secured transactions assignment 12

Secured TransactionsAssignment 12

The Legal Limits on What May Be Collateral

The Big Picture

Chapters 1and 2. Creditors’ RemediesChapter 3. Creation of Security Interests

Assignment 8: Formalities for AttachmentAssignment 9: What Collateral and Obligations are Covered?Assignment 10: Proceeds (State Law)Assignment 11: Proceeds (Bankruptcy)Assignment 12: The Limits on What May Be Collateral

Basic Concepts

• Other Law Restrictions (FTC and Bankruptcy Code)

• UCC Restrictions “Property)

Basic Concepts: §522(f) lien avoidance

Purchase money security interest (PMSI). §9-103(a) and (b). A security interest that secures:1. Payment of the purchase price, or2. An advance made to pay the purchase price if so used.

Possessory security interest. The security interest of a secured party who is in possession of the collateral.

Lien avoidance. A judicial process that voids a lien, rendering the obligation unsecured

§522(f) lien avoidance. Debtor’s right to avoid(A) a judicial lien in any property or (B) a nonpurchase money nonpossessory security interest in certain consumer goodsif the lien impairs an exemption.


Purchase money security interest (PMSI). §9-103(a) and (b). A security interest that secures:1. Payment of the purchase price, or2. An advance made to pay the purchase price if so used.

Possessory security interest. The security interest of a secured party who is in possession of the collateral.

Lien avoidance. A judicial process that voids a lien, rendering the obligation unsecured

§522(f) lien avoidance. Debtor’s right to avoid(A) a judicial lien in any property or (B) a nonpurchase money, nonpossessory security interest in certain consumer goodsif the lien impairs an exemption.


When does a lien “impair an exemption?”Basic Concepts: §522(f) lien avoidance

When does a lien “impair an exemption?”“To the extent that the sum of the lien, all other liens on the property, and the amount of the exemption . . . exceeds the value of the property.” §522(f)(2)(A).



Illustration:



70

100

Illustration:1. The debtor owes $70K on a first

mortgage

Mortgage



70

10025


mortgage2. State law gives debtor a $25K

“homestead” exemption

Mortgage

Exemption



70

10025

50



“homestead” exemption3. Unsecured creditor levies on a

$50K judgment Mortgage

Exemption

Judicial lien


When does a lien “impair an exemption?”“To the extent that the sum of the lien, all other liens on the property, and the amount of the exemption [$145K] exceeds the value of the property [$100K].” §522(f)(2)(A).

70

10025

50




$50K judgment

The $50K lien impairs an exemption to the extent of $45K.

Mortgage

Exemption

Judicial lien


When does a lien “impair an exemption?”“To the extent that the sum of the lien, all other liens on the property, and the amount of the exemption [$145K] exceeds the value of the property [$100K].” §522(f)(2)(A).

70

10025




$50K judgment

The $50K lien impairs an exemption to the extent of $45K.

Mortgage

Exemption

Judicial lien


50

Assignment of wages. The grant of a security interest in future personal earnings.

Basic Concepts

Assignment of wages. The grant of a security interest in future personal earnings.Example: Credit Union lends Debtor $20k to buy a car. Debtor signs an “irrevocable” instruction to Employer to deduct $400 a month from Debtor’s paycheck and pay it to Credit Union against the loan.

Basic Concepts

Assignment of wages. The grant of a security interest in future personal earnings.Example: Credit Union lends Debtor $20k to buy a car. Debtor signs an “irrevocable” instruction to Employer to deduct $400 a month from Debtor’s paycheck and pay it to Credit Union against the loan.Against public policy in most states. Void in bankruptcy in all states.

Basic Concepts

Basic ConceptsUCC 9-408

• (a) [A] term in [certain contracts and licenses] which prohibits, restricts or requires the consent . . . to the assignment. . . is ineffective [to the extent of preventing a security interest in it.]

• (c) A rule of law, statute or regulation that prohibits, restricts or requires the consent [of the government] to the creation of a security interest in [contracts and licenses] is ineffective [to prevent a security interest].

Collateral means the property subject to a security interest. §9-102(a)(12).

