Secured Transactions

Question 1

Security Interest

Answer 1

A security interest arises when a party (debtor) uses certain property as collateral to secure repayment of funds to another. By using the possession of the collateral, if the debtor defaults on repayment of the funds, the creditor may take possession of the property as collateral and apply the collateral to the balance owed.

The creditor’s interest in the collateral is called a security interest.

• Think car repossession

Question 2

UCC Article 9

Answer 2

UCC Article 9 applies to any transaction, regardless of its form, that creates a security interest in personal property or fixture by contract;

leases, if the economic substance of the lease is a financed purchase rather than a true lease;

and sales of accounts recievable, chattel papper, negogitable instruments, and payment intangibles.

Question 3

Types of Collateral

Answer 3

Different rules governing enforcement, perfection of the security interest, and priorities often depend upon which category the collateral falls into. The category that the collateral falls into is dependent on what the debtor uses it for.

The Code provides for certain broad types of collateral and then breaks each down into more specific categories. The broad types of collateral include:
o Goods;
o Tangible intangibles;
o Intangible intangibles; and
o Investment property.

Question 4

Goods

Answer 4

Goods” includes all things that are movable at the time the security interest attaches.

“Goods” are further broken down into several categories depending on in what capacity and how the debtor primarily uses them:
1. Consumer Goods
2. Inventory
3. Farm Products
4. Equipment

Question 5

Consumer Goods

Answer 5

Goods used or bought primarily for personal, family, or household purposes [§ 9-102(a)(23)].

Question 6

Inventory

Answer 6

Goods, other than farm products, that are held for sale or lease or to be furnished under a contract of service.

Inventory also consists of raw materials, work in process, or materials used or consumed in business [§ 9-102(a)(48)].

Question 7

Farm Products

Answer 7

Generally means “goods, other than standing timber, with respect to which the debtor is engaged in a farming operation,” including crops, livestock, products of crops or livestock in their unmanufactured state, aquatic goods produced in aquacultural operations, and supplies used or produced in a farming operation [§ 9-102(a)(34)].

Question 8

Equipment

Answer 8

A catch-all category, defined merely as goods “other than inventory, farm products, or consumer goods” [§ 9-102(a)(33)].

• This term usually refers to goods that are used or bought for use primarily in a business.

Question 9

Tangible Intangibles

Answer 9

Certain intangibles, such as contractual obligations to hold or deliver goods or to pay money, and ownership in goods or business entities, are commonly reduced to tangible or written form; by transferring the writing, the intangibles are transferred.

Tangible intangibles may be categorized as
1. Instruments
2. Documents
3. Chattel Papper

Question 10

Instruments

Answer 10

Instruments under UCC 9, means negotiable instruments, i.e., drafts and notes as defined in Article 3, or any writing that evidences a right to the payment of a monetary obligation but is not itself a security agreement or lease.

The writing must be “of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment.”

Question 11

Documents

Answer 11

Documents under UCC 9 are documents of title which include bills of lading, dock receipts, warehouse receipts, delivery orders, and any other document which, in the regular course of business or financing, is treated as adequately evidencing that the person in possession of it is entitled to receive, hold, and dispose of the document and the goods it covers.

To be a document of title, a document must purport to be issued by, or addressed to, a bailee and purport to cover goods in the bailee’s possession that are either identified or fungible portions of an identified mass [§ 1-201(b)(16)].

Question 12

Chattel Paper

Answer 12

Chattel paper is a record or records evidencing both a monetary obligation and a security interest in or a lease of specific goods.

Electronic chattel paper is chattel paper that is stored in an electronic medium instead of in tangible form.

Question 13

Intangible Intangibles

Answer 13

Many intangibles, such as monetary obligations or literary rights, while possibly evidenced by writings, are treated as intangibles. The writings take on no commercial significance of their own.

Such intangibles include:

1. General Intangibles
2. Accounys

Question 14

General Intangibles

Answer 14

General Intangibles are intangible collateral that fails to fit into any other category. It includes things (choses) in action, payment intangibles, and software

Question 15

Accounts

Answer 15

Accounts are rights to payment of a monetary obligation, generally for property sold or to be sold, or for services rendered or to be rendered

Question 16

Investment Property

Answer 16

Investment Property includes certificated and uncertificated securities, securities accounts, and entitlements, as defined in Article 8.

