Secured Transactions
Assignment 2
Security and Foreclosure
1
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 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:
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?
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?
2. How does the secured creditor foreclose?
6
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 non-payment (3) of a debt.
8
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 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 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 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 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 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).
14
This is a security interest.
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 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 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 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 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).
19
This is a security interest
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 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 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 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 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 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).
25
Arguably a security interest.
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 for 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 non-payment (3) of a debt.
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.
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 non-payment (3) of a debt.
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.
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 non-payment (3) of a debt.
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.
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 non-payment (3) of a debt.
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.
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).
30
This is a security interest.
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 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 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 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 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 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 generates accounts, e.g.
credit cards
37
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 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 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 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 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 operates a business
owing
that 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
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 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 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 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 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 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 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
$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
52
Asset securitization
Sale of Accounts
Originator
$1 billion
Trust
(SPE)
$1.1 billion
Account
debtors
53
Asset securitization
Sale of Accounts
Originator
$1 billion
Trust
(SPE)
$1 billion
$1.1 billion
Account
debtors
Investment
certificates
(“securities”)
Investors
54
Asset securitization
Sale of Accounts
Originator
$1 billion
Trust
(SPE)
$1 billion
$1.1 billion
Account
debtors
Traunch 1
Traunch 2
Traunch 3
Traunch 4
Investors
55
Asset securitization
Sale of Accounts
Originator
$1 billion
Trust
(SPE)
$1 billion
$1.1 billion
Account
debtors
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 deal create a security interest?
“An interest in property contingent on the
non-payment of a debt.”
Investment
certificates
(“securities”)
Investors
57
Asset securitization
Sale of Accounts
Originator
Trust
(SPE)
$1 billion
$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
$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
$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
$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
$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
$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 billion
$1.1 billion
Account
debtors
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 billion
$1.1 billion
Account
debtors
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
Originator)
Underwrit
to care for
er who
or collect
markets
assetsIssu 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
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 $50,000 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 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 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 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 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 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
180.77
36
0
6,507.72
76
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
180.77
36
36
0
6,507.72
77
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
180.77
36
36
0
10
6,507.72
78
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
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 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 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 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 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 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 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 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 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 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
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 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 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 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 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 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 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 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 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 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 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 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 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 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 owns the home
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 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 owns the home
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 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 owns the home
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 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
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 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 owns the home
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 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
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 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
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% 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
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 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
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 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/foreclosure
D makes 30 years of $6,000
monthly payments to buy
Bank’s share of partnership
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% 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/foreclosure
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 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
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 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
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 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
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 foreclose114