chapter 30 - secured transactions

secured transaction

any transaction in which the payment of a debt is guaranteed or secured by any personal property owned by the debtor in which the debtor has a legal interest

article 9 governs

secured transaction in personal property, which includes:

1. accounts

2. agricultural liens

3. chattel paper (documents evidencing a debt secured by personal property)

4. commercial assignments of $1,000 or more

5. negotiable instruments

6. other intangible property(such as patents)

UCC terminology for secured transactions

1. secured party - a creditor(lender, seller, or any other person) in whose favor there is a security interest in the debtor’s collateral

2. debtor - any party who owes payment or performance of a secured obligation

3. security interest - any interest in collateral - “in personal property or fixtures which secures payment or performance of an obligation”

4. security agreement - an agreement that creates or provides for a security interest between the debtor and a secured party

5. collateral - the property subject to a security interest

6. financing statement - a document prepared by a secured creditor and filed with the appropriate government official to give notice to the public that the creditor claims an interest in collateral belonging to the debtor named in the statement

secured transactions

in a security agreement, a debtor and a creditor agree that the creditor will have a security interest in collateral in which the debtor as rights

• in essence the collateral secures the loan and ensures the creditor of payment should the debtor default

debtors concerns

creditor has 2 main concerns if the debtor defaults

1. possession: can the debt be satisified through the psosessoin and usually sale of the collateral ?

2. priority: will the creditor have priority over any other creditors or buyers who may have rights in the same collateral

2 concerns are met thru creation and perfection of a security interest

basic requirements (creation of a security interest)

creation: to become a secured party the creditor must obtain a securiry interst in the collateral of the debtor

three requirements for a creditor to have an enforceable security interst

1. unless the creditor has possession have the collateral, there must be a written or authenticated security agreement that

   • clearly describes collateral subject and

   • is signed or authenticated by the debtor

2. the secured party must give the debtor something of value

3. the debtor must have rights in the collateral

written or authenticated security agreement (creation of a security interest)

when collateral is not in the possession of the secured party, the security agreement must be either written or authenticated

• authenticate - to sign, or on an electronic record, to adopt any symbol that verifies the intent to adopt or accept the record

a security agreement must also contain a description of the collateral that reasonably identifies it

• generally, such phrases as “all the debtors personal property” or “all the debtor’s assets” would not constitute a sufficient description

secured party must give value (creation of a security interest)

the secured party must give something of value to the debtor

under the UCC value examples can include:

• a binding commitment to extend credit

• any consideration sufficient to support a simple contract

normally, the value given by a secured party involves either

• a direct loan or

• a commitment to sell goods on credit

debtor must have rights in the collateral (creation of a security interest)

the debtor must have rights in the collateral =

• ownership interest or

• right to obtain possession of that collateral

the debtors rights can represent either a current or a future legal interest in the collateral

• a debtor does not need to have a title to the collateral to have rights in it

perfection of a security interest

perfection = the legal process by which secured parties protect themselves against the claims of third parties who may wish to have their debts satisfied out of the same collateral

usually accomplished by the filing of a financing statement with the appropriate gov official. however, look at:

• perfection by filing and

• perfection without filing

perfection by filing (perfection of a security interest)

filing a financing statement gives public notice to third parties of the secured party’s security interest. focus on:

1. debtors name

2. description of collateral

3. where to file

consequences of an improper filing - any improper filing renders the secured party’s interest unperfected and reduces the secured partys claim to that of an unsecured creditor

the debtors name

• the UCC sets out detailed rules for determining when the debtor’s name as it appears on a financing statement is sufficient so that the name can be searched adequately on the records database

• corporations, trusts, individuals, and organizations must use their actual, official, legal names

• providing only the debtor’s name or a fictitious name in a financing statement is not sufficient for protection

description of the collateral

• both the security agreemet and financing statement must describe the collateral in which the secured party has a security interest to establish the agreement and to provide public notice

• description in security agreement must be more precise than the description in the financing statement

