Secured Transactions

Secured Transaction

Secured Transaction → transaction intended to create security interest in personal property or fixtures

Look for

• a credit transaction (a sale on credit or a loan) and

  • Sale on Credit: buyer does not pay full purchase price at the time of sale

• an agreement that creates a lien in favor of the creditor in the debtor’s personal property to secure the debt

Secured Transaction

Parties

Debtor → Person who owes the money

Creditor (Unsecured Creditor) → Person who money is owed to

• Secured Creditor → Creditor with special collection rights (security interest)

  • Attachment → steps necessary to create security interest effective against debtor

  • Perfection → steps necessary to create security interest effect against the world

  • Financing Statement → document used to convey notice of security interest

Security Agreement

contract between the Debtor and Creditor with language creating a security agreement

Security Interest

interest in personal property or fixtures securing payment or performance

Purchase Money Security Interest (Special Type of Security Interest)

• 2 ways to Create

  1. Seller-Financed MPSI

     • Secured party sells collateral on credit

     • Retains security interest in collateral

  2. Financer-Financed PMSI

     • Loan to purchase collateral

     • Loan used to acquire that collateral

     • Creditor takes security interest in that collateral

Default

event causing security interest to spring to life

Collateral

property subject to security interest

Clauses

After-Acquired Property Clause → grant of security interest in property obtained in future

Future Advance Clause → grant of security agreement securing future loans with same collateral

Types of Collateral

Goods (Tangible Collateral) → tangible, movable personal property

4 Types: Classify based on how Debtor is using the collateral

1. Consumer Goods

2. Equipment

3. Farm Products

4. Inventory

Intangible or Semi-Intangible Collateral

8 Types

1. Instruments

2. Documents

3. Chattel Paper

4. Investment Property

5. Accounts

6. Deposit Accounts

7. Commercial Tort Claims

8. General Intangibles

Types of Collateral

Goods (Tangible Collateral)

Goods (Tangible Collateral) → tangible, movable personal property

1. Consumer Goods

   • Goods used or bought for use primarily for personal, family, or household purposes

2. Equipment

   • Goods that are used or bought for use in a business

   • Default category (if it doesn’t fall into the other categories, even if it doesn’t meet the definition)

3. Farm Products

   • Crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states (such as ginned cotton, wool-clip, maple syrup, milk, and eggs) if they are in the possession of a debtor (farmer) engaged in farming operations

4. Inventory

   • Goods held by debtor for sale or lease OR materials used or consumed in a business in a short period of time

Types of Collateral

Intangible or Semi-Intangible Collateral

1. Instruments

2. Documents

3. Chattel Paper

4. Investment Property

1. Instruments

   • Pieces of paper representing the right to be paid money

   • Examples: promissory notes, drafts (for example, checks), and certificates of deposit

2. Documents

   • Document that represents the right to receive goods

   • Example: a bill of lading, a warehouse receipt

3. Chattel Paper

   • Record or records which evidence both (1) a monetary obligation, and (2) a security interest in or a lease of specific goods

   • Record → writing

4. Investment Property

   • Examples: stocks, bonds, mutual funds, and brokerage accounts containing such item

Types of Collateral

Intangible or Semi-Intangible Collateral

5. Accounts

6. Deposit Accounts

7. Commercial Tort Claims

8. General Intangibles

5. Accounts

   • Includes a right to payment (that is not evidenced by an instrument or chattel paper) for property sold or services rendered

6. Deposit Accounts

   • Account maintained with a bank

7. Commercial Tort Claims

   • Tort claim where

     • the claimant is an organization (for example, a partnership or corporation) OR

     • the claimant is an individual, the claim arose out of the claimant’s business or profession, and the claim does not include damages for personal injury or the death of an individual

8. General Intangibles

   • Any personal property not coming within the scope of the other definitions

     • Example: patent and trademark rights, copyrights, and goodwill

     • Default category (if it doesn’t fall into the other categories, even if it doesn’t meet the definition)

   • Subset: Payment Intangible

     • General intangible under which the account debtor’s principal obligation is a monetary obligation

Scope of Article 9

Applies in the following circumstances:

1. Transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract

   • I.e. doesn’t matter what you call it but we care about the substance

2. Agricultural liens

3. Sales of accounts, chattel paper, payment intangibles, and promissory notes

4. Commercial consignments of goods

5. A secured sale disguised as a lease

   • True lease not covered by article 9

   • Determining which it is: At the time the parties entered into the transaction, was it reasonably likely that the lessor would get the item back when it still had meaningful economic value?

     • If yes, then real lease.

     • If not, then sale.

