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Secured Transactions Assignment 2 Security and Foreclosure 1 Secured Transactions Assignment 2 Security and Foreclosure 1

Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments 2 -5: Remedies of Secured Creditors Assignment 2: Security and Foreclosure 1. What is a security interest? 2. How does the secured creditor foreclose? 2

Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments 2 -5: Remedies of Secured Creditors Assignment 2: Security and Foreclosure 1. What is a security interest? 2. How does the secured creditor foreclose? 3

Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments 2 -5: Remedies of Secured Creditors Assignment 2: 1. What is a security interest? 2. How does the secured creditor foreclose? 4

Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments 2 -5: Remedies of Secured Creditors Assignment 2: 1. What is a security interest? 5

Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments Chapter 1: Creditors’ Remedies Under State Law Assignment 1: Remedies of Unsecured Creditors Assignments 2 -5: Remedies of Secured Creditors Assignment 2: 1. What is a security interest? 2. How does the secured creditor foreclose? 6

Basic concepts Security interest: An interest in property contingent on the non-payment of a Basic concepts Security interest: An interest in property contingent on the non-payment of a debt. Transactions fitting that definition are security interests Even though the documents show an absolute transfer Example: deed absolute Example: bank account in secured creditor’s name Even though the parties don’t realize they created a security interest Even though the parties didn’t intend some security effects Regardless of who has possession (But § 2 -401(1)? ) UCC § 9 -109(a)(1): [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract. 7

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. 8

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. 9

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 1: A $50, 000 loan secured by Blackacre Secured $50, 000 loan Mortgage Debtor Blackacre 10

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 1: A $50, 000 loan secured by Blackacre Secured $50, 000 loan Mortgage Debtor Blackacre 3. Debtor owes a debt ($50, 000) 11

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 1: A $50, 000 loan secured by Blackacre Secured $50, 000 loan Mortgage Debtor Blackacre 3. Debtor owes a debt ($50, 000) 1. The mortgage (right to force sale) is an interest in Blackacre 12

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 1: A $50, 000 loan secured by Blackacre Secured $50, 000 loan Mortgage Debtor Blackacre 3. Debtor owes a debt ($50, 000) 1. The mortgage (right to force sale) is an interest in Blackacre 2. The right is contingent on nonpayment (if Debtor pays, Secured has no right in Blackacre). 13

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 1: A $50, 000 loan secured by Blackacre Secured $50, 000 loan Mortgage Debtor Blackacre 3. Debtor owes a debt ($50, 000) 1. The mortgage (right to force sale) is an interest in Blackacre 2. The right is contingent on nonpayment (if Debtor pays, Secured has no right in Blackacre). This is a security interest. 14

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent. Secured Lease of real property Obligation to pay rent Debtor Patent 15

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent. Secured Lease of real property Obligation to pay rent Debtor Patent 3. Debtor owes a debt (Obligation to pay rent) 16

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent. Secured Lease of real property Obligation to pay rent Debtor Patent 3. Debtor owes a debt (Obligation to pay rent) 1. The agreement gives Secured a right in the patent 17

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent. Secured Lease of real property Obligation to pay rent Debtor Patent 3. Debtor owes a debt (Obligation to pay rent) 1. The agreement gives Secured a right in the patent 2. The right is contingent on nonpayment (if Debtor pays, Secured has no right in the patent). 18

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent. Secured Lease of real property Obligation to pay rent Debtor Patent 3. Debtor owes a debt (Obligation to pay rent) 1. The agreement gives Secured a right in the patent 2. The right is contingent on nonpayment (if Debtor pays, Secured has no right in the patent). This is a security interest 19

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 3: Jan 1, Debtor sells Blackacre (worth $3 million) to Secured for $500, 000; Secured grants an option to Debtor to repurchase Blackacre for $600, 000 by Dec 30. Secured $500, 000 plus option Deed to Blackacre Debtor Blackacre 20

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 3: Jan 1, Debtor sells Blackacre (worth $3 million) to Secured for $500, 000; Secured grants an option to Debtor to repurchase Blackacre for $600, 000 by Dec 30. Secured Blackacre $500, 000 plus option Deed to Blackacre Debtor 21

