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UCC Article 9 – Secured Transactions

I. CREATION & CHARACTERISTICS

A. Uniform means of obtaining security for payment of debts

1. Prior to UCC, many different types of security arrangements

2. UCC provides simple, uniform rules

B. Terms

● security interest ● secured party● debtor ● security agreement● collateral ● financing statement● Purchase Money Security Interest ● inventory● equipment ● consumer goods● attach[ment] ● perfect[ion]● default ● value

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C. Attachment

1. Is when the security agreement becomes effectivebetween the debtor and creditor, requires:

a. Either

(1) debtor has possession of collateral, OR(2) written (authenticated) security agreement

b. Debtor has legal interest in collateral, and

c. Creditor gives “value” to debtor

2. When the last of the three happens, security interest “attaches”to the collateral

NOTE: There is another definition of “attachment” in the same generalfield of law. A court can issue a writ of attachment that tellsthe sheriff to take possession of a debtor’s property for thepurpose of selling it to pay off a judgment.

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3. From the moment of attachment, the creditor and debtor haveall of the rights and obligations provided in the security agree-ment.

4. Collateral

a. Essentially anything that can be owned can be collateral

(1) Tangible personal property(2) Intangible personal property, e.g.:

» Stocks & bonds» Accounts receivable» Negotiable instruments» Patents, copyrights, royalty contracts» Etc.

b. Art. 9 does NOT apply to security interests in real property

5. “Types” of collateral:» Inventory» Equipment» Farm equipment» Consumer goods

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D. Perfection (UCC article 9 definition)

1. The step necessary to make the security agreement effectivewith respect to third parties

a. A creditor’s “priority” generally depends on the date ofperfection

b. The action that results in perfection can happen beforeattachment » Not effective until attachment

2. The action necessary to perfect depends on the type ofcollateral

a. Possession by the creditor always works

b. Some items (bearer-type instruments) must be possessed

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3. Most frequent perfection method = filing financing statement

a. Standard form used in all states

b. Must be signed by debtor

c. Must describe the collateral, but not in great detail

d. Intent = to provide notice that security interest exists

e. Details of collateral included, terms, etc., are in thesecurity agreement

4. Inconsistency in collateral description

a. Priority is determined by the description in financingstatement (but not greater than in security agreement)

b. Specific collateral covered is determined by the descriptionin the security agreement

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4. Included in collateral

a. “Proceeds” from disposition of collateral (permitted or not)

b. “Products” of collateral» Things made using collateral» Things made by the collateral (wool, offspring, etc.)

5. Debt/obligation secured by the collateral

a. Whatever the parties agree

b. Can be» Prior debt» Contemporaneous debt» Future debt (“future advances”)

6. Special rule for consumer credit purchases » A consumer purchase money security interest is auto-

matically perfected at attachment, nothing else needed

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E. Floating Liens

1. The most frequent type of commercial financing for generaloperations (esp. if debtor has inventory)

2. The parties’ agreement:

a. Creditor “gives” debtor a “line of credit” (with maximum)

b. Debtor grants a security interest in everything it owns

c. Agreement secures all funds lent by the creditor, presentlyand in the future (“future advances”)

d. Security interest attaches to all property now owned andinterests later acquired by the debtor (“after-acquiredproperty”)

e. Normally requires debtor to automatically deposit cashproceeds and assign sale/purchase contracts

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3. The result

a. The debtor has a continuing source for financing operations

b. The creditor has a security interest in any collateral in which the debtor has a legal interest (remember “insurableinterest” from Art. 2, Sales)

c. Purchasers from the debtor take free of the security interest

d. The creditor becomes very interested in the debtor’soperations» Creditor has legal interest in all income, production

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F. Purchase Money Security Interests (PMSI) & Priority

1. Created when the creditor provides credit that enables thedebtor to purchase the collateral

a. Seller-financing (down payment + installment payments)

b. Straight loan specifically for particular purchase» Creditor is not the seller» Creditor usually makes the loan check out to both

the debtor and the seller (may pay direct to seller)

2. Purchase money security interests can have a “super priority”

a. PMSI for by consumer for consumer goods» Automatic perfection (without any filing)» Priority over any past security agreements that

might otherwise attach

NOTE: These rules were made for consumer goods to cut administrativecosts. A very significant number of consumer PMSI. The collateral usually has little resale value.

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b. PMSI for “inventory”

(1) Must be perfected by filing BEFORE the debtor receivespossession of the collateral

(2) If there are prior security interests perfected by filing,creditor must give notice to those creditors BEFORE debtor takes possession

(3) If everything done correctly, PMSI creditor has priorityas to the collateral over previously perfected securityinterest

(4) Very important when the debtor’s primary assets arepart of its inventory» Manufacturers» Wholesalers» Retailers

(5) Makes it possible for a debtor to avoid total control bycreditor with floating lien

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c. PMSI in equipment

(1) PMSI creditor must perfect by filing before, or within20 days after, debtor obtains possession of equipmentcollateral

(2) No special notice requirements

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II. ENFORCEMENT

A. PRIORITIES & ENFORCEMENT

1. Priority between competing secured creditors

a. If both perfected, first to perfect

b. Perfected has priority over unperfected

c. If both unperfected, first to attach

d. If same attachment date, priority to earlier agreement

2. See special rules re PMSI

3. Priorities carry over to any proceeds from the debtor’s sale ofcollateral

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B. Enforcement of Security Interests

1. “Default” gives creditor right to proceed against collateral

a. Not defined in UCC

b. “Parties” can agree on what is default (meaning creditorusually decides)

c. Common defaults – in addition to not paying when due

» Failure to maintain insurance coverage» Failure to maintain the collateral» Selling the collateral (if not permitted in agreement)» Granting any other security interest in the collateral» Filing bankruptcy or taking other debt-relief actions» Preventing creditor from inspecting collateral» Not performing even minor duties under the agreement» “Any other act or event that makes the creditor feel

insecure.”

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2. After default, creditor has option of:» Repo through “self-help” or» Filing suit to obtain court’s assistance

3. Self-help:

a. Security agreement normally requires debtor to assembleand make collateral available for repo» Usually a good idea to do that

b. Creditor (or agents) can take possession of collateral solong as there is no “breach of the peace”» No assault & battery, unlawful imprisonment, etc.» Minor trespass is okay (car from driveway)

-- Not through fence, inside closed structure

4. Most states allow foreclosure through court proceedings

a. Creditor does not necessarily give up secured positionb. Court officials seize and keep the collateralc. May limit options concerning disposition

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5. Disposition of Collateral

a. Creditor can retain collateral in satisfaction of the debt» Must give notice to debtor and other potential/real

secured parties, lien holders» If someone objects, must proceed with sale

b. Retention of collateral is not possible if collateral isconsumer goods and purchaser has paid 60% of theoriginal debt (even if debtor does not object)

c. Disposition must be in a “commercially reasonable”manner

(1) Public sale at recognized auction for that type of thing

(2) Private sale – especially if in the normal course of the creditor’s business

(3) So long as the sale is at something like FMV, debtor cannot successfully object

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6. Disposition of sale proceeds

a. To costs and expenses of repo and sale

b. To the debt owed to the creditor

c. To debts owed to junior (lower priority) creditors (if theyhave made proper requests)

d. Remainder to the debtor

7. Results of the process:

a. If the secured party does not receive full payment, it canobtain a judgment for the deficiency

b. Junior creditor’s rights in the collateral are extinguished

c. Debtor’s rights in the collateral are extinguished