1 Secured Transactions Assignment 40 Why Secured Credit?

1

Secured TransactionsAssignment 40

Why Secured Credit?

2

The Puzzle of Secured Debt

3

The Puzzle of Secured DebtIs secured debt “efficient?” Do the gains from it’s existence

exceed the losses?

4

The Puzzle of Secured DebtIs secured debt “efficient?” Do the gains from it’s existence

exceed the losses?

1. Secured debt helps secured creditors collect more. Lowers interest rates.

5

The Puzzle of Secured DebtIs secured debt “efficient?” Do the gains from it’s existence

exceed the losses?

1. Secured debt helps secured creditors collect more. Lowers interest rates.

2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates.

6

The Puzzle of Secured DebtIs secured debt “efficient?” Do the gains from it’s existence

exceed the losses?

1. Secured debt helps secured creditors collect more. Lowers interest rates.

2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates.

Does secured credit do something good that lowers total system costs?

7

The Puzzle of Secured DebtIs secured debt “efficient?” Do the gains from it’s existence

exceed the losses?

1. Secured debt helps secured creditors collect more. Lowers interest rates.

2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates.

Does secured credit do something good that lowers total system costs? (It must, or secureds and unsecureds wouldn’t agree to it.)

8

The Puzzle of Secured DebtIs secured debt “efficient?” Do the gains from it’s existence

exceed the losses?

1. Secured debt helps secured creditors collect more. Lowers interest rates.

2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates.

Does secured credit do something good that lowers total system costs? (It must, or secureds and unsecureds wouldn’t agree to it.)

Monitoring

9

The Puzzle of Secured DebtIs secured debt “efficient?” Do the gains from it’s existence

exceed the losses?

1. Secured debt helps secured creditors collect more. Lowers interest rates.

2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates.

Does secured credit do something good that lowers total system costs? (It must, or secureds and unsecureds wouldn’t agree to it.)

Monitoring

Relieving secured party of need to monitor

10

The Puzzle of Secured DebtIs secured debt “efficient?” Do the gains from it’s existence

exceed the losses?

1. Secured debt helps secured creditors collect more. Lowers interest rates.

2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates.

Does secured credit do something good that lowers total system costs? (It must, or secureds and unsecureds wouldn’t agree to it.)

Monitoring

Relieving secured party of need to monitor

Does it do something bad that raises total system costs?

11

The Puzzle of Secured DebtIs secured debt “efficient?” Do the gains from it’s existence

exceed the losses?

1. Secured debt helps secured creditors collect more. Lowers interest rates.

2. But doesn’t that cause the unsecured creditors to collect less? Raises interest rates.

Does secured credit do something good that lowers total system costs? (It must, or secureds and unsecureds wouldn’t agree to it.)

Monitoring

Relieving secured party of need to monitor

Does it do something bad that raises total system costs?

Incentives to incur debt that will never be paid

18

Judgment Proofing Strategy: Secured Debt

Allassets

ProtectiveSI

This is a judgment-proof structure.

19

Judgment Proofing Strategy: Secured Debt

Allassets

ProtectiveSI

Lien

This is a judgment-proof structure. If someone obtains a lien . . . .

20

Judgment Proofing Strategy: Secured Debt

Allassets

ProtectiveSI

This is a judgment-proof structure. If someone obtains a lien and forecloses it . . . .

21

Judgment Proofing Strategy: Secured Debt

Allassets

ProtectiveSI

This is a judgment-proof structure. If someone obtains a lien and forecloses it, they don’t get anything.

22

Judgment Proofing Strategy: Secured Debt

Allassets

ProtectiveSI

This is a judgment-proof structure. If someone obtains a lien and forecloses it, they don’t get anything.

If the debtor is entitled to an exemption, the lien does not even attach and the creditor cannot force a sale.

Exemption

23

Judgment Proofing Strategy: Secured Debt

Allassets

ProtectiveSI

LienUnsecured debts, judgments, and liens can be a nuisance.

