Secured Transactions

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Secured transaction - definition:

Back 1

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

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Secured interest - definition:

Back 2

An interest in personal property or fixtures which secures payment or performance of an obligation.

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Collateral - definition:

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property subject to a security interest which the secured party can repossess upon default to ensure that the debt is paid.

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Purchase money security interest (PMSI) - 2 kinds:

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1) collateral sold on credit
2) enabling loan to buy specific collateral

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

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After-acquired property clause - validity:

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Valid

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Future advance clause - validity:

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Valid

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Attachment - definition:

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steps legally required to give the secured party a security interest in the collateral effective against the debtor

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Perfection - definition:

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steps legally required to give the secured party a security interest in the collateral effective against the world (notice)

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Financing statement - definition:

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document generally used to provide public notice of the security interest (to perfect security interest)

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Types of collateral:

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1) goods
2) semi-tangible and intangible property

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Goods - definition:

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all things that are movable at the time the security interest attaches, including unborn animals and growing crops

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Goods - classification:

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1) consumer goods
2) equipment
3) farm products
4) inventory

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Inventory - definition:

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goods held for sale, lease, or to be furnished in service contracts, and materials used or consumed in a business

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Semi-tangible & intangible property - 8 types:

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1) instruments (negotiable)
2) documents (bill of lading)
3) chattel paper (notes)
4) investment property (stock)
5) accounts (receivable)
6) deposit accounts (business ONLY)
7) commercial tort claims
8) general intangibles (software, patents, goodwill)

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Article 9 - scope:

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Article 9 applies to:
1) any transaction that creates security interest in personal property or fixtures
2) agricultural lien
3) sale of accounts, chattel paper, intangibles
4) certain consignments
5) secured sale disguised as a lease

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Article 9 transaction - definition:

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any transaction, regardless of form, that gives the creditor a security interest

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Disguised lease (Article 9 applies) - test:

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1) at the end of transaction, lessee becomes the owner of the item for little or no consideration
2) lease is for the entire life of item
3) lessee is bound to purchase item at the end of lease

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Attachment - requirements:

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1) agreement to create security interest
2) secured party must give value (consideration)
3) debtor must have rights in collateral

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Written agreement - requirements:

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1) record that shows intent to create security interest
2) authenticated by debtor
3) description of collateral (liberal, but not generic "all assets")

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Consideration - requirements:

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Any consideration, even past consideration will suffice.

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Attachment - timing:

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at the moment the last of the 3 requirements is met - order does not matter

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Scope of the security interest:

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may include:
1) future advances
2) after-acquired property
3) identifiable proceeds
4) any supporting obligation for collateral

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After-acquired property - rule:

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Without an explicit after-acquired property clause, no security interest to after-acquired property.

NOTE: BUT, courts will imply for collateral of the type that is rapidly depleted and replenished.

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After-acquired property - exceptions:

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1) does not attach to consumer goods unless debtor acquires rights within 10 days after secured party gives value
2) does not apply to commercial torts claims

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Perfection - methods:

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1) automatic
2) possession of collateral by secured party
3) perfection by control
4) notation of lien on certificate of title
5) filing a financing statement

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Automatic perfection:

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ONLY PMSI in consumer goods is automatically perfected. Some additional step is needed for all others.

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Perfection by control - non-consumer deposit accounts - rules:

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1) bank where deposit held has automatic control
2) if secured party is not bank, it can obtain control by either:
a. putting deposit in secured party's name, OR
b. agreement with bank and debtor that secured party is authorized on the account

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Financing statement - contents:

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1) debtor's name
2) description of collateral (generic OK, unlike security agreement)
3) secured party's name
4) real property related - describe property and file with Recorder's office
5) no signature required (debtor automatically authorizes when signing security agreement)

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Financing statement - debtor's name - requirements:

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1) individual, corporate, or partnership name
2) not trade name (dba)
3) error OK, so long as not seriously misleading
4) name change - effective within 4 months of change, but after must file amendment

NOTE: no liability for filing office mistakes

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Financing statement - where to file?

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1) Secretary of State
2) real property - county where property is located
3) multiple states - state where debtor is located (domicile, place of incorporation, PPB, chief executive office)

NOTE: moves must be amended within 4 months; mergers or sales of assets - within 1 year

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Financial statement - how long effective?

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5 years from filing, but can be extended by filing a continuation statement filed within the last 6 months

NOTE: multiple continuation statements may be filed

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Termination statement:

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When there is no outstanding obligation, upon demand by debtor, secured party must, within 20 days, provide debtor with a termination statement.

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Perfection as to proceeds:

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automatic for 20 days

To remain perfected must take action, unless:
1) proceeds are identifiable cash proceeds, OR
2) security in original collateral was perfected by filing a financing statement, security interest in proceeds would be filed in the same place, and proceeds were not purchased with cash proceeds of the collateral ("same office" rule)

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Priority - definition:

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the secured party and some third party claim interest in the same collateral

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Priority - secured party v. secured party:

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1) First to file OR perfect
2) If no filing or perfection, the first to attach has priority

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Priority - secured party v. secured party - special rules - PMSI in goods:

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PMSI in goods other than inventory or livestock has priority over a conflicting security interest in same goods or their proceeds if perfected at time debtor received possession or within 20 days thereafter

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Priority - seller PMSI v. financer PMSI:

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Seller PMSI has priority over financer PMSI.

