Secured Transactions Assignment 2 Security and Foreclosure

Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments 2-5: Remedies of Secured Creditors Assignment 2: Security and Foreclosure 1. What is a security interest? 2. How does the secured creditor foreclose?

Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments 2-5: Remedies of Secured Creditors Assignment 2: Security and Foreclosure 1. What is a security interest? 2. How does the secured creditor foreclose?

Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments 2-5: Remedies of Secured Creditors Assignment 2: 1. What is a security interest? 2. How does the secured creditor foreclose?

Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments 2-5: Remedies of Secured Creditors Assignment 2: 1. What is a security interest?

Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments 2-5: Remedies of Secured Creditors Assignment 2: 1. What is a security interest? 2. How does the secured creditor foreclose?

Basic concepts Security interest: An interest in property contingent on the non-payment of a debt. Transactions fitting that definition are security interests Even though the documents show an absolute transfer Example: deed absolute Example: bank account in secured creditor’s name Even though the parties don’t realize they created a security interest Even though the parties didn’t intend some security effects Regardless of who has possession (But §2-401(1)?) UCC § 9-109(a)(1): [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract.

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt.

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt.

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 1: A $50,000 loan secured by Blackacre $50,000 loan Secured Debtor Mortgage Blackacre

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 1: A $50,000 loan secured by Blackacre $50,000 loan Secured Debtor Mortgage Blackacre 3. Debtor owes a debt ($50,000)

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 1: A $50,000 loan secured by Blackacre $50,000 loan Secured Debtor Mortgage Blackacre 3. Debtor owes a debt ($50,000) 1. The mortgage (right to force sale) is an interest in Blackacre

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 1: A $50,000 loan secured by Blackacre $50,000 loan Secured Debtor Mortgage Blackacre 3. Debtor owes a debt ($50,000) 1. The mortgage (right to force sale) is an interest in Blackacre 2. The right is contingent on nonpayment (if Debtor pays, Secured has no right in Blackacre).

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 1: A $50,000 loan secured by Blackacre $50,000 loan Secured Debtor Mortgage Blackacre 3. Debtor owes a debt ($50,000) 1. The mortgage (right to force sale) is an interest in Blackacre 2. The right is contingent on nonpayment (if Debtor pays, Secured has no right in Blackacre). This is a security interest.

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent. Lease of real property Secured Debtor Obligation to pay rent Patent

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent. Lease of real property Secured Debtor Obligation to pay rent Patent 3. Debtor owes a debt (Obligation to pay rent)

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent. Lease of real property Secured Debtor Obligation to pay rent Patent 3. Debtor owes a debt (Obligation to pay rent) 1. The agreement gives Secured a right in the patent

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent. Lease of real property Secured Debtor Obligation to pay rent Patent 3. Debtor owes a debt (Obligation to pay rent) 1. The agreement gives Secured a right in the patent 2. The right is contingent on nonpayment (if Debtor pays, Secured has no right in the patent).

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent. Lease of real property Secured Debtor Obligation to pay rent Patent 3. Debtor owes a debt (Obligation to pay rent) 1. The agreement gives Secured a right in the patent 2. The right is contingent on nonpayment (if Debtor pays, Secured has no right in the patent). This is a security interest

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 3: Jan 1, Debtor sells Blackacre (worth $3 million) to Secured for $500,000; Secured grants an option to Debtor to repurchase Blackacre for $600,000 by Dec 30. $500,000 plus option Secured Debtor Deed to Blackacre Blackacre

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 3: Jan 1, Debtor sells Blackacre (worth $3 million) to Secured for $500,000; Secured grants an option to Debtor to repurchase Blackacre for $600,000 by Dec 30. $500,000 plus option Secured Debtor Deed to Blackacre Blackacre

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 3: Jan 1, Debtor sells Blackacre (worth $3 million) to Secured for $500,000; Secured grants an option to Debtor to repurchase Blackacre for $600,000 by Dec 30. $500,000 plus option Secured Debtor Deed to Blackacre Blackacre 3. The option is arguably a debt because it must be exercised

