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Secured Transactions
University of Kansas School of Law
Ware, Stephen J.

Secured Transactions Outline
 
Introduction
 
§         § 1-201(37) – A security interest is an interest in personal property which secures payment or performance of an obligation.
§         Encompasses the following:
·         1) Judicial lien – Created in litigation process in which CR seeks a money judgment on the debt. 
o        Seizure, whether symbolic or physical, results in transfer from DR to CR of an interest in the seized property thus Creating a judicial lien. 
·         2) Statutory lien – Not consensual and do not depend on judicial action by CR. Rather, status lien, i.e., certain Creditors, favored by state, are given rights of secured Creditors even though they did not bargain for security
o        Excluded from Article 9 by § 9-109(d)(1)
·         3) Consensual lien: Usually arise at the inception of a Credit transaction and are subject to Art. 9. 
o        § 9-109(a)(1): Article 9 applies to a transaction, regardless of its form, that Creates a SI in personal property or fixtures by contract;
o        Article 9 security interests are Created only by contract. 
§         Why do Creditors seek security interests?
·         Creditors seek SI’s because is to relieve themselves of having to monitor the activities of their debtors. 
·         An unsecured Creditor should thus know that if another Creditor subsequently extends Credit to the debtor, the effect will be to dilute the first Creditor’s claim to the debtor’s asset pool and impair the prospect of repayment. 
 
 
Effectiveness of SA: § 9-201 – A security agreement is effective according to its terms between the parties, against purchasers of the collateral and against Creditors. 
§         Examples of Unsecured Credit:
·         Student loans, Credit card loans, Services (doctor, utilities – receive service not paid for up front). 
·         Credit Card Transaction:
o        C buys radio for 100 from S. S turns in slip to merchant BK. Credit BK pays merchant BK 100. Merchant pays S 100 less discount rate. Credit BK then charges C 100 per card agreement (CR/DR rel’ship here). 
§         S will pay discount rate because he is guaranteed money and Credit offers convenience to customer. 
·         O sells car to F for 10K. O and F have PN where F will pay in 6 mos. Then F defaults. How does O collect??
o        O has no interest in car. F owns it. O has to sue on PN. Judgment does not guarantee money. Per exemptions, car may be exempt. 
§         Thus, SCR. take a priority in all of a DR’s assets, present and future, to the exclusion of all other Creditors.
§         Ex:
·         1) BK loans money to B. 
·         2) B grants SI in assets (equip and inv). – as collateral. 
·         3) BK files finance statement
·         4) S sells B equip unsecured. 
·         5) B goes bankrupt.
o        BK wins to extent of unpaid debt and value of collateral. 
§         Ex:
·         1) S sells unsecured goods to B. B to pay for this offers BK security interest on loan. B goes bankrupt.
·         Thus, BK’s secured claim paid if collateral – or greater than unpaid debt. S receives what is left (i.e., 10 cents on the dollar. 
§         Why be a secured Creditor?
·         Not subject to exemption rules
·         Protected in bankruptcy
·         Protected against third parties
·         Get collateral back quicker and easier.
§         Why do Creditors seek security interests?
·         They don’t have to monitor the activities of their debtors.
·         An unsecured Creditor should know that if another Creditor subsequently extends Credit to the debtor, the effect may be to dilute the first Creditor’s claim to the asset pool and impair repayment. 
o        Thus, prudent unsecured Creditors monitor!!
§         They demand covenants limiting right of debtor to procure future debt
§         Unsecured Creditors can charge higher interest rates to offset the risk of unsecured debt. 
§         What about tort Creditors? Unlike unsecured Creditors, they don’t have the means to know in advance. Their unsecured status is imposed on t

btor who sends an electronic message containing the SA in encrypted form that id’s the debtor as the sender. 
§         Ex: The text of a writing alone can authenticate a writing, provided the author produced the text with the intent to identify and accept a record.
o        No formal SA: In Re Bollinger Corp. stands for the proposition that where the parties neglect to consummate a formal security agreement, the court will look at the course of dealing between the parties, and any documents that were Created such as promissory notes and financing statements signed by the debtor to determine if the parties’ intent was to Create a SA between them. That is, a PN and FS, standing alone, cannot serve as a SA. 
o        A security agreement is an evidentiary record reflecting the intent of the parties. Combination of documents can reflect this intent
 
·         Description of the Collateral:
o        This requirement is to make clear, in light of the possibility of a later dispute between the parties, exactly what property is the subject of the security agreement.
o        § 9-102-12: Collateral means the property subject to a SI or agricultural lien. This includes:
§         proceeds to which a SI attaches
§         accounts, chattel paper, payment intangibles, and promissory notes that have been sold
§         goods that are the subject of consignment.
o        § 9-108 – A description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described. The description can identify the collateral by
§         1)specific listing,
§         2)category