08-22-06 Tab UCC – use only language from title of statutory provision Remedies of Unsecured Creditors 1. Debtor creditor relationship established in variety of ways Traditional: Bank $ Involuntary means: Car accident – party at fault is creditor Civil procedure – complaint to judgment 30 days to 1 year Unsecured creditor has no property rights Must be secured to have an interest Levy of execution take possession of property Judgment does not create a secured obligation Does not order defendant to pay Execution – writ to seize property and sell Application of proceeds to the debt Creditor must indemnify sheriff Vitale v. Hotel Cali page 5 Improper levy liable to sheriff Sheriff usually takes possession Creates lein of levy Exemptions: State laws Certain property can’t be seized on a writ of execution “Home stead exemption” – Ks $8000 equity – Mo Necessities Limited by use or dollar amount Claimed at levy by debtor Must be released Pre-judgment attachment Court approved Creditor must prove exigent circumstances Self-Help Repossession Physical possession without legal process Unsecured creditor is not entitled
1
Conversion – wrongful exercise of dominion or control over property of another Secured creditor No breach of the peace Set-Off: If A owes B $100 and B owes A $100 = no debt – amount is equal If A owes B $36 and B owes A $100 = $64 debt – amount unequal Portion of larger debt survives 08-24-06 Security Interest Retains ownership An interest in property that is contingent on non-payment of a debt Real estate mortgage – deeds of trust Created under Art 9 Subject to default – collateral Non-possessory interest or possessory Must have writing Writing not required Statute of Frauds Possession of property Form: Substance Absolute transfer v. Security interest Lease and Option Car for 5 years Right to purchase at $10 Look at circumstances Value left at the end of the lease Disguised financing transaction Lease can be a financing agreement Protected as a secured creditor Art 9 requirements Or an unsecured creditor Rights above all others to the collateral Must be perfected – lien creditor Created – although: Shows absolute transfer Parties don’t realize or intend Regardless of possession Basile v. Remedy is foreclosure for a mortgage Granted security interest §1-201 (35), (37)
§9-109(a)(1) §9-102(72)
§9-102(52)
page 25
2
Right of redemption – own free and clear of the security interest Balance of the loan Fees Pay all debt Intended as security §9-109 Any transaction regardless of form Foreclosure Transfers ownership form debtor to a purchase Transfers possession Right to redeem is terminated Debtor looses all right t interest Judicial: File suit – Court order Statutory procedures Approve foreclosure sale – ownership not possession Debtor can purchase Consolidation hearing Distribute funds Final judgment Property – debtor remains in possession Purchaser is entitled to posses Gets a writ of possession Deed in lieu of foreclosure: Voluntary transfer of debtor’s ownership Absolute transfer – ownership Hold for 60 days – security interest Allows debtor to pay 08-29-06 Problem 2.4 page 34
Bank ------------------- Mortgage ------------------- Deed in lieu of foreclosure Debtor substitute for foreclosure ---------------------------------------------------- Trustee (3rd party bank) §9-610(b) 90 days to clear default To Sell Raise ? of no default Down side – loose equity 60 days to redeem Up side – avoid foreclosure Subject to State foreclosure
Repossession of Collateral
3
Changes right to possession Ejectment Eviction Debtor – Creditor have rights and interests Right to possession §9-609 Secured creditor entitled to possess on default Self-help No breach of peace Del’s Big Saver v. Carpenter Cook Took over the store Inventory was the collateral 08-31-06 Art 9 Right to Self-Help Repossession §9-609 1. Immediate without court help Security agreement provides surrender Debtors rarely volunteer to surrender May employ 3rd party agent Responsible for wrongful acts of repossession 2. Self help remedy is not unlimited Not a license to engage in any behavior Salisbury Livestock v. page 44 Must have trespass – plus – Notice to 3rd party who owns land Self-Help to Accounts as Collateral page 49 1. Accounts payable are debtor’s accounts receivables Collateral defined §9-102(2) Issue of control of accounts Debtor may: Have complete freedom to collect and use proceeds in business May collect but be required to pay down portion of loan Revolving credit account Secured party will make future advances secured by new accounts Pay directly to the secured creditor Be under a lock box arrangement P.O. or bank deposit §9-607 §9-406(a) page 40
4
Foreclosure proceedings give ownership §9-610 Secured party has an interest based on agreement Problem 3.2 How do we repossess? Page 51
Owner ^K Contractor ^K Subcontractor Collateral On a construction site 1. No guard and no fence Notice to 3rd party Circumstances that surround the problem Where located Time of day to repossess Trespass 2. Fence but no guard Trespass okay Cutting the lock is questionable 3. With a guard Notify him of the repossession Leave with resistance Okay to lie 4. Locked building Waivers in security agreements §9-602 §9-603
Sheriff can’t aid in self-help repossession Can only act with a writ of replevin from a court order 09-04-06 09-07-06 Problems: 4.2 (c) deficiency judgment at the discretion of the court 4.3 (a) What do we need to know to bid? Tax assessment value Title Nature and condition Value MISSED Chapter 4
5
4.4 (a) probable ability to recover deficiency No statutory right to redeem (b) civil liabilities on the bid Criminal liability for bidding more than able to pay (c) effect of completion of foreclosure sale is to discharge the lien creditor can’t collect the deficiency Standard – shock the conscience Bad faith plus Chapter 5 Art 9 sale and Deficiency 1. Under UCC, sale of collateral after default serves to convert collateral value into cash 2. Art 9 provides for strict foreclosure. The secured party’s retention of collateral in full or partial satisfaction of the debt §9-620 Notification – accepting collateral §9-621 Damages for failure to give notice §9-625 Remedies Strict foreclosure: Transfer title without exchange of money Proceeds of the sale §9-610 sale Subordinate creditor may be protected if sold for surplus Perfecting a security interest Must file a record Sec of State County Identify: Property, creditor, debtor Appropriate time and location §9-621(2)
(e) can’t apply §9-620 strict foreclosure Use §9-610 Paid 60% of cash price or obligation Have equity Secured creditor must put up for sale 09-12-06 09-14-06 Problem 5.2 (a) page 87 MISSED
6
47,136 750 3000 1500 650 350 6250 60,886
6250 40,886
sale proceeds advertising attorney fees – replevin preserving attorney – sale prep attorney – redistribution sale expenses obligation secured (principal + interest)
20,000 deficiency Question attorney fees Reasonable expenses (b)
§9-615
75,000 proceeds §9-615(a)(3) 4200 unsecured creditor Would need a judgment lien to access funds Surplus goes to the debtor Notice of Sale 10 days Waiver after default Can’t waive Used car – no a recognized market §9-611(b) §9-612(b) §9-624(a) §9-602 §9-612 comment 7 §9-610 comment9 §9-610(a),(b) §9-627(b) §9-615 §9-102(64) §9-626(a)(3)
5.3
5.4(a) Dispose of Commercially reasonable Expenses
Security interest attaches to collateral and follows to possession Chapter 6 Bankruptcy and the Automatic Stay Federal Bankruptcy System Court is a separate system Federal Relatively quick and efficient process for resolving the debtor’s financial problems Creditor – access to property 1st in right – judgment lien 1st in time – file first
7
Resolution is achieved by permanently forgiving debt Discharge of personal obligation of debt Deficiency to secured creditor Congress has constitutional power to establish uniform bankruptcy laws Bankruptcy judges Limited jurisdiction Adjunct of US District Court Voluntary – filed by the debtor Automatic stay – an injunction that takes effect on filing US Trustee – appointed and monitors Trustee – independent lawyer or accountant Petition – document that commences Schedules – lists of assets and debts Pro rata distribution – same percentage of debt is paid to each creditor of a class 11- §726 11- §503 8. Proof of claim – creditor statement of debt owed 9. Property of the estate 11- §541 All legal or equitable interests of the debtor in property as of the commencement of the claim 10. Adequate protection – protection against decline in the value of the collateral 1. 2. 3. 4. 5. 6. 7. 09-19-06 Secured Credit MISSED Sept. 19, 2006
Voluntary: Cases filed by debtors. Automoatic Stay: An injunction that takes effect on the filing of a bankruptcy case. United States Trustee: Department of Justice appoints trustees, monitors cases. Failure to file a Proof of claim: Creditor’s statement of debt owing. This is represented by the schedules that the debtor completes. Whatever the debtor says he owes the creditor… Adequate Protection: Protection the secured creditor form any loss of value during the bankruptcy proceedings - against decline in the value of the secured creditor’s collateral. Payments, liens, cushion of equity. To make sure the secured creditor gets at least the value of their property. Debtor can choose several chapters of the Bankruptcy Code Chapter 7 (liquidation of all the property) o Debtor Surrenders all property to trustee. Except from property exempt either under STATE LAW OR EXEMPT UNDER BANKRUPTCY LAW.
