1 secured transactions assignment 2 security and foreclosure
TRANSCRIPT
1
Secured TransactionsAssignment 2
Security and Foreclosure
2
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 2-5: Remedies of Secured Creditors
Assignment 2: Security and Foreclosure
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 2-5: Remedies of Secured Creditors
Assignment 2:
1. What is a security interest?
2. How does the secured creditor foreclose?
5
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?
6
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?
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Basic conceptsSecurity 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.
8
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
9
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
10
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
$50,000 loanSecured
Mortgage BlackacreDebtor
Example 1: A $50,000 loan secured by Blackacre
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Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
$50,000 loanSecured
Mortgage
3. Debtor owes a debt ($50,000)
BlackacreDebtor
Example 1: A $50,000 loan secured by Blackacre
12
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
$50,000 loanSecured
Mortgage
3. Debtor owes a debt ($50,000)
1. The mortgage (right to force sale) is an interest in Blackacre
BlackacreDebtor
Example 1: A $50,000 loan secured by Blackacre
13
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
$50,000 loanSecured
Mortgage
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).
BlackacreDebtor
Example 1: A $50,000 loan secured by Blackacre
14
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
$50,000 loanSecured
Mortgage
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.
BlackacreDebtor
Example 1: A $50,000 loan secured by Blackacre
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Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Lease of real propertySecured
Obligation to pay rent PatentDebtor
Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent.
16
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Lease of real propertySecured
Obligation to pay rent
3. Debtor owes a debt (Obligation to pay rent)
PatentDebtor
Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent.
17
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Lease of real propertySecured
Obligation to pay rent
3. Debtor owes a debt (Obligation to pay rent)
1. The agreement gives Secured a right in the patent
PatentDebtor
Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent.
18
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Lease of real propertySecured
Obligation to pay rent
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).
PatentDebtor
Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent.
19
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Lease of real propertySecured
Obligation to pay rent
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
PatentDebtor
Example 2: Debtor agrees that if Debtor fails to pay rent when due, Secured will become the owner of Debtor’s patent.
20
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
$500,000 plus optionSecured
Deed to Blackacre
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.
BlackacreDebtor
Blackacre
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Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
$500,000 plus optionSecured
Deed to Blackacre
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.
Debtor
22
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
$500,000 plus option
Deed to Blackacre
3. The option is arguably a debt because it must be exercised
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.
DebtorBlackacre
Secured
23
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
$500,000 plus option
Deed to Blackacre
3. The option is arguably a debt because it must be exercised
1. Secured has in interest in Blackacre (ownership)
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.
DebtorBlackacre
Secured
24
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
$500,000 plus option
Deed to Blackacre
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).
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.
DebtorBlackacre
Secured
25
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
$500,000 plus option
Deed to Blackacre
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.
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.
DebtorBlackacre
Secured
26
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Lease and option
Promise to pay rent
Example 4: Secured leases an auto to Debtor for five years. At the end of the lease, Debtor has the right to purchase the auto for $1.
DebtorSecured
27
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Lease and option
Promise to pay rent
3. Debtor owes a debt (Promise to pay rent)
Example 4: Secured leases an auto to Debtor for five years. At the end of the lease, Debtor has the right to purchase the auto for $1.
DebtorSecured
28
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Lease and option
Promise to pay rent
3. Debtor owes a debt (Promise to pay rent)
1. Secured has an interest in the auto (ownership)
Example 4: Secured leases an auto to Debtor for five years. At the end of the lease, Debtor has the right to purchase the auto for $1.
DebtorSecured
29
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Lease and option
Promise to pay rent
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).
Example 4: Secured leases an auto to Debtor for five years. At the end of the lease, Debtor has the right to purchase the auto for $1.
DebtorSecured
30
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Lease and option
Promise to pay rent
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.
Example 4: Secured leases an auto to Debtor for five years. At the end of the lease, Debtor has the right to purchase the auto for $1.
DebtorSecured
31
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Contract to sell later
Promise to pay $30,000
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
DebtorSecured
32
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Contract to sell later
Promise to pay $30,000
3. Debtor owes a debt (Promise to pay $30,000)
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
DebtorSecured
33
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Contract to sell later
Promise to pay $30,000
3. Debtor owes a debt (Promise to pay $30,000)
1. Secured has an interest in the auto (ownership)
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
DebtorSecured
34
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Contract to sell later
Promise to pay $30,000
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).
