1. Class 9 Secured Transactions, Fall, 2018 Perfection: Control
11/26/2018
Class 9 Secured Transactions, Fall, Perfection: Control
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
Copyright © Randal C. Picker. All Rights Reserved.

2. Sears Sales by Channel
November 26, 2018
WSJ, Oct 15, 2018

3. World’s Largest Retailers, 1920
11/26/2018
World’s Largest Retailers, 1920
Levinson, Great A&P, Chapter 7, footnote 34
November 26, 2018
Levinson, The Great A&P

4. NYT, 8 July 1928
November 26, 2018
NYT, July

5. Sears Sales by Channel
November 26, 2018
Emmet & Jeuck, p653

6. Sears Financials,
November 26, 2018
Emmet & Jeuck, p650

7. Sears Expands
November 26, 2018
NYT, Feb 12, 1984

8. Sears v. Walmart v. Amazon
November 26, 2018
WSJ, Oct 13-14, 2018

9. Sears v. Walmart v. Amazon
November 26, 2018
WSJ, Oct 13-14, 2018

10. Secured Lending in Sears
November 26, 2018
WSJ, Oct 12, 2018

11. The DIP Order
November 26, 2018

12. 9-203: Control Elements (b) [Enforceability.]
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9-203: Control Elements
(b) [Enforceability.]
Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if : …
November 26, 2018

13. 9-203: Control Elements (3) one of the following conditions is met: …
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9-203: Control Elements
(3) one of the following conditions is met: …
(D)  the collateral is deposit accounts, electronic chattel paper, investment property, letter-of-credit rights, or electronic documents, and the secured party has control under section 7-106, 9-104, 9-105, 9-106, or pursuant to the debtor’s security agreement.
November 26, 2018

14. 9-314: Perfection Through Control
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9-314: Perfection Through Control
(a) [Perfection by control.]
A security interest in investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, or electronic documents may be perfected by control of the collateral under Section 7-106, 9‑104, 9‑105, 9‑106, or 9‑107.
November 26, 2018

15. 9-312: Exceptions (a) [Perfection by filing permitted.]
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9-312: Exceptions
(a) [Perfection by filing permitted.]
A security interest in chattel paper, negotiable documents, instruments, or investment property may be perfected by filing.
November 26, 2018

16. Lots of Types of Collateral (and UCC Articles!)
Focus on the Table of Contents of the UCC
Article 3: Negotiable Instruments
Article 5: Letters of Credit
Article 7: Documents of Title
Article 8: Investment Securities
November 26, 2018

17. Orienting (a Little) Comment 1 to 7-104
“This article deals with a class of commercial paper representing commodities in storage or transportation. This ‘commodity paper’ is to be distinguished from what might be called ‘money paper’ dealt with in the article of this code on commercial paper (article 3)
November 26, 2018

18. Orienting (a Little) Comment 1 to 7-104
“and ‘investment paper’ dealt with in the article of this code on investment securities (article 8). The class of ‘commodity paper’ is designated ‘document of title’ following the terminology of the Uniform Sales Act section 76. Section ”
November 26, 2018

19. Warehouse Receipt Transaction
11/26/2018
Warehouse Receipt Transaction
Debtor SP
SA: Documents (as defined in 9-102(a)(30)
FS: Ditto $
Debtor turns over goods to warehouse and gets back paper
Warehouse
Is SP perfected? With what rights?
November 26, 2018

20. Situating This Deal UCC Article 7: Documents of Title 9-331(a):
This article does not limit the rights of a holder in due course of a negotiable instrument, a holder to which a negotiable document of title has been duly negotiated, or a protected purchaser of a security.
November 26, 2018

21. Situating This Deal
These holders or purchasers take priority over an earlier security interest, even if perfected, to the extent provided in articles 3, 7, and 8.
Article 9 creates rules for secured parties but steps back here regarding other rights outside of Article 9
November 26, 2018

22. Letter-of-Credit Transaction
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Letter-of-Credit Transaction
Buyer
2/1: Sale of good on unsecured basis
2/1: Issues Letter of Credit
Seller
(Debtor) SP
How does SP attach and perfect interest in Seller’s rights?
Bank
November 26, 2018

23. Meshing Article 9 and Article 5
Key Point
Article 9 rules (such as 9-107, 9-308(d) and 9-329) have to be understood in the context of the rules set forth for letters-of-credit in UCC Article 5
November 26, 2018

24. One Path to Perfection in the LC Rights: Perfect in the Account
9-308(d)
Perfection of a security interest in collateral also perfects a security interest in a supporting obligation for the collateral
9-102(a)(78) defines supporting obligation
Means
Filing a FS for account will also perfect the interest in the support obligation
November 26, 2018