8
Debtor has to have some assets to have a fresh start. o Trustee sells the property and distributes proceeds. o Court Discharges all Debt under 727 [Except for non-dischargeable and reaffirmed debt] – chapter 523 tells what debts are not dischargeable – student loans. Chapter 11 (reorganization) – buz. or individual. o Debtor remains in possession of the property during the case and debtor proposes plan to repay the debt. o Debtor proposes plan to repay debt. Makes a plan. o Creditors vote – each class has a veto of the plan. o Court can confirm the plan, even if some creditors object. The only thing debtor is personally liable IS WHAT THE COURT CONFIRMS. At this point the debtor is discharged from the personal liability for ALL their pre-petition debts. o Plan Binds ALL CREDITORS. if I start off Chapter 12 – reorganization only for family farmer. Chapter 13 - reorganization only for individuals whose assets and liabilities qualify for this. Adjustment. You make your disposable income available to pay debts for three to five years Code pushes people to chapter 13. o Debtor keeps exempt and non-exempt property. o Debtor proposes plan to repay as much as possible over three years. o There is no voting by the creditors. o Court will confirm the plan if it meets statutory requirements. If they came into bankruptcy owing $100,000 of secured debt, and $100,000 of unsecured debt; there plan is to reduce secured by $50,000 and bay unsecured creditors 10% of their claim. The debtor got rid of a lot of their debt. Discharge of this debT is AT THE END OF THE PLAN. NOT AT THE POINT OF CONFIRMATION. o If debtor performs plan, remaining debt is discharged 1328.
Stopping Creditors Collection Activities The filing of a bankruptcy creates a New Estate, called property of the estate. At the time the case is filed you look at what interest the debtor has in the property. Defined at 11 USC § 541. Filing also triggers automatic stay of collection activities 11 USC 362(a). o Gives the estate the time and the ability to account for all the assets. The trustee needs time to collect the property and get them. o Opportunity to account for claims against the debtor and property of the estate. Bankruptcy for the unsecured creditor Reduces the Cost – the unsecured creditors will not have an incentive to keeping collecting on debts. The bankruptcy is reducing expenses and is trying to maximize the return for all unsecured creditors.
9
Violations of the automatic stay are taken very seriously and the debtor may recover actual damages, including costs and attorneys’ fees. The debtor may also recover punitive damages under 362(k)(1). 362(k)(2) punitive damages are only allowed when the creditor action was not taken in good faith. Prohibits a party from improving position or expanding rights after bankruptcy is filed.
CONSEQUENCE ON SECURED CREDITORS – LIFTING THE STAY BETTER TREATMENT THAN UNSECURED CREDITORS. WILL HAVE Access to collateral or equivalent value. Treatment depends on the status of secured creditors. Over secured secure party. Under secured [where $100,000 is owed; but the value of the property is $50,000 – they are under secured and their claim is represented by the value of the property. Bankruptcy will give the creditor $50,000 – get that value. You have to give them interest. 362(b): code allows the creditor to lift the automatic stay (1) for cause or for lack of adequate protection [The creditor will say they are not adequately protected in bankruptcy – the value that I have today will not be there tomorrow and the rights that I have under state law will be lost – to allow the creditor to exercise the rights they have under Article 9 – sell at auction to recover value]. o Grant leave from the automatic stay in a re-organization case. If the property has no equity and the collateral is not necessary to the effective re-organization. 362(d)(2). Trustee: Independent lawyer or accountant who administers property. Problem 6.1: you have to stop collections. Problem 6.2: You cannot repossess the vehicle. You have to go to court to get the stay lifted. Problem 6.3: Have to stop collection proceedings, but need to go to court to get this lifted because the value of the property will decline. Problem 6.4: Bank just needs to sign onto bankruptcy proceedings; because there might be equity in the property. Problem 6.5: BankWest should try to start foreclosure before they file Chapter 11because the def. defaulted; Problem 6.6: PROBLEMS 6 – AND GET THROUGH CHAPTER 7. 09-21-06
10
#6 Bankruptcy and the Automatic Stay D. Lifting the automatic stay 1. The consequences of the bankruptcy on secured creditor Better treatment than unsecured creditors Will have access to collateral or equivalent value 2. Treatment depends on the status of the secured creditor’s Over secured party ? Under secured party 2nd or 3rd priority secured party 3. Grounds for lifting the automatic stay 11§ 362(d) Lack of adequate protection 11 § 362(d)(1) No equity and the collateral is unnecessary to the effective reorganization 11§362(d)(2) In re Craddock-Terry Shoes page 101 $9,000,000 loan 11§ 362(d)(2) Security interest granted Mailing list, customer list, catalogs, 4 trademarks Stay not lifted Additional protection of collateral Debtor needs the collateral to reorganize Strategic move No payments made between filing and plan confirmed Property acquired after filing is not subject to lien 11§ 552 Can be put in the security agreement Art 9 – expanding right to collateral Problems 6.1 11 § 362(a)(6) File a proof of claim No monthly billing or act to collect Secured creditor must perfect 11 § 362(a)(1) No (a)(4) 11 § 362 (d) Challenge stay equity – creditor is protected - unless value decreases No relief in automatic stay
6.2
6.3
6.4
11
6.5
11 § 362 (d)(1) For cause Adequate protection of interest
6.6(a) unsecured creditor – no rights 6.6(b) 11 § 362(e) 30 days Stay automatically granted Petition 50K 3 months Now 40K Motion 35K 30-60 days Hearing 30K
09-26-06 #7 Treatment of Secured Creditors page 110
1. Debt in bankruptcy and under state law Debt – a sum of money owed Amount fluctuates based on contract Non-bankruptcy – debt determined under areas of contract, family, tort, or real estate law Bankruptcy – amount owed under non-bankruptcy law 2. Effect of obtaining a discharge Goal of bankruptcy – discharge of debt Creditor enjoined from replevin or foreclosure 3. Both secured and unsecured debts are discharged Does not affect secured’s collateral May foreclose on collateral 4. Security interest UCC Art 9 Mortgage or deed of trust Special collection rights of a consensual lien creditor whose lien is secured by real estate §9-102(a)(55) 5. Liens §9-102 §101(37)
11§ 524(a)(2)
6. Claims in Bankruptcy page 111 Amount that is owed at the time of filing Non-bankruptcy – implies a potential obligation
§101(5), (12)
12
7. Claims that are allowed are eligible to share in distributions Identifies claims that are not allowed
§502(a) §502(b)
