A Short & Happy Guide to Secured Transactions
Author:
Barnes, Wayne R
Edition:
1st
Copyright Date:
2018
15 chapters
have results for secured transactions
Chapter 1 Introduction to Article 9 22 results (showing 5 best matches)
- Article 9 is entitled “Secured Transactions.” Two words—“secured” and “transactions.” First, “transactions.” A secured transaction is, of course, a kind of “transaction” or contract between two parties. You still know what “contracts” (or transactions) are from your first-year Contracts course.
- What is Secured Transactions law? Many students come to the subject with some trepidation, because of their lack of familiarity with the topic. However, you actually know what secured transactions are, even if you hadn’t thought about it much before. Do you own a car right now? Is it paid off? If not, what happens if you miss a payment or two? We all know what happens—the tow truck happens! Some repo man shows up with a tow truck, and hauls your car away. The repo man was hired by the bank that you were supposed to pay. The bank now has your car, and they are about to sell it and use the money to pay off the car loan. The reason the bank can do this is because you and the bank (or car dealer, or auto manufacturer, or whoever) entered into a loan and secured transaction. Article 9 of the Uniform Commercial Code is the primary law that deals with secured transactions—that is, consensual interests granted in to secure a loan, but that’s called a ...that allows the creation of secured...
- This Short and Happy Guide is all about the basics of Secured Transactions law. It covers most of the basics that you need to know, for your Secured Transactions class in law school. It doesn’t necessarily try to cover every single topic that comes up—this is, after all, a guide that is “Short” and also “Happy.” For longer guides, there are a multitude of options (which West Academic would be as similarly pleased to sell you as they were to sell you this one! Or, sneak over to your law school library and check out the area where Uniform Commercial Code and Secured Transactions materials are kept).
- Second, “secured.” Section 9–109 explains why the transaction is called a “secured” one:
- In Article 9 terms, what has happened is that Donny has entered into a “secured transaction” with First Bank. This is because Donny granted a “security interest” in the personal property (in this case, the Mustang) to First Bank by contract, and the security interest granted secures Donny’s payment of his obligation to First Bank (the $45,000 car loan). Of course, First Bank hopes Donny will just make the 60 payments under the loan schedule. But, First Bank is more “secure” knowing that if Donny misses a payment, First Bank can exercise its right under the security agreement to repossess the Mustang and have a foreclosure sale. First Bank can then use the money it gets from the sale to help pay Donny’s debt. That’s the essence of the secured transaction.
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Chapter 3 Definitions/Concepts/Classification of Collateral 29 results (showing 5 best matches)
- We already know that the type of transaction entered into between Donny and First Bank is a “secured transaction” and that the interest in the Mustang that Donny is granting to First Bank is a “security interest,” given to help secure payment of Donny’s loan obligation owed to First Bank.
- In the first chapter, we introduced the subject of secured transactions, and defined conceptually what a secured transaction is—a contract that grants a property interest known as a security interest. In the second chapter, we discussed the general scope of Article 9 of the UCC, and defined the term “security interest.” In this chapter, we will spend some time going over some basic definitions and concepts of Article 9. We will use these concepts as building blocks to use as we later learn the primary rules and concepts of Article 9.
- Recall that a “security interest” is defined as “an interest in personal property . . . which secures payment or performance of an obligation.” Section 1–201(b)(35). Recall also that obligation can mean any obligation, whether on a loan, credit, or some other contractual obligation such as a lease. Also, recall that Article 9 applies to “a transaction . . . that creates a security interest in personal property . . . by contract.”
- Let’s add a few more definitions to our vocabulary so that we get a fuller picture of the components of the secured transaction. Article 9 defines the following terms:
- We will come back to these definitions at several points throughout our discussion of Article 9 and Secured Transactions, as they are referenced in several important concepts.
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Chapter 12 Default: Part 2 (from Foreclosure Sale to the End) 72 results (showing 5 best matches)
- Now, we will complete our discussion of Secured Transactions by following the scenario all the way until the end. We will assume debtor has defaulted, and the secured party has lawfully taken possession of the collateral. And, we will assume that the debtor is not going to be redeeming it back by paying what’s owed. Instead, the secured party is going to now proceed to do what it bargained for the power to do by taking a security interest in the first place— the secured party is going to take and sell the collateral, and use the money to pay off the debt.
