The Case Studies

Harry C. Sigman/Eva-Maria Kieninger

A. General remarks

Each author is requested to briefly introduce the basic structure of the relevant national law, including, as appropriate, remarks relating to items a), b) and c). Please provide Code, statutory and case citations – supplemented as necessary in the solutions to specific cases.

a)For each case, please indicate whether it makes any difference (1) whether the debtor is a corporation/company; a sole proprietorship; other; and (2) whether the creditor is a regulated financial institution; other. For all cases, assume neither debtor nor creditor is a consumer.

b)For each case, please indicate whether there is a registry for any of the described rights in the encumbered assets, and, if so, describe its characteristics (i.e., notice or document filing? how are parties identified (name, address, identification number, etc.)? how must/may encumbered assets be described on the registration? must the registration identify the secured obligation or subject it to a stated maximum? are there any content requirements in addition to identification of debtor, creditor, and a description of the encumbered assets? is the registry indexed and searchable by debtor name/asset identification number/other? are there any restrictions on public search access? electronic or paper – filing/searching? time/cost for filing/searching; duration of effectiveness of a registration and possibility for extension, etc.)

c)For each case, please indicate whether there are any super-priority or super-privileged persons (whether prior or subsequent in time) that might outrank the holder of the security right.

B.The Case studies

1.Non-possessory security right in specific equipment

Manufacturer owns 200 machines (of varying description, value and useful life), acquired from 20 different suppliers during the preceding 3 years. The machines are used in Manufacturer’s business (so they are

classified as equipment (tangibles held for use), not inventory (tangibles held for sale or lease)). Manufacturer offers these 200 machines as collateral to Lender to secure a single advance term loan repayable in monthly installments of principal and interest.

a)Describe the documentation and formalities required to create a proprietary non-possessory security right in favor of Lender, and any additional steps (registration, stamp or other duties, notarization, etc.) required to perfect the right against third parties (perfection is used in the sense that the proprietary right can be asserted against third parties generally; this does not imply that its has priority over all competing rights).

b)How does Lender ascertain whether there exist earlier-in-time nonpossessory rights in the machines that might be superior to or compete with Lender’s right or preclude it altogether?

c)If Manufacturer sells an encumbered machine, what are Lender’s rights, if any, in either or both (1) the sold machine and (2) the “proceeds” received by Manufacturer (cash, check, open account receivable, title retention sale contract, tangible item received in exchange)?

d)Does Lender have any rights in machines acquired by Manufacturer during the life of the loan that replace (although not received in exchange for) encumbered machines (maintaining a total number of 200 machines)?

e)What are Lender’s remedies upon Manufacturer’s default (judicial, extrajudicial, and appropriation right (qualified or absolute)? Indicate approximate time/costs and briefly describe each process, including any legal pre-conditions.

f)Describe Lender’s position in the event of commencement of an insolvency proceeding against Manufacturer.

g)Describe how the responses to this case, and below with respect to cases 2 and 3, would be modified if the encumbered assets (equipment in cases 1 and 2, inventory in case 3) include motor vehicles.

2.Non-possessory security right in present and future equipment (floating security right)

Same questions as case 1 except that the security agreement provides that the collateral is all of Manufacturer’s present and after-acquired machines (a floating security right).

3.Non-possessory security right in present and future inventory (floating security right)

Same questions as case 2, and likewise a floating security right, except a) the debtor is Wholesaler and the collateral is all of its present and afteracquired inventory (which consists initially of 10,000 units, comprised of 50 different products (all of which are products with respect to which Wholesaler carries multiple competing brands) and which have been obtained from numerous different suppliers, and b) the credit is extended on a revolving basis, i.e., new advances are made upon acquisition of new inventory and repayments are made as inventory is sold. In what ways are the responses different from those in case 2 due to the collateral being inventory instead of equipment or due to the fact that the secured obligation includes future advances? Include description of issues relating to power/right of Wholesaler to sell the inventory and the effect of a sale on the credit provider’s rights in the sold inventory, and discussion of rights of each credit provider in proceeds of the inventory.

