Secured Transactions Assignment 40

1
Secured TransactionsAssignment 40

• Why Secured Credit?
• (Fifth edition)

2
The Puzzle of Secured Debt
3
The Puzzle of Secured Debt
Is secured debt efficient? Do the gains from
its existence exceed the losses?
4
The Puzzle of Secured Debt

• Is secured debt efficient? Do the gains from
  its existence exceed the losses?
• Secured debt helps secured creditors collect
  more. Lowers interest rates.

5
The Puzzle of Secured Debt

• Is secured debt efficient? Do the gains from
  its existence exceed the losses?
• Secured debt helps secured creditors collect
  more. Lowers interest rates.
• But doesnt that cause the unsecured creditors to
  collect less? Raises interest rates.

6
The Puzzle of Secured Debt

• Is secured debt efficient? Do the gains from
  its existence exceed the losses?
• Secured debt helps secured creditors collect
  more. Lowers interest rates.
• But doesnt that cause the unsecured creditors to
  collect less? Raises interest rates.
• Does secured credit do something good that lowers
  total system costs?

7
The Puzzle of Secured Debt

• Is secured debt efficient? Do the gains from
  its existence exceed the losses?
• Secured debt helps secured creditors collect
  more. Lowers interest rates.
• But doesnt that cause the unsecured creditors to
  collect less? Raises interest rates.
• Does secured credit do something good that lowers
  total system costs? (It must, or secureds and
  unsecureds wouldnt agree to it.)

8
The Puzzle of Secured Debt

• Is secured debt efficient? Do the gains from
  its existence exceed the losses?
• Secured debt helps secured creditors collect
  more. Lowers interest rates.
• But doesnt that cause the unsecured creditors to
  collect less? Raises interest rates.
• Does secured credit do something good that lowers
  total system costs? (It must, or secureds and
  unsecureds wouldnt agree to it.)
• Monitoring

9
The Puzzle of Secured Debt

• Is secured debt efficient? Do the gains from
  its existence exceed the losses?
• Secured debt helps secured creditors collect
  more. Lowers interest rates.
• But doesnt that cause the unsecured creditors to
  collect less? Raises interest rates.
• Does secured credit do something good that lowers
  total system costs? (It must, or secureds and
  unsecureds wouldnt agree to it.)
• Monitoring
• Relieving secured party of need to monitor

10
The Puzzle of Secured Debt

• Is secured debt efficient? Do the gains from
  its existence exceed the losses?
• Secured debt helps secured creditors collect
  more. Lowers interest rates.
• But doesnt that cause the unsecured creditors to
  collect less? Raises interest rates.
• Does secured credit do something good that lowers
  total system costs? (It must, or secureds and
  unsecureds wouldnt agree to it.)
• Monitoring
• Relieving secured party of need to monitor
• Does it do something bad that raises total system
  costs?

11
The Puzzle of Secured Debt

• Is secured debt efficient? Do the gains from
  its existence exceed the losses?
• Secured debt helps secured creditors collect
  more. Lowers interest rates.
• But doesnt that cause the unsecured creditors to
  collect less? Raises interest rates.
• Does secured credit do something good that lowers
  total system costs? (It must, or secureds and
  unsecureds wouldnt agree to it.)
• Monitoring
• Relieving secured party of need to monitor
• Does it do something bad that raises total system
  costs?
• Incentives to incur debt that will never be paid

12
Legal Structure
Legal rules make legal structures
possible Example A corporation law makes
corporations possible
Shareholders
Directors
Officers
13
Legal Structure
Legal rules make legal structures
possible Example A corporation law makes
corporations possible A rule that a corporation
can own stock . . .
14
Legal Structure
Legal rules make legal structures
possible Example A corporation law makes
corporations possible A rule that a corporation
can own stock makes corporate groups possible
Corporation A
Corporation B
Corporation C
Corporation D
Corporation E
15
Legal Structure
Legal rules make legal structures
possible Example A corporation law makes
corporations possible A rule that a corporation
can own stock makes corporate groups possible A
rule may lead to entirely unexpected structures
16
Legal Structure
Legal rules make legal structures
possible Example A corporation law makes
corporations possible A rule that a corporation
can own stock makes corporate groups possible A
rule may lead to entirely unexpected
structures Example Deed plus option to
repurchase creates mortgage / security interest
17
Legal Structure
Legal rules make legal structures
possible Example A corporation law makes
corporations possible A rule that a corporation
can own stock makes corporate groups possible A
rule may lead to entirely unexpected
structures Example Deed plus option to
repurchase creates mortgage / security
interest Example Security interest plus Chapter
11 modification makes a judgment-proof business
18
Judgment Proofing Strategy Secured Debt
All assets
Protective SI