- One last thing—under section 9–626, the rebuttable presumption rule only applies to non-consumer transactions. Section 9–626(b) states that the remedy in consumer transactions is left to the courts or individual states. Some states apply the same rebuttable presumption rule to consumer transactions. Some states actually impose a stricter standard with consumers by making the presumption , not rebuttable. This would basically mean that if the debtor could prove the secured party violated the Article 9 rules on collection and enforcement, the debtor would eliminate all deficiency liability, and the secured party would have
- Next comes payment of lower priority secured claims (if notice has been sent to foreclosing secured party).
- transactions, such that notice sent after default and before the earliest time of sale in the notice is deemed to be a reasonable time. In other words, a business debtor like Paula’s World-of-Appliances will not be able to claim that it was commercially unreasonable for the secured party to not send her a sale notice 15 days before the sale. Ten days is always enough for commercial debtors. The Code does not expressly transactions.
- Next comes the foreclosing secured party’s debt.
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Chapter 8 Perfection: Possession, Automatic Perfection, Control, and Other Methods 65 results (showing 5 best matches)
- Allowing secured parties to be perfected when they haven’t filed anything, or taken possession of the collateral, cuts against the UCC’s policy of wanting to give notice to the world of these security interests. No notice to anyone if nothing has been filed or possessed. But, for various policy reasons, several specific categories of secured transactions are allowed to be automatically perfected.
- Therefore, under section 9–309(1), a secured party with (1) a purchase-money security interest (PMSI) in (2) consumer goods, is perfected simply upon attachment (i.e., upon (a) giving value, (b) debtor having rights in the collateral, and (c) debtor signing a security agreement describing the collateral). No need to file. No need to possess. The idea for this automatic perfection rule is that it is expensive and burdensome to ask retailers and banks to file for every single small consumer transaction, since these are not large commercial transactions involving a whole lot of money. So, purely for convenience and logistics, Article 9 doesn’t make secured parties do anything extra to perfect. Just attach, that’s it.
- Subsection (2) is about assigning (which can include granting a security interest in) a small, “insignificant” amount of the debtor’s accounts, in order to secure a loan. So far, we have just assumed that a debtor granting a security interest in accounts to secure a loan is granting a security in ALL of his accounts. All means 100%. All is always significant. So, there is no automatic perfection for a security interest in all accounts—filing is required. On the other hand, if a debtor only granted a security interest in 1 out of 1,000 accounts that would likely be insignificant (unless it was a really huge, disproportionate dollar amount). And so, section 9–309(2) basically says there is no need to file if it’s only one out of a ...insignificant, and so “how much” of the debtor’s accounts before it becomes significant is a fact issue that would be handled by courts on a case-by-case basis (of course, if you’re the secured party, when in doubt, you will file). But, for very small...
- If perfection of a security interest depends upon possession of the collateral by a secured party, perfection occurs no earlier than the time the secured party takes possession and continues only while the secured party retains possession.
- certain other information. The primary point of the title is to demonstrate who, at any point of time, is the current owner (or, “title holder”) of the car. There is a system for transferring the title over to buyers of the car, and getting it re-registered in the new buyer’s name, but that is not our present focus for Secured Transactions purposes.
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Chapter 2 Scope/Applicability of Article 9 49 results (showing 5 best matches)
- The application of this article to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this article does not apply.
- We saw previously that an Article 9 security interest is defined in section 1–201(b)(35) as an “interest in personal property . . . which secures payment or performance of an obligation.” We also defined a “secured transaction” as a transaction that creates a security interest. We did this by looking to another UCC section, section 9–109(a). That section is called the “scope” section. Take another look at that section now, with some additional language and subsections added:
- the transaction does not create a security interest that secures an obligation.
- Simply put, Article 9 applies, first and foremost, when the parties enter into an express contract conveying a security interest in personal property, in order to secure a loan or other obligation. Most of the time, this is very straightforward. Recall in the last chapter, when Donny Debtor signed a “Retail Installment Contract” that agreed to pay First Bank the price of the car over time, and also expressly granted a security interest in the car to secure payment of the loan? That is an expressly created security interest, and that is obviously the type of transaction that Article 9 applies, in the first place.
- exercise the “option” and pay the silly dollar. What’s going on here? Again, the parties are being clever, and taking advantage of tax or accounting reasons for structuring the transaction as a “lease” rather than a secured transaction and purchase (ask one of your accounting friends about “off-balance sheet financing”). But, Article 9 says, in reality, we are going to treat this like the economic reality that it is—the “lessor” is really a seller who is financing the purchase of the item, and the “lessee” is really buying it, and granting a security interest in it to the lessor to secure the purchase price.