25. One Path to Perfection in the LC Rights: Perfect in the Account
That all means
Filing a FS for account will also perfect the interest in the support obligation
Stop there?
November 26, 2018

26. Multiple Methods of Perfection and the Hierarchy of Perfection
We didn’t: see 9-329(1)
A security interest held by a secured party having control of the letter-of-credit right under section has priority to the extent of its control over a conflicting security interest held by a secured party that does not have control.
Means: control beats non-control
November 26, 2018

27. Why?
See Comment 2 to 9-329
Paragraph (1) awards priority to a secured party who perfects a security interest directly in letter-of-credit rights (i.e., one that takes an assignment of proceeds and obtains consent of the issuer or any nominated person under section 5-114(c)) over another conflicting security interest
November 26, 2018

28. Why?
See Comment 2 to 9-329
(i.e., one that is perfected automatically in the letter-of-credit rights as supporting obligations under section 9-308(d)). This is consistent with international letter-of-credit practice and provides finality to payments made to recognized assignees of letter-of-credit proceeds.
November 26, 2018

29. How does SP attach and perfect interest in Owner’s rights in Corp?
11/26/2018
Stock Transaction
Owner
Guarantee of Corp Debt
Corp Debtor SP
Standard SA, FS, $
How does SP attach and perfect interest in Owner’s rights in Corp?
November 26, 2018

30. Answer Investment Property Transaction 9-102(a)(49)
“‘Investment property’ means a security, whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account.”
November 26, 2018

31. Answer: Attachment 1. Take Possession If …
9-203(b)(3)(C): “the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under section 8-301 pursuant to the debtor’s security agreement;”
November 26, 2018

32. Answer: Attachment
2. Create as per usual with appropriate description in security agreement (and consider 9-108(d))
3. Take control as per 9-203(b)(3)(D)
November 26, 2018

33. Answer: Perfection Three Situations
Possession of registered certificated securities
Filing is generally permitted for investment property (see 9-312(a))
Control (see 9-314(a) (and note 9-314(c)))
November 26, 2018

34. Answer: Attachment On Control: How? Why?
9-106(a): “A person has control of a certificated security, uncertificated security, or security entitlement as provided in section 8-106.”
November 26, 2018

35. Answer On Control: How? Why?
9-328(1): “A security interest held by a secured party having control of investment property under section 9-106 has priority over a security interest held by a secured party that does not have control of the investment property.”
November 26, 2018

36. Accounts Transaction Bank Debtor
11/26/2018
Accounts Transaction
1/1: $
Bank
Debtor
SA: Accounts
FS: Accounts
How should we assess this transaction? Is it different than the deal in Benedict v Ratner?
November 26, 2018

37. Control and Secured Credit: Benedict v. Ratner
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Control and Secured Credit: Benedict v. Ratner
Key Question
Should a secured creditor be able to have a perfected security interest even if the debtor retains the ability to dispose of the collateral and the proceeds?
November 26, 2018

38. 9-205. Use or disposition of collateral permissible
When security interest not invalid or fraudulent. A security interest is not invalid or fraudulent against creditors solely because:
November 26, 2018

39. 9-205. Use or disposition of collateral permissible
(1) the debtor has the right or ability to:
(A) use, commingle, or dispose of all or part of the collateral, including returned or repossessed goods;
(B) collect, compromise, enforce, or otherwise deal with collateral;
November 26, 2018

40. 9-205. Use or disposition of collateral permissible
(C) accept the return of collateral or make repossessions; or
(D) use, commingle, or dispose of proceeds; or
(2) the secured party fails to require the debtor to account for proceeds or replace collateral.
November 26, 2018

41. 9-205 Comment 2 Validity of Unrestricted “Floating Lien.”
“… As did former Section 9-205, this section repeals the rule of Benedict v. Ratner, 268 U.S. 353 (1925), and other cases which held such arrangements void as a matter of law because the debtor was given unfettered dominion or control over collateral.”
November 26, 2018

42. 9-205 Comment 2 Validity of Unrestricted “Floating Lien.”
“The Benedict rule did not effectively discourage or eliminate security transactions in inventory and receivables. Instead, it forced financing arrangements to be self-liquidating.”
November 26, 2018

43. 9-312: Exceptions (b) [Control or possession of certain collateral.]
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9-312: Exceptions
(b) [Control or possession of certain collateral.]
Except as otherwise provided in Section 9‑315(c) and (d) for proceeds:
(1) a security interest in a deposit account may be perfected only by control under Section 9‑314;
November 26, 2018

