Pledge – a Secured Party Has Possession of the Underlying Collateral

Exam #3 Final Notes

Secured Transactions and Title

Pledge – a secured party has possession of the underlying collateral

• Pawn shop: people will pawn a diamond ring (give the pawn shop a diamond ring), and then pawn shop will give people money → if people do not pay back the cash with interest within a certain amount of time, the pawn shop gets to keep the collateral

• The pawn shop has title when they have the good

• In a pledge, the security interest of the creditor attaches to the debtor’s collateral automatically, because other creditors do not care about having interest in your collateral
• In a pledge, the secured party also automatically lets other potential creditors know that they have a security interest in the collateral by physically having the collateral in their possession → you could not get a loan from a bank based on this collateral

PMSI (Purchase Money Security Interest) – the debtor purchases and takes home the underlying collateral (the debtor has title to the collateral)

• The security interest is giving you the purchase money for consumer goods, inventory (goods held for sale, including work in progress and materials), or equipment (goods bought use in a business)
• PMSI’s can be in consumer goods and these have special rules → We know that something is a consumer good based on how the debtor uses the collateral

• Scott can sign a security interest (substituting for a promissory note) that allows Scott to bring home a huge TV from Best Buy
• In a PMSI in consumer goods, Best Buy’s security interest would automatically be perfected to Scott’s television → a bank would not give you a loan based on this TV, so Scott’s collateral is not attractive to other creditors
• If Scott bought a TV from Best Buy, and then sold this TV to Mark, Best Buy cannot go knock down Mark’s door if Scott doesn’t pay;

• Unless Mark knew about Scott not paying because Best Buy filed a financing statement, which lets other creditors know that you had a security interest in the collateral
• If Best Buy were to file a financing statement, Best Buy would be able to knock down Mark’s door and repo the TV
• Mark will not know about Scott’s security interest if he is a good faith purchaser

• The security interest of the creditor would attach to the debtor’s collateral through a written security agreement in all PMSIs → PMSIs can be in consumer goods, inventory and equipment
• The secured party would let other potential creditors know that they have claim to the debtor’s collateral by filing a financing statement in a PMSI in inventory and equipment

Non-PMSI – the debtor would get a loan based on something that they already own, and all operating capital and business type transactions are non-PMSIs loans

• The secured interest would attach to the debtor’s collateral through a written security agreement
• The secured party would perfect their security interest by filing a financing statement

Repossessing the Collateral

• Secured creditors are allowed to repo the collateral in secured transactions where the debtor gets to keep the collateral → the secured creditor must: act in good faith, with commercial reasonableness, and preserve the collateral
• The secured party has a few options once they have repo’ed the collateral:

• Retain it → find another use for it and not resell it → this is fine, unless one of the following conditions is true:

• The secured party cannot retain the collateral if the person debtor gives them notice within 21 days that they want them to sell it → the secured party has to tell the debtor immediately if they are planning on retaining the collateral

• If the collateral is a consumer good and the debtor has paid 60% or more of the price then the secured party has to sell the collateral → there may be money leftover for the debtor
• Dispose of the collateral right away

• Method, manner, time, and place of the disposition must be commercially reasonable
• The secured party must notify the debtor of the time and place of sale
• The secured party must notify any other known secured party with claim to the collateral

• Deficiency – if the creditor sells the collateral and there is not enough money to satisfy the underlying debt, the remainder of the debt may be collected from the debtor
• The debtor can redeem the collateral from the secured party before disposition if:

• The debtor pays all of the obligations secured by the collateral
• The debtor pays all of the expenses reasonably incurred from repossession and retention

• Judgment against the Debtor – the secured party may forgo repossessing the collateral, relinquish his security interest and proceed to judgment against the debtor on the underlying debt

Exceptions to the perfect priority rule – UCC article 9 has ways to cut in front of the CIT secured party with a super priority lien if the following procedures are followed

• Collateral is in inventory –Mohawk goes to Wood Floors R Us to buy flooring inventory → buys it through a PMSI in inventory