This is a judgment-proof structure.
19
Judgment Proofing Strategy Secured Debt
Lien
All assets
Protective SI


This is a judgment-proof structure. If someone
obtains a lien . . . .
20
Judgment Proofing Strategy Secured Debt
All assets
Protective SI


This is a judgment-proof structure. If someone
obtains a lien and forecloses it . . . .
21
Judgment Proofing Strategy Secured Debt
All assets
Protective SI


This is a judgment-proof structure. If someone
obtains a lien and forecloses it, they dont get
anything.
22
Judgment Proofing Strategy Secured Debt
Exemption
All assets
Protective SI


This is a judgment-proof structure. If someone
obtains a lien and forecloses it, they dont get
anything. If the debtor is entitled to an
exemption, the lien does not even attach and the
creditor cannot force a sale.
23
Judgment Proofing Strategy Secured Debt
Lien
Unsecured debts, judgments, and liens can be a
nuisance.
All assets
Protective SI


24
Judgment Proofing Strategy Secured Debt
Lien
All assets
Protective SI

Before bankruptcy

A Chapter 11 bankruptcy wipes out the unsecured
debt (without payment) . . . .
25
Judgment Proofing Strategy Secured Debt
Lien
All assets
Protective SI

After bankruptcy
Before bankruptcy

A Chapter 11 bankruptcy wipes out the unsecured
debt (without payment) and leaves the secured
portion of the secured debt in place.
26
Judgment Proofing Strategy Secured Debt
Lien
All assets
Protective SI

After bankruptcy
Before bankruptcy

A Chapter 11 bankruptcy wipes out the unsecured
debt (without payment) and leaves the secured
portion of the secured debt in place. What about
the shareholders/managers?
27
Judgment Proofing Strategy Secured Debt
New value
Lien
All assets
Protective SI

After bankruptcy
Before bankruptcy

A Chapter 11 bankruptcy wipes out the unsecured
debt (without payment) and leaves the secured
portion of the secured debt in place. What about
the shareholders/managers? The shareholders can
buy the business from the bankruptcy court by
contributing new value to the corporation.
28
Judgment Proofing Strategy Secured Debt
Lien
All assets
Protective SI

After bankruptcy
Before bankruptcy

A Chapter 11 bankruptcy wipes out the unsecured
debt (without payment) and leaves the secured
portion of the secured debt in place. What about
the shareholders/managers? The shareholders can
buy the business from the bankruptcy court by
contributing new value to the corporation. The
business can continue to operate.
29
Judgment Proofing Strategy Secured Debt
Lien
Lien
All assets
Protective SI

After bankruptcy
Before bankruptcy

A Chapter 11 bankruptcy wipes out the unsecured
debt (without payment) and leaves the secured
portion of the secured debt in place. What about
the shareholders/managers? The shareholders can
buy the business from the bankruptcy court by
contributing new value to the corporation. The
business can continue to operate. And do it
again!
30
Problem 40.1, page 664
The partnership
V
31
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits
V
32
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests three
dangerous products.
V
33
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities.
V
34
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities. What is the expected value of this
business?
V
35
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities. What is the expected value of this
business? 1 billion loss
V
36
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities. What is the expected value of this
business? 1 billion loss
What do you recommend to Harley?
V
37
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities. What is the expected value of this
business? 1 billion loss
Steady Hand
Alvin
Investors
Product One Inc.
Product Three Inc.
Product Two Inc.
Steady Lending
V
38
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities. What is the expected value of this
business? 1 billion loss
Now what is the total expected value of business?
Steady Hand
Alvin
Investors
Product One Inc.
Product Three Inc.
Product Two Inc.
Steady Lending
V
39
Judgment Proofing Strategy Parent Subsidiary

