SECURED TRANSACTIONS QUESTIONS

1.

What body of law governs Secured Transactions, and how does it

apply? Also define the particular terms of art involved.

Article 9 of the U.C.C. (Uniform Commercial Code) governs the law of Secured Transactions. In other words, Article 9 applies to (1) security interests (2) in personalty (goods) or fixtures, (3) that are both voluntary and consensual (in other words, voluntary collateralizations). An example would be an individual who secures a bank loan by granting the bank a security interest in his business equipment. Because they are not voluntary or consensual, respectively, Article 9 law on secured transactions does not apply to Statutory or Mechanics Liens. Likewise, when the collateral is real estate (rather than personalty or fixtures), Article 9 does not apply; instead, we apply the law of mortgages. A mortgage is entered into between an entity who will owe money (Debtor) and an entity who will lend money (Secured Creditor). The contract (or record) between them is referred to as the Security Agreement; it is a document that outlines the rights of a Creditor in Debtors personalty or fixtures (also known as Security Interest and/or Collateral). It is this collateral to which a Secured Creditor may look for satisfaction on the debt in the event of Debtors default. It should be noted that the key to classifying collateral is its primary use in the hands of the debtor (a subjective test).

2.

How does a Creditor create an enforceable security interest in the

secured property (collateral)? Also, explain how a Creditor might perfect such an Attachment.

Attachment, which is the term of art used to describe the creation of an enforceable Security Interest, is created by a Secured Creditors satisfaction of

three requirements: (1) Value, (2) Contract, and (3) Rights in the collateral. That is, the Secured Party/Creditor must give Value. In return, he receives rights in the collateral. Finally, the parties must have agreed to create such a Security Interest, either by (a) Security Agreement, or (b) Possession. In cases involving Security Agreements, to be valid, such an agreement must be authenticated (signed or electronically marked by Debtor) and must reasonably identify the collateral; there is no need for a security agreement in those actions where the Secured Party already has possession of the collateral. It should be noted that so-called After-Acquired Collateral Clauses, which purport to take a security interest of collateral whether now held or hereafter acquired by Debtor, are in fact enforceable! Upon successful Attachment, a Secured Party may elect to perfect his Security Interest. This is best understood as a publicity device, as its primary functions are to put the world on record (or constructive notice) of its [the secured partys] existence. This serves to help protect the secured party from competing creditors. In order to attain perfection of a security interest, a creditor must first validly attach the interest, and then undertake one of the following three options: (i) take Possession of the collateral; (ii) File Notice of the security interest in the appropriate public records; or (iii) be a bona fide PMSI donor (Purchase Money Security Interests in Consumer Goods) It should be noted that the Secured Party has three options for filing notice of his security interest in public records. He may (1) file a Security Agreement, which is a rare choice due to the large amount of information contained therein; he may instead (2) file a Financing Statement with the Secretary of State of the state in which the Debtor is domiciled; finally, he might (3) elect the medianeutral option of Electronic Filing, which is the option preferred by Article 9.

A Financing Statement is, simply, a document that provides the interested parties with sufficient information to make follow-up inquiries. It includes the name and address of both Debtor and Secured Creditor, and additionally provides a description of the collateral (generic descriptions are permissible here). Note that an individual debtors state for these purposes is the one in which he is principally domiciled; a Registered Organization, on the other hand, is deemed located in the state under whose laws it is organized.* (** An exception to this rule applies when the collateral is (i) timber, (ii) minerals, or (iii) fixtures; if the collateral falls into one of these categories, the financing statement must be filed locally (in the county where the underlying realty is situated).

3.

Discuss the variety of potential Creditors in this model, and rank them

in terms of Order of Priority.

There are six types of potential Creditors given life by the Secured Transactions law; each has differing interests in the secured priority, which will be examined below (in descending order of priority): (a) BIOC (Buyer in Ordinary Course) - A buyer who purchases all or some of the collateral from a merchants inventory. (b) PAC (Perfected Attached Creditor) - An Article IX creditor who has succeeded in attaining perfection. (c) LC (Lien Creditor) - A general (unsecured) creditor who receives a judicial lien on the collateral. (d) NOCie (Non-Ordinary Course Buyer) - Someone who purchased the collateral outside of the ordinary stream of commerce; here the creditor takes the collateral at his peril. (e) AUPie (Attached Unperfected Creditor) - An Article 9 creditor w/ enforceable security interest, but nonetheless unperfected. (f) GUC (General Unsecured Creditor) - The lender who never took collateral from debtor; has the least priority.

