Secured Transactions Assignment 2

1. Secured TransactionsAssignment 2 Security and Foreclosure

2. 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?

3. 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?

4. 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?

5. 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?

6. 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?

7. 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.

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

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

10. 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

11. 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)

12. 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

13. 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).

14. 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.

15. 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

16. 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)

17. 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

18. 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).

19. 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

20. 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

21. 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

22. 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

23. 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)

24. 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).

25. 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.

26. 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

27. 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)

28. 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)

29. 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).

30. 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.

31. 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

32. 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)

33. 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)

34. 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).

35. 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

36. 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.

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

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

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

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

41. 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

42. Sale of Accounts Accounts Buyer Citibank “debtor” $1 billion $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

43. Sale of Accounts Accounts Buyer Citibank “debtor” $1 billion $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

44. 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

45. Sale of Accounts With Recourse 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

46. Sale of Accounts With Recourse Account 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

47. Sale of Accounts With Recourse Account 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.

48. 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

49. 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.

50. 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.