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Priority - special rules - investment property:

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1. time of control
2. control
3. first to file or perfect

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Priority - secured party v. buyer of the collateral - authorized sales:

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If the sale is authorized by the secured party, the buyer takes free of the security interest.

NOTE: inventory is usually impliedly authorized, but not the entire inventory.

NOTE: authorization may be waived by conduct - knew of sale and did nothing.

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Priority - secured party v. buyer - buyer in the ordinary course of business:

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A buyer in the ordinary course of business takes free of the security interest created by his seller even though the security interest is perfected.

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Buyer in the ordinary course - definition:

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1) buys goods in good faith
2) without knowledge that the sale violates the rights of another person (usually the secured party)
3) and in the ordinary course from a person in the business of selling goods of that kind

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Priority - secured party v. buyer - buyer NOT in the ordinary course of business:

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takes subject to perfected security interest, but free from unperfected security interest, unless he knows of the security interest

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Priority - secured party v. buyer - consumer to consumer sales ("garage sale" exception):

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Buyer takes free of security interest even if it is perfected if buyer buys without knowledge, for value, and for own personal, family, or household purposes, unless prior to purchase secured party has filed financing statement.

NOTE: goods must be consumer goods both in hands of buyer and seller.

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Priority - secured party v. judgment lien holders:

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first to levy lien or perfect security interest

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Priority - PMSI v. judgment lien holders:

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If secured party with respect to PMSI files within 20 days after debtor receives possession, he takes priority over lien that attaches between time of security interest creation and time of filing.

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Default - effect:

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triggers rights of secured party

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Self-help repossession - when allowed?

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when done without "breach of the peace" - otherwise, liable for conversion, trespass, etc.

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"Breach of the peace" - definition:

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Any conduct by the secured party that has the potential to lead to violence is breach of the peace. Generally, physical presence by debtor plus verbal objection is enough to create breach of the peace.

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Resale of collateral - notice to whom

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must be given to debtor and any other secured party who has perfected by filing or notified of its interest

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Resale of collateral - notice - requirements:

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1) timely - within reasonable time before sale (10 days or more prior)
2) content:
a. public - time & place
b. private - time after which sale will occur

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Commercially reasonable sale:

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Every aspect of the sale and the notice (method, time, manner, place, and terms) must be commercially reasonable.

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Failure to comply with resale requirements:

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If the secured party fails to conduct a commercially reasonable sale, there is a rebuttable presumption that the sale proceeds equal the amount of the debt.

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Debtor's right to redeem:

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At any time before the secured party has sold the collateral or entered into a contract for its disposition, the debtor may redeem by full payment of all obligations under the security agreement.

NOTE: Waiver of right to redeem before default is invalid.

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PMSI in inventory - priority:

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A PMSI in inventory has priority over other security interests, regardless of time and perfection, if:
1) security interest is perfected at time when debtor gets possession of inventory, AND
2) other secured parties receive authenticated notice of PMSI before debtor receives possession of inventory

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Agreement to create security interest - evidence:

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1) creditor taking possession of collateral
2) debtor's authentication (written agrement)
3) creditor takes control

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PMSI - perfection rules:

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1) PMSI in goods - automatic
2) PMSI in equipment - by filing w/n 20 days after debtor gets possession
3) PMSI in inventory - by filing AND giving other secured parties written notice by the time debtor gets possession (NO 20-days grace period)

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Priorities - hierarchy:

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1) Buyer in the ordinary course of business (w/o notice)
2) Holders in due course
3) Transferee of funds from deposit account
4) Purchaser of chattel paper or instrument
5) Possessory lien holders
6) PMSI
7) PMSI and attached liens
8) buyer not in ordinary course w/o notice
9) unperfected security interests
10) Debtor

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Fixtures - priority versus construction mortgage:

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A construction mortgage takes priority over a subsequent PMSI in fixture even if the security interest is perfected by a fixture filing within 20 days of affixation.

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Fixtures - perfection:

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To perfect a security interest in fixtures, a "fixture filing" must be made in the office where the mortgage on the real estate would be filed.

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Fixtures - priority versus subsequent real estate interest:

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A security interest in fixtures has priority over any real estate interest that arises subsequent to the perfection by fixture filing.

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Fixtures - priority versus prior real estate interest:

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A prior real estate interest that is properly recorded has priority over security interest that subsequently arises.

Exception: PMSI in fixture takes priority if filed within 20 days

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method to identify cash proceeds

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lowest intermediate balance- lowest balance the account reached during the time in question, but never more than the proceeds originally deposited

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financing statement substitute

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authenticated security agreement itself can be filed instead of financing statement if all elements of financing statement are met

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Priority - special rules - deposit accounts:

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1. putting deposit account in own name
2. bank that holds the deposit account
3. time of control
4. control

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Priority - secured party v. statutory lien holders:

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statutory lien holder beats perfected security interest