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A. Creation and Extinction of Secured Interests: Cases 155–170a

Chapter 6: Secured Interests

a. Pignus tacitum (“silent pledge”)
Cases 155–158

b. General Hypothecs and Pledges of Entire Property
Cases 159a–159b

c. Res aliena pignori data
Cases 160–161
Case 161a

d. Consensual Termination of a Security Interest
Cases 162–165
Cases 166–167
Cases 168–169

g. Loss of Secured Property
Cases 170–170a

Cases 155–158. At common law, a landlord had a privilege to “distrain” (i.e., seize without court authorization and hold) a tenant’s personal property on the landlord’s premises in satisfaction of a claim of unpaid rent or as a pledge for its payment, but not for other purposes, such as damage to the property.  In most jurisdictions today the right and manner of “distress” as well as articles exempted therefrom are now regulated by statute.  See, e.g., 68 P.S. § 250.402 (2004) (“All wearing apparel of the tenant and his family, all Bibles and school books in use in the tenant’s family, all sewing machines and other tools of trade used and owned by private families, and all uniforms, arms, ammunition and accoutrements of any commissioned officer or enlisted personnel of the National Guard or of the armed forces of the United States, shall be exempt from levy and sale on any landlord’s warrant. Nothing contained in this section shall be construed to exempt sewing machines kept for sale or hire.”).  Distress statutes usually distinguish between a landlord’s remedies in residential as opposed to commercial real estate.

Discussion Question:
  1. What are the specific rules in your jurisdiction?
  2. How do they differ in effect from the Roman rules?

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Cases 159a–159b. With regard to movables, these cases demonstrate that the ostensible comprehensiveness of the general hypothec is limited in practice to movables within the intention of the parties or to items of a commercial nature. Cf. UCC § 9-204 (2011):

  1. [After-acquired collateral.] Except as otherwise provided in subsection (b), a security agreement may create or provide for a security interest in after-acquired collateral.

  2. [When after-acquired property clause not effective.] A security interest does not attach under a term constituting an after-acquired property clause to:
    1. consumer goods, other than an accession when given as additional security, unless the debtor acquires rights in them within 10 days after the secured party gives value; or

“Consumer goods” are defined at UCC § 9–102 (24) as: “goods that are used or bought for use primarily for personal, family, or household purposes.”

Discussion Question:
  1. How do the UCC provisions regarding “after-acquired property” compare in effect with the Roman rules regarding a general hypothec of future goods?

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Cases 160–161. Cf. UCC §9–203 (2011) (b): “Except as otherwise provided . . ., a security interest is enforceable against the debtor and third parties with respect to the collateral only if : . . . (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party.”

Discussion Question:
  1. Why are these cases not governed by the principle of nemo plus iuris transferre potest quam ipse habet (“No one can transfer more right than he himself has”)? 

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Case 161a.  Moving beyond the facts of this case to the more general issue of debtor fraud, a formerly common method of defrauding secured creditors involved “bulk sales” by merchants of goods encumbered with a security interest.  The secured creditor had no recourse against the good faith purchaser of an entire inventory of goods, and the defaulting debtor had typically absconded with the loan proceeds.  This abuse was addressed initially by bulk sales statutes and later by Article 6 of the UCC.  Changes in the legal context led to the partial repeal and rewriting of Article 6 in 1989, as explained by the National Conference of Commissioners of Uniform State Laws (UCC-TEXT ART. 6 COMMISSIONERS (2011)):

In the legal context in which Article 6 (1987 Official Text) and its nonuniform predecessors were enacted, the benefits to creditors appeared to justify the costs of interfering with good faith transactions. Today, however, creditors are better able than ever to make informed decisions about whether to extend credit. Changes in technology have enabled credit reporting services to provide fast, accurate, and more complete credit histories at relatively little cost. A search of the public real estate and personal property records will disclose most encumbrances on a debtor's property with little inconvenience.

In addition, changes in the law now afford creditors greater opportunities to collect their debts. The development of “minimum contacts” with the forum state as a basis for in personam jurisdiction and the universal promulgation of state long-arm statutes and rules have greatly improved the possibility of obtaining personal jurisdiction over a debtor who flees to another state. Widespread enactment of the Uniform Enforcement of Foreign Judgments Act has facilitated nation-wide collection of judgments.

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Cases 162–165. Regarding the permissible use or disposal of the secured property by the secured debtor, cf.

UCC §9-205 (2011) Use or Disposition of Collateral Permissible

  1. [When security interest not invalid or fraudulent.] A security interest is not invalid or fraudulent against creditors solely because:
    1. the debtor has the right or ability to:
      1. use, commingle, or dispose of all or part of the collateral, including returned or repossessed goods;
      2. collect, compromise, enforce, or otherwise deal with collateral;
      3. accept the return of collateral or make repossessions; or
      4. use, commingle, or dispose of proceeds; or
    2. the secured party fails to require the debtor to account for proceeds or replace collateral.

and UCC §9–201(a): “Except as otherwise provided in [the Uniform Commercial Code], a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors.”

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Cases 166–167.  Cf. UCC § 9–610 (2011):

  1. [Disposition after default.] After default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing.

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Cases 168–169. Cf. UCC § 9–610 (2011) (b)–(c):

  1. [Commercially reasonable disposition.] Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. If commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms.

  2. [Purchase by secured party.] A secured party may purchase collateral:
    1. at a public disposition; or
    2. at a private disposition only if the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations.

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Cases 170–170a. The facts of these cases implicate the doctrines of “accession” and “transformation.”  Cf. Cases 105–109 and 120.

Discussion Question:
  1. Under the facts of Cases 159a–170a, would the same results ensue at common law and under the UCC?

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Chapter 6: Introduction | A. Cases 155–170a
B. Cases 171–185

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