1. Class 4 Secured Transactions, Fall, 2018 Rights in the Collateral
5/9/2019
Class 4 Secured Transactions, Fall, Rights in the Collateral
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. 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

3. 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

4. 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

5. The Derivation Principle
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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

6. 2‑9: Rights in the Collateral
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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

7. 2-9 Answer Answer Bank has an attached SI in the printing press
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8. 2‑10: Rights in the Collateral II
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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

9. 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

10. 2-12: Third Parties and Collateral
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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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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?

19. 5/9/2019
Answer
Bryan
Cornerstone and Peoples have no claims against a separate Glenbrook Cattle Company
May 9, 2019

20. Ver 1 or Ver 2? Is Peoples Bank version 1? Version 2? Something else?
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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

21. Assume Ver 1: What Should Bryan Do?
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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

22. 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

23. 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

24. 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

25. 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

26. Answer Issue Answer SI granted prior to the fee transfer
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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

27. 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

28. Answer Hope Diamond Transfer as Before As to Corp USC
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Answer
Hope Diamond Transfer as Before
As to Corp USC
Bank seems to have no basis to complain about nonrecourse guarantee from 3rd party
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29. Moglia I: Trust as Entity
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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?

30. 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

31. 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?

32. 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

33. 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

34. 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?

35. 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

36. 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