Secure Transactions 1
Secure Transactions
Course Outline- Fall 2012
McJohn
I.Pre-Code Security Devices
-Basic Terminology
(1) Lien= Interest in the debtor’s property given by law to protect the creditor.
(2) Consensual Lien= Voluntarily Granted, in real property termed a mortgage, in personal property termed a security interest
(3) Statutory Lien=A lien imposed by statute or common law in favor of certain creditors the law deems worthy of protection (i.e. artisan’s liens (mechanics liens for garage mechanics).
-Article 9 helps to organize priorities in bankruptcy cases
C: Benedict v. Ratner- Designed to illustrate the evils associated with secret liens where no notice present
-Other pre-code security devices- (A) Pledge- Where the debtor gives physical possession of the collateral to the creditor until the debt is paid (B) Chattel Morgtage- Mortgage in goods (C) Conditional Sale- UCC 2-702-
(D.) Trust Receipts- I.e. car dealership financing
(E.) Field Warehousing-Bills of landing where you want a traditional pledge but goods are too large/vast to do that, here creditor holds on to bill of landing
II.The Scope of Article 9
-UCC 9-109- “This article applies to any transaction (regardless of its form) which is intended to create a security interest in personal property
-List of traditional security devices as spelled out in subsection (2) is illustrative only, other old devices, as well as any new ones which the ingenuity of lawyers may invent, are included, so long as the requisite intent is found. The controlling definition is that it is a transaction intended to create a security interest in personal property.
-If real property (i.e. land) then it is a mortgage, NOT a Security Interest (personal property).
+Security Interest=An interest in personal property or fixtures which secures payment or performance of an obligation.
-Debtor may want to use some of his/her present wealth as collateral to to secure obligation to perform… “Debtor creates an Article 9 Security Interest in (whatever piece of property) in favor of the creditor.
-If debtor does not meet obligation, then specific property can be made directly available to the creditor.
-ID (1) Secured Party (2) Debtor (3) Collateral (4) Obligation Collateral is meant to secure
**Whether a security interest is created is a question of intent, do parties intend to create an SI?
+Mechanics Liens (i.e forced statutory liens) are not governed as Article 9 Security Interests
+Title Retention/Conditional Sale is just a sale with the seller maintaining a security interest in the goods
+Notes are personal property, despite the fact that real estate transactions are not.
**UCC 9-109- General Scope of Article 9-Does not include a lien, other than an agricultural lien given by statute or other rule of law for services or materials. Article 9 does include all transactions, regardless of form, that create a security interest in personal property or fixtures by contract.
~Problem 2-
Assume that a state statute gives someone doing repairs a possessory artisan’s lien on the property repaired. Mr. Baker took his car into Mack’s garage for repair but, being strapped for funds, couldn’t pay the full bill, and Mack wouldn’t let him have the car back. Is Mack’s artisan’s lien an Article 9 Security interest?NO, not covered. What if, prior to the repair work, Mr. Baker signed a statement giving Mack’s garage a right to repossess the car if the bill wasn’t paid, security interest now?Yes, regardless of form, intended to create an SI.
**UCC 9-109-General Scope of Article 9-A sale of accounts, chattel paper, payment intangibles or promissory notes is covered by Article 9.
~Problem 3
To raise money, Farmer Brown’s Vegetables Roadside Stand sold all of its accounts receivable to Nightflyer Finance Company, which notified the customers that henceforth all payments should be made directly to Nightflyer (outright sale, not a lease with Accounts receivable as collateral). Is this sale nonetheless an Article 9 Security Interest? YES, Nightflyer must therefore file an Article 9 Financing Statement and conform to the reqs of Article 9 if it wishes to be perfected as against later creditors.
~Problem 4
Suppose Dickens Publishing agrees “Dickens agrees to repay Lender the entire principal of $18,000 on or before April 1, 2015. If Dickens cannot refinance its current debt to cover this amount or if another source of funds is unavailable, Dickens agrees to sell its inventory and equipment in order to repay lender.” Is this transaction governed by Article 9? NO, promising to sell something is not the same thing as granting a security interest in the asset
II.Consignments-
A true consignment is neither a sale nor a security device; just a marketing device whereby consignor (owner of goods) sends (cosigns) goods to a consignee (retailer)for sale to the public.
+If retailer cannot sell them, they are returned to the consignor.Consignor typically controls the terms of sale.
+Some consignments are not consignments at all bur rather sales on credit (i.e. secure transactions) designed to escape Article 9 filing requirements (i.e. if the retailer is required to pay whether or not he sells the goods or not).
-Some consignments are covered by Article 9, others are not.
+UCC 9-102 Consignments- Consignment means a transaction , regardless of its form, in which a person delivers goods to the merchant for the purpose of sale and:
(A)The merchant:
(i.)Deals in goods of that kind under a name other than the name of the person making the delivery.
(ii.)Is not an auctioneer; and
(iii.)Is not generally known by its creditors to be substantially engaged in selling the goods of others.
(B)With respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of the delivery.