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 3: Jan 1, Debtor sells Blackacre (worth $3 million) to Secured for $500, 000; Secured grants an option to Debtor to repurchase Blackacre for $600, 000 by Dec 30. Secured Blackacre $500, 000 plus option Deed to Blackacre Debtor 3. The option is arguably a debt because it must be exercised 22

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 3: Jan 1, Debtor sells Blackacre (worth $3 million) to Secured for $500, 000; Secured grants an option to Debtor to repurchase Blackacre for $600, 000 by Dec 30. Secured Blackacre $500, 000 plus option Deed to Blackacre Debtor 3. The option is arguably a debt because it must be exercised 1. Secured has in interest in Blackacre (ownership) 23

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 3: Jan 1, Debtor sells Blackacre (worth $3 million) to Secured for $500, 000; Secured grants an option to Debtor to repurchase Blackacre for $600, 000 by Dec 30. Secured Blackacre $500, 000 plus option Deed to Blackacre Debtor 3. The option is arguably a debt because it must be exercised 1. Secured has in interest in Blackacre (ownership) 2. Secured’s right is contingent on nonpayment (if Debtor exercises the option, Secured has no right in Blackacre). 24

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 3: Jan 1, Debtor sells Blackacre (worth $3 million) to Secured for $500, 000; Secured grants an option to Debtor to repurchase Blackacre for $600, 000 by Dec 30. Secured Blackacre $500, 000 plus option Deed to Blackacre Debtor 3. The option is arguably a debt because it must be exercised 1. Secured has in interest in Blackacre (ownership) 2. Secured’s right is contingent on nonpayment (if Debtor exercises the option, Secured has no right in Blackacre). Arguably a security interest. 25

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 4: Secured leases an auto to Debtor five years. At the end of the lease, Debtor has the right to purchase the auto for $1. Secured Lease and option Promise to pay rent Debtor 26

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 4: Secured leases an auto to Debtor five years. At the end of the lease, Debtor has the right to purchase the auto for $1. Secured Lease and option Promise to pay rent Debtor 3. Debtor owes a debt (Promise to pay rent) 27

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 4: Secured leases an auto to Debtor five years. At the end of the lease, Debtor has the right to purchase the auto for $1. Secured Lease and option Promise to pay rent Debtor 3. Debtor owes a debt (Promise to pay rent) 1. Secured has an interest in the auto (ownership) 28

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 4: Secured leases an auto to Debtor five years. At the end of the lease, Debtor has the right to purchase the auto for $1. Secured Lease and option Promise to pay rent Debtor 3. Debtor owes a debt (Promise to pay rent) 1. Secured has an interest in the auto (ownership) 2. The interest is contingent on nonpayment (if Debtor pays debt plus $1, Debtor will own the auto). 29

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 4: Secured leases an auto to Debtor five years. At the end of the lease, Debtor has the right to purchase the auto for $1. Secured Lease and option Promise to pay rent Debtor 3. Debtor owes a debt (Promise to pay rent) 1. Secured has an interest in the auto (ownership) 2. The interest is contingent on nonpayment (if Debtor pays debt plus $1, Debtor will own the auto). This is a security interest. 30

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 5: Secured agrees to sell auto to Debtor if Debtor has paid $30, 000, in three years. Secured gives possession now, but retains ownership until payments have been made Contract to sell later Secured Promise to pay $30, 000 Debtor 31

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 5: Secured agrees to sell auto to Debtor if Debtor has paid $30, 000, in three years. Secured gives possession now, but retains ownership until payments have been made Contract to sell later Secured Promise to pay $30, 000 Debtor 3. Debtor owes a debt (Promise to pay $30, 000) 32

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 5: Secured agrees to sell auto to Debtor if Debtor has paid $30, 000, in three years. Secured gives possession now, but retains ownership until payments have been made Contract to sell later Secured Promise to pay $30, 000 Debtor 3. Debtor owes a debt (Promise to pay $30, 000) 1. Secured has an interest in the auto (ownership) 33