24

Judgment Proofing Strategy: Secured Debt

Before bankruptcy

Allassets

ProtectiveSI

Lien

A Chapter 11 bankruptcy wipes out the unsecured debt (without payment) . . . .

25

Judgment Proofing Strategy: Secured Debt

After bankruptcyBefore bankruptcy

Allassets

ProtectiveSI

Lien

A Chapter 11 bankruptcy wipes out the unsecured debt (without payment) and leaves the secured portion of the secured debt in place.

26

Judgment Proofing Strategy: Secured Debt

After bankruptcyBefore bankruptcy

Allassets

ProtectiveSI

Lien

A Chapter 11 bankruptcy wipes out the unsecured debt (without payment) and leaves the secured portion of the secured debt in place. What about the shareholders/managers?

27

Judgment Proofing Strategy: Secured Debt

After bankruptcyBefore bankruptcy

Allassets

ProtectiveSI

Lien

A Chapter 11 bankruptcy wipes out the unsecured debt (without payment) and leaves the secured portion of the secured debt in place. What about the shareholders/managers?

The shareholders can “buy” the business from the bankruptcy court by contributing “new value” to the corporation.

Newvalue

28

Judgment Proofing Strategy: Secured Debt

After bankruptcyBefore bankruptcy

Allassets

ProtectiveSI

Lien

A Chapter 11 bankruptcy wipes out the unsecured debt (without payment) and leaves the secured portion of the secured debt in place. What about the shareholders/managers?

The shareholders can “buy” the business from the bankruptcy court by contributing “new value” to the corporation.

The business can continue to operate.

29

Judgment Proofing Strategy: Secured Debt

After bankruptcyBefore bankruptcy

Allassets

ProtectiveSI

Lien

A Chapter 11 bankruptcy wipes out the unsecured debt (without payment) and leaves the secured portion of the secured debt in place. What about the shareholders/managers?

The shareholders can “buy” the business from the bankruptcy court by contributing “new value” to the corporation.

The business can continue to operate. And do it again!

Lien

30

Problem 40.1, page 664The “partnership:”

V

31

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

V

32

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests three dangerous products.

V

33

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

V

34

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

What is the expected value of this business?

V

35

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

What is the expected value of this business? $1 billion loss

V

36

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

What is the expected value of this business? $1 billion loss

V

What do you recommend to Harley?

37

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

What is the expected value of this business? $1 billion loss

ProductOne Inc.

ProductThree Inc.

ProductTwo Inc.

SteadyHand

Alvin

SteadyLending

Investors

V

38

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

What is the expected value of this business? $1 billion loss

ProductOne Inc.

ProductThree Inc.

ProductTwo Inc.

SteadyHand

Alvin

SteadyLending

InvestorsNow what is the total expected value of business?

V

39

Judgment Proofing Strategy: Parent Subsidiary

40

Assets Sub stock 0 Plant lease 0Total

Liabilities None 0Equity Total

Corporation

Judgment Proofing Strategy: Parent Subsidiary

41

Assets Sub stock 0 Plant lease 0Total 0

Liabilities None 0Equity 0Total 0

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Equity 0Total 100

Parent Corporation

Judgment Proofing Strategy: Parent Subsidiary

Subsidiary Corporation

42

Assets Sub stock 0 Plant lease 0Total 0

Liabilities None 0Equity 0Total 0

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Equity 0Total 100

Parent Corporation

Judgment Proofing Strategy: Parent Subsidiary

Subsidiary Corporation

Sub owns all group assets

43

Assets Sub stock 0 Plant lease 0Total 0

Liabilities None 0Equity 0Total 0

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Equity 0Total 100

Parent Corporation

Judgment Proofing Strategy: Parent Subsidiary

Owning Corporation

Sub owns all group assets

44

Assets Sub stock 0 Plant lease 0Total 0

Liabilities None 0Equity 0 Total 0

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Equity 0Total 100

Parent Corporation

Judgment Proofing Strategy: Parent Subsidiary

Owning Corporation

Sub owns all group assets

Sub owes preferred debts

45

Assets Sub stock 0 Plant lease 0Total 0

Liabilities None 0Equity 0Total 0

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Equity 0Total 100

Parent Corporation

Judgment Proofing Strategy: Parent Subsidiary

Owning Corporation

Sub owns all group assets

Sub owes preferred debts

Parent leases plant, conducts all business, employs all employees, incurs all liabilities

