Secured Transactions Assignment 40 Why Secured Credit 1

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Secured Transactions Assignment 40 Why Secured Credit? 1

Secured Transactions Assignment 40 Why Secured Credit? 1

The Puzzle of Secured Debt 2

The Puzzle of Secured Debt 2

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from it’s existence exceed the losses? 3

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from it’s existence exceed the losses? 1. Secured debt helps secured creditors collect more. Lowers interest rates. 4

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from it’s existence exceed the losses? 1. Secured debt helps secured creditors collect more. Lowers interest rates. 2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates. 5

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from it’s existence exceed the losses? 1. Secured debt helps secured creditors collect more. Lowers interest rates. 2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates. Does secured credit do something good that lowers total system costs? 6

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from it’s existence exceed the losses? 1. Secured debt helps secured creditors collect more. Lowers interest rates. 2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates. Does secured credit do something good that lowers total system costs? (It must, or secureds and unsecureds wouldn’t agree to it. ) 7

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from it’s existence exceed the losses? 1. Secured debt helps secured creditors collect more. Lowers interest rates. 2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates. Does secured credit do something good that lowers total system costs? (It must, or secureds and unsecureds wouldn’t agree to it. ) Monitoring 8

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from it’s existence exceed the losses? 1. Secured debt helps secured creditors collect more. Lowers interest rates. 2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates. Does secured credit do something good that lowers total system costs? (It must, or secureds and unsecureds wouldn’t agree to it. ) Monitoring Relieving secured party of need to monitor 9

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from it’s existence exceed the losses? 1. Secured debt helps secured creditors collect more. Lowers interest rates. 2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates. Does secured credit do something good that lowers total system costs? (It must, or secureds and unsecureds wouldn’t agree to it. ) Monitoring Relieving secured party of need to monitor Does it do something bad that raises total system costs? 10

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from

The Puzzle of Secured Debt Is secured debt “efficient? ” Do the gains from it’s existence exceed the losses? 1. Secured debt helps secured creditors collect more. Lowers interest rates. 2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates. Does secured credit do something good that lowers total system costs? (It must, or secureds and unsecureds wouldn’t agree to it. ) Monitoring Relieving secured party of need to monitor Does it do something bad that raises total system costs? Incentives to incur debt that will never be paid 11

Judgment Proofing Strategy: Secured Debt All assets Protective SI This is a judgment-proof structure.

Judgment Proofing Strategy: Secured Debt All assets Protective SI This is a judgment-proof structure. 18

Judgment Proofing Strategy: Secured Debt Lien All assets Protective SI This is a judgment-proof

Judgment Proofing Strategy: Secured Debt Lien All assets Protective SI This is a judgment-proof structure. If someone obtains a lien. . 19

Judgment Proofing Strategy: Secured Debt All assets Protective SI This is a judgment-proof structure.

Judgment Proofing Strategy: Secured Debt All assets Protective SI This is a judgment-proof structure. If someone obtains a lien and forecloses it. . 20

Judgment Proofing Strategy: Secured Debt All assets Protective SI This is a judgment-proof structure.

Judgment Proofing Strategy: Secured Debt All assets Protective SI This is a judgment-proof structure. If someone obtains a lien and forecloses it, they don’t get anything. 21

Judgment Proofing Strategy: Secured Debt Exemption All assets Protective SI This is a judgment-proof

Judgment Proofing Strategy: Secured Debt Exemption All assets Protective SI This is a judgment-proof structure. If someone obtains a lien and forecloses it, they don’t get anything. If the debtor is entitled to an exemption, the lien does not even attach and the creditor cannot force a sale. 22

Judgment Proofing Strategy: Secured Debt Lien All assets Protective SI Unsecured debts, judgments, and

Judgment Proofing Strategy: Secured Debt Lien All assets Protective SI Unsecured debts, judgments, and liens can be a nuisance. 23

Judgment Proofing Strategy: Secured Debt Lien All assets Protective SI Before bankruptcy A Chapter