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 5: Secured agrees to sell auto to Debtor if Debtor has paid $30, 000, in three years. Secured gives possession now, but retains ownership until payments have been made Contract to sell later Secured Promise to pay $30, 000 Debtor 3. Debtor owes a debt (Promise to pay $30, 000) 1. Secured has an interest in the auto (ownership) 2. The right is contingent on nonpayment (if Debtor pays, Secured has no right in the auto). 34

Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the Basic concepts Security interest (mortgage): (1) An interest in property (2) contingent on the non-payment (3) of a debt. Example 5: Secured agrees to sell auto to Debtor if Debtor has paid $30, 000, in three years. Secured gives possession now, but retains ownership until payments have been made Contract to sell later Secured Promise to pay $30, 000 Debtor 3. Debtor owes a debt (Promise to pay $30, 000) 1. Secured has an interest in the auto (ownership) 2. The right is contingent on nonpayment (if Debtor pays, Secured has no right in the auto). This is a security interest. § 2 -401(1), page 29 35

Basic concepts Right to redeem: The debtor’s right to pay the debt and own Basic concepts Right to redeem: The debtor’s right to pay the debt and own the property free of the security interest. If a security interest exists, debtor always has the right to redeem. Synonymous with ownership. Foreclosure: Termination of the right to redeem (four types) 1. Judicial foreclosure (court declares, sale by sheriff) 2. Power of sale foreclosure (no court, by trustee, real estate) 3. UCC foreclosure by sale (no court, by creditor, personalty) 4. Strict foreclosure (court declares, no sale, contract for deed) Deed in lieu of foreclosure: Voluntary transfer of the debtor’s ownership / right to redeem to the creditor (merger doctrine) When is a deed in lieu of foreclosure a security interest? 36 When secured’s right is contingent on nonpayment of a debt.

Sale of Accounts Citibank “debtor” Credit cards “Account debtors” Debtor operates a business that Sale of Accounts Citibank “debtor” Credit cards “Account debtors” Debtor operates a business that generates accounts, e. g. credit cards 37

Sale of Accounts Citibank “debtor” Credit cards Account debtors Goods and services Debtor operates Sale of Accounts Citibank “debtor” Credit cards Account debtors Goods and services Debtor operates a business that generates accounts, e. g. credit cards Stores 38

Sale of Accounts Citibank “debtor” $900 million Debtor operates a business advances that generates Sale of Accounts Citibank “debtor” $900 million Debtor operates a business advances that generates accounts, e. g. credit cards Account debtors Goods and services Stores 39

Sale of Accounts Citibank “debtor” $1. 1 billion $900 million accounts Debtor operates a Sale of Accounts Citibank “debtor” $1. 1 billion $900 million accounts Debtor operates a business advances owing that generates accounts, e. g. credit cards Account debtors 40

Sale of Accounts Citibank “debtor” $1. 1 billion accounts owing Account debtors Debtor operates Sale of Accounts Citibank “debtor” $1. 1 billion accounts owing Account debtors Debtor operates a business that generates accounts, e. g. credit cards Debtor wants to free up capital 41

Sale of Accounts Citibank “debtor” $1. 1 billion accounts owing Account debtors Accounts $1 Sale of Accounts Citibank “debtor” $1. 1 billion accounts owing Account debtors Accounts $1 billion Buyer Debtor operates a business that generates accounts, e. g. credit cards Debtor wants to free up capital So Debtor sells the accounts 42

Sale of Accounts Citibank “debtor” Accounts Buyer $1 billion $1. 1 billion accounts Debtor Sale of Accounts Citibank “debtor” Accounts Buyer $1 billion $1. 1 billion accounts Debtor operates a business that owing generates accounts, e. g. credit cards Account debtors Debtor wants to free up capital So Debtor sells the accounts 43

Sale of Accounts Citibank “debtor” “Without recourse” $1. 1 billion accounts owing Account debtors Sale of Accounts Citibank “debtor” “Without recourse” $1. 1 billion accounts owing Account debtors Buyer Debtor operates a business that generates accounts, e. g. credit cards Debtor wants to free up capital So Debtor sells the accounts 44

