secured transactions assignment 10

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Secured TransactionsAssignment 10

Proceeds, Products, and Value-Tracing: State Law

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The Big Picture

Chapters 1and 2. Creditors’ Remedies

Chapter 3. Creation of Security Interests

Assignment 8: Formalities for Attachment

Assignment 9: What Collateral and Obligations are Covered?

Assignment 10: Proceeds (State Law)

Assignment 11: Proceeds (Bankruptcy)

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§9-102(a)(64) “Proceeds” . . . means the following property:

(A) whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral

(B) whatever is collected on, or distributed on account of, collateral

(C) rights arising out of collateral

(D) to the extent of the value of collateral, claims arising out of the loss . . . of, . . . or . . . damage to, the collateral.

(E) to the extent of the value of collateral . . . insurance payable by reason of the loss . . . of . . . or damage to, the collateral.

Basic Concepts



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Basic Concepts

Debtor BuyerCollateral

Proceeds

Secured

Security interest




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Basic Concepts

DebtorAccountdebtors

Secured

Account

Security interestin “accounts”

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Basic Concepts

DebtorAccountdebtors

Payment

Secured

Security interestin “accounts”

$

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Basic Concepts

Debtor CollateralProceeds

Secured

Security interest

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(D) to the extent of the value of collateral, claims arising out of the loss . . . of, . . . or damage to, the collateral.


Basic Concepts

Debtor TortfeasorCollateral

Loss claim

Security interest

9

Collateral: 100

Claim “arising from” loss of collateral: 300

Recovery: 100

Proceeds: ?






Basic Concepts

Debtor TortfeasorCollateral

Loss claim

10

Collateral

Collateral: 100

Claim “arising from” loss of collateral: 300

Recovery: 100

Proceeds: 100, not 33






Basic Concepts

Debtor TortfeasorLoss claim

11Loss claim

Collateral






(E) to the extent of the value of collateral . . . insurance payable by reason of the loss . . . of, . . . or damage to, the collateral.

Basic Concepts

DebtorInsuranceCompany

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§9-315(a)(1) a security interest . . . continues in collateral not-withstanding . . . disposition thereof unless the secured party authorized the disposition free of the security interest . . . . and

(2) a security interest attaches to any identifiable proceeds of collateral

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Basic Concepts

Debtor

ZBank

SecurityInterest (Cow)

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Basic Concepts

DebtorCow

$2K

ZBank


Cowbuyer

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Basic Concepts

DebtorCow

$2K

ZBank


Cowbuyer

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Basic Concepts

DebtorCow

$2K

ZBank


Cowbuyer

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Basic Concepts

DebtorCow

ZBank


Beanseller

Cowbuyer$2K

Beans

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Basic Concepts

DebtorCow

ZBank


Beanseller

Cowbuyer$2K

Beans

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Basic Concepts

DebtorCow

ZBank


Beanseller

Cowbuyer$2K

Beans

But bean seller takes the $2K free of the SI.

§9-332(a). “A transferee of money takes the money free of a security interest . . . .”

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Basic Concepts

Debtor

ZBank


Beanseller

Cowbuyer

Cowbuyer 2

Cow

$2K $2.5K

Beans

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Basic Concepts

Debtor

ZBank


Beanseller

Cowbuyer

Cowbuyer 2

Cow

$2K $2.5K

Beans



Basic Concepts

Debtor

ZBank


Beanseller

Cowbuyer

Cowbuyer 2

Cow

$2K $2.5K

Beans

§9-332(a). “A transferee of money takes the money free of a security interest . . . .”

Cow buyer does not take the $2.5K free of the SI.

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(b) Proceeds that are commingled with other property are identifiable proceeds

(1) if the proceeds are goods, to the extent provided by §9- 336

§9-336. “commingled goods” means good that are physically united with other goods in such a manner that their identity is lost in a product or mass.

Examples: Grain in a grain silo. Steel in an automobile.

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Basic Concepts

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Basic Concepts

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(1) if the proceeds are goods, to the extent provided by §9- 336 and

(2) if the proceeds are not goods, to the extent that the secured party identifies the proceeds by a method of

tracing . . . permitted under law other than this article

Example: Money commingled in a bank account

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(1) if the proceeds are goods, to the extent provided by §9- 336 and

(2) if the proceeds are not goods, to the extent that the secured party identifies the proceeds by a method of

tracing . . . permitted under law other than this article

Example: Money commingled in a bank account

Basic Concepts

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The lowest intermediate balance rule:

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[T]he proceeds of the disposition of collateral remain in a commingled account as long as the account balance is equal to or exceeds the amounts of the proceeds. – Oriental Rug

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Basic Concepts

Proceeds

Non-proceeds

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Basic Concepts

Non-proceeds

ProceedsProceeds

Non-proceeds

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Basic Concepts

Proceeds

Non-proceeds Non-proceeds

Proceeds

Non-proceeds

Proceeds

Segregated bank account. A bank account containing only a single secured creditor's collateral.

Basic Concepts

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Assume: Bank takes a security interest in “all inventory”

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Basic Concepts

Segregated account

Loan proceeds

$

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Payments



Basic Concepts

Segregated account

Loan proceeds

$

Suppliers

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Payments



Basic Concepts

Segregated account

Loan proceeds

$

Suppliers

Debtor’sinventory

Goods

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Payments



Basic Concepts

Segregated account

Loan proceeds

$

Debtor’sinventory

GoodsGoods

Customers

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Suppliers

Payments



Basic Concepts

Segregated account

Loan proceeds

Payments

$

Debtor’sinventory

GoodsGoods

Customers

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Suppliers

Payments

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Basic Concepts

Segregated account

General account

Loan proceeds

Payments

Owner investment

Proceeds of other loans

Tax refunds

Sale of non collateral

All other expenditures

$

$

$

$$

Debtor’sinventory

GoodsGoods

Customers Suppliers

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Problem 10.1, page 179

Firstbank’s description of collateral: “equipment, inventory, and accounts”

1. Does this description cover the proceeds of this collateral? Yes.

2. Does this description cover the products of this collateral? Only if the products are proceeds or after acquired inventory or accounts.

