Secured Transactions Problem Set 1

Lien

For our purposes, a “lien” is an interest in (1) any property of whatever kind that (2) arises in any way and (3) secures payment or performance of an obligation.

What two questions should you ask when you come across a lien?

(1) What sort of property is at issue?

(2) Does the lien arise arise by operation of law, or arise by contract as a result of an agreement between the parties?

What are the two ways in which lien interests arise?

(1) arise by virtue of the operation of law (either common law or statute)

(2) arise by virtue of a contract (a.k.a an agreement entered into by the parties)

To what do artisans’ and mechanics’ liens apply and how do they arise?

Tangible and movable personal property, and they arise by operation of law

To what does a mortgage lien apply, and how do they arise?

Real property, and they arise by contract

What is a judgment lien, to what does it apply, and how does it arise?

• Winner of proceedings/judgement (creditor, say) receives a writ of execution upon the entry of judgement 

• Writ of execution directs the sheriff to seize the debtor’s assets on behalf of the holder of the judgement lien/party receiving the judgement 

• When the sheriff (an officer of the state) seizes the debtor’s property (can cover all types of the debtor’s property) on behalf of the judgement lien holder, the judgement lien attaches 

• This type of lien operates pursuant to the operation of law

Security Interest

Code Sections

1-201(b)(35); 9-109(a)(1). 

• (35)“Security interest” means an interest in personal property or fixtures which secures payment or performance of an obligation. “Security interest” includes any interest of 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. “Security interest” does not include the special property interest of a buyer of goods on identification of those goods to a contract for sale under Section 2–401, but a buyer may also acquire a “security interest” by complying with Article 9. Except as otherwise provided in Section 2–505, the right of a seller or lessor of goods under Article 2 or 2A to retain or acquire possession of the goods is not a “security interest”, but a seller or lessor may also acquire a “security interest” by complying with Article 9. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under Section 2–401 is limited in effect to a reservation of a “security interest.” Whether a transaction in the form of a lease creates a “security interest” is determined pursuant to Section 1–203. 

9-109(a)(1)

• § 9–109. Scope.  

(a)[General scope of article.] Except as otherwise provided in subsections (c) and (d), this article applies to:  

(1) a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract; 

What is a Security Interest?

1-201(b)(35) = “Security interest” means an interest in personal property or fixtures which secures payment or performance of an obligation. ( also = a lien in relation to a debtor’s personal property or fixtures)

In order for a Security Interest to fall within the scope of Artile 9, what must be true?

In order for a security interest to fall within the scope of Article 9, it must arise BY CONTRACT 

What does personal property include, in the context of a security interest?

Goods and intangible items

Personal property by the definition of this course, is property that is movable

In the context of liens, what is NOT considered personal property?

Real Estate is NOT considered personal property, as it is not movable

What is a fixture?

A tangible item sufficiently attached to real estate/land/buildings (to real property) that an interest in them would arise under real property law

They are part personal property, and part real property

Fixtures

9-102(a)(41)

• § 9–102.Definitions and Index of Definitions. 

(a)[Article 9 definitions.]

(41)“Fixtures” means goods that have become so related to particular real property that an interest in them arises under real property law.

To gain priority over a mortgage lien covering a Fixture a security-interest holder must be the first to file in the office in which local real-property records are kept (often the local county recorder of deeds office).  The secured party’s filing in relation to a Fixture is known as a “Fixture Filing.”

Fixture Filing

9-102(a)(40)

• § 9–102.Definitions and Index of Definitions. 

(a)[Article 9 definitions.]

(40)“Fixture filing” means the filing of a financing statement covering goods that are or are to become fixtures and satisfying Section 9–502(a) and (b). The term includes the filing of a financing statement covering goods of a transmitting utility which are or are to become fixtures.

