Secured Transactions

What is a secured transaction?

Transaction intended to create security interest in personal property or fixtures

• generally involces sale on creidt or loan - Seller or lender obtains lien as security

Security interest

• security interest is interest in personal property or fixtures sercuring payment or peformance- contingent property interest

• GIVES NO RIGHTS TO secured party UNLESS default on loan

Sale on credit?

buyer does not pay full purchase price at time of sale

Who is the “secured party”

the creditor/lender/seller/ etc.

What is security agreement?

agreement b/w debtor and secured party that created security interest

• “debtor grants security interest to Bank …”

What is collateral

Property subject to a security interest

• Property that the secured party can repossess upon default to ensure debt is paid

Purchase Money Security Interest (PMSIs)

Special type of security interest in goods

Can arise in 2 ways:

1) Seller-financed PMSI:

• Secured party sells the good on the debtor on credit and

• retains a security interest in the goods;

2) Financer-Financed PMSI:

• Creditor loans the funds to the debtor to enable to debtor to buy specific collateral

• loan is used to acquire collateral

• creditor takes security interest in that collateral

“After-Acquired Property Clause”

grant of security interest in property obtained in future

• just a provision in the K b/w debtor and creditor

future Advances Clause

• grant of security agreement securing future loans with the same collateral

Attachment

Means security interest has been created

• steps legally required to create security interest effective against debtor

Perfection

Steps legally required to create security interets effective against the world

• process of giving public notice of security interest to the world

• financing statement = document used to convey notice of security interest

Types of Collateral

Category will effect the rules under Article 9

1) Goods (tangible collateral)

• consumer goods

• equipment

• farm products

• inventory

2) Intangible or Semi-intangible collateral

Article 9 category of Goods

Goods must fit into ONLY one of these categories: Test to classfy- how is the debtor using this collateral

• Consumer goods:

  • goods used or bought primary for personal, family, or household purposes

• Equipment: Catch-all

  • goods use or bought for use in a business

  • DEFAULT category if none of others

• Farm products:

  • If debtor engaged in farming operations → product of crops or livestock in unmanufactured state

    • cotton, wool-clip, maple syrup, milk, eggs

  • Crops or livestock or supplies used or produced in farming operations

• Inventory:

  • goods held for sale or lease

  • goods that are to be furnished under service contracts, and materials used or consumed in a business in short period of time

    • like raw material, consumables

if unsure, argue it could be one or the other

Article 9 Categories of Intangible / Semi-Intangible Collateral

• Instruments

  • pieces of paper representing right to be paid money

    • promissory notes, checks, certfs of deposit etc.

• Documents

  • dpc represents right to receive good

    • bills of lading, warehouse receipts

• Chattel Paper

  • Record (writing in any medium) w/ both monetary obligtion and security interest in items

    • typically promisorry note + security agreement

• Investment Property

  • stocks, bonds, mutual funds, brokerage accounts

• Accounts

  • Right to payment for property sold or services rendered

    • not in writing

• Deposit Accounts

  • Account maintained w/ a bank

  • BUT just business bank account- not personal

• Commercial Tort Claims

  • basically a lawsuit

• General Intangibles

  • IF NOT IN ANY OTHER DEF IN HERE

    • interallctual property, goodwill

  • payment intangible: if debtor’s principal obligtion is monetary

Scope of Article 9

applies to a transaction that creates security interest in personal property or fixtures by contract…

• no need to say “security interest” in K, substance over form- doesn’t matter what words used- Article 9 will cover

Also if secured sale is disguised as a lease- article 9 applies

ASK is it reasonably likely lessor is going to get items back for meaningful economic value

Creation of a Security interest

rights established by attachment- otherwise not enforceable

Requirements for Attachment

1) Security Agreement (3 subrequirements)

• Can be oral if collateral is in possession of the secured party → pledge

• If Written: (which is typical) must have:

  • Language showing intent to create security interest

  • Authenticated by deptor (signed by debtor); and

  • contain description of collateral - “reasonably identify the collateral"

    • “all assets, all property” is invalid too generic

2) Creditor gives value

• Any consideration that would count in contract law

  • but past consideration also enough

  • Debtor’s value given in the consideration is the implicit value to pay the loan

3) Debtor has rights in collateral

• typically ownership

Whenever last of these 3 things occurs in any order, attachment happens, security interest created and have all rights under Article 9

Scope of the security interest includes what?

may provide that collateral will serve as a security not only for the present obligation, but also for advances the creditor makes to the debtor in the future

Is after-acquired property allowed to be attached in a security agreement

only with an explicit after-acquired property clause

otherwise security interest only reaches collateral that the debtar had rights in at the time the debtor signed the secuirty agreement

When is an after-acquired property clause implied?

