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Secured Transactions
University of North Carolina School of Law
Broome, Lissa Lamkin

SECURED TRANSACTIONS BROOME SPRING 2017
 
Basics:
secured loans are much better than unsecured loans
non-judicial v. judicial methods of enforcing the payment of a debt (judicial methods are a lot less risky)
would rather be secured so if the debtor pays you first! less risk
 
(1) Creation à (2) Attachment à (3) Perfection à (4) Enforcement (w/ (5) Priority rules)
 
Uniform Commercial Code:
Art. 1: General Provisions (a lot of definitions)
Art. 2: Sales
Art. 2A: Leases
Art. 3: Negotiable Instruments
Art. 4: Bank Deposits and Collections
Art. 4A: Funds Transfers
Art. 5: Letters of Credit
Art. 6: Bulk Transfers
Art. 7: Documents of Title
Art. 8: Investment Securities
Art. 9: Secured Transactions
 
 
I. Creating a Security Interest:
 
Security Interest: § 1-201(35) Interest in personal property or fixtures that secures payment or performance of an obligation.
To become enforceable: ATTACHMENT + PERFECTION
Purpose of perfection: to get priority in line as a creditor. Provides public notice of a security interest in collateral so subsequent creditors won’t rely on this collateral.
Three Requirements for Attachment:
must have a security agreement that meets certain criteria;
value must be given;
the debtor must have rights in the collateral, or the power to transfer rights to the secured party
don’t have to be in any certain order, but attachment will not occur until all 3 have happened!
 
The Security Agreement Requirement:
§ 9-203: A security interest attaches to collateral when it becomes enforceable against the debtor.
a security agreement becomes enforceable when (1) value has been given; (2) debtor has rights in the collateral; and (3) [usually] the debtor authenticates a security agreement that provides a description of the collateral
(other methods can also be acceptable in some circumstances, i.e. obtaining control over certain collateral types)
SA must also “adequately” describe the collateral (§ 9-203(b)(3)(A))
 
II.        Collateral:
§ 9-102(12) à Collateral means the property subject to a security interest.
the collateral must be described in the SA for the SI to attach to it
specifically! especially in commercial tort claims, can’t just use the category
§ 9-108: A description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.
description of collateral is sufficient if lists the collateral type:
Types of Collateral:
1. Goods (tangible):
a. Consumer Goods (§ 9-102(23)): goods that are used or bought for use primarily for personal, family, or household purposes.
b. Equipment (§ 9-102(33)): goods other than inventory, farm products, or consumer goods [i.e. machinery] c. Farm Products (§ 9-102(34)): goods [other than standing timber] that are used in connection to the debtor’s farming operation
d. Inventory (§ 9-102(48)): goods that are leased; held for sale; furnished under a contract for service; raw materials used in a business.
                        – Fixtures (§ 9-102(41)): goods that are basically inseparable from real property
2. Quasi-Intangibles:
            a. Money: (§ 1-201): self-explanatory lol $$$$
b. Instruments: (§ 9-102(47)): any writing that evidences a right to the payment of a monetary obligation
            i. checks;
            ii. promissory note (writing that evidences a promise to pay);
iii. certificate of deposit (evidences a promise to pay, given by bank, indicates interest & payout on future date)
c. Chattel Paper (§ 9-102(11)): writing or electronic record evidencing both a monetary obligation and a security interest in specific goods
            i. obligation to pay + SI/lease in goods
            ii. ex: instrument + security agreement = chattel paper
d. Certificated security (§ 8-102(16)): a security represented by a certificate or maintained in records
i. Security: (§ 8-102(15)): an obligation of an issuer of a share, participation, or other interest (i.e. bonds and stocks)
e. Document of Title (§ 1-201(16)): document that evidences the person in possession of it is entitled to receive, hold, and dispose of the document and the goods it covers
            i. warehouse receipt à issued by person e

it is a rebuttable presumption;
also ineffective for consumer goods and commercial tort claims, unless the debtor acquires rights in the consumer goods within 10 days of the secured party giving value (§ 9-108)
 
2. Proceeds:
§ 9-102: proceeds are what the debtor receives in exchange for the disposition of collateral, or the using up of the collateral
§ 9-203(f): the attachment of a SI to collateral automatically attaches to proceeds of the collateral (see § 9-315(a)(2))
examples of proceeds:
inventory is sold to create accounts, which are then paid by check, which checks are in turn deposited into a bank account (each step creates proceeds)
proceeds don’t have to be explicitly stated in the security agreement, but they must be identifiable proceeds from the collateral attached to the SI
ex: the SP can require proceeds from sales of inventory to be kept in a separate account
for comingled deposit accounts à
Lowest Intermediate Balance Rule: the lesser of
amount of proceeds, or
lowest daily balance in account between the time proceeds were deposited and when the SP seeks to enforce the SI
LIB Check:
withdrawal comes first from non-proceeds
deposits of non-proceeds do not benefit the secured party; EXAMPLE:
Day 1: $5,000 of proceeds were deposited, balance is now $11,000
Day 2: deposit is not proceeds
Day 3: deposit is not proceeds; $8,000 withdrawn, reduces balance to $4,000
LIB: is lesser of first amount (proceeds: $5,000) or lowest daily balance in account between time proceeds are deposited & creditor seeks to enforce ($4,000) = LIB is $4,000
if debtor had set up “special” account, the debtor would get the whole $5,000 from the proceeds