13 Secured transactions 1 FOE uma imu The following text introduces concepts and terminology related to the area of the law referred to as ‘secured transactions’. These offer a measure of security for anyone lending something of value (usually money). Read the text, then choose the correct word to complete each of these definitions. You [ECatlisti may need to consult the Glossary booklet. 1) the state o 1. Aloan / pledge / lien is an arrangement in which a lender gives money to a es a borrower, who agrees to repay the money, usually with interest, at some time in the future 2 Aloan / mortgage / pledge is a debt instrument by which the borrower gives the lender a lien on real property as security for a loan. 3 The depositing of personal property by a debtor with a creditor as security for a debt is referred to as a loan / mortgage / pledge. 4 Aciaim which a creditor has on the property of the debtor to ensure payment (often for ‘g00ds for which payment is outstanding) is known as a loan / pledge / lien. cre eae The purpose of secured transactions is to provide credit for the borrower and security for the lender. ‘Credit’ refers to the provision of a benefit for which monetary payment. is to be made to the beneficiary of the security interest (the lender) at some time in the future. The most obvious example of this is a loan. ‘Security (in the context of the law of secured transactions) differs from other arrangements securing payment or performance because it gives the lender a right in rem which binds third parties, so that anyone interested in buying the security from the borrower cannot freely do so. These other types of arrangement are sometimes referred to as quasi-security. (It should be noted that mortgages are a form of security in land and are usually addressed within the scope of real-property law.) There are two types of security interests, possessory and non-possessory. With a Possessory interest, the creditor takes possession of the property which is the security interest (the pledge). The debtor (pledgor) transfers personal property to the creditor (pledgee) in order to secure payment or performance of the underiying obligation. An example of this would be pawning personal property to raise money. The most commonly encountered non-possessory security interests are the fixed charge’ and the floating charge*. A fixed charge creates a security interest in specific property and affords the creditor control over its alienation. This means that the debtor cannot deal in the property without first satisfying the indebtedness secured by the property or receiving the creditor's consent. A floating charge creates a security interest in the assets of the debtor at any given time, which means that the debtor may freely deal with them in the ordinary course of business. It is only when there is a default or a similar event that the charge ‘crystallises’ and becomes fixed. (Us) secur interest in specific asets also chattel mortgage pir to the Uniform Commercial Code) 2 (US) usually referred 028 ating len and not often used, tough possible, under the Uniform Commercial Code 178,All the security interests mentioned above are consensual, since they are created through a security agreement whereby the debtor grants to the creditor an interest in debtor property (collateral) in order to enforce the performance of the debtor's obligations to the creditor. There also exist non-consensual security interests, such as those created by operation of law, e.g. unpaid sellers’ liens, where a seller has a lien ‘over goods in his possession for which he has not received payment. In order to invoke consensual security interests against third parties, perfection of the security interest must take place. Perfection is the action which gives the creditor priority over certain other creditors in the enforcement of the security interest. Perfection can take place in three ways: by registration of the security agreement, by possession of the collateral, and by attachment of the security interest. The underlying purpose of perfection is to put third-party creditors on notice of the security interest and so avoid any hidden interests in property. Attachment refers to the time at which the creditor's interest fastens to the property offered as security, giving the creditor a vested interest. In certain cases, attachment also constitutes perfection. Perfection upon attachment is sanctioned by statute, generally for purposes of commercial convenience and availability of other methods of protecting creditors. @ Key terms: Comparing and contrasting concepts 2.4. Complete the comparisons of key concepts below using the verbs in the box. attaches attaches crystallises defaults has make owns seize sell Security / quasi-security: Security gives a creditor the legal right in property ‘owned by the debtor, ie. the right 10 1) ume ANd 2) vsnnnen the debtor's property if the debtor 3) .. repayment. However, in the case of quasi-security, the creditor typically 4) ........ the property in question, while the debtor only 5) possession of it. Fixed charge / floating charge: While a fixed charge 6) to the property in question as soon as the charge is created, a floating charge 7) only when it 8) , for example as a result of a failure to 9) .. @ payment at the proper time. 2.2 Underline the words and expressions in the paragraphs in Exercise 2.4 which are typically used to compare and contrast ideas. 