• collateral of a type that’s rapidly depleted and

  • replenished- accounts and inventory

• auto get for ANY Identifiable proceeds of collateral

  • if proceed say, yes security interest if identifiable

but not consumer goods or commercial tort claims

Proceeds

WHATEVER was recieved upon the sale, exchange, collection or other disposition of collateral OR proceeds

• include

• second gen proceeds

• insurance

• claims of dmg/loss of collateral

Identifiable if a secured creditor can prove traceable

To acquire max priorirty in collateral over most 3rd parties- must do what?

perfect

Does messing up perfection make someone unsecured?

No, thats a separate concept

unperfect secured creditors exists

Methods of perfection:

Order doesn’t matter but need both:

Step 1: Attach

Step 2: Do one of these methods

1) filing

2) taking possession;

3) control

4) automatic perfection

5) temporary perfection

Automatic perfection

In some situations security interest is automatically perfected upon attachment

1) PMSIs in CONSUMER GOODS

• need both

Perfection through possession (Pledge)

Simply taking possession in most chattel can perfect security interest

• only impossible in items of intangibles, things you can’t possess

ONLY way to perfect security interset in MONEY

Perfection by Control

Security interests that may be perfected through this method =

investment property,

nonconsumer deposit accounts, and

electronic documents

Perfecting for Motor Vehicles

Title for motor vehicles can ONLY be perfected by “notation on the certificate of title” issues by the state (never gonna be automatic)

UNLESS: dealers - for vehicles held in inventory for sale or lease

• these perfected by filing a financial statement under the ordinary Code rules

Perfection by Filing

Filing a financial statement may perfect security interest

• can be filed even before security agreement is entered into as long as authorized to

Financial Statement Contents

Form UCC-1: filed to perfect security interest

must contain:

1) Debtor’s and Secured party’s names + mailing address’

2) description of the collateral covered by the financial statement

• can be very supergenetic

3) need not be signed but must be authorized by debtor

• can be authorized by any signed writing

• ip so factor authorization → if debtor signed security agreement auto authorizes financial statement for same collateral

How are financing statements indexed/organized?

• name requirement?

by Debtor’s name - as seen in valid drivers license

• if no license then “individual name” - name known in community

• errors in debtor name can’t be seriously misleading

  • ok if secured party’s name has error

if Org: don’t file under trade name- must be name in public records

When is an error in debtors name seriously misleading?

Search using correct name - using standard search logic- see if

retrivies the financing statement

• search logic will never fix spelling errors so never gonna find it with spelling mistake

• BUT if filing office causes error → secured party not responsible even if no one will find it

Debtor name change effect on financing statement?

Financing statement is still effective to protect security interest before or within 4 months after the change

• must amend it within 4 month period

Does Financing Statement need to mention after-acquired property in description?

No, perfect it regarless of mentioning it

Financing Statement w/ real property

must additionally be filed in real property records and

contain

1) description of the realted real property

2) name of the record owner

3) indication that it is to be filed in the real property records

Place of Filing Financing Statement

File in Office of Secretary of State (in state of which state law applies)

• Exception: if real estate related collateral → file in county clerk in county where real estate located

Which state law governs perfection?

file in state where debtor is “located”

Locations:

• invididual → principal residence

• registered org → where “organized”

• unregistered org → place of business

What happens if debtor or collateral moves states?

• When debtor move → Unperfected 4 months after debtor moves unless secured party files new financing statement in new jursidiction before 4 month time period if up

• Collateral moving to new owner → one year instead of 4 months

How long is a financing statement valid and what to do if want to extend?

