III [Handout 15a] You can have an authorized sale, but where ONB
says the collateral passes to the third party subject to their security
interest. This comes up where the debtor is a wholesaler and Betty is a
retailer (2 businesses involved.) SO you have a tripartite agreement where
everyone agrees that the security interest continues with the sale. So ONB
can go against both under 9-315(a)(1) collateral and (a)(2) proceeds of
collateral.
1. Hypo: ONB providing inventory financing to debtor. Here the buyer
is a multi-million dollar corporation that runs assisted living
156
Analysis: First thing you do is read the s/a to see if the sale was
authorized. IF you can find a way to construe the agreement as
authorizing the sale, then Bart is OK. But assuming it is out of trust,
then the security interest continues in the vendors cart into Barts
hand under 9-315(a). There may be another attack check the state
law on certificate of title; but lets assume there is proper perfection. So
go to 9-320 can Bart win? 9-320(b) doesnt work because not
consumer goods rather its equipment in the buyer and debtors hands.
Here, Bart loses.
Policy: Should Bart lose?
157
e.
How do we Rationalize the Results From Case I to Case IV: In case I and
III, the corp. and consumer win irrespective of the amount and whether
they are a consumer or corp. In case II and IV, the consumer and
proprietor lose. It is a VERY big deal if you lose the collateral because then
the person is out of money and the good. What were the drafters doing?
The drafters are trying to protect retailers and wholesalers who sell
these types of goods in the ordinary course. The notion is
[encouraging commerce} you want whether individuals or corps. When
they go to buy from people in the business to not have to endure the
transaction cost of checking to see if there are earlier liens and that
promotes commerce. This raises 2 questions: (1) do we need
consumer protection in addition to this; and (2) do you think in the
case of corporate buyers (who have lawyers) ought to have the same
protections as consumers (if they are the least cost avoider when the
secured party has done everything right).
If the creditor is an institutional creditor, institutional creditors may be
better gauging risk, but what if the creditor is a wholesaler, who is not in
the business of loaning money. Another problem with 9-320 should we
analyze on a case by case the buyers reasonable expectation this
approach may result in more just outcomes but there is a shortcoming
and that is it is not a very certain rule and makes it difficult for creditors
to gauge the risk of unauthorized sales and increase litigation. Another
approach may be to separate buyers the Code approach: if buy from
someone in the business then you are protected or another approach
monetary cap or you can separate types of goods. Unfairness can arise
from each of these approaches.
f.
Problem 66(B): Would make a difference if Betty knew about the security
clause. Here are 2 different scenarios:
1.
Case I: Betty walks into the TV store and the owner tells Betty that
there is a lien on the store and backed by his mortgage. Under 9320(a), would Betty win? Look at 9-320(a) it says takes free of a
security interest even if security interest is perfected and the
buyer (betty) knows of its existence. So even though the owner
notifies Betty that everything is encumbered, Betty wins.
2.
Case II: Betty walks into the TV store and the owner says he just got a
loan from ONB and they have a lien on the entire store. Betty asks the
owner she would like to see the s/a? Betty discovers that if she buys
the TV at the discounted price that would violate an express term of
the s/a. But, Betty buys the TV and the debtor defaults. ONB asks
Betty for the TV. In this case Betty loses because she learned that
the sale violated the terms of the s/a and Betty is no longer
considered a buyer in the ordinary course when she knows the
158
Case III: What about the corp.? You want to be willfully blind you
dont want to inquire [totally contrary to the way we treat creditors
in priority battles]. Here the best advise you can give a buyer in
the ordinary course is Dont Ask.
POLICY: Is that the rule you want dont ask? 1-203 and 1-201(9) you
need to act in good faith. But the very intention of 9-320(a) says
even if you know of the existence, you win. Personally, should be
trouble with the case II and IV that they lose and in III the corp. wins.
[think about these four scenarios and the policy possible exam
question].If you are buying from a person in the business, then there
is no burden inquiry.
4.
3.
Hypo: Assume the loan goes to the debtor and then debtor sells the
cart to a broker for money and then the broker sells the cart to broker.
Assume the broker is in the business of selling carts. Go to 9-320(a)
says now Bart is arguably a buyer in the ordinary course of
business the buyers seller here the security interest was not
created by the buyers seller, it was created by the debtor. So, 9320(a) wont help Bart. In fact there is nothing in Art. 9 that will
protect Bart on these facts and if it is a sale out of trust Bart will lose.
9-320(a) is limited to the protections of the sellers financier.
Problem 1 (Handout #15) Chart [stems off case II of Handout 15a] this is
the case where there is equipment financing and there is a sale out of trust
and there is no question that Betty will lose because the bar is not in the
business of selling Tvs, and thus she is not a buyer in the ordinary course of
business. This problems explores in real numbers the consequence of these
rules to Betty.
Priority Battles Where One Claiminat Purchase the Collateral From the Debtor
Case I
Case II
Overcollateralized
Undercollateralized
Balance Owned by ONB by Bar
Value of System Sold to Betty
(What Betty paid)
ONBs Recovery At Foreclosure Sale
[After Expenses]
Proceeds From That Sale To ONB
Proceeds From That Sale To Betty
Recovery if Betty sues Bar (and Bar is
Non-Judgment Proof)
$5,000
$10,000
$12,000
$10,000
$7,000
$7,000
159
9-615(d) (pg. 1237) talking about a surplus (the extra $2000); secured
party shall pay the debtor for any surplus. Remember under the New Art. 9,
debtor means the person who owns the collateral; and obligor means the
person who owes the obligation. In almost all cases weve seen, weve used the
term debtor for both. This is not true here. The debtor (owner) is Betty and the
obligor (owes the money to the creditor) is still the bar. So there are two
different people. And you would rely on 9-615(d) for support for giving the
$2000 to Betty.
b. Second Chart, the only question is what should Betty do as the losing
party. There are 3 options: (1) Betty can turn over the collateral; (2) Betty
can refuse to turn over the collateral and force ONB to sue her; or (3)
negotiate with ONB for a compromise.
1.
b.
Result Column II: Betty loses $8,000 [$10,000 2,000]. She does
better here when she surrenders the TV. There is a $3,000
difference [8,000 5,000]. What happened to the $3,000 of value
its the loss in the foreclosure sale [the FMV of the TV was
$10,000 but it only brought in $7,000 in a liquidation sale]. Who
got the $3,000 windfall whoever bought the TV at the
160
ONB Under-Collateralized
Case II
Betty voluntarily
surrenders the TV at
ONBs request (same as
case I on chart above)
Bettys loss, if any, in the
initial transaction with
the Bar:
Case III
Betty keeps the TV
and is sued for
conversion by ONB
$0
$0
$0
$0
$10,000
$10,000
$5,000
161
Case IV
Betty voluntarily
surrenders the TV at
ONBs request (same as
case II on chart above)
Bettys loss, if any, in
the initial transaction
with the Bar:
$5,000
4.
____________
__________________
$10,000
$10,000
How is this case different from the cases above? Betty hasnt taken
possession or paid the full price yet. What has she done by 11/16
(when debtor defaults on the ONB loan thats the critical time
when the contest begins)? She signed the contract arguably
under 2-501 the car is identified in the contract does Betty
have title to the car by 11/16? Where would you look for title? NO,
if there is a certificate of title in existence, she doesnt have it and
under 2-401, Betty doesnt have physical possession of the car
the car is in the possession of the dealer to the bank. So the
question is if you are a buyer [this is same problem in 66(d)]
and signed the contract and car identified and dont have title
or possession, can you be a buyer in the ordinary course in
that car and cut off the rights of the earlier secured creditor
under 9-320(a)?
If Betty is NOT a buyer (b/c she didnt close the sale), what is
she? She is a general creditor for the 75% she paid down
+ any damages she suffered for getting a substitute. She is
NOT a secured creditor because she doesnt have a s/a
whereby specifying the dealer as the debtor. Here, betty is a
financing purchaser how far do you have to go to be a
buyer is she a buyer or a general creditor. If she is a buyer,
she wins; if she is a general creditor, she loses.
2.
162
2.
2-501 tells us when the legal event of identification occurs. 2501(1) must be construed with 2-105(2) its major purpose is to
tell us what a buyer gets when the legal event of identification
occurs. (2) says the buyer obtains a special property and
insurable interest in goods by identification as a matter of law of
existing good. This means a property interest (consistent with
2-105(2) first sentence) it tells us this what a buyer gets. In the
absence of an explicit agreement, identification occurs when (1)
when the K is made if for the sale of goods already existing as a
matter of fact and identified as a matter of fact.
a.
Problem 2(c): On 11/1 the jeep is future good because its not
in physical existence. Does Betty get a property interest
under 2-501(1) on 11/1? NO, because it only happens w/
163
164
Should the creditor be worried? Yes, they will lose against buyers
who could get possession under 2-716 or right of reclamation
under 2-501/502.
2.
How could the creditor gauge the risk better? How do they deal
with this problem?
a.
165
3.
b.
c.
d.
HYPO: Say you pre-pay a car that is located in Denver. As a prepaid buyer what should you do to protect yourself, so that you
dont end up losing the car to the secured creditor. How do you
make sure (protect) yourself to make sure you have 2-501/502
rights in the standard car, which will make you a buyer in the
ordinary course of business to beat the sellers creditors? (Notice
2-716 doesnt work for standard cars.]. What does the buyer want
in the contract? She wants it to be clear its a consumer car and
the K to show she has a special property interest? How do you
make sure you satisfy 2-501 (special property interest)?
a. 2-501 since we are talking about standard goods already
in physical existence, 2-501(1)(a) says you have a special property
interest if the goods are existing and identified at time of K. So
the buyer would want the VIN # to be specified in the K. So from
the moment you hand over the deposit, you have a special
property interest and thus you are a buyer in the ordinary course.
