CH 30: Secured Transactions

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

secured transaction

What article of the UCC governs secured transactions in personal property?

Article 9

Article 9 of the Uniform Commercial Code (U C C) governs secured transactions in personal property. It does not cover:

creditor-collection devices (such as liens and mortgages on real property)

In every state, the UCC’s terminology is now uniformly used in all documents that involve

secured transactions

any creditor (usually lender or seller) who has a secured interest in the debtors collateral

secured party

the party who owes payment or other performance on a secured obligation

debtor

the interest in the personal property that secures payment or performance of an obligation

security interest

an agreement that creates or provides for a security interest in personal property between the debtor and a secured payment

security agreement

the personal property subject to a security interest

collateral

A document prepared by a secured creditor and filed with the appropriate govt official to give notice to the public that the creditor claims an interest in collateral belonging to the debtor named in the statement

financing statement

The financing statement must: (2)

Contain the names and addresses of both the debtor and creditor
Describe the collateral by type or name

What are the two main concerns if the debtor defaults? These two concerns are met through the creation and perfection of a security interest.

Can the debt be satisfied through the possession and sale of collateral?
Will the creditor have priority over any other creditors or buyers who may have rights in the same collateral?

To become a secured party, the creditor must:

obtain (attach) a security interest in the collateral of the debtor.

obtain

attach

Three requirements for a creditor to have an enforceable security interest:

Unless the creditor has possession of the collateral, there must be a written security agreement that clearly describes the collateral and is signed or authenticated by the debtor
Secured party must give the debtor something of value
Debtor must have rights (usually ownership) in the collateral

Once the three requirements for the creditor to have enforceable security interest have been met, the creditors rights are said to:

attach to the collateral

When the collateral is not in the possession of the secured party, the security agreement must be either ___ or ___

written or authenticated

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

authenticate

Most secured transactions occur when:

secured creditor does not have possession of the collateral

A security agreement must also contain a description of the collateral that reasonably identifies it. Generally the phrases ___ would NOT constitute sufficient description because it must be a distinct collateral

All the debtors personal property
All the debtors property

The secured party must give the debtor something of value. Under UCC, value can include

Binding commitment to extend credit
AND any consideration sufficient to support a simple contract

Normally, the value given by the party involves either:

Direct loan
Commitment to sell goods on credit

The debtor must have rights in the collateral—that is, the debtor must have some ownership interest or right to obtain possession of that collateral. The debtor’s rights can either be:
 Example: A retailer-debtor can give a secured party a security interest not only in existing inventory owned by the retailer but also in future inventory that the retailer will acquire.

Current or a future legal interest in the collateral

The legal process by which a secured party protects themselves against the claims of third parties who may wish to have their debts satisfied out of the same collateral

perfection of security interest

usually accomplished by the filing of financing statement with the appropriate government official

perfection

Whether a secured party’s security interest is perfected or unperfected can have serious consequences for the secured party. Example: If a debtor has borrowed from two different creditors and used the same property as collateral for both loans, and the debtor defaults on both loans, the creditor with a perfected security interest has:

first rights to the collateral

gives public notice to third parties of the secured party’s security interest

financing statement

The Financing statement must (7):

Provide name of debtor
Provides name of secured party
Indicates collateral covered by financing statement
Be uniform in all states
Filed in the appropriate office together with payment of the correct filing fee
CAN be filed electronically
MAY be filed even before a security agreement is made or the security interest attaches

The financing statement IS by nature:

uniform in all states

U C C sets out detailed rules for determining when the debtor’s name as it appears on a financing statement is sufficient. For corporations (organizations that have registered with the state), the debtor’s name on the financing statement must be :

the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization

U C C sets out detailed rules for determining when the debtor’s name as it appears on a financing statement is sufficient. If the debtor is a trust or a trustee for property held in trust, the financing statement must:

disclose this information and provide the trust’s name as specified in its official documents

U C C sets out detailed rules for determining when the debtor’s name as it appears on a financing statement is sufficient. For all others, the financing statement must disclose:

the individual or organizational name of the debtor

T or F: Providing only the debtor’s trade name (or a fictitious name) in a financing statement is not sufficient for protection.

