Bankruptcy

Help Me Decide -- Is a "Replacement" New Collateral

By Bob Lawless

This semester, I have been teaching secured credit from Lynn LoPucki and Elizabeth Warren's wonderful textbook. One of the problems from the book was, I believe, inspired by my former colleague at UNLV and current bankruptcy judge, Bruce Markell, who requires his students to draft a security agreement taking a security interest in an object he brought to class. A student's agreement has presented an interpretive issue with the problem, and I told him I would get the input of our readership on Credit Slips. One thing the assignment allowed me to do is to talk about boilerplate. There is nothing necessarily wrong with boilerplate, but we should understand what it is doing when we use it.

The object I brought to class was a baseball signed by the great Lou Brock, a Hall of Fame outfielder for the St. Louis Cardinals. The instructions specifically state that the students are to draft a security agreement taking a security interest in this object--the baseball--and nothing else. If the students comply with the instructions, they get a pass on the assignment, and if not, they get a fail. As Markell always said to me--in the real world there is no such thing as a security agreement that is almost valid.

The student's security agreement took a security interest in all ?Property described in this agreement? and defined "property" as the baseball and "all parts, accessories, repairs, replacements, improvements, and accessions to the property; any original evidence of title or ownership; and all obligations that support the payment or performance of the Property." The student has persuaded me that most of this clause does not raise any practical possibility that he would get a security interest in something other than the baseball. For example, what would be an "accession" to the baseball? I'm willing to buy that, but the word "replacements" bothers me. Suppose I lose this baseball and buy a new baseball signed by Lou Brock. That would arguably be a "replacement" and thereby extra collateral that violates the instructions of the assignment.

Does my student get a "pass" on this assignment?

Full post as published by Credit Slips on September 30, 2009 (boomark / email).