166
4.
5.
What do you do before you buy? Check the art. 9 files. Its
the opposite advice we gave in the corp. hypo above. You
ask for the s/a; you see its a sale out of trust. If you want
to buy the machine, you go to ONB and get a
subordination agreement b/c you understand the priority
rules.
own personal car from the dealer and signed a s/a. The dealer noted its
lien on the certificate of title. Look at 9-301, there is an exception for
cars covered by certificate of title, so the dealer did everything right. But
there is a sale out of trust. The only question is who wins (no problem
with buyer in ordinary course). We know the car is a consumer good;
the dealer has a perfected and attached security interest; its a sale out
of trust (9-315(a)(1)) and 9-201(a) tells us that the dealer wins unless
there is a buyer protection priority rule.
A. Analysis: Is there a buyer protection rule that overrides 9-201(a)? Start with 9320 because we are talking about goods. There are 2 possibilities under 9-320
either (a) or (b). If you were Annes lawyer, (a) is much more promising than
(b). Start with 9-320(b) What are the difficulties Anne faces under this
provision: (1) one question is whether she has knowledge of the security interest
how does she have actual knowledge notice of the lien on the certificate of title
(Art. Handed her the certificate of title, and had she read it she would be notified
and be out of 9-320(b)). Assume, Anne didnt read the title. What is the effect of a
notation on the certificate of title? Go to 9-311(b) noting the lien on the
certificate of title is equivalent to filing a financing statement. So she loses under 9320(b)(4). What is Annes problem under 9-320(a) Anne is arguably not a
buyer in the ordinary course because its Arts car. Go to 9-201(9) [page. 1267]
assume Anne in good faith, no knowledge, and in the ordinary course of the seller
in the business of selling these goods. Here, Art is not in the ordinary business. On
these facts, however, Anne wins.
167
Problem 70
Problem 3 (Handout #15)
A. Problem 3(a): Instead of goods we have notes as the collateral. This is a
sale out of trust. The creditor claims conversion.
1.
168
Art. 3 has its own priority rule. [the author is wrong] You
go to 3-306 a person having rights of a holder in
due course takes free of the claim to the instrument.
So ONB wins.
B. Assume S filed a f/s before releasing the notes: See 9-302(b) and
knows of the existence of a financing statement, then they are not a holder
in due course. But the professor thinks this is the wrong position.
If ONB is not a holder in due course under Art. 3, it loses, but it
could win under Art. 9. See 9-330(d) a purchaser of an
instrument has priority over a security interest in the instrument
perfected by a method other than possession if: . POLICY: Even if
you assume ONB is not a holder in due course, ONB will win unless
they know its an authorized sale. This is consistent with 9-320(a)
and 1-201(9) for buyer in the ordinary course.
What advice would you give S? Its very important to identify the
secured party. Look at 9-330(f). ONB already has the burden of
inquiry to check the notes. Dont rely on the markings of the note to
protect yourself from another creditor. You better put another f/s
because if not you will lose to another creditor/or trustee.
Review of Buyers of Instruments: Purchasers of instruments are
protected under 3-302 and 306 if holder in due course. This
protection is under Art. 3. and 9-330(d) if good faith purchaser for
value if dont qualify as holder in due course under 3-302. There
only burden of inquiry was to look at the face of the instrument
169
the debtor endorse the stock to CSB (making CSB have control;
and thus ONB couldnt have control); how do you keep ONB
from not getting physical possession require CSB to keep the
stock CSB could say to the debtor that during the loan
repayment period it wants to keep possession of the stock. If the
debtor is concerned about the right-power dichotomy. You could
set up an escrow account. Reason backwards from 8-303(a)
there would be no delivery. The preferable approach is to keep
possession rather than marking the notes. Why? There is a
transaction cost with marking the notes, you will have to find
ONB if they have the notes transaction costs involved with the
battle. If keep the notes, there would be no protected purchaser
and there would be no battle.
D. Problem 3(b)(ii): The collateral was a security entitlement. Start with 9315(a) its a sale out of trust so security interest continues in the security
entitlement into the hands of ONB (read 8-501 essentially, there will be
a debt in debtors account and a credit in ONBs security account). So we
know under 9-201(a) CSB wins unless otherwise provided. Under 9-331(a)
only place to go for a buyer protection rule is Art. 8. So we go to 8-502
(part 5 because we are talking about indirect holding of stock). [notice Art.
8 left out good faith on the buyer but they beefed up the notice
requirement).
A. Analysis: How do you protect CSB this time? There is nothing to
mark? CSB could set up an escrow arrangement (in other words
they could take control its a way to perfect a security interest in
investment property). The safest mode of control is possession because
tripartite agreement the debtor could still sell the stock and under 8502 you lose.
B. HYPO: Say CSB perfects by filing a f/s and later on the debtor is in
financial difficulty. So CSB sends a letter to AGE letting them
know that the debtor is experiencing financial difficulty and they have
a security interest in the stock (send a copy of s/a highlighting the
sale out of trust clause); then debtor sells stock to ONB and AGE
obeys debtors order.
1. CSB wont sue debtor because he has nothing; wont sue ONB b/c
theyll lose under 8-502. So CSB wants to sue AGE because
they gave him notice. Who wins? AGE look at 8-115 AGE is
an innocent converter of property. 8-115 is very protective of
securities intermediaries.
2. Policy: They are not a signatory to the s/a or f/s. They dont want
to have to find out if the agreement is valid, they handle
thousands of exchanges. The code creates a way for CSB to
communicate with AGE. There is only one way that is only
through an effective tripartite agreement; anything else wont
work.
171
8.
9.
11.
12.
Problem 71
Problem 72
Problem 73
Problem 4 (Handout #15) [spin off of problem 73] This problem refers to goods.
There is a sale out of trust in violation of an anti-alienation clause in the
agreement. The goods is stereo (no problem of pre-paid buyer). Now ONB
goes after Used Stereo Haven.
Problem 4(a)(i)
172
Problem 4(a)(ii)
13. Problem 75
14. Problem 5 (Handout #15)
A. Working Problem 5 Under the UCC: the collateral is food products. The
173
B. Working Problem 5 Under the Food Security Act (pg. 1409) How does the
Food Security Act work? (very complex solution to an easy problem).
1631(a) gives the purposes for the rule. Look at 1631(d) the only thing
we needed if we thought the fed. Govt. could intervene at all (at least
according to the professor) takes free of a security interest even
though its perfected (its the lang. Of 9-320(a) just including the farm
products as collateral).Basically it removes the exclusion of farm
product from 9-320(a). That would have been fine, but instead they
decided there would be 3 cases notwithstanding 1631(e) the purchaser
should lose even though the purchaser might satisfy definition of a
buyer of a farm product.
3 Exceptions Where Buyer Will Lose Under the Food Security Act:
1631(e)
(1)
1631(e)(3) (pg. 1412) a state that has a central filing system
(Created an entire separately filing system for f/s dealing with
farm products 1631(c)(2)). Basically, 20 states have central filing
systems that have been approved by the Dept. of Agriculture. It
doesnt have to be approved, and we will see the consequence of
not having certification.
1631(c)(2)(a) assume a state has a certified filing system and
ONB wants to file a f/s; the secretary of state is suppose to create
a master list of all the f/s that come each month and organize
them by farm products (e.g., Idaho donkeys and burrows, fox
and pelts). Go to 1631(c)(2)(d)(1)(e) if you buy farm product, you
are suppose to register with the secretary of state and there is a
master list organized by product. Under 1631(c)(2)(E), the
secretary of state is suppose to distribute the pages of the master
list that relate to farm products you are buyer of farm products.
Start with 1631(e)(3), these are cases where the secured
creditor wins. The buyer receives a written notice (the pages of the
174
master list) and does not secure a waiver from the secured party
by performing any payment obligation. So the idea is if you are a
buyer of corn products from Farmer and you have registered and
ONB has filed a f/s and the secretary state sends the pages to you
[the list will identify the creditor] and you dont contact ONB and
either pay off the farmers obligation to ONB or somehow get a
waiver, the buyer loses. [this is a bigger burden on the buyer then
under 9-320(a)]
(2) 1631(e)(2) also where there is a central filing system the buyer
has failed to register and the secure party has filed an effective
f/s.
Policy: Why would you fail to register? Maybe a consumer buyer or
small buyer who is unaware or economically worth it wont
register. If you dont register and are in a central filing statement,
you lose because dont work something out with the secured
creditor.
(3) 1631(e)(1) the only exception that applies if NOT in a state that
has a central filing system (one of the 30 states that has not
got the Dept. of Agriculture certification they dont create
master lists etc). A buyer of farm products loses if w/in one year
before the sale the buyer has received from secured party written
notice of the security interest organized to the farm product. So
the idea is that for ONB to win in these states notwithstanding
6321(d) it has to send a notice to the buyer within one year before
the sale.
How Do You Know Who All the Potential Buyers will be in the
next year? One thing you will do is ask the farmer (debtor) and
compile a list of past buyers; trying to identify who the largest
buyers of such farm products are in this locale, and then you do
what the lenders call the blizzard approach send notices to all
potential buyers of the debtor. If you are lucky and the notice gets
to the buyer, who wins? 1631(e)(1)(B) must meet the
requirements as in the other exceptions, the buyer has not
performed the farmers payment obligation to the extent ONB
insists that those obligations be paid. The idea is that you have to
work it out and if the debtor is late on payment, you have to take
subject to the security interest.