  • UCC permits broad, general descriptions in the financial statement such as “all assets” or “all personal property”

• for land-related security intersts, a legal description of the realty is also required

where to file

• generally a financing statement for collateral that consists of timber to be cut, fixtures, or items to be extracted from the land- such as oil, coal, gas, and minerals, must be filed in the county where the collateral is located

effective time duration of perfection (perfection of a security interest)

a financing statement is effective for 5 years from the date of filing

filing a continuation statement can extend the effectiveness period

continuation statement = a statement that, if filed within 6 months prior to the expiration date of the original financing statement, continues the perfection of the original security interest for another 5 years

• can continue indefinitely

• if fail to continue, perfection lapses at end of the 5 year period

perfection without filing

security interests can be perfected without filing a financing statement in two types of situations

1. the secured party has possession of the collateral

2. the security interest is one of a limited number under the UCC that can be perfected on attachment

   • “perfected on attachment” means that these security interests are automatically perfected at the time of their creation, without a filing and without possession

   • two of the most common security interests that are perfected on attachment are:

     1. a purchase-money security interest (PMSI) in consumer goods

     2. an assignment of a beneficial interest in an estate of a deceased person

perfection by possession

• the UCC allow collateral to be pledged as a security for a debt

• the collateral is transferred into the creditor’s possession and returned to the debtor once the debt is paid

• oral security agreements are enforceable as long as the secured party possesses the collateral

perfection by attachment - purchase-money security interest (PMSI) - a security interest that arises when a seller or lender extends credit for part or all of the purchase price of goods purchased by a buyer

a PMSI in consumer goods is perfected automatically at the time of a credit sale - that is, at the time the PMSI is created

• most common type of perfection by attachment (14 total under UCC)

• consumer goods = goods bought for personal, family, or household use

two exceptions to the rule of automatic perfection for PMSI’s

1. certain types of security interests that are subject to other federal or state laws may require additional steps to be perfected

2. PMSI’s in non consumer goods, such as a business’s inventory or livestock, are not automatically perfected

Selected Types of Collateral and Methods of Perfection

the scope of a security interest

a security interest can cover property in which the debtor has either present or future ownership or possessory rights

therefore security agreements can cover:

• the proceeds of the sale of collateral

• after-acquired property

• future advances

written document laying out agreement

proceeds (the scope of a security interest)

proceeds - under article 9 of the UCC, whatever is received when collateral is sold or otherwise disposed of

• a security interest in the collateral gives the secured party a security interest in the proceeds acquired from the sale of that collateral

a security interest in proceeds is automatically perfected when the secured party perfects its security interest in the original collateral

• it remains perfected for 20 days after the debtor receives the proceeds from the sale of the collateral

• the parties can agree to extend the 20 day automatic perfection period in the original security agreement

after acquired property (the scope of a security interest)

the security agreement may provide for a security interest in after aquired property, such as debtors inventory

• after acquired property = property of the debtor that is acquired after the execution of a security agreement

generally the debtor will purchase new inventory to replace the inventory sold

• the secured party wants this newly acquired inventory to be subject to the original security interest

future advances (the scope of a security interest)

often, a debtor will arrange with a bank to have a continuing line of credit under which the debtor can borrow funds intermittently

the security agreement may provide that any future advances made against that line of credit are also subject to the security interest in the same collateral

future advances need not be of the same type or otherwise related to the original advance

the floating lien concept (the scope of a security interest)

floating lien - a security interest in proceeds, after-acquired property, or property purchased under a line of credit (or all three); the security interst in collateral is retained even when the collateral changes in character, classification, or location

• a floating lien inventory

  • floating liens commonly arise in the financing of inventories

    • a creditor is not interested in specific pieces of inventory, which are constantly changing, so the lien “floats” from one item to another as the inventory changes

• a floating lein in a shifting stock of goods

  • the concept of the floating lien can apply to a shifting stock of goods

    • the lien can start with raw materials, follow them as they become finished foods and inventrories, and continue as the goods are sold and are turned into accounts recieable

