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Each year, millions of dollars worth of thoroughbred horses bolt from the starting gate, flash by the finish line, pose for the cameras, parade past the bidders, and do their best to propagate the species at stud farms and broodmare barns. There is a lot of money riding on those horses, not just at the track, but also at the bank, where a loan secured by equine collateral is supposed to be a sure thing, not a long shot. Up close, a horse may look like a good solid piece of collateral, but here is a tip: the Uniform Commercial Code (UCC) characterization of this kind of collateral is not so certain and can determine whether the lender's final position is win, place, or show. Some kinds of equine collateral may be goods in some circumstances and general intangibles in others; some may be different kinds of goods (equipment, inventory, farm products, livestock) in different circumstances; and some may be evidenced by or protected by certificates resembling instruments. The different types of collateral are subject to different perfection and priority rules.
Various types of transactions involve collateral consisting of horses and other equine interests. Financial institutions may make working capital loans to trainers, breeders, stud farms, racetracks, and other businesses. Sellers and third-party lenders finance purchases of specific horses, which may then be transferred to others. One of the frontrunners for the 2007 Kentucky Derby, for instance, was subject to a heated dispute between his owner and a bank claiming a lien on the horse (and its winnings) as collateral for an outstanding loan to the horse's prior owner.
A thoroughbred racehorse has two kinds of value-as a racing machine and, even more important, as a breeding machine. A thoroughbred horse must be the product of a live, physical mating between two thoroughbreds in order to take a place in the bloodlines and must be registered with the Jockey Club in order to take a place at the starting gate. The value of equine collateral may depend on proof that these conditions have been met, as a factual matter, and on the UCC characterization of the collateral, as a legal matter.
Why Does the Type of Collateral Matter?
Courts have wrestled with the question...