Commercial Finance: A Transactional Approach (University Casebook Series)

600 Pages·2017·3.968 MB·English

by  Ronald Mann

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EDITORIAL BOARD
ROBERT C. CLARK
DIRECTING EDITOR
Distinguished Service Professor and Austin Wakeman Scott
Professor of Law and Former Dean of the Law School
Harvard University
DANIEL A. FARBER
Sho Sato Professor of Law and Director, Environmental Law Program
University of California at Berkeley
HEATHER K. GERKEN
J. Skelly Wright Professor of Law
Yale University
SAMUEL ISSACHAROFF
Bonnie and Richard Reiss Professor of Constitutional Law
New York University
HERMA HILL KAY
Barbara Nachtrieb Armstrong Professor of Law and
Former Dean of the School of Law
University of California at Berkeley
HAROLD HONGJU KOH
Sterling Professor of International Law and
Former Dean of the Law School
Yale University
SAUL LEVMORE
William B. Graham Distinguished Service Professor of Law and
Former Dean of the Law School
University of Chicago
THOMAS W. MERRILL
Charles Evans Hughes Professor of Law
Columbia University
ROBERT L. RABIN
A. Calder Mackay Professor of Law
Stanford University
CAROL M. ROSE
Gordon Bradford Tweedy Professor Emeritus of Law and Organization and
Professional Lecturer in Law
Yale University
Lohse Chair in Water and Natural Resources
University of Arizona
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UNIVERSITY CASEBOOK SERIES
®
C
OMMERCIAL
F
INANCE
A TRANSACTIONAL APPROACH
RONALD J. MANN
Albert E. Cinelli Enterprise Professor of Law,
Co-Director, Charles E. Gerber Transactional Studies Program
Columbia Law School
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The publisher is not engaged in rendering legal or other professional advice, and this publication is not a
substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services
of a competent attorney or other professional.
University Casebook Series is a trademark registered in the U.S. Patent and Trademark Office.
© 2017 LEG, Inc. d/b/a West Academic
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Printed in the United States of America
ISBN: 978-1-68328-335-5
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For Allison, my inspiration
R.J.M.
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PREFACE
This is a book inspired by a committee meeting. If you are like me, you will
find that remarkable. I have found the overwhelming majority of time spent at
law-faculty committee meetings to be wholly unproductive. But this particular
meeting struck a nerve.
Most of the graduates of the school at which I teach go on to careers at large
law firms practicing some type of business, corporate, or commercial law, broadly
defined. Yet at our school, as at all of the schools at which I teach, enrollment in
commercial law courses has declined steadily from the time a generation ago (my
time as a student) when those courses filled the largest lecture halls available. The
purpose of this committee (and of this particular meeting) was to explore some of
the reasons why students have been choosing less and less to take these courses.
Remarkably, the sense of the committee was that the fault lay not with the
students, nor even with the law firms where they would go to work or the
universities that sent them to us or even with their parents. Rather, we were told,
the fault was ours: it was our fault for teaching commercial-law courses that were
increasingly out of touch with what our students needed to do to succeed in
practice.
As it happened, the concerns about the outdated commercial-law curriculum
resonated with me. I had for most of my career taught a course in Secured Credit,
a subject directly related to my time as a practicing lawyer and also one on which
I had written my most important scholarship. But my practice experience and the
scholarship I had written overlapped rarely if ever with what I taught; as the years
went by I had found myself disinterested in an ever larger share of the material
available in the various casebooks that I tried. Enlightened by our committee’s
discussion, I decided that the problem was with the Secured Credit course itself.
As traditionally taught, the course on Secured Credit was a course tied to
Article 9 of the Uniform Commercial Code. The statute always has been attractive
to academics, at least in part because of the elegance and conceptual advances of
its original formulation by Grant Gilmour. Thus, it was taught for several decades
as a statutory construction course, centered on the interplay among the text of the
statute itself, the detailed official comments, and the ever-developing body of case
law applying it.