Attachment

Attachment (steps necessary to create security interest effective against debtor)

Requirements

1. Security Agreement

   • Writing (or electronically stored agreement) Required

     • Requirements

       1. Record showing intent to create security interest

       2. Signed by debtor

          • Any symbol with intent to sign

       3. Describe collateral 

          • “Reasonably identify” the collateral 

            1. Can be done by category or type OR specify the item

            2. Cannot be done by super generic description → “all of the debtor’s assets”

            3. Can be done by → “all of debtor’s equipment” (using the specific category)

   • Oral agreement is okay → if collateral is in the possession or control of the secured party pursuant to an agreement

2. Creditor gives value

   • Value: Any consideration sufficient to support a simple contract

     • Even past consideration will suffice

   • Note: every debtor gives value by at a minimum promising (implicitly or explicitly) to repay loan 

3. Debtor has right in collateral

The moment the last requirement occurs → attachment happens

Scope of the Security Interest

• Future Advances

Grant of security agreement securing future loans with same collateral

Scope of the Security Interest

• After Acquired Property

Without an explicit after acquired property clause → Security interest only reach collateral debtor had rights in at time of signing security agreement

• Exception: Even without explicit clause, Court will imply one if the collateral is of a type rapidly depleted and replenished (inventory or accounts)

Scope of the Security Interest

• Proceeds

Anything received from sale, exchange, collection, or other disposition of collateral or proceeds

• Unless otherwise agreed, security interest automatically gives the secured party a right to identifiable proceeds

  • “Identifiable” → proceeds can be traced back to the original collateral

    • Secured creditor has to prove

Perfection

Steps necessary to create security interest effect against the world) (giving public notice

• Unperfected DOES NOT MEAN its unsecured

• 2 Requirements to be Perfected

  1. Attachment

  2. Complete 1 of the methods of perfection

Methods of Perfection

1. Automatic Perfection

2. Taking Possession of the Collateral (Pledge)

3. Control

4. Notation on Certificate of Title 

5. Filing

6. Temporary Perfection (And Continuation For Proceeds)

Methods of Perfection

1. Automatic Perfection

Automatically perfected upon attachment

Most common such situation is a PMSI in consumer goods

Methods of Perfection

2. Taking Possession of the Collateral (Pledge)

Perfected from the moment of possession and continues as long as possession is retained

• Impossible with items you can’t take possession of

  • Example: general intangible, accounts

• Can only perfect a security interest in money via possession

Methods of Perfection

3. Control

Security interests in investment property, nonconsumer deposit accounts, and electronic documents may be perfected by “control”

Security interests in nonconsumer deposit accounts can only be perfected by control

Methods of Perfection

4. Notation on Certificate of Title 

Security interests in motor vehicles required to be titled can only be perfected by notation on the certificate of title issued by government authority

• Exception: if you are loaning money to a debtor that holds the cars or trucks as inventory, you can perfect by filing one document, a financing statement, that describes it as inventory

If PMSI of consumer good (motor vehicle) → Still only covered here, NOT automatic perfection

Methods of Perfection

5. Filing

   • Requirements

Secured party may perfect their security interest by filing (either in writing or electronically) a financing statement

Financing statement must contain:

1. Debtor’s name and mailing address;

   • Who is the Debtor?

     1. Individual 

        • With an unexpired driver’s license issued by the state where the financing statement is to be filed → debtor’s name on the financing statement must match the license

        • Doesn’t have such a license → debtor’s individual name or the debtor’s personal name and surname

     2. Debtor registered organization

        1. Debtor’s name must match its most recent public organic record

   • Errors

     1. In debtor’s name

        1. Minor errors → won’t invalidate a financing statement

        2. Seriously misleading errors → will invalidate

           1. Determination steps: (1) search with correct name; (2) using standard search logic; (3) would find financing statement

     2. By Financing Office

        1. Failure of the filing office to correctly index a financing statement → won’t invalidate

   • Debtor Name Change

     1. Financing statement under old name still good on collateral received 4 months or less after change

2. Secured party’s name and mailing address;

   • Error in the secured party’s name will not make the financing statement seriously misleading

3. Description of the collateral covered by the financing statement

   • “Reasonably identify” the collateral 

     1. Can be done by category or type OR specify the item

     2. Can be done by super generic description → “all of the debtor’s assets”

     3. Can be done by → “all of debtor’s equipment” (using the specific category)

   • Does not need to mention after-acquired property to perfect a security interest in such property if the description in the financing statement is broad enough to cover the after-acquired property

4. DOES NOT need to be signed, but must be authorized

   • Authorize: any signed writing either before or after it is filed

   • Automatic Authorization: debtor signs the financing statement or signs a security agreement

5. Real Property-Related Financing Statements

   • Requirements above +

     1. Description of the related real property;

     2. Name of the record owner (if not the debtor);

     3. Indication that it is to be filed in the real property records

Methods of Perfection

5. Filing

   • Where do you file your financing Statement?

