Secured

1
CHAPTER 26
Secured Transactions
2
Quotes of the Day

• All progress is based on a universal innate
  desire on the part of every organism to live
  beyond its means.
• Samuel Butler,
• English author

Be not made a beggar by banqueting on
borrowing. Ecclesiasticus 1833
3
Revised Article 9

• Article 9 of the Uniform Commercial Code (UCC)
  governs secured transactions in personal
  property.
• Article 9, which was recently revised, applies to
  any transaction intended to create a security
  interest in personal property or fixtures.
• About ½ of all UCC lawsuits involve Article 9.

4
Definitions

• Fixtures goods that have become firmly attached
  to real estate.
• Security interest interest in personal property
  or fixtures that secures the performance of an
  obligation.
• Secured party party who holds the security
  interest.
• Collateral property subject to the security
  interest.

5
More Definitions

• Debtor person who has some original ownership in
  the collateral.
• Obligor person who must repay money.
• Security agreement contract which gives a
  security interest to the secured party.
• Default when the debtor fails to pay
• Repossession when the secured party takes back
  the collateral because the debtor has defaulted.

6
And More Definitions

• Perfection steps the secured party must take to
  protect rights in the collateral against people
  other than the debtor.
• Financing statement document filed by secured
  party to give notice of security interest in the
  collateral.
• Record information on paper or other medium.
• Authenticate to sign a document (includes use of
  symbols or electronic encryption.)

7
Article 9 Revisions

• Throughout the 1990s, revisions to Article 9
  were recommended and in 2000, the revisions were
  adopted.
• Revised Article 9 is now law in all states.
• Revisions include
• Expansion of transactions covered
• Clarification of rules for creating, perfecting,
  and enforcing security interests
• Adoption of a medium-neutral provision meaning
  that security interests may be filed
  electronically, on paper, and in other forms.

8
Scope of Revised Article 9

• Collateral for transactions may include, among
  other things
• Instruments
• Investment Property
• Documents of Title
• Accounts (now includes health-care-insurance
  receivables)
• Commercial tort claims
• General Intangibles
• Chattel Paper (includes electronic chattel paper)
• Goods (Software is sometimes included in goods,
  but not always.)

9
Attachment of a Security Interest

• Attachment is a vital step in a secured
  transaction.
• The two parties made a security agreement and
  either, (1) it is in writing, describes the
  collateral, and is signed by the debtor, or (2)
  the secured party has possession of the
  collateral.
• The secured party gave value in order to get the
  security agreement.
• The debtor has rights in the collateral.

10
Future Property

• After-acquired property refers to items that the
  debtor obtains after the parties have made their
  security agreement.
• The parties may agree that the security interest
  attaches to after-acquired property.
• Proceeds what is obtained when collateral is
  sold or disposed of.
• The secured party automatically obtains a
  security interest in the proceeds, unless the
  security agreement states otherwise.

11
Perfection

• Perfection guarantees the collaterals
  availability in case of default. It keeps the
  collateral from being used for more than one
  security agreement at a time.
• Methods of Perfecting
• Filing a financing statement
• Possession of the collateral
• Purchase money security interest in consumer
  goods (PMSI)

(More detail about these on the next several
slides.)
12
Perfecting by Filing

• Contents of the Financing Statement
• A financing statement is sufficient if it
  provides the name of the debtor, the name of the
  secured party and a description of the
  collateral.
• Names must be the registered name of an
  organization or legal name of a person.
• Under Revised Article 9, if a computer search
  under the debtors correct name would reveal the
  financing statement, the record is valid.

13
Perfecting by Filing (contd)

• Place of Filing
• In general, state statutes require filing with
  the Secretary of State (normally in the state
  capital) and/or in the local county.
• Duration of Filing
• Generally, a filed financing statement is good
  for five years unless the secured party files a
  continuation statement within six months prior to
  expiration. This extends the protection for
  another five years.

14
Perfection by Possession

• When the debtor gives the collateral to the
  secured party to hold during the time of the
  loan, it is called a pledge.
• Possession may be used when the collateral is
  goods, negotiable documents, instruments, money,
  chattel paper that is tangible (non-electronic),
  or most securities.
• Mandatory Possession
• Generally, a security interest in money or
  instruments must be perfected by possession.

15
Perfection by Possession

• The advantages to the creditor of holding the
  collateral are obvious the collateral is safe,
  its location is known, it cannot be used to
  secure another loan, and repossession is simple.

16
Perfection by Control

• Control means that the secured party has
  exclusive rights to dispose of the collateral.
• A security interest in investment property,
  deposit accounts, letter-of-credit rights, and
  electronic chattel paper may be perfected by
  control.
• Security interests in deposit accounts and
  letter-of-credit rights may be perfected only by
  control.
• A secured party must use reasonable care in the
  custody and preservation of collateral in her
  possession.

17
Perfection Consumer Goods

• The Code gives special treatment to security
  interests in consumer goods.
• The purchase money security interest (PMSI) is
  one taken by the person who sells the collateral
  or by the person who advances money so the debtor
  can buy the collateral.
• A PMSI in consumer goods perfects automatically,
  without filing.
• A PMSI may be created only in goods, fixtures, or
  software.

