1. Class 17 Secured Transactions, Fall, 2018 Changes: Debts & Debtors
12/3/2018
Class 17 Secured Transactions, Fall, Changes: Debts & Debtors
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. Recapping Yesterday in Two Slides
Are you perfected?
The local law of the debtor’s location determines this (9-301(1))
December 3, 2018

3. Recapping Yesterday in Two Slides
What are the consequences of your status?
For property with a natural location, the local law of the location of the collateral determines this (9-301(3)(C)
For property without a natural location (GI, AC), the local law of the debtor’s location determines this (9-301(1))
December 3, 2018

4. 9-204: After-Acquired Property
12/3/2018
9-204: After-Acquired Property
(a) [After-acquired collateral.]
Except as otherwise provided in subsection (b), a security agreement may create or provide for a security interest in after-acquired collateral.
December 3, 2018

5. 9-204: After-Acquired Property
12/3/2018
9-204: After-Acquired Property
(b) [When after-acquired property clause not effective.]
A security interest does not attach under a term constituting an after‑acquired property clause to:
(1) consumer goods, other than an accession when given as additional security, unless the debtor acquires rights in them within 10 days after the secured party gives value; or
(2) a commercial tort claim.

6. 6‑4: Inventory Turnover Debtor Bank 2/1 What are Bank’s rights? 1/1
12/3/2018
6‑4: Inventory Turnover
Debtor
Bank
1/1
SA: INV
FS: INV
$10K
2/1
Debtor has sold and replaced INV
2/1 What are Bank’s rights?
December 3, 2018

7. 12/3/2018
6‑4: Answer
Answer
Bank has a perfected security interest in the 2/1 inventory based on 1/1 SA
Note would absolutely be cleaner to say “inventory now owned and hereafter acquired by debtor”
December 3, 2018

8. 6‑4: Answer Answer “Inventory” alone might not be seen as temporal
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6‑4: Answer
Answer
“Inventory” alone might not be seen as temporal
Perfected
Priority date from 1/1 FS
December 3, 2018

9. Zartman Is this about insufficient notice?
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Zartman
Is this about insufficient notice?
The best way to ensure trade credit?
How will these rules influence behavior by the secured party? Supplemental mortgages?
December 3, 2018

10. Zartman Secured Transactions Tools
12/3/2018
Zartman
Secured Transactions Tools
Compare asset types (equipment v. inventory)
Compare timing and events
Date of grant of original mortgage (and filing)
Date mortgagee enters and takes possession of the inventory
December 3, 2018

11. From the Case The Bank’s Argument
12/3/2018
From the Case
The Bank’s Argument
The learned counsel for the appellant, in an able argument, contends that while the mortgage did not create an absolute lien upon stock and materials acquired after its date, it operated as an executory contract to deliver possession upon default and to place the property as it then existed under the lien of the mortgage.
December 3, 2018

12. From the Case The Bank’s Argument
12/3/2018
From the Case
The Bank’s Argument
He concedes that property of this nature is subject to seizure on execution by unsecured creditors during the period while it is subject to the disposal of the mortgagor, and until the trustee pursuant to the mortgage takes possession of it, but insists that the act of taking possession ripens the lien of the mortgage and makes it absolute as against general creditors or those with no prior lien.

13. From the Case The Consequences of Entry by the Mortgage Holder
12/3/2018
From the Case
The Consequences of Entry by the Mortgage Holder
The lien of the mortgage upon future earnings is consummated as against other creditors only by the fact of the possession of the property, and cannot have any retroactive operation, since it would then deprive the unsecured creditor of the fund, upon the faith of which he may have given credit to the mortgagor during the time when the latter was permitted to deal with and use it as its own.

14. From the Case The Consequences of Entry by the Mortgage Holder
12/3/2018
From the Case
The Consequences of Entry by the Mortgage Holder
The lien upon the earnings, in favor of the bondholders, attaches only upon what is earned after the time when the lien is perfected by entry and possession
December 3, 2018

15. From the Case The Mortgage Holder vs. The Unsecured Creditors
12/3/2018
From the Case
The Mortgage Holder vs. The Unsecured Creditors
It will not treat a contract to give a mortgage upon a subject to come into existence in the future as a mortgage actually then given, if the result would deprive the general creditors with superior equities so far as after-acquired property is concerned, of their only chance to collect debts.
December 3, 2018