3. The offspring of this collateral?

4. Substitutions for this collateral?

5. Additions to this collateral?

6. Replacements for this collateral?

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1. Does this description cover the proceeds of this collateral?

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1. Does this description cover the proceeds of this collateral? Yes. §9-203(f).

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2. Does this description cover the products, offspring, substitutions, additions or replacements of this collateral?

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2. Does this description cover the products, offspring, substitutions, additions or replacements of this collateral?

Only if the products are (1) proceeds or (2) after acquired inventory or accounts.

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a. Does this description cover the money now in Polly’s bank account? Only if it is proceeds.

b. A parrot that Polly took in payment of an overdue account? Yes. “Proceeds includes “whatever is collected on . . . Collateral.” §9-102(a)(64)(B).

c. A new computer Polly bought to replace the one she owned at the time she granted the security interest? Not unless it is proceeds. After-acquired equipment is not included.

d. Myna bird

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d. Myna bird

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d. Myna bird

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d. Myna bird

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b. A parrot that Polly took in payment of an overdue account? Yes. “Proceeds includes “whatever is collected on . . . collateral.” §9-102(a)(64)(B).


d. Myna bird

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d. Myna bird

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c. A new computer Polly bought to replace the one she owned at the time she granted the security interest? Not unless it is proceeds. After-acquired equipment is not in this description.

d. Myna bird

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d. Myna bird Polly bought and paid for with plumbing work?


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d. Myna bird Polly bought and paid for with plumbing work? No. Distinguish two situations:

Plumbing work account Myna bird

Plumbing work bird contract Myna bird


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Not collateral Collateral ProceedsPlumbing work account Myna bird

Not collateral Not collateral Not collateralPlumbing work bird contract Myna bird


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Not collateral Collateral ProceedsPlumbing work account Myna bird

Not collateral Not collateral Not collateralPlumbing work bird contract Myna bird

§9-102(a)(2) an “account” is a “monetary obligation”


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ELP’s description of collateral: “Horace and all proceeds, products, and profits therefrom.” Horace won a race. Does ELP’s description cover the purse?





Products: the result of fabrication or processing (Black’s)

Profits: (1) excess of revenues over expenses, (2) “a right in the soil of another”

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Problem 10.4, page 180Billie gave a SI in “inventory.”

Billie

First-bank

“Inventory”

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Problem 10.4, page 180Billie gave a SI in “inventory.” Billie is selling everything but

the inventory to Joey.

Billie

LeaseholdFurnitureFixturesEquipment

First-bank

“Inventory”

JoeyGoodwillAccountsTrademarks

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the inventory to Joey. We represent Joey. Is the security interest in inventory of concern?

Billie


First-bank

“Inventory”


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Billie


First-bank

“Inventory”


Could Firstbank have a security interest in the accounts?

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Billie


First-bank

“Inventory”



Other items?

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Billie


First-bank

“Inventory”



Other items?

In re Shirel, page 154. “No reasonable third party would understand that a security interest was created in the refrigerator by merely looking to the description itself.”

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ELP lends Golan $35K secured by XT-100.

XT-100Copier#XEX30

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a. Fire destroys copier. Loss insured. What is ELP’s collateral?

XT-100Copier#XEX30

Insurancepayable

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b. Insuror pays. Golan deposits. What is ELP’s collateral?

XT-100Copier#XEX30

Insurancepayable

Check Bankaccount

Deposits Withdrawals Balance

Start $5,000

Insurance $35,000 $40,000

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c. Golan writes check for rental. What is ELP’s collateral?

XT-100Copier#XEX30

Insurancepayable

Check Bankaccount

Checkto rent


Start $5,000

Insurance $35,000 $40,000

Rent check $2,000 $38,000

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c. Golan writes check for rental. What is ELP’s collateral?

XT-100Copier#XEX30

Insurancepayable

Check Bankaccount


Start $5,000

Insurance $35,000 $40,000

Rent check $2,000 $38,000

Next check $32,000 $6,000

d. Golan writescheck to IRS.What is ELP’scollateral?

Checkto rent

Checkto IRS

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Golan writes check for new copier. What is ELP’s collateral?

XT-100Copier#XEX30

Insurancepayable

Check Bankaccount


Start $5,000

Insurance $35,000 $40,000

Rent check $2,000 $38,000

Next check $32,000 $6,000

§9-332(b)

Checkto rent

Newcopier

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XT-100Copier#XEX30

Insurancepayable

Check Bankaccount


Start $5,000

Insurance $35,000 $40,000

Rent check $2,000 $38,000

Next check $32,000 $6,000

§9-332(b)

Checkto rent

Newcopier

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$6,000 and probably the new copier.

XT-100Copier#XEX30

Insurancepayable

Check Bankaccount


Start $5,000

Insurance $35,000 $40,000

Rent check $2,000 $38,000

Next check $32,000 $6,000

Problem 10.6, page 180Checkto rent

Newcopier

Three Possible Results

• $29,000 of the check was our proceeds. – But it would create a security interest for an

amount less than the value of the collateral and less than the amount of the debt. Unusual

• Only the $6,000 in the bank account remains identifiable. – The remainder of the money loses its

"identifiability" when it is commingled in the check with non-proceeds money.

• The new XT-100 is our collateral – Value of our collateral expands

secured transactions assignment 10

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