(C)The goods are not consumer goods immediately before delivery and;
(D)The transaction does not create a security interest that secures an obligation.
~Problem 5
Antiques R US was the largest antiques store in the city, well known as a place where antique dealers could hire out space and exhibit their wares, with the store handling the sales and taking a commission on each one and returning to the dealer’s items that remain unsold. When the store takes out a loan from Octopus National Bank and uses as collateral “all its property” will the bank’s security interest reach the items in the store that belong to the dealers if the dealers have never taken the steps required of consignors under Article 9? NO, this is not an Article 9 consignment because this merchant is not “not generally known by its creditors to be substantially engaged in selling the goods of others.”
C: In re Fabers, Inc.-Oriental rug shipment is found not to be a true consignment but rather was an agreement intended to form a security interest, covered under Article 9. This is an Article 9 consignment because Oriental Rug Co. was not well known to be involved in the selling of goods of others.
~Problem 6
When Luke Skywalker, an artisan who handcrafted his wares, finished creating a large, jeweled sword, he took it down to Weapons of the World (WOW) a large gun and weapon dealer, which mostly sold items that it either manufactured itself or bought from other dealers around the globe. The sword was appraised at being worth over $25,000. Luke asked WOW to sell the sword for him. Is this an Article 9 consignment so that Luke needs to take Article 9 steps to protect himself from WOW’s other creditors who have an interest in the store’s inventory? Yes, this is an Article 9 consignment because this merchant is “not generally known by its creditors to be substantially engaged in selling the goods of others”
III. Leases-
-Tough to distinguish between lease and a secured sale
+Sale= Seller parts with goods forever vs. Lease=Seller Parts with goods for some designated period of time.
-Is there an expectation that the seller will get the goods back?
-Installed Payment Arrangement Sale + Retained Security Interest is NOT a lease, is a secured sale
-“An economically meaningful reversionary interest in the property”
-Distinguishing leases vs. sales
+A transaction is a secured sale if the lessee’s obligation is for a term “not subject to termination by” that lessee and if ONE of the following (a)- (d) factors is met
(a)Original term of the lease is equal to or greater than the remaining economic life of the goods
(b)The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods.
(c)The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration upon compliance with the lease agreement
(d)The lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.
**Always look to the facts of the case to determine whether or not there is a lease.
~Problem 7-
BIG Machines, Inc. leased a duplicating machine to Connie’s Print Shop. The lease was for five years, and the rental payments over this period exactly equaled the current market price of the machine. The lease contract further provided that at the end of the five years Connie’s print shop borrowed money from the Octopus National Bank and signed a security agreement with the bank granting it an interest in all of the print shop’s equipment. Octopus National seized all the sop’s equipment, including the duplicating machine. In the lawsuit Octopus National Bank v. Big Machines, who gets the machine? Octopus National gets the machine, this is a secured sale between BIG and Connie’s print shop because it is (i) not subject to termination by Connie’s Print shop and (ii) The lessee has an option to become the owner of the goods for no additional consideration or for nominal (just 5 dollars additional) additional consideration upon compliance with the lease agreement. Thus, it is an FS race and Octopus would clearly prevail.
~Problem 8
Business Corporation leased a massive copier from Copies, Inc. for a five year period. At the outset of the lease the copier had a fair market value of $300,000 and a predicted ten-year useful life. Over the course of the five-year lease the rental payments would total to $330,000. The lease provides that Business Corporation has the option to become the owner of the copier at the end of the five year period by paying Copies, Inc. the amount of $10,000. Is this a true lease or a secured sale?This is a true lease because, at the end of the day, the amount of consideration available for ownership is not “nominal” since Business Corporation has already paid more than the value of the thing itself. Would we reach a different result if the copier’s useful life were only five years?If the copier’s useful life were only five years, then a disguised sale has occurred (secured sale) because the lease is for the entire economic life of the leased goods, with or without renewal (aka “junk pile test”)
C: In re Architectural Millwork of Virginia, Inc.- Once you determine Part (i), then you go to Part (ii) to see if you can get one of the four a-d factors (original term of lease equals economic life of goods, lessee bound to renew lease on goods for remaining economic life of goods or just become the owner of goods, lessee has option to renew the lease for the remaining economic life of the goods with no additional consideration upon compliance with terms of lease, lessee has the option to purchase the goods with little or only “nominal consideration” upon compliance w/ terms of lease). None of four can be found in this case so it is considered a true lease and not a secured sale.