8. Debt- liability on a claim § 101(12) Allowed claim may not be allowed to grow Underlying debt will continue to grow under state law Accrual of interest Case is dismissed from bankruptcy without discharge for debtor: The creditor may reassert its collection rights at state law Payment including all interest due from inception of the loan
B. The Claims Process Allowed claims areentitled to distribution 1. Claims process determines the allowed claim amount Proof of claim Written statement setting forth a creditor’s claim Rule §3001(c) Secured claim must file a writing evidencing security interest Claim is deemed allowed unless a party in interest objects §502(a) Deemed filed if in the schedule filed by debtor §1111(a) 2. Petition accelerates installment debts Under state law – only the next payment is due 3. Quick resolution process C. Disputed claim 11 §558 Individual Car value 15K Debt 25K Estate is entitled to the benefit of any defense available as against any entity other than the estate Statute of limitations Statute of frauds Usury Waiver of such defense by the debtor after commencement does not bind estate
Claims estimation process 1. Unsecured claim – calculating amount Check when case was filed
11 §502(c)
13
Allowed amount: Balance of loan Incurred attorney fees Late payment fees a. As of the moment of filing the petition 11 §502(b)
2. Bifurication of the claim page 117 11 §506(a) Secured portion – paid in full Unsecured creditor – prorata payment with other unsecured claims
6k Secured claim
Total 10K Paid 6K to secured claim 4K shared by unsecured claims - % to each
With respect to an allowed claim The holder of the claim has accepted the plan Retain the lien – andThe value of the property – or Debtor surrenders the property securing the claim
11 §1325(a)(5) (A) (B)(i)(I) (ii) (C)
Interest on claims is important 30 years at 6% Over half of payments will be interest 1st year – 10 of 12 payments are interest Is a creditor entitled to interest on the claim? Pre-petition Pendency Before filing the During the claim claim Unsecured Yes – 11 § 502(b) No – 11 §502(b) No – Timbers Yes – 11 §506(b)
Post-confirmation Date of plan Yes – 11 § 1129 (b)(2)(B) Must meet §1129(a) See above See above
Under-secured Over-secured Collateral is greater than the lien
See above See above
The value of the property to be distributed can’t be less than the amount of the claim 11 §1325(a)(5) Sale “subject to lien” v. “free and clear” page 118 Chapter 7 trustee sells the property to maximize the net proceeds
14
Realize value for the estate Non-real estate – Art 9 foreclosure Lien goes with the property 11 §541 (a) Buyer is not liable for any deficiency unless the buyer assumes and agrees to pay Basically selling the equity in property 09-28-06 Till v. SCS Credit page 123 National prime rate Prime plus or formula rate – court determines Account for risk of non-payment Secured party Compensate for the risk of default Reasonable interest rate Value of collateral Protecting the value Adequate protection against loss in value Before planned payments begin Equivalent at the end Problems: 7.1 Claim = 32,700 30,000 principal Unsecured creditor
18% interest rate
Feb 15 Work done 0 interest
March 15 Sept 15 Billing Bankruptcy Contract rate 18% $2700
Dec 15 Now 0 interest Only secured 11 §502(b)(2)
Attorney fees – only if in the contract 7.2 Claim = 32,700 receives 1,635 Total claims = 1,191,500 Available to pay = 59,575 Prorata distribution:
5% of claim paid avail 59,575 Total 1,191,500 = .05 32,700 X .05 = 1,635 ind claim
7.3(a)
Secured Claim
15
6 months 12% Unpaid
Bankruptcy Now 3 months 12%
12 months Keeps accruing
340,000 principal – lien Over-secured creditor 20,400 = 6 months at 12% 10,812 = 3 months at 12% = 371,212 secured claim Interest will keep accruing Fees based on agreement Attorney, etc… 7.3 (b) Court – 12% interest Plan confirmed today Value of 371,212 plus interest
400K - 20.4 - 10.812 - 340K principal until equity is gone
collateral
7.3(c)
Plan confirmed in 1 year Interest = 43,200 340,000 20,400 10,812 28,788 only to the value of the collateral = 400,000 secured claim 0 unsecured 340,000 - lien 325,000 secured principal – value of collateral – under secured creditor 15,000 unsecured principal 20,400 interest for 6 months 0 interest for 3 months 325,000 secured claim 35,400 unsecured claim No post petition interest Subject to prorate distribution
7.4
#8
Formalities of Attachment Creation of a security interest Asset Collateral < Security Interest> Debt Obligation §9-203(a) (b)(A) (1) (2)
Attaches when it becomes enforceable Enforceable only if -Value given Debtor has rights in collateral - and -
16
§2-501(1)(a) Agreement provides adequate description Value has been given by the secured party Loan or loan commitment Pre-existing claim Sufficient to support a simple contract
(3) §1-201(44)(b)
(d)
May be less than full ownership §2-501(1)(a) An interest in collateral Trademark, lease, license Can only foreclose to the extent of debtor’s interest Can have no greater value Existing and identified goods No consideration paid 10-03-06 Debtor has authenticated a security agreement §9-102(7) To sign (A) To execute otherwise adopt a signal (B) Present intent Authenticating person to identify the person and adopt or accept a record §9-102(69) Inscribed on a tangible medium Retrievable in perceivable form Can be electronic Security agreement Creates or provides for a security interest Collateral – property subject to security interest Proceeds Sufficiency of description Reasonably identifiable Objectively determinable §9-102(a)(73)
§9-102(a)(12) (A) §9-108 (a) (b)(6)
In re Thompson page 134 Encumbrance §9-102(a)(32) A right other than ownership in real property In re Ace Lumber Perfection of a security interest UCC financing statement Description Enforceability? §9-203(b)
17
No language granting a security interest in the collateral Must show parties intent Description of the collateral Problems 8.1 Promissory note Signed by debtor Description not enough page 135 Composite Document Rule
Financing statement Not signed Authorized to file Not authenticated
Cover letter from attorney Signed by attorney Not authorized Course of dealing
Attack under: Super-generic description Not sufficient 8.2 Point in time security interest attaches: Becomes enforceable Enforceable only if -Value given Debtor has rights to collateral -and Debtor has authenticated
§9-108(c)
§9-203(a) (b) (1) (2) §2-501(a)(1) §9-203(b)(3)
8.3
“Equipment described on list” Not attached to security agreement (a) No attachment of collateral (b) 2 weeks later – mailed and stapled to security agreement May be enough for attachment Perfected by delivery of a document Attachment if authorized (c) 2 years later – too late (d) No – automatic stay overrides attachment §363(a)(4), (5) Security agreement with no description Debtor authorized secured party attorney to fill in Not filled in – placed in file without Debtor files bankruptcy Trustee requests copy of security agreement “Bulldozer” – reasonably describes – maybe Trustee becomes lien creditor §544
8.4
10-05-06
18
#9
Collateral and Obligations Covered Asset Collateral < security interest> debt obligation
