Select Page

Secured Transactions
Washington & Lee University School of Law
Hoefling, Tricia A.

Prof. Hoefling – Secured Transactions – Spring 2014

I. Introduction to ST

A. Definitions

i. Debtor: person granting interest in collateral (i.e. giving car) when talking about signing security agreement – person who owns property on which lender is taking security interest

ii. Obligor – person who owes payments or performance of the secured obligation

iii. Lien – interest in debtor’s property to secure payment or perf of an obligation

1. Lien creditor – creditor whose lien created by judicial process. Sheriff’s levy creates the lien or lien may arise upon delivery of writ or recording a notice with Sec of State

iv. Conditional Sale: financing device, seller retains title to goods until buyer makes all payments. Retention of title by seller creates security interest.

v. Structural subordination – if sub has creditors, those creditors get paid first.

1. Way get around – take guaranty in that sub

vi. Contractual subordination – agree to be paid subordinate

vii. Setoff (debt coll. tool), 2 reqs: debts must be mature (due & owing) & mutual: owed in same capacity

viii. Value: binding commitment to lend, 1-204

ix. Bankruptcy Estate – all debtor’s assets go into the estate

x. Automatic Stay – no further creditor collection activity outside of bankruptcy proceeding

1. Bankruptcy 362, 544(a) (trustee has legal status of judicial lien creditor)

xi. Security Interest Disguised as lease – lessee can’t terminate payments, option to renew for no/nominal consideration, lack economic life at end of lease (determined at inception of lease)

1. True lease – no equity, no title, no option to purchase at end of term, goods have residual value

xii. Collateral Definitions

1. 9-102(a)(44): Goods/Tangible: consumer, equipment, inventory, fixtures, as-extracted

2. Intangible: accounts, chattel paper, comm’l tort claims, deposit account, document of title, instruments, investment property, financial assets, general intangibles, letter of credit rights, money

3. Instrument – evidences right to payment of monetary obligation, negotiable promissory note

4. Negotiable document – literally piece of paper that represents title that is negotiable – evidences title to something (warehouse/bailee receipts). If transfer paper, you’ve transferred title to those goods.

B. Reasons taking security interest

i. Ease of enforcement, priority in bankruptcy, other bankruptcy ads, structural subordination

C. Elements of a security interest

i. Attachment – Creation of Security Interest

1. The process by which the creditor obtains security interests in the assets of a debtor that will be legally enforceable against the debtor.

2. Governing law: typically the law of the state selected by the parties

ii. Perfection

1. The process by which the creditor ensures that its security interest will be legally enforceable against other creditors (other creditors of debtor outside bankruptcy and bankruptcy trustee)

iii. Priority

1. Relative rights of one creditor with a security interest in an asset vis-à-vis other creditors with a security interest in the same asset.

II. Attachment

A. Governed by UCC 9-203

i. Security interest attaches to collateral when it comes enforceable against the debtor w/ respect to the collateral

ii. 9-203(b): Enforceability. Sets forth requirements for attachment. Order occurs makes no difference.

1. value has been given

2. debtor has rights in the collateral or pwr to transfer rights in the collateral to a SP

3. Some evidentiary requirement has been met:

a. authenticated security agreement that provides a description of the collateral

i. Security agreement doesn’t have to be in writing; however authentication implies a record. Oral agreement would need form of possession or control under (B)-(D)

ii. Debtor must authenticate, 9-102(a)(7)

iii. 9-108(a): description is sufficient whether or not it’s specific, if it reasonably identifies what is described

iv. 9-108(b): Safe harbor

v. 9-108(c): super generic description is not sufficient

b. possession (not a certificated security) under 9-313

c. certificated security in registered form and has been delivered to the SP

d. collateral is deposit accounts, electronic chattel paper, investment property and SP has control under 9-104, 9-105, 9-106, 9-107 pursuant to debtor’s security agreement

B. Composition Document Doctrine

i. If no single written document contains all 3 requirements found in 9-203(b)(3)(A), court developed two-part test to get you an authenticated security agreement:

1. Is there a written document containing language that objectively indicates that the parties intended to create a security interest? (question of law)

2. If yes, then as a question of fact, did the parties actually intend to create a security interest?

ii. Can you fix a mistake in security agreement? YES

iii. In re Sabol: Bank denied secured claim b/c no security agreement & need language of debtor’s intent to grant security interest. Financing Statement never presented to debtor.

iv. In re Weir-Penn: debtor signed financing statement describing collateral and signed a promissory note. Combo of these 2 sufficient to demonstrate intent to secure the debt and satisfy 203(b)(3)

C. After Acquired Property

i. 9-204(a): Security agreement should include an express reference to after-acquired property

1. security interest doesn’t attach until the goods are acquired

2. problem 2-8(a) – needs to explicitly have express language

D. Other choices for meeting evidentiary requirement, 9-203(b)(3)(B) – (D)

i. Possession

ii. Delivery

1. Delivery of a certificated security occurs when purchaser acquires possession of the security certificate

iii. Control – of deposit account, electronic chattel paper, investment property, letter of credit rights

1. 9-104 Control of Deposit Account

2. 9-106 Control of Investment Property

3. 8-106 Control of certificated security if delivered to purchaser and endorsed

E. Proceeds, 9-102(a)(64), 9-315

i. Automatic attachment, 9-203(f), 9-315(a)(2)

ii. Whatever is received upon the sale, lease, license, exchange, or collection of the original collateral. Received in distribution or dividend from collateral. Rights arising out of the collateral. Claims or insurance payable b/c of loss on collateral. Value-tracing concept.

