Secured Transactions

Agricultural Liens

An interest in farm products that secures payment or performance of an obligation for:

• Goods or services furnished with respect to a farming operations; or

• Rent on real property in connection with a farming operation.

Types of collateral where sales of certain rights to payment are treated like secured transactions

I CAN treat these like a secured transaction

Payment intangibles

Chattel paper

Accounts

Promissory notes

To classify collateral, look to the debtor’s _____ at the time the security interest is ______.

principal use

created

Goods

• Movable

• Fixtures 

• Standing timber 

• Unborn animals 

• Growing or unharvested crops 

• Manufactured homes

Rights to Payment

• Instrument 

• Chattel Paper

• Accounts

• Payment Intangible

Other Collateral - not goods or rights to payment

• Documents (title)

• Investment Property (stocks and bonds)

• Deposit Accounts (bank account)

• Commercial Tort Claims 

• Letter of Credit Rights

• General Intangibles

Sub-Catagories of Goods

• Consumer goods

• Farm Products

• Inventory

• Equipment

Consumer Goods

Goods acquired primarily for personal, family, or household purposes.

Ex: electronics, furniture, boats, and home appliances.

Farm Products (+ Exclusion)

Crops, livestock, supplied used (animal feed, fertilizer) or produced (eggs, vegetables) in farming operations.

Not: Farming equipment (tractors and combines).

Inventory

• Goods that that are held for sale or lease (items on the shelf at a store)

• Goods that are furnished under a service contract (like a plumber buying a new pipe)

• Raw materials, works in progress, or materials used or consumed in business (a school buying pens)

• Not: farm products

Equipment

Goods that don't fit into any of the other definitions (consumer goods, farm products, or inventory).

Ex: Machinery, delivery vans, office equipment, and farm equipment.

When are fixtures are goods

Goods can also qualify as fixtures if they are attached to real property in such a way that an interest arises in them under real property law.

Instrument

promissory notes, checks, and drafts governed by Article 3 of the UCC.

Chattel Paper

A record (paper or electronic) with 2 components:

(1) A monetary obligation, +

(2) A security interest or a lease

Accounts

• A right to payment of a monetary obligation for property that is sold, leased, or licensed, or for services rendered

• includes a company’s accounts receivable, the right to be paid under insurance policies, and amounts owing on credit cards

• Note: does not include rights to be repaid loans of money.

Payment Intangible

“catch-all” of rights to payment.

Ex: A right to be repaid a loan of money that does not itself qualify as an instrument or chattel paper is a payment intangible.

Documents (Collateral)

• Documents of title that generally give the holder ownership rights in goods held by a bailee.

• someone is holding the goods and there is something called a document (or a warehouse receipt or a bill of lading) that represents the ownership rights to the goods

Investment Property

Certificated and uncertificated securities

Stocks and bonds

Deposit Accounts

Bank accounts

Ex: a savings, passbook, time, or demand account made with a bank

Commercial Tort Claims (+ Exclusion)

• Claims possessed by an organization or an individual that arose in the course of the organization or individual’s business.

• Do not include claims for personal injury or death.

Letter of Credit Rights

A right to payment or performance under a letter of credit

For a secured party to have a valid interest in the collateral it must first ____.

Attachment

Upon attachment, the security interest becomes ______ against the debtor’s collateral. (+ What does it mean)

• Enforceable

• The lender has rights to sue the debtor and also seize the property.

Attachment Requirements

• (1) Value given by the secured party

• (2) The debtor must have rights in the collateral (owns property interest)

• (3) There must be a security agreement: Either

  • An authenticated security agreement that describes the collateral, or

  • The secured party has transfer of possession or control of the collateral pursuant to an oral or unauthenticated security agreement.

When is an after-acquired collateral clause NOT effective for attachment

• Consumer goods or

  • unless the debtor acquires the good within 10 days after the secured party gives value

• Commercial tort claim

When is an after-acquired collateral clause be effective to attach in comsumer goods?

If the debtor acquires the good within 10 days after the secured party gives value

For attachment, when must a SP give value (general & advances)

General Rule: The SP must give value for the SI at the time the security agreement is entered into

Future Advances: SA can also specified that the collateral secured future value given by the secured party

Value can be given by

• Providing consideration sufficient to form a contract

• Extending credit (line of credit)

• Accepting delivery under a pre existing contract or

• In satisfaction of a pre existing claim

For attachment, what does it mean that the debtor has to have rights

a SI attaches only to the rights the D has in the collateral - D can’t give more than he has (leasehold, joint tenancy, full ownership)

Voidable Title & Attachment Rights

If a debtor has voidable title but could transfer full title to a good faith purchaser for value, then the debtor can create an enforceable security interest

Secured party qualifies as a good faith purchaser for value

When does a SI attach to after-acquired property

Attachment does not occur until the debtor obtains rights in the collateral.

