Secured Transactions And Commercial Paper

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Article 9 scope

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• Article 9 applies to consensual security interests in personalty and fixtures. If collateral is real estate, apply law of mortgages.
○ Personalty: generally equals goods.
○ Voluntary: Article 9 applies only to voluntary or consensual colleralizations, so does NOT apply to statutory or mechanics liens.

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Cast of characters for secured transactions

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• Cast of characters:
○ Debtor: who owes money
○ Secured party or secured creditor: entity who lends money
○ Security agreement: contract or record
○ Security interest: right creditor has in debtor's personalty or fixtures
○ Collateral: personalty or fixtures creditor can look to for satisfaction on debt.

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Tangible collateral

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○ Tangible collateral or goods (classify based on primary use in hands of debtor--subjective determination):
§ Consumer good: item used for person or familial purposes, blender oven, fridge
§ Equipment: used in business, cash registers, china at restaurant
§ Inventory: good held for lease or sale
§ Farm products: crops, livestock, supplies used in farming operations
§ Fixtures: items annexed to realty

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Intangible or semi-intangible collateral

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○ Intangibles or semi-intangibles: patents, trademarks, copyrights; stocks, bonds, mutual funds, proceed received upon sale of the collateral, accounts (rights to payment for good or services), promissory notes and drafts.

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Attachment

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• Creation of enforceable security interest. Attachment mean security interest enforceable.
• Requirements
○ Value: must be given by creditor (bank lends 50K to debtor)
○ Contract, called security agreement or record, must evidence secured transaction, unless secured party has taken possession of collateral, in which case no need for record. But if debtor is in possession, need security agreement.
§ Must be authenticated by debtor (signed or electronically marked); must reasonably identify the collateral.
○ Rights in collateral: debt must have rights in collateral (to confer in first place).
§ After-acquired collateral clauses are enforceable: security interest in all of Staples' inventory, now held or hereafter .

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Perfection of security interest

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• Perfection best understood as publicity device: secured party puts world on record or constructive notice of secured party's existence. Proper perfection held protect secured party from competing creditors.
• How to attain perfection:
○ Possession: by secured party's taking possession of collateral
○ Automatic perfection for purchase money security interests IN CONSUMER GOODS, upon attachment: to encourage lending to consumers.
§ Purchase money security interest (PMSI): Security interest enables debtor to purchase goods.

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Perfection by filing

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○ Filing: most common route to perfection, secured party FILES notice of security interest in public records. Proper filing puts potentially competing creditors on record or constructive notice.
§ What is filed to put world on notice: security agreement could be filed, but rarely is. Instead document typically filed in called financing statement (UCC-1): very simple document whose only purpose is to provide interest parties with sufficient information to make follow up inquires. Article 9 aims to encourage electronic filing and is "media neutral"
§ Contents of financing statement (simple and sparse): need only contain 1) debtor's name and address; 2) creditor's name and address; 3) description of collateral (can be super generic, "all of debtor's assets).
§ Where to file: done centrally, with state Secretary of State, in state where debtor is located
□ Individual debtor: located in state of her principal residence
□ Organization: located in state under whose laws it is organized.
Exception: if collateral is timber, minerals, or fixtures, file locally in county where underlying realty is located.

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Priority

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• Priority: purpose of collateralization and secured party seeks to subordinate NOT share. Each claimant is entitled to satisfaction IN FULL before subordinated claimant is entitled to take.

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Ranking of priority

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• Ranking of priorities:
○ Buyer in ordinary course: purchases collateral from merchant's inventory.
○ Perfected attached creditor: Article 9 creditor who succeeds in attaining perfection.
○ Lien creditor: general unsecured creditor, who goes to court to get judicial lien on collateral
○ Non-ordinary course buyer: purchases collateral outside ordinary stream of commerce.
○ Attached Unperfected Creditor: Article 9 creditor who creates enforceable security interest, but never perfects
General unsecured creditor: lender who never bothered to take collateral.

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○ Attached unperfected creditor against world:

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○ Attached unperfected creditor against world: interest is enforceable against debtor and subsequent attached unperfected creditor and general unsecured creditor, BUT will lose to Perfected Attached creditor, Lien Creditor, and any buyer WITHOUT knowledge of security interest.

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First in time Perfected attached creditor wins

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○ Perfected attached creditor versus world--defeats all except:
§ First in time Perfected Attached creditor
□ Early filing: For purposes of determining priority, Article 9 gives special effect to filing, allows for early filing, even at onset of loan negotiations. If early filer subsequently attaches, gets benefit of early filing, so priority will relate back to early filing date.

