Summary
What are (3) things to note regarding secured transactions and leases?
2.) if the original term of the lease is equal to, or greater than the remaining economic life of the goods, there is one indicator that the lease may actually be a secured transaction;
3.) the determination of whether a lease is actually a secured transaction is made on a case-by-case basis.
Article 9 does not apply to a true lease, but it WILL apply if...
the economic reality of the transaction is actually a secured transaction.
3.) the lessee has the option to renew their lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration. [I.E., the lessee would be crazy not to renew the lease until the goods are used up]; What is this?
Element 2: One of the outcomes that can be present to determine if a lease is a secured transaction.
What is a consignment?
a party (the consignor) has ownership of goods but gives possession of the goods to another party (the consignee) for the purpose of allowing the consignee to sell the goods.
The consignor must deliver goods to a _______ who deals in goods of the kind, for the ______ to sell;
merchant!
In order for a consignment to be subject to Article 9, what is required?
1.) the consignor must deliver goods to a merchant for the merchant to sell;
2.) the goods must not be consumer goods immediately before delivery;
3.) the merchant is not generally known by its creditors to be substantially engaged in the business of selling the goods of others.
What is the Bright-Line test to determine if a lease is a secured transaction?
1.) the lessee of the property is obligated to pay the FULL obligation under the lease, whether or not they terminate the lease early (contract may not be terminated early);
2.) one of the following outcomes is present (basically trying to determine whether the lessor gets anything meaningful back at the end of the lease term)
4.) the lessee has the option to become the owner of the goods for no or nominal additional consideration. [I.E., the lessee would be crazy not to buy the goods at the end of the lease term]. What is this?
Element 2: One of the outcomes that can be present to determine if a lease is a secured transaction.
What is the RISK with consignments?
a consignee's lenders may be misled into thinking that consignment inventory is actually owned by the consignee, rather than by the consignor.
*these rules were designed to deal with a regular store selling inventory that it did not buy, but it is selling for someone else.
the merchant is not generally known by its creditors to be substantially engaged in the business of selling the goods of others
i.e. if merchant is in the business we don't need financing statements to put parties on notice
*therefore, consignor must file a financing statement!
What is the bright-line test to determine if a lease is a secured transaction?
1.) the lessee is bound to renew the lease for the remaining economic life of the goods;
2.) the lessee has the option to become the owner of the goods for no/or nominal additional consideration;
3.) the lessee is obligated to pay the full obligation under the lease regardless of early termination.
Element 2: one of the following outcomes is present (basically trying to determine whether the lessor gets anything meaningful back at the end of the lease term) - what are the (4) outcomes?
1.) the original term of the lease is equal to, or greater than the remaining economic life of the goods. [I.E., the goods are used up during the lease term; nothing of value is going to the lessor];
2.) the lessee is bound to renew the lease for the remaining economic life of the goods. [I.E., the lessee is obligated to extend the lease until the goods are used up;] nothing of value is going back to the lessor;
3.) the lessee has the option to renew their lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration. [I.E., the lessee would be crazy not to renew the lease until the goods are used up];
4.) the lessee has the option to become the owner of the goods for no or nominal additional consideration. [I.E., the lessee would be crazy not to buy the goods at the end of the lease term].
If the Bright-Line test is NOT met: Courts will determine whether...
a "lease" is actually a secured transaction by looking at the facts of the case.
Re. the risk of consignments: Article 9 treats consignments that carry the risk (that a consignee's lenders may be misled into thinking that consigned inventory is actually owned by consignee, rather than by the consignor) as Article 9...
secured transactions in order to facilitate public notice!
the value of the goods must be at least...
$1,000 in each delivery.
Rule: Article 9 governs any transaction, regardless of form, that creates a...
security interest.
1.) the original term of the lease is equal to, or greater than the remaining economic life of the goods. [I.E., the goods are used up during the lease term; nothing of value is going to the lessor]; What is this?
Element 2: One of the outcomes present to determine if a lease is a secured transaction.
Tip: Ask yourself, "Does the lessor get something of value back at the end of the lease?" If the lessee uses up goods or keeps the goods at the end of the lease term, it is likely to be a...
Secured transaction!
the consignor is treated as the secured party and must...
perfect its security interest in the consigned inventory!
the goods must NOT be...
consumer goods immediately before delivery.
Article 9 does NOT apply to a...
true lease!
2.) the lessee is bound to renew the lease for the remaining economic life of the goods. [I.E., the lessee is obligated to extend the lease until the goods are used up;] nothing of value is going back to the lessor; What is this?
Element 2: One of the outcomes present to determine if a lease is a secured transaction.
Practice point: When in doubt, the lessor should file...
a financing statement!
Apply the rules applicable to a PMSI in inventory (i.e. consignor will have PMSI super-priority in consigned goods if consignor perfects by filing before consignee receives possession of the terms and consignor properly notifies any secured parties with conflicting security interests in consignee's...
inventory!
Tip: think of Article 9 consignments as...
BIG-TICKET consignments of inventory where the consignee (the one holding the goods for sale) could easily be mistaken as owning the collateral.