To gain priority over a mortgage lien covering a Fixture a security-interest holder must be the first to file in the office in which local real-property records are kept (often the local county recorder of deeds office).  The secured party’s filing in relation to a Fixture is known as a “Fixture Filing.” 

How does a security-interest holder gain priority over a mortgage lien covering a fixture?

A security-interest holder must be the first to file in the office in which local real-property records are kept (often the local county recorder of deeds office).  The secured party’s filing in relation to a Fixture is known as a “Fixture Filing.”

Where should a fixture filing be filed?

The local county recorder of deeds office

Security Agreement

9-102(a)(74)

• § 9–102.Definitions and Index of Definitions. 

(a)[Article 9 definitions.] In this article: 

(74)“Security agreement” means an agreement that creates or provides for a security interest. 

The security agreement is the contract at the heart of a secure transaction.

What does it mean for a security agreement to attach, and what Section of Article 9 sets out the basic requirements for attachment?

When we say that a security agreement has attached, we are saying that the related contract (the security agreement) has become legally enforceable.

9-203(b) sets out basic requirements that have to be satisfied for the security agreement to be enforceable and the security agreement to attach

What are the steps needed for a security agreement to be attached (legally enforceable) according to 9-203(b)?

• § 9–203.Attachment and Enforceability of Security Interest; Proceeds; Supporting Obligations; Formal Requisites. 

(a)[Attachment.] A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment. 

(b)[Enforceability.] Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if: 

     (1)value has been given;  

     (2)the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and  

     (3)one of the following conditions is met: 

          (A)the debtor has signed a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned; 

What are the ways to satisfy the second prong, of three, for attachment to have occurred?

(9-203(b)-(1)-(3)) = Attach = legally enforceable  

• Value 

• Debtor has rights to the collateral 

• Signed security agreement 

• Or control of controllable  

• Or possession of possessable 

• Possession or control can serve the same evidentiary function as a financing statement 

• THE SECURED PARTY MUST BE IN POSSESSION OR CONTROL OF THE COLLATERAL THAT CAN BE POSSESSED OR CONTROLLED FOR NOTICE NOT THE DEBTOR 

• KEEP THE SECURED PARTY AND THE DEBTOR SEPARATE AND IN MIND 

• OBLIGOR/DEBTOR’S POSSESSION WILL NOT SUFFICE FOR PURPOSES OF PUTTING THE REST OF THE WORLD ON NOTICE 

• Possession and control can satisfy third requirement for purposes of attachment but also serves as notice requirement for purposes of perfection (TWO FOR ONE DEAL – SATISFACTION OF ATTACHMENT REQUIREMENT AND PERFECTION) 

• When the outside world has been appropriately placed on notice, it is then that the security interest has become perfected 

What does it mean for a lender to provide value, in line with the requirements set out in 9-203(b)?

Value is the consideration requirement from contracts

A lender can provide a promise to extend funds, or can actually extend the funds

What does it mean for the debtor to have rights in the collateral, or the power to transfer the rights in the collateral to a secured party, in line with 9-203(b)(2)?

The debtor has properly acquired the collateral, and has rights in it such that transferring the collateral to a secured party would not violate another party’s rights. For the exam, we can generally assume that a party has rights in the collateral.

What question does Professor Williams ask when he wants to know whether a party has adequate rights to collateral when using it as collateral for a loan?

“SHOW ME THE COLLATERAL! WHERE DID YOU GET THAT FUNK FROM?”

What can a party do in order to verify that another party has adequate rights to the collateral?

The party seeking to be secure can trace title, do a title search, and a possession search (for collateral that can be possessed), do a control search (for collateral that can be controlled) and do a filing search (check for financing statements).

For the purposes of this class, what fact pattern pings a concern about whether or not a party has adequate rights to the collateral in question?

When a party has transferred goods to a party in exchange for a bad check, then this party has voidable title.

What is the Last Events Test, and what does it do, and from what section of the UCC is it derived?