46

Assets Sub stock 0 Plant lease 0Total 0

Liabilities None 0Equity 0Total 0

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Equity 0Total 100

Operating Corporation

Judgment Proofing Strategy: Parent Subsidiary

Owning Corporation

Sub owns all group assets

Sub owes preferred debts

Parent leases plant, conducts all business, employs all employees, incurs all liabilities

47

Assets Sub stock 0 Plant lease 0Total 0

Liabilities None 0Equity 0Total 0

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Equity 0Total 100

Operating Corporation

Judgment Proofing Strategy: Parent Subsidiary

Owning Corporation

Sub owns all group assets

Sub owes preferred debts

Parent leases plant, conducts all business, employs all employees, incurs all liabilities

Tort creditor of Parent obtains judgment

48

Assets Sub stock 0 Plant lease 0Total 0

Liabilities Tort Cred 80Equity -80Total 0

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Equity 0Total 100

Operating Corporation

Judgment Proofing Strategy: Parent Subsidiary

Owning Corporation

Sub owns all group assets

Sub owes preferred debts

Parent leases plant, conducts all business, employs all employees, incurs all liabilities

Tort creditor of Parent obtains judgment

49

Assets Sub stock 0 Plant lease 0Total 0

Liabilities Tort Cred 80Equity -80Total 0

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Equity 0Total 100

Operating Corporation

Judgment Proofing Strategy: Parent Subsidiary

Owning Corporation

Sub owns all group assets

Sub owes preferred debts

Parent leases plant, conducts all business, employs all employees, incurs all liabilities

Tort creditor of Parent obtains judgment

Forecloses on stock

50

Assets Sub stock 0 Plant lease 0Total 0

Liabilities Tort Cred 80Equity -80Total 0

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Equity 0Total 100

Operating Corporation

Judgment Proofing Strategy: Parent Subsidiary

Owning Corporation

Sub owns all group assets

Sub owes preferred debts

Parent leases plant, conducts all business, employs all employees, incurs all liabilities

Tort creditor of Parent obtains judgment

Forecloses on stock

51

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Tort EquityTotal 100

Judgment Proofing Strategy: Parent Subsidiary

Owning Corporation

Sub owns all group assets

Sub owes preferred debts

Parent leases plant, conducts all business, employs all employees, incurs all liabilities

Tort creditor of Parent obtains judgment

Forecloses on stock

52

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Tort EquityTotal 100

Judgment Proofing Strategy: Parent Subsidiary

Owning Corporation

Sub owns all group assets

Sub owes preferred debts

Parent leases plant, conducts all business, employs all employees, incurs all liabilities

Tort creditor of Parent obtains judgment

Forecloses on stock

Liquidates Subsidiary Corp.

53

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Tort Equity Total 100

Judgment Proofing Strategy: Parent Subsidiary

Owning Corporation

Sub owns all group assets

Sub owes preferred debts

Parent leases plant, conducts all business, employs all employees, incurs all liabilities

Tort creditor of Parent obtains judgment

Forecloses on stock

Liquidates Subsidiary Corp.

Recovers zero

54

Assets Plant 60 Accounts 40Total 100

Liabilities Bank 100Tort Equity Total 100

Judgment Proofing Strategy: Parent Subsidiary

Owning Corporation

Sub owns all group assets

Sub owes preferred debts

Parent leases plant, conducts all business, employs all employees, incurs all liabilities

Tort creditor of Parent obtains judgment

Forecloses on stock

Liquidates Subsidiary Corp.

Recovers zero

Owning Corporation accomplishes the same thing as a security interest in favor of the bank – but cheaper.

55

Problem 40.1The “partnership:”

V

56

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

V

57

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests IP for three dangerous products.