4.

In the event of a Debtors default, what remedies are available to

secured creditor plaintiffs? How are they distinct from one another; and what, if any, is the scope of said Debtors Right of Redemption?

A Secured Creditor has the options of (i) Repossession (self-help or judicial), (ii) Foreclosure, (iii) Sale, and/or (iv) Action for Deficiency Judgment, when a Debtor is in breach (typically due to failure to pay).

1.

Self-Help Repossessions are permissible, so long as the Creditor does incite violence) or secured

not breach the peace (i.e. exhibits actions likely to

party may not enter it to repossess collateral contained therein unless the Debtor consents Voluntarily and Contemporaneously. In situations where the Secured Creditor attempts a self-repossession in violation of these rules, civil criminal legal penalties may attach.
The Secured Creditor may, however, elect for Repossession by Judicial Action, in which he obtains a judicial and deliver it to the secured party. Writ of Replevin, ordering the Sheriff to obtain possession of the collateral in question

and/or

2. Alternatively, the Secured Creditor might opt for a Strict Foreclosure, in which he will retain the collateral This is usually the option chosen in Full Satisfaction of the Outstanding Debt; in return, the debt is cancelled. when the value of the collateral closely approximates the value of the outstanding debt. The Strict Foreclosure is accomplished by following a set procedure, which differs depending on whether the debtors usage) consumer goods. debtor and also any collateral is (in If the If it is, notice must be sent to the

secondary obligors (e.g. a co-signer).

collateral is not consumer goods, on the other hand, the notice is sent to the debtor, as well as to other secured parties who have told the foreclosing creditor of their security interest in the In collateral, and perfected secured parties and secondary obligers. having been sent, the strict foreclosure will not be allowed to

both scenarios, if any notified party objects within 20 days of notice

proceed; instead, the collateral is disposed of by sale. should be noted that a party may object for any or no strict foreclosure is not allowed in cases where

(It

reason.)

Finally, it should be noted that the 60% Rule dictates that the collateral is consumer goods and the defaulted debtor has paid either (i) 60% of the loan in the event of a non- PMSI, or (ii) 60% of the cash price if a PMSI. Instead, the Secured Creditor must sell the collateral within 90 days, or be liable for conversion. 3. Sale - A Secured Party has the option of selling the collateral and applying the proceeds to the debt that has public (i.e. by auction) to or private. been defaulted upon. It is at the Secured Partys discretion whether such a sale shall be Even so, the sale is required Additionally, prior to be commercially reasonable in every respect.

the sale, Secured Creditor must sent reasonable notice to For the sale of consumer goods, notice must be sent to the

interested parties (forms can be found in Article IX). Debtor and any secondary obligers. Secured Parties, and those seen as 10 All other types of collateral

require that notice be sent to Debtor, Secondary Obligers, Perfected Secured Parties who have advised the The content of such a is by If, foreclosing creditor of their security interest (reasonable time is days or more before day of sale). notice also depends on the type of sale. however, disposition is to be by private purchase the When disposition

public sale, the notice must state the sales time and place. the time after which the sale will be made.

sale, notice must state only A Secured Party may Finally, calculated and how

collateral at a public, but not private, sale.

the notice must state how any deficiency will be the debtor might redeem the of consumer goods).

collateral (provided it is in the form

4. Action for Deficiency Judgment: Provided there has been a valid sale of collateral by a Secured Creditor, he is proceeds of sale were allowed to proceed Courts will against the debtor for a deficiency judgment in those cases where the insufficient to redeem the debt. use the price an Independent Third Party would have paid in instances where collateral was sold to an inside buyer (rather than the

actual amount paid). The Debtor does have a limited Right of Redemption, even after a foreclosure action or completed sale. foreclosure. This right is extinguished once the Secured Party has re-sold the collateral or completed a strict If neither of these events has occurred, Debtor may redeem property by paying all obligations secured by the collateral (i.e. payments owed), in addition to accrued interest and the secured partys reasonable expenses (which include reasonable Attorneys Fees). It should be noted that Acceleration Clauses, which require that the entire balance be paid off after occurrence of default, have been deemed valid.

