Secured Transactions

Secured transactions

A transaction intended to create a security interest in personal property or fixtures. Generally, a sale on credit or loan where the seller or lender gets a lien on the property as security 

Sale on credit

A sale where the buyer doesn’t pay the full purchase price at the time of the sale 

Debtor

The person who owes payment or performance of the obligation secured. Whoever owes the money 

Secured party

A lender, seller, or other in whose favor there is a security interest 

Creditor

The person to whom money is owed to 

Secured creditor

Creditor with a special set of collection rights 

Security agreement

An agreement between the debtor and the secured party that creates a security agreement. A contract between the debtor and creditor. Must have language creating the security interest 

Security interest

Interest in personal property or fixtures securing payment or performance. When the contingency occurs, the creditor has rights in the debtor’s collateral 

Default

Event causing security interest to “spring to life,” which means the creditor has rights in the property

Collateral

The property subject to the security agreement 

Purchase money security interest (PMSI)

A special kind of security interest that gives the lender extra protection when they give you money specifically to buy something 

Two kinds of PMSI

Seller-financed or financier-financed 

Seller-financed PMSI

The Secured party sells collateral on credit and gets a security interest in the collateral. The seller is providing the purchase money to buy the item and loaning you all of or part of it

Financer-financed PMSI

Loan to purchase collateral used to acquire that collateral. Certior takes a security interest in that collateral. Some third party (other than the seller) is loaning you money to buy some kind of collateral, and they take a security interest in it 

After-acquired property interest

Grant of security interest in property obtained in the future. You can put a provision in the contract that gets a security interest in future-obtained property 

Future advances clause

A provision in the contract making the item collateral for the current loan and any loans in the future 

Attachment

A security interest between the debtor and a third party. 

Perfection

Steps legally required to create a security interest effective against the world (other creditors) 

Financing statement

A document used to convey notice of a security interest

Goods

Tangible, movable personal property. 

Four classifications of goods

Consumer, equipment, farm, and inventory 

Equipment goods

Goods used or bought for use in a business (also a catch-all/default classification if it doesn’t meet any other classification) 

Consumer goods

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

Farm products

Crops, livestock, or supplies used or produced in farming operations, or products of crops or livestock in their unmanufactured states. If you don’t have a farmer, don’t worry about this 

Inventory

Goods held for sale or lease or to be serviced under service contracts. Can also include materials used or consumed in a business in a short period of time 

Kinds of instruments

checks, promissory notes, drafts

Documents

Represent the right to receive goods (bill of lading, warehouse receipts) 

Chattel paper

When you have 1) a monetary obligation and 2) a security interest in or a lease of specific goods. Any record can be electronic or written

Types of investment property

Stocks, bonds, mutual funds

Accounts

A right to payment for property sold or services rendered

Deposit accounts

Accounts maintained with a bank

Commercial tort claim

A tort claim where 1) the claimant is an organization or 2) the claimant is an individual, the claim arose out of the claimant’s business or profession, and the claim doesn’t include damages for personal injury or death of an individual 

General intangibles

Any personal property not coming within the scope of other definitions (the catch-all)

Scope of Article 9

Transactions creating a security interest, a seller’s retention of title, agricultural liens, sales of accounts, chattel paper, payment intangibles, and promissory notes, a secured sale disguised as a lease 

What attaching a security interest means

Creating a security interest 

Three requirements for attachments (to create a security interest)

Security agreement, the creditor gives value, the debtor has rights in the collateral

Security agreement writing requirements

Must be in writing, but there can be oral security agreements as long as the collateral is in the possession of the secured party 

Sub-elements of a written security agreement

Record showing intent to create a security interest, an agreement authenticated by the debtor, and a description of the collateral 

Requirements for value

Article 9 will allow any consideration contract law requires, and even past consideration 

Future advances

Security not only for present obligations but for advances the creditor makes in the future 

After-acquired property

Security interest only reaches the collateral the debtor had rights in at the time of signing the agreement. This must be explicitly said in the agreement, or else it doesn’t work 

Exception to the after-acquired property rule

Courts will imply one if the collateral is a type that’s rapidly depleted and replenished (like a grocery store financing its ownership) 

Proceeds

Anything received from the sale, exchange, collection, or other disposition of collateral or proceeds. Doesn’t matter how many times something is exchanged, it continues to be proceeds. Unless otherwise agreed, security agreements automatically give a right to identifiable proceeds 

Perfection

Giving public notice of the security interest to the world. 

Automatic perfection upon attachment

A method of perfecting a security interest. Examples are PMSI in consumer goods because it’s perfected as soon as it attaches 

Taking possession of the collateral

A method of perfecting a security interest. It’s perfected the moment of possession and continues so long as possession is retained. Some intangibles can't be perfected by possession

Perfect by control

A method of perfecting a security interest. Security interest in nonconsumer deposit accounts can only be perfected by control

Notation on certificate of title

A method of perfecting a security interest for cars and trucks. Get the government authority to acknowledge the lien. 

