Assignment 6 - The Concept of Collateral

Question 1

Purdy v. Citizens First Bank

Answer 1

If lease is > economic life of goods then the lease = a security agreement.

If goods retain value after expiry then the lease will be a security agreement if:

1. Lease contains option to purchase at nominal value; or
2. Lessee develops equity, such that the only economically reasonable option is to purchase the goods.

Question 2

Mclemore v. Mclemore

Answer 2

Contract for deed

(Forfeiture provision if borrower defaulted before paying substantial amount i.e built equity)

Forfeiture is appropriate ONLY IF

1. an abandonment or absconding vendee; or
2. where the vendee has paid a minimal amount AND the vendor’s security interest in the property has been jeopardized by the acts or omissions of the vendee

Question 3

What is a contract for deed?

Answer 3

Contract for deed is when the lender has the deed until complete payment is received and the “buyer” forfeits their right to occupy the property immediately upon default.

Question 4

What is a Contract for Deed in the mortgage context?

Answer 4

Courts have all but completely invalidated the contract for deed concept and rewritten such contracts as a sale with an implied mortgage.

Question 5

What is the amount of equity required for a buyer to invalidate Contract for Deed forfeiture?

Answer 5

Buyer no longer needs any equity. The threshold is all but zero.

Question 6

In Re Coronet Capital Company

Answer 6

Participation agreement will be treated as a loan based on these factors.

1. Guarantee of repayment by the lead lender to a participant
2. Participation that lasts for a shorter or longer-term than the underlying obligation
3. Different payment arrangements between borrower and lead lender and participant; and
4. discrepancy between the interest rate due on the underlying note and the interest rate specified in the participation.

Question 7

What is the key to not treating a participation agreement as a disguised security interest?

Answer 7

In a real participation agreement the partners to the sale equally share the risk of default by the buyer.

Question 8

When does the lender have a right to repossess property?

Answer 8

The lender does not have the right to possession of collateral if that collateral is real property. They only have the right to sell the real property in order to satisfy the debt.

Question 9

When a lien is made, the title of ownership splits in two

Answer 9

E/R - Interest of the borrower

Lien - the right to sell the land in order to satisfy the debt.

Question 10

Possible lien outcomes

Answer 10

Borrower does not pay;
- Property sold, lien repaid, remaining equity foes to borrower. Usually no equity. Lender will have unsecured claim that usually amounts to nothing. Broke, bankrupt, or nonrecourse loan

Borrower pays;
-the lien disappears and the borrower has ownership outright.

Question 11

When will a court read a security interest in the contract?

Answer 11

The lessor (taking the lease) has too little upside (Purdy, McLemore) - i.e. when the lessor is not getting back something with residual value he actually has a security interest, not a lease

The buyer has too little downside (Coronet) - i.e. buyer has only a security interest and not participation when they don’t share in the risk