The Last Events Test identifies the latest date on which an event needed for attachment occurred, and it is derived from UCC 9-203(b)(1), (b)(2) and (b)(3).

Usually, can a thief convey good title?

No, under the normal rule, a thief cannot convey good title. A thief does not have adequate rights in collateral and therefore cannot grant a security interest in stolen collateral. Under the theory of chain of title, if the person giving the collateral has no title, then everyone else along the way cannot have good title either, since the rightful owner did not voluntarily place their goods into the chain of commerce.

Is there an exception to the rule that a thief cannot convey good title?

YES! 2-403(1)(b) is an exception to the rule that a thief cannot convey good title. Under the circumstances of 2-403(1)(b), there are three parties at play: the person whose collateral is in question, the debtor, and the purchaser. Th

What is a buyer in the ordinary course of business?

BIOCOB = 1-201(b)(9) 

• Can get title superior to the original owner  

Requirements to be a BIOCOB 

• (1) Need to be acting in good faith, which at a minimum means honesty 

• (2) Need to not have knowledge that your actions violate another’s rights 

• (3) Buys goods from someone in the business of selling goods of that kind 

= A good faith purchaser of goods from someone in the business of selling goods of that kind 

= BIOCOB is a type of good faith purchaser 

What type of sale is deemed outside of the “ordinary course of business”? 

• “a person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged” 1-201(b)(9) 

• Buyer in the ordinary course of business does NOT INCLUDE a (1) person that acquires goods in a TRANSFER IN BULK or (2) as a security for or in total or partial SATISFACTION of a money debt 

• Selling all inventory is sale in bulk and is not ordinary course of business 

• 2k owed, take this watch in satisfaction of this prior money debt is also not ordinary course of business 

What does it mean that the debtor has signed a security agreement that provides a description of the collateral, according to 9-203(b)(3)(A)

The signed security agreement, if the agreement is in writing and to be signed, must describe the collateral in sufficient detail. Saying “this property” is not enough. In order for the security interest to attach, there must be a clear description that describes the collateral at issue.

What is the exception to the requirement that for attachment, there must be a signed security agreement that sufficiently describes the collateral, in 9-203(b)(3)(B-E)?

In 9-203(b)(3)(B)-(E), however, the Code relaxes the signed security agreement requirement in cases in which the Secured Party, pursuant to an UNSIGNED (in many instances Oral) SECURITY AGREEMENT with the Debtor, is in “possession” or “control” of collateral that can be possessed or controlled.

Debtor

9-102(a)(28)

• § 9–102.Definitions and Index of Definitions. 

(a)[Article 9 definitions.] In this article: 

(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. 

= a party with interest in the collateral

When filing a financing statement, where is a human being debtor deemed to be located, and thus where should you file a financing statement?

• A human being debtor is deemed to be located in the jurisdiction/state of their principal residence

• File a financing statement in the jurisdiction in which the debtor is located 

When filing a financing statement, where is a corporation debtor deemed to be located, and thus where should you file a financing statement?

• Corporations are formed by either (1) filing articles of incorporation or (2) filing a certificate of incorporation in a particular state 

• In relation to business entities filing – those business entities are located in the state in which they are incorporated, so file a financing statement in the state in which they are incorporated

What is the general rule for where a party should file a financing statement?

File in the financing statement in the jurisdiction in which the debtor is located (primary residence for individual debtor or state of incorporation for corporate debtor) 

Obligor

9-102(a)(59)

• § 9–102.Definitions and Index of Definitions. 

(a)[Article 9 definitions.] In this article: 

(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. 

Creditor

1-201(b)(13)

• § 1–201.General Definitions. 

b)Subject to definitions contained in other articles of [the Uniform Commercial Code] that apply to particular articles or parts thereof: 

(13)“Creditor” includes a general creditor, a secured creditor, a lien creditor, and any representative of creditors, including an assignee for the benefit of creditors, a trustee in bankruptcy, a receiver in equity, and an executor or administrator of an insolvent debtor’s or assignor’s estate. 

