Secured Transactions

Front 1

What to look for in Secured Transactions?

Back 1

Elements of Attachment (3)
Methods of Perfection (5)
Basic Priority Fight Rules
Categories of Collateral

Front 2

What is a "Secured Transaction?

Back 2

LOOK FOR: 1) a credit transaction (sales on credit or a loan) and 2) an agreement that creates a lean in favor of the creditor and debtor's personal property to secure the debt.

Front 3

Typical Secured Transaction
(Terminology)

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"Debtor"= the person who owes payment or performance of the obligations secured.

"Secured Party"= A lender, seller, or other person in whose favor there is a security interest.

"Security Agreement" = the agreement between the debtor and the secured party that creates the security interest

"Security Interest" = An Interest in personal property or fixtures which secures payment or performance of the application. It is a contingent property interest in the debtors collateral that the debtor grants to the creditor. When the contingency, which is DEFAULT, occurs, the property interest springs to life and the creditor has rights in the debtors collateral.

Front 4

Secured Transactions
(More Terminology)

Back 4

"Collateral" = the property subject to a security interest.

"Purchase Money Security Interest"= PMI, 2 Types
1. Secured party cells that are collateral on credit and retains a security interest in the item sold.
2. An enabling loan, loan to a better that enables that there to buy specific collateral and the creditor takes a security interest in the specific collateral.

"After Acquired Property Clause"= the security often will want to obtain a security interest not only in debtors present property, but also in property that the better will obtain in the future. This is permissible.

"Future Advance Clause" = a secured party often contemplates making future loans to the better and wants to secure these future advances in the present security agreement. This is permissible. Thereby, a new security agreement is not needed when future advances made.

Front 5

Secured Transactions
(More Terminology)

Back 5

"Attachment" = legally required steps to get the secured party a security interest in the collateral that is effective as against the debtor. Once a security interest attaches, it is effective against the debtor and creditor has all the rights of the secured creditor under article 9. A creditor is not a secured creditor until attachment.

"Perfection" deals with the steps legally required to give the secured party in interest in the collateral that is effective as against the world! In general perfection is the process of giving public notice of the secured interest to the world.

"Financing Statement" = Document generally used provide public notice of a security interest, and so to perfect the security interest.

Front 6

COLLATERAL

Back 6

1. GOODS = "tangible, movable personal property. Includes all things which are movable at the time the security interest attaches. This includes the unborn young of animals and growing crops. Goods also include fixtures.

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COLLATERAL
(Classification)

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1. Consumer Goods
2. Equipment
3. Farm Products
4. Inventory

In classifying the collateral look to see how the debtor is using the collateral. What is the collateral in the hands of the debtor?

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COLLATERAL
(Consumer Goods)

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Used or Bought for use primarily for personal, family or household purposes.

Front 9

COLLATERAL
(Equipment)

Back 9

Used for Bought for use primarily in business "catchall category"

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COLLATERAL
(Farm Products)

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Crops for Livestock or Supplies used or produced in farming operations are products of crops and livestock in their on manufactured states. (Such as cotton, maple syrup, milk, and eggs) if they are in the possession of the debtor engaged in farming operations.

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COLLATERAL
(Inventory)

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held by a person who holds them for sale or LEASE or to be furnished under service contract; materials used OR CONSUMED in a business. (In a short period of time)

Front 12

CLASSIFY COLLATERAL?

Back 12

A guitar purchased for my son? Consumer Goods
A guitar purchased by a professional rock musician to be used on to her?Equipment
Milk in the hands of a farmer? Farm Product
Milk in the hands of a grocery store?Inventory
Milk in the hands of the customer at the grocery store? Consumer Goods
Automobiles held by a local car rental agency? Inventory (lease)
Pencils and other stationery supplies used by a credit agency? Equipment or Inventory

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Semi-Intangible & Intangible Property (8 types)

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1. Instruments
2. Documents
3. Chattel paper
4. Investment property
5. Accounts (a right to payment not evidence by an instrument or chattel paper)
6. Deposit accounts
7. Commercial tort claims
8. Gen. intangibles (software, patent and trademark rights, copyrights, goodwill)

Front 14

Intangible Property
(Accounts)

Back 14

A right to payment (not evidence by an instrument were chattel paper) 1) for goods, 2) for services, 3) for real property, 4) for a policy of insurance issued or be issued 5) for a secondary obligation incurred or to be incurred 6) arising out of the use of a credit card 7) for the use or hire of a vessel, 8) for energy provided or to be provided 9) as lottery winnings.

