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Secured Transactions Outline

Law Outlines > Secured Transactions (Article 9) Outlines

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Spring 2021

E. McCullough

Secured Transactions Outline
FOR THE PURPOSES OF THIS OUTLINE THE DEFINITIONS AND ABBREVIATIONS ARE AS FOLLOWS:

"SI" security Interest
"SP" Secured Party
"GFPV" Good faith purchaser for value
Obligor- debtor the one who took out the debt (person who owes the obligation)
Obligee- creditor, who is owed the money (person to whom the obligation is owed)
"dunning" persistent attempt to collect a debt
"set off" both parties have debt to each other
"mature" it is due and owed
"mutual" owed in the same capacity
Bankruptcy
Chapter 7 Liquidation- individual and business
Trustee appointed to sell property, manage debt pay off
Chapter 11- Individual and Corporate Reorganization
Trustee appointed, plan of reorganization, court confirms plan, trustee sees plan out
Chapter 13- Individual Reorganization
Trustee appointed (sometimes), plan of reorganization presented,
CREDITORS vote on plan, court approves plan, payments occur
What is credit?
Credit is a contractual agreement where a borrower or a buyer receives something of value (money or resources) and agrees to pay the Lender or Seller later.
A secured transactions is: (agreement)
An agreement where a buyers or borrower grants a security interest in property
(collateral) to a seller or lender, to guarantee payment of an underlying obligation to be paid LATER
These promote borrowing and buying
It is backed by personal property to cover the obligation in event of default
Two types of secured credit:

1. A seller extends credit to a buyer to purchase property from the seller and pay the seller later, with the seller taking a security interest in the property sold

2. A lender extends credit to a borrower, loaning money to the borrower for a variety of reasons, with the borrower agreeing to pay the lender later and securing the promise of future payment with the borrower's property.
What is unsecured credit?
Credit extended where no property is pledged by the obligor to cover the obligation until paid in full (credit card, medical services, student loans)
In personam relief- obligor can sue personally for payment
Three advantages to a secured transaction1. In Rem Relief- Obligee has personal property to satisfy the obligation
Relief against the THING, purchase car from Baker Motors, purchase car (car is the rem)
personal obligation/ debt (personam) (Rem is against the thing, Personam against the personal obligation)

2. Collection of the obligation by obligee is easier- compared to an unsecured obligation and its complications

1 Spring 2021

E. McCullough

Think about dentist example and how long it took to get paid, (sheriff, resell, writ) (has to foreclose on the property, if property is in another jurisdiction have it transferred, LONG
PROCESS TO GET PAID)
May immediately repossess collateral granted and sell it

3. Priority advantage for the obligee- who is the first in time to properly record the security interest INCLUDING notice, check to see if a security interest is in the property before claiming a new one

4. If security interest that consented and pledged collateral, exemptions DO NOT MATTER (so if the van was pledged as collateral, then it does NOT matter if it was 5,000 vehicle exemption, etc)

Attachment- how a lender can create enforceable security interest (3 steps to attach)
Perfection- put the rest of the world on notice of the security interest (2 steps to perfect)
Priority- who gets the personal property when there are multiple parties involved
Nine Step Classification- end goal, who has priority to piece of property
Who are the parties?
Debtor §9-102(a)(28)
Person who has an interest in the personal property or fixture that acts as collateral
Secured Party (the beneficiary) §9-102(a)(73)
Person in whose favor the security interest is created, a person who holds an agricultural lien, certain cosigners, certain lessors and a person who buys accounts,
chattel paper, and promissory notes
Collateral §9-102(a)(12)
The property or fixture subject to the security interest and more
Obligor
Person who is responsible for the underlying OBLIGATION whether monetary or nonmonetary (NOT ALWAYs the debtor)
Security interest §1-201(b)(35)
Generally, an interest in personal property or fixtures which secures payment of an obligation or performance of a service until the obligation is paid in full or the performance is completed

Step 1- Identify the personal property AT ISSUE
To know what personal property they have, you need to see it
Know who the debtor is, their interest in the property
How the debtor uses the property
Can be goods, intangibles or quasi-intangibles

1. 2.

3. 4.

5. Can the party pledge the interest?
To what extent do they own the property?
What is the value of the debtors interest in this property?
Will the value of the property cover the obligation of the loan over its life?
Should the secured party take several TYPES of property?