MORTGAGES REVIEW

1. Define, generally, the concept of a Mortgage, and outline the characteristics, rights, and responsibilities of all parties involved.

An interest in property created as a form of security for a loan or payment of a debt and terminated on payment of the loan or debt. The borrower, who offers the security, is the mortgagor; the lender, who provides the money, is the mortgagee. Virtually any property may be mortgaged (though land is the most common); exceptions include the salaries of public officials. With respect to the parties rights, unless and until foreclosure, the Debtor/Mortgagor retains Title and the Right to Possession. The CreditorMortgagee simply has a lien (a right to look to the land, or other mortgaged security, should a default on the Debtors obligation(s) occur.

2. What is the difference between an Equitable Mortgage and a Legal Mortgage?

In order to satisfy the Statute of Frauds, a Legal Mortgage must

be committed to writing.

(It should be noted that occasionally a

legal mortgage is referred to as a Mortgage Deed, a Note, a Security Interest in Land, a Deed of Trust, and, occasionally, a Sale-Leaseback.) An Equitable Mortgage, on the other hand, arises when the parties intend to create a mortgage, using Blackacre as collateral, but exchange a deed that is absolute on its face to the Secured Party until repayment is made. In these cases, Parol Evidence is freely admissible (Note that if Creditor sells The to prove the parties true intentions.

Blackacre to a bona-fide purchaser, X, X will then own the land.

original owners sole recourse is to proceed against the Creditor for fraud and recover in damages the proceeds he realized from the sale.

3. How might a mortgage be properly transferred to third parties?

A mortgage automatically follows a properly transferred note. Moreover, all parties to a mortgage are permitted to transfer their interests. The Creditor/Mortgagor may transfer his interest by (1) indorsing the note and delivering it to the transferee, or (2) executing a separate Document of Assignment. If the first option is chosen, the transferee is eligible to become a Holder in Due Course, thereby escaping liability on any personal defenses that might have been raised against the original Mortgagee, and allowing him potentially to foreclose on the mortgage. Nonetheless, a HDC will remain

subject to any Real defenses that the maker might raise (MAD FIFI): (a) Material Alteration (b) Duress (c) Fraud in the Factum (a lie about the instrument itself) (d) Incapacity (e) Illegality (f) Infancy (g) Insolvency

In order for one to be a HDC of the note, the following requirements must be met: (i) The note must be Negotiable in Form - made payable to the named mortgagee; (ii) The original note must be indorsed - signed by the named payee; (iii) The original note must be delivered to the transferee (photocopies are not acceptable); (iv) The transferee must take the note in good faith without any notice of illegality; and (v) The transferee must pay value for the note - some amount that is more than nominal. Should the Debtor/Mortgagor sell the burdened land, the lien will remain on the land so long as the mortgage instrument has been properly recorded. If the Buyer, B, Assumes the Mortgage, both the original debtor, O, and B are personally liable. B is primarily liable, and O remains secondarily liable, until the obligation is modified in any way by the Grantee and Mortgagee discharges the original Mortgagor of all liability. However, if B takes Subject to the Mortgage, B assumes no personal liability on the debt; however, if it was properly recorded, the mortgage remains on the land, which may be foreclosed on if O does not pay (despite Bs current ownership).

4. With respect to the Recording System of mortgages, how do Notice and Race Notice jurisdictions differ?

The Recording System of mortgages and deeds is in place to protect mortgagees. 5. What are the three types of foreclosure action available to plaintiffs in NY?

6. When a mortgage is successfully foreclosed upon, how are the interests of other creditors (both subordinate and senior) effected?

7. List the Order of Priority amongst Creditors post-foreclosure. The order in which two or more mortgages of the same property take effect. If there are several mortgages of the same property, and its value is less than the amount due on the mortgages, the respective claims of the mortgagees must be determined.

8. What is the difference between Equitable and Statutory Redemption, and which theory applies to defaulted Debtors in NY?