Security interest. An interest in personal property or fixtures which secures payment or performance of an obligation. §1-201(37).

§9-109(a). [T]his article applies to a transaction . . . That creates a security interest in personal property or fixtures . . .

9-102(a)(42). “General intangible” means any property . . . Personal property. Property that is not real property.Property. The right to exclude others. A right of ownership.

Whatever the law says is “property.”

Basic Concepts: But Only“property” can be collateral

Debtor grants a security interest in “inventory.” Debtor has no inventory, so the security interest does not attach.

Seller sells an item of inventory to debtor. The security interest attaches.

The security interest cannot attach after bankruptcy. §552(a).

Security interests in Non-propertySecured

party

Debtor

SI in“inventory”

Debtor grants a security interest in “inventory.” Debtor has no inventory, so the security interest does not attach.

Seller sells an item of inventory to debtor. The debtor has “rights in the collateral” and the security interest attaches.

The security interest cannot attach after bankruptcy. §552(a).


party

DebtorSeller

SI in“inventory”

inventory

Debtor grants a security interest in (non-property) “license.” The security interest does not attach to the license. It does attach to the debtor’s right to proceeds from future sale.

Debtor sells the license to buyer. The “bounty” received is proceeds of the debtor’s right to proceeds. §552(b).


party

DebtorSeller

SI in non-propertylicense

non-propertylicense

Debtor grants a security interest in (non-property) “license.” The security interest does not attach to the license. It does attach to the debtor’s right to proceeds from future sale.

Debtor sells the license to buyer. The “bounty” received is proceeds of the debtor’s right to proceeds. §552(b).


party

DebtorSeller

SI in non-propertylicense

non-propertylicense

Debtornon-propertylicense

“bounty”

Problem 12.1, page 215Can Bank get a security interest in this collateral? How should

the security agreement describe it?


the security agreement describe it?a. Electronic equipment used in broadcasting.


the security agreement describe it?a. Electronic equipment used in broadcasting. Yes. “Debtor’s

electronic equipment.”




b. “Peacock” logo.



electronic equipment.”b. “Peacock” logo. Yes. “Debtor’s trademarks and artwork.”



electronic equipment.”b. “Peacock” logo. Yes. “Debtor’s trademarks and artwork.”c. Broadcast license.



electronic equipment.”b. “Peacock” logo. Yes. “Debtor’s trademarks and artwork.”c. Broadcast license. Maybe. “Debtor’s broadcast license” or

“general intangibles” may give Bank right to proceeds of sale.




b. “Peacock” logo. Yes. “Debtor’s trademarks and artwork.”c. Broadcast license. Maybe. “Debtor’s broadcast license” or

“general intangibles” may give Bank right to proceeds of sale.d. Reputation for accurate news reporting.





“general intangibles” may give Bank right to proceeds of sale.d. Reputation for accurate news reporting. No. Not “property.”




“general intangibles” may give Bank right to proceeds of sale.d. Reputation for accurate news reporting. No. Not “property.”e. Action for slander of that reputation.




“general intangibles” may give Bank right to proceeds of sale.d. Reputation for accurate news reporting. No. Not “property.”e. Action for slander of that reputation. Yes. “Debtor’s cause of

action against [employees] for slander.” (Not “commercial tort claim.”) §9-108(e)(1).







f. Future advertising revenues.







f. Future advertising revenues. Yes. “Debtor’s accounts; payment intangibles and deposit accounts”.”

Problem 12.2, page 215How does Bank realize on this collateral in a Chapter 7 case?

a. Electronic equipment.b. Trademarks and artwork.c. Broadcast license and general intangibles.d. Cause of action against [employees] for slander.e. Accounts.


a. Electronic equipment.

b. Trademarks and artwork.c. Broadcast license and general intangibles.d. Cause of action against [employees] for slander.e. Accounts.

What happens if we lift the stay and foreclose?



What happens if we lift the stay and foreclose?Business may close. FCC license is revoked.





Can we move to lift stay on license?





Can we move to lift stay on license? § 362(d)(1) and (d)(2) specifically contemplate the subject of the motion will be “property.”





What can we do?




What can we do?Get the trustee to sell the business as a whole and argue over proceeds attributable to license.

