Class 4 Secured Transactions, Fall, 2018 Rights in the Collateral 5/9/2019 Class 4 Secured Transactions, Fall, 2018 Rights in the Collateral Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2001-18 Randal C. Picker. All Rights Reserved.

5/9/2019 9-203 (a) [Attachment.] A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment. May 9, 2019

9-203 (b) [Enforceability.] 5/9/2019 9-203 (b) [Enforceability.] Except as otherwise provided …, a security interest is enforceable against the debtor and third parties with respect to the collateral only if: (1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and May 9, 2019

9-203 (3) one of the following conditions is met: 5/9/2019 9-203 (3) one of the following conditions is met: (A) the debtor has authenticated a security agreement that provides a description of the collateral … May 9, 2019

The Derivation Principle 5/9/2019 The Derivation Principle Secured Creditor Takes Through Its Debtor Example Debtor leases goods The secured creditor can take the debtor’s lessee interest as collateral, but the secured creditor’s rights will be limited to those held by the debtor May 9, 2019

2‑9: Rights in the Collateral 5/9/2019 2‑9: Rights in the Collateral Debtor Bank 1/1 SA: Printing Press $ “Debtor hereby grants to Bank a security interest in Debtor’s printing press to secure all debts of Debtor to Bank.” What are Bank’s rights? May 9, 2019

2-9 Answer Answer Bank has an attached SI in the printing press May 9, 2019

2‑10: Rights in the Collateral II 5/9/2019 2‑10: Rights in the Collateral II Debtor Bank 1/1 SA: Mona Lisa $ “Debtor hereby grants to Bank a security interest in the Mona Lisa to secure all debts of Debtor to Bank.” What are Bank’s rights? May 9, 2019

2-10 Answer Answer Debtor, which is not The Louvre, has no rights in the Mona Lisa nor does the Debtor have any power to grant rights in the Mona Lisa Bank gets nothing May 9, 2019

2-12: Third Parties and Collateral 5/9/2019 2-12: Third Parties and Collateral Owner Corp Loan by Bank to Corp ? Bank wants additional collateral from Owner for the loan to Corp: How should we do this? Bank May 9, 2019

FS: Cattle, “Louie Dickerson” 5/9/2019 Peoples Bank 10/5/99: SA: Cattle FS: Cattle, “Louie Dickerson” Brooks L. Dickerson Cornerstone 11/02: SA: Cattle FS: Cattle Brooks L. Dickerson Who has priority in the cattle? Peoples May 9, 2019

Answer Cornerstone, if … 5/9/2019 Answer Cornerstone, if … Cornerstone filed first and will have priority over Peoples if the Cornerstone FS is effective Possible name issues May 9, 2019

Farm Security Act: 7 USC 1631(d) 5/9/2019 Farm Security Act: 7 USC 1631(d) (d) Purchases free of security interest Except as provided in subsection (e) of this section and notwithstanding any other provision of Federal, State, or local law, a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected; and the buyer knows of the existence of such interest. May 9, 2019

7 USC 1631(e) (e) Purchases subject to security interest 5/9/2019 7 USC 1631(e) (e) Purchases subject to security interest A buyer of farm products takes subject to a security interest created by the seller if- (1) …; or (2) in the case of a farm product produced in a State that has established a central filing system-- May 9, 2019

5/9/2019 7 USC 1631(e) (A) the buyer has failed to register with the Secretary of State of such State prior to the purchase of farm products; and (B) the secured party has filed an effective financing statement or notice that covers the farm products being sold; or (3) … May 9, 2019

Peoples Bank: Sole P Version 5/9/2019 Peoples Bank: Sole P Version Brooks L. Dickerson 10/5/99: SA: Cattle FS: Cattle, “Louie Dickerson” Cornerstone 11/02: SA: Cattle FS: Cattle Brooks L. Dickerson 05/05: Sells Cattle Bryan Peoples Who has priority in the cattle? May 9, 2019

Answer Cornerstone, if … Prior issue as to names on FSs 5/9/2019 Answer Cornerstone, if … Prior issue as to names on FSs New issue is possibility that Bryan might take free and clear of SI under FSA Bryan failed to satisfy 1631(e)(2)(A) and so takes subject to the SI May 9, 2019

Peoples Bank: New Entity Version 5/9/2019 Peoples Bank: New Entity Version 10/5/99: SA: Cattle FS: Cattle, “Louie Dickerson” Cornerstone Brooks L. Dickerson 11/02: SA: Cattle FS: Cattle Brooks L. Dickerson Glenbrook Cattle Company 05/05: Sells Cattle Bryan Peoples May 9, 2019 Who has priority in the cattle?