For a variety of reasons, that course has become less successful in the law
school curricula of this century, as evidenced by the persistent decline in
enrollments mentioned above. For one thing, the 1999 revisions have made the
statute much more technical. The closed-end drafting of the modern statute is
much more like the Internal Revenue Code than the statute that Grant Gilmour
drafted and is accordingly much less useful for teaching “grand” methods of
statutory interpretation.
A second problem is that over the years a course bounded by Article 9 has
become an increasingly poor match for the likely practice paths of our students.
Two distinct issues are apparent. First, a substantial part of Article 9 involves
rules that apply almost entirely to loans to individuals. Those transactions,
however, rarely are the focus of the finance practice of law firms, centered on loans
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to businesses. The difficult problem of defining the name of an individual for
purposes of filing is a good example of a challenging problem in Article 9 that has
a vanishingly small relevance to the overwhelming majority of lawyers, even
among those focused on finance. The second problem is the exclusion of real estate.
Article 9’s coverage is limited to personal property; security interests in realty are
governed by the law of mortgages. But a large share of commercial lending
transactions involve interests in both personal property and real property; a legal
education that covers one but not the other leaves even the best students ill-
prepared for even the most pedestrian commercial lending practice. If we want to
look for a reason for declining enrollment, irrelevance of coverage is a good place
to start.
A third problem relates to the steady shift in the pedagogical focus of the
modern law school. The emphasis on experiential learning in the last decade
reflects the weakness of a purely doctrinal legal education. That is particularly
problematic for transactional lawyers, for whom the reactive analysis of the
litigation potential of a given fact pattern has always been a poor model of the
proactive practice of transactional design. Transactional lawyers need a course
that builds on a foundation of the documents used to implement the relevant
transactions, illustrating the role of law as an instrument for constraining and
influencing those documents.
Those concerns drove me to design a new course, which I now have been
teaching for several years. Within the curriculum, the idea is that the course is
parallel to the common and successful course on corporate finance, covering all of
the topics of importance for a lawyer raising money for (or lending money to) a
business outside of the capital markets that are the focus of the corporate finance
curriculum.
Starting from the baseline of the Article 9 courses I had taught in one format
or another for many years, that premise led me to shift the coverage of the course
in several distinct ways. The most obvious is that I omitted all of the topics
primarily relevant to transactions with individuals and substituted parallel
materials on real-estate lending for the remaining topics. The need to provide
parallel discussion of the rules for personal property and realty has the salient
advantage of facilitating a conceptual discussion of how lending transactions are
designed and constrained: although the legal rules for the two areas have different
sources and often use different terminologies and categories, they work for the
most part in quite similar ways.
The second major shift, reflecting the focus of the course on preparing lawyers
for a transactional practice, is the integration into the materials of a simple set of
loan documents. The materials include two simple promissory notes, a guaranty,
security agreement, mortgage, and inter-creditor agreement, the provisions of
which are used to show how transactions in fact react to the constraints and
opportunities that arise from the operative legal rules.
Third, the transactional focus forced the addition of two introductory chapters
on the basic framework of lending transactions. To put the idea of a “secured”
transaction in context, it is useful to provide a baseline introduction to the legal
rules and documentation that are used to create simple unsecured transactions.
Like the integration of the real-estate materials, the inclusion of those chapters
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also supports some conceptual sessions on the structure of lending transactions,
because they afford a comparative discussion of guaranties, letters of credit, and
collateral as parallel mechanisms for credit enhancement.
I also have tried over the last few years to integrate some updated pedagogical
practices so that students can get a more nearly real-time assessment of their
progress. To that end, I’ve been disseminating multiple-choice questions
electronically at the end of each assignment; when students have difficulty with
them, it alerts them (and me) to areas of uncertainty in the classroom. For the
published edition, I’m making 200 of those questions available online for
purchasers of the text.
I hope that you enjoy teaching and learning from these materials as much as
I have enjoyed the process of creating them.
