Transcript Standard Setting in High

Class 5
Secured Transactions, Fall, 2014
Rights in the Collateral
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
773.702.0864/[email protected]
Copyright © 2001-14 Randal C. Picker. All Rights Reserved.
9-203

(a) [Attachment.]
A
security interest attaches to collateral when it
becomes enforceable against the debtor with
respect to the collateral, unless an agreement
expressly postpones the time of attachment.
July 17, 2015
2
9-203

(b) [Enforceability.]
Except
as otherwise provided …, a security
interest is enforceable against the debtor and third
parties with respect to the collateral only if:
 (1) value has been given;
 (2) the debtor has rights in the collateral or the
power to transfer rights in the collateral to a
secured party; and
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9-203
 (3)
one of the following conditions is met:
• (A) the debtor has authenticated a security
agreement that provides a description of the
collateral …
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The Derivation Principle


Secured Creditor Takes Through Its Debtor
Example
Debtor
leases goods
The secured creditor can take the debtor’s lessee
interest as collateral, but the secured creditor’s
rights will be limited to those held by the debtor
July 17, 2015
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2-9: Rights in the Collateral
Debtor
“Debtor hereby grants
to Bank a security
interest in Debtor’s
printing press to
secure all debts of
Debtor to Bank.”
July 17, 2015
1/1
SA: Printing Press
$
Bank
What are Bank’s rights?
6
2-10: Rights in the Collateral II
Debtor
“Debtor hereby grants
to Bank a security
interest in the Mona
Lisa to secure all debts
of Debtor to Bank.”
July 17, 2015
Bank
1/1
SA: Mona Lisa
$
What are Bank’s rights?
7
2-12: Third Parties and Collateral
Owner
Loan by
Bank to Corp
Corp
?
Bank
July 17, 2015
Bank wants additional collateral
from Owner for the loan to
Corp: How should we do this?
8
Debtors and Obligors

9-102(a)(28) Definition of “Debtor”
(A)
a person having an interest, other than a
security interest or other lien, in the collateral,
whether or not the person is an obligor;
(B) a seller of accounts, chattel paper, payment
intangibles, or promissory notes; or
(C) a consignee
July 17, 2015
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Debtors and Obligors

9-102(a)(59) “Obligor”
means
a person that, with respect to an obligation
secured by a security interest in or an agricultural
lien on the collateral
 (i) owes payment or other performance of the
obligation
 (ii) has provided property other than the
collateral to secure payment or other
performance of the obligation, or
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Debtors and Obligors
 (iii)
is otherwise accountable in whole or in part
for payment or other performance of the
obligation.
July 17, 2015
11
Peoples Bank
Brooks L.
Dickerson
11/02: SA: Cattle
FS: Cattle
Brooks L. Dickerson
July 17, 2015
Peoples
10/5/99: SA: Cattle
FS: Cattle, “Louie
Dickerson”
Cornerstone
Who has priority in the cattle?
12
Answer

Cornerstone, if …
Cornerstone
filed first and will have priority over
Peoples if the Cornerstone FS is effective
 Possible name issues
July 17, 2015
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Farm Security Act: 7 USC 1631(d)

(d) Purchases free of security interest
Except
as provided in subsection (e) of this section and
notwithstanding any other provision of Federal, State, or
local law, a buyer who in the ordinary course of business
buys a farm product from a seller engaged in farming
operations shall take free of a security interest created
by the seller, even though the security interest is
perfected; and the buyer knows of the existence of such
interest.
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7 USC 1631(e)

(e) Purchases subject to security interest
A
buyer of farm products takes subject to a
security interest created by the seller if (1) …; or
 (2) in the case of a farm product produced in a
State that has established a central filing
system--
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7 USC 1631(e)
• (A) the buyer has failed to register with the
Secretary of State of such State prior to the
purchase of farm products; and
• (B) the secured party has filed an effective
financing statement or notice that covers the
farm products being sold; or
(3) …
July 17, 2015
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Peoples Bank: Sole P Version
Brooks L.
Dickerson
11/02: SA: Cattle
FS: Cattle
Brooks L. Dickerson
10/5/99: SA: Cattle
FS: Cattle, “Louie Dickerson”
Cornerstone
05/05: Sells Cattle
Bryan
Peoples
July 17, 2015
Who has priority in the cattle?
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Answer

Cornerstone, if …
Prior
issue as to names on FSs
New issue is possibility that Bryan might take free
and clear of SI under FSA
 Bryan failed to satisfy 1631(e)(2)(A) and so
takes subject to the SI
July 17, 2015
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Peoples Bank: New Entity Version
Brooks L.
Dickerson
11/02: SA: Cattle
FS: Cattle
Brooks L. Dickerson
Peoples
July 17, 2015
10/5/99: SA: Cattle
FS: Cattle, “Louie
Dickerson”
Glenbrook
Cattle
Company
Cornerstone
05/05: Sells
Cattle
Bryan
Who has priority in the cattle?
19
Answer

Bryan
Cornerstone
and Peoples have no claims against
a separate Glenbrook Cattle Company
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Ver 1 or Ver 2?


