Secured Transactions

1. CHAPTER 25 Secured Transactions

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3. 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 18:33

4. 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.

5. Definitions of Terms • 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.

6. 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.

7. 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.)

8. Article 9 Revisions • Throughout the 1990’s, revisions to Article 9 were recommended and 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.

9. 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) • Deposit accounts • Commercial tort claims • General Intangibles • Chattel Paper (includes electronic chattel paper) • Goods (Software is sometimes included in goods, but not always.)

10. Attachment of Security Interest • Attachment is a vital step in a secured transaction. • The two parties made a security agreement and either, (1) the debtor has authenticated the agreement, or (2) the secured party has control or possession of the collateral. • The secured party gave value in order to get the security agreement (may be future value). • The debtor has rights in the collateral.

11. Attachment to 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.

12. Perfection • Perfection guarantees the collateral’s availability in case of default. It keeps the collateral from being used for more than one security agreement at a time. • Kinds of Perfecting • Filing a financing statement • Possession of the collateral • Purchase money security interest in consumer goods (PMSI) • Perfection of movable collateral & fixtures • (More detail about these on the next several slides.)

13. Perfection 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 debtor’s correct name would reveal the financing statement, the record is valid. • Signature of the debtor is not required.

14. Perfection by Filing (cont’d) • 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.

15. 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. • 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. • Generally, a security interest in money (cash) must be perfected by possession.

16. Perfection by Control • A security interest in investment property, deposit accounts, letter-of-credit rights, and electronic chattel paper may be perfected by control. (The secured party has exclusive rights to dispose of the collateral.) • 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.

18. Perfection of 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 vehicle’s certificate of title.

19. 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.

20. 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.

21. 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.

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

23. Priorities Among Creditors • A party with 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.

24. 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.

25. Priority Involving a PMSI • PMSI in NoninventoryCollateral • 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 20 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).

26. 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.

27. 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.

28. 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.

29. 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.

30. 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, generally within one month of the satisfaction of the debt.

31. “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.”