R5: Secured Transactions

secured transactions

• generally involve credit transactions

• a debtor buys something from a creditor or secured party on credit

• creditor wants to be able to rely on something other than the debtor’s promise to ensure payment so they get a security interest on collateral

security interest

a limited right in specific personal property (the collateral) of the debtor that allows the creditor to repossess the property if the debtor fails to fulfill their obligation

attachment & perfection

Step 1: Attachment

• security interest is effective as soon as interest is attached

• merely establishes rights between the debtor/creditor

• after interest is attached, if the debtor defaults the creditor has some right to take the collateral from the debtor to satisfy the debt

• attachment doesn’t give the creditor rights against 3rd parties who might have interest in the collateral

attachment & perfection

Step 2: Perfection

• perfection serves as a form of notice that the creditor has a security interest in the collateral

• gives the creditor rights in the collateral superior to certain 3rd parties

• basically dibs

scope of article 9 (UCC) w/ secured transactions

• article 9 applies to most contractual security interests in personal property or fixtures & outright sales of A/R

• doesn’t apply to:

  • security interests in land (mortgages)

  • wage claims

  • statutory liens like mechanic liens

purchase money security interest (PMSI)

*special type of security interest

• has priority over all other types of security interests in the same collateral

• PMSI arrises when:

  • a creditor sells the collateral to the debtor on credit, retaining a security interest for the purchase price or

  • creditor advances funds used by the debtor to purchase the collateral

collateral

• property subject to a security interest

• types:

  • goods→ consumer goods, inventory, & equipment

  • intangible collateral accounts→any right to payment for goods, services, real property, or use of a credit card not evidenced by an instrument or chattel paper

  • investment property→stocks, bonds, mutual funds, etc.

  • proceeds→ whatever is received upon sale, exchange, collection, or other disposition of collateral

3 requirements for attachment

1. agreement

2. creditor gives value

3. debtor has rights to collateral

*no specific order that they have to be completed in

property in which debtor acquires interest in future (after-acquired property)

• after-acquired property clause allows a secured party to obtain a security interest in not only a debtor’s present property, but property the debtor obtains in the future

• security interest attaches to the after-acquired property as soon as the debtor acquires an interest in the property

duties of secured party after attachment

• duty to file or send the debtor a termination statement when the debt is paid

• confirm for the debtor the unpaid amount left on the secured debt

• use reasonable care (oral agreement is ok) to preserve any collateral in the secured party’s possession

5 methods of perfection

1. filing

2. taking possession of the collateral (tangible items)

3. control (investment property)

4. automatic perfection

5. temporary perfection

method of perfection - filing

• not allowed for deposit accounts & money by filing a financing statement

• “notice” is given by the filing of a “financing statement”; financing statement must gives names & addresses of debtor/creditor & the type of collateral covered

method of perfection - possession (pledging)

• taking physical possession of the collateral

• similar to when a pawn shop takes an item in exchange for a loan of $

• property owner can redeem the pledged item by paying back the amount borrowed

method of perfection - control

• for collateral that is intangible (stocks, bonds, etc)

• owner must instruct the brokers or mutual fund company that the secured party now has whatever right in the account the owner has or that the broker or mutual fund company is to comply with the secured party’s orders w/o further consent of the owner

method of perfection - automatic perfection

*security interest is perfected simply by the attachment of the security interest w/o any added requirements

2 types:

1. PMSI in consumer goods (creditor either sells the collateral to the debtor on credit & receives a security interest or advances the funds that are used to purchase the collateral & reserves a security interest)

2. small-scale assignment of accounts (i.e. assignment of a few A/R)

method of perfection - temporary perfection

• if creditor has a perfected security interest in collateral & collateral is sold, the creditor has a temporary perfected security interest in the proceeds of the sold collateral

• temporary perfection lasts 20 days

• if debtor moves from 1 state to another, perfection in the 1st state is valid for 4 months after move

right to take possession & sell collateral

*for secured creditors

• secured party may take possession by self-help w/o judicial process if they can do so w/o a breach of the peace

• secured party may always take possession of collateral by replevy action (a judicial action seeking the transfer of personal property)

sale of collateral

• after default & repossession by creditor, secured party can sell or lease the collateral

• sale/lease must be commercially reasonable

• debtor & other parties must be given notice of the sale

• sale wipes out all subordinate interests

• debtor has the right to redeem by paying off indebtedness & costs before the sale, but this is cut off by the sale

proceeds of a default sale

proceeds of a default sale distributed in the following order:

1. pay expenses of repossession & sale

2. pay creditors w/ a security interest in the collateral in order of priority

3. any surplus paid to the debtor

retention of collateral in satisfaction of debt

• transactions not involving consumers (secured party may keep collateral in full or partial satisfaction of the debt, offset its value against debt, & seek to recover the difference from the debtor)

• transactions involving consumers (secured party may keep collateral only in full satisfaction)

  • in either case secured party must give notice of its intent to keep the collateral to the debtor

  • in consumer goods cases in which 60% of loan or more has been paid, secured party must sell collateral w/o 90 days of repo

debtor’s right of redemption (pay all creditors in full)

until the sale or discharge of the debt through retention of the collateral, debtor may redeem the collateral by paying all obligations secured by the collateral plus all reasonable expenses related to the repo

judicial action (reduce claim to judgment)

instead of using self-help, secured party may bring an ordinary judicial action for the amount due & levy on the collateral after judgment