40
Judgment Proofing Strategy Parent Subsidiary
Corporation
Assets Sub stock 0 Plant lease
0 Total
Liabilities None 0 Equity
Total


41
Judgment Proofing Strategy Parent Subsidiary
Parent Corporation
Assets Sub stock 0 Plant lease
0 Total 0
Liabilities None 0 Equity
0 Total 0


Subsidiary Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Equity
0 Total 100
42
Judgment Proofing Strategy Parent Subsidiary
Parent Corporation
Sub owns all group assets
Assets Sub stock 0 Plant lease
0 Total 0
Liabilities None 0 Equity
0 Total 0


Subsidiary Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Equity
0 Total 100
43
Judgment Proofing Strategy Parent Subsidiary
Parent Corporation
Sub owns all group assets
Assets Sub stock 0 Plant lease
0 Total 0
Liabilities None 0 Equity
0 Total 0


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Equity
0 Total 100
44
Judgment Proofing Strategy Parent Subsidiary
Parent Corporation
Sub owns all group assets Sub owes preferred debts
Assets Sub stock 0 Plant lease
0 Total 0
Liabilities None 0 Equity 0
Total 0


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Equity
0 Total 100
45
Judgment Proofing Strategy Parent Subsidiary
Parent Corporation
Sub owns all group assets Sub owes preferred
debts Parent leases plant, conducts all business,
employs all employees, incurs all liabilities
Assets Sub stock 0 Plant lease
0 Total 0
Liabilities None 0 Equity
0 Total 0


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Equity
0 Total 100
46
Judgment Proofing Strategy Parent Subsidiary
Operating Corporation
Sub owns all group assets Sub owes preferred
debts Parent leases plant, conducts all business,
employs all employees, incurs all liabilities
Assets Sub stock 0 Plant lease
0 Total 0
Liabilities None 0 Equity
0 Total 0


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Equity
0 Total 100
47
Judgment Proofing Strategy Parent Subsidiary
Operating Corporation
Sub owns all group assets Sub owes preferred
debts Parent leases plant, conducts all business,
employs all employees, incurs all
liabilities Tort creditor of Parent obtains
judgment
Assets Sub stock 0 Plant lease
0 Total 0
Liabilities None 0 Equity
0 Total 0


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Equity
0 Total 100
48
Judgment Proofing Strategy Parent Subsidiary
Operating Corporation
Sub owns all group assets Sub owes preferred
debts Parent leases plant, conducts all business,
employs all employees, incurs all
liabilities Tort creditor of Parent obtains
judgment
Assets Sub stock 0 Plant lease
0 Total 0
Liabilities Tort Cred 80 Equity
-80 Total 0


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Equity
0 Total 100
49
Judgment Proofing Strategy Parent Subsidiary
Operating Corporation
Sub owns all group assets Sub owes preferred
debts Parent leases plant, conducts all business,
employs all employees, incurs all
liabilities Tort creditor of Parent obtains
judgment Forecloses on stock
Assets Sub stock 0 Plant lease
0 Total 0
Liabilities Tort Cred 80 Equity
-80 Total 0


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Equity
0 Total 100
50
Judgment Proofing Strategy Parent Subsidiary
Operating Corporation
Sub owns all group assets Sub owes preferred
debts Parent leases plant, conducts all business,
employs all employees, incurs all
liabilities Tort creditor of Parent obtains
judgment Forecloses on stock
Assets Sub stock 0 Plant lease
0 Total 0
Liabilities Tort Cred 80 Equity
-80 Total 0


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Equity
0 Total 100
51
Judgment Proofing Strategy Parent Subsidiary
Sub owns all group assets Sub owes preferred
debts Parent leases plant, conducts all business,
employs all employees, incurs all
liabilities Tort creditor of Parent obtains
judgment Forecloses on stock


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Tort Equity Total
100
52
Judgment Proofing Strategy Parent Subsidiary
Sub owns all group assets Sub owes preferred
debts Parent leases plant, conducts all business,
employs all employees, incurs all
liabilities Tort creditor of Parent obtains
judgment Forecloses on stock Liquidates
Subsidiary Corp.