15. Problem 75: Illustrates the problem where a state doesnt not have a central
filing system. Farmer gives ONB a list of potential buyers. Farmer sold to
World, a grain merchant, that was not on the list and Farmer didnt tell ONB
of this off list sale and ONB asks the buyer to pay in cash. We are also told
that the buyer did know that Farmer had borrowed money from ONB. Who
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wins when farmer later defaults and ONB goes after the collateral in Worlds
hands?
B. Large Buyers: When you advise your client you need to first check if
the state has a central filing system and you have to act
accordingly. With states w/out filing system, the BUYER will win; in
most cases its like 9-320 because it is very hard for the creditor to
hit the off list seller. If in the filing system chance, the creditor has
a good chance of winning under one of the exceptions. What weve
seen is the difficulty of allocating the risk of bad behavior by
debtors b/w creditor and buyers.
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Problem 1(b): You have delayed delivery of physical possession under a lease.
Here Hybid and Newcomer lease on 2/1/01 with this agreement for delayed
delivered. On 10/1/00 ONB loans $ to Hybid. On 1/2/01 it delivers the
equipment. And on 2/1/01 Hybid defaults. Assume this is a lease out of trust
and go to 2A-301 that tells Newcomer wins. SO then we go to 2A-307(3)
(revised pg. 1276) we know (1) and (2) doesnt apply, but (3) says a lessee
takes a leasehold interest subject to a secrutiy interest held by a creditor of
the lessor. When does the lessee take its leasehold interest? When you take a
lease hold interest.
A. 2A-103(1)(m): leasehold interest when does a lessee get an interest
under lease K? It depends what we mean by the word interest. It cant
mean a property interest, because dont get a property interest under a
true lease. It means the K right (thats the interest of a leasehold right).
So, Newcomer gets its K right on 2/1/00. So does 2A-307(3) apply? A
lesee takes the interest held by a creditor of the lessor. When does ONB
security interest arises? Not until 10/1/00 so 2A-307(3) does NOT
apply. So we have to go to the default rule under 2A-301 and Newcomer,
the lessee wins.
Policy: From Newcomers perspective, do you like the result? (there is a big
secrecy problem for ONB) but Newcomer would never find anything about
the deal? When does their reliance on their rights begin? They start
relying when they sign the lease (b/c stop looking for alternatives), and
may sign a K with some else relying that they will have the equipment on
such a date. But there is huge problem for ONB? Their problem on
10/1/00 is that they are NOT aware of the lease, and who has possession
of the equipment? Hybid. (they see it after a visual inspection). Also you
dont file a f/s for a true lease and even if it did it would be filed under
Newscomers name (permissive filing under 9-505). So the only way for
ONB to know is to ask Hybid and ask if there are outstanding lease
agreements with respect to the equipment (and we know that is not a good
safety net for ONB to rely on).
3.
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Hybid is likely to give Newcomber a good deal (make below market price
because Hybid is getting out of the K with the University and Newcomer
doesnt have any use for the equipment).
B. Risks: The risk for Newcomer is that after signing the agreements, Hybid
defaults on the ONB loan. What happens? ONB goes to Newcomer and
grabs the equipment. Who is stuck? Newcomer b/c liable to the K with
the university, doesnt have equipment, and will have to pay premium to
rent new equipment on a emergency basis. This is the risk to Newcomer,
the lessee in this type of arrangement.
C. Analysis:
1.
2.
3.
4.
Priority Rules Start with 2A-301 (pg. 181) A lease contract (the
agreement b/w Hybid and Newcomer) is effective against creditors
of Hybid; this means Hybid wins UNLESS otherwise provided there
is some secured protection priority rule. Weve looked at 2A-306,
which doesnt apply it deals with liens arising by operation of law;
but 2A 307 (revised on pg. 1276) Start with 2A-307(1) a
creditor of a lessee takes subject to a lease K doesnt apply; 307(2)
doesnt apply because liens are not art. 9 security interests; 307(3)
subject to a security interest held by the creditor of the lessor
that tells us that ONB wins; so it overturns the default rule. But we
need to worry about the exceptions in 9-317, 321, 322. Starting with
9-317? Is it relevant to our dispute Newcomer would win under 9-
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4.
Hypo: Say Dawn leased the car when she got to Maine. She is driving the
rental car. You stop at a light, ONB wants to repossess the car b/c this lease
violated Hybid Budget cars s/a and they defaulted.
A. Analysis: Dawn will win. Assume ONB filed a f/s, so you cant rely on 9317(c). So you would argue 9-321(c) it says Dawn a lessee in
ordinary course of business takes a lease hold interest (see definition
under art. 2A) free of a security interest created in goods by lessor, even if
perfected and Dawn knows of its existence. So most consumer lessees will
be protected under 9-321(c). This should make us feel better in the
outcome above. Why doesnt 9-321(c) protect Newcomer b/c they are
not a lessee in the ordinary course of business b/c they are leasing from
Hybid who is not in the business of leasing equipment. Read the
definition, since Hybid is in the business of construction and not leasing,
Newcomer cannot take advantage of 9-321(c).
Problem 78
5.
Last class: (missed ) the losing party under the UCC priority rules, they seek to
change the result to change the outcome by arguing fraud. Under the Uniform
fraudulent transfer act (a state statute) the problem is the UCC drafters dont want
fraud challenges to ordinary business transactions. So we learned the UCC has gatekeeping rules, which limit your access to fraud rules. We saw these rules in three
cases:
Its very difficult to get fraud in a lease because you have to produce facts that show
that ONB (buyer/lessee) was in bad faith and showing any value will eliminate the bad
faith argument.
3 Step Approach: UCC Analysis, Gate Keeping Provision, FTA (See Below)
Handout Problem 16 Problem 2 (See Diagram At end of Handout 16a)
1.
1994 AMB makes it loan to Hybid and gets a floating lien covering present and
after acquired equipment; also files a financing statement.
2.
June 5, 01 Hybid promises to pay the 300,000 for a crane from Catfield.
3.
Jan. 2002 Hybid is in financial distress. (this is the point where potential fraud
increases).
4.
Feb. 1 2002 we have a work out agreement (lease back of the crane). Essentially
Hybid has bought the crane and is now leasing it back to Catfield. The lease
transaction is unusual b/c Cat is not paying any rent; instead the dealer is
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canceling 50% of Hybids obligation to pay the purchase of the crane. This the way
Cat is paying for the lease. This is a sweet deal for Cat b/c it knows that
NewComer wants to lease the crane and they are willing to pay $20,000.
5.
Feb. 10, 2002 Subleases the crane to NewComer. Its a sweet deal b/c Cat is
getting $15,000 from Hybid and $20,000 from NC (extra $5,000).
6.
AMB finds out whats going on 3/1/02 both leases are out of trust and they
want to get the crane from NC (the sublessee) [Notice that financing statements
only last for 5 years and ONB did not file a continuation within 6 months of the
gap]. This is why it files again on 3/1/02.
AMB is the plaintiff and NC is the defendant. Will the work out arrangement hold
up or can AMB pull it apart.
UCC Analysis: (1) classify the collateral in the hands of the debtor equipment, and
not covered by certificate of title statute (b/c if did you would have to worry about
9-311). What is AMBs status? When do they get an attached security interest in
the crane that is the subject of the dispute? Attachment means 9-203(b) must be
satisfied: (a) Value 1994 (b) Rights in Collateral 6/5 (c) S/A 1994. But
attachment on 6/5/01. Was there perfection on 6/5/01? N0, because the f/s
lapsed. So AMB is secured but unperfected.
NC is a sublessee (so its rights are derivative to Cat). So its really a battle between
AMB and Cat. Is Cat a lessee or a lessor? Cat is a lessee b/c the owner of the
crane is now Hybid. So Hybid is the lessor and both Cat and NC are the lessees.
The next step is we go to 9-315 to see if a its a lease out of trust? Yes, both of
them were so AMBs security interest continues in the 2 leases.
Who Wins Under the UCC? Start with 2A-301 it tells us a lease K is effective
according to its terms against creditors. This suggests Cat (the lessee) wins. Then
you need to look in Art. 2A to see if otherwise provided (a special priority rule). Go
to 2A-307 (revised on). We are in 2A-307(3) thats what takes us to 9-317
because we are talking about a lessee a lessee takes a lease subject to a security
interest held by a creditor of the lessor. So now we go to 9-317(c), which tells us
on what day do we test the lessees knowledge? When they get delivery and give
value? Both times would 2/1/02. Assume no knowledge? Was AMB perfected? No,
because it lapsed (the critical time is when Cat gave value and when they received
delivery 2/1/02). AMB did not re-perfect until later (result would be different if
perfected in january), therefore NC wins because NCs rights are derivative to Cat.
Policy: Yes, AMB made a mistake, but had there not have been this work out (the leaseback)
AMB could beat Hybid and Cat. Explain Why? Why could AMB beat Cat if there was no lease
back? How would you characterize Cat a general creditor for the balance of the purchase
price (they sold a machine on general credit). The priority rule that would apply if no leaseback
would be 9-201(A) secured party beats a creditor. Also, had the leaseback not had happened,
AMB would beat Hybid. Why? Because you dont need a perfected security interest to beat a
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debtor, just need attachment (9-203(b). AMB is very upset, so they want to argue fraud. Is there a
gatekeeping rule to argue fraud.
Gate Keeping Rules For Fraud:
2A-308 subsection (1) doesnt apply because the lessor is not in possession (NC is). What
about subsection (3) no (in problem 78 Hybid was a seller/lessee), here they are a
buyer/lessor. What about subsection (2) pre-existing claim for money (YES) Cats claim
for the balance of the purchase price. So AMB can claim fraud.
Policy: Never an ordinary course transaction when working out a preexisting claim. When doing
lease backs, the UCC does not limit AMBs resort to the fraud laws.
Fraudulent Transfer Act:
What case can AMB make under FTA?
