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Class 9 Secured Transactions, Fall, Class 9 Secured Transactions, Fall,

Class 9 Secured Transactions, Fall, - PowerPoint Presentation

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Class 9 Secured Transactions, Fall, - PPT Presentation

2018 Perfection Control Randal C Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright 200118 Randal C Picker All Rights Reserved ID: 760343

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Slide1

Class 9Secured Transactions, Fall, 2018Perfection: Control

Randal C. Picker

James Parker Hall Distinguished Service Professor of Law

The Law School

The University of Chicago

Copyright

©

2001-18

Randal C. Picker. All Rights Reserved.

Slide2

October 15, 2018

2

WSJ, Oct 15, 2018

Sears Sales by Channel

Slide3

World’s Largest Retailers, 1920

October 15, 2018

3

Levinson, The Great A&P

Slide4

October 15, 2018

4

NYT, 8 July 1928

NYT, July 8. 1928

Slide5

October 15, 2018

5

Emmet &

Jeuck, p653

Sears Sales by Channel

Slide6

October 15, 2018

6

Emmet &

Jeuck, p650

Sears Financials, 1925-1947

Slide7

October 15, 2018

7

N

YT, Feb 12, 1984

Sears Expands

Slide8

October 15, 2018

8

WSJ, Oct 13-14, 2018

Sears v. Walmart v. Amazon

Slide9

October 15, 2018

9

WSJ, Oct 13-14, 2018

Sears v. Walmart v. Amazon

Slide10

October 15, 2018

10

WSJ, Oct 12, 2018

Secured Lending in Sears

Slide11

The DIP Order

October 15, 2018

11

Slide12

October 15, 2018

12

9-203: Control Elements

(b)

[Enforceability.]

Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if :

Slide13

October 15, 2018

13

9-203: Control Elements

(3) one of the following conditions is met:

(D)

 the collateral is deposit accounts, electronic chattel paper, investment property, letter-of-credit rights, or electronic documents, and the secured party has control under

section 7-106,

9-104, 9-105,

9-106,

or 9-107 pursuant

to the

debtor’s

security agreement

.

Slide14

October 15, 2018

14

9-314: Perfection Through Control

(a)

[Perfection by control.]

A security interest in

investment property

,

deposit accounts

,

letter-of-credit rights

,

electronic chattel paper, or electronic documents

may be perfected by control of the collateral under Section 7-106, 9‑104, 9‑105, 9‑106, or 9‑107.

Slide15

October 15, 2018

15

9-312: Exceptions

(a)

[Perfection by filing permitted.]

A security interest in

chattel paper

,

negotiable documents

,

instruments

, or

investment property

may be perfected by filing.

Slide16

Lots of Types of Collateral (and UCC Articles!)

Focus on the Table of Contents of the UCCArticle 3: Negotiable InstrumentsArticle 5: Letters of CreditArticle 7: Documents of TitleArticle 8: Investment Securities

October 15, 2018

16

Slide17

Orienting (a Little)

Comment 1 to 7-104“This article deals with a class of commercial paper representing commodities in storage or transportation. This ‘commodity paper’ is to be distinguished from what might be called ‘money paper’ dealt with in the article of this code on commercial paper (article 3)

October 15, 2018

17

Slide18

Orienting (a Little)

Comment 1 to 7-104“and ‘investment paper’ dealt with in the article of this code on investment securities (article 8). The class of ‘commodity paper’ is designated ‘document of title’ following the terminology of the Uniform Sales Act section 76. Section 1-201.”

October 15, 2018

18

Slide19

October 15, 2018

19

Warehouse Receipt Transaction

SP

Debtor

Is SP perfected? With what rights?

SA

: Documents (as defined in 9-102(a)(30)FS: Ditto$

Warehouse

Debtor turns over goods to warehouse and gets back paper

Slide20

Situating This Deal

UCC Article 7: Documents of Title9-331(a):This article does not limit the rights of a holder in due course of a negotiable instrument, a holder to which a negotiable document of title has been duly negotiated, or a protected purchaser of a security.

October 15, 2018

20

Slide21

Situating This Deal

These holders or purchasers take priority over an earlier security interest, even if perfected, to the extent provided in articles 3, 7, and 8.Article 9 creates rules for secured parties but steps back here regarding other rights outside of Article 9

October 15, 2018

21

Slide22

October 15, 2018

22

Letter-of-Credit Transaction

SP

Seller(Debtor)

How does SP attach and perfect interest in Seller’s rights?