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Tort Equity Total
100
53
Judgment Proofing Strategy Parent Subsidiary
Sub owns all group assets Sub owes preferred
debts Parent leases plant, conducts all business,
employs all employees, incurs all
liabilities Tort creditor of Parent obtains
judgment Forecloses on stock Liquidates
Subsidiary Corp. Recovers zero


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Tort Equity
Total 100
54
Judgment Proofing Strategy Parent Subsidiary
Owning Corporation accomplishes the same thing as
a security interest in favor of the bank but
cheaper.
Sub owns all group assets Sub owes preferred
debts Parent leases plant, conducts all business,
employs all employees, incurs all
liabilities Tort creditor of Parent obtains
judgment Forecloses on stock Liquidates
Subsidiary Corp. Recovers zero


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Tort Equity
Total 100
55
Judgment Proofing Strategy Parent Subsidiary
Owning Corporation accomplishes the same thing as
a security interest in favor of the bank but
cheaper. Veil piercing is not a remedy.
Sub owns all group assets Sub owes preferred
debts Parent leases plant, conducts all business,
employs all employees, incurs all
liabilities Tort creditor of Parent obtains
judgment Forecloses on stock Liquidates
Subsidiary Corp. Recovers zero


Owning Corporation
Assets Plant 60 Accounts
40 Total 100
Liabilities Bank 100 Tort Equity
Total 100
56
Walkovszky v. Carlton, p. 206
Carlton et al.
Garage
10
8
2
9
6
4
1
3
7
Seon Corp
Lawsuit
Who wins? Carlton. Allegations inadequate
Marchese
Walkovsky
Tort
57
NLRB v. Fullerton (6th Cir. 1990)
The Fullertons use three corporations for
trucking business
Fullertons
Real Estate Corp
Employment Corp
Lease
Lease
Employees
Truck Corp
58
NLRB v. Fullerton (6th Cir. 1990)
Held Only Employment Corp. is liable.
Fullertons
Real Estate Corp
Employment Corp
Employees
Truck Corp
59
Radaszewski v. Telecom (8th Cir. 1992)

• The doctrine of limited liability is intended
  precisely to protect a parent corporation whose
  subsidiary goes broke. . . .

60
Radaszewski v. Telecom (8th Cir. 1992)

• The doctrine of limited liability is intended
  precisely to protect a parent corporation whose
  subsidiary goes broke. That is the whole purpose
  of the doctrine, and those who have the right to
  decide such questions, that is, legislatures,
  believe that the doctrine, on the whole, is
  socially reasonable and useful.

61
Folger v. Cottle, Supp. 83
Cottle
Burrows
Lawsuit
Limited liability
Folger (Martin)
Fliteline Corporation
Strict liability
62
Folger v. Cottle (Cal. App. 2003)

• Standard test for veil piercing two elements
• There is such a unity of interest and ownership
  between the corporation and the individual or
  organization controlling it that their separate
  personalities no longer exist (failure to follow
  formalities) and
• Failure to disregard the corporate entity would
  sanction a fraud or promote injustice.

