Secured Transaction Class Outline Professor Martin PDF

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This is an outlines with notes from class and notes from the book. This is for Professor Jennifer Martin....

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Secured Transactions: Class one: Secured transactions registry If someone does not pay their debt’s Post judgment discovery: figuring out what people own. Sue on an unpaid promissory note for a debt. You can file any judgment in the real estate judgment You must file your judgment in the county in which the property is located or else you will get nothing. Unsecured debt: All states have exemptions. Overview of Article 9: 1. Classification 2. Proceeds 3. 4. Acronym SCATE PERCH PEN (key to secured transaction) Scope Classification Attachment Enforcement Perfection Changes Priority Enforcement 9-102(a) (28) "Debtor" means: (A) a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor; (B) a seller of accounts, chattel paper, payment intangibles, or promissory notes; or

(C) a consignee.

59) "Obligor" means a person that, with respect to an obligation secured by a security interest in or an agricultural lien on the collateral, (i) owes payment or other performance of the obligation, (ii) has provided property other than the collateral to secure payment or other performance of the obligation, or (iii) is otherwise accountable in whole or in part for payment or other performance of the obligation. The term does not include issuers or nominated persons under a letter of credit. (72) "Secondary obligor" means an obligor to the extent that: (A) the obligor's obligation is secondary; or (B) the obligor has a right of recourse with respect to an obligation secured by collateral against the debtor, another obligor, or property of either. (73) "Secured party" means: (A) a person in whose favor a security interest is created or provided for under a security agreement, whether or not any obligation to be secured is outstanding; (B) a person that holds an agricultural lien; (C) a consignor; (D) a person to which accounts, chattel paper, payment intangibles, or promissory notes have been sold; (E) a trustee, indenture trustee, agent, collateral agent, or other representative in whose favor a security interest or agricultural lien is created or provided for; or (F) a person that holds a security interest arising under Section 2-401, 2-505, 2711(3), 2A-508(5), 4-210, or 5-118.

9-204 (b) When after-acquired property clause not effective:  A security interest does not attach under a term constituting an after-acquired property clause to: o (1) Consumer goods, other than an accession when given as additional security, unless the debtor acquires rights in them within 10 days after the secured party gives value; or o (2) a commercial tort claim Learn how to classify the collateral

Proceeds are if you sale, lease, license, exchange, or other disposition Moral of the story: If you want certain property to be encumbered by the security interest, put it in the written security agreement. Do not rely on the automatic coverage of proceeds.

Week 2 September 2 Pages. 69-92

Online problem 2-8; Problem 2-13

Code: §§ 9-102(a)(12), (57), (64), 9-203(f), 9-204(a), (b), 9-315(a)(2) C. Drafting the security agreement: 

§9-203(b)(3)(a): o Requirements (i) authentication by the debtor (ii) a description of the collateral

(In general) Security Agreement § 9-102(a)(74)): an agreement that creates or provides for a security interest; this can be a formal or informal agreement that contains: (1) Description of collateral (2) Debtor’s authentication (3) Granting Language (4) Description of obligation secured

However, the provision’s reference to a “security agreement” suggest two more requirements: 

§9-102(a)(74) defines a “security agreement” as: an agreement that “creates or provides a security interest” o The word “agreement” in security agreement means “the bargain of the parties in fact, as found in their language or inferred from other circumstances.”  This suggest flexibility is appropriate



and §1-201(b)(35) defines “security interest,” in part, as: an interest in personal property “which secure payment or performance of an obligation.”

