Secured Transactions Reading Notes and Cases - Week 2

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The document discusses secured transactions reading notes and cases related to consignments, leases vs security interests, and the Federal Aviation Act.

For a transaction to qualify as an Article 9 consignment, seven requirements must be met as outlined in the text.

Whether the lessee can unilaterally terminate their obligation to pay and if the option to purchase price is nominal or not determines if it is a true lease or security interest.

Secured Transactions Reading Notes and Cases Week 2

Week1HW
1) True Consignment? C/L factors
1. The consignor reserves title to the delivered goods until they are sold;
2. The consignor reserves the right to demand return of the goods at will;
3. The consignee has the right to return goods which are not sold;
4. The consignor exerts control over the sale price;
5. The consignee is obligated to segregate the consigned goods from its own inventory;
6. The consignee is obligated to hold the proceeds of sales and forward them to the consignor;
7. The consignee is required to keep separate books and records pertaining to the goods;
8. The consignor has the right to inspect the goods and the books, records, and premises of the consignee;
9. Shipping papers and other documents refer to the transaction as a consignment;
10. The risk of loss remains with the consignor.

2) Important Enough Consignment?
To qualify as an Article 9 consignment under the definition in 9-102(20), seven requirements must be met:
1. the consignor must deliver goods to a merchant (see 2-104) for sale; (yes, merchant)
2. the merchant must deal in such goods under a name other than the name of the consignor; (yes, Fabers World of Carpets)
3. the merchant is not an auctioneer; (not)
4. the merchant is not generally known by its creditors to be substantially engaged in selling the goods of others; ()
5. the delivered goods are valued at $1,000 or more; (??)
6. the goods were not being used as consumer goods before the delivery; and ()
7. the transaction is not a credit sale with a security interest merely disguised as a consignment. ()

Analyzing a transaction under these requirements will lead to one of three possible determinations:
1. If all the requirements in 9-102(20) are met, the transaction is a consignment subject to Article 9. As you will learn, however,
certain remedies that normally apply to a security interest do not apply to Article 9 consignments.
2. If at least one of the first six requirements in 9-102(20) is not met, the transaction is a consignment not subject to Article 9; other
law governs.
3. If the 7
th
requirement in 9-102(20) is not met (see 9-102(20)(d)), the transaction is not a consignment but a sale and security
interest. Art. 9 governs this transaction. The factors listed on the reverse side of this page will assist in making this determination.
____________________________________________________________________________________________________________
Leases
Problem 7
Problem 8
IN RE WINSTON
Facts: Debtor and Chrysler entered into a lease agreement for a car over period of 48 months in return for car debtor was To pay
545.36 a month at end of lease required to return car to Chrysler but there was an option to purchase for 8,391.30
5 days after the lease expired, debtor filed for Chapter 13 bankruptcy debtor asserts that the agreement between
her/chrysler was a security agreement (not a true lease)
Chrysler argues that it was a true lease with an option to purchase and debtor may only exercise that option according to
terms of lease pay $$
Agreement styled as lease agreement refers to as lease throughout + Paragraph F***

Rule: (above not conclusive Issue security agreement v. lease: Ala. Code 1975, 7-1-201(37)(b), which provides that, if the
lessee cannot unilaterally terminate her obligation to pay under a contract before the end of the lease term, then the contract is a
security interest, rather than a true lease, if either
(a) the original term of the lease is equal to or greater than the remaining economic life of the leased goods; or
(b) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;
or
(c) the lessee has the option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal
additional consideration upon compliance with the lease agreement.

Issue becomes whether or not the amount that the debtor is required to pay under the contract in order to exercise the option to
purchase constitutes nominal consideration.

Analysis: Nominal means being so small, slight, or negligible as scarcely to be entitles to the name: trifling, insignificant.
8,391.30 = 96% of trade in value // 76% of retail value // 70% of value assigned by debtor NOT NOMINAL

[I]n order to be viewed as creating a security interest, the lease agreement must provide the lessee with some ownership of the leased
property. Sharer v. Creative Leasing, Inc., 612 So.2d 1191, 1194 (Ala. 1993). The contract between the Debtor and Chrysler is a
true lease, and does not create a security interest.
Unif.Commercial Code 1-203. Lease Distinguished from Security Interest.
(a) Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.
(b) A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to
possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and:
(1) the original term of the lease is equal to or greater than the remaining economic life of the goods;
(2) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the
goods;
(3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for
nominal additional consideration upon compliance with the lease agreement; or
(4) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional
consideration upon compliance with the lease agreement.
(c) A transaction in the form of a lease does not create a security interest merely because:
(1) the present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is
substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into;
(2) the lessee assumes risk of loss of the goods;
(3) the lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or
maintenance costs;
(4) the lessee has an option to renew the lease or to become the owner of the goods;
(5) the lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market
rent for the use of the goods for the term of the renewal at the time the option is to be performed; or
(6) the lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably
predictable fair market value of the goods at the time the option is to be performed.
(d) Additional consideration is nominal if it is less than the lessee's reasonably predictable cost of performing under the lease
agreement if the option is not exercised. Additional consideration is not nominal if:
(1) when the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods
for the term of the renewal determined at the time the option is to be performed; or
(2) when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the
goods determined at the time the option is to be performed.
(e) The remaining economic life of the goods and reasonably predictable fair market rent, fair market value, or cost of performing
under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into.