Sale of Accounts With Recourse Citibank “debtor” Account debtors Recourse obligation Buyer Debtor operates Sale of Accounts With Recourse Citibank “debtor” Account debtors Recourse obligation Buyer Debtor operates a business that generates accounts, e. g. credit cards Debtor wants to free up capital So Debtor sells the accounts “With recourse: ” If an account debtor doesn’t pay, Debtor will buy the account back for the account’s face amount 45

Sale of Accounts With Recourse Citibank “debtor” Account debtors Account $500 Buyer Debtor operates Sale of Accounts With Recourse Citibank “debtor” Account debtors Account $500 Buyer Debtor operates a business that generates accounts, e. g. credit cards Debtor wants to free up capital So Debtor sells the accounts “With recourse: ” If an account debtor doesn’t pay, Debtor will buy the account back for the account’s face amount 46

Sale of Accounts With Recourse Citibank “debtor” Account debtors Account $500 Buyer Debtor operates Sale of Accounts With Recourse Citibank “debtor” Account debtors Account $500 Buyer Debtor operates a business that generates accounts, e. g. credit cards Debtor wants to free up capital So Debtor sells the accounts “With recourse: ” If an account debtor doesn’t pay, Debtor will buy the account back for the account’s face amount Citibank promises (guarantees) Buyer $1. 1 billion. 47

Security Interest in Accounts Citibank “debtor” $1. 1 billion Account debtors $1. 1 billion Security Interest in Accounts Citibank “debtor” $1. 1 billion Account debtors $1. 1 billion note, security interest Secured Party $1 billion loan Debtor operates a business that generates accounts, e. g. credit cards Debtor wants to free up capital So Debtor borrows against the accounts This deal is the same as the Sale of Accounts With Recourse 48

Security Interest in Accounts Citibank “debtor” $1. 1 billion Account debtors $1. 1 billion Security Interest in Accounts Citibank “debtor” $1. 1 billion Account debtors $1. 1 billion note, security interest Secured Party $1 billion loan Debtor operates a business that generates accounts, e. g. credit cards Debtor wants to free up capital So Debtor borrows against the accounts This deal is the same as the Sale of Accounts With Recourse. Risk of nonpayment of accounts is on Citibank. 49

Security Interest in Accounts Citibank “debtor” $1. 1 billion Account debtors $1. 1 billion Security Interest in Accounts Citibank “debtor” $1. 1 billion Account debtors $1. 1 billion note, security interest Secured Party $1 billion loan Debtor operates a business that generates accounts, e. g. credit cards Debtor wants to free up capital So Debtor borrows against the accounts This deal is the same as the Sale of Accounts With Recourse. Risk of nonpayment of accounts is on Citibank. A sale of accounts with recourse is a security interest. 50

Security Interest in Accounts Citibank “debtor” $1. 1 billion note, security interest Secured Party Security Interest in Accounts Citibank “debtor” $1. 1 billion note, security interest Secured Party $1 billion loan $1. 1 billion Account debtors UCC § 9 -109(a) (1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract. (3) a sale of accounts, chattel paper, payment intangibles, or 51 promissory notes;

Asset securitization Sale of Accounts Originator $1 billion Buyer $1. 1 billion Account debtors Asset securitization Sale of Accounts Originator $1 billion Buyer $1. 1 billion Account debtors 52

Asset securitization Sale of Accounts Originator $1 billion Trust (SPE) $1. 1 billion Account Asset securitization Sale of Accounts Originator $1 billion Trust (SPE) $1. 1 billion Account debtors 53

Asset securitization Sale of Accounts Originator $1. 1 billion Account debtors $1 billion Trust Asset securitization Sale of Accounts Originator $1. 1 billion Account debtors $1 billion Trust (SPE) $1 billion Investment certificates (“securities”) Investors 54

Asset securitization Sale of Accounts Originator $1. 1 billion Account debtors $1 billion Trust Asset securitization Sale of Accounts Originator $1. 1 billion Account debtors $1 billion Trust (SPE) $1 billion Traunch 1 Traunch 2 Traunch 3 Traunch 4 Investors 55