Consignments & Attachment Rights

if the consignor retains title to the consigned goods, then the consignee generally does not have rights in those goods (unless the consignment is covered by Article 9)

Elements of a Security Agreement

Security agreements are R.A.D.

• (1) A Record: Does not have to be written on paper, but must be stored in a record— something that others can retrieve.

• (2) Authentication: Authenticated by the debtor.

  • (1) Signature or other symbol attached or associated with the record +

  • (2) that shows a present intent of the debtor to be bound

• (3) Description: Describe the collateral.

  • Security interest will only attach to that collateral that is described in the security agreement (Unless the lender has possession/control of additional collateral)

How to authenticate a security agreement

• (1) Signature or other symbol attached or associated with the record

• (2) that shows a present intent of the debtor to be bound

Description for purposes of a security agreement (+ Exemptions)

• The description must reasonably identify the collateral.

  • Ex: “All of the debtor’s inventory”

• Description cannot be super generic - “all of the debtor’s assets”

• Exception - Consumer goods & commercial tort claims: collateral must be identified with more particularity.

  • Ex: “All my consumer goods” does not reasonably identify the collateral.

How can a SP attach without an authenticated record

Can still attach with: (1) SP possession or control (2) pursuant to a SA

Collateral that can attach by posession

tangible things

• consumer goods

• equipment

• farm products

• chattel paper

• tangible documents

• certificated securities

• instruments

• money

Collateral that can attach by control

Intangibles

• electronic chattel paper

• investment propert

• letter of credit rights

• deposit accounts

Rights and Duties of a Secured Party in Possession

• The secured party must act with reasonable care with respect to the collateral;

• Must keep the collateral identifiable; and

• Must relinquish the collateral once the obligation has been satisfied.

• May charge the debtor for reasonable expenses for storing and maintaining the collateral.

After-Acquired Property

Property acquired by the debtor after the security interest attaches.

After-Acquired Property & Attachment (+ Exception)

• A security interest only attaches to the collateral described in the security agreement, lender must include an after acquired property clause to have a security interest in property acquired by the debtor after the agreement is authenticated

  • If there is no reference to after-acquired property, the security interest only attaches to the collateral that existed at the time that the security agreement was executed.

• Exception: Inventory & Accounts

  • In most states there is a rebuttable presumption that the description includes after-acquired inventory or accounts.

Accessions (def)

Goods that are physically united with other goods so that the identity of the original goods is not lost.

Effect of Accession on a SI

• If collateral becomes an accession, a security interest in that collateral is not lost

  • the security interest continues in the accession.

• Look to the terms of the security agreement to determine if the SI interest expanded to give the SP a SI in the accession.

Commingled Goods (def)

Goods that are physically united with other goods to the point that their identity is lost in a product or mass

Effect of Commingled Goods on SI

A security interest does not continue in the original goods that have been commingled

but it will attach to the larger product or mass that results.

Proceeds (def)

whatever results when collateral is sold, leased, licensed, exchanged, or otherwise disposed of.

Proceeds - General Attachment Rule

If a security interest attaches to the original collateral, it also attaches to the proceeds automatically whether or not the security interest states that it covers proceeds.

PMSI - Two Components

1. The value given allows the debtor to acquire goods or software; and

2. The goods or software acquired secure the loan.

Lender PMSI

• Lender loans money to the debtor so that the debtor can acquire goods + value is actually used to acquire the goods.

• The lender takes a security interest in those same goods to secure the loan.

Seller PMSI

Goods bought on credit

Ex: Dealer sells Buyer a car for $10,000 on credit. Buyer signs a security agreement granting dealer a security interest in the car.

An Article 9 consignment is treated as a ____ in inventory.

PMSI

The Dual-Status Rule (When)

In non consumer-goods transactions (business transactions), partial PMSIs are permitted.