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Chapter 7 Perfection: Post-Filing Events 22 results (showing 5 best matches)
- In the last chapter, we discussed the process of perfection by filing. Specifically, we discussed how a secured party gets perfected through filing a financing statement, of the secured transaction. Now you know at least three things about that (including some other nuggets along the way): 1) where to file (in the Secretary of State’s office where debtor is located), 2) what to file (a financing statement with the name of debtor, name of secured party, and indication of collateral) and 3) whether mistakes are tolerated in the financing statement (minor errors are ok, except that no mistakes in debtor’s name are allowed unless the search logic exception applies).
- At this point, bright students like yourselves usually ask how the secured party is supposed to know if the debtor changes its name, and whose fault is it if secured party doesn’t find out? The answer is, first of all, that the Code doesn’t care. If the secured party does not amend the financing statement within four months, then the section 9–507(c) consequences happen regardless. As a practical and business matter, the secured party will probably contractually require that the debtor update secured party with any name changes, and may also communicate with the debtor from time to time to be sure this isn’t the case. In short, it’s the secured party that has every incentive to keep tabs on the debtor and his doings.
- The secured party must file in the new state within four months (or sooner if the first financing statement is less than four months away from its five-year lapse point), or it becomes unperfected in ALL of the collateral (old and new).
- If there is attachment and these steps are followed, the secured party’s security interest is perfected . But, things change. Stuff happens. Perfection (unlike diamonds or the Highlander) will not last forever. We need to figure out what things can happen to affect the secured party’s perfection by filing. That is, what post-filing events can occur to cause the secured party’s security interest to cease to be perfected?
- This last bit is basically about priority, which we take up in the next couple of chapters. But, spoiler alert—if a secured party’s filing was first and granted its security priority, and there is an inferior security interest (and/or someone that bought collateral from the debtor) but then the priority secured party’s financing statement lapses, guess what happens? The priority secured party becomes junior—it doesn’t matter that the secured party once had priority. For our purposes, it is as though it never did, and the other interests move ahead in priority. TL; DR—he was a winner, and now he’s a loser.
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Chapter 6 Perfection: Overview and Filing to Obtain Perfection 27 results (showing 5 best matches)
- Section 9–509 provides that a financing statement can only be filed naming a debtor, if the debtor in fact authorized the financing statement. There are a couple of ways that such authorization can be obtained. First, subsection (a) provides that the debtor can expressly authorize the filing in a signed (authenticated) record. This is the most straightforward way, and secured parties will commonly have debtor sign such an authorization as part of the paperwork involved in the closing of any secured loan transaction.
- In this chapter, we will introduce a new concept. Perfection. A secured party will not only want its security interest to attach, it will also want to of the Secured Party’s security interest in Debtor’s collateral. The UCC wants the world to have notice of all security interests. Why? So future secured parties/lenders can make good, informed decisions about whether to make loans and agree to take security interests in stuff to secure those loans.
- The second thing the financing statement must include is the name of the secured party. This requirement is straightforward. The full, formal name of the secured party, usually a retailer or lender, must be provided.
- We now know that in order to properly perfect a security interest by filing, the financing statement must contain: (1) the name of the debtor, (2) the name of the secured party, and (3) an indication of the collateral. The Secured Party obviously wants to put the correct information in the financing statement so that it will be perfected.
- But what if the Secured Party makes a mistake? What if the Secured Party is mistyped in the financing statement as “Dirst Bank” instead of “First Bank”? What if the collateral is described as a “Wasco” forklift instead of a “Wesco” forklift?
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Chapter 5 Attachment/Creation of a Security Interest 19 results (showing 5 best matches)
- So far, we have defined what a security interest is, and who the major players in a secured transaction are (the Debtor and the Secured Party). We have also defined several important concepts, including several types of collateral and the purchase-money security interest concept. Next, we are going to consider the Article 9 concept of “Attachment,” which concerns the
- Under section 9–108(e)(2), a secured party is not allowed to use the term “consumer goods” in a secured transaction with a consumer for consumer purposes. This is a major instance in which using a UCC collateral type for the description will not be sufficient. The idea is that such clauses are undesirable from a public policy standpoint. We don’t want banks scooping up a security interest on every single item in a consumer’s home, such that if
- We didn’t excerpt subsections (b)(3)(C) and (b)(3)(D) of 9–203, because it’s really getting into the weeds of Secured Transactions law, and we are trying to keep this guide Short and Happy. However, the point of these subsections is that, in addition to to the secured party will work in lieu of an authenticated security agreement, to satisfy the third element of attachment. And, subsection (b)(3)(D) says that, for various types of collateral (deposit accounts, electronic chattel paper, investment property, and electronic documents), the concept of applies such that if a secured party obtains Article 9 “control” over these types of collateral, such control suffices in lieu of an authenticated security agreement, to satisfy the third element of attachment.