V

58

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

V

59

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

What is the expected value of this business?

V

60

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

What is the expected value of this business? $1 billion loss

V

61

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

What is the expected value of this business? $1 billion loss

V

What do you recommend to Harley?

62

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

What is the expected value of this business? $1 billion loss

ProductOne Inc.

ProductThree Inc.

ProductTwo Inc.

SteadyHand

Alvin

SteadyLending

Investors

V

63

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

What is the expected value of this business? $1 billion loss

ProductOne Inc.

ProductThree Inc.

ProductTwo Inc.

SteadyHand

Alvin

SteadyLending

InvestorsNow what is the total expected value of business?

V

64

Problem 40.1The “partnership:”

Steady Hand invests $4 million in return for (1) repayment with 15% interest and (2) half the profits

Alvin invests IP for three dangerous products. Two will each make $1 billion, the third will generate $3 billion in liabilities.

What is the expected value of this business? $1 billion loss

ProductOne Inc.

ProductThree Inc.

ProductTwo Inc.

SteadyHand

Alvin

SteadyLending

InvestorsNow what is the total expected value of business?

$2 billion less up to

1/3 of $4 million

V

65

Problem 40.1

ProductOne

Mfg Inc.

SteadyHand

Alvin

SteadyLending

Investors

ProductOne

Mkt Inc.

ProductTwo

Mkt Inc.

ProductTwo

Mfg Inc.

ProductThree

Mkt Inc.

ProductThree

Mfg Inc.

V

66

Problem 40.1

ProductOne

Mfg Inc.

SteadyHand

Alvin

SteadyLending

Investors

ProductOne

Mkt Inc.

ProductTwo

Mkt Inc.

ProductTwo

Mfg Inc.

ProductThree

Mkt Inc.

ProductThree

Mfg Inc.

V

Now what is the total expected value of business?

67

Problem 40.1

ProductOne

Mfg Inc.

SteadyHand

Alvin

SteadyLending

Investors

ProductOne

Mkt Inc.

ProductTwo

Mkt Inc.

ProductTwo

Mfg Inc.

ProductThree

Mkt Inc.

ProductThree

Mfg Inc.

V

Now what is the total expected value of business?

$2.5 billion, less up to 1/6 of $4 million

68

Problem 40.1

ProductOne

Mfg Inc.

SteadyHand

Alvin

SteadyLending

Investors

ProductOne

Mkt Inc.

ProductTwo

Mkt Inc.

ProductTwo

Mfg Inc.

ProductThree

Mkt Inc.

ProductThree

Mfg Inc.

V

We can make these companies public companies without changing Alvin’s or Steady’s return

69

Problem 40.1

ProductOne

Mfg Inc.

Investors Alvin

SteadyLending

Investors

ProductOne

Mkt Inc.

ProductTwo

Mkt Inc.

ProductTwo

Mfg Inc.

ProductThree

Mfg Inc.

Contint’lMagna-tech, Inc

SteadyUnderwriters

V

We can make these companies public companies without changing Alvin’s or Steady’s return

70

Problem 40.1

ProductOne

Mfg Inc.

Investors Alvin

SteadyLending

Investors

ProductOne

Mkt Inc.

ProductTwo

Mkt Inc.

ProductTwo

Mfg Inc.

ProductThree

Mfg Inc.

Contint’lMagna-tech, Inc

SteadyUnderwriters

V

We can make these companies public companies without changing Alvin’s or Steady’s return

Now veil piercing is impossible.

71

Problem 40.2

ProductOne

Mfg Inc.

Investors Alvin

SteadyLending

Investors

ProductOne

Mkt Inc.

ProductTwo

Mkt Inc.

ProductTwo

Mfg Inc.

ProductThree

Mfg Inc.

Contint’lMagna-tech, Inc

SteadyUnderwriters

Cash PlantIP rights

Steady Lending (SI)Trade creditorsPerson injury claims

Continental Magnatech

V

72

Problem 40.2

ProductOne

Mfg Inc.