2.3 Match the nouns in the box with the verbs (1-6) with which they can collocate. collateral credit indebtedness aloan payment performance a security interest 1. toattach 2 to perfect 3 to pledge 4 to secure 5 to provide 6 toenforce Unit 13 Secured transactions 79)we) 3 TRL eis ieee A security agreement is a legal instrument signed by a debtor. It grants a security interest to a lender in personal property which is pledged as collateral to secure the loan. Lawyers assist clients in drawing up and filing these instruments, as well as in handling disputes arising from matters connected with them, 3.4. Read the excerpts from a security agreement below and answer these questions. 1. Which kinds of property are pledged as collateral for the loan? 2 What happens upon default of the agreement? SECURITY AGREEMENT This SECURITY AGREEMENT is made on this 11th day of May, 2011, between Appleby Designs Inc. (“Debtor”), and Richard J. Cross (“Secured Party”). 1 SECURITY INTEREST. Debtor grants to Secured Party a security interest in all inventory equipment, appliances, furnishings and fixtures now or hereafter placed upon the premises located at 99 Appleby Road, Baltimore, MD (the “Premises” ) or used in connection therewith and in which Debtor now has or hereafier acquires any right and the proceeds therefrom. As additional collateral, Debtor assigns to Secured Party a security interest in all of its right, tile and interest to any trademarks, trade names and contract rights which Debtor now has or hereafter acquires. The Security Interest shall secure the payment and performance of Debtor’s promissory note of even date herewith in the principal amount of ‘twenty thousand ($20,000) Dollars and the payment and performance of all other liabilities and obligations of Debtor to Secured Party of every kind and description, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising. ne, ene 3 DEFAULT. The Debior shall be in default under this Agreement upon the happening of any of the following: (a) any misrepresentation in connection with this Agreement on the part of the Debtor; (b) any non-compliance with or non-performance of the Debtor's obligations under the Note or this Agreement; (c) if Debtor is involved in any financial difficulty as evidenced by (i) an assignment for the benefit of creditors, or (ii) an attachment or receivership of assets not dissolved within thirty (30) days, or (iti) the institution of bankruptcy proceedings, whether voluntary or involuntary, which is not dismissed within thirty (30) days from the date on which it is filed. Upon default and at any time thereafter, Secured Party may declare all obligations secured hereby immediately due and payable and shall have the remedies of a Secured Party under the Uniform Commercial Code. ee OO gan ncn 3.2 Read the excerpts again and answer these questions. 1 Where is the inventory located in which the Secured Party has an interest? 2 According to the agreement, what would constitute evidence of financial difficulty on the part of the Debtor? 3 Which remedies are available to the Secured Party in the case of default?‘3.3 Match these words and phrases from the excerpts (1-5) with their definitions (ae). 1. of even date misrepresentation contingent non-performance 2 3 4 5 receivership failure or refusal to fulfil contractually agreed-upon terms or actions depending on something else in the future in order to happen ¢ the situation in which, during bankruptcy proceedings of an insolvent corporation or person, the court appoints a person to take charge of all assets in order to preserve them for creditors da false statement, often in order to obtain an advantage written on the same date @ Language use A: Anticipating events and planning contingencies When legal agreements like the one on page 180 are drawn up, the drafter will strive to anticipate possible events which may arise and plan contingencies, i.e. to deal in advance with events that may or may not occur. This is done by wording, the text in such a way that these possible events are mentioned and thus covered by the agreement. Often opposing pairs of words are used in order to cover the full range of possibilities. Look at this example from the security agreement: As additional collateral, Debtor assigns to Secured Party a security interest in all of its right, title and interest to any trademarks, trade names and contract rights which Debtor now has or hereafter acquires. ‘The word pair now or hereafter is used to refer to both currently existing assets as well as assets which may become the property of the debtor in the future. 4.1. Explain in your own words what is meant by each of the four word pairs in italics in this sentence from the security agreement on page 180, The Security Interest shall secure the payment and performance of Debtor's promissory note of even date herewith in the principal amount of twenty thousand ($20,000) Dollars and the payment and performance of all other liabilities and obligations of Debtor to Secured Party of every kind and description, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising. 