• Wood Floors R Us can only cut in line to the extent that the wood floors have not been paid off (if 25% has been paid off, Wood Floors R Us can cut in line for 75% of the floors)
• The PMSI has priority over prior perfected parties if the PMSI party gives notice of the perfection to the prior perfected secured parties before the debtor acquires the inventory

• Collateral is in non-inventory (equipment) – Mohawk goes to purchase equipment at Floor Equipment R Us → buys it through a PMSI in equipment

• The PMSI has priority over prior perfected parties if the PMSI is perfected within 10 days of the date that the debtor acquired the non-inventory (equipment)

• Buyer in the Ordinary Course of Business

• Buyer who purchases from a merchant takes the goods free of any security interest → a bank can never repo your goods

• Innocent Purchasers

• Buyer of second-hand goods takes the goods free of a security interest in those goods if they buy for personal, family, or household use
• Consumer buyer has priority unless he or she knows of the security interest and/or unless the secured party has filed a financing statement

• Artisan’s Lien – personal property

• The artisan and mechanics lien are both super priority lien’s because they get to cut in line in front of the prior perfected party
• The rule with liens is that if you do not pay off the debt that you owe someone, they can sell off your property to pay off the debt, and then any leftover money will go to you
• Example: Burdette has an engagement ring that is financed (PMSI in consumer goods) and the prong needs to get fixed by an artisan → if Burdette does not pay for this service in a timely manner, the artisan can resell her ring to cover the cost of Burdette’s debt:

• First: the money that goes to the attorney’s fees
• Second: artisan’s lien for fixing the ring
• Third: jeweler who gave and financed the PMSI in the consumer goods
• Fourth: anything leftover will go to Burdette

• Mechanic’s lien – real property: i.e. a contractor will cut in front of the mortgage lender

• You will pay a contractor at the end of the job and he will turn around and pay the subcontractors → this is what is supposed to happen
• If the subcontractor demands money from Burdette because the original contractor didn’t pay him, Burdette has to pay the subcontractor or he can put a mechanic’s lien on the house
• Waiver of liens (this can just be in your contract or has to be signed by all of the subcontractors) – subcontractor can’t come after you if contractor screws him over

Who gets the collateral when a company goes bankrupt?

• If you have a secured creditor (possesses the collateral or has a written security agreement showing that they have an underlying interest in the collateral) vs. an unsecured creditor (i.e. hospitals, credit cards) → secured creditors have priority to the underlying collateral
• Competing secured creditors (two creditors that are both secured): the first creditor to attach has priority → the first creditor to attach to the collateral with the written security agreement has priority to the underlying collateral

• Perfected vs. unperfected (we know that these are both secured parties): the first to perfect (the perfected security interest) has priority → there are two ways to perfect: automatic and by filing a financing statement → the perfected secured party has priority to the collateral

• This rule trumps the previous rule about which creditor is the first to attach
• One party, Alpha, creates a security interest first, and party Beta, creates a security interest second → however, party Alpha forgets to file a financing statement, but party Beta goes ahead and files a financing statement
• If the debtor fails to pay, Beta will get paid from the proceeds of the sale of the collateral before Alpha

Three Main Types of Perfection – this is letting other potential third parties know that the secured party has a security interest in the collateral

• Taking possession of the collateral

• A security interest in money and negotiable interest is almost always perfected by possession
• A security interest in negotiable documents is automatically perfected in 21 days without filing or taking possession

• Automatic Perfection → pledge and PMSI in consumer goods
• Filing a financing statement → PMSI in equipment/inventory and non-PMSI

• Financing statements must include: debtor’s signature, debtor’s name and address, secured parties name and address, and a description of the collateral
• The financing statements are filed where the UCC specifies: generally the secretary of the state’s office, the county clerk in the county of the debtor’s residence or in the country where the goods are kept
• Duties and rights concerning financing statements:

• A secured party’s rights – may assign all or part of his or her rights under a financing statement by the use of a signed statement of assignment
• Any person’s right – request a filing office to issue a certificate of filing revealing certain information about any presently effective financial statements
• Debtor’s right – debtor may request information from the secured creditor about the status of the debts at any time
• The secured party must furnish that information or be liable for any resulting loss