Investors Alvin

SteadyLending

Investors

ProductOne

Mkt Inc.

ProductTwo

Mkt Inc.

ProductTwo

Mfg Inc.

ProductThree

Mfg Inc.

Contint’lMagna-tech, Inc

SteadyUnderwriters

Cash PlantIP rights

Steady Lending (SI)Trade creditorsPerson injury claims

Continental Magnatech

V

You represent Alicia Card, tort victim. What do you do?

Alicia

73

Problem 40.3Our law firm is an unsecured creditor of Sigment, $40K

74

Problem 40.3Our law firm is an unsecured creditor of Sigment, $40K

Portage State Bank files a financing statement against Sigmet covering “equipment, inventory, accounts receivable”

75

Problem 40.3Our law firm is an unsecured creditor of Sigment, $40K

Portage State Bank files a financing statement against Sigmet covering “equipment, inventory, accounts receivable”

Where do we stand?

76

Problem 40.3Our law firm is an unsecured creditor of Sigment, $40K

Portage State Bank files a financing statement against Sigmet covering “equipment, inventory, accounts receivable”

Where do we stand?

What should we do?

77

Problem 40.3Our law firm is an unsecured creditor of Sigment, $40K

Portage State Bank files a financing statement against Sigmet covering “equipment, inventory, accounts receivable”

Where do we stand?

What should we do?

Should we be doing UCC searches to monitor all of our clients?

78

Problem 40.4National Secured Credit Review Commission asks what

should be done about Article 9 security interests.

a. Keep Article 9 as is.

b. Nationalize Article 9. Give tort creditors and small wage claims priority over secured creditors

c. Nationalize Article 9. “Carve-out” 20% of the collateral for unsecured creditors

d. Adopt b. through uniform state law

e. Adopt c. through uniform state law

79

Problem 40.4National Secured Credit Review Commission asks what

should be done about Article 9 security interests.

a. Keep Article 9 as is.

b. Nationalize Article 9. Give tort creditors and small wage claims priority over secured creditors

c. Nationalize Article 9. “Carve-out” 20% of the collateral for unsecured creditors

d. Adopt b. through uniform state law

e. Adopt c. through uniform state law

80

Problem 40.4National Secured Credit Review Commission asks what

should be done about Article 9 security interests.

a. Keep Article 9 as is.

b. Nationalize Article 9. Give tort creditors and small wage claims priority over secured creditors

c. Nationalize Article 9. “Carve-out” 20% of the collateral for unsecured creditors

d. Adopt b. through uniform state law

e. Adopt c. through uniform state law

81

Problem 40.4National Secured Credit Review Commission asks what

should be done about Article 9 security interests.

a. Keep Article 9 as is.

b. Nationalize Article 9. Give tort creditors and small wage claims priority over secured creditors

c. Nationalize Article 9. “Carve-out” 20% of the collateral for unsecured creditors

d. Adopt b. through uniform state law

e. Adopt c. through uniform state law

82

Problem 40.4National Secured Credit Review Commission asks what

should be done about Article 9 security interests.

a. Keep Article 9 as is.

b. Nationalize Article 9. Give tort creditors and small wage claims priority over secured creditors

c. Nationalize Article 9. “Carve-out” 20% of the collateral for unsecured creditors

d. Adopt b. through uniform state law

e. Adopt c. through uniform state law

83

Problem 40.4National Secured Credit Review Commission asks what

should be done about Article 9 security interests.

a. Keep Article 9 as is.

b. Nationalize Article 9. Give tort creditors and small wage claims priority over secured creditors

c. Nationalize Article 9. “Carve-out” 20% of the collateral for unsecured creditors

d. Adopt b. through uniform state law

e. Adopt c. through uniform state law

84

LoPucki on Secured Credit

85

LoPucki on Secured CreditSystem gives secured parties certainty by making others

uncertain

86

LoPucki on Secured CreditSystem gives secured parties certainty by making others

uncertain

1. Unsecureds don’t know what they can collect. (Carol Dearing problems).

87

LoPucki on Secured CreditSystem gives secured parties certainty by making others

uncertain

1. Unsecureds don’t know what they can collect. (Carol Dearing problems).

2. Even at the Mall, buyers are not safe. (Alica Card problems.)

88

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

89

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller

“An agreement between A and B that C get nothing”

90

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller

“An agreement between A and B that C get nothing”

2. System rewards security agreements, filing, and searching

91

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller

“An agreement between A and B that C get nothing”

2. System rewards security agreements, filing, and searching

Most Americans don’t know these things exist.