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
DebtorSecured
35
Basic conceptsSecurity interest (mortgage): (1) An interest in property
(2) contingent on the non-payment (3) of a debt.
Contract to sell later
Promise to pay $30,000
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
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
DebtorSecured
36
Basic conceptsRight 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?
When secured’s right is contingent on nonpayment of a debt.
37
Sale of Accounts
Citibank“debtor”
“Accountdebtors”
Debtor operates a business that generates accounts, e.g. credit cards
Creditcards
38
Sale of Accounts
Citibank“debtor”
Accountdebtors
Debtor operates a business that generates accounts, e.g. credit cards
StoresGoods andservices
Creditcards
39
Sale of Accounts
Citibank“debtor”
Accountdebtors
Debtor operates a business that generates accounts, e.g. credit cards
$900 millionadvances
StoresGoods andservices
40
Sale of Accounts
Citibank“debtor”
Accountdebtors
$1.1 billionaccounts
owingDebtor operates a business that generates accounts, e.g. credit cards
$900 millionadvances
41
Sale of Accounts
Citibank“debtor”
Accountdebtors
Debtor operates a business that generates accounts, e.g. credit cards
Debtor wants to free up capital
$1.1 billionaccounts
owing
42
Sale of Accounts
Citibank“debtor”
Accounts
$1 billion
Accountdebtors
Debtor operates a business that generates accounts, e.g. credit cards
Debtor wants to free up capital
So Debtor sells the accounts
Buyer
$1.1 billionaccounts
owing
43
Sale of Accounts
Citibank“debtor”
Accounts
$1 billion
Accountdebtors
Debtor operates a business that generates accounts, e.g. credit cards
Debtor wants to free up capital
So Debtor sells the accounts
Buyer
$1.1 billion accounts owing
44
Sale of Accounts
Citibank“debtor”
Accountdebtors
Debtor operates a business that generates accounts, e.g. credit cards
Debtor wants to free up capital
So Debtor sells the accounts
Buyer
$1.1 billion accounts owing
“Without recourse”
45
Sale of Accounts With Recourse
Citibank“debtor”
Accountdebtors
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
BuyerRecourseobligation
46
Sale of Accounts With Recourse
Citibank“debtor”
Accountdebtors
Debtor operates a business that generates accounts, e.g. credit cards
Debtor wants to free up capital
So Debtor sells the accounts
Buyer$500
Account
“With recourse:” If an account debtor doesn’t pay, Debtor will buy the account back for the account’s face amount
47
Sale of Accounts With Recourse
Citibank“debtor”
Accountdebtors
Debtor operates a business that generates accounts, e.g. credit cards
Debtor wants to free up capital
So Debtor sells the accounts
Buyer$500
Account
“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.
48
Security Interest in Accounts
Citibank“debtor”
$1.1 billion note,security interest
$1 billion loan
Accountdebtors
$1.1 billion 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
SecuredParty
49
Security Interest in Accounts
Citibank“debtor” $1 billion loan
Accountdebtors
$1.1 billion 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.
SecuredParty
$1.1 billion note,security interest
50
Security Interest in Accounts
Citibank“debtor” $1 billion loan
Accountdebtors
$1.1 billion 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.
SecuredParty
$1.1 billion note,security interest
51
Security Interest in Accounts
Citibank“debtor” $1 billion loan
Accountdebtors
$1.1 billion
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 promissory notes;
SecuredParty
$1.1 billion note,security interest
52
Originator BuyerSale of Accounts
$1 billion
Accountdebtors
$1.1 billion
Asset securitization
53
OriginatorTrust
(SPE)
Sale of Accounts
$1 billion
Accountdebtors
$1.1 billion
Asset securitization
54
Asset securitization
OriginatorTrust
(SPE)
Investors
Sale of Accounts
Investmentcertificates(“securities”)
$1 billion
$1 billion
Accountdebtors
$1.1 billion
55
Asset securitization
OriginatorTrust
(SPE)
Investors
Sale of Accounts
Traunch 1Traunch 2Traunch 3Traunch 4
$1 billion
$1 billion
Accountdebtors
$1.1 billion
56
Asset securitization
OriginatorTrust
(SPE)
Investors
Sale of Accounts
Investmentcertificates(“securities”)
$1 billion
$1 billion
Accountdebtors
$1.1 billion
§ 9-109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property
57
Asset securitization
OriginatorTrust
(SPE)
Investors
Sale of Accounts
Investmentcertificates(“securities”)
$1 billion
$1 billion
Did this deal create a security interest?