1. As the form of collateral changes, the security interest follows

iii. Limits on automatic attachment for proceeds rule:

1. If proceeds are property outside scope of Art 9, 315(a) probably wouldn’t apply

2. Only to identifiable proceeds of collateral, 9-315(a)(2):

a. Tracing Rues: Lowest Intermediate Balance Rule: identify cash proceeds deposited into deposit account

i. Lesser of the amt of the proceeds and the lowest daily balance in the acct b/w the time the Proceeds are deposited and the time of enforcement by the creditor

iv. **9-315(a)(1): Unless the SP authorized the collateral to be transferred free of the security interest, the security interest continues in the collateral in the hands of the transferee

1. B/C the security interest may follow the collateral transferred & attach the proceeds rec’d on disposition, SP may increase amt of collateral available to satisfy obligation owed although SP is entitled to only one satisfaction of the debt owed

F. Commingled Goods & Accessions

i. 9-336 Commingled Goods

1. goods that physically united with other goods in such a manner than their identity is lost in a product or mass

2. a security interest doesn’t exist in original goods, but a security interest may attach to a product or mass that results when goods become commingled goods

3. if collateral becomes commingled goods, a security interest attaches to the product or mass

ii. 9-102(a)(1) Accessions: goods that are physically untied with other goods in such a manner that the identity of the original goods is not lost. Ex: new engine in bulldozer.

1. NO automatic attachment in accession since they each remain separately identifiable

G. Other types of automatic Attachment

i. Certain investment property: if sufficiently stated “all securities account at Brokerage House”

1. 9-203(h) and (i)

ii. Rights in a secured obligation: liens, when a right to payment is offered as collateral, the sec interest extends to any lien securing the payment. Caveat: mortgages when foreclosure.

1. 9-203(g)

iii. Supporting Obligations: sec int attaches not only to an acct but obligation of guarantor on guaranty

1. 9-203(f)

attach to new property as soon as the debtor acquires rights in it

C. Restriction on the reach of an after acquired property clause doesn’t apply to proceeds

i. The secured party’s interest can attach to any proceeds of the original collateral the debtor or the estate acquires post-petition, as long as the debtor acquired rights in the original coll. pre-petition

1. Any new property constituting identifiable proceeds will be covered by the secured agreement

D. Future advances – post-petition are unsecured.

i. If have some lender arrangement, where company can pay back and re-borrow, any borrowings post petition are unsecured.

V. Perfection = attachment + perfection step/method of perfection (9-308). Take all steps in 9-310 though 9-316.

A. Process the secured party uses to protect and preserve its priority in the collateral, particularly from those who may later acquire an interest in it – including bankruptcy trustee and other secured creditors

i. Can’t have perfection without proper attachment

B. 9-301. General rule: Location of debtor determines governing law for perfection

i. Exceptions: 9-301(2)-9-305 (location of collateral for perfection by possession)

C. Debtor’s Location, 9-307

i. 9-307(b): debtor who is individual, debtor’s location is principle residence. Debtor who is organization who has 1 location is where located, if more then 1 place of business located at chief executive office

ii. 307(e) Exceptions: if debtor is registered organization, location is where registered as required to register by State. 9-102(a)(70) definition of registered organization

iii. if perfecting by UCC filing, where we file – if need to search if anyone else has priority in property, it’s where you search

1. when in doubt, file in every place can think of

iv. if foreign – 9-307(c) – located in DC, only if debtors residence, place of business or chief office is in jurisdiction whose law provides method of searching, filing, and perfecting. Only Canada and one province in Mexico has a notice system, so any other place – located in DC – method of perfection.

v. Certificated security – you perfect based on the law in place where security is located.

vi. Fixtures – where it’s located.

vii. Deposit, security accounts – law of bank’s jurisdiction is governing law that applies to perfection. DEFINED TERM determined by bank.

D. Methods of Perfection

i. UCC Financing Statement filed in appropriate govt office, 9-310(a): Default is to file f/s. Rule in Part 5.

1. Only way for general intangibles, receivables

2. Duration: effective for 5 years, 9-515

3. Continuation Statement may be filed, within 6 months prior to expiration

a. Once lapsed: SP is unperfected and also may be deemed to be retroactively unperfected as to purchasers for value, 9-515(c)

4. Required Info: 9-502(a): name of SP, the debtor, indicates collateral covered by fin. statement

a. if you miss those 3, you aren’t perfected

5. Name of Debtor: EXACT LEGAL NAME, 9-503

a. Individual debtor’s name = “individual’s name”

b. 2010 amendments, not all states adopted, VA adopted ONLY IF RULE

i. Option A, Only if: If there is a drivers license, not expired issued by state of debtor’s location, filing name must be name on that.

1. If no DL, goes back to individual name or one surname/one first

ii. Option B- 3 alternatives, Safe harbor

1. May use DL or may use “individual name” or last name and one surname