4.2 Look for other word pairs of this kind in the security agreement. Explain them to a partner. J Reading C: A seminar on revised legislation When legislation is revised, itis important for lawyers to find out what changes will take place and it is therefore common for them to attend intensive seminars focusing directly on the revised legislation and its practical implications. The advertisement on the next page is for an upcoming seminar concerning the Uniform Commercial Code (UCC], which is a code of laws regulating legal aspects of business and financial transactions in the United States. Unit 13 Secured transactions 81)5.4 Look at the advertisement and answer these questions. 1 Where might you expect to see the advertisement? 2 What is the subject of the seminar? The Shuttleworth Institute of Continuing Education for the Legal Profession Re i a rae Rue meer Red What you need to know August 19-20 ‘A salection of topes tobe covered * Flings and perfecions under Revised UCC Aricle 8 + Gettng a seareioant sven soe foo ncudog dating enuryagreoens hk + ‘Sccured franeactons: ul governing transtion fom Pro Article 9 of fhe UCC to the new Revised Article 9 of tha U + Special rules applying to consumer secured transactions in Revised Article 9 ofthe UCC. * Intellectual property as collateral i + Seeuay rests W personal property |) Target audience | “This two-day seminar is intended for attorneys and paralegals, loan officers, vce presidents, ‘commercial oan officers, credit and collection managers, branch manager, loan department Personnel, accountants, and auditors. Featured speaker ohn Kellogg (Parner), Knowles, Kellogg, and Grangor i Kologg has substantal experince inal aspects of business gation emphasizing ‘rediors rights, secured transactone, and real-estate rates; bankruptcy and business reorganization; loan documentation and Toan restructuring. Mr. Kelopg has reprserted Secured and unsecured creditors, bankruptcy trustes,crediors commtees, and business sear fr the past 90 years Materials Participants wil receive a marual which has been compiled by the Instute special for this seminar. The seminar wl be recorded, registration constutes consent o such receding. Ita registered participant cannot attend, he or she may order a set of the digitally recorded (CDs and the accompanying manual from tis program. Contact the Shuttleworth Insitute for hote’seminar information at (555) 456-6048 (please Call hotel for accommodations or crections only). ‘Cancellations: i you cancel six or more business days in advance, you will receive a full refund, less a $20 service charge. Ifyou cancel within five business days, you are not entiled toa cash refund. 5.2 Read the advertisement again and decide whether these statements are true or false. 4. The seminar will deal with the issues involved when changing over from the old Article 9 to the new one. 2 The seminar is only suitable for senior legal personnel. 3 When they arrive at the seminar, the participants will be asked to give their consent to being recorded. 4 A participant can get his money back if he cancels one day before the seminar takes place. 5 The seminar does not cover the writing of legal documents. 6 The speaker has experience representing both sides in a secured transaction. 5.3 Have you attended any continuing legal education seminars of the type advertised? If so, what was the topic of the seminar? Do you think itis an effective way to learn about legal matters? &6 PAL nnn ety The seminar advertisement (Reading C) was sent as an attachment to the following email 6.1 Read the email below and answer these questions. 1 Who sent it, and to whom? 2 Why does the writer think that the recipients should attend the seminar? Ourbox To: S.T.Team ae From: J. Sampson Subject: Seminar Dear All Although | am aware that this arrives at rather short notice, | have attached a flyer about an interesting seminar being held at the Shuttleworth Institute in Boston next Thursday and Friday and would strongly advise that all of the members of the secured transactions team attend this two-day event. The seminar will be held by a highly respected expert on Revised Article 9, Considering the fact that there are two young newcomers in the department and several important cases dealing with secured transactions currently in the pipeline, | firmly believe that we cannot afford to miss this seminar. Naturally, it may be necessary for some of you to rearrange your schedules so that you can fly to Boston next Wednesday and participate in the seminar which ‘commences on Thursday morning | sincerely hope that all of you welcome this opportunity to improve our knowledge and thus our ability to serve our clients. | look forward to your response in this matter. Sincerely Jennifer Sampson 6.2 The email was written by a senior partner to her subordinates. Discuss these questions. 1. What is the level of formality of the email - is it friendly or respectful, familiar or distanced, informal or formal? 