Problem 12.3, page 215Bank of Friend wants to take a security interest in Harry’s Bar.

State law says a liquor license is not property, can’t be sold.


State law says a liquor license is not property, can’t be sold.a. What should Bank take as security?


State law says a liquor license is not property, can’t be sold.a. What should Bank take as security? “Furniture, trademarks,

tradenames, inventory, fixtures, leasehold, general intangibles, and liquor license.”




b. What can Bank do if the debtor does not repay?


State law say`s a liquor license is not property, can’t be sold.a. What should Bank take as security? “Furniture, trademarks,


b. What can Bank do if the debtor does not repay? Foreclose on the collateral, buy in at the sale, and apply for a liquor license. (State will probably deny application.)




b. What can Bank do if the debtor does not repay? Foreclose on the collateral, buy in at the sale, and apply for a liquor license. (State will probably deny application.) Bankruptcy?





c. Any advantage in requiring Harry’s bar to incorporate?

Problem 2.5

Bank

LoanMortgage

Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that.

Security interest in the stock

100% ownership(stock)

Corporateborrower

Share-holder





c. Any advantage in requiring Harry’s bar to incorporate?Bank can foreclose on the stock and apply to substitute new management on the license/change of control.


State law says a liquor license is not property, can’t be sold.a. What should Bank take as security? “Furniture, fixtures,

leasehold, general intangibles, and liquor license.”b. What can Bank do if the debtor does not repay? Foreclose

on the collateral, buy in at the sale, and apply for a liquor license. (State will probably deny application.) Bankruptcy?

c. Any advantage in requiring Harry’s bar to incorporate?Bank can foreclose on the stock and apply to substitute new management on the license.State will probably grant application because there has been no sale of the license, just a change of management/control.

Problem 12.4, page 215You represent Desmond seeking settlement with Takki.

Problem 12.4, page 215You represent Desmond seeking settlement with Takki.Your old law school classmate, Martin Short, represents Takki


Short offers to accept a SI in Desmond’s ERISA pension rights.

Problem 12.4, page 215You represent Desmond seeking settlement with Takki.Your old law school classmate, Martin Short, represents TakkiShort offers to accept a SI in Desmond’s ERISA pension rights.a. If we make the deal, what is the effect?


Short offers to accept a SI in Desmond’s ERISA pension rights.a. If we make the deal, what is the effect? The SI is invalid.

Takki can’t reach the pension funds.



Takki can’t reach the pension funds.b. Ethical problem?




Rule 8.4. It is professional misconduct for a lawyer to . . . engage in conduct involving dishonesty, fraud, deceit or misrepresentation.

Problem 12.4, page 215You represent Desmond seeking settlement with Takki.Your old law school classmate, Martin Short, represents TakkiShort offers to accept a SI in Desmond’s ERISA pension rights.a. If we make the deal, what is the effect? The SI is invalid.



But Takki is deceiving itself.

Problem 12.4, page 215You represent Desmond seeking settlement with Takki.Your old law school classmate, Martin Short, represents TakkiShort offers to accept a SI in Desmond’s ERISA pension rights.a. If we make the deal, what is the effect? The SI is invalid.



But Takki is deceiving itself.Rule 1.4(b). A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

Rule 1.6: Confidentiality of Information(a) A lawyer shall not reveal information relating to the representation . . . unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).

(b) A lawyer may reveal [such] information . . . to the extent the lawyer reasonably believes necessary:(1) to prevent reasonably certain death or substantial bodily harm;(2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests . . . of another and in furtherance of which the client has used or is using the lawyer's services;(3) to prevent, mitigate or rectify [such an injury] . . . (6) to comply with other law or a court order.

Problem 12.4, page 215What should you do?


1. Withdraw?


1. Withdraw? Might tip short, hurt Desmond.



2. Send Short the offer?



2. Send Short the offer? (What about lack of consideration? Mistake? Interpretation that agreement binding only SI is effective?


1. Withdraw? Might tip short, hurt Desmond.2. Send Short the offer? (What about lack of consideration? Mistake? Interpretation that agreement binding only SI is effective?

Add “Assumption of risk. If any element of this settlement is ineffective, the remainder of the settlement shall remain enforceable.”



2. Send Short the offer? (What about lack of consideration? Mistake? Interpretation that agreement binding only SI is effective?

Add “Assumption of risk. If any element of this settlement is ineffective, the remainder of the settlement shall remain enforceable.”3. Take Short to the end of the fishing pier and tell him what is going on.

Problem 12.5, page 216§444.2. It is an unfair act or practice . . . for a lender . . . to take

. . . a nonpossessory security interest in household goods other than a purchase money security interest.


. . . a nonpossessory security interest in household goods other than a purchase money security interest.(i) Household goods. Clothing, furniture, appliances . . . and personal effects. . . provided that the following are not included (1) works of art, (2) electronic entertainment equipment, (3) items acquired as antiques, and (4) jewelry.



a. Can IFF legally take a security interest in these items?1. Video game set, replacement cost $500.



a. Can IFF legally take a security interest in these items?1. Video game set, replacement cost $500. Yes.



a. Can IFF legally take a security interest in these items?1. Video game set, replacement cost $500. Yes.2. Collection of pictures drawn by her children.



a. Can IFF legally take a security interest in these items?1. Video game set, replacement cost $500. Yes.2. Collection of pictures drawn by her children. Maybe art.



a. Can IFF legally take a security interest in these items?1. Video game set, replacement cost $500. Yes.2. Collection of pictures drawn by her children. Maybe art.3. Old family photos dating back to the civil war.



a. Can IFF legally take a security interest in these items?1. Video game set, replacement cost $500. Yes.2. Collection of pictures drawn by her children. Maybe art.3. Old family photos dating back to the civil war. Yes.



a. Can IFF legally take a security interest in these items?1. Video game set, replacement cost $500. Yes.2. Collection of pictures drawn by her children. Maybe art.3. Old family photos dating back to the civil war. Yes.4. Jewelry, replacement cost $500.



a. Can IFF legally take a security interest in these items?1. Video game set, replacement cost $500. Yes.2. Collection of pictures drawn by her children. Maybe art.3. Old family photos dating back to the civil war. Yes.4. Jewelry, replacement cost $500. Yes.



a. Can IFF legally take a security interest in these items?1. Video game set, replacement cost $500. Yes.2. Collection of pictures drawn by her children. Maybe art.3. Old family photos dating back to the civil war. Yes.4. Jewelry, replacement cost $500. Yes.5. Toyota automobile, market value $2000.



a. Can IFF legally take a security interest in these items?1. Video game set, replacement cost $500. Yes.2. Collection of pictures drawn by her children. Maybe art.3. Old family photos dating back to the civil war. Yes.4. Jewelry, replacement cost $500. Yes.5. Toyota automobile, market value $2000. Yes.



a. Can IFF legally take a security interest in these items?1. Video game set, replacement cost $500. Yes.2. Collection of pictures drawn by her children. Maybe art.3. Old family photos dating back to the civil war. Yes.4. Jewelry, replacement cost $500. Yes.5. Toyota automobile, market value $2000. Yes.6. Portable computer, market value $500.



a. Can IFF legally take a security interest in these items?1. Video game set, replacement cost $500. Yes.2. Collection of pictures drawn by her children. Maybe art.3. Old family photos dating back to the civil war. Yes.4. Jewelry, replacement cost $500. Yes.5. Toyota automobile, market value $2000. Yes.6. Portable computer, market value $500. Maybe.

Problem 12.5, page 216b. Zelda granted a valid security interest in the video game set

“and any replacements.”


“and any replacements.”Later, the set broke and she replaced it.


“and any replacements.”Later, the set broke and she replaced it.Does IFF have a security interest in the replacement video game set?



§9-204(b). A security agreement does not attach under a term constituting an after-acquired property clause to:(1) consumer goods . . . unless the debtor acquires rights in them within 10 days after the secured party gives value . . . .



§9-204(b). A security agreement does not attach under a term constituting an after-acquired property clause to:(1) consumer goods . . . unless the debtor acquires rights in them within 10 days after the secured party gives value . . . .

Answer: IFF does not have a valid security interest.

