Class 5 Secured Transactions Spring 2021 Perfection Introduction

Class 5 Secured Transactions Spring 2021 Perfection: Introduction Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago 773. 702. 0864/r-picker@uchicago. edu Copyright © 2001 -21 Randal C. Picker. All Rights Reserved.

9 -308: When SI is Perfected n (a) [Perfection of security interest. ] u. Except as otherwise provided in this section and Section 9‑ 309, a security interest is perfected if it has attached and all of the applicable requirements for perfection in Sections 9‑ 310 through 9‑ 316 have been satisfied. A security interest is perfected when it attaches if the applicable requirements are satisfied before the security interest attaches. December 31, 2021 2

Standard Perfection Tools n Key Tools u. Filing a financing statement u. Taking possession u. Taking control u. Automatic perfection n Under what circumstances? December 31, 2021 3

3 -1: Categorizing the Collateral n What is a glomph? u. You don’t know and need to act accordingly u. Need to recognize what you know and don’t know u. Need to recognize what a judge in a lawsuit might see n Design the deal structure to manage the uncertainty December 31, 2021 4

Figuring out UCC Collateral Types Debtor SA: “Debtor hereby grants to Bank a security interest in Debtor’s copiers to secure all debts of Debtor to Bank. ” December 31, 2021 1/1 FS: Equipment? Inventory? $ Bank What category should Bank list in the FS? 5

9 -102(a)(44): Goods n “Goods” means uall things that are movable when a security interest attaches. … The term also does not include accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles, instruments, investment property, letter-of-credit rights, letters of credit, money, or oil, gas, or other minerals before extraction. December 31, 2021 6

Answer n Drafting Approach u. Conceptual definition of goods—movable things —with exclusions by other categories u. Have to know those definitions to understand goods u. But if this scheme is working copier will be good n What kind of good? December 31, 2021 7

Classes of Goods n Official Comment 4. a to 9 -102 u. The classes of goods are mutually exclusive. For example, the same property cannot simultaneously be both equipment and inventory. In borderline cases–a physician’s car or a farmer’s truck that might be either consumer goods or equipment–the principal use to which the property is put is determinative. December 31, 2021 8

Classes of Goods n Official Comment 4. a to 9 -102 u. Goods can fall into different classes at different times. For example, a radio may be inventory in the hands of a dealer and consumer goods in the hands of a consumer. As under former Article 9, goods are “equipment” if they do not fall into another category. December 31, 2021 9

9 -102(a)(33): Equipment n “Equipment” means ugoods other than inventory, farm products, or consumer goods. December 31, 2021 10

9 -102(a)(23): Consumer Goods n “Consumer goods” means ugoods that are used or bought for use primarily for personal, family, or household purposes. December 31, 2021 11

9 -102(a)(34): Farm Products n “Farm products” means goods, other than standing timber, with respect to which the debtor is engaged in a farming operation and which are: u(A) crops grown, growing, or to be grown, including: w (i) crops produced on trees, vines, and bushes; and December 31, 2021 12

9 -102(a)(34): Farm Products w (ii) aquatic goods produced in aquacultural operations; u(B) livestock, born or unborn, including aquatic goods produced in aquacultural operations; u(C) supplies used or produced in a farming operation; or u(D) products of crops or livestock in their unmanufactured states. December 31, 2021 13

9 -102(a)(48): Inventory n (48) “Inventory” means goods, other than farm products, which: u(A) are leased by a person as lessor; u(B) are held by a person for sale or lease or to be furnished under a contract of service; u(C) are furnished by a person under a contract of service; or December 31, 2021 14

9 -102(a)(48): Inventory u(D) consist of raw materials, work in process, or materials used or consumed in a business. December 31, 2021 15

TTYN Figuring out UCC Collateral Types Debtor SA: “Debtor hereby grants to Bank a security interest in Debtor’s copiers to secure all debts of Debtor to Bank. ” December 31, 2021 1/1 FS: Equipment? Inventory? $ Bank What category should Bank list in the FS? 16