16. What Should We Make of Zartman?
12/3/2018
What Should We Make of Zartman?
Key Structural Points
SI on inventory does not create “absolute lien” on inventory acquired after execution of mortgage but one that “ripens” on repossession as to later acquired property
General creditors can defeat this interest prior to repossession but not after, at least as to the inventory that arises after entry and repossession
December 3, 2018

17. 9-204: Future Advances (c) [Future advances and other value.]
12/3/2018
9-204: Future Advances
(c) [Future advances and other value.]
A security agreement may provide that collateral secures … future advances or other value, whether or not the advances or value are given pursuant to commitment.
December 3, 2018

18. 6‑5: Multiple Advances, Single Financing Statement
12/3/2018
TTYN
6‑5: Multiple Advances, Single Financing Statement
Debtor
Bank
2/1: $10K
SA: EQ
FS: EQ
3/1: $10K
SA: EQ
3/1 What will be the Bank’s status and when will its priority date from?
December 3, 2018

19. 12/3/2018
6‑5: Answer
Answer
This is 9-322(a)(1): A single financing statement gives notice for all SAs covered by it
Bank is perfected for both loans and dates priority as of 2/1 (see example 1 in comments to 9-323)
December 3, 2018

20. Future Advances and Secured Creditors
12/3/2018
Future Advances and Secured Creditors
General Rule for SP v. SP
Date of advance irrelevant to priority
9-323 Comment 1
Under a proper reading of the first-to-file-or perfect rule of Section 9-322(a)(1) (and former Section 9-312(5)), it is abundantly clear that the time when an advance is made plays no role in determining priorities among conflicting security
December 3, 2018

21. Future Advances and Secured Creditors
12/3/2018
Future Advances and Secured Creditors
interests except when a financing statement was not filed and the advance is the giving of value as the last step for attachment and perfection. Thus, a secured party takes subject to all advances secured by a competing security interest having priority under Section 9-322(a)(1).
9-323(a) sets out special rules where date of advance matters (see ex. 2 under comment 1)
December 3, 2018

22. Competing Secured Creditors
12/3/2018
TTYN
Competing Secured Creditors
Debtor
Finco
2/15: $10K
SA, FS: EQ
2/1: $10K
SA: EQ, covering all debts owed now or hereafter
FS: EQ
6/1
$10K
6/15 How split EQ worth $20K?
Bank
December 3, 2018

23. 12/3/2018
Answer
Answer
Again, this is a core Article 9 feature and arises from 9-322(a)(1); see comment 1 to 9-323
Both Bank’s 2/1 loan and the 6/1 have priority over Finco
Bank gets entire $20K
December 3, 2018

24. Future Advances and Lien Creditors: 9-323(b)
12/3/2018
Future Advances and Lien Creditors: 9-323(b)
(b) [Lien creditor.]
Except as otherwise provided in subsection (c), a security interest is subordinate to the rights of a person that becomes a lien creditor to the extent that the security interest secures an advance made more than 45 days after the person becomes a lien creditor unless the advance is made:
December 3, 2018

25. Future Advances and Lien Creditors: 9-323(b)
12/3/2018
Future Advances and Lien Creditors: 9-323(b)
(1) without knowledge of the lien; or
(2) pursuant to a commitment entered into without knowledge of the lien.
December 3, 2018

26. SA: EQ, covering all debts owed now or hereafter
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TTYN
Secured Creditor v. LC I
Debtor LC
2/1: $10K
SA: EQ, covering all debts owed now or hereafter
FS: EQ
2/15: Becomes LC owed $10K
6/1
$10K
6/15 How split EQ worth $20K?
Bank
December 3, 2018

27. 12/3/2018
Answer
Answer
Under 9-323(b), SP protected for at least 45 days and thereafter if no knowledge of LC
Bank has priority for 2/1 loan and 6/1 loan
Bank gets $20K
December 3, 2018

28. Secured Creditor v. LC II
12/3/2018
TTYN
Secured Creditor v. LC II
Debtor LC
2/1: $10K
SA: EQ, covering all debts owed now or hereafter
FS: EQ
2/15
Becomes LC
Owed $10K
2/16
Gives B knowledge
6/1
$10K
6/15 How split EQ worth $20K?
Bank
December 3, 2018

29. 12/3/2018
Answer
Answer
Under 9-323(b), SP protected for at least 45 days and thereafter if no knowledge of LC
Bank got knowledge immediately
Bank is senior to LC for 2/1 loan and junior for 6/1 loan
Bank gets $10K, LC gets $10K
December 3, 2018