Front 15

Intangible Property
(Deposit Accounts)

Back 15

an account maintained with the bank. Article 9 only applies to "nonconsumer deposit accounts" and deposit accounts that are claimed as proceeds of other collateral.

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Intangible Property
(Commercial Tort Claims)

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1. A claim arising in court with respect to which the claimant is an organization
2. Where the claimant is an individual and the claim arose in the claimant's business or profession AND does not include damages for personal injury or the death of an individual.

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Intangible Property
(Chattel Paper)

Back 17

a record or records which evidence both a monetary obligation and a security interest in or a lease of specific goods. A record is information that is stored in either, a tangible medium (written on paper) or in any tangible medium (electronically stored). Chattel paper that is stored in electronic medium also this cold electronic chattel paper. (Promissory Note, Security Interest)

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How would you classify the following items of collateral?

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A promissory note = instrument
a stock certificate = investment property
a receipt given to a farmer by a silo operator when the farmer stored her goods there = document
written contract in which a car buyer purchasing on credit promises to pay the car dealership for the car and grants the dealership a security interest in the car = chattel paper
A Tire Salesman. Its customers obligations? = Account
a hospital paper authorizing the hospital to seek payment from a person's health insurance coverage provider. = Accounts
visa issues millions of credit cards used them in transactions with merchants. Merchants send the resulting paperwork to visa for reimbursement. Collateral? = Yes, Accounts
the checking account that you have at your bank = deposit account a claim arising in court that has been settled and reduced to a contractual obligation to pay? = Payment intangible
a computer program = Equipment or General Intangible

Front 19

Scope of Article 9

Back 19

Article 9 Applies to:
1) any transaction, regardless of its 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 the purpose of collection only, or the sale is part of the sale of the business)
4) certain consignments;
5) secured sale disguised as a lease

Front 20

CREATION of An Article 9 Security Interest
(ATTACHMENT)

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A Security Agreement: unless the collateral is in the possession or control of the secured party pursuant to an agreement, a written (or elect Tronic restored) security agreement is required. Most often, the debtor once possession of the collateral, so writing is necessary.

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ATTACHMENT
(Pledge)

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"I'll loan you $50 but we agree that I will keep your watch until you pay me back; if you don't pay me back, we agree that I can sell your watch."

Front 22

ATTACHMENTS
(Form of the Security Agreement -- when written)

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1. The agreement must be evidenced by a record! (Written or electronically stored information) and must show an interest to create the security interest. Any language conveying interest will work.
2. The agreement must be "authenticated" by the debtor. This usually means "signed" by the debtor. Any symbol including electronic symbol, that is made with the present intent to authenticate the record will work. (An ex sign or a :-))
3. An agreement must contain a description of the collateral (and if the security interest covers timber to be cut, a description of the land concerned).

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ATTACHMENT
(Value)

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the value definition is very liberal! Any consideration is sufficient to support a simple contract. Even past consideration is enough. The debtor always gives value because the debtor, at a minimum, promises to pay. So the question is whether the secured party gave value.

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ATTACHMENTS
(Debtors Rights)

Back 24

the debtor must have writes in the collateral because the debtor cannot grant a contingent property interest in a property that does not own.

The moment the last of these 3 elements happens in any order, ATTACHMENT happens!

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SCOPE of SECURITY INTEREST

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debt secured may include future advances.

Property secured may include after acquired property

Property secured generally includes proceeds!!