“An interest in property contingent on the non-payment of a debt.”
58
Asset securitization
OriginatorTrust
(SPE)
Investors
Sale of Accounts
Investmentcertificates(“securities”)
$1 billion
$1 billion
Did this deal create a security interest? No, trust owns the accounts, has the risk of loss.
59
Asset securitization
OriginatorTrust
(SPE)
Investors
Sale of Accounts
Investmentcertificates(“securities”)
$1 billion
$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
60
Asset securitization
OriginatorTrust
(SPE)
Investors
Sale of Accounts
Investmentcertificates(“securities”)
$1 billion
$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
1.Originator will “service” the accounts
61
Asset securitization
OriginatorTrust
(SPE)
Investors
Sale of Accounts
Investmentcertificates(“securities”)
$1 billion
$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
1.Originator will “service” the accounts
2.Originator will replace bad accounts (like recourse)
62
Asset securitization
OriginatorTrust
(SPE)
Investors
Sale of Accounts
Investmentcertificates(“securities”)
$1 billion
$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
1.Originator will “service” the accounts
2.Originator will replace bad accounts (like recourse)Now does the securitization create a security interest?
63
Asset securitization
OriginatorTrust
(SPE)
Investors
Sale of Accounts
Investmentcertificates(“securities”)
$1 billion
$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
1.Originator will “service” the accounts
2.Originator will replace bad accounts (like recourse)Now does the securitization create a security interest? Yes, sale is “with recourse” and debtor has the risk of loss.
Debtor Secured party
64
Asset securitization
OriginatorTrust
(SPE)
Investors
Sale of Accounts
Investmentcertificates(“securities”)
$1 billion
$1 billion
This transaction creates a security interest.
Debtor Secured party
Accountdebtors
$1.1 billion
65
Asset securitization
OriginatorTrust
(SPE)
Investors
Sale of Accounts
Investmentcertificates(“securities”)
$1 billion
$1 billion
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.
Debtor Secured party
Accountdebtors
$1.1 billion
Basic Concepts
IssuerAsse
ts sold to
issuer
Originator (or
Originators) of assets
Underwriter who
markets securities
Investors
Services (often is the Originator)Contract
to care for or collect
assets
Securities
Securities
Securities
Basic Concepts
IssuerResiden
tial mortgag
es
First National
Bank
First National
Securities
Investors
First National Mortgage Service
CoContract to collect
mortgagesSecuritie
s
Securities
Securities
71
Problem 2.1, page 36Problem 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
72
Problem 2.2, Two ways to move cars
Sale Lease
Price 5,000
Down payment 0
Amount financed 18% 5,000
Monthly payment 180.77
Number of payments 36
Additional amount payable to own
0
Total payments 6,507.72
73
Problem 2.2, Two ways to move cars
Sale Lease
Price 5,000 Not applicable
Down payment 0
Amount financed 18% 5,000
Monthly payment 180.77
Number of payments 36
Additional amount payable to own
0
Total payments 6,507.72
74
Problem 2.2, Two ways to move cars
Sale Lease
Price 5,000 Not applicable
Down payment 0 0
Amount financed 18% 5,000
Monthly payment 180.77
Number of payments 36
Additional amount payable to own
0
Total payments 6,507.72
75
Problem 2.2, Two ways to move cars
Sale Lease
Price 5,000 Not applicable
Down payment 0 0
Amount financed 18% 5,000 Not applicable
Monthly payment 180.77
Number of payments 36
Additional amount payable to own
0
Total payments 6,507.72
76
Problem 2.2, Two ways to move cars
Sale Lease
Price 5,000 Not applicable
Down payment 0 0
Amount financed 18% 5,000 Not applicable
Monthly payment 180.77 180.77
Number of payments 36
Additional amount payable to own
0
Total payments 6,507.72
77
Problem 2.2, Two ways to move cars
Sale Lease
Price 5,000 Not applicable
Down payment 0 0
Amount financed 18% 5,000 Not applicable
Monthly payment 180.77 180.77
Number of payments 36 36
Additional amount payable to own
0
Total payments 6,507.72
78
Problem 2.2, Two ways to move cars
Sale Lease
Price 5,000 Not applicable
Down payment 0 0
Amount financed 18% 5,000 Not applicable
Monthly payment 180.77 180.77
Number of payments 36 36
Additional amount payable to own
0 10
Total payments 6,507.72
79
Problem 2.2, Two ways to move cars
Sale Lease
Price 5,000 Not applicable
Down payment 0 0
Amount financed 18% 5,000 Not applicable
Monthly payment 180.77 180.77
Number of payments 36 36
Additional amount payable to own
0 10
Total payments 6,507.72 6,517.72
80
§ 9-109(a)(1) [T]his article applies to a transaction, regardless of its form, that creates a security interest in personal property
Sale-Lease Distinction
81
§ 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
Sale-Lease Distinction
82
§ 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
Economic lifeLease/consideration term
Security interest
Sale-Lease Distinction
83
§ 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
Economic lifeLease/consideration term
Security interest
Sale-Lease Distinction
84
§ 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
Economic lifeLease term