63
Problem 40.1, page 664
The partnership
V
64
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits
V
65
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests IP for three
dangerous products.
V
66
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests IP for three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities.
V
67
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests IP for three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities. What is the expected value of this
business?
V
68
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests IP for three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities. What is the expected value of this
business? 1 billion loss
V
69
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests IP for three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities. What is the expected value of this
business? 1 billion loss
What do you recommend to Harley?
V
70
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests IP for three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities. What is the expected value of this
business? 1 billion loss
Steady Hand
Alvin
Investors
Product One Inc.
Product Three Inc.
Product Two Inc.
Steady Lending
V
71
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests IP for three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities. What is the expected value of this
business? 1 billion loss
Now what is the total expected value of business?
Steady Hand
Alvin
Investors
Product One Inc.
Product Three Inc.
Product Two Inc.
Steady Lending
V
72
Problem 40.1, page 664
The partnership Steady Hand invests 4 million
in return for (1) repayment with 15 interest and
(2) half the profits Alvin invests IP for three
dangerous products. Two will each make 1
billion, the third will generate 3 billion in
liabilities. What is the expected value of this
business? 1 billion loss
Now what is the total expected value of
business? 2 billion less
up to 1/3 of 4 million
Steady Hand
Alvin
Investors
Product One Inc.
Product Three Inc.
Product Two Inc.
Steady Lending
V
73
Problem 40.1, page 664
Steady Hand
Alvin
Investors
Product One Mfg Inc.
Product One Mkt Inc.
Product Two Mkt Inc.
Product Two Mfg Inc.
Product Three Mkt Inc.
Product Three Mfg Inc.
Steady Lending
V
74
Problem 40.1, page 664
Steady Hand
Alvin
Investors
Product One Mfg Inc.
Product One Mkt Inc.
Product Two Mkt Inc.
Product Two Mfg Inc.
Product Three Mkt Inc.
Product Three Mfg Inc.
Steady Lending
Now what is the total expected value of business?
V
75
Problem 40.1, page 664
Steady Hand
Alvin
Investors
Product One Mfg Inc.
Product One Mkt Inc.
Product Two Mkt Inc.
Product Two Mfg Inc.
Product Three Mkt Inc.
Product Three Mfg Inc.
Steady Lending
Now what is the total expected value of
business? 2.5 billion, less up to 1/6 of 4
million
V
76
Problem 40.1, page 664
Steady Hand
Alvin
Investors
Product One Mfg Inc.
Product One Mkt Inc.
Product Two Mkt Inc.
Product Two Mfg Inc.
Product Three Mkt Inc.
Product Three Mfg Inc.
Steady Lending
We can make these companies public companies
without changing Alvins or Steadys return
V
77
Problem 40.1, page 664
Investors
Alvin
Investors
Steady Underwriters
Product One Mfg Inc.
Product One Mkt Inc.
Product Two Mkt Inc.
Product Two Mfg Inc.
Product Three Mfg Inc.
Contintl Magna- tech, Inc
Steady Lending
We can make these companies public companies
without changing Alvins or Steadys return
V
78
Problem 40.1, page 664
Investors
Alvin
Investors
Steady Underwriters
Product One Mfg Inc.
Product One Mkt Inc.
Product Two Mkt Inc.
Product Two Mfg Inc.
Product Three Mfg Inc.
Contintl Magna- tech, Inc
Steady Lending
We can make these companies public companies
without changing Alvins or Steadys return Now
veil piercing is impossible.
V
79
Problem 40.2, page 665
Investors
Alvin
Investors
Steady Underwriters
Product One Mfg Inc.
Product One Mkt Inc.
Product Two Mkt Inc.
Product Two Mfg Inc.
Product Three Mfg Inc.
Contintl Magna- tech, Inc
Steady Lending
Continental Magnatech
Cash Plant IP rights
Steady Lending (SI) Trade creditors Person injury
claims
V
80
Problem 40.2, page 665
Investors
Alvin
Investors
Steady Underwriters
Product One Mfg Inc.
Product One Mkt Inc.
Product Two Mkt Inc.
Product Two Mfg Inc.
Product Three Mfg Inc.
Contintl Magna- tech, Inc
Alicia
Steady Lending
Continental Magnatech
Cash Plant IP rights
Steady Lending (SI) Trade creditors Person injury
claims
You represent Alicia Card, tort victim. What do
you do?
V
81
Problem 40.3, page 666
Our law firm is an unsecured creditor of Sigment,
40K
82
Problem 40.3, page 666
Our law firm is an unsecured creditor of Sigment,
40K Portage State Bank files a financing
statement against Sigmet covering equipment,
inventory, accounts receivable
83
Problem 40.3, page 666
Our law firm is an unsecured creditor of Sigment,
40K Portage State Bank files a financing
statement against Sigmet covering equipment,
inventory, accounts receivable Where do we
stand?
84
Problem 40.3, page 666
Our law firm is an unsecured creditor of Sigment,
40K Portage State Bank files a financing
statement against Sigmet covering equipment,
inventory, accounts receivable Where do we
stand? What should we do?
85
Problem 40.3, page 666
Our law firm is an unsecured creditor of Sigment,
40K Portage State Bank files a financing
statement against Sigmet covering equipment,
inventory, accounts receivable Where do we
stand? What should we do? Should we be doing UCC
searches to monitor all of our clients?
86
Problem 40.4, page 666