Secured Party

9-102(a)(73)

• § 9–102.Definitions and Index of Definitions. 

(a)[Article 9 definitions.] In this article: 

(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, 2–711(3), 2A–508(5), 4–210, or 5–118. 

Collateral

9-102(a)(12)      

• § 9–102.Definitions and Index of Definitions. 

(a)[Article 9 definitions.] In this article:  

(12)“Collateral” means the property subject to a security interest or agricultural lien. The term 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 the subject of a consignment. 

Scope of Article 9

9-109(a)  

• § 9–109.Scope. 

  (a)[General scope of article.] Except as otherwise provided in subsections (c) and (d), this article applies to: 

(1)a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract; 

(2)an agricultural lien;  

(3)a sale of accounts, chattel paper, payment intangibles, or promissory notes; 

(4)a consignment; 

(5)a security interest arising under Section 2–401, 2–505, 2–711(3), or 2A–508(5), as provided in Section 9–110; and  

(6)a security interest arising under Section 4–210 or 5–118. 

What is 9-109(a)(1) requirements as it relates to a “security interest”?

Must relate to “personal property or FIXTURES” and it must arise “by contract.”

With few exceptions, to what does Article 9 apply?

“With few exceptions” Article 9 “applies only to consensual [i.e, contractual] interests in personal property [or fixtures]”.

What does Article 9 NOT govern and with what is it generally not concerned?

Article 9 does NOT govern the creation of liens that arise by operation of non-contractual common-law principles or by statutes (such as “artisans or mechanics liens”),  In addition, Article 9 is generally not concerned with the creation of liens (contractual or otherwise) on Real Property. A prototypical example of a contractual lien on Real Property is a “mortgage.”  

What is a conditional sale?

• Credit seller is holding onto title until credit buyer pays for the goods 

• Title – the passage of title, and therefore the sale, is being conditioned on the buyer’s paying for the goods  

• Credit seller’s retention of title is equivalent to the credit seller being granted a security interest 

What is a floating lien?

A security interest that attaches to after-acquired collateral, UCC 9-204

What section of the UCC explains the relationship between attachment and perfection?

UCC 9-308(a) sets out in general, in order to have a security interest, it must first attach before it can be perfected (subject to special exceptions) 

• Makes sense: if the security agreement is not legally enforceable, then it cannot be enforceable against the outside world 

What is the function of perfection, and when does it happen?

Perfection is the means by which the outside world is placed on notice that an item is or may be subject to a security interest.

Generally, a Security Interest will become perfected when it is attached and the Secured Party takes appropriate steps to notify the outside world (in particular, the Debtor’s other creditors) of the possibility that the Secured Party may have an attached underlying security interest.

What dictates the type of notice that is required for perfection under Article 9, and what are the 3 types of searches that can be done to uncover notice?

The type of collateral dictates the type of notice that is required under Article 9

The three types of searches to uncover notice are:

• Possessed collateral – possession search 

• Controlled collateral – control search 

• Perfected collateral via financing statement – financing statement filing search 

What sections of the UCC refer to categories of collateral that are subject to perfection by possession?

9-313(a) and 9-314(A)

For the categories of collateral that are subject to perfection by possession, which party’s possession counts?

The secured party’s possession is what to watch for NOT DEBTOR’S POSSESSION 

What are the categories of collateral that are subject to perfection by possession?

Subject to perfection by possession: MAN GOOD DISCO (o is silent) CHARLIE PARKER 

What is MAN GOOD DISCO (o is silent) CHARLIE PARKER?

(Tangible) Money, Goods, (Tangible) Documents, (Negotiable) Instruments, (Tangible) Stock Certificates, (Tangible) Chattel Paper

What is the “MAN” from MAN GOOD DISCO (o is silent) CHARLIE PARKER?