Security interestMandatory renewal
Sale-Lease Distinction
85
§ 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
Economic lifeLease term
Security interestFree renewal
Sale-Lease Distinction
86
§ 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]”
Economic lifeLease term
Security interestOption to buy for free
Sale-Lease Distinction
87
§ 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]”
Sale-Lease Distinction
Economic lifeLease term
True Lease“Meaningful reversion”
88
Problem 2.2, Two ways to move cars
Sale Sale
Price 5,000 Not applicable
Down payment 0 0
Amount financed 18% 5,000 Not applicable
Monthly payment 180.77 180.77
Number of payments 36 36
Additional amount payable to own
0 10
Total payments 6,507.72 6,517.72
89
Problem 2.5, page 38
Old way: We loan to a corporate borrower, take a mortgage, and
foreclose on default.
BankLoan
Mortgage
Corporateborrower
90
Problem 2.5, page 38
Old way: We loan to a corporate borrower, take a mortgage, and
foreclose on default.
Loan
Mortgage
Year long foreclosure!
Bank Corporateborrower
Problem 2.5, page 38
Loan
Mortgage
Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that.
Share-holder
Security interestin the stock
Bank Corporateborrower
92
Problem 2.5, page 38
Loan
Mortgage
Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that.
Security interestin the stock
Bank Corporateborrower
Share-holder
Foreclosuresale of stock
93
Problem 2.5, page 38
Loan
Mortgage
Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that.
How much will the stock sell for?
Assume factory worth $1 million,
mortgage $1 million
Bank Corporateborrower
Share-holder
Foreclosuresale of stock
94
Problem 2.5, page 38
Loan
Mortgage
Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that.
Assume factory worth $1 million,
mortgage $1 million
The value of the stock is about zero
Bank Corporateborrower
Share-holder
Foreclosuresale of stock
95
Problem 2.5, page 38
Loan
Mortgage
Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that.
Bank
Nominal price
Foreclosuresale of stock
Bank Corporateborrower
Share-holder
96
Problem 2.5, page 38
Loan
Mortgage
Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that.
BankBank is the shareholder
and owns the borrower.
Bank Corporateborrower
97
Problem 2.5, page 38
Loan
Mortgage
Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that.
BankBank elects new
directors.
Bank Corporateborrower
98
Problem 2.5, page 38
Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that.
Deedin lieu.
Bank Corporateborrower
Bank
99
Problem 2.5, page 38
Bank Corporateborrower
Bank
Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that.
Problem 2.5, page 38
Loan
Mortgage
Mashimoto’s new idea: We also take a security interest in the stock, foreclose against that.
Share-holder
Security interestin the stock
Bank Corporateborrower
Will this work to avoid mortgage foreclosure?
101
Problem 2.6: Bank wants to finance homes for Muslims, but Islamic law prohibits charging interest.
Bank lends D $800,000 at 6% interest to buy $1 million home
Bank becomes D’s 80% 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 D owns the home
102
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
Bank becomes D’s 80% 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 D owns the home
103
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 D owns the home
104
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
Bank becomes D’s 80% 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 D owns the home
105
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
Bank becomes D’s 80% 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 D owns the home
106
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
Bank becomes D’s 80% 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 D owns the home
107
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
Bank becomes D’s 80% 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 D owns the home
108
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
Bank becomes D’s 80% 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 D owns the home
109
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
Bank becomes D’s 80% 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 D owns the home
110
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
Bank becomes D’s 80% 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
111
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
Bank becomes D’s 80% 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/foreclosure?
112
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
Bank becomes D’s 80% 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 D owns the home
Does Bank or Partnership have an interest in property contingent on the non-payment of a debt?
113
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
Bank becomes D’s 80% 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 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?
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 foreclose114
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
Bank becomes D’s 80% 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 D owns the home