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Secured Transactions
South Texas College of Law Houston
Worley, John J.

Secured Transactions Outline – Worley Fall 2008
Type of contract
Governed by
What can seller do upon default?
Sales agreement
I agree to buy this car from you for $20,000.
Article 2
Establish performance duties & warranties. (delivery & payment)  
Transfer of ownership from seller to buyer
Sue for breach of contract. Court issues writ of fieri facias. Sheriff levies the car and sells it.
Promissory note
I promise to pay 40 payments of $500.
Article 3
Establish the terms of credit: amount and frequency of payment.
Credit agreement
Negotiable instrument, maker’s contract.
Security agreement
I pledge my car as collateral for the loan.
Article 9
Debtor’s commit-ment of specific assets as collateral for credit.
Repossess the collateral and sell it.
Article 9 Collateral
·         Collateral: any tangible or intangible asset belonging to the debtor in which the debtor grants a security interest to the secured creditor.
o    Types of tangible collateral are determined according to their use by the debtor
o    Types of quasi-tangibles and intangibles are determined according to their nature.
·         Examples 
o    Mortgage Company wants to borrow money from bank, using mortgages as collateral.
§ The collateral is “promissory notes” not “mortgages.” 
§ The mortgages are not the primary collateral – they are just “supporting obligations.”
o    Consumer buys a car and signs 2 pieces of paper: a promissory note and security agreement.
§ If the promissory note alone is sold to a finance company, it is an “instrument,” but if the 2 papers are sold together, they constitute “chattel paper.”
o    Consumer buys furniture from furniture store using a retail sales contract – chattel paper.
§ Between the furniture store and the buyer the collateral is the furniture, but between the furniture store and a bank that loans the store money, the collateral is chattel paper.
·         Money
o    “Money” means a medium of exchange currently authorized or adopted by a domestic OR foreigngovernment. It does not have to be U.S. currency in order to qualify as Money in a U.S. Security Agreement.
o    Examples:
§ Mexican Peso: this is money and could be the collateral in a U.S. Security Agreement
§ $20 Gold Coin: this is not money (because it is not currently adopted)
§ Ancient Roman Coin: not money (not currently adopted)
o    If the collateral does not qualify as money, then it is goods and perfection can be attained by either possession or filing a FS.
     Categories of Collateral
chattel paper
Investment Property
Accounts receivable
Deposit accounts
General intangibles
Goods are MOVEABLE.
GOODS: fixtures, standing timber to be cut under a contract, the unborn young of animals, crops grown, growing, or to be grown, manufactured homes
Computer software embedded in goods if customarily considered part of the goods.
Pieces of paper used to represent the real collateral.
Instruments: negotiable and non-negotiable including checks and promissory notes.
Chattel paper: must include a monetary obligation AND a security interest in specific goods such as a retail sales contract.
Investment property: securities (stocks & bonds), security entitlements (brokerage accounts)
Accounts: a right to payment for property or services sold. Credit card receivables.
Deposit accounts: bank accounts, usually article 9 does not cover consumer deposit accounts.
General intangibles are a residual category for non-goods collateral items that don’t fit into any of the other more specific categories.
Software is a general intangible.
Categories of Goods
Consumer Goods
Farm Products
Used, or bought for use, primarily for personal, family, or household purposes
Debtor is engaged in farming operations AND:
Not farm products AND:
Held for sale or lease
Goods other than inventory, farm products, or consumer goods.
Crops Or Livestock
Standing timber with contract to be cut
Unmanufactured        products of crops
or livestock.
Raw materials, work in process, or materials used or consumed in business
Supplies used in farming operation
The test for deciding between inventory and equipment is time. If used for a short period of time, then it is inventory. Inventory = stuff that is “used up” or consumed in a business.
Specialty goods
Collateral Category
Security Agreement
Financing statement
Real Estate
Security interest is not allowed
Standing timber to be cut
Real estate description
·    Real estate description
·    Describe the collateral as timber
·    State that this FS is to be recorded in the real estate records.
Oil, gas, & minerals
In ground
Real Estate
 Security interest is not allowed
“as extracted” collateral
Oil/gas/minerals PLUS the accounts generated by their sale
Must say “as extracted”
·    Real estate description
·    Must say “as extracted” oil, gas, or minerals
·    State that this FS is to be recorded in the real estate records.
Once extracted 
grown or growing
·    Real estate description
·    Describe the collateral as fixtures.
·    State that this FS is to be recorded in the real estate records.
Scope of Article 9: Inclusion
·         Article 9 Scope, 9-109(a)
o    all transactions that create a security interest in personal property or fixtures by contract
o    Sales of accounts, chattel paper, payment intangibles, or promissory notes
§ This does not apply to the sale of: negotiable instruments (checks) or securities
o    Agricultural liens
o    consignments
·         Exclusions: all liens, other than agricultural liens.
·         Security agreement
o    means any agreement that creates a security interest, no matter what it calls itself (such as “conditional sale”) and regardless

to be reseller. 
·         Protective filing: same as for lease. Can file a FS without admitting that transaction is a secured transaction instead of a consignment.
SALES of Accounts, Payment Intangibles, Chattel Paper, and Promissory Notes
o    Article 9 covers the outright SALE of these items. Why?
§ Practical difficulty of distinguishing between sales and security interests in these collateral.
·         What result:
o    The purchaser has to file a financing statement in order to protect his interest even though he bought the accounts outright.  
Types of Transactions that are EXCLUDED from Article 9, by section 9-109(c) and (d)
·         Transactions were the collateral is real estate, such as mortgages.
o    Bank loans Aesop $150K.  Aesop signs a promissory note promising to repay the loan and signs a mortgage that gives Bank an interest in his house as security for the promissory note. 
o    Is this transaction governed by Article 9?
§ No this is a real estate transaction, because the collateral is the homestead, not the mortgage. A homestead is not “personal property or fixtures.”
·         Preemption by federal or state laws
o    Special federal filing systems: examples are income tax and airplanes
o    When the federal government is the lender such as FHA home loans
o    Federal forfeiture laws having to do with drug enforcement, environmental law, labor law
·         Liens, other than agricultural.
o    Assignment of wages, salary, or other employee compensation
o    Using a consumer deposit account as collateral in a consumer transaction. 
§ The requirements: the transaction is primarily for personal, family, or household purposes AND the deposit account is held primarily for personal family purposes.
§ Example: Maria owns a restaurant. The bank loans the restaurant money, with Maria’s personal checking account as collateral. Article 9 will govern this transaction because the purpose of the loan is for business.
Creating the Security Interest                                                                                                     .
·         A Security Agreement is primarily a contract between the debtor and creditor (details of deal).
·         A financing statement primarily gives notice to people other than the debtor and creditor.
·         Attachment
o    Means the point in time when the security interest becomes enforceable against the debtor.
·         Attachment does not occur until all 3 of the elements are present: