What is a secured transaction? What are its two components?
A transaction intended to create a security interest in personal property or fixtures.
Generally involves:
1) a credit transaction (sale on credit or a loan)
2) an agreement that creates a lien in favor of the creditor in the debtor’s personal property to secure the debt
Important terminology in a secured transactions?
Debtor: The person who owes payment
Secured party: A lender, seller or person in whose favor there is a security interest
Security agreement: Agreement between debtor and secured party that creates the security interest
Security interest: The interest in personal property or fixtures which secures payment or performance
Collateral: The property subject to a security interest (i.e., inventory, equipment, consumer goods)
Attachment: Process that gives the secured party a security interest effective against the debtor
Perfection: Process that gives the secured party a security interest effective against the world
Financing statement: Document generally used to provide public notice of the security interest, and PERFECT the security interest
Purchase money security interest: Two types?
Secured party sells debtor collateral on credit and retains a security interest (a car, washing machine, etc.)
OR
An enabling loan, a loan to a debtor that enables the debtor to buy collateral
After-acquired property clause?
Secured party obtains a security interest not only in the debtor’s present property, but also in property that the debtor will obtain in the future (typically in a security agreement)
Future advance clause?
Allows a secured party to secure future loan advances in the present security agreement (typically in a security agreement)
What are the two types of collateral, and how are they further classified?
Goods: All things which are moveable at the time the security interest attaches (and includes unborn young animals and growing crops) (also, fixtures). Have to look at primary use to decide what kind of good it is.
- Consumer goods: primarily for personal or family use
- Equipment: Used or bought for use in business
- Farm products: Crops/livestock used in farming operations or products of crops/livestock in their unmanufactured states
- Inventory: Held by a person who holds them for sale or lease or to be furnished under service contracts; materials used or consumed in a business
Semi-intangible and intangible property:
- Instruments: Negotiable instruments and any other writing which evidences a right to the payment of a monetary obligation (no investment property)
- Documents: A document which in the regular course of business shows that the possessor is entitled to use or dispose of the document and the goods it covers
- Chattel paper: A record which evidences both a monetary obligation and a security interest in specific goods. A record is info stored in a tangible or intangible medium (electronic or paper)
- Investment property: Stocks, bonds, mutual funds, and brokerage accounts containing such items
- Accounts: A right to payment for goods, services, real property, insurance policy, energy provided, for use of a vessel, use of a credit card, or lottery winnings (ex: accounts receivable) (contractual obligation arising out of a loan does not count–this obligation is a general intangible)
- Deposit accounts: bank account or similar account
- ->Exception: Art. 9 does NOT apply to an assignment of a deposit account in a consumer transaction
- Commercial tort claims: A claim arising in tort where the claim is not for personal injury or death of an individual (organization’s claim or claim arose in business)
- General intangibles: Any personal property not coming within the scope of other definitions (software, patent, trademark rights, goodwill). General intangible under which debtor’s obligation is a monetary obligation is a payment intangible.
What is the scope of Article 9? To what does it apply?
Article 9 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 only for collection purposes, or a sale is part of a sale of a business)
4) Most consignments: Where manufacturer (or cosigner) has turned over goods to a retailer (consignee) who acts as a selling agent at the retail. Consignor retains title to the goods. Article 9 applies where:
- Goods are worth more than $1000
- Consignor did not use the goods as consumer goods
- Consignee deals in goods of the kind in a name other than consignor’s
- Consignee is not an auctioneer
- Consignee is not generally known by her creditors to be substantially engaged in selling goods of others
5) A secured sale disguising as a lease–Article 9 applies if:
- At the end of lease, the lessee becomes the owner of the good for little or no consideration; OR
- The lessee is bound to purchase the goods at the end of the lease or to renew the lease for the remaining economic life; OR
- The lease is for the entire economic life of the leased goods
How does an Article 9 Security Interest Attach? What are the prerequisites?
1) Authenticated Security Agreement: Unless collateral is in possession or control of the security party, need a Written or Electronically Stored security agreement.
2) Form of the Agreement:
- Agreement needs to be evidenced by a record that shows an intent to create a security interest
- Agreement is authenticated by the debtor–must be signed or marked electronically with present intent to identify the authenticating person and adopt the agreement
- Also, need a description of the collateral–can be of the type of goods (But for tort claims, consumer goods, and consumer securities, needs to be described specifically)
3) Given Value by secured party: Secured party extends credit to the debtor and takes a security interest in the goods. A pre-existing debt is considered to be a value given (ex: lender making an unsecured loan and later taking a security interest out)
4) Debtor must have rights in the collateral: Needs an ownership interest in or the right to obtain possession of the collateral–debtor also has rights in collateral where the property belongs to another person who’s authorized its use as collateral
What is the scope of the security interest?
Debt secured may include future advances
Property secured may include after acquired property
- (Exception: a security doesn’t attach under an after-acquired property clause to consumer goods UNLESS the debtor acquires rights in them within 10 days after the secured party gives value)
- (Exception: An after-acquired property clause is ineffective as to commercial tort claims)
Property Secured Generally includes proceeds
-Proceeds: Whatever is received upon sale, exchange, collection or other disposition of collateral (or later proceeds). UNLESS otherwise agreed, a security agreement gives the secured party a right to proceeds
-The attachment of a security interest in collateral is ALSO an attachment of a security interest in a supporting obligation for that collateral (ex: a security interest in accounts receivable is also an interest in a surety to an account)
What are the four methods of perfection, and what is perfection necessary for?
Perfection deals primarily with rights between the secured party and third parties, but it also helps determine priority between different secured parties
4 Methods of Perfection:
- Automatic
- Possession
- Control
- Filing
Automatic perfection (which interests or types of collateral are automatically perfected)?
Automatic perfection applies to:
-Purchase money security interest in consumer goods (ex: security interest in a dining room set bought with a loan)
- Assignment of accounts or payment intangibles that does not in conjunction with other assignments transfer a significant part of outstanding accounts or payment intangibles of assignor is AUTOMATICALLY PERFECTED
- ->”Casual and isolated test”: No need to file as to assignments which no one would think of filing (regular assignments of debtor’s accounts should be filed)
- ->Percentage test: Consider only what percentage of the total accounts of the assignor was assigned, and whether it was significant part of whole
- Sale of payment intangible or a promissory note (where banks and other parties are selling off parts of loans, and don’t want to take action to perfect)
- A security interest created by the assignment of a health-care insurance receivable to the provider of the health care goods or services
- Certain security interests in investment property (ex: where debtor purchases assets through a securities intermediary and has not paid–intermediary has automatically perfected interest to secure purchase price)
- Supporting obligations: Perfection of a security interest in collateral also automatically perfects a security interest in a supporting obligation for the collateral
- Temporary automatic perfection: Security interest in certificated securities, documents or interests is automatically perfected without filing or possession for a period of 20 days from when it attaches
Possession of collateral?
Possession: May perfect security in MOST types of collateral by taking possession of collateral. Security interest is perfected from the moment of possession without relation to time of attachment. Perfection continues as long as possession is retained.
-(Exception: Secured party may make an instrument or good available to the debtor temporarily–remains perfected for 20 days, unless possession is again taken or a financing statement is filed)
Perfection by Control?
Control: Security interests in investment property, non-consumer accounts and electronic chattel paper may be perfected by control (Control is only way to perfect bank accounts)
- Investment property: Control exists whenever secured property has taken steps to have the property sold without further action
- ->Certificated securities (Look up-14)
- ->Uncertificated securities (Look up-14)
- ->Securities accounts (Look up-14)
- Non-consumer deposit accounts (by bank or other person)
- Electronic chattel paper (Look up-14)
(Note: Only way to perfect a security interest required to be titled under state law is by noting the lien on the certification of title UNLESS the debtor is holding the motor vehicle as inventory for sale or lease)
Filing a Financing Statement?
Filing Financing Statement: May perfect by filing as to all kinds of collateral EXCEPT deposit accounts and money (unless they are proceeds)
-Notice filing: Enough info to put people on notice that they need to find out more
- Contents:
- -> Debtor’s name: Usually content of driver’s license, or the “individual name” (not defined); If a corporation, use name stated in document filed or issued by state registration
- -> Name change? If seriously misleading, financing statement is effective before or within 4 months after the change. Need to amend later
- ——-> Error in secured party’s name is not seriously misleading
- -> Real property related financing statements must describe the realty, and must indicate that it is to be filed in the real property records
- -> No signature required, but filing must be authorized
- -> Authenticated security agreement itself may be filed, BUT it must contain all of the elements above
- Where to file:
- ->With the clerk of the superior court of any county of the state (filing officer). May be made in any county, or where the financing statement is filed as a fixture filing and the collateral is goods that are fixtures, filing must be made in the real estate records in the county of the subject
- ->Usually file in state where the debtor is located–if it has more than one place of business, file in the place of the chief executive office
- ——->If party moves, secured party remains perfected for four months after move, for collateral pre- and post-move. But needs to refiled within 4 months or it becomes unperfected
–>When farm products are located in a state, an agricultural lien on those products is perfected in that state
–>A financing statement is effective for five years from filing, but can be extended
Perfection as to Proceeds?