5(deals with constructive fraud) what 2 elements must AMB satisfy to show fraud: (1)
AMBs claim arose before the transfer (the transfer is the leaseback); so AMB has standing and
needs to show (a) reasonable equivalent value; and (b) insolvency.
Assume Hybid by January 2002 is insolvent within in the meaning of FTAs 5 definition. Only
question is whether there was reasonably equivalent value? The value was 50% discount of
15,000 dollars a month. Is this reasonable equivalent value for the transfer (giving Cat the right
to use the crane)? Cat turned around and subleased this lease (the crane) for $20,000 a month,
but it only took $15,000 of of Hybids bill thats not reasonably equivalent. (You could argue
there are transaction costs, but you are talking close to 25% 5,000 on 20,000). So, this can be
challenged as fraud. If fraud is found, the court may require Cat to discount the purchase even
further or they may rescind the lease.
So you can challenge on the basis of fraud this is the analysis you use for lease backs.
HYPOS:
1.
Say AMB did everything right (f/s is good) and Cats lawyer knowing FTA isnt too greedy
and just gives Hybid a $20,000 discount on its purchase price. This helps AMB if Hybid gets
a $20,000 cancellation because Hybid will have more money to pay back the loan from
AMB. On these facts there is no constructive fraud challenge. Under the UCC, who wins?
Under 2A-301 then go to 2A-307(3) and we wouldnt get to 9-317(c) and AMB
would win. So if there was a f/s at time of the lease back was done AMB would win.
2.
Say Cat knows by 1/2002 of AMB assuming no fraud. Will 9-317(c) protect Cat? Start with
2A-301 2A-307(3) says except as provided the lesee takes the leasehold subject to a
security interest held by a creditor of the lessor. Then go to 9-317(c) wont help in either of
the 2 hypos b/c the lessee doesnt take free if at time lessee gives value and delivery it either
has knowledge or there is a financing statement. And 9-321 wont help either because there
is no lessee in the ordinary course of business. So, AMB wins.
What Should You do If You Are the Lawyer for CAT working out a LeaseBack:
1. It can be challenged under the FTA so dont bee too greedy.
2. Before you do the deal, check the files. If find nothing, go ahead. If no nothing about AMB
go ahead but dont be greedy. But if find a f/s then under the UCC rules you have to deal
with AMB, so you bring them into the bargaining and work something out between all three
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parties. That is the interplay b/w the fraud and UCC rules would shape a leaseback
agreement.
F.
2.
Problem 79: (refer to Handout 16(b)) Good review of rejection and revocation of
acceptance. Marc is being deceived: (1) sale out of trust; and (2) he got lizard
luggage instead of alligator. Classifying the collateral in Jacks hands is
equipment (b/c uses it in his business) and ALF has an earlier security
interest and under 9-315 it continues because it is sale out of trust. Marc is a
different type of buyer, he is a revoking buyer.
Art. 9 Secured Creditor v. Revoking Buyer
Case I: Asks for a drill press in gray. 4 weeks later it arrives and its bright
orange. Jack says they dont make the press any more in gray. Jack says
hell give him a 15% discount if he takes it in orange. Assume Marc says
Ok. Under Art. 2 lang., Marc has accepted a non-conforming good with the
defect. See 2-601 and 602.
Analysis: He cant revoke. If you accept with notice of a defect, then under
2-607 he has no right to revoke. He could have rejected, but he didnt. The
standard is higher for revocation of acceptance. See 2-607(2).
2.
Case II. He orders a fancy attachment with the drill press. It comes and
there is no attachment. Jack says take it the way it is and I will order the
attachment and because of the disruption, I will give you a 1 year free
maintenance. Marc says Ok. 3 weeks later Jack calls and says there is a
problem they dont sell the attachment separately. Instead Jack will give
you another 20% discount. Marc says I dont want it, I need the
attachment. I want my deposit back I want to revoke my acceptance.
This is acceptance with notice of a defect.
Analysis: Here, 2-608(1)(a) applies. Because he thought the defect would
be cured, he could reject. For revocation of acceptance, only the cases
specified in 2-608 can you reject. Revocation of acceptance the seller
has to take back used goods.
What are Marcs remedies if he has properly revoked? Start with 2-608(3)
then go to 2-711 he has all of the remedies he would have had if had
rejected in the beginning. Under 2-711(1), Marc would be able to cancel
the K (out of this deal) and recover his deposit, recover cost of substitution
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and other damages. Assume Marc does all this and Jack says give me the
machine back? Why would Marc not want to hand over the machine back
to Jack? Because he wants to get repaid. How would you describe Marcs
status after he has revoked acceptance he ends up being a creditor and
2-711(3) he is a secured creditor. Look at 2-711(3) a buyer has a security
interest in goods in his possession (has to keep them) for any expenses
incurred; he can sell it and use the drill press as collateral for the money
owed by his seller. However, Marc is not alone. There is another earlier Art.
Secured perfected creditor. Assuming the buyer keeps physical
possession, you get an Art. 2 security interest. Make sure you know why
its an Article 2 security (its not a consensual lien the parties didnt
agree to it, its created by operation of law its part of the remedy of
section of the buyer). Under Article 9-109(a)(5) article 2 security
interests are swept into Art.9.
3.
1.
Does Marc have an Art. 9 security interest? Not under 9-203 because
subsection (b) isnt satisfied (Jack didnt sign a S/A for his buyer).
Under 9-109(a)(5) says we are in art. 9 and sends us to 9-110(1) the
Art. 2 security interest is enforceable even if 9-203(b) hasnt been
satisfied, and filing is not required to perfect the security interest. If we
were to stop at 9-110(2) (old Art. 9) who would win? ALF because they
perfected first under 9-322(a)(1). Under new article 9, Marc wins
because under 9-110(4) whether earlier or later Marc wins.
2.
Article 9-110 gives the art. 2 favorable status dont need to file a f/s
(no secrecy problem b/c buyer has to keep possession); also favorable
priority rule in 9-110(4)
Case III. Marc gets everything. But after 2 weeks, Marc realizes that the
good has faulty wiring. Marc doesnt want it. He wants his cost of cover.
This would be acceptance without notice with a latent defect (this is the
case where most controversy arises).
Analysis: Same as above.
Assume Jack is judgment proof; so if Marc keeps the machine and goes
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after Jack for damages, he wont get anything b/c Jack is broke. Jacks
debt to the financier is $150,000 (much more than the value of the
machine). So when you focus on the machine, Aligator Bank is undercollateralized. But its expensive enough that they may go after Marc, and
it may be in Jacks interest to tell the bank who owns the various drill
presses. Under 2-711(1) March can get the purchase price + damages. See
rest of assumptions on the handout.
Table on the Chart: There are two columns: column I is designed to show the
outcome of priority battles under the old art. 9; column II shows the
outcome under the new art. 9. This explains what 9-110(4) does. This is
the only new thing that we will talk that is new to new article 9 is the
addition of 9-110(4). In other words, under the old art.9 once you have
concluded that Marc had an art. 2 security interest included in art.9 you
went to art. 9 default priority rules to determine who wins, because no
special rules.
There are 4 different cases:
Case A and B: Marc is a buyer in ordinary course of business. See 1-201(9).
Case C and D: Marc is not a buyer in ordinary course of business.
We will explore the losses to Marc under these facts: Its too late to reject
because he accepted; he has two options: (1) keep the machine with the defect;
or (2) revoke his acceptance.
Case A: He is a buyer in ordinary course of business. It is a straight forward
seller from a wholesaler to a business person. Marc paid $30,000.
1.
Old Art. 9: He is out $30,000. Marc is in a battle with AL bank against the
machine. The $20,500 is described because the professor thinks he will
win the battle. If Marc keeps the drill press, he is a buyer in the
ordinary course. Start with 9-315 9-201 9-320(a) as a buyer in
ordinary course even if AL bank is perfected and knows of the security
interest, he wins. So if he keeps it, he gets $20,500. He gets nothing from
Jack, because judgment proof. So he totally loses (30 20, 500) = 9,500 if
he keeps the press.
2.
Old Article 9: He has paid out $30K. The value of press to Marc is 0. Why
0? You must think Aligator Bank can beat Marc in a fight over the drill
press. Why? (remember under old art. 9 there is no 9-110(4)). What is the
status of Marc if he justifiably revokes acceptance? Marc is a secured
perfected creditor under under art. 2-711 and 9-109(a)(5). So who wins?
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Aligator banks under 9-322(a)(1) b/c they were perfected first (4/1) and
Marc was perfected on (4/10). Once Marc revokes he is no longer a buyer,
rather he becomes the equivalent of art. 9 secured creditor because of art.
9-110. Jack is judgment proof; so no damages. Marcs total loss is
$30,000.
Policy: If Marc keeps the machine he only loses 9,500; but if he justifiably
revokes, he loses the full $30K and we havent even talked about damages
for cover. This should strike you as very Odd! We say to Marc, as a buyer
of ordinary course, dont check the files you can rely on Jack that he sells
goods of this kind; he loses an important remedy, namely the remedy to
revoke acceptance if there happens to be an earlier art. 9 secured creditor.
He loses his remedy; it has no meaning because he cant collect in the face
of this early secured creditor; who he shouldnt know is there since he
doesnt have to check the files because he is a buyer in the ordinary
course of business and we want to encourage people like Marc to buy
goods from sellers in the ordinary course (b/c it promotes commerce).
Although Marc has a security interest it is worth nothing b/c there was
earlier perfected security interest.
2.