2 What language features of the text contribute to create this impression? ‘3. When would it be appropriate for you to use this level of formality? Unit Secured transactions 183)xt analysis: Formality / Adverb-verb collocations Generally speaking, itis useful to distinguish between a formal style of language and a neutral/informal style. Writers should be aware of features of a text which play a role in establishing the level of formality so that they can make conscious choices to ensure that the level is appropriate to the situation. 7.1 Complete this table using the more formal equivalents from the email. Feature es Pee ‘contractions ‘Avoids using contractions: !am, Ihave, _| Uses contractions: eS do not, wll not, cannot, etc. _ I'm, te, don’t, won't, can't, etc. sentence length Tends to use longer, more complex Tends to use shorter, simpler sentences, sentences like in everyday speech sentence structure Tends to use subordination (joining Tends to use co-ordination (joining clauses with words such as while, because, | independent clauses with words such although) as and, of, but) personal pronouns / Tends to use personal pronouns less often; | Uses personal pronouns freely and passive verb forms however, passive verb forms are often used | often; prefers personal and active to avoid naming a personal agent constructions: 2). A highly respected expert will hold .. Two of you are newcomers ... You may need to. vocabulary and fixed Uses formal words: Uses neutral or informal words: expressions — I really think you should .. 5). I really think that. Uses formal fixed expressions: Uses informal fixed expressions: 6) Best wishes 7” Let me know what you are going S todo. Uses formal verbs, often polysyilabic, often. | Uses phrasal verbs / neutral verbs: of Latinate origin .. and take part in the seminar .. 8) -» Which starts on Thursday morning. 9) 7.2 The email contains examples of adverb-verb collocations commonly used in professional correspondence, as well as in more formal speaking situations. Underline the three adverb-verb collocations. 7.3 Match the verbs in the box with the adverbs (1-6) to make all possible collocations. advise agree believe hope objectto recommend regret suggest support understand a ee eset dre eee 1 deeply 2 firmly 3 fully 4 sincerely 5 strongly 6 wholeheartedlyA polite refusal 8.1. You receive Jennifer Sampson's email. Write an email in response, telling her it will ot be possible for you to attend the seminar, as you will be in court that day. (You are also aware that other members of the secured transactions team have important appointments.) In your email, you shoul © refer to her email to you; O state the reason you are writing: © express your agreement with the idea of attending a seminar on the topic; © explain why you cannot attend on that date; © suggest an alternative to attending the seminar in question; © offer to make arrangements for such an alternative. Use at least two adverb-verb collocations in your email 8.2 Rewrite the email from Jennifer Sampson to make it less formal, so that it would be appropriate for a lawyer to send to a colleague with whom he or she has a friendly relationship. Do not change the content of the emai SCO Wea eC One of the topics covered in the continuing education seminar advertised in the flyer on page 182s that of creating a security interest. You are going to hear an excerpt from the seminar, in which the speaker outlines seven steps in creating a security interest in the USA. 9.1. Before you listen, try to put the steps involved in order. Step. Draft the security agreement. step Identify the debtor. Step nnn! Perfect the security interest by filing a financing statement. Step + Confirm that secured party has given value. Identify the collateral, either by a list of specific property or by a categorical description. Confirm that the debtor has rights in the collateral. Ask for bills of sale, invoices, etc. Authenticate the security agreement, either by signing or by email Step ... Step ... Step = Listen and check your answers. 9.3 4¢ Listen again and answer these questions. 1 According to the speaker, why is it important to identify precisely the party granting, a security interest? 2 What is meant by a blanket lien? Why does the speaker think such a lien is problematic? 3 When would a security agreement describe property with the phrase now owned or later acquired? 4 What does the speaker mean when he says that ‘the requirement of value is easily met in the typical lending relationship’? 5 What is meant by authenticating a security agreement? 9.4 How is a security interest created in your jurisdiction? What are the most common problems or issues arising from a security interest? Unit Secured transactions 185)ORST arc Rema ct Lawyers need to inform themselves of recent developments and rulings in unsettled areas of the law. Generally speaking, an unsettled area of the law is one in which the law is open to interpretation, due to the fact that case law decisions are inconsistent with each other or with legislation. Often such areas are new, growing and with little precedent. The text on page 187 deals with an unsettled area of the law in which two of the key terms introduced in this unit, fixed charges and floating charges, play an important role 10.1 Read the first paragraph and answer these questions. 1. What is the issue in question? 2 Who is affected by this issue? 