If a secured party has a perfected security interest in collateral, a secured party automatically has a perfected interest in whatever the proceeds the debtor receives for that collateral for 20 DAYS.
To remain perfected in those proceeds beyond 20 days, the secured party must take new action to perfect its interest, UNLESS:
- the proceeds are identifiable cash proceeds
- the security in the original collateral was perfected by a financing statement, the interest in the proceeds would be filed in the same place, and the proceeds were not purchased with cash proceeds of the collateral
Priority between secured party and some third party? What is the general rule between secured parties?
What are the special rules?
Secured v. Secured: General Rule is the first to file or perfect, whichever one first, has priority
Special Rules:
-Purchase money security interest (PMSI) in goods OTHER than inventory or livestock: A PMSI in such goods has priority over a conflicting interest in the same goods or proceeds IF the PMSI is perfected at the time the debtor receives possession of the collateral or within 20 days of possession
- PMSI in inventory or livestock: PMSI in these goods has priority over a conflicting interest (and proceeds of various form) IF before possession, the secured party–
- ->1) Perfects
- ->2) Sends an authenticated notification to the previously filed conflicting interests
- IF Inventory, the conflicting holders must receive this notice WITHIN 5 years before debtor receives possession.
- IF Livestock, the conflicting holders must receive notice WITHIN 6 months before debtor receives possession
- PMSI in crops: IN GEORGIA, a secured party who gives new value to enable a debtor to grow crops within 3 months before crops are planted has priority over perfected security interests covering obligations incurred more than 6 months before the crops were planted–even with knowledge of earlier interest
- Conflicting PMSI: Seller who has a PMSI has a priority over a lender who has a PMSI in the same collateral
- Investment Property Priority Rules
- -> Security interest perfected by control has priority over any other method
- ->If both conflicting interests were perfected by control, they rank according to the the timing of control
- ->Security interest granted to a debtor’s intermediary has priority over an interest granted by the debtor to another security party
- ->Except for above, the first to file or perfect governs priority questions for investment property
- Deposit Account Priority Rules
- ->Security interest perfected by control has priority over a security interest perfect by any other method
- ->If both conflicting interests were perfected by control, they rank according to the timing of control
- ->Secured party who has obtained control by putting deposit account in its own name has priority over ALL OTHER secured parties with control
- ->A bank that has control because it maintains the account has priority over all other parties EXCEPT a secured party who has put deposit account in its own name
- Chattel Paper Purchaser Priority Rules: If purchaser of chattel paper gives new value and takes possession in the ordinary course of business, purchaser will have priority over:
- ->A security interest in the chattel paper that arises merely as proceeds of inventory
- ->Any other security interest, AS LONG AS the purchaser acquired its interest without knowledge that a conflicting party’s rights were violated
-Instrument Purchaser Priority Rules: Purchaser of an instrument has priority over a perfected interest IF the purchaser gives value AND takes possession of the instrument in good faith AND without knowledge that the purchase violates rights of other party
Priority between secured party and buyer of the collateral?
Special Rule?
Authorized sales: If the sale is authorized, the buyer takes free of the security interest–this authorization may be express OR implied from the type of sale or from seller’s conduct
Unauthorized Sales: A buyer in the ordinary course of business takes free of a security interest created by his seller EVEN though the interest is perfected and EVEN THOUGH the buyer knows of its existence
-Buyers NOT in the ordinary course of business take subject to perfected security interests. They take free from unperfected security interests UNLESS they know of the security interest
Special Rule: Exception exists for conflicts between PMSI and Buyer Not in the Ordinary Course of Business (PMSI Grace Period Exception)
-If the secured party files with respect to a PMSI within 20 days after the debtor receives possession, he takes priority over the rights of a buyer not in the ordinary course of business that arises BETWEEN attachment and the time of filing
Special Rule (consumer-to-consumer sales): In the case of consumer goods, the buyer takes free of a perfected interest IF he buys without knowledge, for value, and for his own personal, family, or household purchases, UNLESS prior to the purchase, a filing statement was filed.