What collateral secures obligation? What obligations are secured? Whatever the security agreement says Interpretation: 1. Rules of contract 2. As of its execution effective date intent of parties 3. “All equipment” = presently owned 4. Exception for inventory, accounts Rapid turnover assets Includes after acquired §9-108 Comment 3 Validity of description Required Reasonable / sufficiency Specific Category UCC category Quantity Computational formula Objectively determinable Not “all assets” – super generic Addresses adhesion contacts Not “commercial tort claims” Not consumer goods transactions
§9-203(b)(3)(A) §9-108(b) (1) (2) (3) (4) (5) (6) (c) §9-108(e)(1) (e)(2)
Objectively determinable §9-108(b)(6) By whom? What additional info? 1. Crops – real estate – serial # 2. All items purchased on this account 3. Equipment now used in restaurant @ address What if they move? Limited by language used Courts allow extrinsic evidence – parol In re Shirel page 151 Super generic description – ineffective Adhesion contract Floating lien After acquired property attached
19
Attachment: 1. Agreement 2. Value 3. Rights
Stoumbos page 155 “After acquired” – regarding accounts receivables Automatic attachment – ongoing financing Revolving line of credit Express language not needed Problems: 9.1 Security Agreement -------- Planting --------Now -------- Harvest a. Crops growing on the debtor’s farm Will make a difference if crops are already planted Before or after security agreement Use more definite language Growing or to be grown Present v. Future collateral Farm products Crops – grown from the soil Livestock Equipment in the security agreement Clear and unambiguous language Only as of the effective date No express after acquired language “All merchandise purchased on this credit card” Must be more detailed Description is insufficient §9-102(34) (A) (B)
9.2
9.2
9.3
10-10-06 #10 Proceeds, Products, Value Tracing – State law Transformation of collateral UCC encourages secured lending Take risk and rely on collateral As it exists today Value regardless of what debtor does Still have a security interest Proceeds collateral §9-102(a)(64)
20
Whatever is acquired on the sale, lease, license, exchange, or other disposition (A) Whatever is collected on or distributed (B) Rights arising out of (C) To the extent of the value – claims arising/torts (D) Insurance policy – loss or damage (E) Debtor ---Collateral - --- Proceeds ----Account or Tort Debtor or Insurance
Every security interest includes proceeds – built in Attachment … Gives secured party the rights to proceeds §9-203(f) The proceeds or proceeds are proceeds Collateral includes proceeds §9-102(a)(12)
Disposition of collateral Continuation of security interest §9-315(a) Once perfected has superior rights to any secured creditor who perfected after (c) To perfect: Description – may not be identifiable Crops – file by county Proceeds – file with Sec of State Security interest continues – unless §9-315(a)(1) Authorizes disposition free of security interest Purchaser takes free and clear of security interest of the seller §9-320 Attaches to any identifiable proceeds §9-315(a)(2) Gets the collateral after default §9-609 Z Bank security interest in cow Seller –Beans Debtor – Cow 2000 Buyer 2000
Transfer of money §9-332 Takes free unless in collusion with debtor to violate the rights of the secured party Security interest continues Commingled proceeds are identifiable Goods Physically united §9-314(a)(2) (b) (1) §9-336
21
Identity is lost Receives security interest in the mass Not goods – cash Identifies by tracing Permitted under laws other than Art 9 Lowest Intermediate Balance Rule page 170 Collateral remaining = lowest balance of all funds Between time collateral is deposited and the time the rule is applied In re Oriental Rugs page 171 Consignment agreement Not a true assignment Intent security interest in consigned goods Protect by monitoring business of the debtor Audit to ensure security interest intact Track the collateral Potential for undermining value Burden of secured creditor to prove 10-12-06 Problems: 10.1 Collateral = Equipment, inventory, accounts Proceeds – yes Products, substitutions, additions – not mentioned Only if proceeds or after acquired inventory Or accounts Traceable to proceeds Also replacements 10.2 a.
Page 175
Account §9-102(a)(2) Bank account – only if it arises from the collateral Performance by the debtor – only if proceeds result in money form an account b. Parrot in lieu of payment of overdue account Proceeds of the account – obligation due §9-102(a)(64)(B) c. New replacement computer Part of equipment – does not include after acquired Traceable to money or proceeds d. Bird in exchange for services Only if generated from an account Not if there is no billing
22
10.3
Rights arising out of collateral Proceeds form race horse purse Security interest in inventory to bank Selling everything but inventory Are accounts receivable clear? Not if balance is for inventory sold Bank has a security interest as proceeds Would have to release interest Proceeds – equipment, fixtures, etc… Security interest attaches if accounts used to purchase Warranty or guarantee from the seller Protects buyers interest in purchase agreement Escrow funds to deal with unknown claims XT-100 copier 35,000 secured Destroyed – insurance proceeds to the extent of the value of the collateral Intermediate Balance Rule Deposit Start Insurance 35,000 Rent check IRS check 6,000 would be secured amount
10.4
10.5
Withdrawal
2,000 32,000
Balance 5,000 40,000 38,000 6,000
#11
Tracing Collateral Value During Bankruptcy Basic concepts: When acquired? Source of Right Justification Criterion for Coverage Avail During Bankruptcy Value Tracing After acquired Proceeds After sec agree signed ------------------- Sec Agree description §9-203(f) Contract Value Tracing Fit the description? Acquire on dispositio No- §552(a) Yes- §552(b) No Yes but loosely
§552(a) Pre-petition obligations Post-petition property Property to satisfy: Free and clear Bankruptcy §552(B) Interest in pre-petition collateral Trace to proceeds Continues post-petition
23
After acquired property: Clauses invalid after filing bankruptcy In re Delbridge page 179 Is milk the product of a cow? When it is produced post-petition? Equities of the case: Contributions of debtor v. value post-petition Gives the creditor a portion of the milk In re Hotel Sierra Trustee must segregate and account for cash collateral Trustee has burden – adequate protection Entity has burden – security interest §363 page 1852
§363(p)(1) (2)
Proceeds Tracing in Bankruptcy 4 theories 1. §9-102(a)(64) 2. Former §9-306(a) 3. Delbridge 4. Hotel Sierra
received on disposition and rights arising received on disposition ratio disposition minus §363(a)
Cash collateral: Highly liquid Must provide adequate protection Can get substitute collateral Not traced as proceeds Not as after acquired property Was free and clear post-petition 10-17-06 Problems: 11.1 page 188
Sec agree ------- 50K purse ---- B’rupt ---------- Track pays In trust account §552(a) doesn’t apply §552(b) security interest extends to the proceeds 11.2 Is payment collateral?
24
Sec agree---- B’rupt ----- Works --------- Paid As after acquired? No §552(a) Was equipment or inventory used to generate proceeds?? Maybe some allocation Equities of the case §552(b)(1) How tenuous is the connection between the equipment and the creation of the account? Doesn’t qualify as proceeds under §9-102(a)(64) 11.3 Lowest Intermediate Balance Rule Commingling of funds 6K collateral Maybe the new copier Consent to use After acquired property Court can limit use Avoid transfer of property Relief from stay 11.3 page 188 Rooms 510K revenue 520K expenses -10K Food 121K 100K +21K §9-332(b)
§363(c)(2) §552 §363(e) §549(a) §362(d)
Hotel Sierra How much is cash collateral? Net room revenues - $0 Food and drink Not rents or proceeds After acquired property 10-19-06 #12 Legal Limits What may be collateral
Lien avoidance – renders obligation unsecure §522(f) May avoid if: Judicial lien (A) Non-possessory, non-purchase money sec int (B) PMSI – Purchase Money Security Interest §9-103(a),(b)
25
Secures: Payment of the purchase price Advance made to pay the purchase price Possessory security interest Secured party is in possession of the collateral Lien – “impair an exemption” Sum of the lien All other liens – and Amount of the exemption Exceeds the amount of the exemption Value 100K 50K Judicial lien -------- 25K Exemption 70K Mortgage
(1) (2)
§522(f)(2)(A) (i) (ii) (iii) (f)(1)(A)
Avoid 45K - unsecured Only 5K remains
Assignment of wages Granting of a security interest in future personal earnings Can’t receive directly Against public policy Void in bankruptcy in all states Indirect: Security interest in a separate deposit account Collateral – property Security interest in personal property §9-109(a) Transaction that creates a security interest in personal property General intangible §9-102(a)(42) Means any property Catch all provision Personal property Not real property Governed by state law Security interest in non-property Cannot attach after bankruptcy -Except
§552(a) (b)
Seller ----------------- Debtor ----------- Secured Party Non-property Security Interest License
26
Security interest doesn’t attach to license Attaches to debtor’s right to proceeds from future sales Bounty received is proceeds of the debtor’s rights §552(b) In re SRJ Nissan franchise Money paid for termination Inherent value of general intangible Goodwill, going value concern Market value Restrictions on assignment Cannot encumber: Franchise Makes ineffective any attempt to restrict Prevails over inconsistent law In re Chris-Don Trustee sold liquor license State law exempts as property #13 Default, Acceleration, and Cure under State Law Default – Rights and judicial enforcement Failure to pay the debt when due -Or- otherwise perform the agreement Requirements of the security agreement Secured party – protect the value May jeopardize collateral Ability to receive payment Acceleration page 215 Rendering a debt previously payable at some future date, due and payable now Cure page 215 Reversal of an acceleration by payment or other action that relieved the creditor of the effects of the default §9-601(a) §9-408 (e)
Installment loan – series of payments Line of Credit page 214 Creditor agrees to lend and receive payment at times elected by the debtor, up to the line amount and until the contracted due date of the line
27
Insecurity Clause §1-208 A provision that the loan is in default if the secured party deems itself insecure or the like Good faith Right to receive payment will be impaired Waiver Voluntary relinquishment of a known right Express or implied Repeated behavior Acceptance By estoppel Misleading a debtor into the honest and reasonable belief that the creditor intended a waiver Can be silence to repeated behavior 10-24-06 JR Hale page 216 Insecurity clause No express or implied waiver 1st payment on the debt No previous course of business Waiver by estoppel Good faith belief Based on facts and circumstances Reasonable reliance to debtor’s detriment Legal doctrines to excuse default Old Republic v. Lee page 221 Acceleration and cure Notified of default and accelerated Sent payment to cure default Rejected by Bank Right of acceleration Must occur before default is cured KMC v. Irving Notification of payment due on demand Took control of accounts Payments sent to lock box Shut down cash flow Left with no operating capital Limitations: Good faith Notice
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Reasonable time to get financing Kham’s and Nates Equitable subordination of a claim Inequitable conduct Pre or post petition Opportunistic advantage #14 Default, Cure, and Acceleration under Bankruptcy Law Chapter 11 & 13 right to cure defects
§510(c)
Modification Right to modify underlying obligation Post petition interest due Must be paid in full to get plan approved 1. Pay contract in full 2. Allows debtor to cure and re-instate Principal residence 2 transactions Arrears and fee/penalties Look at agreement and state law Curing Chapter 11 Chapter 13 10-26-06 Two systems combine to create one: State Defines default Authorizes acceleration Cure only before acceleration effective date of plan reasonable time
§506
Bankruptcy Accepts state definition Accepts pre-filing acceleration, but stays collection Permits cure, before or after acceleration, conditioned on adequate protection Permits modification of repayment schedules
Modification –creditor is entitled to payments of a value, as of effective date of the plan, equal to the secured interest To have that value, payments must equal the secured claim plus interest at market rate Till v. SCS Credit
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To modify in bankruptcy, must have property or rights to be administered In re Moffett Repossession of car §9-609 Disposal §9-610 Filed Chapter 13 Estate is automatically created at filing All legal and equitable interests Right to redeem collateral §9-623 10 day notice of disposal §9-611, 612 Right to surplus amount §9-615(d) Rights are not extinguished until disposal §9-610 Until accepts collateral under§9-620 §9-617 Modification – rewrite loan New payment schedule Arrears included in new payments Merged into principal Interest at market rate Chapter 11 No limit on length of payment Chapter 13 Payment only for plan period §1322(d) <3yrs Ct approve max 5 Only short home mortgage §1322(c)(2) File before sale - Roach Cure and Reinstatement Return to original schedule Arrearage paid separately
Not home mortgage §1123(b)(5) Generally can’t modify a home loan if for principal residence Must file before sale - DeSono §1123(a)(5)
Interest at contract rate for reinstated portion of debt Chapter 11 Chapter 13 Cure at effective Cure over date – case law reasonable time 30 days §1322(b)(5) Must file before sale §1322(c)(1) State law fixes State law fixes §1123(d) §1322(e) Adequate protection -Use of collateral - declining value §363(b)(2),(c)(2) - not against principal
In re DeSono Chapter 11 Principal residence can’t cure and reinstate Foreclosure judgment terminates rights State law for contract rights Mortgage has rights only from judgment Makes entire debt due and payable from proceeds of sale
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Can cure until sale is completed #15 Prototype Transaction
Floorplan / Wholesale Lending Retail goods Inventory financing a. Each loan advance is made against a specific piece of collateral Statement of Transaction With financing terms included at market rate Can object to terms b. As each piece of collateral is sold by dealer, the loan advance for that piece of collateral is payable
Involves 3 relationships: Triangle Bank $$ 1. Floorplan agreement
2. Security agreement Statement of transaction Financing statement Dealer
Supplier
Inventory
1. Bank – finances purchases of inventory by approved dealer Dealer submits order for inventory Supplier submits invoice for goods to bank Bank gives approval # or issues payment to supplier Inventory delivered to dealer with 30 days acceptance If bank repossesses inventory from dealer, supplier agrees to repurchase goods from bank 2. Bank and Dealer Executes security agreement in favor of bank Agrees to purchase from floor plan supplier only Bank will do inventory checks to verify Statement of transaction for each inventory purchase Includes financing terms Can get personal guarantee 3. Dealer and Supplier Dealer sells inventory to buyer Buyer gets 2nd bank to finance and pay for inventory
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Buyer has financing agreement with 2nd bank Dealer sends invoice price plus interest to bank for sold item Retains profit from the sale 10-31-06 MISSED CHECK EMAIL Secured Transactions Oct. 31, 2006 Chapter 16 – Personal Property The Big picture Part One: The creditor-Debtor relationship. What is default Part Two: The creditor and Third Party Relationship. Chpater 6: Perfection – Process by which you notify the world about your security interest; and est. priority between creditors est. an interest in the same collateral. Chapter 7: Maintaining Perfection; Article 9 – SI terminates after 5 years. How do you renew and keep this up. Attachment – this is different than perfection. The fact the Security interest goes with the collateral does not mean the perfection will be maintained. Chapter 8: The Concept of Priority. Chapter 9: Particular Priority Contests. Priority Effect If two secured parties have security interests in the same collateral, the one with priority is entitled to be paid in full before the other is entitled to any payment at all. [271-279] I. What does it mean for one creditor to have priority over another, and how does a creditor obtain priority over another creditor? a. Lien: A relationship between a debt and property that serves as collateral. – a Secured Creditors Remedy the ability to foreclose, sell the collateral, and have the proceeds applied to the debt. b. Priority: If there is > 1 lien on the collateral each lien will have a priority. [high – Senior lien; subordinate and jr. lien]: You have property worth $100,000. Lien 1 is $70,000 and Lien 2 is $50,000 the property is sold. Lien 1 gets $70,000 and lien 2 gets $30,000 and has an unsecured claim for the remaining $20,000. c. Some priority is taken care of through the distributional rules of the Bankruptcy Code 507(a) and 726(a). d. Perfection: Steps that the holder of a lien must take to give public notice and thereby est. priority. Filing UCC financing statement is not enough; must do one of the following – (a) filing notice in public records system (b) taking possession of the collateral (c) taking control of collateral by means of the stake holder’s agreement (4) posting notice on the property on where it will be seen by persons dealing with the property. i. Purpose: Later lenders will know of the first lender and adjust.