10.2 Read the whole text. It discusses the court rulings in two important cases and explains their general significance. Complete the ruling(s) and a summary of its ‘significance (1-5) for each case, using the sentences below (a-e). Siebe Gorman & Co. Ltd v. Barclays Bank Limited Ruling 1) Significance: 2) National Westminster Bank Pic v. Spectrum Plus Limited First ruling: 3) Ruling on appeal: 4) Significance: 5) a The court held that the bank only had a floating charge over book debt. b Since the specific wording of debentures had created a fixed charge for 25 years, this wording was reasoned to have acquired that meaning by customary usage. The court held that the charge on book debts was a valid fixed charge. d The decision was reversed by the Court of Appeal; it held that restrictions, imposed by debentures on book debt meant the bank had a fixed charge. @ This resulted in banks and creditors taking fixed charges on book debts. 10.3 Complete these definitions of words or expressions from the article. ace. td are the debts owed to a business, as recorded in the business's accounting records. They are also known as ‘accounts receivable’. (paragraph 1) 2 An unsecured debt obligation which is issued against the general credit of a corporation is known as a Crone «(DAFABFAPH 3) 3 A promise given by a bank that it will repay the debt of another person if that person does not pay the debt is called a b.. Benssum «(Paragraph 4) 4 Ap. creditor is a creditor who has the right to receive payments distributed by a liquidator before other unsecured creditors. (paragraph 5) 10.4 Which unsettled areas of the law in your jurisdiction are you aware of?The last word on book debts'? 1 There have been court battles for more than a century over whether itis possible to have a fixed charge on the book debts of a company. This is a topical issue of particular concern to company directors, bankers, other lenders and creditors. 2. The modem practice of lenders taking a fixed charge on book debts arose in the UK from court decision in 1979, in the case of Siebe Gorman & Co. Lid v. Barclays Bank Limited. In that case, Barclays Bank had taken a fixed charge on book debts and a floating charge on other assets of the company. The judge held that the charge on book debts was a valid fixed charge. He said that the critical feature distinguishing a floating charge from a fixed charge was the company’s power to deal with assets in the ordinary course of business. He interpreted the charge as meaning that the company was not free to draw its account without the consent of the bank, even when it was in credit, and so the charge on book debts and their proceeds was a fixed charge. The overall effect of the Siebe Gorman case ‘was to expand the practice of banks and other lenders taking fixed charges on book debts. 3. Inthe most recent case of National Westminster Bank Plc v. Spectrum Plus Limited, the court said that Siebe Gorman had been wrongly decided. It held that the bank only had a floating charge over the book debts because the company was entitled to collect its book debts and use the proceeds in the normal course of business unless the bank intervened. However, the case went to appeal, and the Court of Appeal reversed the decision and said that the restrictions imposed by the debenture on the use of the proceeds of the book debt were enough to give the bank a fixed charge. 4 What is significant about this case is that the Court of Appeal pointed out that, for the last 25 years, debentures with the wording that had been approved in the Siebe Gorman case had been used on the understanding that this would create a fixed charge. The Court of ‘Appeal said that banks have relied upon this understanding and bank guarantees have been given on this basis. It also said that even if the interpretation in the Siebe Gorman ‘case had appeared erroneous, it would have held that the wording had, by customary usage, acquired the meaning which the Siebe Gorman case had attributed to it. However, the case of Spectrum Plus Limited is going to be looked at by the House of Lords, and it may very well reach a different conclusion from that of the Court of Appeal 5 But does all this really matter? Well, yes, it does, because the reason why there has been ‘80 much conflict over charges is that book debts are often a very significant part of a ‘company's assets. If a company becomes insolvent, book debts can become critical for ‘a debenture holder. If the charge was a floating charge only, then the book debts would go to the company's preferential creditors — mainly the Inland Revenue, Customs & Excise and ‘employees. That said, the picture changed radically in September last year when, by legislation, the Inland Revenue and Customs & Excise lost their rights as preferential creditors in insolvencies. Now they are part of the body of unsecured creditors. 6 As time goes by, the number of such cases will fall away, but itis stil a problem for many debenture holders and for people who gave guarantees on behalf of companies that later became insolvent. If a debenture holder is unable to be paid from book debts, where Possible, a claim will be made under a personal guarantee instead. (Us) accounts recehable Unit Secured transactions 81)