With the secretary of state

• Exception—Timber to Be Cut, Minerals, and Fixtures

  • Real estate-related collateral → county filing where the real estate is located

State to file in → state where state law applies

1. General Rule: File where the debtor is located

   • Location

     1. Individual → principal residence

     2. Registered Organization → where organized

        • Examples: corporation, limited liability company, or limited partnership

     3. Unregistered organization → place of business if it only has one place of business OR at its chief executive office if it has more than one place of business

        • Example: general partnership, limited liability partnerships

2. Movement of Debtor or Collateral

   • Debtor Relocates to a different State→ Security interest generally will become unperfected 4 months after the debtor’s move

     • Unless the secured party files a financing statement in the new jurisdiction before that 4-month period is up

   • Collateral is transferred to a new owner in a different State → Security interest will become unperfected one year after the collateral moves

     • Unless the secured creditor files a financing statement in the new jurisdiction before that one-year period is up

Methods of Perfection

5. Filing

   • How long is the financing statement effective?

Length: 5 years from date of filing

• Continuation Statement: extends financing statement an additional 5 years

  • Must be filed within 6 months before the lapse of the filed statement

Termination Statement:

• Secured party must, on demand of the debtor, within 20 days, file a termination statement or provide one to the debtor

Methods of Perfection

6. Temporary Perfection (And Continuation For Proceeds)

Proceeds → Anything received from sale, exchange, collection, or other disposition of collateral or proceeds

Perfected security interest in collateral extends to proceeds for 20 days

• Perfection continues if:

  1. Cash Proceeds Rule OR

     • Proceeds are identifiable cash proceeds

  2. Same Office Rule

     • Original collateral perfected by financing statement AND

     • Security interest in proceeds type would be perfected by filing in same place AND

     • Proceeds not purchased with cash proceeds

Priorities

• Secured Party vs. Secured Party

Priority Rules: Determine which creditor is first in line to get paid

Secured Party vs. Secured Party

1. Between Perfected Secured Parties

   • First to file OR Perfect (whichever is earlier) → Wins

2. Between Unperfected Secured Parties

   • First to attach → Wins

3. Between Unperfected and Perfected Secured Parties

   • Perfected Secured Party → Wins

4. PMSI Super Priority

   1. PMSI in Goods Other than Inventory and Livestock (Usually Equipment)

      • PMSI in goods jumps to front of priority line if perfected immediately or within 20 days after the debtor receives possession of the goods

   2. PMSI in Inventory and Livestock

      • Takes priority over conflicting security interest if 

        • Before debtor receives possession

          1. Secured party perfects; and 

          2. Sends authenticated notice to other holders; and

          3. Notice received within five years of debtor getting possession

   3. Seller-financed PMSI vs. Financer-financed PMSI

      • Seller-financed PMSI → Wins

Priorities

• Secured Party vs. Buyer Or Other Transferee

Priority Rules: Determine which creditor is first in line to get paid

Secured Party vs. Buyer Or Other Transferee

• Secured Party → wins

Exceptions

1. Authorized Sale 

   • By the secured party free of the security interest - Buyer takes free of the security interest

   • Can be expressed or implied

     • Implied Example: 

       1. When it’s inventory being sold to ordinary consumers when security agreement is otherwise silent

       2. By acquiescence 

2. Unauthorized Sales 

   1. Buyer in the Ordinary Course (BIOC)

      • BIOC takes free of a security interest created by his/her seller

      • BIOC

        1. Buyer in good faith

        2. Without knowledge of violations

           • Knowing that there’s a security interest on the item is fine

           • Knowing that the sale violates the secured creditor’s rights is not fine

        3. In ordinary course

        4. From seller of goods of that kind

   2. Buyer not in the Ordinary Course

      • Takes subject to perfected security interest AND

      • Take free of unperfected security interests

        1. Unless they know of the security interest when they give value or take delivery

   3. Consumer to Consumer Sales

      • Buyer takes free of security interest if

        1. No knowledge

        2. Value

        3. Personal use

        4. No financing statement

      • Goods must be consumer goods in the hands of both the buyer and the seller

Priorities

• Secured Party Vs. Judicial Lien Creditor Or Holder Of Possessory Lien

Priority Rules: Determine which creditor is first in line to get paid

Secured Party Vs. Judicial Lien Creditor Or Holder Of Possessory Lien

1. Secured Party vs. Judicial Lien Creditor

   • Judgment Lien Holder → wins if lien arose before security interest was perfected

     • Judgment Lien Holder: a creditor who won a judgement in court

   • PMSI vs. Judgment Lien Holder

     • PMSI → wins if secured party files a financing statement with respect to a PMSI within 20 days after the debtor receives the collateral