18
Perfection Consumer Goods

• The Code gives special treatment to security
  interests in consumer goods.
• The purchase money security interest (PMSI) is
  one taken by the person who sells the collateral
  or by the person who advances money so the debtor
  can buy the collateral.
• A PMSI in consumer goods perfects automatically,
  without filing.
• A PMSI may be created only in goods, fixtures, or
  software.

19
Movable Collateral

• Movable Goods Generally
• A security interest perfected in one state is
  valid in a second state for four months after the
  property is brought into that new state. When
  the collateral is transferred to a new state, the
  security interest remains perfected for one year.
• Motor Vehicles and the Like
• Code provisions for perfecting generally do not
  apply to motor vehicles, trailer, mobile homes,
  boats and tractors. State laws deal with these
  situations.
• A security interest in an automobile (and in some
  states, boats) generally must be noted on the
  vehicles certificate of title.

20
Fixtures

• Fixtures are goods permanently attached to real
  estate such as a furnace.
• Using fixtures as collateral can become complex,
  especially if someone else has an interest in the
  real estate itself.

21
Protection of Buyers

• Generally, once a security interest is perfected,
  it remains effective regardless of whether the
  collateral is sold, exchanged, or transferred.
• Buyers in Ordinary Course of Business
• One who buys goods in good faith from a seller
  who routinely deals in such goods.
• A BIOC takes the goods free of a security
  interest created by his seller even though the
  security interest is perfected.

22
Protection of Buyers (cont'd)

• Buyers of Consumer Goods
• Buyer takes free of a security interest he is not
  aware of, if he pays value for the goods, he is
  buying for his own family or household use, and
  the secured party has not yet filed a financing
  statement.
• Buyers of Chattel Paper, Instruments, and
  Documents
• If bought in the ordinary course of her business,
  and she takes possession, she generally takes
  free of any security interest.

23
Liens

• A lien is a security interest created by law
  (rather than by agreement).
• Artisans lien is a security interest in personal
  property created when a worker makes some
  improvements to the property.
• Mechanics lien is created when a worker improves
  real property.
• A landlords lien is when a landlord gains an
  interest in the tenants personal property after
  the tenant fails to pay rent.
• Article 9 does not apply to liens.

24
Priorities Among Creditors

• A a perfected security interest takes priority
  over one with an unperfected interest.
• If neither secured party has perfected, the first
  interest to attach gets priority.
• Between perfected security interests, the first
  to file or perfect wins.
• A secured party controlling or possessing an
  instrument, deposit account, investment property
  and letter-of-credit rights wins over a party
  that merely filed.

25
Priority Involving a PMSI

• PMSI in Inventory (goods that the seller is
  holding for sale or lease in the ordinary course
  of its business)
• Takes priority over a conflicting perfected
  security interest (even one perfected earlier),
  if two conditions are met
• Before filing, the secured party must check for
  earlier security interests and, if any, must
  notify that holder concerning the new PMSI.
• The secured party must then perfect its PMSI
  before the debtor receives the inventory.

26
Priority Involving a PMSI

• PMSI in Non-Inventory Collateral
• A PMSI in collateral other than inventory takes
  priority over a conflicting security interest if
  the PMSI is perfected at the time the debtor
  receives the collateral or within 10 days after
  he receives it.
• Article 9 now explicitly provides for the rights
  and duties of third parties (ones who are neither
  the debtor nor the secured party).

27
Default and Termination

• Default when debtor fails to make payments due
  or enters bankruptcy.
• Taking Possession of the Collateral
• When the debtor defaults, the secured party may
  take possession of the collateral.
• The secured party can take the collateral without
  a court order if it can be done without
  disturbing the peace.

28
Disposition of Collateral

• A secured party may sell, lease, or otherwise
  dispose of the collateral in any commercially
  reasonable manner.
• A debtor is liable for any deficiency
  (insufficient funds to pay off the debt).
• Any surplus is to be returned to the debtor.
• Right of Redemption
• The debtor may redeem the collateral by paying
  the full value of the debt at any point before
  the secured party disposes of it.

29
Acceptance of Collateral

• If the secured party has possession, he may
  notify the debtor that he intends to retain the
  collateral as full or partial satisfaction of the
  debt.
• If the debtor does not object within 20 days, the
  secured party may keep the collateral as full
  payment, but not as partial.
• If the debtor objects to acceptance, the secured
  party must sell or otherwise dispose of the
  collateral.
• Consumer goods may not be repossessed if the
  debtor has possession or has paid more than 60
  of the debt.

30
Proceeding to Judgment

• Upon default, a secured party may sue the debtor
  for the full debt instead of seizing the
  collateral.
• This is sometimes done when the collateral has
  decreased in value to an amount less than the
  debt, and there is reason to believe that other
  assets are available to pay the debt.

31
Termination

• A termination statement is a document indicating
  that there is no longer a security interest in
  the collateral.
• This happens when the debtor has fully paid off
  the debt.
• The termination statement must be filed
  everywhere the financing statement had been filed.

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Secured transactions are essential to modern
commerce but create pitfalls for the unknowing.
A person doing business in ignorance of Article 9
risks losing goods and money.
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