Judgment Proofing Strategy: Secured Debt Lien All assets Protective SI Before bankruptcy A Chapter 11 bankruptcy wipes out the unsecured debt (without payment). . 24

Judgment Proofing Strategy: Secured Debt Lien All assets Protective SI Before bankruptcy After bankruptcy

Judgment Proofing Strategy: Secured Debt Lien All assets Protective SI Before bankruptcy After bankruptcy A Chapter 11 bankruptcy wipes out the unsecured debt (without payment) and leaves the secured portion of the secured debt in place. 25

Judgment Proofing Strategy: Secured Debt Lien All assets Protective SI Before bankruptcy After bankruptcy

Judgment Proofing Strategy: Secured Debt Lien All assets Protective SI Before bankruptcy After bankruptcy A Chapter 11 bankruptcy wipes out the unsecured debt (without payment) and leaves the secured portion of the secured debt in place. What about the shareholders/managers? 26

Judgment Proofing Strategy: Secured Debt New value Lien All assets Protective SI Before bankruptcy

Judgment Proofing Strategy: Secured Debt New value Lien All assets Protective SI Before bankruptcy After bankruptcy A Chapter 11 bankruptcy wipes out the unsecured debt (without payment) and leaves the secured portion of the secured debt in place. What about the shareholders/managers? The shareholders can “buy” the business from the bankruptcy court by contributing “new value” to the corporation. 27

Judgment Proofing Strategy: Secured Debt Lien All assets Protective SI Before bankruptcy After bankruptcy

Judgment Proofing Strategy: Secured Debt Lien All assets Protective SI Before bankruptcy After bankruptcy A Chapter 11 bankruptcy wipes out the unsecured debt (without payment) and leaves the secured portion of the secured debt in place. What about the shareholders/managers? The shareholders can “buy” the business from the bankruptcy court by contributing “new value” to the corporation. The business can continue to operate. 28

Judgment Proofing Strategy: Secured Debt Lien All assets Lien Protective SI Before bankruptcy After

Judgment Proofing Strategy: Secured Debt Lien All assets Lien Protective SI Before bankruptcy After bankruptcy A Chapter 11 bankruptcy wipes out the unsecured debt (without payment) and leaves the secured portion of the secured debt in place. What about the shareholders/managers? The shareholders can “buy” the business from the bankruptcy court by contributing “new value” to the corporation. The business can continue to operate. And do it again! 29

Problem 40. 1, page 664 The “partnership: ” 30 V

Problem 40. 1, page 664 The “partnership: ” 30 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits 31 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests three dangerous products. 32 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. 33 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. What is the expected value of this business? 34 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. What is the expected value of this business? $1 billion loss 35 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. What is the expected value of this business? $1 billion loss What do you recommend to Harley? 36 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. What is the expected value of this business? $1 billion loss Investors Steady Hand Product One Inc. Steady Lending Alvin Product Two Inc. Product Three Inc. 37 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. What is the expected value of this business? $1 billion loss Investors Steady Hand Product One Inc. Steady Lending Alvin Product Two Inc. Now what is the total expected value of business? Product Three Inc. 38 V

Judgment Proofing Strategy: Parent Subsidiary 39

Judgment Proofing Strategy: Parent Subsidiary 39

Judgment Proofing Strategy: Parent Subsidiary Corporation Assets Sub stock Plant lease Total Liabilities 0

Judgment Proofing Strategy: Parent Subsidiary Corporation Assets Sub stock Plant lease Total Liabilities 0 None 0 Equity Total 0 40

Judgment Proofing Strategy: Parent Subsidiary Parent Corporation Assets Sub stock Plant lease Total Liabilities

Judgment Proofing Strategy: Parent Subsidiary Parent Corporation Assets Sub stock Plant lease Total Liabilities 0 None 0 Equity 0 Total 0 0 0 Subsidiary Corporation Assets Liabilities Plant 60 Bank 100 Accounts 40 Equity 0 Total 100 41