Answer n Depends on Facts u. What use is Debtor making of the copier? u. If using it to run its business—like the Law School —it is equipment but if the copier is the thing that Debtor sells, then inventory December 31, 2021 17

Bean Timberland Bean Sale of cut timber Potlach December 31, 2021 SA: Timber FS: Timber Sale of cut timber Bank Is the timber inventory such that P and I are BIOCOB for 9 -320? Idaho 18

Section 9 -320: Buyer of Goods n (a) [Buyer in ordinary course of business. ] u. Except as otherwise provided in subsection (e), a buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence. December 31, 2021 19

Section 9 -320: Buyer of Goods n Farm Security Act u. Recall that FSA (7 USC 1631) creates parallel regime at federal level for farm products December 31, 2021 20

1 -201(b)(9): Definition of Buyer in Ordinary Course of Business n Buyer in ordinary course of business means ua person that buys goods in good faith without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. December 31, 2021 21

9 -102(a)(44): Goods n “Goods” means uall things that are movable when a security interest attaches. The term includes (i) fixtures, (ii) standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) the unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes. December 31, 2021 22

The Status of Cut Timber n Official Comment 3 to 9 -501 u. Unlike as-extracted collateral, standing timber may be goods before it is cut. See Section 9 -102 (defining “goods”). Once cut, however, it is no longer timber to be cut, and the filing in the realproperty-mortgage office ceases to be effective. The timber then becomes ordinary goods, and filing in the office specified in subsection (a)(2) is necessary for perfection. December 31, 2021 23

Why is the Court Wrong in Bean Timberland? n The Court’s Analysis u. Equipment means “goods other than inventory, farm products, or consumer goods. ” 9‑ 102(a)(33). The Commentary notes that, generally speaking, “goods used in a business are equipment if they are fixed assets or have, as identifiable units, a relatively long period of use. ” See 9‑ 102. This obviously does not describe cut timber. December 31, 2021 24

Why is the Court Right in Bean Timberland? n Categorize the cut timber u. Farm products under 9 -102(a)(34)? u. Inventory under 9 -102(a)(48)? u. Equipment under 9 -102(a)(33)? December 31, 2021 25

Bean Timberland: Right Outcome, Wrong Reasons n Court gets outcome right because u. Cut timber doesn’t seem to qualify as farm products and should qualify as inventory and therefore is not equipment u. Not that cut timber isn’t farm products and isn’t equipment and therefore must be inventory December 31, 2021 26

11 East th 36 LLC: Step 1 East 36 th LLC Sole Member M. Lofts LLC 15 Condos December 31, 2021 13 Condos 27

11 East Guthrie th 36 LLC: Step 2 Lends $ M. Fund LLC Borrows $, Grants Mortgage on Condo Bank December 31, 2021 28

11 East th 36 LLC: Step 3 SA and FS: ? ? ? Guthrie East 36 th LLC Sole Member Guthrie gets UCC 9 SI. How should she do SA? FS? December 31, 2021 M. Lofts 13 Condos LLC 15 Condos 29

11 East n th 36 LLC: Step 3 Questions u. How should we classify the collateral? u. How should we describe it in the SA? The FS? December 31, 2021 30

11 East n th 36 LLC: Step 3 SA Language u“In relevant part, the 11 East 36 th Pledge grants Guthrie a security interest in all of 11 East 36 th’s ‘right, title, and interest. . . in and to its membership interest in Morgan Lofts, LLC. ’” December 31, 2021 31

11 East n th 36 LLC: Step 3 FS Language u“The collateral secured shall include 11 East 36 th LLC’s interest in the following units owned by Morgan Lofts LLC located at 11 East 36 th St. , NY: 701, 803, 804, 903, 904, 1003, 1004, 1103, and 1104. The collateral shall not include units 1001, 1203, and 1204 located at 11 East 36 th St. , NY …” December 31, 2021 32

