Law School Resources
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
The security interest reserved by the seller
is inchoate (it’s there, but its only important if
someone doesn’t pay)
Recourse on non-payment:
Take item back (b/c of inchoate SI)
Threaten to take item back
Important points to discuss on exam:
How do you get a SI?
What is the SI secured by?
What is your SI’s priority?
How do you enforce your SI?
Article 9: goes into effect July 1, 2001
What transactions are covered by Article 9?
a transaction that creates a security
“security interest” 1-201(37): interest
which secures payment of an obligation
lease or sale + SI? 1-201(37)
if the lessee have an obligation for the
term of the lease AND
no right to terminate the transaction
lease one of the following)
term of lease is greater than/equal to
economic life of the property (useful life) or
lessee is bound to (a) buy property or (b)
renew lease for rest of property's economic life
can renew lease for rest of economic life for
can buy property for no/nominal ¢
not a security interest just because:
lease payments = or more than cost (just b/c
you've paid the entire cost doesn't mean you've
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.
existence of an option to buy or renew for
rest of economic life
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
SI or lease considerations :
it’s a case-by-case analysis
if price is 20% or less of value, argue it’s
a SI, not lease
future price: was the price based on a
reasonable prediction at the time the price was set?
option to buy: consider whether the amount
is nominal now (if lease for 5 years, how
much is good worth after first 5 years??)
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
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
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.
Result if true lease
not covered by art. 9
lessor gets paid in bankruptcy dollars
whereas if he was a SP he would get
in personal property or fixtures
by contract (not statute 9-109(d)2)
sale of accounts, chattel paper, payment
intangibles, promissory notes
sale of accounts receivable does not create a
SI, but is covered by art 9
sale of paper as part of sale of an entire
(rzn: b/c low chance for fraud & plays minor role
in commercial financing)
assigning paper for collection purposes only
assignment of entire K (performance &
payment) (d)6 (exterminator co. assigns payment and
duty to exterminate = assignmt. of entire K)
assigning a single account in
satisfaction of pre-existing debts d(7)
exceptions to 9-109 scope (not covered by art
future earnings (wages, salary) of an
employee (d)3; must be of an employee, not an indy
federal law preempts art. 9 (b/c that’s state
law) if an actual conflict btwn the laws
real estate is not covered by art. 9
exception: if something is removed from the
1st tier real estate transaction
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
Classifying Collateral 9-102(a)(9, 12,
28, 72, 73), 9-502
Goods (moveable at time SI attaches)
Goods held for sale or lease (incl. raw
Provided in connection with a service
Sale of type of goods that are in the
ordinary course of seller’s bsns.
Includes bsns. supplies if consumable
Equipment (catch all)
Everything that is not one of the other goods
Goods = moveable at time SI attaches
Primary purpose is for personal, HH or family
Predominant purpose test
Things for hobbies = consumer goods
Things produced or consumed in the
Products of crops/livestock
Must be held by a farmer!!!
If something is manufactured, no longer a
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.
Paper that entitles holder to specific goods.
ex. Warehouse receipts and bills of
lading (“documents of title”)
Promises to pay.
ex. Promissory note
Chattel paper: instrument + security
ag. (gives financer the rt. to repossess)
Investment property: stocks, bonds,
commodities futures, rts. to brokerage accounts
Defined: a right to accounts that are
yet to be paid.
No physical manifestation (no paper) b/c
Healthcare ins. receivables: rt to payment
dr. has from insurance co.
Deposit accounts: account at a bank.
General intangibles: (the catch all)
Literary rts., goodwill, etc.
Includes commercial tort and K claims (not
the jj, but the claim)
Torts are excluded from art 9.
Exception: commercial tort claims
P is an organization or
P is a person and claim
Arose in course of P’s bsns/profession and
includes PI damages or death.
Includes tort and K judgments (claim
is general intangible)
Primary obligation is a monetary payment
When do you classify?
Lock in the classification at the time the SI
attaches (see attachment)
What if debtor lies (about what he will use
goods for)? Irrelevant unless you know.
Tractor used by farmer for bsns:
equipment! (not farm
Rt to return
of security deposit from LL
rt. to payment for papers delivered account
to pymt for papers to be delivered account
of deposit form a bank
held to appreciate in value prob.
Equipment b/c not really consumer goods b/c not for
How to create a security interest:
Security agreement (K between debtor and
9-203 SA requirements
authenticated by debtor
acts intended to id the person w/ the paper)
describe the collateral 9-108
(sufficient as long
as rzbly ID’s; these are safe harbors)
can specifically describe (ibm printer 500)
can describe by category (all debtor’s
computers) or by code type (farm products)
(500 bushels of grain)
words of grant
(this is why a FS alone is not enough; you need an
intent to create the SI)