Judgment Proofing Strategy: Parent Subsidiary Parent Corporation Assets Sub stock Plant lease Total Liabilities

Judgment Proofing Strategy: Parent Subsidiary Parent Corporation Assets Sub stock Plant lease Total Liabilities 0 None 0 Equity 0 Total Sub owns all group assets 0 0 0 Subsidiary Corporation Assets Liabilities Plant 60 Bank 100 Accounts 40 Equity 0 Total 100 42

Judgment Proofing Strategy: Parent Subsidiary Parent Corporation Assets Sub stock Plant lease Total Liabilities

Judgment Proofing Strategy: Parent Subsidiary Parent Corporation Assets Sub stock Plant lease Total Liabilities 0 None 0 Equity 0 Total Sub owns all group assets 0 0 0 Owning Corporation Assets Liabilities Plant 60 Bank 100 Accounts 40 Equity 0 Total 100 43

Judgment Proofing Strategy: Parent Subsidiary Parent Corporation Assets Sub stock Plant lease Total Liabilities

Judgment Proofing Strategy: Parent Subsidiary Parent Corporation Assets Sub stock Plant lease Total Liabilities 0 None 0 Equity 0 Total Sub owns all group assets 0 0 0 Sub owes preferred debts Owning Corporation Assets Liabilities Plant 60 Bank 100 Accounts 40 Equity 0 Total 100 44

Judgment Proofing Strategy: Parent Subsidiary Parent Corporation Assets Sub stock Plant lease Total Liabilities

Judgment Proofing Strategy: Parent Subsidiary Parent Corporation Assets Sub stock Plant lease Total Liabilities 0 None 0 Equity 0 Total Sub owns all group assets Sub owes preferred debts 0 0 Parent leases plant, 0 conducts all business, employs all employees, incurs all liabilities Owning Corporation Assets Liabilities Plant 60 Bank 100 Accounts 40 Equity 0 Total 100 45

Judgment Proofing Strategy: Parent Subsidiary Operating Corporation Assets Sub stock Plant lease Total Liabilities

Judgment Proofing Strategy: Parent Subsidiary Operating Corporation Assets Sub stock Plant lease Total Liabilities 0 None 0 Equity 0 Total Sub owns all group assets Sub owes preferred debts 0 0 Parent leases plant, 0 conducts all business, employs all employees, incurs all liabilities Owning Corporation Assets Liabilities Plant 60 Bank 100 Accounts 40 Equity 0 Total 100 46

Judgment Proofing Strategy: Parent Subsidiary Operating Corporation Assets Sub stock Plant lease Total Liabilities

Judgment Proofing Strategy: Parent Subsidiary Operating Corporation Assets Sub stock Plant lease Total Liabilities 0 None 0 Equity 0 Total Sub owns all group assets Sub owes preferred debts 0 0 Parent leases plant, 0 conducts all business, employs all employees, incurs all liabilities Owning Corporation Tort creditor of Parent Assets Liabilities obtains judgment Plant 60 Bank 100 Accounts 40 Equity 0 Total 100 47

Judgment Proofing Strategy: Parent Subsidiary Operating Corporation Sub owns all group assets Assets Sub

Judgment Proofing Strategy: Parent Subsidiary Operating Corporation Sub owns all group assets Assets Sub stock Plant lease Total Liabilities Sub owes preferred debts 0 Tort Cred 80 0 Equity -80 Parent leases plant, 0 Total 0 conducts all business, employs all employees, incurs all liabilities Owning Corporation Tort creditor of Parent Assets Liabilities obtains judgment Plant 60 Bank 100 Accounts 40 Equity 0 Total 100 48

Judgment Proofing Strategy: Parent Subsidiary Operating Corporation Sub owns all group assets Assets Sub