Under NEW Art. 9 (we have 9-110(4) this is a new addition). Again there is
a $30,000 loss. The value of the press to Marc is $20,000. Why? Because
under 9-110(4) Marc will win against the bank. Again he is a later secured
creditor, but look what 9-110(4) says. It is very generous to the revoking
buyer. Look: the art. 2 security interest has priority over a conflicting
security interest created by the debtor, Jack. Its 20,000 because Marc
doesnt want the machine hes kept the machine as collateral to cover
his loss so he will sell the press at a foreclosure sale (like any secured
creditor would). Its only 20,000 because the foreclosure sale discounts the
price. So, Marcs total loss is $10,000.
Policy: If March keeps the machine and revokes under New Article 9, the
result is very similar. The advantage of new Art. 9, Marc can make the
decision b/w those 2 remedies: keep it or sell it without worrying about an
earlier secured creditor. His choice is not driven by an earlier secured
creditor, which he didnt have to worry about when he bought the
machine.
Old Article 9: Marc keeps the drill press. Purchase price paid out is $30,000
(loss). Value of the press with latent defect to Marc who is in a battle with the
bank is $0. Why? Because the bank will beat Marc. If Marc decides to keep the
machine, then he remains a buyer. He bought it and he is keeping it; so his
status stays buyer. But he is a buyer not in ordinary course. Under 9-315 the
banks security interest continues and under 9-201(a), bank wins and there is
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no other special provision for buyers not in ordinary course. So, Marcs total
loss is $30,000.
Policy: (remember the example where the hospital bought a medical machine)
Whats the danger if they keep the machine with the defect? You lose.
2.
Old Article 9: $30,000 paid out. The value to Marc is $0? Why? Who wins?
Aligator bank wins because the same rationale. Now Marcs status if he
revokes is a creditor with an art. 2 security interest (in art. 9). It doesnt help
b/c he is second in time to debtors earlier creditor. Under 9-322(a)(1) Marc
loses the full $30,000.
Policy: This result shouldnt bother you. Because they should have known
they were not a buyer in the ordinary course. Knowing that you should have
check the art. 9 files and you would know about the bank. You should have
got a subordination agreement from Bank.
2.
New Article 9: $30,000 paid out. If Marc justifiably revokes, the value of the
drill press to Marc is $20,000. Why? Because Marc will beat the bank. Now
Marc is a perfected secured creditor and under 9-110(4), Marc beats Aligator
Bank. It protects Marc whether he is a buyer in ordinary course OR NOT a
buyer in ordinary course.
Policy: The addition of 9-110(4) cured the anomaly we saw b/w the $9,500 and
the $30,000 when Marc was a buyer in ordinary course. But it went so far
that they created an anomaly the other way that benefits buyers NOT in
ordinary course of business.
Advice If Representing Buyer: Check art. 9 files and discover the f/s. Tell them
to revoke because if you revoke you beat the bank, but if you keep the machine
you lose. And that seems crazy to the professor. Whats the rationale? We are
going to protect you if you buy in ordinary course b/c we want to
promote commerce, but if you buy outside ordinary course and a defect
arises, we will rescue you. Art. 9-110(4) provides an opening for buyers to
take advantage of this scheme when making a decision to keep or revoke
the machine.
How Long Can You Marc Hold On to the Machine Before He Goes to the
Foreclosure sale without risk being turned on Characterizing Him as Keeping
the Machine: The standard is commercially reasonable.
If up to the professor, she would limit recourse of 9-110(4) to only buyers in
ordinary course.
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G. Fixtures: The main challenge is again harmonizing two bodies of law. Here the
bodies of law, both of which are state law, are art. 9 financing law and state real
estate law dealing with real estate financing. Both apply to fixtures.
1.
Notes:
a.
(1) At one extreme you have goods that are so thoroughly merged into
real property that they lose their independent physical identity as
separate goods (9-333(4)(a) building materials a security
interest does not exist in ordinary material buildings these are not
fixtures they are real estate (e.g., the window incorporated in a
building, a steal beam, bricks in the faade).
(2) The middle approach: Examples, the black board, wall to wall carpeting,
chair lift at a skii area integrated into the land (affixed) yet maintains its
identity as goods (not totally merged) We treat both as personal property
and real estate. If you want a consensual lien you can either get a
mortgage and record it or get an art. 9 security interest.
(3) Goods attached to real estate but there attenuous that no one would
think they are part of the real estate (e.g., a painting hanging on a
wall, curtains). Again its a affixed to a building, but its attenous and
the goods maintain their identity. These goods are regulated by art.
9. If you want a consensual lien, you comply with 9-203(b) and
perfection rules. Real estate law doesnt apply at all. These are nonfixtures.
187
parties to leave it till its full ecn. Life; The lift is critical to the real
estate. Most courts would say a chair lift is a fixture.
2 Approaches to Getting a Consensual lien in fixtures:
1.
Real Estate Approach: Ignore Art. 9 and just go to state real estate law and
find out what formalities you need to follow to create a mortgage on real estate
(make sure description on mortgage is broad enough to include fixtures) and
record it just like dealing with traditional real estate. There will be secrecy
problems (this should remind you of negotiable documents if one party
views it as personality and perfects under Art.9 and the other views it as real
estate, there is a huge problem).
2.
1.
2.
Problem 83: This question raises the issue what approach you should take
for securing a fixture?
Facts: ONB wants a consensual lien on the RR tracks (its a fixture b/c they
are attached to real property but have a separate identity). Assume ONB wants
to use the article 9 approach (this makes sense here for reasons that will
become apparent below so it follows 9-203(b)). The only question is what it
should do to perfect the fixture?
188
a. Analysis: Transmittal utility under 9-102? Yes. Since they can get a
fixture filing by filing centrally, they will file one per 12 states. This is an
exception for transmitting utilities under 9-502(b). The idea is that a
subsequent searcher (even if they view the RR tracks as real estate would
know that there are special rules for transmitting utilities and so they will go
to this central statewide office to check filings).
3.
Problem 4(a): ONB wants to rely on the land and easements as well as the
pipeline for collateral. What should they do? Assume the pipe line is a
fixture. The pipeline also falls under the definition of transmitting utilities;
so as to the pipeline itself, your client would have the option to file in the
office, whichever designated, for transmitting utilities under 9-502(b).
What about the land and the easements?
1.
Will these fixture filings in the 12 states perfect ONBs consensual lien
on the land? No Put aside the easements where Monopoly owns
the land will the filing of the 12 fixture filings give your creditor a
perfected lien in the land? See 9-501(b) does it say anything about
perfection in real estate? No, in fact article 9 doesnt even talk about
real property. Article 9 doesnt tell us how you create a lien on straight
real property. It only tells us about this narrow case of fixtures, where
the law overlaps. So if you represent ONB and you want a perfected
lien on the land and pipeline, ONB will have to record their mortgage
to get a perfected interest in the land (it will be filed in the county
office). SO ONB has to file 2 separate recordings.
2.
b. Problem 4(b): This time BFX owns the land and Monopoly (debtor) owns
the tower and leases it and ONB is interest in getting a consensual lien
just on the tower. This may be a case where you may not want to use real
estate law at all b/c the debtor doesnt own it.
1.
2.
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Problem 4(c):
1. Classification: Looks like fixtures and equipment.
2. Perfection: For equipment file one in each state (so 12); for the
fixtures, you have to file in every county real estate record. In this case you
have to do both, OR take a chance (that the debtor wont default and wont
need a perfected security interest).
5.
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3.
4.
5.
6.
7.
Policy: If you are a real estate lender (a mortgagee) you dont need to
check the art. 9 files except with transmitting utilities.
(b) Problem 5b Everything the same except this is a sale of notes with
backed up mortgage (realty paper). But thats not our problem b/c the
fight is not over realty paper, its over fixtures.
1.
Analysis: Assume its a fixture filing and under 9-334(c) ONB will win
under the default rule unless FCC can take advantage of one of
the exceptions above. 9-334(d) doesnt apply b/c no purchase money
security interest; 9-334(e)(1) doesnt work b/c in (e)(1)(b) essentially,
analyze the battle b/w FU and FCC and figure out who wins thats
what (e)(1)(b) says you have to do. Start with default rule FU beats
FCC. None of the exceptions apply (e)(1)(a) wont help b/c FU filed
before FCC. B/c FCC would lose to FU, it also loses to ONB.
2.
Policy: Dont worry about FCC b/c they could have found out about
FUs interest by looking the land records. So we learned that the
Fixture financier (FCC) has a burden of inquiry they have to look in
the land records and if they had they wouldnt have realized the sale
took place but they would have found out about FU and then would
have found out about the sale to ONB.
(c) Problem 5c Whats different is that FCC doesnt get a signed s/a until
12/18. So, the question is who wins?
1.
Analysis: ONB wins. Start with 9-334(c), it tells us ONB wins. Now you
could check the exceptions why doesnt (e)(1) work? Isnt filing first in
time enough? No, FCC loses because (e) is not satisfied b/c under (e)(1)(a)
says the security interest is perfected by a fixture filing (when is perfection
for FCC need attachment for perfection, here its 12/18 its perfection
under 9-334(e) which tells us that there is no anticipatory filing for a
fixture financier when its in a battle with a mortgagee like ONB; it would
work for another creditor under art. 9 under 9-322(a) or other lienors like
judicial lienors under 9-317). Why did they eliminate anticipatory filing?
2.
Policy: Why did they eliminate anticipatory filing? Can the mortgagee
anticipatorily file you would have to check real estate law (but
the professor hasnt seen one that allows it for mortgages). We are
trying to mesh two systems it wouldnt make sense to impose
anticipatorily filing on 50 different versions of real estate law. Lesson:
Need to perfect early (dont rely on anticipatory filing).
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(d) Problem 5d This is a sale out of trust as to FCC, it violates its S/A.
Should M Developer pay the debtors bill to FCC? Who wins?
