Secured Trannies/Commercial Paper

Question 1

Secured Trannies/Commercial Paper: Scope of Article 9

What does Article 9 of the UCC apply to?

Answer 1

Consensual (voluntary) security interests in personalty (goods) or fixtures.

Question 2

Secured Trannies/Commercial Paper: Scope of Article 9

What is the key to classifying tangible collateral?

Answer 2

The primary use in the hands of your debtor

EXAMPLE: The primary use of golf clubs in the hands of a recreational golfer, a golf pro shop, and Tiger Woods all differ, so their classifications would differ as well (consumer goods, inventory, equipment)

Question 3

Secured Trannies/Commercial Paper: Creation of an Enforceable Security Interest

What is the mnemonic to remember how to discern whether a security interest has attached, rendering it enforceable?

Answer 3

“VCR”

V alue must be given by creditor

C ontract (aka security agreement) must evidence the secured transaction (unless secured party already has possession)

R ights in the collateral (debtor must have these)

NOTE: After-acquired collateral clauses are enforceable- they are floating liens

Question 4

Secured Trannies/Commercial Paper: Perfection of Security Interests

What is the perfection of a security interest?

Answer 4

Perfection is something the secured party does to put the world on record or constructive notice of the secured party’s existence.

NOTE: Generally, first in time = first in right

Question 5

Secured Trannies/Commercial Paper: Perfection of Security Interests

What are the three ways of obtaining perfection?

Answer 5

1. Secured party takes possession of the collateral
2. Automatic perfection for purchase money security interests in consumer goods (PMSI’s are security interest that enable debtors to purchase goods)
3. Filing notice of the security interest in the public records (puts the world on record and constructive notice)

Question 6

Secured Trannies/Commercial Paper: Perfection of Security Interests

What is required in a financing statement?

Answer 6

1. Debtor’s name/address
2. Creditor’s name/address
3. Description of the collateral (general is ok)

Question 7

Secured Trannies/Commercial Paper: Priority

What are the meanings of these various mnemonics used to remember the prioritization of various creditors: AUPie, LC, PAC, NOCie, BIOC, GUC

Answer 7

AUPie: Attached Unperfected Creditor- the creditor who is properly attached but not perfected

LC: Lien Creditor- the general unsecured creditor who goes to court to get a judicial lien on the collateral

PAC: Perfect Attached Creditor- properly attached AND perfected

NOCie: Non-Ordinary Course Buyer- buyer who purchases the collateral outside the ordinary stream of commerce (jewelry from an auto parts store)

BIOC: Buyer in Ordinary Course- buyer who purchases the collateral from a merchant’s inventory

GUC: General Unsecured Creditor- lender with no collateral

Question 8

Secured Trannies/Commercial Paper: Priority

What is the hierarchy of competing security interest holders from “winning” to “losing”?

Answer 8

BIOC, PAC, LC, NOCie, AUPie, GUC

NOTE: For the purposes of determining priority, if an early filer subsequently attaches, s/he is allowed the benefit of the early filing date, and priority relates back to that date.

Question 9

Secured Trannies/Commercial Paper: Priority

In the “battle” between a PMSI and an AACF, how does equipment vs. inventory collateral impact priority?

Answer 9

When collateral is equipment: A PMSI will achieve first priority over an AACF if the PMSI files properly within 20 days after the debtor takes possession of the equipment.

When collateral is inventory: A PMSI will achieve first priority over an AACF if the PMSI files properly AND notifies the AACF BEFORE the debtor takes possession of the inventory.

Question 10

Secured Trannies/Commercial Paper: Default

When is self-help permissible in security interest defaults?

Answer 10

Self-help repossession is permissible as long as the creditor does not breach the peace (aka does not do anything provocative/likely to cause violence).

NOTE: A repossession over ANY protest by debtor constitutes a breach of the peace.

Question 11

Secured Trannies/Commercial Paper: Default

What is repossession by judicial action?

Answer 11

If a secured party chooses not a resort to self-help repossession, he or she may get a judicial writ, ordering the sheriff to obtain possession of the collateral and deliver it to the secured party.