Judgment Proofing Strategy: Parent Subsidiary Operating Corporation Sub owns all group assets Assets Sub stock Plant lease Total Liabilities Sub owes preferred debts 0 Tort Cred 80 0 Equity -80 Parent leases plant, 0 Total 0 conducts all business, employs all employees, incurs all liabilities Owning Corporation Tort creditor of Parent Assets Liabilities obtains judgment Plant 60 Bank 100 Accounts 40 Equity 0 Forecloses on stock Total 100 49

Judgment Proofing Strategy: Parent Subsidiary Operating Corporation Sub owns all group assets Assets Sub

Judgment Proofing Strategy: Parent Subsidiary Operating Corporation Sub owns all group assets Assets Sub stock Plant lease Total Liabilities Sub owes preferred debts 0 Tort Cred 80 0 Equity -80 Parent leases plant, 0 Total 0 conducts all business, employs all employees, incurs all liabilities Owning Corporation Tort creditor of Parent Assets Liabilities obtains judgment Plant 60 Bank 100 Accounts 40 Equity 0 Forecloses on stock Total 100 50

Judgment Proofing Strategy: Parent Subsidiary Sub owns all group assets Sub owes preferred debts

Judgment Proofing Strategy: Parent Subsidiary Sub owns all group assets Sub owes preferred debts Parent leases plant, conducts all business, employs all employees, incurs all liabilities Owning Corporation Tort creditor of Parent Assets Liabilities obtains judgment Plant 60 Bank 100 Forecloses on stock Accounts 40 Tort Equity Total 100 51

Judgment Proofing Strategy: Parent Subsidiary Sub owns all group assets Sub owes preferred debts

Judgment Proofing Strategy: Parent Subsidiary Sub owns all group assets Sub owes preferred debts Owning Corporation Assets Liabilities Plant 60 Bank 100 Accounts 40 Tort Equity Total 100 Parent leases plant, conducts all business, employs all employees, incurs all liabilities Tort creditor of Parent obtains judgment Forecloses on stock Liquidates Subsidiary Corp. 52

Judgment Proofing Strategy: Parent Subsidiary Sub owns all group assets Sub owes preferred debts

Judgment Proofing Strategy: Parent Subsidiary Sub owns all group assets Sub owes preferred debts Owning Corporation Assets Liabilities Plant 60 Bank 100 Accounts 40 Tort Equity Total 100 Parent leases plant, conducts all business, employs all employees, incurs all liabilities Tort creditor of Parent obtains judgment Forecloses on stock Liquidates Subsidiary Corp. Recovers zero 53

Judgment Proofing Strategy: Parent Subsidiary Owning Corporation accomplishes the same thing as a security

Judgment Proofing Strategy: Parent Subsidiary Owning Corporation accomplishes the same thing as a security interest in favor of the bank – but cheaper. Owning Corporation Assets Liabilities Plant 60 Bank 100 Accounts 40 Tort Equity Total 100 Sub owns all group assets Sub owes preferred debts Parent leases plant, conducts all business, employs all employees, incurs all liabilities Tort creditor of Parent obtains judgment Forecloses on stock Liquidates Subsidiary Corp. Recovers zero 54

Problem 40. 1 The “partnership: ” 55 V

Problem 40. 1 The “partnership: ” 55 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits 56 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests IP for three dangerous products. 57 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. 58 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. What is the expected value of this business? 59 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. What is the expected value of this business? $1 billion loss 60 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. What is the expected value of this business? $1 billion loss What do you recommend to Harley? 61 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. What is the expected value of this business? $1 billion loss Investors Steady Hand Product One Inc. Steady Lending Alvin Product Two Inc. Product Three Inc. 62 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. What is the expected value of this business? $1 billion loss Investors Steady Hand Product One Inc. Steady Lending Alvin Product Two Inc. Now what is the total expected value of business? Product Three Inc. 63 V

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for

Problem 40. 1 The “partnership: ” Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities. What is the expected value of this business? $1 billion loss Investors Steady Hand Product One Inc. Steady Lending Alvin Product Two Inc. Now what is the total expected value of business? Product Three Inc. $2 billion less up to 1/3 of $4 million 64 V

Problem 40. 1 Investors Steady Hand Alvin Product Product One Two Three Mfg Inc.