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 3: Jan 1, Debtor sells Blackacre (worth $3 million) to Secured for $500,000; Secured grants an option to Debtor to repurchase Blackacre for $600,000 by Dec 30. $500,000 plus option Secured Debtor Deed to Blackacre Blackacre 3. The option is arguably a debt because it must be exercised 1. Secured has in interest in Blackacre (ownership)

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 3: Jan 1, Debtor sells Blackacre (worth $3 million) to Secured for $500,000; Secured grants an option to Debtor to repurchase Blackacre for $600,000 by Dec 30. $500,000 plus option Secured Debtor Deed to Blackacre Blackacre 3. The option is arguably a debt because it must be exercised 1. Secured has in interest in Blackacre (ownership) 2. Secured’s right is contingent on nonpayment (if Debtor exercises the option, Secured has no right in Blackacre).

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 3: Jan 1, Debtor sells Blackacre (worth $3 million) to Secured for $500,000; Secured grants an option to Debtor to repurchase Blackacre for $600,000 by Dec 30. $500,000 plus option Secured Debtor Deed to Blackacre Blackacre 3. The option is arguably a debt because it must be exercised 1. Secured has in interest in Blackacre (ownership) 2. Secured’s right is contingent on nonpayment (if Debtor exercises the option, Secured has no right in Blackacre). Arguably a security interest.

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 4: Secured leases an auto to Debtor for five years. At the end of the lease, Debtor has the right to purchase the auto for $1. Lease and option Secured Debtor Promise to pay rent

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 4: Secured leases an auto to Debtor for five years. At the end of the lease, Debtor has the right to purchase the auto for $1. Lease and option Secured Debtor Promise to pay rent 3. Debtor owes a debt (Promise to pay rent)

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 4: Secured leases an auto to Debtor for five years. At the end of the lease, Debtor has the right to purchase the auto for $1. Lease and option Secured Debtor Promise to pay rent 3. Debtor owes a debt (Promise to pay rent) 1. Secured has an interest in the auto (ownership)

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 4: Secured leases an auto to Debtor for five years. At the end of the lease, Debtor has the right to purchase the auto for $1. Lease and option Secured Debtor Promise to pay rent 3. Debtor owes a debt (Promise to pay rent) 1. Secured has an interest in the auto (ownership) 2. The interest is contingent on nonpayment (if Debtor pays debt plus $1, Debtor will own the auto).

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 4: Secured leases an auto to Debtor for five years. At the end of the lease, Debtor has the right to purchase the auto for $1. Lease and option Secured Debtor Promise to pay rent 3. Debtor owes a debt (Promise to pay rent) 1. Secured has an interest in the auto (ownership) 2. The interest is contingent on nonpayment (if Debtor pays debt plus $1, Debtor will own the auto). This is a security interest.

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 5: Secured agrees to sell auto to Debtor if Debtor has paid $30,000, in three years. Secured gives possession now, but retains ownership until payments have been made Contract to sell later Secured Debtor Promise to pay $30,000

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 5: Secured agrees to sell auto to Debtor if Debtor has paid $30,000, in three years. Secured gives possession now, but retains ownership until payments have been made Contract to sell later Secured Debtor Promise to pay $30,000 3. Debtor owes a debt (Promise to pay $30,000)

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 5: Secured agrees to sell auto to Debtor if Debtor has paid $30,000, in three years. Secured gives possession now, but retains ownership until payments have been made Contract to sell later Secured Debtor Promise to pay $30,000 3. Debtor owes a debt (Promise to pay $30,000) 1. Secured has an interest in the auto (ownership)

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 5: Secured agrees to sell auto to Debtor if Debtor has paid $30,000, in three years. Secured gives possession now, but retains ownership until payments have been made Contract to sell later Secured Debtor Promise to pay $30,000 3. Debtor owes a debt (Promise to pay $30,000) 1. Secured has an interest in the auto (ownership) 2. The right is contingent on nonpayment (if Debtor pays, Secured has no right in the auto).

