Security Interests Flashcards
(9 cards)
Summary
The “lease” transaction between Leaseco and Printco created a security interest, not a lease. Therefore, Leaseco’s interest in the press is governed by Article 9. Leaseco’s security interest in
the press is unperfected because it did not file a financing statement or take any other steps to perfect its interest. Bank also has a security interest in the press by virtue of its security agreement with Printco. Bank’s security interest is perfected. Bank’s perfected security interest has priority over Leaseco’s unperfected interest. As the $50,000 recovered by the sale of the press did not fully cover Printco’s debt to Bank, Bank is entitled to retain the $50,000 proceeds of the sale and Leaseco is not entitled to any recovery
from Bank. Leaseco cannot recover the press from Purchaser. Bank’s proper foreclosure sale of the press to Purchaser transferred all of Printco’s rights in the press to Purchaser and also discharged both
Bank’s and Leaseco’s security interests.
What is the nature of Leaseco’s interest in the printing press?
Although Leaseco’s arrangement with Printco was denominated a “lease,” Leaseco actually transferred ownership of the press to Printco and retained an unperfected security interest.
Rule and Application
Whether a transaction in the form of a lease actually creates a “true lease” or a security interest depends on the “economic realities” of the transaction, not on the form of the transaction or the supposed intent of the parties. See UCC § 1-203, Official Comments.
In this case, the lease transaction was structured so that Printco was obligated to pay an amount that would fully cover the cost of the printing press and also ensure Leaseco a 10% return. Moreover, Printco was not entitled to terminate the lease at any point prior to full performance. If Printco failed to perform, Leaseco could recover the printing press. If Printco performed, Printco could keep the printing press for the trivial sum of $10. In economic reality, this was not a lease of the printing press at all. It was the economic equivalent of an installment sale of the press, with Leaseco’s retained title constituting only a security interest (the right to recover the press if payments were not made, thereby securing Printco’s obligation to pay the purchase price). UCC § 1-203(b) identifies certain situations in which a transaction creates a security interest, not a lease. In particular, § 1-203(b)(4) explicitly states that “a transaction in the form of a lease creates a security interest if” lease payments must be made for the full term of the lease and are
not subject to termination, and the lessee has an option to “become the owner of the goods . . . for nominal additional consideration” at the conclusion of the lease agreement. That is precisely
the structure of the Printco-Leaseco contract, and therefore this transaction should be treated as a sale of the press with Leaseco retaining a security interest. The fact that the lease agreement provided for title to remain in Leaseco’s name is immaterial.
See UCC § 9-202. Leaseco’s interest in the press is a security interest and is governed by Article 9. Because Leaseco did not file a financing statement, its security interest is unperfected.
Did Bank have a right to repossess and sell the printing press?
Bank had a perfected security interest in the press and was entitled to repossess and sell the printing press.
Rule and Application
In a signed agreement, Printco gave Bank a security interest in “all Printco’s equipment, whether now owned or hereafter acquired.” Bank advanced value to Printco by making a loan to Printco.
Finally, Printco obtained rights in the printing press so that Bank’s security interest attached to the press. A security interest attaches to collateral and is enforceable only if the debtor has rights
in the collateral, but “limited rights in collateral, short of full ownership, are sufficient for a security interest to attach.” UCC § 9-203(b), Official Comment 6. Here Printco had at least the
right to possession of the press for the lease term. In addition, because Bank filed its financing statement covering Printco’s equipment, Bank’s security interest was perfected. UCC § 9-310(a). Following a debtor’s default, a secured party may repossess and sell any collateral that secures its debt. See UCC §§ 9-609 (right to repossess), 9-610 (right to dispose of collateral by sale). As
a secured party, Bank had the right to repossess and sell the printing press.
[NOTE: Moreover, the facts suggest that Bank fully complied with applicable laws: the repossession was peaceful, and the sale was made at a public auction, in a commercially reasonable manner, and after notice to the debtor.]
As between Bank and Leaseco, which has a superior interest in the
proceeds of the sale of the printing press?
Because Bank’s security interest was superior to Leaseco’s, Bank has a superior claim to the proceeds of the sale of the printing press, and it need not share those proceeds with Leaseco unless the proceeds exceed the amount due to Bank.
Rule and Application
Bank had a perfected security interest. Leaseco’s interest was unperfected. A perfected security
interest has priority over an unperfected security interest. UCC § 9-322(a)(2).
[NOTE: If Leaseco had filed a financing statement within 20 days of delivery of the printing press to Printco, it would have had a perfected purchase-money security interest with priority
over Bank’s general security interest. UCC § 9-324(a). The facts state that Leaseco did not make such a filing.]
When a secured party with priority disposes of collateral, the proceeds of that disposition are
applied in the following order: (1) the expenses of the disposition, (2) satisfaction of the obligation owed to the disposing secured party, and (3) satisfaction of any obligation secured by a subordinate interest. See UCC § 9-615(a). Because Bank had priority over Leaseco, Bank was entitled to use the proceeds from the sale of the collateral to cover its expenses and any amounts owed to it by Printco before making any payment to Leaseco. The amount recovered from the sale of all of Printco’s collateral, including the printing press, was only $75,000. The amount owed to Bank by Printco, on the other hand, was $150,000 (plus the expenses of the disposition). Thus, the proceeds of the collateral did not fully satisfy Printco’s obligations to Bank, and there was no surplus that Leaseco could claim. Leaseco therefore has no valid claim to any of the proceeds of the sale of the printing press.
Does Leaseco have the right to recover the printing press from
Purchaser?
Leaseco cannot recover the printing press from Purchaser because Bank’s sale of the press to Purchaser discharged Leaseco’s security interest and therefore eliminated its claim to the press.
Rule and Application
A secured party’s disposition of collateral after a debtor’s default transfers the debtor’s rights in the collateral to any transferee for value, and also discharges the secured party’s interest in the
collateral and “any subordinate security interest.” UCC § 9-617(a).
Bank sold the printing press to Purchaser for $50,000. As a good-faith buyer of collateral at a foreclosure sale, Purchaser is a “transferee for value,” and has the rights set out in UCC § 9-617.
Thus, Purchaser takes free of Leaseco’s interest, because Leaseco’s interest is nothing more than a “security interest” that is subordinate to Bank’s interest. See UCC § 9-617(b).