• PMSIs and non-PMSIs are created/attached through Written Security Agreements, which must include: description of the collateral, debtor’s promise to repay, the creditor’s rights upon default, and debtor’s signature

• In order for the security interest to be attached, the secured party either has to initiate a written security agreement with the debtor, or the secured party has to possess the collateral

Title

• Valid Title – title exists

• Example: Burdette takes her watch to an artisan to get it fixed, and this artisan also sells watches, and Burdette does not pay for the fix, the artisan can now go and sell the watch to someone else → the artisan automatically gets title to the watch

• Voidable – undue influence, duress, intoxication, temporarily insane, minor, trickery

• If Burdette got Arthur’s watch under undue influence, and then sold this watch to an innocent/ good faith purchaser, the innocent purchaser WOULD have title to the watch

• Arthur can still sue Burdette, because her title is voidable, but the innocent purchaser’s title is valid, so Arthur cannot get his watch back

• Void – title is void (nonexistent) if a good is stolen

• Example: Burdette stole Arthur’s watch, and then Burdette sold this watch to Kate (an innocent purchaser) → Arthur can get his watch back from Kate, and then Kate can sue Burdette through the Violation of Warranty of Title

• Entrustment Rule – when you entrust an item to somebody that repairs and sells items, they automatically get title to the item under the entrustment rule, and they could pass on title to a GFP

• Good Faith Purchaser (GFP) / Innocent Purchaser: You can’t have an artisan’s lien without an entrustment rule, or else the artisan wouldn’t have title to sell the item to someone else

Torts and Products Liability (11/15, 11/19, 11/27, 11/28, 12/4)

Crime: Criminal persecutions brought by the state to individuals → you intent to do crime

• You only have crimes with intentional torts against persons, intentional torts against property, intentional torts against economic interests
• Torts and crimes can be the same act but they are two separate prosecutions
• A crime is thought to be against a state (Sandusky committed an affront against Pennsylvania) and there needs to be a high level of proof → state lawsuits are always criminal
• The injured parties can sue the perpetrator in tort
• In criminal law, assault and battery are put together

Intentional Torts → Against Persons

• Assault – apprehension/fear → “Oh no, she’s going to hit me”
• Battery – unwanted touching → actually hitting someone

• If a dentist rapes you while you are sleeping, you can not sue the dentist for sexual assault because there was no apprehension but you can sue the dentist for sexual battery
• The prosecution in the state usually goes first, and if the state convicts someone, you can use the standard of proof that the state used in your individual tort lawsuit → if the state loses, then you can still sue in tort because the standard of proof is different

• Standard of proof with tort suit: 51%

• Defense: self-defense, permission and defense of others

• Defamation – libel / slander

• This is where you say something untrue and defamatory against someone → you have to say something publically and it has to be a fact
• Defenses: it is a true statement, it is an opinion, it is all in the role of comedy
• You can never be sued for defamation in a court room, or the floor of the senate/house
• When you are public figure, an actual malice standard (higher standard) is applied to you, because public figures have access to the news and media to defend themselves more readily
• The statement has to be published → even if just one person overhears you or if the spoken word tarnishes someone’s reputation, it is considered published

• Invasion of Privacy

• Public disclosure of private fact – when someone tells you something in confidence and you disclose it to the world, and it causes damages, you can be sued
• False light – painting someone in a bad light by opening something such as a scandal (Clinton and his affair in the white house) → newspapers do this all of the time, but they are rarely successfully sued
• Appropriation – you cannot use someone’s picture or steal their identity without permission → 

• You own your own face and your own picture; however, paparazzi can take and sell pictures of you, but they cannot take these pictures to market themselves → the paparazzi can economically benefit though
• You cannot use someone’s image for profit in an advertisement or promotion without getting permission from the person

• Invasion of privacy – you actually invade the privacy itself → peeping Tom
• The defense to invasion of privacy is consent

• Intentional Infliction of Emotional Distress → someone prank calls you and says that your family is dead and then you kill yourself