Financing statemnet is valid for 5 years

can extend another 5 years with Continuation statement

• must be filed in last 6 months of 5 year life

Termination Statement

creditor say im not longer claiming security interest its paid off

• Generally, no obligation to file this

  • If demanded → secured party must file on demand of debtor w/in 20 days

  • If consumer goods MUST auto file w/in 1 months

Perfection as to Proceeds

Auto have perfected security interest in any proceeds of collateral for 20 days after receipt of the proceeds

• If want continuously Perfected beyond 20 days →

  • Proceeds extend if are identifiable cash proceeds;

    OR (“Same office rule”)

  • OG interest was perfected by filing;

  • Security interests in proceeds type would be perfected by filing in same place as og, AND

  • proceeds not purchased with cash

  • ~ usually inventory sold on credit so accounts are produced or trades

• or can amend financing statement to include new

perfectino when there is a Change in use of collateral

filed financing statement remains effective to perfect the security interest

Priorities

where is creditors place in line on same piece of collateral

• must do perfection and attachment in priority analysis

1) Identify fighters ,

2) apply proper priority rule

Priority: Perfected Secured vs Perfected Secured Party

Goes to whichever party was the first to either file OR perfect

whichever earlier

Priority: UNPerfected Secured vs UNPerfected Secured Party

first to attach has priority

Priority: Perfected Secured vs UNPerfected Secured Party

Perfected wins

PMSI’s special priority rule

PMSI has superpriority if:

• PMSI in Inventory and Livestock

  • priority over conflicting security interest in same inventory/proceed IF:

    • Before debtor gets possession →

      • secured party perfects,

      • sends authenticated notice to other holders; and

      • notice is received within 5 years of debtor getting possession

  • Consignor’s interest in consigned goods = PMSI in inventory

• PMSI in Goods Other than inventory and livestock

  • Has priority over ALL conflicting security interest in same goods/proceeds IF:

    • perfected w/in 20 days of debtor getting possession

  • if not fall back to general rule

Priority: Secured Party vs Buyer / Transferee

normally buyer buying/leasing something w/ lien on it, typially lien stays on it. but if buyer wins fights → buyer takes item free of security interest

Exceptions (takes lien off item):

1) Authorized sales → Express, impled

2) Unauthorized sales → BIOC, B not IOC, consumer consumer sale

Authorized Sales (Secured party vs buyer)

if the sale is authorized by secured party to be free of security interest → buyer will take free of security interest

• typically express in security agreement

• May be implied →

  • if security agreement silent, implied authorization for Inventory sold to an ordinary customer, w/out express limitation

  • acquiescence, you may try to block selilng but you’ve allowed it many times so you’ve waiver your right here.

Unauthorized Sales (Secured party vs buyer) - BIOC

“Buyer in ordinary course” (BIOC) → take free of security interest if:

• a buyer in ordinary course of business takes free of a security interested created by his/her seller (debtor creates security interest)

  • SO: if Bank put lien on X’s boat. X sells boat to Y (who takes subject to lien). Z buys from Y (seems like fits BIOC BUT will never because Y did not create the security interest)

• BIOC is a

  • buyer acted in good faith w/out knowledge of sale’s violations of other’s rights

    • can have knowledge theres security interest in item

  • and seller is in business of selling goods of that kind

Unauthorized Sales : “Buyer not in ordinary course”

• take subject to perfected security interests

• take free of unperfected security interests

Consumer to Consumer Sales

“Garage sale rule”

in the case of consumer goods, a buyer takes free of S.I. even though perfected if:

• buys without knowledge of security interest

• for value

• for buyer’s wn personal, family, household purposes, and

• before a financing statement covering the goods has been filed

Priority: Secured party vs Judicial Lien Creditor

Judicial Lien creditor prevails over holder of a security interest in cllateral if lien creditor becomes such before security interest is perfected

• any prior perfected security interest has priority over judicial lien

• imposition of judicial lien = levy

Levy before perfection → levy wins

Judicial Lien Creditor

started off as unsecured creditor then won judgment → still unsecured but now called this

Priority: PMSI v Judial Lien creditor

if secured party files PMSI w/in 20 days after debtor received collateral → they have priority over judicial lien that arises b/w time of attachment and time of filing

Priority: Secured Party v Statutory (Posessory) lien Holder

Statutory lienholder always wins if they maintain possession of collateral

Statutory (Posessory) lien Holder

state statute can provide for statutory liens those statutes provide

Default

gateway to remedies - event causing security interest to spring into life

• usually grounds specified in security agreement

  • usually late or missed payments

• can get help w/ deafult repossession through judicial process or without judicial process (self-help)

