OVERALL TOPICS COVERED
1) Classification of collateral;
1) Attachment (creation) of a security interest
2) Perfection of an attached security interest, and
3) Priority rules between secured creditors.
Purposes; Rules of Construction—§1.102
1) The UCC shall be liberally construed to promote its underlying purposes and policies;
2) The purposes and policies of the UCC are
a) To simplify, clarify and modernize the law governing commercial transactions;
b) To permit the continued expansion of commercial practices through custom, usage and agreement of the parties;
c) To make uniform the law among the various JDs.
Obligation of Good Faith—§ 1.203
1) Every K or duty w/in the UCC imposes an obligation of good faith
2) In its performance or enforcement.
TEXAS CL EXCEPTION: Texas Sup Ct declined to imply a duty of good faith in non-UCC K obligations.
Supplementary General Principles of Law Applicable—§ 1.103
1) Unless displaced by the particular provisions of this title, the principles of
2) Law an equity, including the law merchant and contract, principal/agent,
3) Etoppel, fraud, misrepresentation, duress, coercion, mistake, BR,
4) Or other validating or invalidating cause shall supplement its provisions.
EFFECT: security interest arises from a security agreement, which is a contract. So, to the extent that a security agreement has terms unaddressed by article 9, ordinary contract laws apply.
Security Interest § 1.201(37)(A) (general)/Obligor vs. Debtor
1) “Security interest” means an interest in personal property or fixtures that
2) secures payment or performance of an obligation, and the
3) person who owes payment or other performance of the secured obligation is the obligor;
4) the owner of the collateral is the debtor (usually debtor/obligor same person).
OVERVIEW OF SECURED FINANCING: a secured transaction is a credit transaction, and a security interest secures the debt.
NON-OBLIGOR SECURITY INTEREST: the security interest does not have to be against the assets of the obligor. The security interest may be created against a third party, who is doing so on behalf of the obligor. The 3rd party though that puts up collateral is the “debtor” because the 3rd party has the “rights in the collateral” for purposes of a secured creditor attaching an interest to the 3rd party’s collateral. The party owing the obligation in this situation is not the “debtor” but the “obligor” under article 9.
HYPO: East’s nephew may need tuition money and East allows him to use his watch as a pledge for a loan. Note the security interest is created in East’s property, but East is not the obligor. This is a credit transaction, as it must be for a secured transaction. East is the debtor and his nephew is the obligor for purposes of article 9.
Secured versus unsecured credit—advantages
1) Two basic types of credit relationships exist: secured, and unsecured credit.
2) The difference lies in the creditor’s legal rights in the event of debtor default and its
3) ability to fend off other creditor claims to be paid first.
TWO CORE LEGAL QUESTIONS: commercial financing involves two core legal questions—(1) a creditor’s rights against a debtor and the debtor’s assets (foreclosure issues) and its rights vis-à-vis others holding claims against the debtor (priority issues), including other private, consensual lien holders and non-consensual statutory (M&M liens), judgment (judgment creditor), or public (taxing authorities) lien holders.
IMPORTANCE: a security interest grants the secured creditor a property interest in the debtor’s, or other party’s personal property or fixtures to secure payment or performance of an obligation. An unsecured loan is characterized by the absence of this property interest.
STEPS FOR UNSECURED CREDITOR TO ENFORCE:
1) Ask D for payment of the amount owed or for the goods sold to be returned; can’t engage in self-help b/c not have a security interest and if do so ML committing civil conversion, criminal trespass and theft.
2) Engage in formal (judicial) debt collection.
a) Sue for breach of the agreement/K;
b) Awarded a judgment, but must wait until the judgment is “final” (usually 30 days); the judgment alone does not create a property interest in any of the judgment-Ds assets; thus,
c) Enforcing the judgment calls for requesting the court clerk to issue a
d) writ of execution to the sheriff, which commands the sheriff to satisfy the judgment from the judgment-Ds assets; the sheriff will attempt to “execute” the writ, by locating property of the debtor that is not beyond the reach of judgment creditors, that is, assets that are non-exempt from execution according to state law, so-called “nonexempt assets.” The writ directs the sheriff to satisfy judgment first from the debtor’s personal property, and if that is insufficient, from the debtor’s real property.
i) If non-exempt assets are located, the sheriff will seize (constructively or actually) enough of them to satisfy the judgment debt and the sheriff’s collection costs.
e) The sheriff’s seizure of D’s assets creates a lien (a property interest) in them, typically referred to as an “execution lien,” or “judgment lien.” Note the property seized may not be the actual goods sold b/c, inter alia, those assets may not be exempt.
i) When the judgment lien takes effect, the unsecured creditor becomes a “judgment lien creditor,” or simply “lien creditor,” and is now a secured creditor. A judgment lien is nonconsensual.
(1) A “lien creditor” is defined at § 9.102(a)(52) as a
(a) A creditor who was formerly unsecured but who has acquired a lien on
(b) By judicial process (attachment, levy, etc.) is a judicial “lien creditor,” and
(c) This includes trustees appointed in BR from the petition date, and
(d) An assignment for benefit of creditors from date of assignment, which is a voluntary transfer by D all assets to a receiver to sell them and pay creditors.
ii) RELATION BACK NOT IN TEXAS: in Texas, the lien does not relate back to the date of judgment for the time of att
ITATION: the D had to actually own the collateral.
3) Conditional Sales Contract (title retention contract): unlike the chattel mortgage for which a debtor had to own the property to grant a security interest in it,
a) Conditional sales K allowed a debtor to acquire property on secured credit, where the
b) Seller retained a security interest in the property to secure its purchase price.
Classification of Collateral
IMPORTANCE: Classification of collateral is vital for accurate perfection and priority. Classification turns on definitions. There are two basic subsets of personal property that serve as collateral—(1) goods, and (2) intangibles.
“Goods:” §9.102(a) recognizes four different types of “goods,” in addition to “goods” per se.
1) “Goods:” means all things that movable when a security interest attaches, including
b) standing timber that is to be cut and removed under a conveyance or K for sale;
c) the unborn young of animals;
d) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and
e) manufactured homes; the term also includes a
f) computer program embedded in goods and any supporting information provided in connection w/ a transaction relating to the program if
(1) the program is associated w/ the goods in such a manner that is customarily is considered part of the goods, or
(2) by becoming the owner of the goods, a person acquires a right to use the program in connection w/ the goods.
EXCEPTION: goods do not include accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles, instruments, investment property, letter-of-credit rights, letters of credit, money, or oil, gas, or other minerals before extraction (after extraction, hydrocarbons become goods b/c becomes personalty).
HYPO: the operating system software that comes with a PC when purchase is a good example of a software embedded in the goods, the computer, to be part of the computer, versus buying a game and installing it on the computer (which would be a general intangible).
2) “Inventory” § 9.102(a)(47): means goods, other than farm products, that are
a) leased by a person as lessor;
b) held by a person for sale or lease or to be furnished under a K of service;
c) furnished by a person under a K or service; or
d) consist of raw materials, WIP, or materials used or consumed in a business;