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 5: Secured agrees to sell auto to Debtor if Debtor has paid $30,000, in three years. Secured gives possession now, but retains ownership until payments have been made Contract to sell later Secured Debtor Promise to pay $30,000 3. Debtor owes a debt (Promise to pay $30,000) 1. Secured has an interest in the auto (ownership) 2. The right is contingent on nonpayment (if Debtor pays, Secured has no right in the auto). This is a security interest. §2-401(1), page 29

Basic concepts Right to redeem: The debtor’s right to pay the debt and own the property free of the security interest. If a security interest exists, debtor always has the right to redeem. Synonymous with ownership. Foreclosure: Termination of the right to redeem (four types) 1. Judicial foreclosure (court declares, sale by sheriff) 2. Power of sale foreclosure (no court, by trustee, real estate) 3. UCC foreclosure by sale (no court, by creditor, personalty) 4. Strict foreclosure (court declares, no sale, contract for deed) Deed in lieu of foreclosure: Voluntary transfer of the debtor’s ownership / right to redeem to the creditor (merger doctrine) When is a deed in lieu of foreclosure a security interest? When secured’s right is contingent on nonpayment of a debt.

Sale of Accounts Citibank “debtor” Credit cards Debtor operates a business that generates accounts, e.g. credit cards “Account debtors”

Sale of Accounts Citibank “debtor” Credit cards Debtor operates a business that generates accounts, e.g. credit cards Account debtors Goods and services Stores

Sale of Accounts Citibank “debtor” $900 million advances Debtor operates a business that generates accounts, e.g. credit cards Account debtors Goods and services Stores

Sale of Accounts Citibank “debtor” $1.1 billion accounts $900 million owing $900 million advances Debtor operates a business that generates accounts, e.g. credit cards Account debtors

Sale of Accounts Citibank “debtor” $1.1 billion accounts owing Debtor operates a business that generates accounts, e.g. credit cards Debtor wants to free up capital Account debtors

Sale of Accounts Accounts Buyer Citibank “debtor” $1 billion owing Debtor operates a business that generates accounts, e.g. credit cards Debtor wants to free up capital So Debtor sells the accounts Account debtors

Sale of Accounts Accounts Buyer Citibank “debtor” $1 billion owing Debtor operates a business that generates accounts, e.g. credit cards Debtor wants to free up capital So Debtor sells the accounts Account debtors

Sale of Accounts “Without recourse” Buyer Citibank “debtor” $1.1 billion accounts owing Debtor operates a business that generates accounts, e.g. credit cards Debtor wants to free up capital So Debtor sells the accounts Account debtors

Sale of Accounts With Recourse obligation Buyer Citibank “debtor” Debtor operates a business that generates accounts, e.g. credit cards Debtor wants to free up capital So Debtor sells the accounts Account debtors “With recourse:” If an account debtor doesn’t pay, Debtor will buy the account back for the account’s face amount

Sale of Accounts With Recourse Buyer Citibank “debtor” $500 Debtor operates a business that generates accounts, e.g. credit cards Debtor wants to free up capital So Debtor sells the accounts Account debtors “With recourse:” If an account debtor doesn’t pay, Debtor will buy the account back for the account’s face amount

Sale of Accounts With Recourse Buyer Citibank “debtor” $500 Debtor operates a business that generates accounts, e.g. credit cards Debtor wants to free up capital So Debtor sells the accounts Account debtors “With recourse:” If an account debtor doesn’t pay, Debtor will buy the account back for the account’s face amount Citibank promises (guarantees) Buyer $1.1 billion.

Security Interest in Accounts $1.1 billion note, security interest Secured Party Citibank “debtor” $1 billion loan $1.1 billion Debtor operates a business that generates accounts, e.g. credit cards Debtor wants to free up capital So Debtor borrows against the accounts Account debtors This deal is the same as the Sale of Accounts With Recourse

Security Interest in Accounts $1.1 billion note, security interest Secured Party Citibank “debtor” $1 billion loan $1.1 billion Debtor operates a business that generates accounts, e.g. credit cards Debtor wants to free up capital So Debtor borrows against the accounts Account debtors This deal is the same as the Sale of Accounts With Recourse. Risk of nonpayment of accounts is on Citibank.

Security Interest in Accounts $1.1 billion note, security interest Secured Party Citibank “debtor” $1 billion loan $1.1 billion Debtor operates a business that generates accounts, e.g. credit cards Debtor wants to free up capital So Debtor borrows against the accounts Account debtors This deal is the same as the Sale of Accounts With Recourse. Risk of nonpayment of accounts is on Citibank. A sale of accounts with recourse is a security interest.

Security Interest in Accounts $1.1 billion note, security interest Secured Party Citibank “debtor” $1 billion loan $1.1 billion Account debtors UCC § 9-109(a) (1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract. (3) a sale of accounts, chattel paper, payment intangibles, or promissory notes;

Asset securitization Sale of Accounts Buyer Originator $1 billion debtors

Asset securitization Sale of Accounts Trust Originator (SPE) $1 billion $1.1 billion Account debtors

Asset securitization Sale of Accounts Trust (SPE) Originator $1 billion $1 billion Investment certificates (“securities”) $1.1 billion Account debtors Investors

Asset securitization Sale of Accounts Trust Originator (SPE) $1 billion Traunch 1 Traunch 2 Traunch 3 Traunch 4 $1 billion $1.1 billion Account debtors Investors

Asset securitization Sale of Accounts Trust (SPE) Originator $1 billion $1 billion Investment certificates (“securities”) $1.1 billion Account debtors Investors § 9-109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property

Asset securitization Sale of Accounts Trust (SPE) Originator $1 billion $1 billion Investment certificates (“securities”) Did this deal create a security interest? “An interest in property contingent on the non-payment of a debt.” Investors

Asset securitization Sale of Accounts Trust (SPE) Originator $1 billion $1 billion Investment certificates (“securities”) Did this deal create a security interest? No, trust owns the accounts, has the risk of loss. Investors

Asset securitization Sale of Accounts Trust (SPE) Originator $1 billion $1 billion Investment certificates (“securities”) Did this deal create a security interest? No, trust owns the accounts, has the risk of loss. Add: Investors want guaranteed return, don’t want to engage in business Investors

Asset securitization Sale of Accounts Trust (SPE) Originator $1 billion $1 billion Investment certificates (“securities”) Did this deal create a security interest? No, trust owns the accounts, has the risk of loss. Add: Investors want guaranteed return, don’t want to engage in business Originator will “service” the accounts Investors

Asset securitization Sale of Accounts Trust (SPE) Originator $1 billion $1 billion Investment certificates (“securities”) Did this deal create a security interest? No, trust owns the accounts, has the risk of loss. Add: Investors want guaranteed return, don’t want to engage in business Originator will “service” the accounts Originator will replace bad accounts (like recourse) Investors

Asset securitization Sale of Accounts Trust (SPE) Originator $1 billion $1 billion Investment certificates (“securities”) Did this deal create a security interest? No, trust owns the accounts, has the risk of loss. Add: Investors want guaranteed return, don’t want to engage in business Originator will “service” the accounts Originator will replace bad accounts (like recourse) Investors Now does the securitization create a security interest?

Asset securitization Secured party Debtor Sale of Accounts Trust (SPE) Originator $1 billion $1 billion Investment certificates (“securities”) Did this deal create a security interest? No, trust owns the accounts, has the risk of loss. Add: Investors want guaranteed return, don’t want to engage in business Originator will “service” the accounts Originator will replace bad accounts (like recourse) Investors Now does the securitization create a security interest? Yes, sale is “with recourse” and debtor has the risk of loss.

Asset securitization Secured party Debtor Sale of Accounts Trust (SPE) Originator $1 billion $1 billion Investment certificates (“securities”) $1.1 billion Account debtors Investors This transaction creates a security interest.

Asset securitization Secured party Debtor Sale of Accounts Trust (SPE) Originator $1 billion $1 billion Investment certificates (“securities”) $1.1 billion Account debtors Investors This transaction creates a security interest. Consequence: If originator files bankruptcy, the accounts are property of the estate. Debtor can use collection proceeds to reorganize.

Securitized Loan Debtor Trust Originator (SPE) $1 billion Investment certificates (“securities”) secured by accounts. Secured party Investors $1.1 billion

Securitized Loan Debtor Trust Originator (SPE) $1 billion Investment certificates (“securities”) secured by accounts. Secured party Investors $1.1 billion This loan is economically identical to a recourse Asset Securitization.