1.
Analysis: M Developer would win. Start with 9-315 b/c we know with
respect to any collateral if its an authorized sale FCC would lose
its security interest; but b/c its a sale out of trust the security
interest continues. Then we go to 9-334(c), M Dev. Wins under the
default rule (conflicting interest of whom? Is M Dev an
encumberancer? No they are the owner). What about 9-334(d)? No; 9334(e)(1)? Depends. A perfected security interest in fixtures has
priority if the debtor has an interest of record in real property (as of
Dec. 15, it is M Dev that has the interest of record but we are
talking about the period when FCC was dealing with Simon); and the
s/I is perfected by a fixture filing before If FCC filed a fixture filing
on 12/3 and 12/15 M Dev. Records? FCC wins. But if its a normal f/s
M Dev. Wins.
Recap: We learned fixture filings provide better protection for fixture financiers than
regular art. 9 filings.
(e) Problem 5e This example deals with a purchase money loan; and a
fixture filing statement was filed. Who wins? Good Real Estate Law Case
1.
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1.
Analysis: Start with FCC v. ONB Under 9-334(c), ONB will win;
again under 9-334(e)(1) wont help FCC b/c its second in time in terms of
perfection of its interest in fixtures. Is there another provision that helps
FCC? 9-334(d)
(1) purchase money security interest
(2) satisfied
(3) perfection Ok
Under 9-334(d) FCC beats ONB.
ONB v. State Bank this is a battle b/w 2 mortgagees. Does 9-334(c)
apply? Because we have 2 encumberancers and no art. 9 creditors. So
where do we go? A mortgagee has a consensual lien on real estate art. 9
wont help we go to real estate law. From the general principles and the
NC statute it should be clear who wins? ONB wins b/c they recorded first.
Record in first in time.
FCC and State Bank now we are bank in article 9. Under 9-334(c), State
Bank wins. Will 9-334(e)(1) (first in time rule help FCC)? No because FCC
perfected after State bank recorded. What about 9-334(d) because FCC is
a purchase money lender (1) pmsi yes; (2) interest of encumberancer
arises before the goods become fixtures? No (when did interest of state
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bank arise under NC law? 12/11/01 goods became fixtures before that
date). So, 9-334(d) doesnt work. State bank wins.
Look what happens we have a circular outcome. You can see what causes
this circular outcome look, FCC beats ONB, but FCC loses to State
Bank. FCC beats the earlier mortgagee but loses to the later.
Policy: Whats the policy behind that result (the requirement in (d)(2))?
Why does FCC lose to State Bank? Think about notice neither state
bank or ONB has notice if they check land records b/c FCC filed after both
them committed their resources to the deal. FCC acted within the grace
period (12/4-12/24) and that enables him to beat the earlier creditor but
not the later creditor. Had State Bank grilled the debtor do you have any
fixture financers at least State bank could have found out about FCC
whereas its impossible for ONB. Why did the drafters do that? Why should
there be a different outcome when both mortgages gave money and
couldnt find out about the previous security interest.
(1) If in the shoes of State bank check records dont find the f/s. Make
a visual inspection of the building when you saw the building you
would see the fixtures. (For ONB, on the other hand, they would not
have seen the fixtures). You could argue State Banks reliance interest
is greater. In other words, State bank saw new fixtures in the building
and no fixture filing; therefore, unless the debtor tells State bank
about FCC state bank might loan more than it would otherwise. ONB
however didnt rely on the fixtures as collateral because they didnt
exist; therefore for that reason the 2 are treated differently. That tells
us something about the grace period dont count on it b/c you dont
know when a second mortgagee will come around if you depend on the
grace period. There is an alternative for FCC just have to file a
fixture filing on 12/2 and FCC would beat both mortgages this time
under 9-334(e)(1).
(2) 3 ways to break the circle:
1.
2.
3.
Pay ONB first, State bank, FCC [under this scenario FCC cant
use the grace period]
State bank, ONB, FCC (this option wont be upheld b/c it would
upset the real estate recordation system).
FCC, ONB, State Bank [under this scenario the distinction
drawn above b/w the 2 mortgagees is unimportant the
reliance interest argument and we will treat State bank the later
mortgagee just like ONB and the purchase money secured creditor
gets super priority).
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b.
c.
d.
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(h) Problem 5g(2): Everything is the same except ONB made the Oct. 1 loan to
refinance a 1990 construction loan by Second State Bank. Who wins?
1.
Analysis: Need to know what the mortgage recorded says and whether
the construction is ongoing. Does the ONB mortgage need to say
construction mortgage or just State Banks mortgage? [We saw in 9334(h) to be a construction mortgage it must so indicate in the
records] Its not totally clear from the statute, but you could argue that
9-334(h) doesnt say a construction mortgage has this priority, it just
says a mortgage which seems to suggest that the ONB mortgage does
not need to say construction, but clearly State Banks record must.
Does the construction have to be ongoing on 12/4/01? Yes (its not
totally clear but if think of the rationale behind the rule it makes
sense once ONB is a regular mortgage the other rules would apply
and cant take advantage of (h)). Its unlikely here that the construction
is ongoing because it started 1990 to 2001. But we dont know?
(i)
(j)
Analysis: Start with 9-334(c) (the residual rule) that tells us ONB
wins. What about 9-334(d)? Because after all FCC has a purchase
money security interest, it would win. But ONB wins under 9-334(h).
9-334(e)(1) wont work because FCC is second in time. What about 9334(e)(2) purchase money has priority if before the goods become
fixtures the security interest is perfected and the fixtures are readily
removable replacements of appliances that are consumer goods.
Theres 2 problems with (e)(2) (1) if the security interest is perfected
before goods became fixtures (12/4) and perfection wasnt till (12/10)
not satisfied; (2) consumer goods requirement its a replacement
of a domestic appliance, but is it a consumer good? Is the dishwasher
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6.
7.
Problem 86: CSB makes a construction loan and getting a mortgage on the
building. Construction is over; BI files a fixture financing statement in the
furnace; the furnace is installed. An attorney who did work for debtor sues
him for owed judgments. There are levies on the fixtures. There are three
creditors (1) CSB; (2) BI; (3) Lawyer.
a.
b.
Policy:
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a.
b. Policy: why should you classify the refrigerator as a consumer good (why
view it through TTs perspective and not Simon how do we know by
looking at 9-334(e)(2) what time period are we suppose to focus on?
Before the goods become fixtures b/c after they are fixtures they are no
longer consumer goods they are fixtures. The time period before the goods
became fixtures there was only one debtor and one creditor here TT and
Easy Credit. This why Easy Credit wins. Why does Easy Credit win? This
is a trickle down benefit to consumers make it easier for Easy credit to sell
to tenants and then making it easier for tenants to buy. Easy Credit gets 4
breaks under art. 9 (1) doesnt have to check land records; (2) automatic
perfection; (2) doesnt have to file a fixture statement; and (4) doesnt have
to bargain with ONB. All of these benefits is designed to help TT.
8.
Problem 5
(a) Problem 5i like 87, but the refrigerator is not a replacement, its a
second refrigerator. The question is assuming you have a default and the
fight is b/w Easy Credit and CSB who wins. TT is worried b/c of the real
estate law that she may not want to stay in the apartment and so she gets
in writing from Simon and CSB an agreement that says she has a right to
remove the refrigerator if she leaves. Who wins?
1.
(b) Problem 5j: 10/1/99 ONB makes a loan to debtor; record 10/5/99; On
1//15/01 debtor enters into a K with K&D to install heating equipment.
12/2/01 K&D purchases the equipment from Loews. K&D buys on credit.
[K&D gives Loews a purchase money security interest; next day the
furnace is delivered on 12/3; installed on 12/4; on 12/10 Loews files a
fixture filing]. On 2/1/01 debtor defaults. There are three creditors: (1)
Debtor to K&D; (2) K&D to Loews; and (3) Loews to ONB.
(1) Analysis: We start with 9-334(c)(residual rule), we know ONB will win
(security interest in fixtures overpowers an encumbrancer). Is
there an argument that Loews doesnt have a security interest in the
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heat pumps (this would say we dont need 9-334(c)? Separate the
transactions Loews extending credit to K&D and K&D selling the
equipment to debtor. In a battle between Debtor and Loews, is there an
argument that Loews doesnt even have an interest in the equipment
(putting aside fixture law)? We dont know if there is a sale out of trust
(in other words, if Loews is selling to a contractor, you know they wont
keep it theyll sell it and it may very well be an authorized sale, and
with an authorized sale on 9-315 the security interest may not
continue]. Lets assume, however, there is a sale out of trust. Then
under 9-334(c), we know ONB will win. 9-334(e)(1) wont help b/c
Loews is in second in time; (e)(2) wont help b/c fixtures not readily
movable; (e)(3) no judicial liens; (f) wont work because NO consent, (h)
no constructive mortgage. So only hope to Loews is 9-334(d) at
beginning of (d) if the debtor has an interest of record in OR is in
possession of the real property but Loews debtor is K&D and K&D
doesnt have an interest in the real estate and doesnt have physical
possession. [But what about T&T problem? T&T was in possession of
her apt. so in that sense she was different; Also in problem 7 we will
see the debtor is in possession]. So 9-334(d) wont work here
because K&D doesnt have possession. What can Loews do to
protect themselves? They could ask K&D whose building are
these fixtures going into and check out the files and then work
out a deal with ONB. But this doesnt sound practical if the
equipment is low price. They could take other property as
collateral; not extend credit; OR they may have under state real
estate law a statutory lien (mechanics Lien) basically this
type of lien is a lien on real estate created by statute which is to
protect individuals or companies which either provide materials
that goes to improving real estate or services (e.g., those who do
the labor). If Loews had such a statutory lien, 9-334 wouldnt work
we would have a battle between 2 encumbrancers and real estate
law governs. The point is that art. 9 wont tell us a lot about this type
of battle.