Problem 40. 1 Investors Steady Hand Alvin Product Product One Two Three Mfg Inc. Mkt Inc. Mfg Inc. Steady Lending 65 V

Problem 40. 1 Investors Steady Hand Alvin Product Product One Two Three Mfg Inc.

Problem 40. 1 Investors Steady Hand Alvin Product Product One Two Three Mfg Inc. Mkt Inc. Mfg Inc. Steady Lending Now what is the total expected value of business? 66 V

Problem 40. 1 Investors Steady Hand Alvin Product Product One Two Three Mfg Inc.

Problem 40. 1 Investors Steady Hand Alvin Product Product One Two Three Mfg Inc. Mkt Inc. Mfg Inc. Steady Lending Now what is the total expected value of business? $2. 5 billion, less up to 1/6 of $4 million 67 V

Problem 40. 1 Investors Steady Hand Alvin Product Product One Two Three Mfg Inc.

Problem 40. 1 Investors Steady Hand Alvin Product Product One Two Three Mfg Inc. Mkt Inc. Mfg Inc. Steady Lending We can make these companies public companies without changing Alvin’s or Steady’s return 68 V

Problem 40. 1 Investors Steady Investors Underwriters Alvin Product Product Contint’l One Two Three

Problem 40. 1 Investors Steady Investors Underwriters Alvin Product Product Contint’l One Two Three Magna. Mfg Inc. Mkt Inc. Mfg Inc. tech, Inc Steady Lending We can make these companies public companies without changing Alvin’s or Steady’s return 69 V

Problem 40. 1 Investors Steady Investors Underwriters Alvin Product Product Contint’l One Two Three

Problem 40. 1 Investors Steady Investors Underwriters Alvin Product Product Contint’l One Two Three Magna. Mfg Inc. Mkt Inc. Mfg Inc. tech, Inc Steady Lending We can make these companies public companies without changing Alvin’s or Steady’s return Now veil piercing is impossible. 70 V

Problem 40. 2 Investors Steady Investors Underwriters Alvin Product Product Contint’l One Two Three

Problem 40. 2 Investors Steady Investors Underwriters Alvin Product Product Contint’l One Two Three Magna. Mfg Inc. Mkt Inc. Mfg Inc. tech, Inc Steady Lending Continental Magnatech Cash Plant IP rights Steady Lending (SI) Trade creditors Person injury claims 71 V

Problem 40. 2 Investors Steady Investors Underwriters Alvin Product Product Contint’l One Two Three

Problem 40. 2 Investors Steady Investors Underwriters Alvin Product Product Contint’l One Two Three Magna. Mfg Inc. Mkt Inc. Mfg Inc. tech, Inc Alicia Steady Lending You represent Alicia Card, tort victim. What do you do? Continental Magnatech Cash Plant IP rights Steady Lending (SI) Trade creditors Person injury claims 72 V

Problem 40. 3 Our law firm is an unsecured creditor of Sigment, $40 K

Problem 40. 3 Our law firm is an unsecured creditor of Sigment, $40 K 73

Problem 40. 3 Our law firm is an unsecured creditor of Sigment, $40 K

Problem 40. 3 Our law firm is an unsecured creditor of Sigment, $40 K Portage State Bank files a financing statement against Sigmet covering “equipment, inventory, accounts receivable” 74

Problem 40. 3 Our law firm is an unsecured creditor of Sigment, $40 K

Problem 40. 3 Our law firm is an unsecured creditor of Sigment, $40 K Portage State Bank files a financing statement against Sigmet covering “equipment, inventory, accounts receivable” Where do we stand? 75

Problem 40. 3 Our law firm is an unsecured creditor of Sigment, $40 K

Problem 40. 3 Our law firm is an unsecured creditor of Sigment, $40 K Portage State Bank files a financing statement against Sigmet covering “equipment, inventory, accounts receivable” Where do we stand? What should we do? 76