2. Secured Party vs. Possessory (Statutory) Lien Holder

   • Statutory Lien Holder → wins if they maintain possession of collateral

Default

event causing security interest to spring to life

• Security agreement lacks such a provision: “default” is generally construed as a failure to pay or perform

• Remedies

  1. Self-Help Repossession

  2. Strict Foreclosure

Default

• Self-Help Repossession

Self-Help Repossession: Creditor takes collateral without going to court first

If this can be done without a breach of the peace

• Breach of the peace

  1. Conduct that can lead to violence

     • Example: physical presence by debtor + objection

  2. Breaking and entering of a residence

     • Even if you consented when you signed the security agreement

     • Entering of a commercial property is less likely to be a breach of the peace

       • Picking lock and not relocking it on the way out is likely breach of the peace 

  3. Simple trespass is not a breach of the peace

Other Methods of Self-Help

• Secured party may also make equipment unusable and dispose of it on the debtor’s property if the secured party can do so without a breach of the peace

• Collateral is an account, the secured party can notify the person owing money to the debtor (that is, the account debtor) to make payment to the secured party, rather than to the debtor

If self-help unavailable, the judicial process

Default

• Strict Foreclosure

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

Requirements

1. Notify any other creditor that has a lien on that same collateral

   • If they object, you can’t keep it

2. Must also obtain the debtor’s consent

   • If they object, you can’t keep it

Default

• Resale

Requirements

1. Need reasonable notice

   • Within a reasonable time before the sale

     • Nonconsumer transactions, notice is deemed to be sent within a reasonable time if it’s sent 10 days or more before the sale

   • Contents of notice

     • Public sale → time and place of sale

     • Private sale → time of sale after which sale will occur, describe the parties and the collateral

2. Every aspect of sale must be “commercially reasonable”

Proceeds of the Sale

1. Repay the costs of the repossession and sale → pay off the debt of the foreclosing creditor → pay off the debt of creditors with lower priority than the foreclosing creditor → debtor gets this surplus

   • Creditors with higher priority than the foreclosing creditor receive no money from the sale because they don’t lose their liens

2. Secured Party’s Right to Deficiency Judgment

   • Deficiency Judgment: amount creditor can collect form debtor beyond value of collateral

Failure to Comply with Code Rules

1. Secured Creditor → Liable for the actual damages caused

2. Collateral is consumer goods AND the secured creditor violates the Code’s rules on default → Debtor is entitled to a minimum of 10% of the cash price of the goods plus an amount equal to all the interest charges to be paid over the life of the loan

3. No commercially reasonable sale → No deficiency judgment (rebuttable presumption)

Default

• Debtor’s Right to Redeem

Debtor’s Right To Redeem: Debtor’s ability to recover collateral by paying everything owed to creditor

• Most security agreements contain an acceleration clause (that is, a clause allowing the creditor to declare the entire loan balance due upon default) → debtor typically must tender the entire balance in order to redeem

Fixtures

Fixtures: goods permanently attached to real property

• Example: elevator

Perfection

• Fixture Filing (not just a financing statement) normally needed for fixtures

  • Requires

    1. Info from financing statement;

    2. Description of real property;

    3. Name of owners

  • File with the county where fixtures are located

Fixtures

• Rights on Default

When the security interest in the fixture has priority over all interests in the real property, the holder of the security interest in the fixture may, upon default, remove the fixture from the real property.

If the debtor does not own the property from which the collateral is removed, the creditor must reimburse the owner of the property for the cost to repair damage to the property caused by removal, but not for any other diminution in value.

Fixtures

• Priority

Secured Party v. Subsequent Real Estate Interest

• Security interest in fixtures → wins over any real estate interest that is recorded subsequent to the perfection of the security interest by fixture filing

Secured Party v. Prior Real Estate Interest

• Prior real estate interest that is properly recorded → wins over a security interest that subsequently arises

  • Exception: PMSI → wins over an earlier in time realty interest if it’s perfected by a fixture filing before the goods become fixtures or within 20 days thereafter

    • Exception: Construction mortgage → always wins over a subsequent PMSI in fixtures

Accessions

Accessions: goods physically united with other goods in such a manner that the identity of the original goods is not lost

Perfection

• If a security interest is perfected when the collateral becomes an accession, the security interest remains perfected in the collateral

Priority

• General priority rules apply to accessions

  • Except: Vehicles

    1. Security interest in accession

    2. Subordinate to security interest in whole

    3. Perfected by compliance with title statute

Removal and Reimbursement for pHysical Injury to the Whole

• The secured party removing the accession is responsible for the cost of repair of any physical injury to the whole or the other goods