9.
Problem 6: Instead of the situation where we are considering who wins the
priority battle, we are focusing on remedies available to the winner. We are
to assume Blast, who has a perfected security interest in irrigation pumps.
Blast wants to know whether it has to pay to compensate the farmer or the jr.
mortgagee (CSB) or damages which are caused when it forecloses on the
pumps. Thats the issue. We are told there is 15K damage to the loan and it
will cost 20K to farmer to replace the irrigation pumps that have been
removed. What does Blast have to pay, if anything?
a.
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compensate harm to the real estate and wouldnt have to pay anything to
the farm (no payment of 20,000). 9-601(a) after a default, so you could
have the remedies provided by statute as well as supplemental. Then you
go to 9-604(c) which gives Blast its right to removal (they have priority
over all owners, farmer, and encumbrancers, CSB subject to other
provisions 9-609 it has to be done without breach of peace. 9-604(b)
says the secured party has to reimburse the encumbrancer for any
damages caused by removal. Dont compensate for replacement costs of
the pumps, however. Only for damages to the area.
Under 9-609, if cant move the pumps without a breach of peace, the
secured party can go to court because cant move with breaking peace.
b.
Policy: Why doesnt Blast have to pay 15K to farmer? Farmer granted a
security interest in the pumps to Blast; but Blast has caused damages to
farmers land. Why shouldnt farmer be compensated? Its an assumption
of risk if grant a security, too bad if dont want a risk dont grant a security
interest in a fixture difficult to remove. The farmer assumed the risk. Why then
does Blast, who is senior to CSB, have to pay $15,000 to the mortgagee? This is the
first case where a senior creditor has to compensate a junior creditor? CSB has a
consensual lien on the real estate and after acquired equipment. In exercising its
remedy against the pumps, its caused damage to land. So as to CSB who is senior
in the land OR as to a non-debtor (owner of the land, we dont have one) you are
entitled to compensation b/c Blasts interest doesnt extend to the land.
c.
9-604(c) Policy whats wrong with this remedy. Imagine you have a
security interest in an elevator and you can pull it out if there is a default. Its not
very practical, it creates a lot of inefficiency have to reimburse the non-debtor
owner, costs of removal, re-affix the replacement (often there are cross default
clauses a default on fixtures is a default for mortgagee so you two people
seeking remedies.). What do people really do when the debtor defaults? The
mortgaee (CSB) and secured party (Blast) are likely together, preferably before
default, and they usually agree that there will be a single foreclosure sale of the real
estate with the fixture attached; this makes better sense then removing the fixture.
In the agreement, they will try to figure out the value added to the real estate by the
fixture (e.g., an elevator adds 10% of value to the apt. building). They also agree
how the foreclosure proceeds will be divided. This creates another problem
which is illustrated in the MapleWood Case(comments of 9-604) sometimes
you have the mortgagee selling the real estate before an agreement is reached
the question is whether the secured party has a legal right to demand part of the
proceeds. Under old Art. 9, they couldnt demand. But as a matter of practice, they
usually agreed, but NO legal right; Now under NEW art. 9 (tried to solve this)
see 9-604(b)(2) solve the Maplewood problem if the s/a covers goods that
are fixtures, the secured party (blast) may proceed in accordance with the
rights with respect to real property [the difficulty is that the fixture
financier has no rights to the real property: it raises two issues: (1) does it mean
that if CSB doesnt want to sell the land, Blast can? In other words, does it
mean that Blast can sell the fixtures with land attached? Isnt that absurd?
Cant mean that? The courts will read the language to mean that if they dont
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enter into an agreement in advance of the foreclosure sale where you have the
mortgagee initiating the foreclosure sale if the creditor has a senior claim
under 9-334(c) will have a right to the proceeds from the foreclosure sale. This
is what it must mean if real estate foreclosure, Blast gets a share of the proceeds
and this would result in the sensible outcome of courts ordering the mortgagee if its
junior to pay a share of foreclosure to the senior fixture financier. But we havent
seen any cases on this point yet.
11. Problem 7: City is our client and wants to sell a sound system to debtor for his
business. City wants to be sure that they can get the system back if debtor
defaults. Thats there major concern. You should know you cant assure City
that they will be able to do that. There is NO way you cant make that
guarantee b/c of the breach of peach provision (it is very easy for the
debtor to precipitate a breach of peace e.g., stand in the door and not let the
REPO man in) under 9-609. Also, City would want to know the obligation to
reimburse the obligation to reimburse non-debtor owners (here, Universal
realty who owns the building) and should there be other mortgages they may
have to be reimbursed if exercise right to remove. Assuming City wants to go
ahead with those 2 caveats, you want City to assert a purchase money
security interest with a fixture filing made in advance before the installation of
the system (assuming the system is a fixture since there is wiring and
bolted speakers, its highly likely its a fixture). You also want to do a visual
inspection b/c we know 9-334(h) trumps 9-334(d) if construction on-going.
Also, do you need to know the name of the landlord? You need to do a fixture
filing to win under 9-334(d) does a fixture filing require the name of the LL?
We would look under 9-502(b)(4) you need to know the LL if going to make
a fixture filing, which you need to do. You also want to know the name of the
owner of Real estate b/c of the right of reimbursement and if something goes
wrong you want an agreement on how to divide the proceeds because 9-604(b)
(2) gives no instruction to courts about how to divide the proceeds from
foreclosure sale. You want to have it worked out in advance and in an
agreement. Do you want to know the names of the mortgages? Yes,
particularly b/c if anything goes wrong you want to know who you are dealing
with.
12. Problem 8
I.
All private contestants in the course will be subject to a battle with IRS
Federal government has a tax lien for collection of taxes
A failure to pay federal taxes leads to a delinquency assessment which
automatically leads to the creation of a federal tax lien. Federal tax law tells
us how its create (attachment) and who wins the priority battles (IRS v.
purchasers, Art. 9 secured creditors, and others).
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How does federal tax lien arise: 3 steps: (1) assessment; (2) demand and (3)
failure to pay.
o Assessment: They file and in it they say they owe x, but they are only
paying 7 (they admit in their filing that they are not paying full tax).
Assessment can also occur when taxpayer underestimates his liability
on return (maybe the IRS discovers it through an audit and then you
contest it if lose then it becomes an assessmnt).
o Formal Demand that you pay is the next step.
o Third step is you dont pay.
Federal Tax Lien Statutes (Pg. 2088)
1. Failure to pay 6321
2. 6322 (attachment) it arises when assessment made and continues
until payment made. [whats important in priority battles is when IRS
gives Notice tax lien filing see 6323(f) there is a form for a
notice of tax lien and its filed its not the same place where you file real
estate records or Art. 9 security records; so when worrying about tax liens,
have to do a separate search for tax liens).
3.
Pay roll taxes (see handout 17(a)) You get your check and you see
withholding and ER w/holds supposedly to pay fed., state, and social
security. The ER is accruing a liability to the fed. Govt, they are going into
debt and they pay it usually quarterly. So what happens during the 3 months
the taxpayer or govt. doesnt get the money, but in effect your ER gets the
opportunity cost of using the money b/c not being paid to anyone yet. When an
ER is in financial distress (tax liens arise from pay roll usually), they have to
figure out which creditor to pay first b/c dont have enough cash? Who do they
pay first? Lots of times they choose not to pay the federal govt. first. They do
that for a very good, practical reason because, they think it is less likely
the fed. Govt. will discovery quickly that they havent paid and the govt. is
less likely to be tough on them if dont pay, and govt. will work with them
then the other creditors who will either cut them off or leave their job. So
they will either underestimate their liability or admit their liability. At
some point the fed. Govt. discovers the non-payment. Usually, the govt. will
file a notice of tax lien and thats the major endorsement tool used to collect
these back taxes and collect penalties. This is a major concern for other
creditors. Who has priority once a notice of tax lien is filed?
Priority Battles of Federal Tax Liens: Generally, what the federal govt. has done
is to play by the same rules (of course with exceptions); basically if the fed. Govt
wants to win, it has to give notice first. This is surprising because the govt. could
have created a super-priority rule, but it didnt. Incidentally, some state govts. Take
the position that state tax liens take priority but not federal tax liens. Why? The
answer in legislative history that there was a concern that if the govt. didnt play by
the same rules there would be impediment of private lending (it would reduce the
amount of lending by private lenders).
Problem 1A: On 3/1/01 ONB lends money and s/a; On 4/15 IRS makes
and assessment and a formal demand. On 5/15/01 IRS files a tax lien
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and comes after the equipment to pay the tax liability. The question is who
wins?
a.
b.
Priority Rules 6323: The default rule is that the IRS wins (but
statute doesnt say it). Then you go to 6323 to see if there is an
exception where the IRS loses. 6323(a) is the most general exception
and based on notion of notice; under subsection (b) through (d) refine
and expand subsection (a). SO the order with which we go is that (1)
IRS wins then you go (2) to 6323(a) and then to the next exceptions.
6323(a) the lien shall NOT be valid as against any holder of
security interest until NOTICE has been filed. What does this
mean? It means you look at the time the private contestant becomes a
holder of a security interest by that time had the IRS filed a
notice of tax lien. If it has NOT, then its notice of tax lien is NOT
Valid its subordinate to the holder of security interest. Here,
when did ONB get its security interest and was it before the NOTICE of
tax lien was filed? If we applied art. 9 security interest, ONB wins. But
you have to look at the definitions in the Federal Tax Lien (it
defines a security interest broader (b/c it covers real estate) and
narrow (b/c it doesnt cover all things in art. 9). The Federal Tax Lien
security interest is defined as: (6323(h)(1) any interest in
property (it includes real property) acquired by contract for
purposes of securing payment of an obligation (talking about
consensual liens created by contract on property). When does ONB get
a property interest acquired by K? ON 3/1/01 (thats what s/a does).
