Law School Resources

Case Briefs, Hypos, Class Notes, Outlines, & Analysis

Law School Resources

Secured Transaction

1)      Background

a)      Secured transaction:  a transaction in which a lender reserves an interest in something they sell you or a service they provide on credit for you

b)      The security interest reserved by the seller is inchoate (it’s there, but its only important if someone doesn’t pay)

i)        Recourse on non-payment:

(1)   Take item back (b/c of inchoate SI)

(2)   Threaten to take item back

c)      Important points to discuss on exam:

i)        How do you get a SI?

ii)       What is the SI secured by?

iii)     What is your SI’s priority?

iv)     How do you enforce your SI?

d)      Article 9:  goes into effect July 1, 2001

2)      What transactions are covered by Article 9?

a)      9-109 scope:

i)        security interests:

(1)   a transaction that creates a security interest

(a)    “security interest” 1-201(37):  interest which secures payment of an obligation

(b)    lease or sale + SI?  1-201(37)

(i)      if the lessee have an obligation for the term of the lease AND

      no right to terminate the transaction

AND:  (at lease one of the following)

1.       term of lease is greater than/equal to economic life of the property (useful life) or

2.       lessee is bound to (a) buy property or (b) renew lease for rest of property's economic life or

3.       can renew lease for rest of economic life for no/nominal ¢

4.       can buy property for no/nominal ¢

=> secured transaction

(ii)    not a security interest just because:

1.       lease payments = or more than cost (just b/c you've paid the entire cost doesn't mean you've bought it)

2.       just because lessor pays taxes, insurance, repairs, maintenance doesn't mean you own it (though those things are usually incidents of ownership)  why? b/c even if lessor pays them, really the lessee is still paying them in the payment amt.

3.       existence of an option to buy or renew for rest of economic life

4.       lessee has option to buy/renew (at a fmv reasonably predicted at time of option); predict at end lease term (5 years from now) machine worth $3k; if actually appreciates, it's okay as long as you had a rzbl basis to predict price

(iii)   SI or lease considerations :

1.      it’s a case-by-case analysis

2.      if price is 20% or less of value, argue it’s a SI, not lease

3.      future price:  was the price based on a reasonable prediction at the time the price was set?

4.      option to buy:  consider whether the amount is nominal now (if lease for 5 years, how much is good worth after first 5 years??)

(iv)  Morris:  week to week lease held to be true lease b/c lessee was not bound to lease for full 52 weeks (even though after 52 weeks he would own property)

(v)    Hypo:  Seller leases machine to Bill (borrower) for 10 years.  The useful life of machine is 10 years.  At the end of 10 years, Bill must return the machine.  Sale or lease?  Sale b/c conditions are met even though have to give used-up machine back.

(vi)  Hypo:  Lease for 12 mos.; option to purchase at end for nominal consideration.  Rt. to terminate at beginning of each month.  Lien cr. acquires lien in month 11.  Does Lien cr. have priority over Lessor?  Probably not b/c there is no more rt. to terminate in month 11 so can argue it’s a sale w/ SI & lessor wins over Lien cr.

(vii) Result if true lease

1.      not covered by art. 9

2.      lessor gets paid in bankruptcy dollars

3.      whereas if he was a SP he would get collateral back

(2)   in personal property or fixtures

(3)   by contract (not statute 9-109(d)2)

ii)       agricultural liens

iii)     sale of accounts, chattel paper, payment intangibles, promissory notes

(1)   sale of accounts receivable does not create a SI, but is covered by art 9

(2)   exceptions: 

(a)    sale of paper as part of sale of an entire business 9-109(d)4 (rzn:  b/c low chance for fraud & plays minor role in commercial financing)

(b)   assigning paper for collection purposes only (d)5

(c)    assignment of entire K (performance & payment) (d)6 (exterminator co. assigns payment and duty to exterminate = assignmt. of entire K)