Question 12

Secured Trannies/Commercial Paper: Default

1. What is repossession by strict foreclosure?
2. How do you accomplish it?

Answer 12

1. Strict foreclosure occurs when the secured party retains the collateral in full satisfaction of the debt still owed. Works best when value of collateral approximates value of outstanding debt.
2. Secured party must send a written proposal to retain the collateral in satisfaction of the debt.
   - Consumer goods: notice is sent to debtor and secondary obligors
   - Not consumer goods: notice sent to debtor and other secured parties, perfected creditors and secondary obligors
   - If any notified party objects w/in 20 days after notice sent, strict foreclosure not allowed and collateral must be disposed of by sale.

Question 13

Secured Trannies/Commercial Paper: Default

When is strict foreclosure not allowed?

Answer 13

If the collateral is a consumer good and debtor has paid 60% or more of loan or cash price of good, strict foreclosure is not allowed. Instead, secured party must sell the collateral w/in 90 days or be liable in conversion.

Question 14

Secured Trannies/Commercial Paper: Default

What are the requirements for when a secured party sells collateral to apply proceeds to debt?

Answer 14

Secured party chooses whether the sale will be public or private.

• Every aspect of the sale must be commercially reasonable
• Prior to the sale, reasonable notice must be sent.

Question 15

Secured Trannies/Commercial Paper: Default

What can a secured party do if the sale of collateral nets less than the outstanding debt?

Answer 15

Secured creditor proceeds against debtor for a deficiency judgment.

NOTE: if a secured party sells collateral at a low price to an insider buyer, the price that an independent 3rd party would have paid, rather than the actual amount paid, is the price that will be used in calculating the deficiency.

Question 16

Secured Trannies/Commercial Paper: Default

What are the debtor’s rights of redemption and how can debtor redeem?

Answer 16

Debtor’s right to redeem the collateral is cut off once the secured party has resold or completed a strict foreclosure.

To redeem the debtor must pay the missed payments plus any interest and creditor’s reasonable expenses (incl. attny fees). UNLESS there’s an acceleration clause. Then debtor must pay off full debt plus interest and expenses.

Question 17

Secured Trannies/Commercial Paper

What is Commercial Paper?

Answer 17

When a negotiable instrument is duly negotiated to a holder in due course, the holder in due course takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses.

Question 18

Secured Trannies/Commercial Paper: Negotiable Instruments

What are the Types of Negotiable Instruments?

Answer 18

1. Promissory Note
   
   • Writings calling for payment of money
   • Promise to Pay
     Parties = maker and payee
2. Draft
   
   • Usually a check
     Parties = drawer, drawee and payee

Question 19

Secured Trannies/Commercial Paper: Negotiable Instruments

How can you tell whether a writing is a negotiable instrument or just a contract?

Answer 19

To qualify as a negotiable instrument, we need WOSSUP:

• a Writing;
• payable to Order or to bearer;
• Signed by the maker or drawer;
• reciting a Sum certain;
• containing an Unconditional promise or order, and no additional promises or orders;
• Payable on demand or at a definite time; and
• Payable in currency

Contracts have conditional language

Question 20

Secured Trannies/Commercial Paper: Negotiable Instruments

What is sum certain?

Answer 20

A specifically ascertainable sum payable in currency. Must be able to calculate how much is to be paid from what the writing says or reference to an outside source.

Question 21

Secured Trannies/Commercial Paper: Negotiable Instruments

In a commercial paper hypothetical, how does the D get sued? (2 theories)

Answer 21

1. A contract or signature liability

2. A warranty or contract liability

Question 22

Secured Trannies/Commercial Paper: Contract or Signature Liability

Who are possible defendants in a contract or signature liability case?

Answer 22

The D is the person who signed the negotiable instrument.

• The maker of the promissory note
• The indorser
• The drawer
• The drawee
• When words “without recourse” accompany the signature = disclaimer of liability

Question 23

Secured Trannies/Commercial Paper: Warranty or Transfer Liability

1 Who may be sued for breach of warranty?
2. Who is entitled to sue the defendant for breach of warranty?

Answer 23

1. Any transferor who sells the negotiable instrument, therefore any transferor who is not a donor
2. a) Plaintiff in possession of it the instrument may sue any defendant who indorsed the instrument
   b) If defendant did not indorse the instrument then Plaintiff may only sue his immediate transferee

Question 24

Secured Trannies/Commercial Paper: Warranty or Transfer Liability

What are the five warranties made by the defendant?