Dual Status Rule - Consumer Goods

The UCC does not specify a rule for consumer-goods transactions, so courts can either apply the dual status rule or conclude that there is no PMSI (it destroys the PMSI)

PMSI in Software

D acquired an interest in software in an integrated transaction in which the D also acquired an interest in goods (a computer) +

D acquired that interest in the software for the principal purpose of using the software in the goods

Methods of Perfection

1. Filing (the most common way to perfect)

2. Possession

3. Control

4. Alternate Perfection Systems (Certificate of Title)

5. Automatic perfection

Perfection by Filing (What, Where & Exceptions)

File a financing statement in the Central Financing Office of the appropriate state.

• Applicable to perfect security interests in all collateral

• Except:

  • deposit accounts

  • money

  • letters of credit, and

  • collateral subject to other perfection methods (like state certificate of title laws).

    • Exception: cars that are inventory can be perfected by filing.

Financing Statment - Where to File (+ consequence + exception)

In the central filing office, often the secretary of state’s office in the state where the debtor is located.

• Corporation: located in its state of incorporation.

• Business that is not a registered organization: located in the state in which it operates its business.

  • If multiple states, the state where the chief executive office is located

• Individuals: located in the state of their principal residence .

• Exception - Real Property:

  • File in the local real property records in the county where the property is located

  • Includes fixtures, as extracted collateral, including oil and gas, and timber to be cut

• Consequence: If a secured party files in the wrong location, there is no perfection.

Financing Statment - Required Essential Information

1. Name of the debtor

2. Name of the secured party

3. Description of the collateral

Financing Statment - Real Property Required Information

Regular Required Info

• 1. Name of the debtor

  2. Name of the secured party

  3. Description of the collateral

Plus Additional Requirements

• The financing statement must indicate that a security agreement covers this type of collateral.

• It must note that it is to be filed in the local real property records.

• Describe the real property to which the collateral relates

• Name the record owner of the real property (if the debtor is not the person who has an interest in the real property)

• Note: Recording the mortgage in the local real property records can satisfy the financing statement requirements if it contains the information listed above.

  It doesn’t not note that it is filed in the local real property records

Financing Statment - Required Non- Essential Information

• A filing office will refuse to accept a financing statement that does not include:

  • Addresses for both the debtor and the secured party, and

  • An indication of whether the debtor is an individual or an organization. 

• If a financing statement is accepted without this non essential information, it is still effective to perfect a security interest.

Financing Statment - Authorization (+ consequence)

• The debtor must authorize a financing statement in an authenticated record.

  • The debtor does not have to sign the financing statement itself

• If the debtor authenticates a security agreement, that authentication authorizes the secured party to file a financing statement.

  • D authenticating SA = FS authenticated

• Consequence: Failure to obtain authorization before filing a financing statement can result in the secured party being liable for actual and statutory damages.

Financing Statment - Debtor’s Name - Registered Organization

use the name on the articles of incorporation, or last public organic record filed with the state.

Cannot file under the trade names (i.e., no d/b/a)

Financing Statment - Debtor’s Name - Individual

• Majority rule: If the debtor has a non-expired driver's license (or state issued I.D.), use that name.

  • If debtor does not have a valid state-issued I.D., use legal name

• Minority rule: Driver’s license/state I.D. is a safe harbor, but other legal names may be sufficient to perfect.

Financing Statment - Description of Collateral (+ proceeds/ after-aquired)

Use the same types of descriptions used for a security agreement or

Financing statement can have a super generic description.

Financing statement does not need to mention proceeds or indicate that it covers after-acquired property or future advances.

Security interest must _____ before it becomes perfected.

Attach

Financing Statment - Errors (generally)

minor errors in a financing statement do not affect perfection unless they make the financing statement seriously misleading

If the mistake is seriously misleading, then the security interest is not perfected.

Financing Statment - Error in Debtor’s Name

Almost always seriously misleading

Exception: If the search for the correct name of the debtor would uncover the financing statement with the error, the error is not seriously misleading.

When should a filing office refuse a financing statment

• If it lacks the required information

• if the creditor fails to tender the fee or

• if the creditor submits the financing statement in an improper manner.

Financing Statment - Effect of Justified Rejection

financing statement is treated as having not been filed

Financing Statment - Effect of Unjustified Rejection

Financing statement is treated as having been filed.

Exception: It will be ineffective against

• a purchaser or

• secured party who gave value in reasonable reliance upon the absence of the record from the files.

Financing Statment - Effect of Filing Office Index Error

If the filing office indexes the financing statement incorrectly, that has no effect on perfection.

Financing Statment - Date Effective

generally effective on delivery to the filing office and tender of the filing fee

Financing Statment - Duration

Financing statements lapse five years after the date of filing, unless continued.

Financing Statment - Continuation

Filing statament won’t lapse if a continuation statement is filed within six months before the financing statement lapses.