(d)   assigning a single account in satisfaction of pre-existing debts d(7)

iv)     consignments

b)      exceptions to 9-109 scope (not covered by art 9):  9-109c&d

i)        future earnings (wages, salary) of an employee (d)3; must be of an employee, not an indy contractor

c)      federal law preempts art. 9 (b/c that’s state law) if an actual conflict btwn the laws

d)      real estate is not covered by art. 9

i)        exception:  if something is removed from the 1st tier real estate transaction

ii)       ex.  SI in real estate (not covered) => SI in promise to pay for real estate; this is a SI in promissory note (not real estate), so it is covered by art. 9

3)      Classifying Collateral 9-102(a)(9, 12, 28, 72, 73), 9-502

a)      Goods (moveable at time SI attaches)

i)        Inventory

(1)   Goods held for sale or lease (incl. raw materials)

(2)   Provided in connection with a service

(3)   Sale of type of goods that are in the ordinary course of seller’s bsns.

(4)   Includes bsns. supplies if consumable

ii)       Equipment (catch all)

(1)   Everything that is not one of the other goods

(2)   Goods = moveable at time SI attaches

iii)     Consumer goods

(1)   Primary purpose is for personal, HH or family use

(2)   Predominant purpose test

(3)   Things for hobbies = consumer goods

iv)     Farm products

(1)   Things produced or consumed in the farming bsns

(a)    Crops

(b)   Livestock

(c)    Supplies or

(d)   Products of crops/livestock

(2)   Must be held by a farmer!!!

(3)   If something is manufactured, no longer a farm product.

b)      Quasi-Intangibles:  pieces of paper that embody a right to payment or a right to goods (ex. bills of lading); you transfer these rights by passing the paper.

i)        Documents

(1)   Paper that entitles holder to specific goods.

(2)   ex. Warehouse receipts and bills of lading (“documents of title”)

ii)       Instruments

(1)   Promises to pay.

(2)   ex. Promissory note

iii)     Chattel paper:  instrument + security ag. (gives financer the rt. to repossess)

iv)     Investment property:  stocks, bonds, commodities futures, rts. to brokerage accounts

c)      Intangibles

i)        Accounts receivable:

(1)   Generally:

(a)    Defined:  a right to accounts that are yet to be paid.

(b)   No physical manifestation (no paper) b/c intangible.

(2)   Healthcare ins. receivables: rt to payment dr. has from insurance co.

ii)       Deposit accounts:  account at a bank.

iii)     General intangibles: (the catch all)

(1)   Generally:

(a)    Literary rts., goodwill, etc.

(b)   Includes commercial tort and K claims (not the jj, but the claim)

(i)      Torts are excluded from art 9.

(ii)    Exception:  commercial tort claims (9-109(d)12)

1.       P is an organization or

2.       P is a person and claim

a.       Arose in course of P’s bsns/profession and

b.      Does not includes PI damages or death.

(2)   Payment intangibles:

(a)    Includes tort and K judgments (claim is general intangible)

(b)   Primary obligation is a monetary payment

d)      When do you classify?

i)        Lock in the classification at the time the SI attaches (see attachment)

ii)       What if debtor lies (about what he will use goods for)?  Irrelevant unless you know.

e)      Hypos:

i)         Tractor used by farmer for bsns:                               equipment! (not farm product)

ii)       Rt to return of security deposit from LL                   general intangible

iii)     Paperboy’s rt. to payment for papers delivered      account receivable

iv)     Paperboy’s rt to pymt for papers to be delivered   account receivable

v)      Certificate of deposit form a bank                             instrument

vi)     Elvis’ guitar held to appreciate in value                   prob. Equipment b/c not really consumer goods b/c not for “HH use”

vii)   Purchase a lease                                                           chattel paper

4)      How to create a security interest:

a)      Security agreement

i)        Security agreement (K between debtor and creditor)

(1)   9-203 SA requirements

(a)    authenticated by debtor (signed, adopted, acts intended to id the person w/ the paper)

(b)   describe the collateral 9-108 (sufficient as long as rzbly ID’s; these are safe harbors)

(i)       can specifically describe (ibm printer 500)

(ii)     can describe by category (all debtor’s computers) or by code type (farm products)

(iii)   by quantity (500 bushels of grain)

words of grant (this is why a FS alone is not enough; you need an intent to create the SI) ...more