Asset securitization Sale of Accounts Originator $1. 1 billion Account debtors $1 billion Trust Asset securitization Sale of Accounts Originator $1. 1 billion Account debtors $1 billion Trust (SPE) $1 billion Investment certificates (“securities”) Investors § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property 56

Asset securitization Sale of Accounts Originator $1 billion Trust (SPE) $1 billion Did this Asset securitization Sale of Accounts Originator $1 billion Trust (SPE) $1 billion Did this deal create a security interest? Investment certificates (“securities”) “An interest in property contingent on the non Investors -payment of a debt. ” 57

Asset securitization Sale of Accounts Originator Trust (SPE) $1 billion Did this deal create Asset securitization Sale of Accounts Originator Trust (SPE) $1 billion Did this deal create a security interest? No, trust owns the accounts, has the risk of loss. Investment certificates (“securities”) Investors 58

Asset securitization Sale of Accounts Originator Trust (SPE) $1 billion Did this deal create Asset securitization Sale of Accounts Originator Trust (SPE) $1 billion Did this deal create a security interest? No, trust owns the accounts, has the risk of loss. Add: Investors want guaranteed return, don’t want to engage in business Investment certificates (“securities”) Investors 59

Asset securitization Sale of Accounts Originator Trust (SPE) $1 billion Did this deal create Asset securitization Sale of Accounts Originator Trust (SPE) $1 billion Did this deal create a security interest? No, trust owns the accounts, has the risk of loss. Add: Investors want guaranteed return, don’t want to engage in business Investment certificates (“securities”) Investors 1. Originator will “service” the accounts 60

Asset securitization Sale of Accounts Originator Trust (SPE) $1 billion Did this deal create Asset securitization Sale of Accounts Originator Trust (SPE) $1 billion Did this deal create a security interest? No, trust owns the accounts, has the risk of loss. Add: Investors want guaranteed return, don’t want to engage in business Investment certificates (“securities”) Investors 1. Originator will “service” the accounts 2. Originator will replace bad accounts (like recourse) 61

Asset securitization Sale of Accounts Originator Trust (SPE) $1 billion Did this deal create Asset securitization Sale of Accounts Originator Trust (SPE) $1 billion Did this deal create a security interest? No, trust owns the accounts, has the risk of loss. Add: Investors want guaranteed return, don’t want to engage in business Investment certificates (“securities”) Investors 1. Originator will “service” the accounts 2. Originator will replace bad accounts (like recourse) Now does the securitization create a security interest? 62

Asset securitization Debtor Sale of Accounts. Secured party Trust Originator (SPE) $1 billion Did Asset securitization Debtor Sale of Accounts. Secured party Trust Originator (SPE) $1 billion Did this deal create a security interest? No, trust owns the accounts, has the risk of loss. Add: Investors want guaranteed return, don’t want to engage in business Investment certificates (“securities”) Investors 1. Originator will “service” the accounts 2. Originator will replace bad accounts (like recourse) Now does the securitization create a security interest? Yes, 63 sale is “with recourse” and debtor has the risk of loss.

Asset securitization Debtor Sale of Accounts. Secured party Trust Originator (SPE) $1 billion $1. Asset securitization Debtor Sale of Accounts. Secured party Trust Originator (SPE) $1 billion $1. 1 billion Account debtors $1 billion Investment certificates (“securities”) Investors This transaction creates a security interest. 64

Asset securitization Debtor Sale of Accounts. Secured party Trust Originator (SPE) $1 billion $1. Asset securitization Debtor Sale of Accounts. Secured party Trust Originator (SPE) $1 billion $1. 1 billion Account debtors $1 billion Investment certificates (“securities”) Investors This transaction creates a security interest. Consequence: If originator files bankruptcy, the accounts are property of the estate. Debtor can use collection proceeds to reorganize. 65

Basic Concepts Securities Originator (or Originators ) of assets Services (often is the Contract Basic Concepts Securities Originator (or Originators ) of assets Services (often is the Contract Originator) Underwrit to care for er who or collect markets assets. Issu Securiti securities er es Asse ts sold to issue r Investo rs Securitie s