Priority between secured party and judicial lien creditor?
Special Rule
Rule: In GA, a secured party that files or perfects before judgment lien is properly record has priority over the judgment lien; If the secured party files after, its interest is subordinate to the judgment lien
Special Rule: PMSI v. Lien Creditor (PMSI Grace Period Exception)–IF the secured party files with respect to a PMSI within 20 days after debtor receives possession, he takes priority over the rights of the lien creditor which arises BETWEEN attachment and the time of filing
Priority rule between secured party and statutory lien claimants?
Rule: If a party has a lien on the collateral by statute, then it has priority over any earlier or later perfected security interest
What does default trigger? What needs to happen for default to occur?
The right of the secured party to proceed against collateral is normally triggered by default. Typically, the grounds for default are specified in the security agreement. In absence of an agreement, look for:
- Late or missed payments
- Possible waiver by security party of late or missed payments
What is self-help repossession?
What constitutes a “breach of the peace”?
Self-help repossession: After default, a secured party is entitled to take possession of the collateral IF it can be done without a breach of the peace. If peace is breached, party loses authorization to repossess and is liable for damages
-If self-help is unavailable, secured party can use the judicial process (ex: replevin) to obtain the goods
Breach of peace: Look for acts likely to lead to violence
What is Retention of Collateral (or Strict Foreclosure)? What are the requirements?
Exceptions?
Retention of collateral: After default and repossession, secured party may propose retaining the collateral in FULL or PARTIAL satisfaction of the debt. Party must:
- Send its proposal to any other secured party from whom it’s gotten notice of a claim and to any other secured party who has a perfected interest by financing statement or noting interest on title.
- ->If notified party objects, collateral must be disposed of by sale
- Get debtor’s consent–debtor can either agree in an authenticated record, or in a full foreclosure, fail to make an authenticated objection WITHIN 20 days after notice is sent
- ->Exceptions: In a consumer transaction, secured party may keep the collateral only in FULL satisfaction of the debt
What is Resale of Collateral? What are the requirements?
Resale of Collateral: After default, secured party may sell or lease the collateral in its condition when repossessed or after reasonable preparation. Sale may be either public or private, and may be by one or more contracts. Sale discharges the security interest under which sale is made as well as any inferior interests. Purchaser is still subject to superior security interests.
Requirements for Resale:
- Reasonable notification: Authenticated reasonable notice (can’t be oral) must be given to 1) the debtor, 2) any sureties, 3) any other secured parties who have notified party of their interests, and 4) any secured parties who perfected by filing a financing statement or making notation on a certificate of title.
- ->Debtor or surety may, after default, waive this right to notice
-Timeliness: Notice must be sent within a reasonable time before the sale. In non-consumer transactions, reasonable time is 10 days or more before the time of sale
- Content: In non-consumer transactions, notice should contain a description of the debtor and secured party, a description of the collateral, the method of sale, a statement that the debtor is entitled to an accounting of the unpaid indebtedness, and the time and place of any public sale
- ->In consumer transactions, need notice of everything above, and there must be a description of the recipient’s liability for a deficiency, and a telephone number for more info
- Commercially reasonable sale: Every aspect of the sale must be commercially reasonable
- Secured party buying collateral: Secured party may buy at any public sale, but at a private sale ONLY IF the collateral is a type customarily sold in a recognized market
- Compliance with resale requirements: Secured party has a right any deficiency, and debtor has a right to any surplus
- Failure to comply with resale requirements: If you fail to comply with resale requirements, there is a rebuttable presumption that value of collateral equals the amount of debt
- ->Secured party is also liable for actual damages caused by his failure to comply
What is the debtor’s Right to Redeem?
Right to Redeem: Any time before the collateral has been resold or been entered into a contract for its disposition, or the obligation has been discharged by the secured party’s retention of the collateral, the debtor may REDEEM the collateral. Must:
- Tender fulfillment of all obligations secured by the collateral
- Because most security agreements contain an acceleration clause, debtor typically must tender the entire balance in order to redeem