T

Both the ___ and ___ must describe the collateral in which the secured party has a security interest.

security agreement and the financing statement

The security agreement must describe the collateral because no security interest in goods can exist unless the parties:

agree on which goods are subject to the security interest

The___ must describe the collateral to provide public notice of the fact that certain goods of the debtor are subject to a security interest.

financing statement

The description of collateral in the ___must be more precise than the description in the financing statement.

security agreement

For land-related security interests, a ___ is also required.

legal description of the realty

Normally, a financing statement must be filed centrally in the appropriate state office in the state where the ___ is located (e.g., secretary of state)

debtor

The debtor’s location is determined by where the debtor resides, not necessarily where the collateral is located. For an individual debtor, location is:

state of the debtors principal residence

The debtor’s location is determined by where the debtor resides, not necessarily where the collateral is located. For an corporate debtor, location is:

state in which it is incorporated

The debtor’s location is determined by where the debtor resides, not necessarily where the collateral is located. For an debtors that are not individuals or corporations, location is:

state in which the business is located or if in multiple states, place from which the debtor manages its business operations and affairs.

Exception to the general rule of perfection of filing is that a financing statement for collateral that consists of:

timber to be cut, fixtures, or items to be extracted (oil, coal, gas, minerals) must be filed in the county where the collateral is located

Attach first then:

perfect it

Any improper filing renders the secured party’s interest ___.

Example: If the debtor’s name is incorrect or if the collateral is not sufficiently described on the financing statement, the filing may not be effective. (bc not adequate notice)

unperfected and reduces the secured party’s claim to that of an unsecured creditor

What are the two types of situations in which security interests can be perfected without the filing of financing statement

When collateral is transferred into the possession of the secured party
Certain special situations where interest is perfected on attachment

automatically perfected at the time of creation, without a filing and without possession of the goods)

perfection on attachment

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

A purchase-money security interest in consumer goods
An assignment of a beneficial interest in an estate of a deceased person

The secured party can perfect a security interest by taking possession of tangible or semi- tangible collateral.

Perfection by Possession

for most collateral, perfection by profession is:

impractical

Commonly, certain items like ___ are transferred into the creditors possession when they are used as collateral for loans (and can cause perfection by possession)

stocks
bonds
negotiable instruments
jewelry

The Purchase-Money Security Interest in Consumer Goods

Perfection by Attachment

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.

Purchase money security interest (PMSI)

A PMSI in consumer goods is perfected automatically at the time of a:

credit sale (aka at the time the PMSI is created)

What are the two exceptions to the rule of automatic perfections for PMSI’s

Certain types of security interests that are subject to other federal or state laws may require additional steps to be perfected
PMSI’s in non consumer goods (business’s inventory or livestock) are not automatically perfected

Certain types of security interests that are subject to other federal or state laws may require additional steps to be perfected. Many jurisdictions have certificate of title statutes that establish perfection requirements for security interests in automobiles, trailers, boats, mobile homes, and farm tractors. To be perfected, the secured party must:

file a certificate of title with the appropriate state office

Where or how to perfect a security interest sometimes depends on whether the collateral is:

Tangible
Intangible

collateral that consists of or generates rights (ex: stock)

intangible collateral

A financing statement is effective for ___ from the date of its filing

five years

Renewal of perfection is affected by filing a continuation statement within ___. Original statement is then extended for an additional five years.

six months of the expiration date of the prior filing

Renewal of perfection is affected by filing a ___

continuation statement

A security interest can cover property in which the debtor has either present or future ownership or possessory rights. Therefore, security agreements can cover: (3)

The proceeds of the sale of collateral
After-acquired property
Future advances

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