Question 17

Proceeds

Answer 17

Collateral subject to a security interest may also be in the form of proceeds obtained from the disposition of other collateral, including whatever is received upon the sale, lease, license, exchange, or other disposition of collateral, including payment of insurance proceeds.

Question 18

Cash Proceeds

Answer 18

Cash proceeds are proceeds that come in the form of money, checks, deposit accounts, and the like.

Question 19

Noncash Proceeds

Answer 19

Noncash proceeds that are all other types of proceeds that are not cash proceeds.

Question 20

Security Interest Creation

Answer 20

Two steps are required to create a security interest:
o a written security agreement or possession of the collateral by the secured party with the intent to secure a debt; and
o attachment of the security interest to the collateral.

Question 21

Security Agreement

Answer 21

A security agreement is an agreement that creates or provides for a security interest in certain collateral.

The security interest must be in writing and be authenticated by the debtor.

Authentication means either signing a written document or executing or otherwise adopting a symbol, or encrypting or similarly processing a record in whole or in part.

The security interest must also contain a “granting” clause, stating that it is creating a security interest. The granting clause need not be formal and can be in a different document.

The security interest must also contain a description of the collateral. A description is sufficient if it reasonably identifies what is described.

1. In writing and authenticated by the debtor
2. contain a granting clause
3. contain a description of the collateral

Question 22

Possession

Answer 22

Where the secured party has possession, all that is needed is an agreement, which can be oral, that the secured party is to have a security interest. Such security interests are frequently referred to as pledges.

A security agreement is generally binding and effective between the parties, against purchasers of the collateral, and against creditors

Question 23

Purchase-Money Security Interest (PMSI)

Answer 23

A security interest in goods is a purchase-money security interest (PMSI) if it pertains to goods that are purchase-money collateral.

(Think: I borrow money from you to buy a stove & I give you an interest in that thing I buy the stove, you have a PMSI so long as I actually use the borrowed money to buy the item. (If i dont use the borrowed money to buy stove but use my credit card for stove and borrowed money for food you still have security interest in stove just not a PMSI)

Question 24

Purchase-Money Obligation

Answer 24

A debtor incurs a purchase-money obligation if the obligation is incurred:
1. as all or part of the price of the collateral; or
2. for value given to enable the debtor to acquire rights in or the use of the collateral, if the value is in fact so used.

Thus, to qualify as a PMSI, the security interest must be in goods that are given as collateral for an obligation the debtor incurred for the purchase of the goods, and actually used to purchase the goods.

Question 25

Purchase-Money Collateral.

Answer 25

Goods securing a purchase-money obligation that a debtor incurs to purchase the goods are called purchase-money collateral.

Question 26

Attachment

Answer 26

Attachment is the process by which the security interest is created. A security interest is created by a contract between the debtor and the secured party. Once the security interest has attached the secured party has all of the enforcement rights provided by Article 9, including the right to repossess the collateral upon the debtor’s default.

Question 27

Attachment - Security Interest

Answer 27

The security interest attaches when: 1. The secured party gives value; 2. the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and 3. the debtor has authenticated a security agreement that sufficiently describes the collateral. A collateral description is sufficient if it reasonably identifies what is described.

Question 28

After-Acquired Collateral

Answer 28

After-Acquired Collateral is property obtained after the security agreement is created. A security interest will attach to after-acquired collateral if the agreement specifically says it includes after-acquired collateral.

Question 29

After-Acquired Collateral -Exceptions

Answer 29

A security agreement specifying an interest in inventory or accounts receivable will create an interest in after-acquired collateral, notwithstanding the fact that there is no explicit after-acquired property clause. A security agreement cannot provide that it covers after-acquired consumer goods, unless the debtor acquires rights in the consumer goods within 10 days of the secured party giving value.

Question 30

Future Advances

Answer 30

A security agreement may also provide that the collateral secures future advances. For instance, a security agreement may secure all advances under a revolving credit agreement.

Question 31

Proceeds - Attachment

Answer 31

A security interest in collateral automatically extends to identifiable proceeds of the collateral. A secured party's security interest in collateral will continue regardless of a sale, lease, or other disposition of the collateral, unless the secured party authorized disposition of the property free of the security interest.