5/9/2019 Answer Bryan Cornerstone and Peoples have no claims against a separate Glenbrook Cattle Company May 9, 2019

Ver 1 or Ver 2? Is Peoples Bank version 1? Version 2? Something else? 5/9/2019 Ver 1 or Ver 2? Is Peoples Bank version 1? Version 2? Something else? Having seen the facts, how would you restructure If you were Dickerson? Cornerstone or Peoples Bank? Bryan? May 9, 2019

Assume Ver 1: What Should Bryan Do? 5/9/2019 Assume Ver 1: What Should Bryan Do? Buys Cattle 10/5/99: SA: Cattle FS: Cattle, “Louie Dickerson” Cornerstone Brooks L. Dickerson 11/02: SA: Cattle FS: Cattle Brooks L. Dickerson 05/05: Sells Cattle Bryan Peoples Who has priority in the cattle? May 9, 2019

5/9/2019 Answer Bryan should Make an appropriate filing to trigger the benefits of 7 USC 1631(e)(2) More general point: Consider buying cattle directly so that title is never lodged in Dickerson What would that accomplish? May 9, 2019

1/1: Fee Transfer of Hope Diamond 5/9/2019 Moglia Run Up I Corp 3rd Party 1/1: Fee Transfer of Hope Diamond 2/1: Grants SI in HD What are Bank’s rights? Bank Corp USC May 9, 2019

Answer The First Transfer Grant of Security Interest 5/9/2019 Answer The First Transfer Fee transfer ends rights of Corp in Hope Diamond Grant of Security Interest Corp has no rights in the HD Cannot grant SI in it See 9-203(b)(2) May 9, 2019

2/1: Fee Transfer of Hope Diamond 5/9/2019 Moglia Run Up II Corp 3rd Party 2/1: Fee Transfer of Hope Diamond 1/1: Grants SI in HD What are Bank’s rights? Bank Corp USC May 9, 2019

Answer Issue Answer SI granted prior to the fee transfer 5/9/2019 Answer Issue SI granted prior to the fee transfer Does the SI survive the transfer? Answer Yes, if not a transfer to a buyer in the ordinary course of business See 9-315(a)(1); 9-320(a) May 9, 2019

1/1: Fee Transfer of Hope Diamond 5/9/2019 Moglia Run Up III Corp 3rd Party 1/1: Fee Transfer of Hope Diamond 2/1: Grants SI in HD 1/1: 3d party grants nonrecourse guarantee to USC as to HD vis-à-vis debts owed by Corp to USC Bank Corp USC What are Bank’s rights? May 9, 2019

Answer Hope Diamond Transfer as Before As to Corp USC 5/9/2019 Answer Hope Diamond Transfer as Before As to Corp USC Bank seems to have no basis to complain about nonrecourse guarantee from 3rd party May 9, 2019

Moglia I: Trust as Entity 5/9/2019 Moglia I: Trust as Entity Outboard Trust Execs 1/1: $14mm 1/1: Money transfers to Execs under certain conditions 2/1: Grants SI in Corp’s rights in GI 1/1: Only USC can collect from res; no SI in res allowed USC Bank May 9, 2019 What are Bank’s rights?

Answer Bank is (mainly) out of luck 5/9/2019 Answer Bank is (mainly) out of luck The assets have exited Outboard before Bank gets a SI in Outboard’s assets Outboard might have certain residual rights under trust agreement and Bank’s GI interest could pick up those May 9, 2019

Moglia II: Trust as Contract 5/9/2019 Moglia II: Trust as Contract Outboard Execs $14mm 1/1: Conditional Fee Transfer of $14mm: Title transfers if change of control 2/1: Grants SI in Corp’s rights in GI 1/1: Only USC can collect from res; no SI in res allowed Bank USC May 9, 2019 What are Bank’s rights?

Key Terms of Trust Access to Trust 5/9/2019 Key Terms of Trust Access to Trust “Trust Corpus ... shall remain at all times subject to the claims of the general creditors of [Outboard]. Accordingly, [Outboard] shall not create a security interest in the Trust Corpus in favor of the Executives, the Participants [a term that apparently refers to retired executives] or any creditor.” May 9, 2019

Key Terms of Trust On Insolvency, the Trustee 5/9/2019 Key Terms of Trust On Insolvency, the Trustee “will deliver the entire amount of the Trust Corpus only as a court of competent jurisdiction, or duly appointed receiver or other person authorized to act by such court, may direct to make the Trust Corpus available to satisfy the claims of the Company’s general creditors.” May 9, 2019

Moglia III: Trust as Contract 5/9/2019 Moglia III: Trust as Contract Outboard Execs $14mm 1/1: Conditional Fee Transfer of $14mm: Title transfers if change of control 2/1: Grants SI in Corp’s rights in GI 1/1: Unperfected SI in GI Bank USC May 9, 2019 What are Bank’s rights?

Answer Bank Position Superior to “USC” 5/9/2019 Answer Bank Position Superior to “USC” Unperfected SI is junior to perfected SI (9-317(a)(1) and see comment 3) Prior grant of SI doesn’t block grant of another SI even if there is an agreement to that effect (9-401(b)) May 9, 2019

Both Cases for Today 9-203 and Rights in the Collateral Think the Mona Lisa case. The debtor isn’t the Louvre, so the debtor can’t grant an SI in the Mona Lisa In both Peoples Bank and Moglia, it wasn’t clear that the debtor’s had full rights to the relevant assets and that put the SI at risk. May 9, 2019