Security Interest in LLC Membership Interests n 9 -312(a): Perfection by filing permitted. u. A security interest in chattel paper, negotiable documents, instruments, or investment property may be perfected by filing. n Is the interest in the LLC interest “investment property”? December 31, 2021 33

Security Interest in LLC Membership Interests n 9 -313(a): Perfection by possession or delivery. u. Except as otherwise provided in subsection (b), a secured party may perfect a security interest in tangible negotiable documents, goods, instruments, money, or tangible chattel paper by taking possession of the collateral. n Can’t perfect via possession for accounts, GI December 31, 2021 34

Security Interest in LLC Membership Interests n 9 -313(a): Perfection by possession or delivery. u. A secured party may perfect a security interest in certificated securities by taking delivery of the certificated securities under Section 8 -301. n Is the interest in the LLC interest a certificated security under 8 -301? December 31, 2021 35

Definition of Investment Property n 9 -102(a)(49): Definition of “Investment Property” u“a security, whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account. ” December 31, 2021 36

Analysis in 11 East 33 th Street n Don’t know for sure, but … u. Not trying to claim perfection based on possession u. Filing works for investment property or for general intangibles and those are the competing characterizations here December 31, 2021 37

Analysis in 11 East 33 th Street Actual FS wrong either way n But: n u. If FS about notice, what should we make of this FS? December 31, 2021 38

3 -2: Figuring out UCC Collateral Types Copiers-R-Us™ Debtor is a copying firm. It provides copying services and sells and leases copiers. It also sells toner and paper. It does all of that for cash and credit. December 31, 2021 TTYN Bank How should Bank describe collateral in the SA? The FS? 39

Mapping Transactions and Collateral n Possible CRU transactions u. Purchase new copiers u. Buy more paper, toner u. Sell toner/paper for cash/credit u. Provide copying services on credit u. Sell copiers for cash/credit u. Lease copiers December 31, 2021 40

Purchase New Copiers n Collateral Issues u. Should be inventory under 9 -102(a)(48) but firm could use some of them internally in its business and those would likely be treated as equipment under 9 -102(a)(33) u. Potential lender would probably want both categories in SA/FS December 31, 2021 41

Cash/Check Transaction n Collateral Issues u. Actual cash or check will likely flow through deposit account w 9 -102(2)(29): “Deposit account” means a demand, time, savings, passbook, nonnegotiable certificates of deposit, uncertificated certificates of deposit, nontransferrable certificates of deposit, or similar account maintained with a bank. December 31, 2021 42

Cash/Check Transaction n Collateral Issues u. Deposit account as original collateral: w Must perfect via control (9 -312(b)(1) and 9 -314) u. Deposit account as proceeds (derivative of prior collateral) w Need not take control (see 9 -315(c, d)) December 31, 2021 43

Credit Transaction for Services, Paper/Toner n Collateral Issues u. Do this as store credit (credit card or invoice payable in 30 days), not as Amex, Visa etc. u. This will give rise to an “account” under 9102(a)(2) December 31, 2021 44

Own Credit Transaction for Services, Paper/Toner n 9 -102(a)(2) u“Account”, except as used in “account for”, means a right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (ii) for services rendered or to be rendered, … December 31, 2021 45

Own Credit Transaction for Services, Paper/Toner n 9 -102(a)(2) u(vii) arising out of the use of a credit or charge card or information contained on or for use with the card …. The term does not include (i) rights to payment evidenced by chattel paper or an instrument, … or December 31, 2021 46

Own Credit Transaction for Services, Paper/Toner n 9 -102(a)(2) u(vi) rights to payment for money or funds advanced or sold, other than rights arising out of the use of a credit or charge card or information contained on or for use with the card. n Have to file FS for accounts; can’t possess or control (9 -312, 9 -313) December 31, 2021 47

General Intangible Definition n 9 -102(a)(44): “General intangible” means uany personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software. December 31, 2021 48

Third-Party Credit Case (Amex et al) n Collateral Types u. Rights to store under contracts with Amex et al will give rise to general intangibles under 9102(a)(44) and probably payment intangibles under 9 -102(a)(61) (Payment intangible “means a general intangible under which the account debtor’s principal obligation is a monetary obligation. ”) December 31, 2021 49