4.Purchase-money financing – alternative sources

Manufacturer needs to finance the acquisition of a new high-value robotic machine.

a)Does Manufacturer have available the options to obtain that financing from a (1) title-retaining seller, (2) financial lessor and (3) thirdparty secured lender?

b)What differences exist between the three alternative sources with respect to (1) the documentation and formalities and additional steps required for creation and perfection of the credit provider’s proprietary rights against Manufacturer and third parties; (2) the priority position of the credit provider’s rights vis-à-vis competing claimants (both prior and subsequent in time); (3) the remedies (judicial and ex- tra-judicial) available to each credit provider in the event of default by Manufacturer; and (4) the position of each credit provider in the event of commencement of an insolvency proceeding against Manufacturer.

5.Bona fide acquisition

A company that sells at wholesale both goods it manufactures and goods that it buys from other manufacturers has encumbered all of its present and after-acquired inventory and equipment (a floating security interest) in favor of a lender that has perfected its security rights, either by means

of a timely public filing/registration or by simple agreement if that is sufficient to produce third-party effectiveness. The company sells goods from its inventory in the ordinary course of its business to a retailer that buys at normal market price in the ordinary course of its business. Does it make any difference whether the retailer has knowledge of the existence of the lender’s perfected security right or could have obtained at least inquiry notice by checking the public registry? Having decided to upgrade its manufacturing capabilities, the company sells several of its used machines to a buyer that manufactures the same type of goods. That buyer makes its purchase in the ordinary course of its business for a normal market price for such used equipment. Does it make any difference whether that buyer has knowledge of the existence of the lender’s security right or could have obtained at least inquiry notice by checking the public registry? To determine whether the buyers take free of the lender’s security right, is the same rule applied to both buyers?

6.Possessory pledge – constructive or fictive possession

In any of cases 1-4, could the financier take a pledge over the encumbered assets under traditional pledge law by obtaining, in lieu of actual possession, the agreement of the party being financed that it holds the encumbered assets on behalf of the financier?

7.Over-security

Is there a doctrine of over-security and, if so, describe how and to whom it is applied.

8.Legal (non-consensual) rights of unpaid seller

Does an unpaid seller of goods that has neither retained title to nor been granted a security right in the sold goods have any legal rights in the sold goods? If so, describe such rights and their position vis-à-vis competing claimants and in the event of buyer’s insolvency.

9.Special property registries

Identify and describe the characteristics of any registries that deal only with particular categories of tangible property (e.g., ships, airplanes) and that are intended to record not only ownership but also security rights.

10.Non-possessory security rights in raw materials – effects of processing (commingling, attachment)

Same questions as case 4 except the debtor is Processor and the credit providers finance the acquisition of various elements of raw materials, each of which is separately acquired and financed. What are the rights of the credit providers in the several elements of raw materials and in the final product? Assume the facts involve a) raw materials whose separate existence disappears when the are commingled in the manufacturing process, and b) elements whose separate identity can be discerned although they are physically connected or attached to each other to create the finished product.

11. Cross-border issues

An item of equipment located in State A is made subject to a right (retained title, financial lease, non-possessory security interest). Assume, first, that that right has been perfected against third parties under the law of State A, and, second, that it has not been perfected. Six months later, the financed party moves the equipment into your country (State B). Indicate the requirements for perfection of such a right under the law of State B. Six months after the movement of the equipment into State B, two third parties (a new secured party and a seizing creditor) acquire and perfect (by doing whatever is required under the law of State B) their respective rights in the equipment. In priority litigation in a competent court in State B, will the initial secured party prevail over either or both of the later parties, and under which State’s law? Would it make any difference if the initial secured party had during the six months after the movement of the equipment into State B, perfected its right under the law of State B? If you are the counsel to the initial secured party, what advice would you give your client at the outset of the transaction with respect to the risk of movement of the equipment out of State A?