Secured Transactions Outline
I. Collecting Debts
A. Ways to Collect Debt
· FDCPA is a limit on the informal collection process.
· FCRA limits how much creditors can screw up your credit reports.
· There are also tort limitations on how a creditor can collect a debt.
2. Collecting Debt Judicially:
· You could sue for the amount that is owed.
o If we sue and she doesn’t show up, court can order default judgment against debtor.
o If we sue and debtor shows up, person being sued can raise defenses.
· Can get an interest in the asset of the debtor.
o You can get a property interest, as a creditor, in that property. You then sell the assets and use proceeds of the sale to satisfy the judgment/debt.
o This is pricey and potentially not going to have a big return. Also takes a long time.
o This MUST be done judicially.
o Limits on debt collection:
§ Redemption rights of the debtor.
§ Exemptions; we will exempt things that creditor cannot collect, such as tools of the trade of the debtor or things with sentimental value.
§ Constitutional considerations (due process and fourth amendment issues).
3. Collecting Debts Secured by Liens:
· Liens: legal right/interest that creditor has in another’s property, lasting until debt or duty that is secures is satisfied.
· Consensual Liens:
o Real estate mortgages or deeds of trust.
o Security interests in personal property or fixtures.
· Statutory Liens:
o E.g. innkeepers, attorneys, health care providers, IRS, mechanics liens.
A. Scope of Article 9
1. Included within Article 9-109(a): a transaction, regardless of form, that creates a security interest in personal property or fixtures by contract.
· Security interest means an interest in personal property or fixtures, which secures payment or performance of an obligation.
2. Article 9-203(a): Attachment.
· The process by which a security interest becomes enforceable against the debtor with respect to the collateral.
· What’s “enforceable”?
B. Requirements For Attachment
1. What are the Requirements?
· A security interest is enforceable against the debtor regarding collateral WHEN:
o (1) The secured party gives value;
o (2) The debtor has rights in the collateral; and
o (3) There is a security agreement meeting on of the requirements of 9-203(b)(3).
· A security interest must attach to a particular piece or group of collateral.
· A debtor, who has rights in some personal property, agrees by contract to give the creditor (secured party) an interest (security interest) in that property to secure debtor’s obligations.
2. Attachment Overview
· (1) The security agreement. 9-203(b)(3)(a).
o Authenticated record. “Authenticate” is to sign, or to encrypt or similarly process a record in whole or in part with the present intent of the authenticating person to identify the person and accept the record.
o Possession or control (alternative to authenticated record).
· (2) Value.
· (3) Rights in the collateral.
3. Article 9-203(b) Conditions:
· (a) The debtor has authenticated a security agreement that describes the collateral.
· (b) (For collateral that is not a Certificated Security) Collateral is in the possession of the secured party pursuant to the debtor’s security agreement.
· (c) (For certificated securities) Collateral is in registered form and certificate has been delivered to secured party pursuant to the security agreement; or
· (d) (For various types of intangible collateral) Secured party has control pursuant to the security agreement.
4. Adequate Description of Collateral:
· Article 9-203(b)(3)(a): the debtor has authenticated a security agreement that describes the collateral.
· Collateral is the property subject to a security interest.
5. Description of Collateral:
· Article 9-108(a): A description of [collateral] is sufficient, whether or not it is specific, if it reasonably identifies what is described.
· Article 9-108(b): Reasonable identification includes descriptions by category or type, or any other method if the identity is not objectively determinable.
· Article 9-108(c): A super generic description of collateral is not sufficient to identify collateral in the security agreement.
o I.e. “all of the debtor’s assets,” or “all of the debtor’s personal property.”
6. Types of Collateral:
· Goods. These are defined as “all things that are moveable at the time the security interest attaches.” 9-102(a)(4).
o There are four mutually exclusive subcategories of goods: inventory, consumer goods, farm products, and equipment.
· The characterization of goods depends on the principle use in the hands of the debtor.
o Inventory: “goods other than farm products which…are held for sale.” This includes raw materials and goods used up in business. 9-102(a)(48).
o Farm Products: “debtor engaged in farming operations.” This can include crops, livestock, supplies used or produced in farming operations. Also, the products of crops/livestock in their unmanufactured states (things like raw cotton or wool). 9-102(a)(34).
§ Can also include fixtures, such as crops or trees.
o Equipment: “not inventory or farm products.” This is used whenever inventory or farm products does not apply; these are goods used in business that are used again and again (such as a cash register at a store). 9-102(a)(33)
§ 9-102(a)(41) fixtures: goods that have become so related to particular real property than an interest in them arises under real property law; i.e. business built-ins.
o Consumer Goods: “personal family or household purposes.” These are things bought for personal or household purposes, not business purposes. 9-102(a)(23). Fixtures here would be home built-ins.
7. Rights to Payment (or commercial receivables):
· Chattel Paper: records that evidence both a monetary obligation and a security interest or leave. 9-102(a)(11).
o (1) Monetary Obligation: buyer will pay seller the balance of the purchase price.
o (2) Security Interest or Lease: seller retains security interest in the goods sold until purchase price is repaid.
· Instrument: a negotiable instrument OR any other writing that evidences a right to the payment of a monetary obligation, and is not itself a security agreement or lease and is of a type that in the ordinary course of business is transferred by delivery with any necessary endorsement.
o Look for a
n of immediately available credit.
2. Future Advances:
· “Dragnet Clauses.” This is a way of saying that whatever the collateral is today, it’s going to secure all loans made in the future.
· 9-204(c): a security agreement may provide that collateral secures future advances or other value.
3. Rights in Collateral Requirement:
· If you have less than full rights in the collateral, a security interest can only attach to the rights that you DO have.
· The big question here is AT WHAT POINT do you acquire rights in the collateral.
· 9-203(b)(2) requires the debtor to have rights in the collateral or the power to transfer rights in the collateral.
4. Article 2-403: a person with voidable title has power to transfer a good title to a good faith purchaser for value…even if:
· (b) the delivery was in exchange for a check that is later dishonored.
· (c) the delivery was procured through criminal fraud.
o HINT: look at definition of purchaser. Secured party would qualify!
· (2) any entrusting of goods to a merchant that deals in goods of that kind gives the merchant power to transfer all of the entrusters rights to the goods and to transfer the goods free of any interest of the entruster to a buyer in the ordinary course of business.
5. Special Attachment Rules – Automatic Attachment:
· Proceeds of collateral.
· Certain investment property.
· Rights in a secured obligation.
· Supporting obligation.
A. Perfection by Filing
1. This is the most common method of perfection. The Financing Statement:
· “What is required to be filed…only a simple record providing a limited amount of information.” (financing statement). 9-502, cmt.2.
· “Filing”: is to present a proper financing statement, together with a filing fee, to the relevant filing office.
· 9-502: To be “sufficient” a financing statement must include:
o Name of the debtor.
o Name of the secured part or representative of SP.
o An indication of the collateral covered (real property description, if the collateral is as-extracted collateral or timber to be cut, or if the financing statement constitutes a fixture filing).
o The point: inquiry notice. “Further notice” may be necessary.
2. Name of the Debtor (9-503):
· Registered Organization Debtor: the financing statement must provide the name of the debtor indicated on the public record of the debtor’s jurisdiction or organization.
· Individual or Non-Registered Organization Debtor: the financing statement must provide the individual or organizational name of the debtor. Do not use trade names.