UCC general rules of priority

1. perfected security interest v. unsecured creditors and unperfected security interests (and most other parties)

   • when 2+ parties have claims to the same collateral, a perfected secured party’s interest has priority over the interest of most other parties

2. conflicting perfected security interests

   • when 2+ secured parties have perfected securirt interests in the same collateral, generally the first to perfect has priority

3. conflicting unperfected security interests

   • when 2 conflicting security interests are unperfected, the first to attach (be created) has priority. this is sometimes called the “first-in-time” rule

exception to the general priorities rules

buyers in the ordinary course of business

a major exception to the priority rules exists for a buyer in the ordinary course of business, who, in good faith, buys goods from a party in the business of selling such goods

a buyer in the ordinary course takes the foods free from any security interest created by the seller, even if the securirt interest is perfected and the buyer knows of its existence

purpose of exception is to not hinder the free flow of goods in the marketplace

rights and duties of debtors and creditors

the security agreement itself determines most of the rights and duties of the debtor and the secured party

the UCC, however, imposes some rights and duties that apply automatically unless the security agreement states otherwise

1. information requests

2. release, assignment, and amendment

3. confirmation or accounting request by debtor

4. termination statement

information requests

financing statements

• proof of filing - the secured party can request that the filing officer note the file number, date, and hour of the original filing on the copy of the financing statement at the time of filing

• copies upon request - the filing officer must send a copy of the financing statement to the person designated by the secured party or to the debtor, if the debtor makes the request

• third party information - the filing officer must also give information to a person who is contemplating obtaining a security interest from a prospective debtor

  • if requested, the filing officer must issue a certificate (for a fee) that provides information on possible perfecting financing statements with respect to the named debtor

release, assignment, and amendement

release - a secured party can release all or part of any collateral described in the financing statement, thereby terminating its security interest in that collateral

assignment - a secured party can also assign all or part of the security interest to a third party (the assignee)

amendment - if the debtor and secured party agree, they can amend the info in the filed financing statement and can add or substitute new collateral. an amendment does not extend the time period of perfection

any release, assignment, and amendment must be recorded by filing a uniform amendment form

confirmation or accounting request by debtor

the debtor has the right to request a confirmation of the unpaid debt or a lsit of collateral subject to the securirty interest from the secured party

the secured party must comply with the debtor’s confirmation reuqest by authenticating and sending the debtor’s confirmation request by authenticating and sending to the debtor an accounting with 14 days after the request is received

• otherwise the secured party can be held liable for any loss suffered by the debtor, plus $500

termination statement

when the debtor has fully paid the debt, the debtor is entitled to have a termination statement filed to notify the public if the secured party is perfected the security interest by filing

whenever consumer goods are involved, the secured party must file a termination statement within one month of the final payment or within 20 days of receiving the debtor;s authenticated demand, whichever is earlier

when the collateral is not consumer goods, the secured party is not required to file or to send a termination statement unless the debtor demands one

whenever a secured party fails to file or send the termination statement as requested, the debtor can recover $500 plus any additional lost suffered

default

article 9 of the UCC defines the rights, duties, and remedies of the secured paerty and of the debtor on the debtor’s default

look at

1. what constitutes default

2. basic remedies

3. disposition of collateral

what constitutes default

UCC article 9 does not define the term “default”

encourages the parties to include in their security agreemetns the conditions that will consitute default

any breach of the terms of the securirt aggreement can consitute default

• default occurs most commonly when the debtor:

  • fails to meet the scheduled payments that the parties have agreed on or

  • becomes bankrupt

the UCC does impose some restriction

• the parties cannot agree to waive or alter certain UCC provisions, such as those involving the debtor’s right to an accounting or disposition of collateral

• the terms may not run counter to the UCC’s provisions regarding good faith and unconscionability

basic remedies

the secured party’s remedies can be divided into 2 basic categories

1. repossession of collateral

   • the self-help remedy

   • the “self-help” provision of article 9 states that, on the debtor’s default, a secured party can take peaceful possession of the collateral covered by the security agreement without the use of the judicial process