Securitized Loan Trust Originator (SPE) $1 billion Investment certificates (“securities”) secured by accounts. Investors $1.1 billion Both the Securitized Loan and the recourse Asset Securitization: 1. “Securitize” the accounts 2. Assure investors payment of $1.1 billion account ownership 3. Give investors “an interest in [accounts] contingent on the nonpayment of a debt”

Basic Concepts Securities Services (often is the Originator) Investors Contract to care for or collect assets Underwriter who markets securities Securities Originator (or Originators) of assets Issuer Securities Assets sold to issuer

Basic Concepts Securities First National Mortgage Service Co Investors Contract to collect mortgages First National Securities Securities First National Bank Issuer Securities Residential mortgages

Problem 2.1, page 36 Problem 1.5, we represent Benning to collect $50,000 from Knopf We have a security agreement naming these items as collateral: 1. Toyota automobile worth $15,000 2. Inherited house, value $275,000, mortgage $225,000 3. Day care equipment worth $25,000 4. Bank account, balance $12,265.92 Which can we foreclose on? 815.18 (12) “No property . . . may be claimed as exempt . . . against the claim . . . of a holder of a security interest.” b. “Waiver” is a voluntary relinquishment of a known right. Isn’t a security interest a “waiver of exemptions” prohibited by Wis. Stat. 815.18(6)(a)? Page 17

Problem 2.2, Two ways to move cars Sale Lease Price 5,000 Down payment Amount financed 18% Monthly payment 180.77 Number of payments 36 Additional amount payable to own Total payments 6,507.72

Problem 2.2, Two ways to move cars Sale Lease Price 5,000 Not applicable Down payment Amount financed 18% Monthly payment 180.77 Number of payments 36 Additional amount payable to own Total payments 6,507.72

Problem 2.2, Two ways to move cars Sale Lease Price 5,000 Not applicable Down payment Amount financed 18% Monthly payment 180.77 Number of payments 36 Additional amount payable to own Total payments 6,507.72

Problem 2.2, Two ways to move cars Sale Lease Price 5,000 Not applicable Down payment Amount financed 18% Monthly payment 180.77 Number of payments 36 Additional amount payable to own Total payments 6,507.72

Problem 2.2, Two ways to move cars Sale Lease Price 5,000 Not applicable Down payment Amount financed 18% Monthly payment 180.77 Number of payments 36 Additional amount payable to own Total payments 6,507.72

Problem 2.2, Two ways to move cars Sale Lease Price 5,000 Not applicable Down payment Amount financed 18% Monthly payment 180.77 Number of payments 36 Additional amount payable to own Total payments 6,507.72

Problem 2.2, Two ways to move cars Sale Lease Price 5,000 Not applicable Down payment Amount financed 18% Monthly payment 180.77 Number of payments 36 Additional amount payable to own 10 Total payments 6,507.72

Problem 2.2, Two ways to move cars Sale Lease Price 5,000 Not applicable Down payment Amount financed 18% Monthly payment 180.77 Number of payments 36 Additional amount payable to own 10 Total payments 6,507.72 6,517.72

Sale-Lease Distinction § 9-109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property

Sale-Lease Distinction § 9-109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property §1-203. “[A] transaction in the form of a lease creates a security interest if the consideration . . . is an obligation for the term of the lease not subject to termination by the lessee

Sale-Lease Distinction § 9-109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property §1-203. “[A] transaction in the form of a lease creates a security interest if the consideration . . . is an obligation for the term of the lease not subject to termination by the lessee, and . . . [the lease is for the remaining economic life of the goods Economic life Security interest Lease/consideration term

Sale-Lease Distinction § 9-109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property §1-203. “[A] transaction in the form of a lease creates a security interest if the consideration . . . is an obligation for the term of the lease not subject to termination by the lessee, and . . . [the lease is for the remaining economic life of the goods by 1. Original term Economic life Security interest Lease/consideration term

Sale-Lease Distinction § 9-109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property §1-203. “[A] transaction in the form of a lease creates a security interest if the consideration . . . is an obligation for the term of the lease not subject to termination by the lessee, and . . . [the lease is for the remaining economic life of the goods by 1. Original term 2. Required renewal or purchase Economic life Security interest Lease term Mandatory renewal