Financing Statment - Amendment (for what & date)

Can be filed to add or delete collateral covered by the statement.

effective from the date of filing but does not extend the financing statement’s period of effectiveness

Financing Statment - Effect of Lapse

If a financing statement lapses, the secured party loses perfection (unless it is perfected by some other means) and is treated as if it was never perfected

The secured party may file a new financing statement to re-perfect, but might lose its place in a priority contest.

Financing Statment - Termination

When the obligation is paid back, a termination statement voids the financing statement.

Perfection by Posession (+ Collateral)

Security interests in tangible collateral may be perfected if the secured party takes possession of the collateral.

Collateral can be perfected by possession:

• Money

• Goods

• Instruments

• Negotiable documents

• Tangible chattel paper

How to perfect a SI in money

Possession is the only way to perfect a security interest in money.

Perfection by Control (+ Collateral)

A secured party may perfect a security interest in specific intangible collateral by taking control of that collateral.

Collateral can be perfected by control:

• Deposit accounts

• Investment property

• Electronic documents

• Electronic chattel paper

• Letter of credit rights.

How to perfect a SI in deposit accounts

Control only — filing will not perfect

How to perfect a SI in letter of credit rights

Control only — filing will not perfect

Ways to control a deposit account

• 1. The secured party is the bank that has the deposit account

  • lender and the bank are the same party

• 2. Control Agreement: The secured party, the bank and the debtor agree in an authenticated record that the lender (secured party) has control over the deposit account

• 3. The secured party can become the bank’s customer with respect to the deposit account.

Perfection Under Alternate Perfection Systems (Meaning)

When another statute (non-Article 9) governs how a security interest is perfected, you must follow the rules of that statute or perfection isn’t satisfied

How to perfect a SI in cars (+ exception)

State certificate of title statutes

• Applicable to cars, motorcycles, or other vehicles that have a title

• Perfect by noting a security interest on that certificate of title.

Filing, Possession of the car, or possession of the title are insufficient to perfect in most cars.

Exception: Cars that are inventory can be perfected by other means

• if you purchase a new car, that car likely didn’t have a title when purchased so there was no title on which to note the lien – so filing works when the cars are inventory

Perfection - PMSI in Consumer Goods (+ Exception)

Auto perfected on attachment without a FS

Exception: If a certificate of title statute governs, then no automatic perfection.

Automatic Perfection - Permanent

• PMSI in Consumer Goods

• Casual or isolated assignments of accounts that do not transfer a significant part of the outstanding accounts receivable

• Sales of payment intangibles or promissory notes

Temporary Perfection (when - generally)

Temporary perfection may be available if a security interest was perfected but the debtor or the collateral has changed since perfection occurred.

Temporary Perfection - New Value (+ Collateral)

New value is given under an authenticated security agreement

Perfection: Automatically perfected for 20 days from attachment

Collateral: certificated securities, negotiable documents, or instruments

Temporary Perfection - Delivery

Collateral is delivered to the debtor for the purpose of selling or exchanging it

Duration: remains temporarily perfected for 20 days.

Temporary Perfection - D Moves

If the debtor moves to another state

Perfection: a four-month grace period to refile in a new state.

Temporary Perfection - Collateral Moves

Collateral is transferred to a debtor in another state

one-year grace period for a perfected security interest

Note: A perfected possessory security interest remains perfected when the security interest is perfected under the new state’s laws.

Temporary Perfection - Proceeds

If a security interest in original collateral is perfected, then a security interest in proceeds is temporarily perfected for 20 days from attachment.

Indefinite Perfection - Proceeds

• Financing statement

• Cash Proceeds

• Same-office rule

Perfection - Cash Proceeds

If the security interest in the original collateral is perfected, then the security interest in the identifiable cash proceeds is perfected indefinitely.

Indefinite Perfection - Proceeds - Financing Statment

Proceeds indefinitely perfected if

(a) SP amends the financing statement to cover proceeds within 20 days or

(b) original financing statement is broad enough to cover proceeds

Same-office Rule (+ Exception & Timing)

Indefinite perfection of proceeds if:

• (1) a filed financing statement covers the original collateral and

• (2) the proceeds are collateral in which a security interest may be perfected by filing in the same office as the financing statement

Exception: Does not apply to proceeds acquired with cash proceeds.

Note: If the original filing ceases to be effective after the 20-day period, then the security interest in proceeds also ceases to be automatically perfected.

Post-fiLING cHANGES