- The second limitation concerns consumer goods. Consumer goods can only be the subject of an after-acquired property clause to the extent that the debtor acquires the, with 10 days after the secured party gives the value for attachment. So, if Grandma Gail borrowed $10,000 from First Bank, and granted a security interest in “all my furniture, now owned or hereafter acquired,” this only will cause a security interest to actually attach to furniture acquired over the course of the next 10 days. As a practical matter, the drafters of the UCC wanted to limit after-acquired clauses in the consumer context, and confine most situations of enforceability to the purchase-money variety, or at least one shot, limited transactions.
- Basically, section 9–204 says that the parties can include a future advance clause, just like they can include an after-acquired clause. And, if included, in the above example the entire $200,000 loan balance would be secured by all the collateral. So, First Bank will want to include language along the following lines: “Wayne hereby grants a security interest in all equipment, now owned or hereafter acquired (the after-acquired clause), in order to secure payment of the $100,000 loan made on June 1, as well as any future advances that First Bank makes thereafter (the future advances clause).” If the future advances clause were not present, the second $100,000 would not be secured by equipment—only the original identified $100,000 loan would be.
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Chapter 11 Default: Part 1 (Before Foreclosure Sale) 53 results (showing 5 best matches)
- Our final topic to discuss for Secured Transactions is the rules on default. Up until now, we have focused on how to create a security interest and how to perfect it. We also just finished discussing our rules on priority of conflicting security interests between two or more claims to the collateral. Now, we will talk about the Article 9 rules on default, which ultimately have to do with the secured party’s
- From section 9–601(a), we learn that upon default, the secured party has basically two avenues of judicial enforcement rights. One avenue is something that all creditors have, whether they have a security interest or not. This is the right to . That is, upon default a secured party can usually sue the debtor in court, and get a money judgment for the amount of the debt. Because a secured transaction involves a debt, this is an on the debt—it says Paula’s World-of-Appliances is supposed to get out its checkbook and give First Bank the money. Secured parties can take this step upon default.
- Stepping into a debtor/secured party’s shoes.
- Secured party entitled to proceeds.
- When a secured party makes a loan and takes a security interest in collateral, obviously the secured party hopes the loan will just be paid back according to its terms. That way, the secured party gets its money back, and hopefully some interest, and all is good. It doesn’t really want the debtor to default on the loan.
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Table of Contents 10 results (showing 5 best matches)
Title Page 1 result
Chapter 4 Purchase-Money Security Interest 16 results (showing 5 best matches)
- 9–103(f) provides for several scenarios in which a part-PMSI secured transaction, still retains that status to the extent of its
- The other complexity to discuss about PMSIs are “dual status” issues. In a word, a secured transaction can be part-PMSI, part-regular security interest. This used to not be the case under some court decisions (combining a PMSI with a non-PMSI security interest used to be held to destroy the PMSI status completely), but 9–103(f) has explicitly allowed it under Article 9.
- Subsection (f)(1): Purchase-money collateral secures both kinds of debts.
- But, there is a “cross-collateralization rule” under 9–103(b)(2), which says “if the security interest is in inventory that is or was purchase-money collateral, [a security interest in goods is a PMSI] also to the extent that the security interest secures a purchase-money obligation incurred with respect to other inventory in which the secured party holds or held a purchase-money security interest.” So, here’s what’s happening. Say Donny Debtor borrows $10,000 from First Bank to purchase Inventory item #1, giving First Bank a security interest in Inventory item #1. This is a PMSI. Let’s say that, at the time, the parties include a clause—let’s call it a “cross-collateralization clause”—that says, basically, that all other inventory Donny owns or may own will also secure the $10,000 Inventory Item loan #1 amount (this is allowed—we’ll discuss it in more detail later). Later, Donny borrows $15,000 from First Bank to purchase Inventory Item #2, giving First Bank a security interest in...
- Subsection (f)(2): The purchase-money obligation is secured by both kinds of collateral.
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Chapter 9 Priority: Basic Rules 25 results (showing 5 best matches)
- Early filing is allowed for purposes of convenience, under section 9–502(d). The secured party might file several days before the debtor signs the security agreement or the loan is made, just to have everything in place by the time the loan transaction closes.
- On the secured party’s side, notice that there are two possibilities. One possibility, under section 9–317(a)(2)(A), is that the secured party’s security interest is perfected before the lien creditor obtains a judicial lien by levy. This means what perfection generally means—the secured party’s security interest has attached, plus has also been perfected via some perfection method (usually filing). If the secured party does this, gets perfected before the judicial lien arises by sheriff’s levy, then the Article 9 secured party has priority in the property.