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ii. RULE: LIENS by nature are meant to by public and easily discoverable, so subsequent creditors can know about the liens. iii. GENERAL RULE: the date and time of perfection will determine the priorities of the liens. e. Purchase Money Security Interests: no perfection needed, code provides this is already perfected. f. Peerless Packing Co. v. Malone And Hyde Inc. i. FACTS: Appellee purchases store from Mr. K; Mr. K owes $387,000 to Appellee - Appellee has SI in the inventory. [None of the inventory providers had a purchase money SI in the inventory – this could have given appellants priority over appellee’s security interest in the inventory]. Mr. K defaults – Appellee takes possession of the store, runs it, and sends letters to creditors saying Appellee is in possession and will not pay on any accounts before he took possession. – Creditors sued Appellee under unjust enrichment theory. ii. This is a seller financed transaction. iii. Ordinary course of business: Entities selling to the debtor, they are usually unsecured creditors. iv. Court Reasoning 1. RULE: unjust enrichment claim is not allowed when gov. by the UCC. Although the result of disallowing an equitable unjust enrichment claim may appear harsh, the unsatisfied creditors, could have protected themselves either by demanding cash payments for their goods, or by taking a purchase money security interest in the goods they delivered. v. Key: The creditor with the Security Interest has priority, the secured creditor got everything when the buz. failed; and 12 unsecured creditors did not get paid… This is priority. g. Filing System Principal means used to communicate the possible existence of a lien from a creditor who has one to a creditor who is thinking of acquiring one. i. Financing Statement for UCC: Creditors who take SI file with this system – as a note to other creditors and before creditors take their liens they search this file to see whether prior secured creditors are there. ii. Each county in USA has a filing system so this is a difficult task. iii. 9-501. FILING OFFICE: 9-501. FILING OFFICE ON THE EXAM HE WILL GIVE A 501 STATUTE TO KNOW WHERE FILING IS DESIGNATED THE CODE LEAVES IT OPEN FOR THE STATE TO DETERMINE WHERE TO FILE. 1. (a) [Filing offices.] Except as otherwise provided in subsection (b), if the local law of this State governs perfection of a security interest or agricultural lien, the
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office in which to file a financing statement to perfect the security interest or agricultural lien is: a. (1) the office designated for the filing or recording of a record of a mortgage on the related real property, if: i. (A) the collateral is as-extracted collateral or timber to be cut; or ii. (B) the financing statement is filed as a fixture filing and the collateral is goods that are or are to become fixtures; or b. (2) the office of [] [or any office duly authorized by []], in all other cases, including a case in which the collateral is goods that are or are to become fixtures and the financing statement is not filed as a fixture filing. 2. (b) [Filing office for transmitting utilities.] The office in which to file a financing statement to perfect a security interest in collateral, including fixtures, of a transmitting utility is the office of []. The financing statement also constitutes a fixture filing as to the collateral indicated in the financing statement which is or is to become fixtures. 9-203: Attachment occurs and there is a SI, perfection is when the financing statement is filed. 9-109(a): applies to trasaction that create a SI in Personal property or fixtures by contract. 9-310: U.C.C. § 9-310 9-310. WHEN FILING REQUIRED TO PERFECT SECURITY INTEREST OR AGRICULTURAL LIEN; SECURITY INTERESTS AND AGRICULTURAL LIENS TO WHICH FILING PROVISIONS DO NOT APPLY (a) [General rule: perfection by filing.] Except as otherwise provided in subsection (b) and Section 9-312(b), a financing statement must be filed to perfect all security interests and agricultural liens. (b) [Exceptions: filing not necessary.] The filing of a financing statement is not necessary to perfect a security interest: (1) that is perfected under Section 9-308(d), (e), (f), or (g); (2) that is perfected under Section 9-309 when it attaches; (3) in property subject to a statute, regulation, or treaty described in Section 9-311(a);
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(4) in goods in possession of a bailee which is perfected under Section 9-312(d)(1) or (2); (5) in certificated securities, documents, goods, or instruments which is perfected without filing or possession under Section 9-312(e), (f), or (g); (6) in collateral in the secured party's possession under Section 9-313; (7) in a certificated security which is perfected by delivery of the security certificate to the secured party under Section 9-313; (8) in deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights which is perfected by control under Section 9-314; (9) in proceeds which is perfected under Section 9-315; or (10) that is perfected under Section 9-316. (c) [Assignment of perfected security interest.] If a secured party assigns a perfected security interest or agricultural lien, a filing under this article is not required to continue the perfected status of the security interest against creditors of and transferees from the original debtor. 9-311. PERFECTION OF SECURITY INTERESTS IN PROPERTY SUBJECT TO CERTAIN STATUTES, REGULATIONS, AND TREATIES (a) [Security interest subject to other law.] Except as otherwise provided in subsection (d), the filing of a financing statement is not necessary or effective to perfect a security interest in property subject to: (1) a statute, regulation, or treaty of the United States whose requirements for a security interest's obtaining priority over the rights of a lien creditor with respect to the property preempt Section 9-310(a); (2) [list any certificate-of-title statute covering automobiles, trailers, mobile homes, boats, farm tractors, or the like, which provides for a security interest to be indicated on the certificate as a condition or result of perfection, and any non-Uniform Commercial Code central filing statute]; or (3) a certificate-of-title statute of another jurisdiction which provides for a security interest to be indicated on the certificate as a condition or result of the security interest's obtaining priority over the rights of a lien creditor with respect to the property. (b) [Compliance with other law.] Compliance with the requirements of a statute, regulation, or treaty described in subsection (a) for obtaining priority over the rights of a
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lien creditor is equivalent to the filing of a financing statement under this article. Except as otherwise provided in subsection (d) and Sections 9-313 and 9-316(d) and (e) for goods covered by a certificate of title, a security interest in property subject to a statute, regulation, or treaty described in subsection (a) may be perfected only by compliance with those requirements, and a security interest so perfected remains perfected notwithstanding a change in the use or transfer of possession of the collateral. (c) [Duration and renewal of perfection.] Except as otherwise provided in subsection (d) and Section 9-316(d) and (e), duration and renewal of perfection of a security interest perfected by compliance with the requirements prescribed by a statute, regulation, or treaty described in subsection (a) are governed by the statute, regulation, or treaty. In other respects, the security interest is subject to this article. (d) [Inapplicability to certain inventory.] During any period in which collateral subject to a statute specified in subsection (a)(2) is inventory held for sale or lease by a person or leased by that person as lessor and that person is in the business of selling goods of that kind, this section does not apply to a security interest in that collateral created by that person. 11 USCS 544 § 544. Trustee as lien creditor and as successor to certain creditors and purchasers (a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by-(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists; - the trustee becomes a lien creditor when the bankruptcy is filed, now you have a battle between this creditor and the traditional lien holder. NPI – Case. (2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or (3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
National Peregrine, Inc. v. Capitol Federal Savings and Loan and Association of Denver
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ISSUE: Whether a Security Interest in a copyright perfected by an appropriate filing with the US Copyright Office or by a UCC -1 financing statement filed with the relevant secretary of state? Key to this case: May file – you can file elsewhere. The statute says may file. But the policy issues the court deals with Federal Copyright act, looks like Congress wanted to prempt the whole area. In re: Pasteurized Eggs Corporation * Did this case at the end of class did take too many notes, but you should read it.