Other Transactions
Problem 9

Exclusions from Article 9
Federal Statutes Article 9 does not apply to a security interest subject to a federal statute to the extent that the statute governs the
rights of the parties

Problem 10
PHILKO AVIATION v. SHACKET (page 33)
Issue: whether Federal Aviation act of 1958 prohibits all transfers of title to aircraft from having validity against innocent 3
rd
parties
unless the transfer had been evidence by a written instrument, and the instrument has been recorded with the FAA (holding = does
have such effect)

Facts: Corporation owned by Smith sold a new airplane to Shackets and they paid in full and took possession of the plane (and
maintained) Smith did not give the Shackets their original bill of sale reflecting change in title (but rather photocopies and said
would take care of) Shackets thought this would include FAA recordation so never attempted
Smith did not keep his word and engaged in a fraudulent scheme he sold the same plane to Philko (told that plane was in
MI having electrical equipment installed)
Smith gave documents to Philko and bank recorded the sale
After the fraud became apparent, Shackets filed this action for a declaratory judgment to determine title
PHILKO argues that it had title because Shackets never recorded their interest with FAA (page 34)
SHACKETS were awarded SJ by District Court because Shackets had title under state law (page 34)
The Court finds that 503(c) means that every aircraft transfer must be evidenced by an instrument (page35) and STATE laws
permitting undocumented/unrecored transfer are PREEMPTED because they are in direct conflict with 503(c) (and federal law
prevails)
Reasons legislative history congress intended each transfer of an interest
Any other construction would defeat purpose

Holding: state laws allowing undocumented or unrecorded transfers of interests in aircraft to affect innocent third parties are
preempted by federal act
(between Smith/Shackets valid and binding sale so if Philko had actual notice they would not have an enforceable interest)
Landlords Lien and Other Statutory Liens Article 9 does not apply to a landlords lien or to a lien created by statute or
common law for the provider of services or materials unless the lien qualifies as an agricultural lien

Problem 11

Wage Assignments Article 9 does not apply to a transfer of a claim for wages, salary, or other employee compensation

Problem 12

Non-financing Assignments

Problem 13

Real Estate Article 9 generally does not apply to the creation or transfer of real estate interests article 9 does apply to security
interests in fixtures or personal property

Problem 14
Other Exclusions
Problem 15
Problem 16

CHAPTER 3 - The Creation of a Security Interest
Classifying the Collateral most personal property fits into one of three distinct, broad categories:
1) Goods assets that are movable at the time the security interest attaches to them (with exclusion of any property belonging in
indispensable or intangible categories)
2) Indispensable Records between the other two includes instruments, negotiable documents, and chattel paper
3) Intangibles value not based on anything physical accounts and general intangibles
Goods 4 basic categories:
1) Consumer Goods
2) Farm Products
3) Inventory
4) Equipment

Problem 17

IN RE TROUPE
Issue: whether debtors tractor, which has a purchase money security interest, is consumer goods under Article 9 of the UCC
If so, s security interest is perfected even though did not file a financing statement
If not, s security interest is unperfected and subject to avoidance
*Court holds the tractor is consumer goods and the has a perfected security interest because of representations in the security
agreement regarding the debtors intended personal use of the tractor

Facts: Chapter 7 Trustee/ brought this action against the /Creditor/Deere seeking to avoid Deeres security interest in the tractor
pursuant to the Bankruptcy code.
Argues that Deeres admitted failure to file a financing statement renders Deeres purchase money security interest
unperfected trustee asserts the tractor was intended/used for business rather than personal purposes which would make it
outside of Article 9 consumer goods.
/Deere maintains that the debtors primary intended and actual use was for personal/family/household use which makes
it a consumer good
= Debtors lived on 10 acre tract of land, debtors were not self employed/each worked 60ish hours a week/ told salesman wanted to fill
irrigation ditches on land // was an X next to personal on security agreement PLUS #11 on page 45
Consumer goods defined on page 46

Problem 18
Problem 19
Problem 20

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