Secured Transactions Nc

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Secured Transaction

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transaction intended to create a security interest in personal property or fixtures.

Look for (1) a credit transaction (sale on credit or a loan) and (2) an agreement that creates a lien in favor of the creditor in the debtor's personal property to secure the debt

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Debtor

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person who owes payment or performance of the obligation secured

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Secured party

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

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security agreement

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the agreement bewtween debtor and secured party that creates the security interest

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security interest

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an interest in personal property or fixtures which secures payment or the performance of an obligation - the interest is contingent - the contingency is default

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Collateral

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property subject to a security interest - the property that secured party can repossess upon default

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Purchase Money Security Interest (2 kinds)

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(1) Secured party sells debtor the collateral on credit and retains a security interest in the item sold

(2) A loan to debtor that enables debtor to buy specific collateral, and the creditor takes a security interest in the specific collateral

NOTE: The credit or loan proceeds must actually be used to acquire the collateral.

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After-acquired property clause

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Clause in the agreement that allows the creditor to take a security interest not only in debtor's present property, but also in property that debtor will obtain in the future

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Future Advance Clause

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A clause in the security agreement which allows the creditor to make future loans to the debtor and secure those future advances in the present security agreement (that way a new security agreement is not needed when a future advance is made)

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Attachment

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The process required to give the secured party a security interest that is effective as against the debtor.

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Perfection

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The process required to give the secured party an interest in the collateral that is effective as against the world (i.e. a 3rd party).

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Financing Statment

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Document that is generally used to provide public notice of a security interest, which perfects the security interest.

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Classification of Property

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(1) Goods (tangible personal property)
(2) Semi-intangible and intangible property

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Further classification of Goods - judged by how the debtor uses

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(1) consumer goods
(2) equipment (the catch-all)
(3) farm products
(4) inventory (also includes materials used or consumed in a business)

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8 types of Semi-intangible and intangible property

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(1) Instruments e.g. promissory note
(2) Documents e.g. bill of ladng or warehouse receipt
(3) Chattel Paper
(4) Investment Property
(5) Accounts (not evidences by an instrument or chattel paper) e.g. accounts receivable
(6) Deposit accounts e.g. account at a bank NOTE: Article 9 applies nonconsumer deposit accounts and deposit accounts that are claimed to be proceeds of other collateral
(7) commercial tort claims
(8) general intangibles (catch-all category)

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Chattel Paper

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A record or records which evidence both a monetary obligation (promise to pay) and a security interest (security agreement) - can be tangible or intangible (i.e. electronic)

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Scope of Article 9

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applies to:
(1) any transaction, regardless of form, that creates a security interest in personal property or fixtures by contract

(2) an agricultural lien

(3) a sale of accounts, chattel paper, payment intangibles, or promissory notes (unless the sale is for purposes of collection or is part of the sale of a business)

(4) certain consignments

(5) a secured sale disguised as a lease

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Relevant question to determine if a lease is a secured sale

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Must determine on a case-by-case basis whether: at the time the parties entered into the transaction, was it reasonably likely that teh "lessor" would get the item back when it still had meaningful economic value?

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Attachment - Creation of an Article 9 Security Interest - requires 3 things

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(1) A security agreement
(2) the secured party gave value
(3) the debtor has rights in the collateral

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Security Agreement - when writing required

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If debtor has possession of the collateral.

NOTE: If the collateral is in the possession of the secured party pursuant to oral security agreement (i.e. I'll loan you $50 but I keep your watch until you repay and if you don't repay then we agree I can sell your watch), this meets the "security agreement" requirement and is called a pledge.

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Form of the security agreement (when written)

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(1) must show an intent to create a security interest
(2) "authenticated" by debtor - i.e. signed
(3) must have a description of the collateral - "reasonably identify"

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After Acquired Property Clause

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Default Rule: w/o this clause no interest in after acquired property

Exception - inventory and accounts - for this type of property which is rapidly depleted and replenished - court will often imply an after acquired property clause assuming the parties must have meant to have one or else the security interest would reach nothing

Exception - consumer goods - security interest will not attach under an after acuqired property clause unless the debtor acquires rights in the goods within 10 days after the secured party gives value

Exception - commercial tort claims - after acquired property clause is ineffective as to commericial tort claims

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Property secured generally includes proceeds

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Proceeds = whatever (so money or other property) is received upon the sale, exchange, collection or other disposition or collateral or proceeds (i.e. there can be a chain)

This right is automatic unless the security agreement provides otherwise.

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Lowest intemediate balance rule

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used to determine which part of a commingled mass of cash is "identifiable" when cash is received as "proceeds" and then "commingled" with other cash non-proceeds.