Answer 24

1. Defendant promises that Plaintiff has good title to the instrument
2. Defendant promises that all signatures are genuine and authorized
3. Defendant promises that the instrument has not been materially altered
4. Defendant promises that there is no defense or claim good against the defendant, meaning that the instrument is enforceable
5. Defendant promises that she has no knowledge of any bankruptcy or insolvency action against the maker or drawer

Question 25

Secured Trannies/Commercial Paper: How is a Negotiable Instrument Properly Transferred?

Answer 25

1. If it is payable to order of a specific person then transfer upon delivery delivery of the instrument to that person with her indorsement 2. If payable to bearer then transfer does not require indorsement

Question 26

Secured Trannies/Commercial Paper: Every indorsment must be either [BLANK] or [BLANK] and [BLANK] or [BLANK]

Answer 26

1. Special or blank | 2. Restrictive or unrestrictive

Question 27

Secured Trannies/Commercial Paper: 1. What is a special indorsement? 2. What is a blank indorsement? 3. What is a restrictive indorsement?

Answer 27

1. Special indorsement names a particular person as "indorsee," thereby requiring her signature in order to be further negotiated 2. Blank indorsement does not require a signature and may be further negotiated by delivery alone 3. Restrictive indorsement contains a restriction - e.g. "for deposit only"

Question 28

Secured Trannies/Commercial Paper: How does a transferee become a Holder in Due Course (HDC)?

Answer 28

A holder who takes the instrument: 1. for Value - ----A mere promise is not value - ----Old value is good value 2. in Good Faith, and (honesty in fact and observance of reasonable commercial standards of fair dealing) 3. Without notice that it is overdue or has been dishonored or is subject to any defense or claim (objective test)

Question 29

Secured Trannies/Commercial Paper: When should a HDC have notice that the instrument is not good?

Answer 29

1. Notice that the instrument is overdue 2. Notice of any defense or claim against the negotiable instrument's enforcement 3. Notice of a competing claim to the negotiable instrument 4. Notice that fiduciary has negotiated the instrument in breach of his or her fiduciary duty

Question 30

Secured Trannies/Commercial Paper: HDC an the Shelter Rule

Answer 30

A transferee acquires whatever rights her transferor had

Question 31

Secured Trannies/Commercial Paper: Benefits of being a HDC?

Answer 31

The Rule - a HDC takes the instrument free from claims, free from personal defenses and subject only to real defenses 1. A claim is a right to a negotiable instrument because of superior ownership - --If a negotiable instrument is duly negotiated to a HDC, the HDC defeats the superior owner 2. Free from Personal Defense available in ordinary contract actions, such as lack of consideration, unconscionability, waiver, estoppel, fraud in the inducement 3. However, still Subject to Real Defenses Material Alteration D duress ``` Fraud In Factum Incapacity Illegality Infancy Insolvency ```

Question 32

Secured Trannies/Commercial Paper: Duties and Liabilities What are the duties of Drawee Bank?

Answer 32

1. To honor customer's check if sufficient funds 2. Honor a customer's check if insufficient funds and charge for the overdraft 3. If bank wrongfully dishonors a check then customer may recover damages 4. Death of a customer does note revoke the bank's authority to pay a check until the bank i) knows of the death and ii) has a reasonable time to act on that knowledge 5. The bank must honor a check as drawn Cannot charge the customer's account if: i) drawer's signature was forged ii) for more money than the original order iii) if the bank pays the wrong person, or iv) if the check is post dated 6. Stop payment orders: Oral stop payment is binding on the bank for 14 days Written payment is binding for 6 months, renewable every 6 months in writing

Question 33

Secured Trannies/Commercial Paper: Duties and Liabilities Forgery or Material Alteration of Negotiable Instruments 1. Basic Context? 2. Properly payable rule? 3. Drawee Bank's remedies? 4. When is the drawer negligent?

Answer 33

1. Writing checks without authority 2. The drawee bank that honors a forged or materially altered check must recredit the drawer's account, as long as the drawer was not negligent 3. Drawee bank's remedies - -The thief is always liable - -The drawer is also liable if negligent? 4. a) Leaving blank or spaces on the instrument b) Failing to follow internal procedures designed to avoid forgeries c) Failure to examine one's own bank statements - IMPORTANT d) If imposter induces the drawer to write a check e) Employer is liable for forgeries by an employee who was entrusted with responsibility for handling checks - IMPORTANT