Question 32

Perfection

Answer 32

Perfection establishes a secured party's rights in the collateral against third parties. A security interest is perfected if it has attached, and if all of the requirements for perfection have been met [§ 9-308]. If the requirements are met before attachment, then upon attachment the security interest is perfected.

Question 33

Perfection - How its Done

Answer 33

Perfection of a security interest is most commonly done by: o filing; o possession; o control; or o automatic perfection.

Question 34

Filing

Answer 34

Filing a financing statement in a public office is the most common way to perfect a security interest. Filing can be done: o usually in the Secretary of State’s Office; or o in limited circumstances (when the collateral consists of fixtures), in the Office of the County Clerk (land records) in the county where the land to which the collateral is attached is located. The law governing perfection of a security interest is the law of the jurisdiction where the debtor is located. - A debtor who is an individual is located at the individual's principal residence. - A debtor that is a non-registered organization is deemed to be located at its place of business. If the debtor has more than one place of business, it is deemed located at its chief executive office. - A debtor that is a registered organization is deemed to be located in its state of organization. A registered organization is one as to which a state must maintain a public record showing the organization to have been organized. In certain instances, a mechanism other than a financing statement is required for perfection. The most common instance is notation on a certificate of title to perfect a security interest in motor vehicles.

Question 35

Financial Statement

Answer 35

The Code adopts the system of notice filing, which essentially requires a filing that provides notice that a person may have a security interest in the collateral indicated. The security agreement itself need not be filed; instead, the financing statement is filed. A financing statement must include [§ 9-502(a)]:  the name of the debtor;  the name of the secured party or the secured party’s representative; and  a description of the collateral covered by the financing statement. A financing statement sufficiently describes the collateral it covers if it provides [§ 9-504]: o a description of the collateral that reasonably identifies what is described; or o an indication that the financing statement covers all assets or all personal property. A financing statement must be authorized by the debtor. - A security agreement is authorization for the financing statement.

Question 36

Special Rules for Fixtures

Answer 36

Fixtures are goods that are so related to real property that an interest in them passes under real estate law. In addition to the requirements of a financing statement mentioned above, a fixture filing must also [§ 9-502(b)]: * indicate that it covers fixtures; * indicate that it is to be filed in the real property records; * provide a description of the real property to which the fixture is related; and * provide the real property owner’s name, if different than the Article 9 debtor.

Question 37

Effectiveness of Financing Statement

Answer 37

If a financing statement is filed in the wrong place, does not include the required information, or is not authorized by the debtor, it is ineffective. An ineffective financing statement does not perfect a security interest. A financing statement containing minor errors will still be effective, unless the errors make the financing statement seriously misleading. Failure to sufficiently provide the name of the debtor is seriously misleading.

Question 38

Timing of Filing

Answer 38

A financing statement may be filed before a security agreement is made or a security interest otherwise attaches [§ 9-502(d)]. This is important to priority.

Question 39

Changes That Can Affect the Effectiveness of a Financing Statement

Answer 39

A filed financing statement remains effective even if the collateral is sold, exchanged, leased, or otherwise disposed of, and in which a security interest continues, even if the secured party knows of or consents to the disposition. Proceeds: A perfected security interest in proceeds is provided by the Code automatically when the security interest in the original collateral is perfected, unless the security agreement specifically provides that proceeds are not covered

Question 40

Automatic Perfection Timeline

Answer 40

* Automatic perfection for proceeds continues for only 20 days after attachment , unless: o a filed financing statement covers the original collateral, the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed, and the proceeds are not acquired with cash proceeds; o the proceeds are identifiable cash proceeds; or o the security interest in proceeds is otherwise perfected when the security interest attaches to the proceeds or within 20 days thereafter

Question 41

Name Changes

Answer 41

If the information in the financing statement becomes seriously misleading only after the financing statement is filed, the financing statement will remain effective unless the debtor changes its name or the original collateral is exchanged for proceeds. If a debtor changes its name, resulting in a financing statement that is seriously misleading, the financing statement will only be effective to perfect security interests in collateral acquired within four months of the name change, unless an amendment to the financing statement correcting this is filed within four months of the name change

Question 42

Debtor Moves

Answer 42

A financing statement can also become ineffective if the debtor moves [§ 9-316]. If the debtor moves to another state, the secured party must file a new financing statement in the new state within four months of the debtor’s move. * If the secured party does so, it is continuously perfected, and its priority will relate back to the date it filed in the debtor’s original state. * If the secured party does not file in the debtor’s new state within four months of the debtor’s move, the secured party becomes unperfected in all of the collateral covered by the financing statement. A filed financing statement is effective for five years after the date of filing [§ 9-515]. - If the financing statement expires without a continuation statement being filed, the financing statement will lapse. Upon lapse, the financing statement becomes ineffective, and any security interest that was perfected by the financing statement becomes unperfected. - A continuation statement must be filed within six months before the expiration of the five-year period. - A continuation statement extends the effectiveness of the original filing statement for another five-year term from the date the financing statement would have become ineffective absent the filing of the continuation statement. - Continuation statements may be filed repeatedly to extend the effectiveness of the financing statement.

Question 43

Possession - Perfection

Answer 43

A secured party may also perfect a security interest by taking possession of the collateral. Perfection by possession only applies to the following types of collateral: o tangible negotiable documents; o goods; o instruments; o money; or o tangible chattel paper. The secured party normally perfects by taking possession of the collateral itself. However, the Code provides for the secured party to have a third-party possess the collateral on its behalf, so long as the third-party authenticates a record acknowledging that it is holding the collateral for the secured party’s benefit. A secured party who has taken possession of collateral must use reasonable care in its custody and preservation [§ 9-207]. -Reasonable expenses incurred in the custody and preservation of the collateral may be charged to the debtor.

Question 44

Control

Answer 44

A secured party may also perfect a security interest by taking control of the collateral. Taking control of the collateral applies only to: 1. Investment Securities 2. Letter-of-Credit Rights 3. Deposit Accounts 4. Electronic Chattel Paper

Question 45

Investment Securities

Answer 45

A secured party has control of a certificated security in bearer form if he has possession of the security. A secured party has control of a certificated security in registered form if he has possession of the security, and the certificate is endorsed to the secured party or registered in the name of the secured party. A secured party has control of an uncertificated security if he has possession of the security or the issuer agrees that it will comply with instructions from the secured party.

Question 46

Letter of Credit Rights

Answer 46

A secured party has control of a letter-of-credit right if the issuer has consented to an assignment of proceeds of the letter of credit.

Question 47

Deposit Accounts

Answer 47

A security interest in a deposit account is perfected only by control. Such perfection is effective only when, and for as long as, the secured party has control. A secured party has control of a deposit account if: o the secured party is the bank with which the deposit account is maintained

Question 48

Electronic Chattel Paper

Question 49

Automatic Perfection

Answer 49

There are limited instances in which perfection is automatic. The most common is when the security interest is a PMSI in consumer goods, which perfects upon attachment If the security interest is a PMSI in consumer goods perfection is automatic as soon as the security interest attaches and remains effective permanently. - Automatic perfection also sometimes occurs in other situations, including the assignment of accounts or payment intangibles that does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts or payment intangibles. The Code sometimes provides for grace periods in various instances of 20 days [see rules elsewhere on proceeds and PMSI priority rules], or sometimes for four months [see elsewhere for rules on name changes and debtor moves], in which a secured party has a grace period in which to take further perfection steps. These grace periods, in a sense, provide a type of automatic perfection during the grace period, albeit a temporary granting of automatic perfection.

Question 50

Standard Search Logic Exception

Answer 50

If a search of the records of the financing office under the debtor’s correct name, using the office’s standard search logic, would disclose a financing statement that fails sufficiently to provide the name of the debtor, the financing statement is not misleading.

Question 51

Multiple Methods of Perfection

Answer 51

If a security interest is perfected by one method, and later perfected by another method without an intermediate period of being unperfected, the security interest is perfected continuously.

Question 52

First-in-Time, First-in-Right

Question 53

Special Rule for Instruments or Chattel Paper

Question 54

Special Rules for PMSIs (vs. other security interests)

Question 55

Priority Disputes Between Lien Creditors and Security Interests

Question 56

Lien Creditior

Question 57

Special Rule for PMSIs vs. Lien Creditors

Question 58

Accessions

Question 59

Commingled Goods

Question 60

Buyers Versus Secured Parties

Question 61

Garage Sale Exception.