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PROCEEDS

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Includes whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds. If collateral is insured and money is received from the insurance company on account of loss or damage to the collateral, the money is a proceed of the collateral (up to the value of the collateral) unless it is payable to someone other than the debtor or a secured party claiming it. In addition any claims arising out of the wall self, defects and, or damage to collateral are proceeds of the collateral (up to the value of the collateral). UNLESS otherwise agreed, a security interest automatically gives the secured party a right to the identifiable proceeds.

Front 27

PROPERTY SECURED AFTER ACQUIRED

Back 27

without an explicit after acquired property clause in the security agreement, the secured party's security interest only reaches collateral that the debtor had writes in "at the time the debtor signed the security agreement."
EXCEPTIONS
1. Even if there is not one explicit in the clause, the courts will often imply and after acquired property clause when the collateral is of a type that is rapidly depleted or replenished (inventory or accounts)
2. A security interest does not attach under and after required property clause to consumer goods unless the debtor acquires rights in them within 10 DAYS after the secured party gives value.
3. And after acquired property clause is ineffective as to a commercial tort claim.

Front 28

ATTACHMENT
(Supporting Obligation)

Back 28

Sarah grants Finance Company a security interest in her accounts receivables. One of these accounts has a surety, who promised Sarah that she would pay the amount if the account debtor did not. Finance Company's security interest automatically attaches to this supporting obligation. (Guarantee/Surety (promised to pay the debts of another)

Front 29

PERFECTION

Back 29

PERFECTION deals primarily with rights as between the secured party and third parties. PERFECTION is NOT necessary to create a valid enforceable security interest as between the debtor and the secured party. All you need is ATTACHMENT.

Front 30

PERFECTION
(Methods of Perfection)
Perfection = Attachment +1 of 5 Things...

Back 30

1. Automatic Perfection --(possession or filing is usually enough for attachment) BUT specific situations
a. PMSI in Consumer Goods
2. Possession of Collateral by Secured Party: simply by taking possession of the collateral the security interest is protected from the moment the possession without relation back to the time of attachment. Perfection continues only so long as possession is retained.

Front 31

PERFECTION
(Possession of Collateral by Secured Party)

Back 31

When is it Impossible?Cash, accounts, deposit accounts, Gen. intangibles.

Most often, and possession by the secured party is not very practical. The debtor usually once possession of the collateral.

Front 32

PERFECTION
(By "Control")

Back 32

Security interest in investment property and electronic chattel paper may be perfected by control. Security interest in nonconsumer deposit accounts can ONLY be perfected by control.
1. "Investment Property" control is gained by the secured party when it has taken whatever steps are necessary to be able to have the investment property sold without further action from the owner.
2. Nonconsumer Deposit Accounts*ALWAYS ON EXAM
a. The bank in reaching nonconsumer deposit account is maintained automatically has control over the deposit account.
b. If the secured party is not such a bank, it can obtain control over the deposit account by either 1) putting the deposit account in the secured party's name, OR 2) agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that the bank will follow the secured party supporters without further consent by the debtor.

Front 33

PERFECTION
(By Notation of lien on certificate of title)

Back 33

the ONLY way to perfect a security interest in an automobile is for the secured party to note its name on the certificate of title.
EXCEPTION: if the debtor is holding the automobile as inventory than a secured party must perfect by filing a financing statement against the inventory. There is no need in this situation for the secured party to note its lien on the certificate of title.

Front 34

PERFECTION
(FILING a FINANCING STATEMENT)
*Most Common*

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I. Notice filing -- the financing statement is premised on the concept of "notice filing". The notice must indicate merely that a person MAY have a security interest in the collateral indicated.
II. Contents of Financing Statement
a. Debtors Name(not trade name) (an error is OK as long as it is not seriously misleading) (Secured Creditor is not responsible for filing office errors)
b. Description of Collateral
c. Secured Parties Name
d. Real Property Related
e. No Signature Requirement of Debtor
f. Authenticated Security Agreement itself may be filed if it contains all of the elements above.