A security interest exists at any time (a) if such time the property
is in existence (distinction b/w present and future goods) here the
goods are present and the interest has been protected in local
law against the subsequent judgment lien (what does judgment lien
mean its a judicial lien that covers both liens on real property and
personal property (execution lien). Local law means Article 9 law. So
the question we are asked to answer is what is the earliest date
when ONB would beat a subsequent judicial lienor in a fight over
this equipment under article 9? The answer is that ONB would not
beat a judical lienor (say they came on 5/14/01) because according to
9-317(a) and (b). ONB would lose to any subsequent judicial lienor on
these facts because to win it would have to satisfy 9-317(a) or (b) and
it cant because it didnt perfect or file a financing statement. So, ONB
203
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Problem 1(d): 4/15 IRS makes a demand; 4/17 ONB gives $/s/a and f/s; 5/15
IRS files notice and 5/30 the debtor gets new tools and that is what the fight is
about.
a.
Analysis: ONB doesnt have an attached security interest under 9-203(b) until
5/30 because debtor doesnt have rights in the collateral until 5/30. Notice the
goods werent bought until after IRS filed its tax lien. Perfection isnt until
5/30 again because under 9-308 you need attachment. IRS lien arose at time
of assessment before 4/15 and notice given 5/15.
When does ONB get a security interest under 6323(h)(1)? When did ONB get
an interest in the new tools created by K to secure payment of debt? On 5/30
because that when the debtor had rights in the collateral. At such time,
the interest has become protected under local law (art. 9) against a subsequent
judicial lien? What is the earliest time on these facts under 9-317 of the new
art. 9 when ONB could win this battle? 4/17 because you dont need
perfection under 9-317(a)(2)(b) all you need is a signed s/a and a f/s
before the other party becomes a judicial lienor (this is a weak form of
anticipatory filing). How about VALUE? Money is given on 4/17 as well. If
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look at all three requirements above, then when does ONB have a federal tax
lien law security interest? On 5/30 because that is the first moment that ONB
had an interest in property under art. 9. Federal Govt wins.
When does IRS get a tax lien on the new tools? At the same instant as
ONB. Look at 6321 all property belonging to such person you dont get
a tax lien on someone elses property. So we have a tie here. This is the
situation in McDermott case (see Handout 17).
McDermott: Basically, there bank had a judicial lien on real estate. IRS filed
its notice and then taxpayer purchased a new real estate. The court said it was
a tie. The supreme court held that the IRS wins in the event of a tie.
There were three reasons: (1) statutory argument; (2) structural argument;
and (3) policy argument.
Policy: If you agree we have a tie, and weve seen other situations where we
have had ties what do you do? You either give victory to the first creditor
who gave notice or a pro-rata distribution of the debt outstanding. The funny
thing about McDermot if just look at notice, ONB gave notice first. ONB in
effect made an anticipatory filing.
Supreme Court Analysis:
(1) Statutory Argument: According to 6323(a) it says the lien shall NOT
be valid as against a holder of security interest until notice is filed. Court
says it does not say a lien shall not be valid until notice of an attached
federal tax lien is given. It just says notice is given. (the professor thinks
this argument is weak). This is a weak argument because look at the
words following the lien the lien imposed by 6321 and that
says its only imposed on the taxpayers property.
(2) Structural Argument: (Good Argument) Basically, court says 6323(c)
and (d) deal with exactly this problem the problem of after acquired
property (after the filing of the tax notice) and if you give victory to ONB
based on anticipatory filing you will in effect make those special exceptions
redundant. You wouldnt need them the general rule would swallow the
exceptions.
(3) Policy Argument: (See page 4284 on Handout 17 at end of opinion) A
strong first to record presumption may be appropriate under ordinary statutes
creating private liens. But the govt. cannot indulge in the luxury of this
requirement. Notice doesnt enable govt. to protect itself. [Remember Harriet
the tort victim and 9-317(a)(2)(b) and its form of anticipatory filing
letting an earlier creditor who is a consensual lienor and filing a f/s
and beat a jucial lienor like Harriet (who is an involuntary creditor).] This
is the courts argument the fed. Govt. is a creditor for taxes it cant
change its behavior based on anticipatory filing. The govt. is like Harriet.
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Analysis: Start with general rule that IRS wins. 6323(a) doesnt help Ricardo
because he bought the car after the notice. But is there a buyer protection
priority rule Ricardo can rely on? 6323(b)(2) it says even though notice of a
lien has been filed such lien shall not be valid with respect to a motor vehicle
as a against a purchaser of a motor vehicle if at time of purchase there was
notice and before he obtained notice he had possession and he has not
relinquished possession of the car. Why does Ricardo have possess this car?
We are worried about laundering cars through tax liens through innocent
third parties.
b.
Policy: Federal Tax liens are not noted on certificate titles of car. So there is
problem of notice for buyers if they didnt have this protection.
Analysis: 6323(a) or (b) do NOT mention lessees of cars. Under the language of
Article 9 Ricardo would be a lesse in the ordinary course of business. Under
art. 9 there would be protection under 9-321(c). But how about under the
federal tax lien law? Is there any protection for a lessee? If go to definition of
purchaser the term lessee is included. 6323(h)(6) a lease of property shall
be treated as an interest in property. We are to pretend that a lessee is a
purchaser for the purpose of subsection (a) NOT (b). In subsection (a) a
lessee is treated as a purchaser; that means a lessee will beat the govt. if
the govt. has NOT yet filed a notice. But if you are late like you are in the
case (where notice has been filed) you need to get into subsection (b)(2) to
win and the cross reference doesnt get us there. We saw under article 9
most business lessees have a burden of inquiry to check files; the only
person who will do worse in a fight against the tax lien is a lessee in
ordinary course of business. Thus, lessees have a burden of inquiry to
check files.
1(e)(3): Smiles sold family car to Ricardo and paid in full; he had no notice of tax
problem.
a. Analysis: 6323(a) doesnt apply because he bought the car after the tax
lien. First, thing to notice is that if he did get the certificate of title
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Ricardo wins (thats more generous to the buyer than article 9 is). Here,
Ricardo is NOT a buyer in ordinary course under article 9 and under 9320(b) he would lose. Under federal tax lein, it protects a buyer NOT in
ordinary course even if come after the filing Why? Because tax liens
dont appear on the certificate of title; thus, problem with notice. If
Ricardo does NOT get the certificate of title, he has a serious problem
under federal tax lien law. To win under (b)(2), Ricardo has to be a
purchaser. To be a purchaser, (h)(6), among other things, a person who
gets an interest in property which is valid under local law against
subsequent purchasers without actual notice. Assume Smiles first sold
the car to Ricardo, he takes possession and pays, but doesnt get the
certificate of title. Say Smiles sells the same car to another person and
gives that person the certificate of title. The question is who would win
under non-federal law (certificate title law) against Smiles and the other
person. The other person wins because he has the title.
1(e)(4): Ricardo buys the car from Smiles Motors (so the purchase is from a dealer);
but, Ricardo only pays 60% of the list price.
Policy: Why is there a greater emphasis of value in tax lien law than under
article 9. There is a greater fear of sham transactions. We are more worried
about Smiles not getting enough money b/c the hope is that the IRS can get
the proceeds. If Ricardo gets a windfall, who pays? All the taxpayers because if
Smiles doesnt get reasonable equivalent value the IRS has no proceeds to go
after.
1(e)(5): What happens when Mia takes her car to the repair garage. Mac refuses to
release the car until she pays her bill. Along comes the IRS and finds the car
in Macs garage and demands him to relinquish the car.
a.
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1(e)(6): Fed. Govt. going after a buyer. Tumor bought a 1000 share of IBM stock
from Smiles Motor. Under art. 8, these 1000 shares would be a security
entitlement its held indirectly. What does the federal tax lien law call this
security entitlement to 1000 shares? It calls it a security. [Under art. 8 a
security means stock in direct holding system see the difference].
6323(h)(4) security means share of stock. Who wins? Tumor wins
6323(b)(1) people who owns stock not expected to search the files.
Would it be different if the stock was given as a charitable donation. Yes. It has
to pay tax bills before it gives money away as a donation.
1(e)(7): New car radio sold and no knowledge of tax problems. Is there a buyer
protection rule? 6323(b)(3) personal property purchased at retail. The tax
lien law allocates the risk the question who gets stuck suing the debtor.
With respect to tangible personal property purchased at retail (retail means
buying for your own ultimate use and usually in a relatively small
quantity).
1(e)(7): cell phone hypo. Ricardo wins under 6323(b)(4). 6323(b)(4) provides for a
monetary cap. With respect to HH goods and personal effects or property (e.g.,
tools of trade of small businesses), purchase in a causal sale (a sale by
someone not in business of selling those goods) but only if there is no actual
notice and sale must be less than 1000. [we saw in 9-320(b), you loses if
secured party files].
Policy: not one of a series of sales what does that mean? There is a
concern that people will sell al their valuable property by trying to avoid
paying taxes.
ONB wins they would have a si on 5/20 which is after the notice of tax lien, but
ONB wins b/c of 6323(b)(1)(b). Why are we in (b)(1) dealing with securites
because securities includes NOTICE. Remember (b)(9) applies to NOTes
ONB has a security interest in deposit account on 5/20. ONB has automatic
perfection under 9-104. Is that security interest beats tax lien. Under 6323(b)
(10). Remember (b)(10) applies to deposit accounts.
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