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First time perfected attached creditor versus PSMI

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§ Certain Purchase Money Security interest holders: relevant priority contest is between
□ holder of purchase money security interest (SI that enables purchaser to buy goods)
□ after-acquired collateral financier(floating lien holder: secured creditor who takes as collateral security interest "in all of debtor's [inventory] now held or hereinafter acquired)
□ Equipment collateral: After-acquired collateral financier perfected attached creditor versus Purchase money SI when collateral is equipment--Purchase money lender must file properly within 20 days after debtor takes possession and wins.
□ Inventory collateral: PSMI can prevail over after acquired creditor financier perfected attached creditor if FILES properly BEFORE debtor takes possession AND notifies after acquired creditor financier perfected attached creditor BEFORE debtor takes possession (to prevent debtor fraud-- bad faith might otherwise entice floating lien holder on basis of new inventory without mentioning PMSI encumbrance).

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§ Buyer in ordinary course versus first in time perfected attached creditor

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§ Buyer in ordinary course: Perfected attached creditor loses to buyer in ordinary course. Takes free of even perfected security interest in seller's inventory.
□ Reason for rule: to promote commerce and consumerism AND to honor buyer's reasonable expectations (buyer gets title to merchandise).

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Self-help remedy to default

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○ Self-help repossession: permissible, so long as creditor does not breach peace: when secured party's actions are likely to cause violence. Relevant question on exam is not whether fight broke out, but whether secured party did something provocative or likely to cause violence.
§ Reposession made over ANY protest (any objection) by debtor, however mild protest constitutes breach of peace.
§ If repossessor misuses color of law (impersonating law enforcement officer), used constructive force and breached peace
□ Civil and criminal penalties attach creditor's misconduct.
§ Home: enjoys zone of privacy. Creditor may not enter debtor's home without voluntary and contemporaneous consent.
§ Outside home: creditor may take collateral so long as no debtor objection.

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Repossession by judicial action (writ of replevin):

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Repossession by judicial action (writ of replevin): if secured party choose not to resort to self-help, may go to court and obtain judicial writ, ordering sheriff to obtain possession of collateral and deliver to secured party.

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Strict foreclosure

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○ Strict foreclosure: when secured party retains collateral in full satisfaction of outstanding debt. Creditor lawfully retains collateral and debt is cancelled. Works best when value of collateral approximates value of outstanding debt.
§ Method: secured party must send written proposal to retain collateral in satisfaction of debt. Send to:
□ Consumer goods: notice sent to debtor and any secondary obligors (guarantor of underlying debt)
□ NOT consumer goods: notice sent to debtor and other secured parties who have told foreclosing creditor of interest in collateral as well as perfected secured parties and secondary obligors.
□ Objection: if any of notified parties objects, with or without cause, within 20 days after notice is sent, strict foreclosure will not be allowed, instead sale will be required.
§ Consumer good and 60% rule: if collateral is consumer goods, debtor has paid 60% of loan in vent of non-PMSI or 60% of cash price in event of PMSI, strict foreclosure is not allowed. Instead secured party must sell collateral within 90 days or be liable in conversion.
□ Reason: avoid awarding creditors windfalls.

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Sale to satisfy debt

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○ Sale: secured party may sell collateral and apply sale proceeds to debt. Secured party chooses whether sale will be public (auction) or private. Every aspect of sale must be commercially reasonable.
§ Notice: Prior to sale, reasonable notice must be send (Article 9 provides standard notice forms which, if used, are presumptively commercially reasonable).
□ Consumer goods: notice must be sent to debtor and any secondary obligors
□ Other types of collateral: notice must be sent to debtor and those secured parties who have advised foreclosing creditor of their SI, as well as perfected secured parties and secondary obligors.
□ Contents of notice: Public sale: state time and place of sale; Private sale: state time after which sale will be made
® Consumer goods: additional consumer-protective provisions are mandatory, including how to calculate any deficiency and how debtor can redeem collateral.
□ Advance notice: no bright line, standard is commercial reasonableness. In non-consumer transaction, notice is deemed sent within reasonable time is sent 10 days or more before time of sale.
□ Secured party buy at sale: public--yes; private--generally no (absent external market checks), because too much potential for self-dealing.

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Action for deficiency judgment

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○ Action for deficiency judgement: if sale of collateral does not cover debt, secured party can proceed against debtor for deficiency judgment

If secured party sells collateral at low price to insider buyer, price independent third party would have paid, rather than actual amount paid, is price used in calculating deficiency.

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Debtors limited right to redeem

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○ Debtor's limited right to redeem: cut off once secured party has resold or completed strict foreclosure
§ To redeem: debtor must pay amount owed (missed payment or payments) PLUS accrued interest and secured party's reasonable expenses, including attorney's fees.
§ If security agreement contains acceleration clause (permits creditor to declare full balance due in even of default), to redeem debtor must pay off entire debt plus interest plus expenses.

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Types of negotiable instrument

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• Types of negotiable instruments:
○ Promissor note: contains affirmative promise to pay between two parties (I promise to pay . . . NOT mere IOU)
§ Parties: promisor= maker; promisee = payee
○ Draft: Contains order or command to pay (Pay to order of . . . Check)
§ Parties: drawer gives order; drawee is ordered to pay (usually bank); payee is beneficiary of order.
○ Indorser: appears with promissor notes an checks. Signs on back.

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• How to tell whether writing is negotiable instrument

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• How to tell whether writing is negotiable instrument (WOSSUPP): Writing, Payable to order or to bearer, signed by marker or drawer, reciting sum certain, containing unconditional promise or order and no additional promises or orders, payable on demand or at definite time, payable in currency.

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Payable to order or to bearer

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○ Payable to Order or to bearer:
§ Order: must use "order" or "assigns in connection with payee's name (Pay to “the order of…” “the assigns off…” “to ___ or his order.” )
§ Bearer: If not payable to order, then to be negotiable must be payable to bearer, meaning payable to anyone who has it. ("Pay to bearer." "Pay to the order of bearer." "Pay to Andy Garcia or bearer." "Pay to cash." (article 3 term of art) "Pay to the order of cash." (article 3 term of art)).
§ Pay to Andy Garcia: NOT negotiable, because does not contain order, assigns or bearer.

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Signed by marker or drawer

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○ Signed by maker or drawer: signed by maker if promissory note or by drawer if draft)
§ Any authentication, found anywhere on instrument, qualifies: could be initials, some defining mark, or nickname, found in margins or anywhere else on paper. NOT formal standard.

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reciting sum certain

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○ Reciting sum certain: specifically ascertainable sum. Must be able to calculate how much is to be paid from what writing say or reference to outside source.
§ Payable with interest: article 3 says if interest is not states, use judgment rate, set by state statute.
□ Interest rate need not be calculated by looking only to instrument itself, can refer to generally accepted commercial or financial index, compendium of interest rates or announced rate of named financial institution

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○ Containing unconditional promise or order and no additional promises or orders:

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○ Containing unconditional promise or order and no additional promises or orders: unconditional promise for note or unconditional order if draft
§ Condition = contract (promise to pay if, governed by or subject to another agreement, then non-negotiable).
□ But merely referring to another writing does not itself make promise or order conditional. Promise or order is not conditional simply because refers to another writing for statement of rights with respect to collateral, prepayment or acceleration. Can refer to another document on more tangential matters.
□ Deemed conditional is limits payment to particular source or fund (pay out of crop)
No additional promises or orders: 2's a crowd. Pay $5K AND give goods, then non-negotiable.

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○ Payable on demand or at definite time

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○ Payable on demand or at definite time
§ On demand: when instrument specifically state that payable on demand or at sight or on presentation.
□ Silent: still negotiable and payable on demand
§ Definite time: on or before stated date or fixed period after a stated date.
§ Acceleration clauses are permissible and do not destroy negotiability (super bowl), BUT future event not linked to date certain means not negotiable (birth of first grandchild)

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Payable in currency

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○ Payable in currency: means money, include foreign currency, but NOT goods.

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Contract liability

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• Contract or signature liability: when you signed it , you promise to pay it
○ Who signed negotiable instrument:
§ Maker: promisor in promissory note: merely by signing his name to instrument, maker enters into contract, whereby agrees to pay instrument. If fails to pay, can be sued
§ Drawer: party who signs check, by signing if bounces, drawer is notified, drawer promises to pay. If fails to do so, can be sued.
§ Indorser: signs name on back of instrument by signing, if maker or drawer of instrument does not pay and original promisee or payee is given notice, indorser promises to pay and can be sues.

Without recourse: term of art, used by indorsers and drawers, represents disclaimer of liability. Passes title, but assumes no signature liability.

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Warranty or transfer liability

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• Warranty or transfer liability: seller's liability for selling defective instrument.
○ Who is D: any transferor who sells negotiable instrument (NOT donors)
○ Who can sue
§ If D indorsed instrument, any P in possession of instrument may sue seller (indorsement = warranties run with instrument)
§ If D did not indorse instrument, then only D's is immediate transferee may sue (no indorsement = warranties will not run with instrument.