2/1: Sale of good on unsecured basis

Bank

2/1: Issues Letter of Credit

Buyer

Slide23

Meshing Article 9 and Article 5

Key PointArticle 9 rules (such as 9-107, 9-308(d) and 9-329) have to be understood in the context of the rules set forth for letters-of-credit in UCC Article 5

October 15, 2018

23

Slide24

One Path to Perfection in the LC Rights: Perfect in the Account

9-308(d)Perfection of a security interest in collateral also perfects a security interest in a supporting obligation for the collateral9-102(a)(78) defines supporting obligationMeansFiling a FS for account will also perfect the interest in the support obligation

October 15, 2018

24

Slide25

One Path to Perfection in the LC Rights: Perfect in the Account

That all meansFiling a FS for account will also perfect the interest in the support obligationStop there?

October 15, 2018

25

Slide26

Multiple Methods of Perfection and the Hierarchy of Perfection

We didn’t: see 9-329(1)A security interest held by a secured party having control of the letter-of-credit right under section 9-107 has priority to the extent of its control over a conflicting security interest held by a secured party that does not have control.Means: control beats non-control

October 15, 2018

26

Slide27

Why?

See Comment 2 to 9-329Paragraph (1) awards priority to a secured party who perfects a security interest directly in letter-of-credit rights (i.e., one that takes an assignment of proceeds and obtains consent of the issuer or any nominated person under section 5-114(c)) over another conflicting security interest

October 15, 2018

27

Slide28

Why?

See Comment 2 to 9-329(i.e., one that is perfected automatically in the letter-of-credit rights as supporting obligations under section 9-308(d)). This is consistent with international letter-of-credit practice and provides finality to payments made to recognized assignees of letter-of-credit proceeds.

October 15, 2018

28

Slide29

October 15, 2018

29

Stock Transaction

SP

Corp Debtor

How does SP attach and perfect interest in Owner’s rights in Corp?

Guarantee of Corp Debt

Standard SA, FS, $

Owner

Slide30

Answer

Investment Property Transaction9-102(a)(49)“‘Investment property’ means a security, whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account.”

October 15, 2018

30

Slide31

Answer: Attachment

1. Take Possession If …9-203(b)(3)(C): “the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under section 8-301 pursuant to the debtor’s security agreement;”

October 15, 2018

31

Slide32

Answer: Attachment

2. Create as per usual with appropriate description in security agreement (and consider 9-108(d))3. Take control as per 9-203(b)(3)(D)

October 15, 2018

32

Slide33

Answer: Perfection

Three SituationsPossession of registered certificated securitiesFiling is generally permitted for investment property (see 9-312(a))Control (see 9-314(a) (and note 9-314(c)))

October 15, 2018

33

Slide34

Answer: Attachment

On Control: How? Why?9-106(a): “A person has control of a certificated security, uncertificated security, or security entitlement as provided in section 8-106.”

October 15, 2018

34

Slide35

Answer

On Control: How? Why?9-328(1): “A security interest held by a secured party having control of investment property under section 9-106 has priority over a security interest held by a secured party that does not have control of the investment property.”

October 15, 2018

35

Slide36

October 15, 2018

36

Accounts Transaction

Bank

Debtor

1/1: $

SA:

AccountsFS: Accounts

How should we

assess this transaction? Is it different than the deal in Benedict v Ratner?

Slide37

October 15, 2018

37

Control and Secured Credit: Benedict v. Ratner

Key Question

Should a secured creditor be able to have a perfected security interest even if the debtor retains the ability to dispose of the collateral and the proceeds?

Slide38

9-205. Use or disposition of collateral permissible

(a)When security interest not invalid or fraudulent. A security interest is not invalid or fraudulent against creditors solely because:

October 15, 2018

38

Slide39

9-205. Use or disposition of collateral permissible

(1) the debtor has the right or ability to:(A) use, commingle, or dispose of all or part of the collateral, including returned or repossessed goods;(B) collect, compromise, enforce, or otherwise deal with collateral;

October 15, 2018

39

Slide40

9-205. Use or disposition of collateral permissible

(C) accept the return of collateral or make repossessions; or(D) use, commingle, or dispose of proceeds; or(2) the secured party fails to require the debtor to account for proceeds or replace collateral.

October 15, 2018

40

Slide41

9-205 Comment 2

Validity of Unrestricted “Floating Lien.”“… As did former Section 9-205, this section repeals the rule of Benedict v. Ratner, 268 U.S. 353 (1925), and other cases which held such arrangements void as a matter of law because the debtor was given unfettered dominion or control over collateral.”