RONALD J. MANN
February 2017
New York, New York
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SUMMARY OF CONTENTS
PREFACE ................................................................................................................ vi
TABLE OF CASES ................................................................................................ xiv
CHAPTER 1. NOTES ................................................................................................. 1
Assignment One: Interest Rates ........................................................................... 1
Assignment Two: Usury ........................................................................................ 5
Assignment Three: Late Payment and Prepayment .......................................... 19
CHAPTER 2. CREDIT ENHANCEMENT ..................................................................... 31
Assignment Four: Credit Enhancement by Guaranty ....................................... 31
Assignment Five: Protections for Guarantors .................................................... 40
Assignment Six: The Concept of Collateral ........................................................ 66
CHAPTER 3. Creation of Liens .............................................................................. 88
Assignment Seven: Formalities of Creation ....................................................... 88
Assignment Eight: Formalities of Perfection ................................................... 111
Assignment Nine: The Basics of Priority ......................................................... 127
Assignment Ten: Lending Against Copyrights ................................................ 135
Assignment Eleven: Lending Against Patents ................................................. 152
Assignment Twelve: Exceptions and Additions to the Filing Requirement ... 166
CHAPTER 4. Maintaining Perfection .................................................................. 184
Assignment Thirteen: Sales of Realty .............................................................. 184
Assignment Fourteen: Sales of Personalty ....................................................... 186
Assignment Fifteen: Proceeds ........................................................................... 193
CHAPTER 5. REMEDIES ........................................................................................ 204
Assignment Sixteen: The Basic Remedies........................................................ 204
Assignment Seventeen: The Effect of Foreclosure ........................................... 226
CHAPTER 6. PRIORITY ......................................................................................... 249
Assignment Eighteen: Priority Among Secured Creditors .............................. 249
Assignment Nineteen: Involuntary Liens ........................................................ 277
Assignment Twenty: Purchase-Money Lenders ............................................... 311
Assignment Twenty-One: Fixtures ................................................................... 321
Documentary and Statutory Appendix ................................................................ 335
I. Form Documents ............................................................................................ 335
II. Miscellaneous Federal Statutes ................................................................... 419
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III. Restatement Provisions .............................................................................. 421
INDEX ................................................................................................................... 570

Table of Contents
PREFACE ................................................................................................................ vi
TABLE OF CASES ................................................................................................ xiv
CHAPTER 1. NOTES ................................................................................................. 1
Assignment One: Interest Rates ........................................................................... 1
A. Promissory Notes ......................................................................................... 1
B. Determining the Amount of Compensation ................................................ 1
C. Problem Set 1 ............................................................................................... 4
Assignment Two: Usury ........................................................................................ 5
A. The Basic Concept ....................................................................................... 5
B. Typical Usury Problems .............................................................................. 5
C. Exemptions from Usury Statutes ............................................................. 12
D. Problem Set 2 ............................................................................................. 18
Assignment Three: Late Payment and Prepayment .......................................... 19
A. Late Payment ............................................................................................. 19
B. Prepayment ................................................................................................ 21
C. Problem Set 3 ............................................................................................. 29
CHAPTER 2. CREDIT ENHANCEMENT ..................................................................... 31
Assignment Four: Credit Enhancement by Guaranty ....................................... 31
A. The Role of Guaranties .............................................................................. 31
B. Rights of the Creditor Against the Guarantor ......................................... 33
C. Problem Set 4 ............................................................................................. 39
Assignment Five: Protections for Guarantors .................................................... 40
A. Rights of the Guarantor Against the Principal ........................................ 40
B. Rights of the Guarantor Against the Creditor ......................................... 54
C. Problem Set 5 ............................................................................................. 64
Assignment Six: The Concept of Collateral ........................................................ 66
A. What Is a Security Interest? ..................................................................... 66
B. Why Take a Security Interest?.................................................................. 68
C. What Law Governs Security Interests? .................................................... 70