o Combining both those rules means that §9-203(b)(3)(A) requires:  that the debtor authenticate an agreement that “creates or provides for” an interest in personal property that “secures… an obligation.” REMEMBER  § 9-203 lists three formalities for creating a security interest enforceable against the debtor: (1) value given by the creditor; (2) the debtor having rights in the collateral; and (3) an authenticated security agreement or other validating device such as possession of the collateral. 4 methods for a security agreement: (1) Authentication, (2) Possession, (3) Delivery of certified copy, (4) control A security agreement is defined by Article 9 simply as any agreement that creates or provides for a security interest. How do we know what collateral is covered by the security agreement?  We have to know what it says. o Ex: finding out could be as simple as reading the document & looking for identification of the collateral.  Majority of the time  a secured creditor will identify the collateral in a general way: (i) by category (like computers) or (ii) by the type of collateral under Article 9 (such as equipment). What personal property is included in the collateral of the security agreement?  We consider the personal property at the time the debtor signs the security agreement.  EXCEPTION  § 9-204 allows a security agreement to provide for a security interest in afteracquired property, but the agreement simply must so state. Imagine that the creation of the security interest attaches a sort of invisible string between the debtor’s obligation to pay the creditor and the collateral.  In result  issues can arise with respect to exactly what the collateral is and what obligations are covered.  Ex: What collateral is the string attached to? What obligations are on the other end of the string? Some of these issues involve: (1) After acquired property clauses and (2) Future advances.

The Composite Document Rule

When the intent of the parties making the security interest is unknown A security agreement is usually one document known as the security agreement, but the composite doctrine rule permits this requirement to be in multiple documents. Composite Doctrine Rule: A judicially created doctrine where the court looks at all documents and tries to determine whether the parties intended to create a security interest. This is the court’s consideration of all documents executed by a creditor and debtor in order to determine whether the parties intended to create a security interest in collateral. The documents must have: (1) collateral described, (2) the debtors rights in the collateral, (3) the value given, and (4) authentication. Under the Composite Document Rule  two or more documents in combination may qualify as a security agreement. Subjective element  Did the parties actually intend to create a security interest? Objective element  Is there objective language in the document that evidences that same intent to create a security interest?  Look at the document itself.  Look for collateral description  Look for debtor’s signature ***All documents must be contemporaneous!!! EXAM TIP  Martin says to search for each of the relevant Factors (if not  it will fail): (i) Were the documents contemporaneous? (ii) Were they EACH authenticated by the Debtor? (iii) Do the documents cross reference each other?

BOOK PROBLEM 2-8 A. Which one of the following contains the best language to “create or provide for” a security interest? Which, if any, are insufficient?

Choose

Choose

Borrower hereby conveys Lender a security interest in … .  Not effective Probably not effective Effective Borrower agrees that Lender has a security interest in … .  Not effective Probably not effective Effective

(sufficient  but Martin says she would never use it because in a Contract aspect, it does not create a full contractual action)

Choose

Choose

Borrower shall grant Lender a security interest in … .  Not effective Probably not effective

Effective

If borrower fails to pay, Lender may take possession of . . . .  Not effective Probably not effective Effective

B. Which one of the following is the best language to identify the secured obligation (assume in each case that “Loan” is adequately defined in the document)? Which, if any, are insufficient?

Choose

In consideration for the Loan … .  Best language Not ideal

Choose

In exchange for the Loan … .  Best language Not ideal

Choose

… until the Loan is repaid in full. Not ideal  Best language

Choose

… to secure repayment of the Loan.  Best language Not ideal

PROCEEDS Proceeds: a value tracing concept including whatever is received upon the sale, lease, license, exchange or collection of collateral. § 9-012(a)(64). • It also includes claims for liability arising from and insurance payable by reason of any damage to the collateral. • Ex: Assume securities are the collateral and a dividend is payable t shareholders. The dividend is proceeds of the securities. § 9-203(f)  states that proceeds are a type of property that secured parties do not need to worry about describing in the security agreement because the security interest attaches automatically to them. Article 9 provides that a securities interest automatically extends to whatever proceeds of the original collateral are identifiable  and to each successive generation. Article 9 expressly contemplates that the debtor might retain possession and use of the collateral. § 9205. NOTE: it does not matter what the value is of the original collateral transferred when it comes to proceeds. • The security interest follows the transmutation and encumbers the new asset.