October 15, 2018

41

Slide42

9-205 Comment 2

Validity of Unrestricted “Floating Lien.”“The Benedict rule did not effectively discourage or eliminate security transactions in inventory and receivables. Instead, it forced financing arrangements to be self-liquidating.”

October 15, 2018

42

Slide43

October 15, 2018

43

9-312: Exceptions

(b)

[Control or possession of certain collateral.]

Except as otherwise provided in Section 9‑315(c) and (d) for proceeds:

(1) a security interest in a

deposit account

may be perfected

only by

control under Section 9‑314

;

Slide44

9-102(a)(29): Deposit Account

“Deposit account” meansa demand, time, savings, passbook, or similar account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument.

October 15, 2018

44

Slide45

Instruments

9-102(a)(47)“‘Instrument’ means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment.”

October 15, 2018

45

Slide46

Status of Certificates of Deposit?

9-102 Comment 12“Deposit accounts evidenced by article 9 ‘instruments’ are excluded from the term ‘deposit account’. … The revised definition clarifies the proper treatment of nonnegotiable or uncertificated certificates of deposit.”

October 15, 2018

46

Slide47

Status of Certificates of Deposit?

9-102 Comment 12“Under the definition, an uncertificated certificate of deposit would be a deposit account (assuming there is no writing evidencing the bank's obligation to pay) whereas a nonnegotiable certificate of deposit would be a deposit account only if it is not an ‘instrument’ as defined in this section”

October 15, 2018

47

Slide48

Status of Certificates of Deposit?

9-102 Comment 12“(a question that turns on whether the nonnegotiable certificate of deposit is ‘of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment’).”

October 15, 2018

48

Slide49

October 15, 2018

49

9-104: Control of Deposit Account

(a)

[Requirements for control.]

A secured party has control of a deposit account if:

(1) the secured party is the bank with which the deposit account is maintained;

Slide50

October 15, 2018

50

9-104: Control of Deposit Account

(2) the debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the account without further consent by the debtor; or

(3) the secured party becomes the bank’s customer with respect to the deposit account.

Slide51

October 15, 2018

51

9-104: Control of Deposit Account

(b)

[Debtor’s right to direct disposition.]

A secured party that has satisfied subsection (a) has control, even if the debtor retains the right to direct the disposition of funds from the deposit account.

Slide52

October 15, 2018

52

Taking the Security Interest in the Deposit Account

Bank

SA: Deposit Account

FS: Deposit Account$

Has a perfected security interest been created?

Debtor

Slide53

October 15, 2018

53

Answer

No

This is

Counceller

9-312(b)(1) requires control under 9-314 (and then 9-104) for non-proceeds interest in deposit account

Slide54

October 15, 2018

54

Selling Positions I

Bank

Debtor

To what extent is Creditco perfected?

1/1

SA: EQFS: EQ$

Creditco

Sells Position

Slide55

October 15, 2018

55

Answer: No Refiling Requirement

9-310(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.

Creditco steps into Bank’s position

Slide56

October 15, 2018

56

Selling Positions II

Bank

Debtor

To what extent is Creditco perfected?

SA: EQ

Bank takes possession of asset$

Creditco

Sells Position (and transfers possession)

Slide57

October 15, 2018

57

Answer: 9-310(c) Again?

Comment 4

Subsection (c) applies not only to an assignment of a security interest perfected by filing but also to an assignment of a security interest perfected by a method other than by filing, such as by control or by possession

.

Slide58

October 15, 2018

58

Answer: 9-310(c) Again?

Comment 4

Although

subsection (c) addresses explicitly only the absence of an additional filing requirement, the same result normally will follow in the case of an assignment of a security interest perfected by a method other than by filing.

Slide59

Answer: 9-310(c) Again?

October 15, 2018

59

For example, as long as possession of collateral is maintained by an assignee or by the assignor or another person on behalf of the assignee, no further perfection steps need be taken on account of the assignment to continue perfection as against creditors and transferees of the original debtor

.

Slide60

October 15, 2018

60

Selling Positions III

Bank

Debtor

To what extent is Creditco perfected?

SA: CD

Bank ???

Creditco

Sells Position

Slide61

October 15, 2018

61

Beal Bank v. Fewell

US Bank

Fewell

To what extent is Creditco perfected?

SA: CD

Control under 9-105(a)(1)

Beal

Sells position but CD is still at US Bank