Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide or previous slide. CHAPTER 26 Secured Transactions
Quotes of the Day “All progress is based on a universal innate desire on the part of every organism to live beyond its means.” Samuel Butler, English author “Be not made a beggar by banqueting on borrowing.” Ecclesiasticus 18:33
Article 9 • Article 9 of the Uniform Commercial Code (UCC) governs secured transactions in personal property. • New Article 9 – some changes to Article 9 have been proposed, but have not been adopted yet. • Scope of Article 9 • Article 9 applies to any transaction intended to create a security interest in personal property or fixtures.
Collateral for Transactions • May include, among other things: • Instruments • Documents of Title • Accounts • General Intangibles • Chattel Paper • Goods
Attachment of a Security Interest • Attachment is a vital step in a secured transaction. • The two parties made a security agreement and either, (1) it is in writing, describes the collateral, and is signed by the debtor, or (2) the secured party has possession of the collateral. • The secured party gave value in order to get the security agreement. • The debtor has rights in the collateral.
Future Property • After-acquired property refers to items that the debtor obtains after the parties have made their security agreement. • The parties may agree that the security interest attaches to after-acquired property. • Proceeds: what is obtained when collateral is sold or disposed of. • The secured party automatically obtains a security interest in the proceeds, unless the security agreement states otherwise.
Perfection • Perfection guarantees the collateral’s availability in case of default. It keeps the collateral from being used for more than one security agreement at a time. • Methods of Perfecting • Filing a financing statement • Possession of the collateral • Purchase money security interest in consumer goods (PMSI) • (More detail about these on the next several slides.)
Perfecting by Filing • A financing statement gives the names of all parties, describes the collateral, and outlines the security interest. • Contents of the Financing Statement • A financing statement is sufficient if it provides the name and address of the debtor and the secured party, the signature of the debtor, and a description of the collateral.
Perfecting by Filing (cont’d) • Place of Filing • In general, state statutes require filing with the Secretary of State (normally in the state capital) and/or in the “local county.” • Duration of Filing • Generally, a filed financing statement is good for five years unless the secured party files a continuation statement within six months prior to expiration. This extends the protection for another five years.
Perfection by Possession • When the debtor gives the collateral to the secured party to hold during the time of the loan, it is called a pledge. • The advantages to the creditor of holding the collateral are obvious – the collateral is safe, its location is known, it cannot be used to secure another loan, and “repossession” is simple.
Perfection by Possession (cont’d) • Mandatory Possession • Generally, a security interest in money or instruments must be perfected by possession. • Care of the Collateral • A secured party must use reasonable care in the custody and preservation of collateral in her possession.
Perfection: Consumer Goods • The Code gives special treatment to security interests in consumer goods. • The purchase money security interest (PMSI) is one taken by the person who sells the collateral or by the person who advances money so the debtor can buy the collateral. • A PMSI in consumer goods perfects automatically, without filing.
Movable Goods and Fixtures • Movable Goods Generally • A security interest perfected in one state is valid in a second state for four months after the property is brought into that new state. • Motor Vehicles and Boats • State title laws generally require that a security interest in an automobile be noted directly on the vehicle’s certificate of title. • Fixtures (goods permanently attached to real estate – such as a furnace) • Using fixtures as collateral can become complex, especially if someone else has an interest in the real estate itself.
Protection of Buyers • Generally, once a security interest is perfected, it remains effective regardless of whether the collateral is sold, exchanged, or transferred. • Buyers in Ordinary Course of Business • One who buys goods in good faith from a seller who routinely deals in such goods. • A BIOC takes the goods free of a security interest created by his seller even though the security interest is perfected.
Protection of Buyers (cont'd) • Buyers of Consumer Goods • Buyer takes free of a security interest he is not aware of, if he pays value for the goods, he is buying for his own family or household use, and the secured party has not yet filed a financing statement. • Buyers of Chattel Paper, Instruments, and Documents • If bought in the ordinary course of her business, and she takes possession, she generally takes free of any security interest.
Liens • A lien is a security interest created by law (rather than by agreement). • Artisan’s lien, meaning a security interest in personal property, is created when a worker makes some improvements to the property. • Mechanic’s lien is created when a worker improves real property.
Priorities Among Creditors • A party with a perfected security interest takes priority over a party with an unperfected interest. • If neither secured party has perfected, the first interest to attach gets priority. • Between perfected security interests, the first to file or perfect wins.
Priority Involving a PMSI • PMSI in Inventory (goods that the seller is holding for sale or lease in the ordinary course of its business) • Takes priority over a conflicting perfected security interest (even one perfected earlier), if two conditions are met: • Before filing, the secured party must check for earlier security interests and, if any, must notify that holder concerning the new PMSI. • The secured party must then perfect its PMSI before the debtor receives the inventory.
Priority Involving a PMSI (cont’d) • PMSI in Non-Inventory Collateral • A PMSI in collateral other than inventory takes priority over a conflicting security interest if the PMSI is perfected at the time the debtor receives the collateral or within 10 days after he receives it.
Default and Termination • Default: when debtor fails to make payments due or enters bankruptcy. • Taking Possession of the Collateral • When the debtor defaults, the secured party may take possession of the collateral. • Retention of Collateral • If the secured party has possession, he may notify the debtor that he will retain the collateral. If the debtor does not object within 21 days, the secured party automatically forecloses (obtains valid title).
Disposal of the Collateral • A secured party may sell, lease, or otherwise dispose of the collateral in any commercially reasonable manner. • A debtor is liable for any deficiency (insufficient funds to pay off the debt). • Right of Redemption • The debtor may redeem the collateral by paying the full value of the debt at any point before the secured party disposes of it.
Proceeding to Judgment • Upon default, a secured party may sue the debtor for the full debt instead of seizing the collateral. • This is sometimes done when the collateral has decreased in value to an amount less than the debt, and there is reason to believe that other assets are available to pay the debt.
Termination • A termination statement is a document indicating that there is no longer a security interest in the collateral. • This happens when the debtor has fully paid off the debt. • The termination statement must be filed everywhere the financing statement had been filed.
Article 9 Revisions • Some proposed revisions to Article 9: • An expanded scope, to include secured transactions in various accounts and intangibles. • Changes in creation and perfection terminology, which would allow creditors to use generic phrases like “all personal property” when describing collateral. • Simplified filing procedures, eliminating most county-level filing.
“Secured transactions are essential to modern commerce but create pitfalls for the unknowing. A person doing business in ignorance of Article 9 risks losing goods and money.”