Problem 40. 3 Our law firm is an unsecured creditor of Sigment, $40 K

Problem 40. 3 Our law firm is an unsecured creditor of Sigment, $40 K Portage State Bank files a financing statement against Sigmet covering “equipment, inventory, accounts receivable” Where do we stand? What should we do? Should we be doing UCC searches to monitor all of our clients? 77

Problem 40. 4 National Secured Credit Review Commission asks what should be done about

Problem 40. 4 National Secured Credit Review Commission asks what should be done about Article 9 security interests. a. Keep Article 9 as is. b. Nationalize Article 9. Give tort creditors and small wage claims priority over secured creditors c. Nationalize Article 9. “Carve-out” 20% of the collateral for unsecured creditors d. Adopt b. through uniform state law e. Adopt c. through uniform state law 78

Problem 40. 4 National Secured Credit Review Commission asks what should be done about

Problem 40. 4 National Secured Credit Review Commission asks what should be done about Article 9 security interests. a. Keep Article 9 as is. b. Nationalize Article 9. Give tort creditors and small wage claims priority over secured creditors c. Nationalize Article 9. “Carve-out” 20% of the collateral for unsecured creditors d. Adopt b. through uniform state law e. Adopt c. through uniform state law 79

Problem 40. 4 National Secured Credit Review Commission asks what should be done about

Problem 40. 4 National Secured Credit Review Commission asks what should be done about Article 9 security interests. a. Keep Article 9 as is. b. Nationalize Article 9. Give tort creditors and small wage claims priority over secured creditors c. Nationalize Article 9. “Carve-out” 20% of the collateral for unsecured creditors d. Adopt b. through uniform state law e. Adopt c. through uniform state law 80

Problem 40. 4 National Secured Credit Review Commission asks what should be done about

Problem 40. 4 National Secured Credit Review Commission asks what should be done about Article 9 security interests. a. Keep Article 9 as is. b. Nationalize Article 9. Give tort creditors and small wage claims priority over secured creditors c. Nationalize Article 9. “Carve-out” 20% of the collateral for unsecured creditors d. Adopt b. through uniform state law e. Adopt c. through uniform state law 81

Problem 40. 4 National Secured Credit Review Commission asks what should be done about

Problem 40. 4 National Secured Credit Review Commission asks what should be done about Article 9 security interests. a. Keep Article 9 as is. b. Nationalize Article 9. Give tort creditors and small wage claims priority over secured creditors c. Nationalize Article 9. “Carve-out” 20% of the collateral for unsecured creditors d. Adopt b. through uniform state law e. Adopt c. through uniform state law 82

Problem 40. 4 National Secured Credit Review Commission asks what should be done about

Problem 40. 4 National Secured Credit Review Commission asks what should be done about Article 9 security interests. a. Keep Article 9 as is. b. Nationalize Article 9. Give tort creditors and small wage claims priority over secured creditors c. Nationalize Article 9. “Carve-out” 20% of the collateral for unsecured creditors d. Adopt b. through uniform state law e. Adopt c. through uniform state law 83

Lo. Pucki on Secured Credit 84

Lo. Pucki on Secured Credit 84

Lo. Pucki on Secured Credit System gives secured parties certainty by making others uncertain

Lo. Pucki on Secured Credit System gives secured parties certainty by making others uncertain 85

Lo. Pucki on Secured Credit System gives secured parties certainty by making others uncertain

Lo. Pucki on Secured Credit System gives secured parties certainty by making others uncertain 1. Unsecureds don’t know what they can collect. (Carol Dearing problems). 86

Lo. Pucki on Secured Credit System gives secured parties certainty by making others uncertain

Lo. Pucki on Secured Credit System gives secured parties certainty by making others uncertain 1. Unsecureds don’t know what they can collect. (Carol Dearing problems). 2. Even at the Mall, buyers are not safe. (Alica Card problems. ) 87

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 88

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 88

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller “An agreement between A and B that C get nothing” 89