No after-acquired property clause is required for proceeds & the security agreement need not mention the words: (i) “Proceeds” (ii) “Cash” (iii) “Inventory” (iv) “Consumer Goods”

AFTER-ACQUIRED PROPERTY Additional Collateral Description Issue Article 9 allows parties to draft an after-acquired property clause  which grants a security interest in property acquired after the security agreement goes into effect. After-Acquired Property: property acquired by the debtor after the debtor authenticates the security agreement (collateral acquired after initial security interest is created). § 9-204(a). The granting language will typically read something like  “Debtor grants a security interest in all its inventory, whether now owned or hereafter acquired, to Secured Party.”  This type of floating lien is quite common. A security agreement can cover property acquired after the execution of the security agreement through: (1) Language in the agreement (2) The transaction is a credit sale of inventory (3) The length of the secured obligation term (4) Trade usage for this type of property (usually, livestock) After acquired property = the creditor taking a type of continuing or floating lien on the specified collateral of the debtor as stated in the security agreement. When a security agreement includes an after-acquired property clause  the language is valid for the collateral the debtor owns at the time the value is given and property acquired in the future that is of the kind of collateral specified in the agreement. After-acquired collateral must be provided for in the security agreement.  Security agreement must contain sufficient description of the after-acquired collateral under UCC. Description of after-acquired collateral is a question of contract interpretation.  Standard  whether the agreement contains future language (ex: "after acquired" or "owns or acquires in the future"). Security interest does not attach in the after-acquired property until the debtor obtains rights in the after-acquired property.

HYPO: Suppose two parties secure a loan using inventory as collateral. The original inventory used to secure the loan gets sold to third-party buyers, who take free of the secured party’s security interest. That original inventory is then replaced with new inventory. ANALYSIS: The loan is still in place, and there’s still a need for collateral. The secured party needs to be attached to the new inventory. But no one wants to spend money amending the prior security agreement or creating a new one. Article 9 contains two important limitations on after-acquired property clauses: (i) A security interest would not attach using an after acquired property clause for consumer goods, other than accessions given as additional security (unless the debtor acquires rights to the consumer goods within ten days after the secured party gives value); (ii) an after-acquired property clause does not attach to commercial tort claims that are later acquired. NOTE: Inventory and accounts are inherently future. Consumer Goods SA Description Requirements the collateral must be described with a higher degree of specificity than required for most other types of collateral.  Simply stating the subgroup of consumer goods is too broad in a security agreement  though it’s generally sufficient to identify a particular consumer good.  Ex: a particular car or piece of jewelry. Commercial Tort Claims SA Description Requirements it’s not enough merely to refer to that type of collateral by the term the UCC would use to describe it.  The agreement should reference the specific event or events giving rise to the claims.  Ex: “all tort claims arising out of the January 2017 building fire.” Article 9 contains two important restrictions to which a security interest will automatically attach to proceeds: (i) If the proceeds are property outside the scope of Article 9  it is doubtful that § 9-315(a)(2) would be applicable. o Ex: If the debtor used encumbered personal property to buy real estate  the security interest might not flow through into the real estate purchased (would depend on the language of the parties). (ii) A security interest extends only to identifiable proceeds of the collateral. o Ex: If the creditor cannot trace what happened when collateral was converted from one thing to another, the security interest might be lost. What happens if SA does not provide for after-acquired property?  If a security agreement does not provide for after-acquired property  then the creditor is limited to what the security interest initially attaches to. Exception  most courts hold that inventory that is after-acquired is included in the security interest whether or not specifically stated in the security agreement. Creditors often use after-acquired property clauses even for inventory  even though it might not be required.

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Remember  secured creditors like to get this right & be clear in their agreements as to the collateral covered. After-Acquired Property Hypos

HYPO: Does a security agreement covering “livestock” reach after-acquired livestock? ANALYSIS: It does not reach after-acquired livestock  unless the agreement were to expressly say so. HYPO: Does a security agreement covering “the cattle dealer’s livestock” reach after-acquired livestock? ANALYSIS: It does reach after-acquired livestock.

