CHAPTER 25 SECURED TRANSACTIONS: ATTACHMENT AND PERFECTION

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CHAPTER 25SECURED TRANSACTIONS ATTACHMENT AND
PERFECTION
DAVIDSON, KNOWLES FORSYTHE Business Law Cases
and Principles in the Legal Environment (8th Ed.)
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CREDIT FINANCING AND ARTICLE 9

• Buyer gives owner of the goods a security
  interest, which is another method of commercial
  transaction.
• Article 9 deals with secured transactions.
• Secured transactions common in business.
• Security interest ensures payment by buyer, if
  buyer does not pay seller can repossess good.

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CREDIT FINANCING AND ARTICLE 9

• Secured transaction allows buyer to receive good
  sooner than having to pay cash, seller has right
  to repossess if buyer does not pay.
• Buyer defaults, seller must comply with rules in
  Article 9, relating to perfection and priorities.
  
• Seller is called the secured party.
• Person who owes payment is the debtor.

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CREDIT FINANCING AND ARTICLE 9

• Agreement that creates security interest is a
  security agreement.
• Property subject to a security interest is the
  collateral.
• Article 9 unified approaches to secured financing.

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CREDIT FINANCING AND ARTICLE 9

• Newest version of Article 9
• Expands scope of property available for secured
  transactions.
• Eliminated need for multiple filings.
• Creditors will file where debtor is located.
• Clarifies place for filing if debtor is an
  international entity or individual.
• Permits electronic filings.

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SCOPE OF ARTICLE 9

• Governs transactions intended to create security
  interest in personal property or fixtures.
• Security interest an interest in personal
  property/fixtures which secures payment or
  performance of an obligation.
• UCC categorizes collateral according to nature or
  use.

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SCOPE OF ARTICLE 9

• Types of collateral on basis of nature
• Documents.
• Negotiable documents of title to goods bills of
  lading/warehouse receipts.
• Instruments.
• Negotiable instruments checks/promissory notes.
• Securities stocks and bonds.

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SCOPE OF ARTICLE 9

• Types of collateral on basis of nature
• Proceeds Whatever is received upon the sale,
  exchange, collection, or other disposition.
• Chattel paper. A writing or writings that
  represent
• Promise to pay money or
• Either a security interest in, or a lease of,
  specific goods.

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SCOPE OF ARTICLE 9

• Types of collateral on basis of nature
• Accounts.
• Right to payment for goods sold or leased.
• Services rendered not represented by an
  instrument or chattel paper.
• General intangibles.
• Other personal property, such as goodwill of a
  business and trademarks.

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SCOPE OF ARTICLE 9

• Types of collateral on use by debtor
• Consumer goods.
• Goods used/bought for personal, family, or
  household purposes.
• Equipment.
• Goods used/bought primarily in business.
• Farm products.
• Crops, livestock, or supplies used/produced in
  farming operations.
• Products of crops or livestock in their
  unmanufactured states held by farmers.

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SCOPE OF ARTICLE 9

• Types of collateral on use by debtor
• Inventory.
• Goods held for sale or lease.
• Raw materials, work in process, and materials
  consumed in a business.
• Fixtures.
• Goods that become a part of real estate.

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SCOPE OF ARTICLE 9

• Classes of goods mutually exclusive.
• Article 9 applies to all consensual security
  interests in personal property and fixtures.
• Article 9 does not apply to a security interest
  that arises by operation of law.

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ATTACHMENT CREATION OF A SECURITY INTEREST

• An interest in personal property/fixtures that
  secures payment or performance of an obligation.
• Important to distinguish between a true lease and
  a lease used as a security interest.
• Article 9 applies to a lease intended as
  security.
• Facts of each case determine if a lease is
  intended.

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ATTACHMENT

• Lessee person who is leasing.
• Lessor person leasing the property to another.
• Lease intended as security is subject to Article
  9s filing requirement.
• True lease not subject to Article 9s filing
  requirement.

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ATTACHMENT

• Lease intended as security treats bankruptcy
  trustee as a lien creditor.
• Trustee has superior rights than original owner.

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SECURITY AGREEMENT

• Security interest must be valid and enforceable.
• First step in creation and enforcement of a
  security interest requires attachment.
• Attachment process by secured party and debtor
  create security interest and confer secured party
  certain enforceable rights collateral vis-à-vis
  the debtor.

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SECURITY AGREEMENT

• Attachment does not give secured party rights
  superior to other creditors.
• Attachment occurs when secured party does all
• Enters into security agreement and debtor agrees
  security interest will attach.
• Possesses security agreement signed by debtor.
• Ascertains that debtor has rights in collateral.
• Gives value.

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SECURITY AGREEMENT

• Transaction involving a pledge attachment has
  occurred.
• A signed security agreement must
• Be in writing.
• Create or provide for a security interest.
• Reasonably identify the collateral.
• Be signed by the debtor.

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SECURITY AGREEMENT

• Security agreement may contain
• Amount of indebtedness/terms of payment.
• Liability in event of risk of loss to collateral.
• Requirement of insurance on maintenance and
  repair of collateral.
• Warranty by debtor, owns collateral free from
  liens or security interests.
• Statement of debtors rights.
• Description events constitute default by debtor.

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SECURITY AGREEMENT

• Security agreement may extend security interest
  of secured party to all collateral that is
  subject to agreement and debtor amy acquire after
  entering into agreement.

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PERFECTION

• Process used by secured parties protect
  collateral from attachment by third parties.
• Date of perfection determines priorities over
  competing claims among other creditors.
• Perfection occurs in one of three ways
• Creditors filing a financing statement.
• Creditor taking possession of collateral.
• Creditor refraining from doing anything beyond
  attachment. (automatic attachment)

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PERFECTION BY FILING

• If collateral consists of accounts or general
  intangibles.
• Financing statement used by UCC to give notice of
  the security interest.
• Another method of filing involves registering the
  security interest according to the requirements
  of statutes other than the UCC.

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PERFECTION BY FILING

• Financing statement must contain
• Names and addresses of debtor and secured party.
• Debtors signature.
• Description of the collateral.
• Provides public notice of a claimed interest in
  the collateral.
• Financing statement effective if contains enough
  information to cause the party searching records
  to look further.

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PERFECTION BY FILING

• Insufficient filing when debtor uses trade or
  business name rather than legal name.
• Filing before attachment does not constitute
  perfection.
• Financing statement effective for five years,
  then security interest lapses unless secured
  party files continuation statement before lapse.

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PERFECTION BY FILING

• UCC imposes secured party must comply within two
  weeks when debtor requests a statement of account
  or a list of collateral from secured party.
• UCC limits debtor to one list every six months.
• No outstanding obligation on financing statement,
  UCC, may require secured party to file
  termination statement.

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PERFECTION BY POSSESSION

• Method used for perfecting security interest.
• Security interest in negotiable instruments
  perfected only by secured party taking possession
  of the collateral.
• Secured party may perfect security interest in
  tangible collateral by physical possession of
  collateral.

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AUTOMATIC PERFECTION

• Method ordinarily used for perfecting purchase
  money security interests in consumer goods.
• Perfection occurs upon attachment.
• Security interest in consumer goods perfected
  automatically (PMSI).
• Secured party is not required to do anything to
  perfect it.

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PROCEEDS

• Secured party has lien that floats over the
  collateral and includes proceeds.
• Proceeds whatever is received on the sale,
  exchange, collection, or other disposition of
  collateral.
• Extends to identifiable money proceeds.
• Realized from the sale of the collateral.