• National Secured Credit Review Commission asks
  what should be done about Article 9 security
  interests.
• Keep Article 9 as is.
• Nationalize Article 9. Give tort creditors and
  small wage claims priority over secured creditors
• Nationalize Article 9. Carve-out 20 of the
  collateral for unsecured creditors
• Adopt b. through uniform state law
• Adopt c. through uniform state law

87
Problem 40.4, page 666

• National Secured Credit Review Commission asks
  what should be done about Article 9 security
  interests.
• Keep Article 9 as is.
• Nationalize Article 9. Give tort creditors and
  small wage claims priority over secured creditors
• Nationalize Article 9. Carve-out 20 of the
  collateral for unsecured creditors
• Adopt b. through uniform state law
• Adopt c. through uniform state law

88
Problem 40.4, page 666

• National Secured Credit Review Commission asks
  what should be done about Article 9 security
  interests.
• Keep Article 9 as is.
• Nationalize Article 9. Give tort creditors and
  small wage claims priority over secured creditors
• Nationalize Article 9. Carve-out 20 of the
  collateral for unsecured creditors
• Adopt b. through uniform state law
• Adopt c. through uniform state law

89
Problem 40.4, page 666

• National Secured Credit Review Commission asks
  what should be done about Article 9 security
  interests.
• Keep Article 9 as is.
• Nationalize Article 9. Give tort creditors and
  small wage claims priority over secured creditors
• Nationalize Article 9. Carve-out 20 of the
  collateral for unsecured creditors
• Adopt b. through uniform state law
• Adopt c. through uniform state law

90
Problem 40.4, page 666

• National Secured Credit Review Commission asks
  what should be done about Article 9 security
  interests.
• Keep Article 9 as is.
• Nationalize Article 9. Give tort creditors and
  small wage claims priority over secured creditors
• Nationalize Article 9. Carve-out 20 of the
  collateral for unsecured creditors
• Adopt b. through uniform state law
• Adopt c. through uniform state law

91
Problem 40.4, page 666

• National Secured Credit Review Commission asks
  what should be done about Article 9 security
  interests.
• Keep Article 9 as is.
• Nationalize Article 9. Give tort creditors and
  small wage claims priority over secured creditors
• Nationalize Article 9. Carve-out 20 of the
  collateral for unsecured creditors
• Adopt b. through uniform state law
• Adopt c. through uniform state law

92
LoPucki on Secured Credit
93
LoPucki on Secured Credit
System gives secured parties certainty by making
others uncertain
94
LoPucki on Secured Credit
System gives secured parties certainty by making
others uncertain 1. Unsecureds dont know what
they can collect. (Carol Dearing problems).
95
LoPucki on Secured Credit
System gives secured parties certainty by making
others uncertain 1. Unsecureds dont know what
they can collect. (Carol Dearing problems). 2.
Even at the Mall, buyers are not safe. (Alica
Card problems.)
96
LoPucki on Secured Credit

• Favors the powerful/knowledgeable over the
  weak/ignorant

97
LoPucki on Secured Credit

• Favors the powerful/knowledgeable over the
  weak/ignorant
• Security makes the secured party and debtor
  better off, at the expense of unsecured party,
  buyer, or seller
• An agreement between A and B that C get nothing

98
LoPucki on Secured Credit

• Favors the powerful/knowledgeable over the
  weak/ignorant
• Security makes the secured party and debtor
  better off, at the expense of unsecured party,
  buyer, or seller
• An agreement between A and B that C get
  nothing
• 2. System rewards security agreements, filing,
  and searching

99
LoPucki on Secured Credit

• Favors the powerful/knowledgeable over the
  weak/ignorant
• Security makes the secured party and debtor
  better off, at the expense of unsecured party,
  buyer, or seller
• An agreement between A and B that C get
  nothing
• 2. System rewards security agreements, filing,
  and searching
• Most Americans dont know these things exist.