Look at the balanace of a commingle bank account starting at the time the cash proceeds are deposited and ending at the time you are applying the test - the lowest balance during the period is the secured party's identifiable proceeds

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Perfection of the Security Interest - 5 Methods

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(1) Automatic Perfection
(2) Possession of Collateral by Secured Party
(3) Perfection by "Control"
(4) Notation of lien on certificate of title
(5) filing a financing statement (called a UCC-1)

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Automatic Perfecton

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(1) Purchase money security interest in consumer goods

(2) assignment of certain accounts or payment intangibles

(3) sale of a payment intangible or promissory note

(4) A security interest created by the assignment of a health-care insurance receiveable to the provider of the health care goods or services

(5) investment property in limited situations

(6) supporting obligations - where security interest in collateral perfected

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Contents of Financing Statement

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(1) debtor's name
(2) description of the collateral
(3) secured party's name
(4) for real property related financing statements - must reasonably identify property (metes and bounds not required) and must indicate to be filed in real property records

(5) signature not required but debtor must authorize the filing (automatic when he authenticates security agreement on the same collateral)

NOTE: The authenticated security agreement itself may be filed so long as it contains items (1)-(5)

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Where to file financing statement

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(1) General rule - with Sec of State

(2) real estate related - with the Register of Deeds in county where real property is located

(3) multi-state transaction - where the debtor is located

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Duration of financing statement

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5 years - a continuation statement (UCC-3) which will extend 5 years must be filed within the 6 month period before the 5 year period expires

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Perfection as to Proceeds

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Secured party w/ a perfected interest in collateral automatically has a perfected security interest in proceeds for 20 days to remain perfected, the secured party must take new action unless:

(1) the proceeds are identifiable cash proceeds OR

(2) "same office rule" - the security in the origianl collateral was perfected by filing a financing statement, a security interest in the proceeds woudl be filed in the same place and the proceeds were not purchased with CASH proceeds of the collateral

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Priority

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Situation where secured creditor and some third party are claiming the same collateral.

Approach:
(1) Identify the combatents
(2) Apply the correct "fight" rule

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Secured v. Secured

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General Rule: First to file or perfect has priority.

Special Rules:
(1) PMSI in goods other than inventory or livestock has priority if the PMSI is perfected within 20 days of the time the debtor received possession.

(2) PMSI in inventory or livestock has priority if BEFORE the debtor receives possession, the secured party perfects and sends an authenticated notification to holders of previously filed conflicting security interests in the collateral - good for 5 years

(3) PMSI in software arises only if the debtor acquires the software for the purpose of using the software in goods subject to a PMSI (i.e. a PMSI covers both the software and the computer) - the PMSI in the software has the same priority as the security interest in which the software was used

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Conflicting PMSIs

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A seller PMSI has priority over a lender PMSI.

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Special Priority rules for investment property

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(1) security interest perfected by control has priority

(2) if both by control then rnak in order of time

(3) security interest granted a broker has priority

(4) except as in (1), (2) or (3) first to file or perfect has priority

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Special priority rule for deposit accounts

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(1) security interest perfected by control has priority

(2) if both by control then rnak in order of time

(3) control by putting the account in secured party's name has priority

(4) bank w/ control b/c it maintains the account has priority over all but (3)

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Secured party v. buyer of collateral

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(1) Authorized Sales - buyer takes free of the security interest

(2) Unauthorized sales - buyer in the "ordinary course of business" takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence

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Authorized sales

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May be express or implied (either from type of sale or by conduct of the parties)

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Buyer in the ordinary course

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A person who buys goods in good faith w/o knowledge that the sale violates the rights of another person in the goods and from a person in the business of selling goods of that kind.

You can know there is a security interest - just can't know that the sale was a violation of the security agreement.

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"garage sale exception" - consumer to consumer sales

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In the case of consumer goods, buyer takes free of security interest even though perfected if he buys w/o knowledge of the interest for a consumer use unless the secured party has filed a financing statement covering such goods (note that in the case of PMSI for consumer goods - perfection is automatic so the creditor must take the extra step of filing a financing statement to protect against this risk)

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Secured Party v. Judgment Lien holders

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A security interest perfected before the person becomes a lien creditor (NC peculiar law - the is the point in time when sheriff levies) has priority.

Special Rule for PMSI - has 20 days to file after debtor takes possession

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Secured party v. Statutory Lien claimants (mechanic's lien)

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statutory lien claimant wins

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Default

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Grounds of default are typiclaly specified in the agreement, in the absence of a specification, default is restricted to failure to perform or pay the obligation when due

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Self-help repossession

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AFTER defualt, a secured party is entitled to take possession of the collateral w/o judicial process if it can be done w/o "breech of the peace"

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breach of the peace

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Any conduct by the secured party that has the potential to lead to violence - generally physical presence plus verbal objection by the debtor