11-02-06 #16 Problems: 16.1 page 287 Felicia – arrears – 10K Alimony and child support Judgment – 6 months prior Subject to statutes Rights to collateral Judgment gives right to levy of execution lien Perfected when sheriff goes out Now – unsecured creditor No right to vehicle After judgment – 30 day appeal period File for pre-hearing attachment of interest {Granting of a lien could be fraud} Non-dischargeable debt – child support §523
§311(b)
Lien rights: Trustee or debtor in possession In re Peregrine page 274 Judicial lien on all assets of estate in bankruptcy Shall have the rights and powers of a creditor §544(a)(1) Lien creditor has priority over anyone not perfected Motion to void lien Eliminates subordinate liens Unperfected Creates unencumbered property to satisfy debts
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Fund reorganization Debtor in possession Same rights as a trustee 16.2 page 288 Winchell --- sale of cart -- Sergio Buy property subject to liens which exist Can’t avoid under Art 9 If perfected, creditor has rights against BPV Value is decreased by liens the buyer is unaware of Must rely on public record Financial statements filed to perfect liens #17 Financing Statements The Debtor’s Name Is it effective to perfect the lien? Filing office Contents – sufficiency Name found in the state Records of the organization Decedent’s estate A trust Other cases
§1107(a)
§9-501 §9-502 §9-503 (a)(1) (a)(2) (a)(3) (a)(4)
Name of the debtor No Art 9 definition for individual Common law – name generally known, for non-fraudulent purposes in the community In re Kinderknicht page 296 Didn’t use correct legal name Errors §9-506(a) Minor errors okay unless seriously misleading No nick names Corporations Sec of State office Art of Inc Names used previously to find Financing statements In the public record? List of entities that appears on the internet listing
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Financing statement not seriously misleading §9-506(c) Search under correct name would disclose statement with incorrect name Error doesn’t void Search in records of filing office using the office’s standard search logic Varies by jurisdiction Not all searches are the same Based on the search program that each office uses Under this rule – only a single search is necessary to get the correct name Multiple searches are needed to find tax liens In re Spearing Tool page 302 Didn’t use precise registered name Tax lien IRS Rule: Form 668 – valid notwithstanding any provision of law regarding form and content Problems: 17.1 page 305 Name to search under Must find out who debtor is Corporation or sole proprietorship Full name Correct name Will depend on the search system A searcher who knows the correct name doesn’t have to search other names Description of collateral May be trade name Trade name only insufficient Must also have name of debtor 17.2 Names to search for – 3 options May show additional possibilities SOS has 2 search options: 1. Hard copy of Debtor’s Name Index 2. Give clerk exact name §9-503(c)
11-07-06
Theory of the filing system First takers communicate their interests to later takers Problems: Filing and searching in same system
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Filing and searching under same name Searcher may need more information Weed out false positives To make additional inquiry of secured party 1. Financing statement should contain 8 more pieces of information To qualify for filing: §9-516(a) Filing officer to refuse unless contains: §9-502(a) 1. Name of debtor 2. Name of secured party 3. Indication of collateral Need not be correct 4. Mailing address of secured party §9-516(b)(4) 5. Mailing address of debtor (b)(5)(A) 6. Whether debtor is individual or organization (b)(5)(B) If debtor is an organization requires: (b)(5)(C) 7. Type of organization 8. Jurisdiction of organization 9. Organization id # What must be in a financing statement: 2. Against a reliance purchaser 1. Name of debtor Not seriously misleading 2. Name of secured party Must not give rise to estoppel 3. Indication of collateral Not seriously misleading Mandatory refusal Communication of refusal 2 business days When effective Effect of errors or omissions Debtor’s name 3. Against bankruptcy trustee Same as reliance purchaser
§9-516(b) §9-502(a) §9-506(c) §9-506 comment 2
§9-520(a) (b) (c) §9-506
§9-516(b)
In re Pickle Logging The totality of information included must not be seriously misleading §9-506(a) Debtor avoids the lien Secured creditor becomes unsecured Unperfected creditor
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Initial financing statement – 5yrs – farm §9-521(a) Addendums – maintain priority (b) Changes to initial financing statement Assignments – transfer the secured party’s interest Continuation statement – financing statement effective 5 more years Termination statement – makes financial statement ineffective Financing statement §9-102(a)(39) Problems: 18.1 page 317 a. Must fill in required information If left blank it will be rejected Incorrect information can be corrected later b. Rejected using license plate # Is it perfected? Yes
§9-516(b)(5)(C)(iii)
§9-516(d)
c. Accepts the filing §9-520(c) Effective §9-338 Subordinate only to purchaser with reliance on incorrect information (1) Value with reliance and possession (2) In bankruptcy the §544 trustee is the lien creditor Would be subordinate 18.2 Bankruptcy §544(a) trustee has power to avoid security interests not sufficiently perfected a. Address – not required or misleading §9-506(a) §9-516(b)(4) For secured party it puts them on notice to search further
b. Incorrect mailing address for debtor Maybe c. Use of secured creditor’s trade name Not considered misleading d. Entirely wrong name for secured party Not misleading Search by debtor name 11-09-06
§9-506(a) comment
§9-502(a) §9-506 comment
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#19
Exceptions to the filing requirement 3 ways to perfect: page 320 1. Taking possession 2. By operation of law 3. Give notice to person who controls Possession: The detention or control The manual or ideal custody of property Agent: Acts of behalf of another Subject to the other’s control Collateral in possession by person other than the debtor Not an agency relationship In possession of 3rd party Secured party can take possession Why allow possession? Will give notice Filing gives notice Possession-Gives-Notice Theory 1. Searcher will look for the collateral 2. Possession will be visible Money : Government medium of exchange §9-313(c)(1)
§9-201(24)
Instrument: §9-102(a)(47) Negotiable instrument or any other writing that evidences a right to payment of a monetary obligation Is not itself a security agreement or lease And Is the type that in the ordinary course of business is transferred by delivery with any necessary endorsement or assignment Chattel paper §9-102(a)(11) Record or records that evidence both a monetary obligation and a security interest in specific goods or a lease of specific goods Monetary obligation – secured by the goods or owed under a lease of the goods Security interest in a security interest