Sale-Lease Distinction § 9-109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property §1-203. “[A] transaction in the form of a lease creates a security interest if the consideration . . . is an obligation for the term of the lease not subject to termination by the lessee, and . . . [the lease is for the remaining economic life of the goods by 1. Original term 2. Required renewal or purchase 3. Renewal term for no (or nominal) additional consideration Economic life Security interest Lease term Free renewal

Sale-Lease Distinction § 9-109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property §1-203. “[A] transaction in the form of a lease creates a security interest if the consideration . . . is an obligation for the term of the lease not subject to termination by the lessee, and . . . [the lease is for the remaining economic life of the goods by 1. Original term 2. Required renewal or purchase 3. Renewal term for no (or nominal) additional consideration 4. Option to buy for no (or nominal) additional consideration]” Economic life Security interest Lease term Option to buy for free

Sale-Lease Distinction § 9-109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property §1-203. “[A] transaction in the form of a lease creates a security interest if the consideration . . . is an obligation for the term of the lease not subject to termination by the lessee, and . . . [the lease is for the remaining economic life of the goods by 1. Original term 2. Required renewal or purchase 3. Renewal term for no (or nominal) additional consideration 4. Option to buy for no (or nominal) additional consideration]” Economic life True Lease Lease term “Meaningful reversion”

Problem 2.2, Two ways to move cars Sale Price 5,000 Not applicable Down payment Amount financed 18% Monthly payment 180.77 Number of payments 36 Additional amount payable to own 10 Total payments 6,507.72 6,517.72

Problem 2.5, page 38 Old way: We loan to a corporate borrower, take a mortgage, and foreclose on default. Loan Bank Corporate borrower Mortgage

Problem 2.5, page 38 Old way: We loan to a corporate borrower, take a mortgage, and foreclose on default. Loan Bank Corporate borrower Mortgage Year long foreclosure!

Problem 2.5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Loan Bank Corporate borrower Mortgage Security interest in the stock Share- holder

Problem 2.5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Loan Bank Corporate borrower Mortgage Foreclosure sale of stock Security interest in the stock Share- holder

Problem 2.5, page 38 Assume factory worth $1 million, mortgage $1 million Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. How much will the stock sell for? Loan Bank Corporate borrower Mortgage Foreclosure sale of stock Share- holder

Problem 2.5, page 38 Assume factory worth $1 million, mortgage $1 million Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Loan Bank Corporate borrower Mortgage Foreclosure sale of stock Share- holder The value of the stock is about zero

Problem 2.5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Nominal price Loan Bank Bank Corporate borrower Mortgage Foreclosure sale of stock Share- holder

Bank is the shareholder and owns the borrower. Problem 2.5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Loan Bank Corporate borrower Mortgage Bank is the shareholder and owns the borrower. Bank

Bank elects new directors. Problem 2.5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Loan Bank Corporate borrower Mortgage Bank elects new directors. Bank

Problem 2.5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Deed in lieu. Bank Corporate borrower Bank

Problem 2.5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Bank Corporate borrower Bank

Will this work to avoid mortgage foreclosure? Problem 2.5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Loan Bank Corporate borrower Mortgage Security interest in the stock Share- holder Will this work to avoid mortgage foreclosure?

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner, invests $800,000 D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner, invests $800,000 D buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner, invests $800,000 D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner, invests $800,000 D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D owns the home

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner, invests $800,000 D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner, invests $800,000 D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner, invests $800,000 D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home/foreclosure D owns the home

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner, invests $800,000 D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home/foreclosure D owns the home/foreclosure?

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner, invests $800,000 D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home Does Bank or Partnership have an interest in property contingent on the non-payment of a debt?

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner, invests $800,000 D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home Does Bank or Partnership have an interest in property contingent on the non-payment of a debt? If so, what consequence?

Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800,000 at 6% interest to buy $1 million home Bank becomes D’s 80% partner, invests $800,000 D buys home Partnership buys home D makes 30 years of $6,000 monthly payments of principal and interest D makes 30 years of $6,000 monthly payments to buy Bank’s share of partnership D owns the home Does Bank or Partnership have an interest in property contingent on the non-payment of a debt? If so, what consequence? Bank or Partnership must foreclose