2. judicial remedy - litigation

   • a secured party can relinquish the security interest and use any judicial remedy available, such as obtaining a judgment on the underlying debt, followed by execution and levy

     • execution - an action to carry into effect the directions in a court decree or judgement

     • levy - the obtaining of money by legal process through the seizure and sale of property; usually don’t after a writ of execution has been issued

disposition of collateral

once default has occured and the secured party has obtained possession of the collateral, the secured paerty can

1. retain the collateral or in fill or partial satisfaction of the debt (limitations apply)

2. sell, lease, license, or otherwise dispose of the collateral in any commercially reasonable manner and apply the proceeds toward the satisfaction of the debt

   • any sale is always subject to procedures established by state law

retention of the collateral by the secured party (disposition of collateral)

this general right to retain the collateral has several limitations

consumer goods - a secured party may retain the collateral unless it consists of consumer goods and the debtor has paid 60% or more of the purchase price in a PMSI or debt in a non-PMSI

notice requirement (disposition of collateral)

the secured party must notify the debtor of its proposal to retain the collareral, unless the debtor has signed a statement renouncing or modifying their rights after default

• if the collateral is consumer goods, the secured party does not need to give any other notice

in all other situations, the secured party must also send notice to

• any other secured party from which the secured party has received notice of a claim of interest in the collateral

• any junior lienholder who held a security interest or statutory lien in the collateral 10 dats before the debtor consented to the retention

  • junior lienholder = a person or business that holds a lien that is subordinate to one or more other liens on the same property

objections (disposition of collateral)

the debtor or other party notified of the retention has the right to object

• if within 20 days after the notice is sent the secured party receives a written objection, the secured party must sell or otherwise dispose of the collateral

• if not written objection is recieved, the secured party may retain the collateral in full or partial satisfaction of the debtor’s obligation

consumer goods (disposition of collateral)

when the collateral is consumer goods and the debtor has paid 60% of the purchase price on a PMSI or loan amount, the secured party must sell or otherwise dispose of the repossessed collateral within 90 days

• failure to comply opens the secured party to liability

• a secured party will not be liable if the consumer-debtor signed a written statement after default renouncing or modifying the right to demand the sale of the goods

disposition of collateral by the secured party (disposition of collateral)

a secured party who does not choose to retain the collateral or who is required to sell it must dispose of it in a commercially reasonable manner

• the secured party must notify the debtor and other specified parties in writing ahead of time about the sale and disposition of the collateral

• exception: notification is not required if the collateral

  • is perishable

  • will decline rapidly in value

  • is of a type of customarily sold on a recognized market

the sale can be public or private

the collateral can be disposed of in its present condition or following any commercially reasonable preparation or processing

every aspect of the dispositions method, manner, time, and place, must be commerically reasonable to obtain a satisfactory price

proceeds from disposition (disposition of collateral) order to pay people

proceeds from the disposition of collateral after default on the underlying debt are distributed in the following order

1. reasonable expenses incurred by the secured party in repossessing, storing, and reselling the collateral

2. balance of the debt owed to the secured party

3. junior lienholders who have made some written or authenticated demands

4. any surplus to the debtor (some exceptions based on collateral type)

deficiency judgement (disposition of collateral)

if the secured party has not collected all that the debtor owed after proper disposition of the collateral, the debtor is normally liable for any deficiency and the creditor can obtain a deficiency judgement from a court to collect the deficiency

• deficiency judgment = a judgement against a debtor for the amount of a debt remaining unpaid after collateral has been repossessed and sold

redemption rights (disposition of collateral)

the debtor or any other secured party can exercise the right of redemption of the collateral

• redemption may occur at any time before the secured party:

  • disposes of the collateral

  • enters into a contract for its disposition

  • discharges the debtor’s obligation by retaining the collateral

to redeem the collateral, the debtor or other secured party must tender

• the entire obligation that is owed

• any reasonable expenses and attorney’s fees incurred by the secured party in retaking and maintaining the collateral