Front 35

FINANCING STATEMENT
(Where?)

Back 35

General Rule: except as otherwise specified, the financing statement is filed with the Secretary of State.

Filing must be made in the office were a mortgage on the real estate would be filed or recorded where the collateral is timber to be cut court has extracted collateral -- in Missouri these real estate related filings are filed in the real estate records of the county where the real property is located.

Multiple State Transactions: where the debtor is located if the debtor is an individual. Her principal residence. If it is a Corporation, business, partnership, located in the state where the registered organization is organized.

Front 36

FINANCING STATEMENT
(Unregistered Organization)

Back 36

were the chief executive office is located.

Front 37

FINANCING STATEMENT
(What if the Debtor moves?)

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The secured party will become on perfected 4 MONTHS after the debtor's move unless it files a financing statement in the new jurisdiction before that 4 MONTH this period is up.

Front 38

FINANCING STATEMENT
(What if the Collateral moves?)

Back 38

If you collateral it is then transferred to a new debtor who is located in Missouri, the secured party will be, on perfected ONE YEAR after the collateral moves unless it files a financing statement in the new jurisdiction for that ONE YEAR period is up.

Front 39

FINANCING STATEMENT
(Duration?)

Back 39

A financing statement is effective for FIVE YEARS from the date of filing. It can be extended by filing a continuation statement. To be effective but continuation statement must be filed in the last six months of the five-year "Life" of the financing statement.

20 DAYS to file a termination statement to the effect that the secured party no longer claims a security interest under the financing statement. If a financing statement covers "consumer goods", then within ONE MONTH after there is no outstanding obligation or within 20 DAYS of receiving an authenticated demand from the better. If not, this third party is liable to the debtor for $500 and for any loss caused by the debtor for failure to comply with the above.

NOTE: a financing statement can be filed even before security agreement is entered into. Discussion "priorities".

Front 40

PERFECTION
(As to Proceeds)

Back 40

if a secured party has a perfected security interest in collateral, a secured party automatically has a perfected security interest in whatever proceeds the debtor receives in exchange for that collateral FOR 20 DAYS. To remain perfected in those proceeds beyond 20 DAYS, the secured party must take new action perfect the interest UNLESS:
1. The proceeds are identifiable cash proceeds; or
2. The security interest in the original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral (sometimes called the "same office" rule).

Front 41

PERFECTION
(Proceeds Illustration)

Back 41

Sally loans money to David and takes a security interest in David's inventory. Sally perfected security interest by filing a financing statement with the Secretary of State.David trade some of its inventory to Kyle for some equipment. So it remains perfected as to the equipment. "Equipment" = "Proceeds".

Sally loans money to David and takes a security interest in David's inventory. So I perfected security interest by filing a financing statement with the Secretary of State. David sells some inventory for cash, and uses the cash to purchase some equipment. Unless the financing statements description is broad enough to include the equipment, Sally would need to file a new financing statement within 20 DAYS to be perfected as to the equipment.

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PERFECTION
(Change in Use of Collateral)

Back 42

if the debtor changes the use of the collateral (equipment to inventory) the file financing statement (within the description of equipment) remains effective to perfect the security interest. The secured creditor has no duty to monitor the collateral or to amend the financing statement even if it knows that the description is seriously misleading.

Front 43

*PRIORITY*

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A situation where the secured party and some third-party proclaiming the same collateral. The third party may be another secured party, a purchaser of a collateral, or a creditor who has obtained a judgment against the debtor. There are specific rules which the party is entitled to first satisfy its claim of the collateral.

Front 44

*PRIORITY*
(Secured Party verses Secured Party)

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General Rule: the first to file or perfect, whichever occurs first, as priority.

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*PRIORITY*
(Perfected Security Creditor versus Perfected Security Creditor)

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the first to file a financing statement if both give consideration for the collateral.