Perfection by filing a financing statement

A method of perfecting a security interest. How a lender makes their security interest official and public so they can claim priority over other creditors. 

Financing statement

AKA UCC1, a document with the government that lists the debtor’s name and address, the lender's name and address, and a basic description of the collateral. Once filed, others are on notice that the lender has a legal claim to the collateral upon default

What state law governs

File in the state where the debtor is governed. If the debtor is an individual, look to the principal residence. If it’s an organization, look at the state where it’s organized 

If the debtor moves from one state to another

The security interest will become unperfected 4 months after the debtor’s move unless the secured party files a new financing statement in the new jurisdiction before the 4-month period is up

If collateral moves across state lines

The secured party is unperfected in 1 year unless a new financing statement is filed within that 1 year 

Financing statements duration

Effective for 5 years once filed and can be extended by filing a continuation statement. To be effective, it must be filed within the last 6 months of the original statement. So you have 4.5 years since filing to file the continuation statement 

Terminating statements

After paying off the loan, you can demand the creditor file a termination statement. The secured party must, on demand of the debtor, within 20 days, file a termination statement or provide one to the debtor 

Priority rules

Determine which creditors are first in line to get paid 

Knowledge requirements when determining priority

Priority doesn’t matter about whether you know of another’s interests 

Perfected secured lender

A lender who has a valid security interest in collateral but also has taken the extra step to “perfect” it.

Perfected secured creditor v. perfected secured creditor

First to file OR first to perfect (whichever is first) wins 

Special priority rules

PMSI in goods has priority over conflicting security interests in the same goods or their proceeds. 

Seller-financed PMSI v. Financer-financed PMSI

Seller-financed takes priority 

Secured Party v. buyer or other transferee

Secured party wins unless the Authorized Sale Exception or the Buyer in Ordinary Course Exception applies 

Authorized sale exception

If the secured party authorizes the sale, either in the security agreement or separately, then the buyer takes the item free of the security interest (can’t be repossessed later) 

Buyer in the ordinary course exception

A buyer in the ordinary course takes free of a security interest created by the seller. A buyer in the ordinary course is one who buys in good faith, without knowledge of the violation, in the ordinary course, from a seller of goods of that kind 

Consumer-consumer sales exception

(garage sales, for example), a buyer takes free of a security interest if they do not know of the security interest, pay value, for the buyer’s own personal, family, or household purposes, and before a financing statement covering the goods has been filed 

Secured creditor v. judicial lien creditor

Judgment lienholder wins if the lien arose before the security interest was perfected 

Judgment lienholder

A creditor who won a judgment in court 

Secured creditor v. Statutory lienholder

Statutory lienholder wins if they maintain possession of the collateral 

Where to find the grounds for default

In the security agreement, but if it lacks, there are default rules that are construed as failure to pay or perform 

Self-help repossession

Creditor takes collateral without going to the court first, so long as it can be done without breaching the peace 

Act of replevin

A legal action a creditor can file in court to get back collateral the debtor still has but won’t return 

Trespassing to repossess

There’s a statutory privilege to trespass onto someone’s property and convert the property (can only be done if the peace isn’t breached) 

Breach of the peace

Any conduct by the secured party that has the potential to lead to violence. Generally, a physical presence + verbal objection is enough 

Restrictions on repossessing

Anything that breaches the peace: unauthorized entry to a home, taking a car from a driveway, etc. 

Alternative way to self-help repossess

You could make the equipment unusable and dispose of it on the debtor’s property if the secured party can do it without breaching the peace (ex. Pulling the engine wires of bulldozer) 

Strict foreclosure

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

How to strictly foreclose

Notify any other lender that has a lien on the same collateral. If a notified party objects within 20 days after the notice is sent, you must dispose of it by sale. You must also get the debtor’s consent (unless they don’t respond within 20 days) 

Resale of collateral

After default, the secured party can sell, lease, license, or otherwise dispose of the collateral. The purchaser is still subject to superior security interests. Reasonable notice 

Deficiency judgment

The amount the creditor can collect from the debtor beyond the value of the collateral. 

Debtor’s right to redeem

Debtor’s ability to recover collateral by paying everything owed to the creditor 

Fixtures

Goods permanently attached to the real property. It started as personal property but is now attached to the real estate so we treat it as part of the real estate (ex., elevator) 

Perfecting a security interest in a fixture

File a fixture filing with information from the financing statement + description of real property, + name of the owner

Rights on default regarding fixtures

You can remove the fixture but if the debtor doesn’t own the property, the debtor must reimburse the owner of the property for any damages caused by removal, but not for any other diminution in value 

Fixtures: Secured party v. subsequent real estate interest

Secured interest in fixtures has priority over any real estate interest recorded subsequent to the perfection of the security interest

Secured party v. real estate interest

First in time wins, unless the security interest is PMSI, then PMSI 

Accession

Goods that are physically united with other goods in such a manner that the identity of the original goods is not lost (like tires on a car). A little thing attached to a bigger thing that can be removed 

Removing an accession

You’re responsible for the cost of repairs