Tangible Money

What is the “GOODS” from MAN GOOD DISCO (o is silent) CHARLIE PARKER?

Goods  

= Items that are tangible (you can hold onto them and move them) at the time the security interest attaches 

• Different from the article 2 definition  

Connecticut's Good Farmer Paul Invents Equipment 

CT’S GOOD = consumer goods = goods held primarily for personal, family, or household use  

FARMER PAUL = farm products = crops, livestock, or products of crops or livestock in the hands of a debtor who is engaged in farming operations (who is a farmer, in essence)  

• Product or Eggs laid by chickens, for example  

• Farm supplies = hay for horses  

• In the hands of a debtor engaged in farming operations  

INVENTS = inventory = goods held primarily for sale or lease  

• Macy’s items for sale = inventory  

• Long term leases of vehicles = held primarily for lease, qualify as inventory  

• Goods used up over a relatively short period of time in the course of the debtor’s business = also INVENTORY  

• Ink   

• If Loyola were a debtor, the expo markers at the school are inventory because they are used up quickly over a relatively short period of time  

EQUIPMENT = goods held for a long term business use  

• Like in problem 1.1, Trib’s printing press is equipment  

• Catchall category  

• Not consumer goods, not farm products, and not inventory  

• Equipment will be held for a long term business use  

• Loyola's podium is equipment, used for a long term business use 

Fixtures  

• Good that becomes incorporated (sufficiently attached) to the real property (land or buildings) in such a way that an interest arises under local real property law 

• Focus on the moment in time when the good becomes attached to the underlying real property – ceases to be its own thing and becomes a fixture 

What is the “D” from MAN GOOD DISCO (o is silent) CHARLIE PARKER?

(Tangible) Documents 

• We mean -- “A document of title” -- a warehouse receipt 

• A piece of paper (tangible document) that evidences (that entitles the holder) the right to take possession of goods being held by a third party bailee 

• For exam: we will only be responsible for generic definition of document, and the warehouse receipt 

• One master copy -- “everything is on the one” 

• Perfection by possession only works when there is one master copy, readily identifiable as such 

• One and only one authoritative copy of the warehouse receipt 

What is the “I” from MAN GOOD DISCO (o is silent) CHARLIE PARKER?

Instruments (Negotiable Instruments) 

= a negotiable instrument 

• For example, a check 

• Paperwork, representing the right to receive payment, meets certain formal requirements 

• For our course, example of a negotiable instrument is a promissory note – for exam, if you see a promissory note, it is an instrument 

• A debtor has provided goods or services to a third party, and a third party hands the debtor a promissory note in which the third party promises to pay  

• One master copy -- “everything is on the one” -- Subject to the Principle of the One 

• Perfection by possession only works when there is one master copy, readily identifiable as such 

• Your client should sign only one copy of the promissory note – pursuant to the principle of the one 

• The authoritative copy of the promissory note 

• Cannot have an electronic promissory note – THE ONLY ONE THAT MUST BE PHYSICAL 

• With respect to negotiable instruments and a negotiable promissory note, it is only possible to have a definitive master paper copy

What is the “SC” from MAN GOOD DISCO (o is silent) CHARLIE PARKER?

• (Tangible) Stock Certificates – subject to the Principle of the ONE 

• We are going to stipulate a world in this course in which there are still paper (tangible) stock certificates 

• There will be a master copy that is understood as being the legal embodiment of rights associated with the stock certificates – sometimes do show up on the exam 

What is the “CHARLIE PARKER” from MAN GOOD DISCO (o is silent) CHARLIE PARKER?

(Tangible) Chattel Paper -- will be subject to the Principle of the One 

• Tangible chattel paper = one definitive paper master copy 

• Electronic chattel paper – control only possible if we can identify one electronic copy of the chattel paper as being the master copy 

• “chattel” old fashioned legal term for goods 

• Think of “goods paper” as for what it means in our course