Third-Party Credit Case (Amex et al) u. See also comment 5. d to 9 -102: w “A debtor’s right to payment from another person of amounts received by the other person on the debtor’s behalf, including the right of a merchant credit-card, debit-card, prepaid-card, or other payment-card transaction to payment of amounts received by its bank from the card December 31, 2021 50

Third-Party Credit Case (Amex et al) usystem in settlement of the transaction, is a ‘payment intangible. ’ (In contrast, the right of a credit-card issuer payment arising out of the use of a credit card is an ‘account. ’)” n New Comment u. That comment was added in the 2010 amendments. December 31, 2021 51

Lease of Copier n Collateral Types u 9 -102(a)(11): “Chattel paper” means w a record or records that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of December 31, 2021 52

Lease of Copier w software used in the goods, a lease of specific goods, or a lease of specified goods and a license of software used in the goods. In this paragraph, “monetary obligation” means a monetary obligation secured by the goods or owed under a lease of the goods and includes a monetary obligation with respect to software used in the goods. December 31, 2021 53

TTYN 3 -3: One More Time Copiers-R-Us™ One year lease of copier with 5 year life; 12 monthly payments followed by return of copier Bank ? How should Bank describe collateral in the SA? The FS? Lessee December 31, 2021 54

Answer n Should be straightforward u. When CRU looks to borrow money from Bank, it offers as collateral the lease rights and that will be classified as chattel paper under 9 -102(a)(11) u. Tangible CP vs. Electronic CP will matter (see 9105) but not today December 31, 2021 55

3 -4: Unbundling Chattel Paper Copiers-R-Us™ One year lease of copier with 5 year life; 12 monthly payments followed by return of copier Lessee December 31, 2021 Payment Stream under CP Non-Payment Rights under CP Bank 2 Bank 1 How should Banks describe collateral in the SA? The FS? 56

Is this Commercial Money Center? n And u. Is December 31, 2021 this just glomphs again? 57

Ex Post Argument Drivers n As to perfection: u. No financing statements filed u. Questions re possession (not today but soon) u. Auto perfection for sales of payment intangibles under 9 -309(3) n Trustee wants to avoid sale characterization and payment intangible classification December 31, 2021 58

Court’s Analysis n Payment Intangibles? u“Payment streams stripped from the underlying leases are not records that evidence monetary obligations—they are monetary obligations. Therefore, we agree with Net. Bank that the payment streams are not chattel paper. ” December 31, 2021 59

Court’s Analysis u“If they are not chattel paper, what are they? Most monetary obligations are ‘accounts’ but the definition of account excludes ‘rights to payment evidenced by chattel paper. ’ Therefore the monetary obligations in this case fall within the payment intangible subset of the catch-all definition of general intangibles. See 9 -102(a)(2) …. ” December 31, 2021 60

2010 Comment Changes n Revised Comment 5. d to 9 -102 Rejects CMC I u“Thus, an assignment of the lessor’s right to payment under a lease also transfers the lessor’s rights with respect to the leased goods under Section 2 A-523. ” December 31, 2021 61

2010 Comment Changes n Revised Comment 5. d to 9 -102 Rejects CMC I u“If, taken together, the lessor’s rights to payment and with respect to the leased goods are evidenced by chattel paper, then, contrary to In re Commercial Money Center, Inc. , 350 B. R. 465 (Bankr. App. 9 th Cir. 2006), an assignment of the lessor’s right to payment constitutes an assignment of the chattel paper. ” December 31, 2021 62

2010 Comment Changes n Revised Comment 5. d to 9 -102 Rejects CMC I u“Although an agreement excluding the lessor’s rights with respect to the leased goods from an assignment of the lessor’s right to payment may be effective between the parties, the agreement does not affect the characterization of the collateral to the prejudice of creditors of, and purchasers from, the assignor. ” December 31, 2021 63