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller “An agreement between A and B that C get nothing” 2. System rewards security agreements, filing, and searching 90

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller “An agreement between A and B that C get nothing” 2. System rewards security agreements, filing, and searching Most Americans don’t know these things exist. 91

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller “An agreement between A and B that C get nothing” 2. System rewards security agreements, filing, and searching Most Americans don’t know these things exist. 3. Byzantine filing system favors repeat users 92

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller “An agreement between A and B that C get nothing” 2. System rewards security agreements, filing, and searching Most Americans don’t know these things exist. 3. Byzantine filing system favors repeat users Thousands of offices 93

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller “An agreement between A and B that C get nothing” 2. System rewards security agreements, filing, and searching Most Americans don’t know these things exist. 3. Byzantine filing system favors repeat users Thousands of offices Refined legal distinctions control place of filing 94

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller “An agreement between A and B that C get nothing” 2. System rewards security agreements, filing, and searching Most Americans don’t know these things exist. 3. Byzantine filing system favors repeat users Thousands of offices Refined legal distinctions control place of filing Information costs money – on Web most people won’t pay 95

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller “An agreement between A and B that C get nothing” 2. System rewards security agreements, filing, and searching Most Americans don’t know these things exist. 3. Byzantine filing system favors repeat users Thousands of offices Refined legal distinctions control place of filing Information costs money – on Web most people won’t pay Technical rules that invalidate 13% to 30% of all filings. 96

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 97

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 97

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 4. Threatens to

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 4. Threatens to destroy the liability system 98

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 4. Threatens to

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 4. Threatens to destroy the liability system Respondeat superior: liability reaches those in control Corporation (Assets) Control Employee Respondeat superior Tort victim 99

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 4. Threatens to

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 4. Threatens to destroy the liability system Respondeat superior: liability reaches those in control Security: Puts the value beyond reach of creditors Secured party (Value) No respondeat superior Corporation (Assets) Control Employee Tort victim 100

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 4. Threatens to

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 4. Threatens to destroy the liability system Respondeat superior: liability reaches those in control Security: Puts the value beyond reach of creditors Secured party (Value) Moral of the story: No respondeat superior Corporation (Assets) 1. Be secured Control Employee Tort victim 101

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 4. Threatens to

Lo. Pucki on Secured Credit Favors the powerful/knowledgeable over the weak/ignorant 4. Threatens to destroy the liability system Respondeat superior: liability reaches those in control Security: Puts the value beyond reach of creditors Secured party (Value) Moral of the story: No respondeat superior Corporation (Assets) 1. Be secured 2. Don’t take a second Control Employee Tort victim 102

Mc. Call on Secured Credit It's Just Secured Credit: A Natural Law Case in

Mc. Call on Secured Credit It's Just Secured Credit: A Natural Law Case in Support of Some Forms of Secured Credit, 43 Indiana Law Review 7 (2010) 103

Mc. Call on Secured Credit It's Just Secured Credit: A Natural Law Case in

Mc. Call on Secured Credit It's Just Secured Credit: A Natural Law Case in Support of Some Forms of Secured Credit, 43 Indiana Law Review 7 (2010) Lopucki’s criticisms are accurate but 104

Mc. Call on Secured Credit It's Just Secured Credit: A Natural Law Case in

Mc. Call on Secured Credit It's Just Secured Credit: A Natural Law Case in Support of Some Forms of Secured Credit, 43 Indiana Law Review 7 (2010) Lopucki’s criticisms are accurate but Harris and Mooney’s argumetn about property rights is irrefutable. 105

Mc. Call on Secured Credit It's Just Secured Credit: A Natural Law Case in

Mc. Call on Secured Credit It's Just Secured Credit: A Natural Law Case in Support of Some Forms of Secured Credit, 43 Indiana Law Review 7 (2010) • The problem is not with secured credit but with consumer credit combined with secured credit and with the type of obligations secured in business finance. In short, the problem is with our theory of credit generally. 106