- It’s actually more complicated than this, by several orders of measure. If the security interest is unperfected at the moment that bankruptcy is filed, there is a bankruptcy provision known as the “strong arm power” under 11 U.S.C. § 544, whereby the bankruptcy trustee can possibly “avoid” the security interest altogether. The trustee would do this so that there is more property (the collateral which has now been stripped of the unperfected secured party’s security interest) for liquidation and distribution among the unsecured creditors of the debtor in bankruptcy. There is at least one other bankruptcy issue that some of you may discuss in your classes, as well. This involves whether the grant or perfection of a security interest is a bankruptcy “preference” in the 90 days before bankruptcy, under 11 U.S.C. § 547. Because this is a bankruptcy issue (albeit with some Secured Transaction crossover), I will leave discussion of it to other Longer and Sadder guides.
- In the last few chapters, we have discussed the process of perfection of a security interest. If you recall, we said that perfection was the UCC’s way to encourage secured parties to take steps—usually filing—that give the world notice of the secured party’s security interest. By the secured party’s filing (and thereby the security interest getting perfected), anyone can search the Secretary of State database and find the record of the secured party’s security interest granted to it by the debtor.
- General Priority Rules: Secured Party vs. Secured Party
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Chapter 10 Priority: Special Rules 77 results (showing 5 best matches)
- In a sense, this rule is the cousin to the rule in section 9–317(a) that provides that lien creditors that obtain a judicial lien before the secured party is perfected have priority. Section 9–317(b) provides that genuine buyers who buy (without knowledge) before the secured party is perfected “have priority,” or take free of the unperfected security interest. Either way, usually secured parties who are unperfected at the time a lien creditor obtains a lien, or a buyer buys the assets from the secured party’s debtor, are in trouble. It pays, therefore, for a secured party to get perfected, and to get perfected quickly.
- Fixture priority vs. “manufactured home transaction.”
- Last time, we started our priority discussion by looking at the basic rules. Those basic rules are that the creditor that is first in time is generally first in right. This plays out in different ways, depending on the circumstances and who the contesting creditors are. Between two or more creditors with perfected Article 9 security interests, the rule is that the secured party that is first to file or perfect has priority, so long as they have remained continuously perfected since such perfection. Of course, a perfected secured party always has priority over an unperfected secured party, and if both secured parties are unperfected then the rule is that the first secured party to attach has priority. Finally, if the secured party is in a priority contest with a lien creditor, then the secured party must generally be perfected (or, at least, file a financing statement and obtain a signed security agreement from
- In that vein, we’ll look at several basic PMSI priority rules. The first one is the general rule for a PMSI secured party vs. a non-PMSI secured party. The second one is the rule for a PMSI in inventory vs. a non-PMSI security interest in inventory. The third one will be a PMSI secured party vs. another PMSI secured party. And, the fourth one will be PMSI secured party vs. a lien creditor. In almost all of these rules, if the PMSI follows the prescribed steps, the result will be “superpriority”—that is, PMSI secured parties will enjoy priority
- a buyer in the ordinary course, buying goods which are subject to a fully perfected security interest. The provisions work similarly to subsection (b), with one primary difference. Assuming that the secured party did not enter into an original commitment without notice of the buyer’s purchase in the first place, the time during which a secured party can make a protected future advance is limited to 45 days after the purchase, or when the secured becomes aware of the buyer’s purchase, . With judgment liens, in theory if a secured party never became aware of the judgment lien, then future advances made by the secured party would always retain first priority, indefinitely. But with buyers of goods, 45 days is the outside limit (again, unless the advance was made pursuant to a commitment originally made without notice).
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- Publication Date: August 17th, 2018
- ISBN: 9781683286264
- Subject: Commercial Law
- Series: Short & Happy Guides
- Type: Overviews
- Description: This new Short & Happy Guide to Secured Transactions has been created by Professor Barnes to make important concepts from Article 9 of the Uniform Commercial Code plain and understandable to students. The complex topics are explained in a plain-spoken, straightforward way, to make the concepts as simple and accessible as possible. The important provisions of the Code are excerpted and edited for readability, and all concepts are explained with simple, narrative text, and accompanied by easy-to-understand examples which help students understand the Secured Transactions concepts. Look, we’re not going to sugar-coat this – Secured Transactions is difficult. This guide makes it much easier to understand, and get a great grade on your Secured Transactions exam.
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