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5 warranties made by D

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○ 5 warranties (promises) made by D:
§ D promises that P has good title to instrument
§ All signatures are genuine and authorized (fraud is breach of warranty)
§ Instrument has not been materially altered (tampered with= defective)
§ No defense or claim good against D, meaning instrument is enforceable.
D has no knowledge of bankruptcy or insolvency proceeding against maker or drawer.

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Transfer

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• Transfer: due negotiation of "duly negotiated" means proper transfer of instrument.
○ If properly transferred, transferee is holder and may be eligible to be holder in due course. If improperly transferred, transferee is not holder and cannot qualify as holder in due course.
○ Payable order: when instrument is payable to order of specific payee, negotiated by delivery of instrument to payee
§ Any further negotiation requires that payee indorse instrument AND deliver it to transferee. No indorsement, not valid transfer. Indorsement must be authorized and valid.
Payable to bearer: if instrument is payable to bearer, indorsement is NOT required for negotiation

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Types of indorsement

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○ Types of indorsements: every one must be either special or blank and restrictive or unrestrictive.
§ Special: names particular person as indorsee. Indorsee must sign in order for instrument to be further negotiated.
§ Blank: does not name specific indorsee, may be negotiated by delivery alone.
§ Restrictive indorsement: contains condition, must be met to negotiate.
□ Check: for deposit only cannot be cashed. If lost before deposited and cashed by 3rd party, indorser can recover from bank in conversion.

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Qualifying as holder in due course

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• Qualify as holder in due course: takes instrument 1) for value, 2) in good faith and 3) without notice that it is overdue or has been dishonored or is subject to any defense or claim.
○ For value: holder must give value for instrument (can be less than legal value).
§ Does NOT mean consideration, which is contract principle. Mere promise is NOT value.
§ Old value is good value: check indorsed to pay for goods already delivered.
○ In good faith: good faith mean honesty in fact (subjective test, aka rule of pure heart and empty head).
○ Without notice: holder must acquire instrument without notice that is overdue, dishonored or is subject to any defense or claim. Notice requirement imposes objective test: did holder know or have reason to know of problem.

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Instrument overdue

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§ Overdue: should have already been paid. If holder has notice or reason to know that instrument is overdue, not HDC.
□ Payable at definite time: holder buys after pay date, cannot qualify as HDC
□ Principal in arrears: if holder had notice that payment or more of principal is in arreas, cannot qualify as HDC, but if take with notice of payments of interest in arrears, can qualify as HDC

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§ Notice of any defense or claim against the negotiable instrument's enforcement:

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□ When appearance of instrument gives notice: void or paid on face, holder cannot qualify as HDC.
□ Notice that obligation of any party is voidable: obligation may be voidable if seller defrauds buyer. As between Buyer and seller, obligation is voidable. If seller negotiates instrument to 3rd party, 3rd party could still qualify as holder in due course if did not have notice of reason to know of buyer's defense.
□ Notice of competing claim to negotiable instrument: if instrument is lost by or stolen from true owner, transferee could still qualify as HDC if instrument has been properly transferred and transferee did not have notice or reason to know of theft or loss.
□ Notice that fiduciary has negotiated instrument in breach of his or her fiduciary duty: standard is ACTUAL knowledge. Holder must actually know fo breach of duty, absent actual knowledge, holder can qualify as HDC.

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Shelter rule

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○ Shelter rule: transferee acquires whatever rights her transferor had (transferee takes shelter in statue of transferor).
§ Allows transferee to step into shoes of HDC, even though otherwise fails to meet requirement of due course holding. Transferee has all right of HDC even though transferee is donee or otherwise fails to meet requirements of due course holding.

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Benefits of holder in due course

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• Benefits of holder in course status: holder in due course (and subsequent transferee who take "shelter" in that statues) takes instrument free from claims and personal defenses and subject to only to real defensese
○ Claims: right to negotiable instrument because of superior ownership.  If negotiable instrument is duly negotiation to holder in due course, HDC defeats superior ownership
○ Personal defenses (all defense in ordinary contract actions): lack of consideration, fraud in inducement (personal fraud), unconscionability, waiver, estoppel.

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Real defenses

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○ Real defenses (MAD FiFI4):
§ Material alternation: change in terms of instrument. (check for $100, payee changes to $2100 and sells to HDC, maker liable for only $100)
□ If maker was negligent, estopped from raising material alteration. Includes leaving blanks or wide spaces on check.
§ Duress
§ Fraud in factum (real fraud): lie about instrument.
§ Incapacity
§ Illegality
§ Infancy
§ Insolvency