After-Acquired Property Hypo’s HYPO: Suppose I want to buy a clarinet for my young son Marshall. Music City, the seller of the clarinet, might agree to sell me the clarinet on credit with me signing a security agreement granting Music City a security interest in the clarinet to secure payment of $50 per month over three years for the clarinet. But what if, instead, the security agreement granted Music City a security interest in my musical instruments? I only own the clarinet for Marshall right now  but what if my other son Leeland comes home from school tomorrow and says he needs a violin for his class? If I purchase the violin  would it be subject to the security interest of Music City? ANALYSIS: After reading the security agreement to determine that the clarinet is the collateral, we would conclude that the collateral subject to the security agreement that described the collateral as “my musical instruments” would include the musical instruments that I own at the time the security agreement is signed. That would just be the clarinet. If Music City wants its security interest to extend to any musical instruments that I might buy in the future, § 9-204 tells us that’s possible. HYPO: Same facts, but let’s suppose the security agreement instead provides that I grant Music City a security interest in musical instruments, now owned and hereafter acquired. ANALYSIS: Now, in accordance with § 9-204, Music City would have a security interest in the clarinet that I own today and a violin that I buy for Leeland later this week. As it turns out, though, after acquired property clauses are not always effective. Issue: Here, the violin and the clarinet are consumer goods because they are used for family or household purposes. Rule: Article 9 contains two important limitations on after-acquired property clauses. Holding: Here, the after-acquired property clause would only reach musical instruments that I purchase within ten days after Music City gave value. Reasoning: I purchased the violin for Leeland in the first week, so it would be covered by the security interest. But, if I purchase a trumpet next month because one of the boys decides to take up that instrument, it would not be covered by the security interest of Music City because it was purchased more than ten days after it gave value. Martin’s Proceeds Example (1) If I grant a security interest to a creditor in my book on Secured Transactions, but later sell the book and receive $50  the $50 would be proceeds of the collateral. WHAT IF I TAKE THE $50 AND PURCHASE A BOOK ON CONTRACTS?

(2) If I take the $50 and purchase a book on Contracts  the book on Contracts also would be considered proceeds of the book on Secured Transactions, so long as the secured creditor can trace the money used to purchase the book.  It is proceeds because it was acquired upon the sale of the collateral, the book on Secured Transactions.  We might imagine that the collateral has been transformed into the new book on Contracts.

THE LOWEST INTERMEDIATE BALANCE RULE The lesser of: (1) amount of the proceeds; or (2) lowest daily balance in the account between the time the proceeds were deposited and the time the creditor seeks to enforce its interest. ACRONYM  NPFO (non-proceeds out first)

Lowest Intermediate Balance Rule Hypo HYPO: Consider the following account ledger for a debtor with a beginning balance of $6,000 of nonproceeds, who thereafter deposited $5,000 of proceeds: ANALYSIS: (1) The lowest intermediate balance rule treats the current balance as containing $4,000 of proceeds (the lesser of the $5,000 initial deposit of proceeds and the lowest daily balance after that).

(2) In contrast  first in first out (FIFO) would treat the deposit account as containing $3,000 of proceeds and last in first out (LIFO) would treat it as containing no proceeds.

BOOK PROBLEM 2-13 Dependable Delivery Service delivers appliances to the residences of people who purchase them at various local retail stores and home improvement centers. Sure Thing Auto has a security interest in Dependable’s delivery van. Dependable’s driver got into an accident and the van was totaled. The insurance company sent Dependable an $18,000 check to cover the loss and Dependable deposited that check into its deposit account at Bank. a) Upon that deposit, the account balance was $24,875. At that point, what, if anything, serves as collateral for Sure Thing Auto? • Answer: $18,000 of the balance in the deposit account. o Sure Thing had a security interest in the van (the original collateral) and the claim against the insurance company due to the damage to the van is “proceeds” of that original collateral. § 9-102(a)(64)(E). The claim against the insurance company is

thus...