Introduction to Secured Transactions
Advantages of secured creditor
Asset-based versus overall credit
Recover without litigation
Control after default
Priority in bankruptcy
Lien is an interest in the debtor’s property given by the law to protect a creditor
Consensual lien if voluntarily granted
Mortgage if in debtor’s property
Security interest – consensual lien in personal property or fixtures
Governed by Article 9 of UCC
Judicial lien if lien arises from judicial proceedings
Statutory lien created by statute or common law in favor of creditors the law deems worthy of protection
E.g. landlords, artisans repairing personal property (garage mechanic)
Pre-code security devices
Seeking to avoid the “secret lien” (Benedict v. Ratner): assignment of accounts kept secret and would deceive other creditors
Lead to uncertainty of enforceability of security devices in:
Enforceability
Notice to others
Rights on default
Priority disputes
Proceeds
Protection for debtor
Priority in bankruptcy
Goal of UCC A9 – bring uniformity, predictability, and simplicity to commercial law
UCC is a model statute adopted by all states
Not an exclusive area of law
Types of security devices
Pledge – creditor has physical possession of collateral until debt is paid
Automatic perfection
Still exists within A9
Field warehousing – goods kept on buyer’s property but separate from other goods until paid
Possession of negotiable document of title perfects the interest
Still exists within A9
Chattel mortgage – just like with real property; mortgage is recorded and debtor retains the property
Conditional sale – seller agrees to deliver the goods and buyer agrees to pay; creditor can repossess collateral on 3 conditions:
When §2-702 applies
Buyer specifically granted seller a security interest
Seller sues, recovers judgment and property seized
Trust receipt – bank financing
Factor’s lien – whole seller
Scope of Article 9
Security interest defined (§1-201): interest in personal property that secured payment (usually) or performance of an obligation
§9-109: A9 applies to:
Transaction that creates “security interest” in personal property, regardless of form, created by contract
Agricultural lien
Sale of accounts, chattel paper, payment intangibles, promissory notes
Consignment
A2 interests
Consignments – owner of goods (consignor) sends (consigns) goods to retailer (consignee) for sale; retailer appears to own goods and no notice to potential creditors
A9 covers consignments as defined by §9-102: delivery of goods, by non-consumer, to merchant for sale for $1000 or more per delivery, unless:
Similar name (e.g. sister corporation of the same name)
Auctioneer, or
Generally known by its creditors to deal in the goods of others (In re Fabers)
No reason to believe goods not dealers (no sign, not in name, etc.)
Bailment – not consignment if not for purposes of sale, but still may be security interest
Exceptions in some circumstances because creditors may be on notice, or the transaction is so small A9 need not be followed
Leases – can disguise secured sale as a lease;
“regardless of form” – doesn’t matter want you call it if security interest is created (conditional sale, sale with option to repurchase, lease, trust, loan, bailment, license, etc.)
E.g. conditional sale – retention of title by seller is merely a security interest
Lease vs. secured transaction
Factors to consider (Gibraltar Financial Corp. v. Prestige Equipment Corp.)
End of lease: lessee becomes owner for little or no consideration = ST
Lessee can terminate at any time = lease
Junk pile test: goods leased for entire economic value = ST
Risk of loss
Present value of payments versus price
No bright line test
Exclusions from A9 (§9-109(d))
Federal statutes – UCC (state law) does not trump federal (Philko Aviation, Inc. v. Shacked)
State statutes are usually supplementary
Certain federal statutes may void some S.I.
E.g. selling plane requires filing with FAA, but state did not require recording of sale—S.I. lost because federal law trumps
Confusion about IP – where to file notice (USPTO or state)
To be safe, file in both places
Landlord’s lien and other statutory liens
Do not want A9 conflicting with state statutes; exclude from A9 to avoid inconsistency
Landlord’s lien created by law – not Sis created by agreement that happen to belong to landlords
Wage assignments – some states make some agreements void
Non-financing assignments §9-109(d)(4)-(9)
Chattel paper, payment intangibles, promissory notes as part of a sale of a business
Doesn’t harm creditors because no one is being misled
An assignment of accounts, chattel paper, payment intangibles, or promissory notes which is for the purpose of collection only
Account replaced with money
An assignment of a right to payment under a contract to an assignee that is also obligated to perform under the contract (e.g. commissioned painting transferred)
No deception because debtor no longer has contract
An assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of a preexisting indebtedness
Creditors already knew debtor had debt
Insurance policy – except healthcare insurance receivables
Judgments (like for tort claims)
Real estate – mortgage used as security; excludes fixtures
Surety’s subrogation rights – created by operation of law, non-consensual and not covered by A9
Others
§9-109(d)(13): does not apply to consumer checking account
§9-109(d)(9): settlement is not a judgment; A9 applies to settlements
Creation of a Security Interest
Classifying the collateral – important because dictates the way to perfect the security interest; rules for attachment in general apply across all categories;
Subcategories depend on debtor’s announced intended use
Goods: moveable things; not real estate or intangibles or mere software on disk (includes embedded software in goods)
Consumer goods – personal, family, household
Farm products – crops, livestock, supplies
Inventory – to be leased, sold, raw materials or stuff used up
Equipment – catch-all
Quasi-tangible: pieces of paper used as collateral
Instruments – checks, notes
Investment property – stocks and bonds and rights to accounts containing same
Documents – document of title, warehouse receipts and bills of lading
Chattel paper – writing(s) that evidence a monetary obligat
out additional paperwork
Security agreement may provide for security interest in after acquired property, but not:
Consumer goods as additional collateral more than 10 days after value, or
Commercial tort claim
No floating lien in consumer goods as additional collateral acquired greater than 10 days after value from lender
Financing statement must be sufficient to alert the searcher to the necessity for further inquiry
Description need only inform, not educate
Super generic description ok
Attachment of the security interest – process by which the security interest in favor of the creditor becomes effective against the debtor
§9-203 attachment of security interest steps:
Collateral in possession of secured party by agreement OR debtor has authenticated (e.g. signed) a security agreement with description of collateral (contract law concepts)
Evidence that the debtor intended to convey an interest to creditor
Need oral agreement and possession or signed agreement (similar to statute of frauds)
Value given (contract law concepts)
Binding commitment to extend credit:
As security for or in total or partial satisfaction of a pre-exists claim; or
By accepting delivery pursuant to a pre-existing contract for purchase; or
Generally, in return for any consideration sufficient to support a simple contract
Debtor has rights in collateral (property law concepts)
Do not need to have full ownership in collateral to secure interest (Border State Bank of Greenbush Bank v. Bagley Livestock Exchange)
Can have sufficient interest in collateral even if doesn’t own collateral outright
Nemo dat quod non habet – a person who does not own property, especially a thief, cannot confer it on another except with the true owner’s authority
No rights in an account from a buyer of goods to put up as collateral where debtor sold goods to buyer under contract from a third party supplier, debtor was intermediary acting as agent of supplier
Timing of attachment – attaches when all three requirements are met
Interest attaches once the goods are identified
Perfection of the Security Interest
Perfection generally
Must attach before can be perfected
Attachment is between creditor and debtor
Perfection is creditor against other creditors
How to perfect §9-308: attach plus… (depends on type of collateral)
§9-310: Must file to perfect, unless
Automatic (permanent or temporary) §9-309
Purchase money security interest in consumer goods (PMSI)