44. 9-102(a)(29): Deposit Account
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9-102(a)(29): Deposit Account
“Deposit account” means
a demand, time, savings, passbook, or similar account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument.
November 26, 2018

45. Instruments
9-102(a)(47)
“‘Instrument’ means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment.”
November 26, 2018

46. Status of Certificates of Deposit?
9-102 Comment 12
“Deposit accounts evidenced by article 9 ‘instruments’ are excluded from the term ‘deposit account’. … The revised definition clarifies the proper treatment of nonnegotiable or uncertificated certificates of deposit.”
November 26, 2018

47. Status of Certificates of Deposit?
9-102 Comment 12
“Under the definition, an uncertificated certificate of deposit would be a deposit account (assuming there is no writing evidencing the bank's obligation to pay) whereas a nonnegotiable certificate of deposit would be a deposit account only if it is not an ‘instrument’ as defined in this section”
November 26, 2018

48. Status of Certificates of Deposit?
9-102 Comment 12
“(a question that turns on whether the nonnegotiable certificate of deposit is ‘of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment’).”
November 26, 2018

49. 9-104: Control of Deposit Account
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9-104: Control of Deposit Account
(a) [Requirements for control.]
A secured party has control of a deposit account if:
(1) the secured party is the bank with which the deposit account is maintained;
November 26, 2018

50. 9-104: Control of Deposit Account
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9-104: Control of Deposit Account
(2) the debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the account without further consent by the debtor; or
(3) the secured party becomes the bank’s customer with respect to the deposit account.
November 26, 2018

51. 9-104: Control of Deposit Account
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9-104: Control of Deposit Account
(b) [Debtor’s right to direct disposition.]
A secured party that has satisfied subsection (a) has control, even if the debtor retains the right to direct the disposition of funds from the deposit account.
November 26, 2018

52. Taking the Security Interest in the Deposit Account
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Taking the Security Interest in the Deposit Account
Debtor
Bank
SA: Deposit Account
FS: Deposit Account $
Has a perfected security interest been created?
November 26, 2018

53. Answer No This is Counceller
11/26/2018
Answer No
This is Counceller
9-312(b)(1) requires control under (and then 9-104) for non-proceeds interest in deposit account
November 26, 2018

54. To what extent is Creditco perfected?
11/26/2018
Selling Positions I
Debtor
Bank
1/1
SA: EQ
FS: EQ $
Sells Position
To what extent is Creditco perfected?
Creditco
November 26, 2018

55. Answer: No Refiling Requirement
11/26/2018
Answer: No Refiling Requirement
9-310(c)
[Assignment of perfected security interest.] If a secured party assigns a perfected security interest or agricultural lien, a filing under this article is not required to continue the perfected status of the security interest against creditors of and transferees from the original debtor.
Creditco steps into Bank’s position
November 26, 2018

56. Selling Positions II Debtor Bank Creditco
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Selling Positions II
Debtor
Bank
SA: EQ
Bank takes possession of asset $
Sells Position (and transfers possession)
To what extent is Creditco perfected?
Creditco
November 26, 2018

57. Answer: 9-310(c) Again? Comment 4
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Answer: 9-310(c) Again?
Comment 4
Subsection (c) applies not only to an assignment of a security interest perfected by filing but also to an assignment of a security interest perfected by a method other than by filing, such as by control or by possession.
November 26, 2018

58. Answer: 9-310(c) Again? Comment 4
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Answer: 9-310(c) Again?
Comment 4
Although subsection (c) addresses explicitly only the absence of an additional filing requirement, the same result normally will follow in the case of an assignment of a security interest perfected by a method other than by filing.
November 26, 2018

59. 11/26/2018
Answer: 9-310(c) Again?
For example, as long as possession of collateral is maintained by an assignee or by the assignor or another person on behalf of the assignee, no further perfection steps need be taken on account of the assignment to continue perfection as against creditors and transferees of the original debtor.
November 26, 2018

60. To what extent is Creditco perfected?
11/26/2018
Selling Positions III
Debtor
Bank
SA: CD
Bank ???
Sells Position
To what extent is Creditco perfected?
Creditco
November 26, 2018

61. Beal Bank v. Fewell Fewell US Bank Beal
11/26/2018
Beal Bank v. Fewell
Fewell
US Bank
SA: CD
Control under 9-105(a)(1)
Sells position but CD is still at US Bank
To what extent is Creditco perfected?
Beal
November 26, 2018