Is Peoples Bank version 1? Version 2?
Something else?
Having seen the facts, how would you
restructure
If
you were Dickerson?
Cornerstone or Peoples Bank?
Bryan?
July 17, 2015
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Assume Ver 1: What Should Bryan
Do?
Buys Cattle
Brooks L.
Dickerson
11/02: SA: Cattle
FS: Cattle
Brooks L.
Dickerson
Peoples
July 17, 2015
10/5/99: SA: Cattle
FS: Cattle, “Louie
Dickerson”
Cornerstone
05/05: Sells Cattle
Bryan
Who has priority in the cattle?
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Answer

Bryan should
Make
an appropriate filing to trigger the benefits of
7 USC 1631(e)(2)
More general point:
 Consider buying cattle directly so that title is
never lodged in Dickerson
 What would that accomplish?
July 17, 2015
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Moglia Run Up I
3rd Party
Corp
1/1: Fee Transfer
of Hope Diamond
2/1: Grants
SI in HD
Bank
July 17, 2015
What are Bank’s rights?
Corp USC
24
Answer

The First Transfer
Fee

transfer ends rights of Corp in Hope Diamond
Grant of Security Interest
Corp
has no rights in the HD
Cannot grant SI in it
See 9-203(b)(2)
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Moglia Run Up II
3rd Party
Corp
2/1: Fee Transfer
of Hope Diamond
1/1: Grants
SI in HD
What are Bank’s rights?
Bank
July 17, 2015
Corp USC
26
Answer

Issue
SI
granted prior to the fee transfer
Does the SI survive the transfer?

Answer
Yes,
if not a transfer to a buyer in the ordinary
course of business
See 9-315(a)(1); 9-320(a)
July 17, 2015
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Moglia Run Up III
Corp
2/1: Grants
SI in HD
1/1: Fee Transfer
of Hope Diamond
1/1: 3d party grants nonrecourse
guarantee to USC as to HD vis-àvis debts owed by Corp to USC
Bank
July 17, 2015
3rd Party
What are Bank’s rights?
Corp USC
28
Answer


Hope Diamond Transfer as Before
As to Corp USC
Bank
seems to have no basis to complain about
nonrecourse guarantee from 3rd party
July 17, 2015
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Moglia I: Trust as Entity
Trust
Outboard
Execs
1/1: $14mm
1/1: Title transfers if change
of control of Outboard
2/1: Grants
SI in Corp’s
rights in GI
Bank
July 17, 2015
1/1: Only USC
can collect from
res; no SI in res
allowed
What are Bank’s rights?
USC
30
Answer

Bank is out of luck
The
assets have exited Outboard before Bank
gets a SI in Outboard’s assets
July 17, 2015
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Moglia II: Trust as Contract
Outboard
$14mm
2/1: Grants
SI in Corp’s
rights in GI
Execs
1/1: Conditional Fee
Transfer of $14mm: Title
transfers if change of control
1/1: Only USC can collect
from res; no SI in res allowed
Bank
July 17, 2015
What are Bank’s rights?
USC
32
Key Terms of Trust

Access to Trust
“Trust
Corpus ... shall remain at all times subject
to the claims of the general creditors of
[Outboard]. Accordingly, [Outboard] shall not
create a security interest in the Trust Corpus in
favor of the Executives, the Participants [a term
that apparently refers to retired executives] or any
creditor.”
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Key Terms of Trust

On Insolvency, the Trustee
“will
deliver the entire amount of the Trust Corpus
only as a court of competent jurisdiction, or duly
appointed receiver or other person authorized to
act by such court, may direct to make the Trust
Corpus available to satisfy the claims of the
Company’s general creditors.”
July 17, 2015
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Moglia III: Trust as Contract
Outboard
$14mm
2/1: Grants
SI in Corp’s
rights in GI
Execs
1/1: Conditional Fee
Transfer of $14mm: Title
transfers if change of control
1/1: Unperfected SI in GI
Bank
July 17, 2015
What are Bank’s rights?
USC
35
Answer

Bank Position Superior to “USC”
Unperfected
SI is junior to perfected SI (9317(a)(1) and see comment 3)
Prior grant of SI doesn’t block grant of another SI
even if there is an agreement to that effect (9401(b))
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