SECURED TRANSACTIONS
INTRODUCTION
Secured Transaction: Transaction where creditor has a security interest in some collateral pledged by the debtor.
If you’re an unsecured creditor you still have rights against the debtor but they are subordinate to the rights of a secured creditor.
Article 9 governs secured transactions; doesn’t govern real estate transactions; only personal property
Debtors will prefer unsecured lending because they can then go out again and borrow against the asset, but you can also get lower rate because of less risk. Debtor wants its assets unencumbered.
Collateral reduces the risk of default
Can reduce the risk of default in an unsecured transaction by requiring a higher interest rate and a shorter time period.
When taking a security interest in accounts or inventory should be sure to add an after-acquired clause so you don’t lose security interest
§9-609: Secured Party’s Right to Take Possession After Default
Failure to make a payment when due is a default.
This definition can be expanded to include business problems, decrease in value of asset, or decrease in level of inventory.
Allows creditor to take possession upon default but this may not always be the best option
If you take a company’s assets they are likely to go out of business
Most lenders want to be paid and not repossess because might affect reputation
If they are their supplier on the one hand they can sell it themselves, but loose the business.
Problem 1.1 p. 20.
Credit inc does not secure and Ace immediately defaults and closes its business. Under these circumstances any creditor can go after Ace’s assets.
Computers on sale
cash registers, shelves etc.
Invoices outstanding to city of S. Francisco and Stanford.
Leases- you need to compare value of property with rent in order to determine if it is an asset. Lease is not article 9 collateral bc it is not considered personal property. Exception co-op are considered personal property by Article 9. Condo’s are considered real estate.
$300,000 wholesale $450,000 retail – computers on sale
$150,000 cost – cash reg, shelves etc
$16,000 face amount – invoices
At the most optimistic this is not enough to pay everybody. Each creditor gets a judgment and the he must docket the judgment. Then sheriff levies. The first creditor who gets a judicial lien on the property gets priority.
Why sometimes you do not secure?
If Ace is netting 2,000 a month, it is not in a position to pay a considerable interest, so you need collateral. But Microsoft with a huge cash flow pretty sure they are going to pay, so you might not secure. Also, in consumer setting there are unsecured transactions, bc other than a house and car there is no much other large assets.
Article 9 definitions of problem 1.1:
Inventory –e.g. computers
Equipment – e.g. cash registers
Accounts – invoices
Bank accounts- are article 9 collateral.
Risks of security interest:
In you have secured loan – you have to sign security agreement which gives description of the collateral.
Inventory collateral is different – must write security agreement to include “present and after acquired inventory” (due to nature of inventory). Same with accounts –accounts present and after acquired
Another risk –inventory obsolescence – include provision that debtor must maintain inventory of 2 times security agreement.
When lenders take accounts they would evaluate the accounts at some level less than 100%
Problem 1.2
The lender can repossess property only if there is a missed payment (default). In this case there is not any. There is no right to repossess until default.
Lets say Credit is entitled to repossess they have lent 100,000 and the debtor has inventory of 300,000. Should Credit repossess? It is pretty safe, because there is cushion. On the other hand if there is unstable value (old fashioned computers), obsolete stuff, or change in management.
Security interest is created when it attaches to the collateral once it attaches the creditor can repo.
Priority of creditors – 1st to perfect security interest
CLASSIFYING COLLATERAL
Goods
Semi Intangibles
Pure Intangibles
Sui generi(s)
Inventory
Documents (warehouse receipts, bills of lading)
Accounts (including credit cards, life insurance, lottery winnings, does not include tort claims)
Investment property (stock with no certificate)
udes the right to payment, “arising out of the use of a credit or charge card or information contained on or for use with the card.
iii. Right to a Tax Refund is not an account – it’s a general intangible
iv. Lottery winnings or policy of insurance
Accounts are not:
1. rights of payments based on chattel paper or instrument
2. commercial tort claims
3. deposit accounts
4. investment property
5. letter of credit
b. General Intangibles[1]
i. This is the catchall for this category
ii. EX. Literary Rights
c. Deposit Accounts
i. A demand time, savings, passbook, or similar account maintained with a bank. Doesn’t include investment property or accounts evidenced by an instrument. (9-102)(a)(29)
C. SEMI-INTAGIBLES (not completely physical or non-physical embodiment)
a. Documents
i. Document of title of a right to goods or Right to get goods from a 3rd Party.
b. Chattel Paper
· Chattel paper 9-102 (11) – a record or records that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of specific goods……..”
i. A record that evidences a monetary obligation & a security interest in specific goods
ii. AS I SEE IT SELLER HAS CHATTEL PAPER when he has IOU and title AND PMSI. When you give chattel paper as collateral it is not PMSI but chattel paper.
iii. BE CAREFUL NOTES AND CHATTEL PAPERS ARE GIVEN TO THIRD PARTY LENDER NOT BETWEEN PEOPLE WHO MAKE TRANSACTION. IF BETWEEN PEOPLE WHO MAKE TRANSACTIONS IS PROBABLY SOME KIND OF GOOD.
