Scope of Article 9

Question 1

The scope of article 9 applies to what? 5 Categories, if on the bar look for 1 & 5

Answer 1

1. Any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
2. An agricultural lien
3. A sale of accounts, chattel paper, payment intangibles, or promissory notes (unless the sale is for the purposes of collection only, or the sale is part of the sale of a business)
4. Certain consignments
5. A secured sale disguised as a lease

Question 2

D rents a stall at Ark Self Storage and stores his goods there. The rental agreement provides that Ark has Aa contractual lien@ on the contents of the stall, and that if D defaults in his rental payments, Ark has the right to enter the stall, seize the contents and sell them to satisfy the rental obligation. No mention is made of the creation of any security interest. Is there a security interest?

Answer 2

YES - a security interest has been created that is governed by Article 9; Any transaction regardless of what you call it, if the effect is that one party gets contingent property on default than it will be covered by art. 9 - Substance over form doctrine

Question 3

Is a “true lease” covered by Article 9

Answer 3

NO

Question 4

What is a secured sale disguised as a lease?

Answer 4

To distinguish the “true lease” from the “disguised sale,” ask whether the transaction is, in substance, a lease or a sale. In a lease (e.g., a car rental), the lessor is going to receive the item back at the end of the lease term when the item still has meaningful economic value. In a sale, the buyer is the owner and is generally going to drain all of the economic value from the item. The relevant question is: at the time the parties entered into the transaction, was it reasonably likely that the “lessor” would get the item back when it still had meaningful economic value? If yes, it is a “true lease.” If no, it is a sale with a security interest in substance, and it is governed by Article 9.

Question 5

Machines, Inc. leases a duplicating machine to Print Shop. The parties execute a 5-year lease. Is this is a “true lease” outside the scope of Article 9, or it is a “disguised secured sale” governed by Article 9?

Answer 5

Cases like this must be determined on a case by case basis
Article 9 will apply if a 3 part test is met:
(1) at the end of the lease period, the lessee (Print Shop) becomes the owner of the machine for little or no consideration (e.g., option to purchase for $1); or;
(2) the lessee is bound to purchase the goods at the end of the lease or to renew the lease for the remaining economic life of the goods; or;
(3) the lease is for the entire economic life of the leased goods, with or without renewal.