100
LoPucki on Secured Credit

• Favors the powerful/knowledgeable over the
  weak/ignorant
• Security makes the secured party and debtor
  better off, at the expense of unsecured party,
  buyer, or seller
• An agreement between A and B that C get
  nothing
• 2. System rewards security agreements, filing,
  and searching
• Most Americans dont know these things exist.
• 3. Byzantine filing system favors repeat users

101
LoPucki on Secured Credit

• Favors the powerful/knowledgeable over the
  weak/ignorant
• Security makes the secured party and debtor
  better off, at the expense of unsecured party,
  buyer, or seller
• An agreement between A and B that C get
  nothing
• 2. System rewards security agreements, filing,
  and searching
• Most Americans dont know these things exist.
• 3. Byzantine filing system favors repeat users
• Thousands of offices

102
LoPucki on Secured Credit

• Favors the powerful/knowledgeable over the
  weak/ignorant
• Security makes the secured party and debtor
  better off, at the expense of unsecured party,
  buyer, or seller
• An agreement between A and B that C get
  nothing
• 2. System rewards security agreements, filing,
  and searching
• Most Americans dont know these things exist.
• 3. Byzantine filing system favors repeat users
• Thousands of offices
• Refined legal distinctions control place of
  filing

103
LoPucki on Secured Credit

• Favors the powerful/knowledgeable over the
  weak/ignorant
• Security makes the secured party and debtor
  better off, at the expense of unsecured party,
  buyer, or seller
• An agreement between A and B that C get
  nothing
• 2. System rewards security agreements, filing,
  and searching
• Most Americans dont know these things exist.
• 3. Byzantine filing system favors repeat users
• Thousands of offices
• Refined legal distinctions control place of
  filing
• Information costs money on Web most people
  wont pay

104
LoPucki on Secured Credit

• Favors the powerful/knowledgeable over the
  weak/ignorant
• Security makes the secured party and debtor
  better off, at the expense of unsecured party,
  buyer, or seller
• An agreement between A and B that C get
  nothing
• 2. System rewards security agreements, filing,
  and searching
• Most Americans dont know these things exist.
• 3. Byzantine filing system favors repeat users
• Thousands of offices
• Refined legal distinctions control place of
  filing
• Information costs money on Web most people
  wont pay
• Technical rules that invalidate 13 to 30 of
  all filings.

105
LoPucki on Secured Credit
Favors the powerful/knowledgeable over the
weak/ignorant
106
LoPucki on Secured Credit
Favors the powerful/knowledgeable over the
weak/ignorant 4. Threatens to destroy the
liability system
107
LoPucki on Secured Credit
Favors the powerful/knowledgeable over the
weak/ignorant 4. Threatens to destroy the
liability system Respondeat superior liability
reaches those in control
Corporation (Assets)
Respondeat superior
Control
Tort
Employee
Tort victim
108
LoPucki on Secured Credit
Favors the powerful/knowledgeable over the
weak/ignorant 4. Threatens to destroy the
liability system Respondeat superior liability
reaches those in control Security Puts the
value beyond reach of creditors
Secured party (Value)
No respondeat superior
Corporation (Assets)
Control
Tort
Employee
Tort victim
109
LoPucki on Secured Credit
Favors the powerful/knowledgeable over the
weak/ignorant 4. Threatens to destroy the
liability system Respondeat superior liability
reaches those in control Security Puts the
value beyond reach of creditors
Secured party (Value)

• Moral of the story
• Be secured

No respondeat superior
Corporation (Assets)
Control
Tort
Employee
Tort victim
110
LoPucki on Secured Credit
Favors the powerful/knowledgeable over the
weak/ignorant 4. Threatens to destroy the
liability system Respondeat superior liability
reaches those in control Security Puts the
value beyond reach of creditors
Secured party (Value)

• Moral of the story
• Be secured
• Dont take a second

No respondeat superior
Corporation (Assets)
Control
Tort
Employee
Tort victim