Basic Concepts Securities First National Bank First National Mortgage Service Contract to Co First Basic Concepts Securities First National Bank First National Mortgage Service Contract to Co First collect National mortgages Securities Issu Securiti er Residen es tial mortgag es Investo rs Securitie s

Problem 2. 1, page 36 Problem 1. 5, we represent Benning to collect $50, Problem 2. 1, page 36 Problem 1. 5, we represent Benning to collect $50, 000 from Knopf We have a security agreement naming these items as collateral: 1. Toyota automobile worth $15, 000 2. Inherited house, value $275, 000, mortgage $225, 000 3. Day care equipment worth $25, 000 4. Bank account, balance $12, 265. 92 a. Which can we foreclose on? 815. 18 (12) “No property. . . may be claimed as exempt. . . against the claim. . . of a holder of a security interest. ” b. “Waiver” is a voluntary relinquishment of a known right. Isn’t a security interest a “waiver of exemptions” prohibited by Wis. Stat. 815. 18(6)(a)? Page 17 71

Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed 18% Monthly payment Number of payments Additional amount payable to own Total payments Lease 5, 000 0 5, 000 180. 77 36 0 6, 507. 72 72

Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed 18% Monthly payment Number of payments Additional amount payable to own Total payments Lease 5, 000 Not applicable 0 5, 000 180. 77 36 0 6, 507. 72 73

Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed 18% Monthly payment Number of payments Additional amount payable to own Total payments Lease 5, 000 Not applicable 0 0 5, 000 180. 77 36 0 6, 507. 72 74

Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed 18% Monthly payment Number of payments Additional amount payable to own Total payments Lease 5, 000 Not applicable 0 0 5, 000 Not applicable 180. 77 36 0 6, 507. 72 75

Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed 18% Monthly payment Number of payments Additional amount payable to own Total payments Lease 5, 000 Not applicable 0 0 5, 000 Not applicable 180. 77 36 0 6, 507. 72 76

Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed 18% Monthly payment Number of payments Additional amount payable to own Total payments Lease 5, 000 Not applicable 0 0 5, 000 Not applicable 180. 77 36 36 0 6, 507. 72 77

Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed 18% Monthly payment Number of payments Additional amount payable to own Total payments Lease 5, 000 Not applicable 0 0 5, 000 Not applicable 180. 77 36 36 0 10 6, 507. 72 78

Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed 18% Monthly payment Number of payments Additional amount payable to own Total payments Lease 5, 000 Not applicable 0 0 5, 000 Not applicable 180. 77 36 36 0 10 6, 507. 72 6, 517. 72 79

Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property 80

Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property § 1 -203. “[A] transaction in the form of a lease creates a security interest if the consideration. . . is an obligation for the term of the lease not subject to termination by the lessee 81

Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property § 1 -203. “[A] transaction in the form of a lease creates a security interest if the consideration. . . is an obligation for the term of the lease not subject to termination by the lessee, and. . . [the lease is for the remaining economic life of the goods Security interest Economic life Lease/consideration term 82

Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property § 1 -203. “[A] transaction in the form of a lease creates a security interest if the consideration. . . is an obligation for the term of the lease not subject to termination by the lessee, and. . . [the lease is for the remaining economic life of the goods by 1. Original term Security interest Economic life Lease/consideration term 83

Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property § 1 -203. “[A] transaction in the form of a lease creates a security interest if the consideration. . . is an obligation for the term of the lease not subject to termination by the lessee, and. . . [the lease is for the remaining economic life of the goods by 1. Original term 2. Required renewal or purchase Security interest Economic life Lease term Mandatory renewal 84

Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property § 1 -203. “[A] transaction in the form of a lease creates a security interest if the consideration. . . is an obligation for the term of the lease not subject to termination by the lessee, and. . . [the lease is for the remaining economic life of the goods by 1. Original term 2. Required renewal or purchase 3. Renewal term for no (or nominal) additional consideration Security interest Economic life Lease term Free renewal 85

Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property § 1 -203. “[A] transaction in the form of a lease creates a security interest if the consideration. . . is an obligation for the term of the lease not subject to termination by the lessee, and. . . [the lease is for the remaining economic life of the goods by 1. Original term 2. Required renewal or purchase 3. Renewal term for no (or nominal) additional consideration 4. Option to buy for no (or nominal) additional consideration]” Security interest Economic life Lease term Option to buy for free 86

Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its Sale-Lease Distinction § 9 -109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property § 1 -203. “[A] transaction in the form of a lease creates a security interest if the consideration. . . is an obligation for the term of the lease not subject to termination by the lessee, and. . . [the lease is for the remaining economic life of the goods by 1. Original term 2. Required renewal or purchase 3. Renewal term for no (or nominal) additional consideration 4. Option to buy for no (or nominal) additional consideration]” True Lease Economic life Lease term “Meaningful reversion” 87

Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed Problem 2. 2, Two ways to move cars Sale Price Down payment Amount financed 18% Monthly payment Number of payments Additional amount payable to own Total payments Sale 5, 000 Not applicable 0 0 5, 000 Not applicable 180. 77 36 36 0 10 6, 507. 72 6, 517. 72 88

Problem 2. 5, page 38 Old way: We loan to a corporate borrower, take Problem 2. 5, page 38 Old way: We loan to a corporate borrower, take a mortgage, and foreclose on default. Loan Bank Corporate Mortgage borrower 89

Problem 2. 5, page 38 Old way: We loan to a corporate borrower, take Problem 2. 5, page 38 Old way: We loan to a corporate borrower, take a mortgage, and foreclose on default. Loan Bank Corporate Mortgage borrower Year long foreclosure! 90

Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Loan Bank Corporate Mortgage borrower Security interest in the stock Shareholder

Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Loan Bank Foreclosure sale of stock Corporate Mortgage borrower Security interest in the stock Shareholder 92

Problem 2. 5, page 38 Assume factory worth $1 million, mortgage $1 million Mashimoto’s Problem 2. 5, page 38 Assume factory worth $1 million, mortgage $1 million Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. How much will the stock sell for? Foreclosure sale of stock Loan Bank Corporate Mortgage borrower Shareholder 93

Problem 2. 5, page 38 Assume factory worth $1 million, mortgage $1 million Mashimoto’s Problem 2. 5, page 38 Assume factory worth $1 million, mortgage $1 million Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Loan Bank Foreclosure sale of stock The value of the stock is about zero Corporate Mortgage borrower Shareholder 94

Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Bank Nominal price Foreclosure sale of stock Loan Bank Corporate Mortgage borrower Shareholder 95

Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Loan Bank Corporate Mortgage borrower Bank is the shareholder and owns the borrower. Bank 96

Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Loan Bank Corporate Mortgage borrower Bank elects new directors. Bank 97

Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Bank Deed in lieu. Corporate borrower Bank 98

Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Bank Corporate borrower Bank 99

Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest Problem 2. 5, page 38 Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that. Loan Bank Corporate Mortgage borrower Security interest in the stock Will this work to avoid mortgage foreclosure? Shareholder

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home 101

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home 102

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% interest to buy $1 million home D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home 103

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner, invests $800, 000 D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home 104

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner, invests $800, 000 D buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home 105

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner, invests $800, 000 D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home 106

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner, invests $800, 000 D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D owns the home 107

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner, invests $800, 000 D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home 108

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner, invests $800, 000 D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home 109

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner, invests $800, 000 D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home/foreclosure D owns the home 110

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner, invests $800, 000 D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home/foreclosure? 111

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner, invests $800, 000 D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home Does Bank or Partnership have an interest in property contingent on the non-payment of a debt? 112

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner, invests $800, 000 D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home Does Bank or Partnership have an interest in property contingent on the non-payment of a debt? If so, what consequence? 113

Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits Problem 2. 6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest. Conventional mortgage Shari’a-compliant contract Bank lends D $800, 000 at 6% Bank becomes D’s 80% interest to buy $1 million home partner, invests $800, 000 D buys home Partnership buys home D makes 30 years of $6, 000 monthly payments of principal and interest D makes 30 years of $6, 000 monthly payments to buy Bank’s share of partnership D owns the home Does Bank or Partnership have an interest in property contingent on the non-payment of a debt? If so, what consequence? Bank or Partnership must foreclose 114