Step 2- Classify the personal property- from debtors perspective 2 Spring 2021

E. McCullough

Can classify as UCC Types or individual items
Need sufficient description of the collateral- types can be sufficient
"existing and after acquired"- includes all current and future

3 

Goods (moveable at the of identification to the contract) (good can transform types- dairy)
o Inventory- stuff being sold, leased or used up in the business

Equipment- default category, rule all other goods out first, vehicles, tools, etc

farm products- goods in "farming operation" used to harvest or animals

consumer goods- household or family purposes

Intangibles

Deposit Account- means a demand, time, savings, passbook, or similar,
account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument.
o Accounts (riskiest)o Investment Property
 Certified Security (electronic)
 Uncertified Security
 Commodity Account- means an account maintained by a commodity intermediary in which a commodity contract is carried for a commodity customer
 Securities Account

General Intangibles- means any personal property, including things in action,
other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-ofcredit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.
 Breach of Contract Claims

Letter of Credit Right- means a right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. The term does not include the right of a beneficiary to demand payment or performance under a letter of credit.
o Commercial Tort Claims- means a claim arising In tort with respect to which:
(A)The claimant is an organization; or
(B)The claimant is an individual and the claim:
a. Arose in the course of the claimant's business or profession; and b. Does not include damages arising out of personal injury to or the death of an individual

Quasi- Intangibles

Instruments- means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or Spring 2021
E. McCullough assignment. This term does not include (i) investment property, (ii) letters of credit, or (iii) writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card

Chattel Paper (least risky)
o Document

Investment Property (certified security)
Security agreement: calls for a "reasonable description" of collateral

Step 3- Identify all possibly claimants with an interest in this personal property
Step 4- Scope (explain IF and HOW each transaction is within article 9)
-Creation and enforcement and priority of consensual liens on PERSONAL property
-You can create an enforceable security interest through contract, but the interest can also be created via the nature of the transaction when the deal is MORE like a secured transaction than other things
Other types of article 9 transactions:

1. Conditional sales contract
Can have a conditional clause in the Sales Agreement that allows seller to retain "title" in the good until obligation is paid in full- (not actually a title,
they are basically taking a security interest)
The conditional clause allows the seller (SP) to reclaim the collateral in the event the Buyer (debtor) does not pay for the goods in full
STILL HAS TO PREFECT AND NOTICE the SI and follow all the other conditions of Article 9, just without the separate security agreement

2. Leases that are more like sales
A TRUE LEASE is governed by article 2A
A sale disguised as a LEASE where typically the lessor retains the title to the goods leased and can easily reclaim the goods if Lessee defaults on the lease
*If the consideration to be paid is for a term and the Lessee must still pay the obligation EVEN IF they return the property then if one of the following a. The term of the lease is greater than the economic life of the goods OR
b. Lessee is bound to renew the lease for the rest of economic life of the goods OR is BOUND to purchase the goods OR
c. Lessee has the option to renew the lease for the economic life of the goods for little to no additional moolah d. Lessee has option to buy the goods for little to no additional moolah
*If true and if one of a-d exist then the lease is more like a credit sale disguised as a lease with the lessor retaining title to good and a right to reclaim it
*Economic reality test- does not want goods back if virtually worthless to anyone else 4 Spring 2021
E. McCullough

3. Certain consignments
- True consignment (not governed by article 9) (bailment)
- Consignment which is in fact a SALE disguised as a consignment and is governed by article 9
Chairs at a store for sale, % goes to owner, but store must buy if they fail to sell them- THIS IS A CSALE
- Article 9 Consignment 9-102(a)(20)
A transaction in any form where the person delivers the goods to a "merchant" for sale where 'merchant" deals in goods of that kind under a name different than the cosigner, merchant is not an auctioneer and not generally known by creditors to sell cosigned goods, the goods have a value of less than $1000, not consumer goods immediately before delivery- AND transaction itself doesn't create a security interest
*If all are true then governed by article 9 and a creditors security interest can attach to this

4. True Sales-Sales of accounts, chattel paper, payment intangibles and promissory notes
-These all have underlying payment obligations
- Problems with these- Ostensible Ownership- how to know that they aren't secured by multiple parties- still have to notice the world
- Securitization- conversion of assets into marketable securitiesPROTECT PARTIES AND PROMOTE Securitization
-if whole business closing doesn't matter because no issue in another taking interest

5. Agricultural Lien-??
An interest in FARM PRODUCTS which secures payment for goods or performance of services associated with FARMING OPERATIONS
created by statue for a person in ordinary course of its business furnished goods AND effectiveness of the lien doesn't depend on possession of goods.
ARTICLE 9 DOES NOT APPLY TO

Landlord's lien, other than if it is an Agricultural Lien
Materialman's, artisan's lien except as to a priority contest of liens
Assignment of a CLAIM for wages, salary or other compensation
A sale of accounts, chattel paper, payment intangibles, promissory notes as part of sale of business where arose
An assignment of accounts, chattel paper, payment intangibles, promissory notes for collection purposes
An assignment of a RIGHT TO PAYMENT under a contract to an Assignee that is obligated to perform under the contract
An assignment of a SINGLE account, payment intangible or promissory note to an assignee in satisfaction of a preexisting debt.

Step 5- Attachment- explain if each claimant has an
ATTACHED security interest and explain why or why not 5 Spring 2021

E. McCullough

based on the law OR determine if their interest is not a security interest
How to obtain an enforceable security interest again the Debtor

1. Have a security Agreement 9-203(b)(3)- some kind of agreement between the debtor and secured party and if written the agreement MUST be authenticated by the Debtor and have a reasonable description of the collateral a. The Security Agreement may be ORAL, ONLY IF
A. Secured party takes possession or delivery of certain types of collateral OR
B. Secured party takes "control: of certain types of collateral
The Security Agreement Written:
AUTHENTICATED by the DEBTOR and SUFFICIENTLY DESCRIBE THE
COLLATERAL
Caveat: if timber (to be cut) is the collateral then the land on which the timber is on must be sufficiently described
How does one "authenticate" the security agreement?
A security agreement is contained in a record is authenticated when the
Debtor signs or adopts a symbol, sound or process with present intent to identify itself and adopt or accept the record.
b. How to sufficiently describe the collateral?
Must Reasonably Identify under 9-108
In a consumer transaction cannot use "TYPES" as a classification, not sufficientneed to specifically describe the collateral
For Commercial tort claims the Secured Party must describe the commercial tort claim SPECIFICALLY- name the tort or generally the context
AVOID AMBIGUITIES, they can invalidate the security interest, they are skewed agains thte drafter
Use EXISTING AND THEN AFTER ACQUIRED PROPERTY (AAP) - certain types of property are presumptively included (like inventory and accounts, constantly changing, turn over, Filtercorp case)
ii. Allows for a floating lien or continuing lien on A/A collateral of the same TYPE listed in the security agreement with no additional SA if the iii. LIMITED on consumer goods- only those acquired w/I 10 days authentication

2. VALUE must be given by the Secured Party; AND
a. Value is 1-204 consideration for obtaining the Security interest such as i. Giving a binding commitment to extend credit ii. Extending immediate available credit whether drawn upon or not iii. Getting a security interest for an old, pre-existing obligation iv. Any consideration sufficient to support a contraction b. The secured party must give the value c. The DEBTOR does not Always have to give the value- can be an obligor 6 Spring 2021
E. McCullough d. The bank can give additional value and have it secured by the original collateral given with original loan i. Yes, only if there is a FUTURE ADVANCES clause ii. Language "grants a security interest to (secured party) in all existing and after-acquired equipment to secure the CURRENT obligation owed by (debtor) AND any FUTURE ADVANCES made by (secured party) to
(debtor).
iii. In Re Wollin- initial obligation and any future advances must be of the same class or "so related" that later advances may be inferred iv. BUT the drafters of the code said it DID NOT have to be of the similar class or type v. The combination of both a future-advances clause and an afteracquired property clause is called CROSS-COLLATERALIZATION- loan can been secured by debt currently and future debt and future property
(pg 98)

3. Debtor must have rights in the collateral to grant a security interest in the property to the secured party a. Is the collateral really "property"
i. Problem types of property- golf club membership, liquor license, season tickets b. What is the extent of the Debtor's rights in the property- can he transfer more than he has i. Owns it (solely or co-owned)
ii. Leases it (leasehold interest)
iii. Stole it (VOID interest)
iv. Bought it with a bad check (VOIDABLE
interest) (can transfer to GFPV)
*TITLE not particularly relevant c. WHEN did the DEBTOR actually receive an interest in the property i. If inventory- when manufactured it or when
Debtor bough it to sell or use up in its business ii. If equipment, when the Debtor bought it iii. If accounts, chattel paper, or note, when the
Debtor created each with the customers or obligors iv. If checking account, when Debtor opened it with the Bank or when a particular proceed is deposited v. If a check, when debtor received the check
*Attachment the outermost date of the dates associated with each of the 3 attachment requirements (SA completed, VALUE give, RIGHTs in Prop). The date the Debtor gets rights in the collateral may often be the OUTERMOST
DATE.
*CAUTION: If goods are purchased- date of CONTRACT if the goods exist
OR if for future goods- the date when they are ASSIGNED to the contract 7

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