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Deposit account: §9-102(a)(29) An account maintained with a bank Does not include accounts evidenced by an instrument Certificate of deposit – is an instrument Secured party has control of a deposit account if: §9-104 1. They are the bank 2. The debtor, secured party, and bank have agreed Even if the debtor retains the right to direct the disposition of the funds 3. Secured party becomes the bank’s customer §9-104(a)(5) The bank is not required to confirm the existence of a §9-104 to another customer unless requested to do so by its customer §9-342 Automatic perfection: Perfected when it attaches Factor: Use of goods Filing §9-312 Optional Exclusive Optional Possession §9-313 Optional Preferred §9-309
Control §9-314
Goods Certified goods Chattel paper Instruments Tangible §9-330(b) Deposit accounts Electronic chattel paper Money Certificated security Uncertificated security Negotiable bill of lading Warehouse receipt
Optional Exclusive Optional
Exclusive Optional
Optional Optional Optional
Preferred Preferred
Optional
Gallatin PMSI and Automatic Perfection page 328 Perfecting a security interest in consumer goods Value doesn’t control Be aware that state law governs a maximum $ limit for PMSI Ks $1000 Mo ? – Ferguson has no idea Look at the use of the goods to determine Default on power boat – high $ item Filed Chapter 11
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Consumer goods: Subject to an exemption from filing of a financial statement Purchase money security interest Loan is made for the goods Ask the debtor Look at his credit report Bluxome Street Associates Read this case page 332
Problems: 19.1 a. Cash in register daily Take it daily Send an agent who is not the debtor b. Negotiable promissory note Filing Possession c. Money in a bank account 3 options for deposit account – above Right to a set off Apply one obligation against another owed d. Shares of stock – Certificate issued Control preferred Can either file or possess Priority given to possession e. Promissory note and Security interest in a car Chattel paper If electronic Possession is preferred
§9-312(b)(3)
§9-312 §9-313
§9-314 §9-328
§9-313(a) §9-314(a)
19.2 Casa Grande 500K contract Canards 300K loan Canards Franchise Watson Rest 500K Contract Security interest in a security interest “Contract to pay” – Is it a promissory note?
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Is it a negotiable instrument? 11-14-06 #20 The Land and Fixtures Recording Systems Real property recording By county Courthouse Administrative office Documents evidencing liens Transfers of ownership Costs more Filing fee Transfer tax based on value of property Amount of mortgage Can structure transaction to avoid transfer tax Fail to record in time Avoidance of unperfected mortgages Not self-purging Filed with identifying # # of book and # of page Permanently on the record Debtor’s name problem is insignificant Record reflects chain of title to property Search by tract (description) Abstract or title company keeps records Real estate law governs goods sufficiently related to real estate to be a fixture §9-102(a)(41) §9-334(b) Art 9 permits attachment and perfection of security interest in goods, and fixtures But not – §9-334(a) Ordinary building materials incorporated into an improvement on the land Subsequent placement and association Trade fixtures: Store shelving and displays that are not a permanent part of the real estate Goods: Includes fixtures and ordinary building materials ** see paragraph 1 page 345 §9-102(a)(44) §9-334 comment
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Real Estate Recording Mortgages Financing statement filed as a fixture filing §9-502(b) Mortgages effective as a fixture filing §9-502(c)
Art 9 Filing Financing statement Financing statement filed against fixtures §9-501(a)(2) – Where Financing statement against collateral Transmitting utility - §9-501(b) §9-502(b)
Formalities - Fixture filing 1. Name of debtor and signed 2. Name of secured party and address 3. Indicate collateral covered 4. Covers fixtures 5. Will be filed in real estate office 6. Describe real property 7. Name of record owner in chain of title
In re Cliff’s Ridge Skiing page 341 Priority §9-334 PMSI (d) Before become fixtures or within 20 days Fixtures (e) Priority over conflicting interest Consent (f) In re Renaud page 347 Mobile home and land refinanced Borrowed $33,100 Recorded mortgage Not on certificate of title Subject to state law Mobile home is a motor vehicle Follow procedures accordingly Problems: 20.1 Perfecting an interest in collateral a. Record deed in filing office Tenancy in common – mortgage Trust – financing statement – SOS office b. Trees growing on land crop or not Timber to be cut – planted purposely File in real estate records Possibly a fixture
§9-102(a)(44)(ii) §9-501(1)(A) §9-102(a)(41)
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Time on the land – permanent Not a fixture – crop – file in the SOS office Mortgages reach crops in some states c. Virgin growth of trees Not a crop – not planted deliberately to be cut Mortgage will reach unless a decision to cut is made d. Should mortgage mention the trees? Probably To include one may exclude the other Will limit ability to cut e. Promissory note and mortgage that secures it Don’t have to file – but should anyway Take possession – Trumps filing 11-16-06 #21 Characterizing Collateral for the Purpose of Perfection Proper place for filing: Based on classification: Intrinsic nature Use to which it is put 11-28-06 1. Will dictate where the secured party must file Fixture – office for filing real estate 2. Will dictate method use to perfect Deposit account §9-334 comment 12
§9-203(g) §9-313(a)
§9-311(a)(2)
§9-501(a)(1)
§9-312
Inventory v. Equipment Same filing system Depends on use Inventory Equipment – what its not
§9-501(a) §9-102(a)(48) §9-102(a)(33)
Proper method for perfecting 5 ways 1. Filing
page 355
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2. 3. 4. 5.
Possession Control Notice to stakeholder Doing nothing – PMSI automatic
Instruments v. General Intangibles Omega Environ page 355 Security interest in a CD Art 9 requirements: Assigned to the bank Transferred by delivery Ordinary course of business Non-negotiable Look at market place Treats CD as instrument Not clearly erroneous Possession will perfect General intangible Must file to perfect True Lease distinguished from a lease intended as security May look like a sale financed by owner page 375
True lease – not intended as security Security interest v. lease §9-201(37) Lease – not an Art 9 transaction Determined by the facts of the case If the length of the lease and payment happen to be for exactly the useful life of the property When no value is left Sale Allowed to file a financial statement §9-505 Realty paper – promissory note – mortgage Perfect in the right to payment Instrument By taking possession By filing Possession will take priority over a later purchaser Chattel paper §9-102(a)(11) Possession §9-313(a) Priority §9-330(d) Filing §9-312(a) Purchaser who gives value: - Ordinary course of Instrument §9-102(a)(47) V. §9-308(e) §9-102(a)(47) §9-313(a) §9-312(b) §9-330(b)
Accounts §9-102(a)(2) General intangible (42) Filing §9-312(a)
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-
business Acts without knowledge Of security interest perfected by filing Has priority
Multiple items of collateral In re Leasing Consultants See slides Read this case page 360
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