Problem 12.5, page 216c. Will bankruptcy help Zelda keep the disputed items? (Can

she avoid IFF’s security interest and claim the items exempt?)



§522(f)(1). The debtor may avoid the fixing of a lien . . . to the extent that such lien impairs an exemption . . . if such lien is(B) a nonpossessory, nonpurchase money security interest in any [listed goods]. Statutory Supplement, pages 2177-78.




Video game set, replacement cost $500.




Video game set, replacement cost $500. Keep. §522(f)(4)(B)(ii)




Video game set, replacement cost $500. Keep. §522(f)(4)(B)(ii)Collection of pictures drawn by her children.




Video game set, replacement cost $500. Keep. §522(f)(4)(B)(ii)Collection of pictures drawn by her children. Keep. (f)(4)(B)(i)




Video game set, replacement cost $500. Keep. §522(f)(4)(B)(ii)Collection of pictures drawn by her children. Keep. (f)(4)(B)(i)Old family photos dating back to the civil war.




Video game set, replacement cost $500. Keep. §522(f)(4)(B)(ii)Collection of pictures drawn by her children. Keep. (f)(4)(B)(i)Old family photos dating back to the civil war. Keep. (f)(4)(B)(iii)




Video game set, replacement cost $500. Keep. §522(f)(4)(B)(ii)Collection of pictures drawn by her children. Keep. (f)(4)(B)(i)Old family photos dating back to the civil war. Keep. (f)(4)(B)(iii)Jewelry, replacement cost $500.




Video game set, replacement cost $500. Keep. §522(f)(4)(B)(ii)Collection of pictures drawn by her children. Keep. (f)(4)(B)(i)Old family photos dating back to the civil war. Keep. (f)(4)(B)(iii)Jewelry, replacement cost $500. Keep. (f)(4)(B)(iv)




Video game set, replacement cost $500. Keep. §522(f)(4)(B)(ii)Collection of pictures drawn by her children. Keep. (f)(4)(B)(i)Old family photos dating back to the civil war. Keep. (f)(4)(B)(iii)Jewelry, replacement cost $500. Keep. (f)(4)(B)(iv)Toyota automobile, market value $2000.




Video game set, replacement cost $500. Keep. §522(f)(4)(B)(ii)Collection of pictures drawn by her children. Keep. (f)(4)(B)(i)Old family photos dating back to the civil war. Keep. (f)(4)(B)(iii)Jewelry, replacement cost $500. Keep. (f)(4)(B)(iv)Toyota automobile, market value $2000. Lose. (f)(4)(B)(v)




Video game set, replacement cost $500. Keep. §522(f)(4)(B)(ii)Collection of pictures drawn by her children. Keep. (f)(4)(B)(i)Old family photos dating back to the civil war. Keep. (f)(4)(B)(iii)Jewelry, replacement cost $500. Keep. (f)(4)(B)(iv)Toyota automobile, market value $2000. Lose. (f)(4)(B)(v)Portable computer, market value $500.




Video game set, replacement cost $500. Keep. §522(f)(4)(B)(ii)Collection of pictures drawn by her children. Keep. (f)(4)(B)(i)Old family photos dating back to the civil war. Keep. (f)(4)(B)(iii)Jewelry, replacement cost $500. Keep. (f)(4)(B)(iv)Toyota automobile, market value $2000. Lose. (f)(4)(B)(v)Portable computer, market value $500. Keep. §522(f)(4)(A)(xv)




Video game set, replacement cost $500. Keep. §522(f)(4)(B)(ii)Collection of pictures drawn by her children. Keep. (f)(4)(B)(i)Old family photos dating back to the civil war. Keep. (f)(4)(B)(iii)Jewelry, replacement cost $500. Keep. (f)(4)(B)(iv)Toyota automobile, market value $2000. Lose. (f)(4)(B)(v)Portable computer, market value $500. Keep. §522(f)(4)(A)(xv)Why is the law making all these petty distinctions?

secured transactions assignment 12

Documents

judicial lien

purchase price

judicial process

secured party

certain consumer goodsif

secured transactionsassignment

proceeds bankruptcyassignment

legal limits