30. 12/3/2018
Why?
SP v. SP
Prior SP has absolute right to advance and junior falls farther behind
SP v. LC
SP has absolute right to advance without knowledge
LC can create knowledge and limit additional future advance priority to 45-day window

31. 9-323(b) Timeline SP Protected Lending Window
12/3/2018
9-323(b) Timeline
SP Protected Lending Window
Extended Window w/Late Knowledge
LC Arises K1
45 days K2
December 3, 2018

32. SA: EQ, for all debts owed N and HA
12/3/2018
TTYN
Baseline I
Debtor
Finco
2/15: $10K
SA, FS: EQ
4/15 How split EQ worth $20K?
2/1: $10K
SA: EQ, for all debts owed N and HA
FS: EQ
3/5: $10K USC
Bank
Creditco
December 3, 2018

33. Answer Answer Bank gets $10K, Finco gets $10K, Creditco gets $0
12/3/2018
Answer
Answer
Bank gets $10K, Finco gets $10K, Creditco gets $0
December 3, 2018

34. Baseline II Debtor Finco Creditco Bank 4/15 How split EQ worth $20K?
12/3/2018
TTYN
Baseline II
Debtor
Finco
2/15: $10K
SA, FS: EQ
2/1: $10K
SA: EQ, for all debts owed N and HA
FS: EQ
4/15 How split EQ worth $20K?
3/5: $10K USC
4/5:Lends $10K to repay Creditco
Creditco
Bank
December 3, 2018

35. Answer Answer Bank gets $20K, Finco gets $0
12/3/2018
Answer
Answer
Bank gets $20K, Finco gets $0
Creditco has already been paid $10K
December 3, 2018

36. Joint SPs? Debtor Finco Creditco Bank 4/15 How split EQ worth $20K?
12/3/2018
TTYN
Joint SPs?
2/15: $10K
SA, FS: EQ
Debtor
Finco
4/15 How split EQ worth $20K?
2/1: $10K
SA: EQ, for all debts owed N and HA to Bank and/or Creditco
FS: EQ, SPs: Bank and Creditco
3/5: $10K pursuant to 2/1 Arrangements
Creditco
Bank
December 3, 2018

37. Answer Answer Bank gets $10K, Creditco gets $10K Finco gets nothing
12/3/2018
Answer
Answer
Bank gets $10K, Creditco gets $10K
Finco gets nothing
December 3, 2018

38. SA: EQ, for all debts owed N and HA
12/3/2018
TTYN
Assignments
Debtor
Finco
2/15: $10K
SA, FS: EQ
4/15 How split EQ worth $20K?
2/1: $10K
SA: EQ, for all debts owed N and HA
FS: EQ
3/5: $10K USC
4/5: Buys debt for $9K
Bank
Creditco
December 3, 2018

39. 12/3/2018
Answer
This is the simple version of Fretz
December 3, 2018

40. 8/23/72: Fretz files for bankruptcy
12/3/2018
Fretz
Fretz
Revlon
Realistic
Cosmetic
Capital
4/3/71: SA
FS: Texas SS
9/19/72: Assign Fretz debts
8/23/72: Fretz files for bankruptcy
6/30/71
SA: INV & PR
FS: Texas SS
Republic
Can Revlon assert priority for its original debts and for those assigned to it?
December 3, 2018

41. Two Steps Given footnote 2: Do we even need the assignment?
12/3/2018
Two Steps
Given footnote 2: Do we even need the assignment?
Were Revlon Realistic and Cosmetic Capital secured parties under the security agreement?
Or: does the assignment give Revlon priority?
December 3, 2018

42. 12/3/2018
The Relevant Language
1) All debts, liabilities, obligations, guarantees, covenants, and duties owing by Debtor and/or any of its present and future divisions and affiliates to REVLON, INC. and/or all of its present and future divisions and affiliates, of every kind and description (whether or not evidenced by any invoice or note or other instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter
December 3, 2018

43. 12/3/2018
The Relevant Language
arising, including without limitation any debt, liability or obligation owing from Debtor and/or any of its present and future divisions and affiliates to others which REVLON, INC. and /or its present and future divisions and affiliates may have obtained by assignment or otherwise,
December 3, 2018

44. 12/3/2018
The Relevant Language
2) All existing and future indebtedness and liabilities of any and every kind or nature, now or hereafter owing by Debtor to Secured Party, howsoever such indebtedness shall arise or be incurred or evidenced.
December 3, 2018