92

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller

“An agreement between A and B that C get nothing”

2. System rewards security agreements, filing, and searching

Most Americans don’t know these things exist.

3. Byzantine filing system favors repeat users

93

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller

“An agreement between A and B that C get nothing”

2. System rewards security agreements, filing, and searching

Most Americans don’t know these things exist.

3. Byzantine filing system favors repeat users

Thousands of offices

94

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller

“An agreement between A and B that C get nothing”

2. System rewards security agreements, filing, and searching

Most Americans don’t know these things exist.

3. Byzantine filing system favors repeat users

Thousands of offices

Refined legal distinctions control place of filing

95

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller

“An agreement between A and B that C get nothing”

2. System rewards security agreements, filing, and searching

Most Americans don’t know these things exist.

3. Byzantine filing system favors repeat users

Thousands of offices

Refined legal distinctions control place of filing

Information costs money – on Web most people won’t pay

96

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

1. Security makes the secured party and debtor better off, at the expense of unsecured party, buyer, or seller

“An agreement between A and B that C get nothing”

2. System rewards security agreements, filing, and searching

Most Americans don’t know these things exist.

3. Byzantine filing system favors repeat users

Thousands of offices

Refined legal distinctions control place of filing

Information costs money – on Web most people won’t pay

Technical rules that invalidate 13% to 30% of all filings.

97

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

98

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

4. Threatens to destroy the liability system

99

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

4. Threatens to destroy the liability system

Respondeat superior: liability reaches those in control

Corporation(Assets)

Employee Tort victim

Control

Tort

Respondeat superior

100

Control

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

4. Threatens to destroy the liability system

Respondeat superior: liability reaches those in control

Security: Puts the value beyond reach of creditors

Corporation(Assets)

Employee Tort victimTort

Secured party(Value)

No respondeat superior

101

Control

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

4. Threatens to destroy the liability system

Respondeat superior: liability reaches those in control

Security: Puts the value beyond reach of creditors

Corporation(Assets)

Employee Tort victimTort

Secured party(Value)

No respondeat superior

Moral of the story:

1. Be secured

102

Control

LoPucki on Secured CreditFavors the powerful/knowledgeable over the weak/ignorant

4. Threatens to destroy the liability system

Respondeat superior: liability reaches those in control

Security: Puts the value beyond reach of creditors

Corporation(Assets)

Employee Tort victimTort

Secured party(Value)

No respondeat superior

Moral of the story:

1. Be secured

2. Don’t take a second

McCall on Secured Credit

It's Just Secured Credit: A Natural Law Case in Support of Some Forms of Secured Credit, 43 Indiana Law Review 7 (2010)

103

McCall on Secured Credit

It's Just Secured Credit: A Natural Law Case in Support of Some Forms of Secured Credit, 43 Indiana Law Review 7 (2010)

Lopucki’s criticisms are accurate but

104

McCall on Secured Credit

It's Just Secured Credit: A Natural Law Case in Support of Some Forms of Secured Credit, 43 Indiana Law Review 7 (2010)

Lopucki’s criticisms are accurate but

Harris and Mooney’s argumetn about property rights is irrefutable.

105

McCall on Secured Credit

It's Just Secured Credit: A Natural Law Case in Support of Some Forms of Secured Credit, 43 Indiana Law Review 7 (2010)

• The problem is not with secured credit but with consumer credit combined with secured credit and with the type of obligations secured in business finance. In short, the problem is with our theory of credit generally.

106