~Problem 9-
When Mercy Hospital’s administrators decided to build a new addition, they hired a general contractor named Crash Construction Co., and required it to get a surety to guaranty the performance of the construction job and the payment of all workers and material suppliers (to avoid a mechanic’s lien on the hospital). Standard Surety issued such a performance and payment bond covering Crash’s obligation to Mercy Hospital. To finance the construction, Crash borrowed money from Octopus National Bank (ONB) and have as collateral the right to collect progress payments from Mercy Hospital as they became due. ONB duly filed an Article 9 financing statement. Halfway through the job, Crash went bankrupt, and Standard Surety had to finish and pay off the employees and suppliers. At this point, by virtue of common law right to subrogation (the equitable right given to sureties to step into the legal shoes of persons they have paid) Standard Surety claimed a superior right to unpaid monies retained by Mercy Hospital, which were to be paid to Crash. ONB also claimed this fund, pointed to its filed security interest, and stated that standard Surety’s subrogation right was only an unfiled article 9 security interest. Who should win?Standard Surety should win, because subrogation, or the surety which pays of the debt taking the place of the creditor and thus being entitled to funds owed, is not an Article 9 Security Interest. Article 9 security interests apply only to security interests created by contract, NOT as a matter of law like subrogation. Surety has claim to disputed funds even absent the adequate financing statement.
IV. Exclusions from Article 9
-UCC 9-109
(A) Federal Statutes- Do not always trump UCC (state provisions), sometimes the two supplement each other.
***Intellectual Property as Collateral~ Sort of unclear as to whether federal filing is necessary to perfect an IP Security Interest (i.e. trademark, patent, etc.).
+This is consequential because if only UCC is required one filing in name of debtor will suffice for all intangible rights he/she owns. If federal filing is necessary, it will have to be done for each patent, copyright, and trademark, a much more expensive undertaking.
~Problem 10
Pollution Solutions borrows one googol dollars from Octopus National Bank (ONB), putting up as collateral its copyright, patents, and trademarks. Where should ONB file, to be sure it has a perfected security interest? No one knows where ONB must file to perfect the security interest, but the question here is slightly different. To be safe, ONB should file at the federal level, for each of its copyrights, patents, and trademarks. Although a UCC filing as a one-time deal may be all that is required, it is much more sensible to file at the federal level so as to secure ONB’s interest.
C: Philko Aviation, Inc. v. Shacket-This case really embodies the way federal law can control, Federal Aviation Act- all airplane transactions must be registered with the FAA in order to have validity over subsequent purchasers for value. Here federal law is in direct conflict with state law and thus federal law governs.
(B) Landlord’s Liens and Other Statutory Liens- UCC 9-109 excludes statutory liens from Article 9, but this might not include landlord’s liens where they are mutually agreed upon/consensual and a contract is formed.
~Problem 11-
When Christopher Morley opened his bookshop, the landlord wanted security for the rent. They signed a lease agreement providing that all of the inventory (the books) would be subject to a lien in the landlord’s favor and could be seized and sold if Christopher defaulted on the rent payment. Is the landlord’s lien required to be perfected under Article 9? Yes, this is a consensual landlord’s lien brought about by contract, and thus Article 9 is triggered and the landlord’s lien is required to be perfected under Article 9.
(C) Wage Assignments
-Generally, Article 9 does notapply to an assignment of a claim for wages, salary, or other compensation of an employee.
+There do remain some statutory exceptions which survive this
~Problem 12
Carl Jugular was an independent insurance agent who sold policies for many companies, though his primary sales were the life and automobile policies of the Montana Insurance Association (MIA), In order to float a loan to buy a car, Carl gave the lending bank a security interest in “all present and future commissions earned or to be earned” from the MIA. Does Article 9 cover this assignment? No, Article 9 likely does not exclude this assignment since these are commissions, NOT really considered wages.
(D) Non-Financing Assignments- UCC 9-109(d)(4)-(7) excludes Sales of accounts, chattel paper, payment intangibles, or promissory notes as part of the sale of a business out of which they arose or for the purposes of collection only, an assignment of a right to payment under a contract to an assignee that is obligated to perform under the contract, and an assignment of a single account, payment or intangible, or promissory note to an assignee in full or partial satisfaction of pre-existing debts.
~Problem 13-
When Dean Malone sold his lucrative art business to John Pivarski, he sold not only all the tangible assets but his outstanding accounts receivables as well. Must the buyer take the steps required by Article 9 of a secured party?No, the sale of accounts, chattel paper, payment intangibles or promissory notes as part of the sale of a business out of which they arose are excluded from Article 9 by UCC 9-109 (d)(4). If Malone received a commission to paint a portrait of the city’s mayor but decided he was too busy to perform the task and (with the mayor’s permission) transferred the job (and the right to the payment for it) to another artist, must the new artist take Article 9 steps? No, an assignment of a right to payment under a contract to an assignee that is also obligated to perform under the contract is excluded from Article 9 by UCC 9-109(d)(6).When one of Malone’s clients refused to pay for a delivered painting, Malone sold the account to Trash Collection Agency. Must Trash Collection Agency comply with Article 9?No, an assignment of accounts, chattel paper, payment intangibles or promissory notes which is for the purposes of collection only is excluded from Article 9 by UCC 9-109(d)(5). Finally, pressed by his art supplies store for payment of his outstanding tab, Malone transferred to the store the money due him from a client whose portrait he had painted the month before. Must the art supplies store take Article 9 steps?No, an assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of preexisting indebtedness is excluded from Article 9 by UCC 9-109(d)(7).