Front 46

*PRIORITY*
(Unperfected Security Creditor versus Unperfected Security Creditor)

Back 46

The first to "Attach" has priority.

Front 47

*PRIORITY*
(Rule for purchase money security interest in consumer goods)

Back 47

a loan on purchase money security interest in consumer goods is automatically perfected.

Front 48

*PRIORITY*
(PMSI in goods other than inventory or livestock)

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SPECIAL RULES: Hypo
"on May 1, David buys equipment from Kyle on credit, and Kyle retains a security interest in the equipment. Kyle delivers the equipment to David on May 5, but does not file a financing statement until May 12, in the interim, David draws money from Paul and Paul files a security interest in the same equipment and files a financing statement on May 10. David defaults, and the value of the equipment is less than the amount owed to both Kyle and Paul."
Paul wins under the general rule,but under this special rule, Kyle wins -- beats conflicting security interest if file via May 25.

Front 49

*PRIORITY*
(Special Priority Rules for Deposit Accounts!!) MUST Know

Back 49

1. A security interest perfected by control has priority over a security interest perfected via proceeds.
2. If conflicting interests each were perfected by control, they rank according to the time of obtaining control.
3. A secured party who has obtained control by putting the deposit account in its own name has priority over all other secured parties with control.
4. A bank that has control because it maintains the deposit account has priority over all other secured parties with control except a secured party who has obtained control by putting the deposit account in its name.

Front 50

*PRIORITY*
(Secured Party versus Buyer of the Collateral)

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1. Authorized sales: if the sale is authorized by the secured party, the buyer takes free of the security interest. This authorization must be in writing. In most states, authorization can also be inferred from a course of conduct, such as where the secured creditor new of prior similar sales and never objected. But Missouri has a nonuniform requirement that written authorization.
2. Unauthorized sales: a buyer in the ordinary course of business (other than a person buying farm products from a person engaged in farming operations) 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.

Front 51

What is a Buyer in the "ordinary course"?

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A buyer in the ordinary course means a person who buys goods in "good faith", without knowledge, that the sale violates the rights of another person (usually the secured party) in the goods, and in the ordinary course from a person in the business of selling goods of that kind.

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Buyers Not in the Ordinary Course of Business?

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They take subject to perfected security interest. They take free from on perfected security interests (and unperfected agricultural liens) unless they know of the security interest.
MERE KNOWLEDGE of a security interest hurts you!

Front 53

*PRIORITY*
(Secured Party versus Judgment Lien Holders)

Back 53

an unperfected security interest is subordinate to the rights of the person who becomes a lien creditor before the security interest is perfected. If the security interest is perfected before the person becomes a lien creditor, the security interest has priority.

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What is a "lien creditor"?

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Article 9 defines a "lien creditor" as a creditor who has acquired a lien on the property involved by attachment, levy, or the like. While Article 9 does not clearly define the moment when the status of the "lien creditor" arises, the lien obtained by judicial proceedings must attach to the collateral. (An unsecured creditor who has obtained a judgment and has levied on that judgment is a "lien creditor.")

Front 55

*PRIORITY*
(Secured Party Versus Judgment Lien Holder)

Back 55

the priority rule for this particular case is that the secured party has priority 1)if the secured party perfected before the judgment lien holder got its lien, 2) if the secured party obtained a security agreement and filed a financing statement before the judgment lien holder got it's lien.

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*PRIORITY*
(Priority for Future Advances)

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a security agreement can secure present and future advances. A future advanced by a secured creditor has priority overwhelming creditor if the future advances made 1) without knowledge of the lien, OR 2) within 45 days of the lien are rising, OR 3) pursuant to a commitment entered into without knowledge of the lien.

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DEFAULT

Back 57

the right of the secured party to proceed against collateral is normally triggered by default. But Article 9 does not define the term "default". (Usually, failure to make payments when due, selling collateral without the secured party's permission, failing to keep the collateral insured)
1. Look for late or missed payments
2. Look for a possible waiver by the secured party of late or missed payments.