Self-Help Reposession

After default, secured party is entitled to take possession of the collateral w/out judicial process IF:

• can do w/out breach of the peace (courts vary on definition)

  • can be sued for breach of peace damages

What’s a breach of the peace

can’t do for self-help

Breach of Peace: potential to lead to violence

• generally → physical presence by debtor + their verbal objection = breach of peace

• Breaking and entering a home (probably) even if allowed in their K

NOT Breach of Peace:

• Simple trespass

• hotwire car from driveway as long as no one there

• business premises less likely

Replevin

court proceeding to reposses collateral

through judicial process

Another form of self-help w/out removal of collateral.

secured party may make equipment unusable and dispose of it on debtor’s property IF:

• can do w/out breach of the peace

usually for big heavy items- ex. take keys from bulldozer

Self-Help in Accounts

If debtor deafults on account collateral- creditor can send notice to persons owing money to debtor and to make payments to creditor instead

Strict Foreclosure

Creditor keeps collateral itself to satisfy debt (instead of selling it)

This is allowed but creditor must:

• notify any other creditor who has a lien on that collateral, and if they object you can’t do it

• and Debtor must not object

  • through signed record of default, or failling to make single objection w/in 20 days after notice

Partial strict foreclosure not allowed this way

Resale of Collateral that Secured Party Repossessed

“Foreclosure Sale” EVERY ASPECT OF SALE must be commercially reasonable

• method, time, place, terms

Sale will discharge the security interest under which the sale is being made and all subordinate security interests (but not superior security interest)

• senior liens stay on property , junior liens get wiped

Notice requirements for foreclosure sale

Needs timely reasonable notice signed by secured party unless perishable

• time and place for public sale

• private sale same but also describe clletal, extra info for consumer goods

Proceeds of foreclosure sale

1) repay costs of repossession and sale

2) pay off debt of foreclosing creditor (if not enough Deficiency Judgment → can go after debtor for this)

3) lower priority creditors paied

4) any left over, debtor gets surplus

Creditor Penalties for not conducting commercially reasonable sale

1) Liable for any actual damages caused by failure to follow rules

2) Statutory penalty for when collateral is consumer goods

3) Presumption of Not allowing deficiency judgment

Debtor’s right to redeem

Debtor’s ability to recovery collateral by paying EVERYTHING owed to creditor and must do before foreclosure sale

• b/c most security agreements have acceleration clause so declares entire balance is due

Fixtures

Started off as personal property but becomes attached to real estate so consider the goods as permanently attached to real property/ part of the real property

ex. central AC, elevators, built in appliances etc.

How to perfect security interest in fixtures?

“Fixture filing” normally needed for fixtures

~ basically financing statement but county filing not secretary of state

• requires info from financing statement + description of real property + name of owner

Rights on default of fixtures

if fixture S.I. has priority over all interests in real property → creditor may on default remove the fixture from real property

• if real property not owned by debtor → creditor must reimburse owner for repair to damage caused by removal

• no payment for diminusion in value

Piority on Fixtures: Secured party v subsequent real estate interest

Fixture wins over any real estate interest if Real estate interest recorded after perfection of fixture s.i.

recorded subsequently to perfection of S.I.

Priority Fixture: Secured Party v Prior real estate interest

Properly recorded real estate interest wins over later fixture security interest

BUT: PMSI wins over earlier real estate interests IF

• perfected fixture before goods become fixture or 20 days after

Fixtures: Construction Mortgage vs PMSI

construction mortage wins over a later PMSI in fixtures

Accessions

goods that are physically united with other goods in such a manner that the ID of OG goods is not lost

(ex. tires on car)

Perfection of Accession

if S.I. is perfected when collateral becomes an accession, S.I. remains perfected in the collateral

Priority in Accession

General priority rules apply to accessions

BUT

a s.i in an accession is subordinate to S.I. in whole which is perfected by compliacne with certificate of title statute required of vehicles

Removal of accession from whole + dmgs

if accession S.I. has priority over ALL other interests in whole → creditor may on remove accession from other goods

• will be liable for costs of repair of any physical injury to whole or the other goods

  • person entitled to reimbursement may refuse permission to remove until adequate assurance as to reimbursement is given