• An act that is really outrageous and first amendment rights put limits on this as well
• The defense to intentional infliction of emotional distress is that the act is not outrageous

• False Imprisonment – if you stop someone from leaving an area (physically or by a threat)

• Actual false imprisonment
• Constructive false imprisonment
• Example: if there is a man who is trying to stop a drunk woman from leaving because she is drunk, and he takes her keys, he could be sued for false imprisonment
• Defense: in a reasonable manner, for a reasonable time, or if someone thinks that you are shoplifting, they can detain you (shopkeeper’s privilege)

Intentional Torts – Against Property

• Real property is anything attached to the ground or anything that is a fixture
• Personal property is something that you own and is not a fixture → the rule is that if you could take it apart in 5 minutes with a screwdriver, it is personal property
• Personal property could become real property → a mobile home → the government will put a road through a mobile home and then you can no longer move your home
• Trespass of personal property

• To personalty – when someone borrowed something and did not return it before you needed it, you would sue for damages
• Real Property – the owner still has a duty to the trespasser if the trespasser is walking on their property, especially if something on the property is considered a hidden danger (the trespasser could potentially sue for negligence if they got hurt)

• Conversion – converting real property to personal property → this would be the same thing as unlatching a light fixture

• This is where you take all of the value → if you take out an old light fixture, you have converted that light fixtures value to zero, because it is not giving off light
• Defense is necessity

• Danger has to be foreseeable → if a car drives off of a road into a restaurant and kills one of the people in the restaurant, the people will lose because the restaurant could not have foreseen this

Intentional Torts – Against Economic Interests

• Disparagement (i.e. business defamation) – Oprah Winfrey → when Oprah talks, people listen

• When Oprah Winfrey said that she would not eat any more beef before of the Mad Cow outbreak in Europe, she was not able to be sued → even though what she said was not true at the time and may have caused harm, this fell into the realm of opinion rather than fact
• The defense for this tort are truth and opinion → it what you’re saying is true, it cannot be disparagement

• Intentional Interference with a Contract → they have a similar tort to this in places like North Carolina, except deals with cases of marriage

• Tiger Woods lived in North Carolina, and his wife, Ellen, wanted to sue based on intentional interference with a marriage contract → in this contract the wronged spouse can actually sue the mistress (Ellen would be suing Tiger Wood’s mistress)
• If one business knows of a contract and intentionally interferes with the contract, there can potentially be a tort
• If you are standing in line at McDonalds in the mall food court and someone dressed up as a giant cow comes up to you with little pieces of Chick Filet food on a platter, and says that they’ll give you a coupon if you come over to Chick Filet, Chick Filet is crossing the line between good advertising and interfering with a contract
• The defense for this tort is no knowledge of the contract

• Unfair Competition → this is uncommon

• There was a son who decided to start his own business instead of going into his father’s business → the father was so mad that he started a business just to compete with his son’s business

• The son then sued the father and won

• The defense for this tort is that everything was fair

• Misappropriation (i.e. stealing or appropriation) → we are talking about misappropriation in terms of intellectual property

• If you are infringing on a patent (misappropriation of a patent), you are going to get a letter saying that you are infringing on a patent, you will fight about the patent, and you may end up buying some kind of license or reaching some kind of settlement
• If you have stolen a trade secret (misappropriation of a trade secret), the law will say that you have misappropriated the trade secret → when Coke employees tried to sell the Coca Cola formula to Pepsi, Pepsi rejected it because Pepsi did not want to get sued for misappropriation
• Misappropriation of copyright: Copyright holders are very aggressive lobbyists in congress and they have extended copyright protection to the extreme, so that material does not go into the public domain for a long time
• If you have an idea and you send it to a company, and they use it, you can sue them for misappropriation → therefore, most companies will not take your unsolicited ideas because they are worried about a lawsuit
• The defense for this tort is independent origination (it doesn’t always work)

Negligent Torts – Penn State will get sued because of Jerry Sandusky for a negligent tort → when you own land; you owe a duty to trespassers, guests, and business people → negligent torts are someone’s failure to meet a standard of care