Secured Transactions - Indiana University Bloomington



Secured Transactions

I. Introduction

A. Goals of debtor and creditor

1. Debtor’s Goal: To get as much credit as needed w/out giving any more security (collateral or a surety) than necessary.

2. Creditor’s Goal: To get repayment plus a profit. Creditor also wants priority over other creditors as against debtor’s collateral or surety.

3. Goal of Security Interest Legislation: to regulate a balance between the goals of creditor and debtor.

B. Pre-Code Security Devices

1. Seller’s Retention of Goods After Sale

a. Statute of Elizabeth: Seller’s possession of goods after sale was void and fraudulent as against seller’s creditors.

b. Early U.S. Laws: U.S. law generally retains the policy against “sham” sales, presuming fraud if the seller retains possession.

c. UCC: The Code incorporates existing law except that the seller’s retention “in good faith for a commercially reasonable time” is not deemed fraudulent.

2. Pledge: A pledge (or hypothecation) occurs when the creditor takes possession of the debtor’s property (collateral) during the debt period. Note that the pledge is still a widely used security device.

3. Chattel Mortgage: This was a mortgage on the debtor’s personal property filed in the appropriate place to give notice of the creditor’s interest.

4. Conditional Sale: This occurred when the seller of property retained title (but not possession) until the buyer completely paid for the goods.

5. Trust Receipt: This was a form of inventory financing in which a bank purchased goods from a manufacturer and then released them “in trust” to the retailer, after filing a notice that it was engaged in such financing.

6. Field Warehousing: This was and is a means of pledging collateral of great bulk. The warehouse is created around the goods and the warehouse receipt is issued to the creditor, who then lends the debtor money.

7. Factor’s Acts: These were state statutes allowing financers to perfect their interests in inventory goods which their extensions of credit had helped to produce.

8. Assignment of Accounts receivable: This method of financing was accomplished in most states by filing notice of the creditor’s interest in the outstanding account of the debtor-business. Th debtor’s customer the obligors) may or may not have been notified that their obligation were assigned to the creditor.

C. The Uniform Commercial Code

1. In general: Adoption of the UCC Art. 9 (secured transactions) eliminated most of the pre-Code security devises.

2. Revised Art. 9: The original (1962) version has substantially been rewritten in 1972 and now in 2000).

D. Liens [

1. In General: Liens are creditor interests in the debtor’s property.

2. Types of Liens

a. Judicial liens: These are acquired in judicial proceedings.

b. “Statutory” liens: Statutes and the common law have created certain liens for specific unsecured creditors.

c. Consensual Liens: These are created by agreement and include Art. 9 security interests.

II. Coverage of Art. 9

A. Terminology [9-102]

1. Intro: The Code simplified financing arrangements by introducing standard terminology.

2. “Security Interests”: This is any consensual lien interest in the debtor’s property or fixtures given toe the creditor to secure payment or performance of the debtor’s obligation.

a. Note: the term also includes the sale of accounts or chattel paper.

3. “Security Agreement”: This is the agreement (contract) by which the security interest is created.

4. “Secured Party”: This refers to the creditor having a security interest, or the buyer in the sale of accounts or chattel paper.

5. “Debtor”: This term means the person owing the obligation giving rise to the security interest, or the seller in the sale of accounts or chattel paper.

B. Scope of Art. 9 Coverage

1. In general—[§9-101] deposit accounts, sales of payment intangibles and promissory notes, health-care insurance receivables, nonpossessory statutory agricultural liens, consignment, supporting obligations and property securing rights to payment, commercial tort claims, transfers by State and governmental units of States, nonassignable general intangibles, promissory notes, health-care insurance receivables and letter of credit rights: Art. 9 applies to any transaction intended to create a security interest in personal property or fixtures and to any sale of accounts or chattel paper.

2. Types of Collateral [§ 9-102(a)(12) Property subject to a security interest or agricultural lien. [9-102]

a. Tangible collateral—goods: “Goods” is defined as movables or fixtures

i. Four subcategories of goods

(a) Consumer goods are goods bought for use primarily for personal, family, or household purposes.

(b) Inventory is goods held for sale or lease to others in the ordinary course of business.

(c) Farm products are goods used or produced in farming operations by a farmer-debtor. Goods other than standing timber, w/ respect to which the debtor is engaged in a farming operation, e.g., crops, crops from trees, vines, bushes, livestock, born or unborn, etc.

(d) Equipment is goods that do not fit into any of the other three categories.

(e) manufactured homes

(f) computer program embedded in goods and any supporting information provided in connection w/ a transaction relating to the program if (i) the program is associated w/ the goods in such a manner that it customarily is considered part of the goods or (ii) by becoming the owner of the goods, a person acquires a right to use the program in connection w/ the goods.

b. Quasi-tangible collateral [9-102]: These are legal rights represented by a indispensable writing

i. Instruments are writing containing a right to payment of money, if of the type sold in the ordinary course of business. Also, the term includes the types of paper created by UCC Art. 3 (checks, promissory notes, etc.).

ii. Document means a UCC Art. 7 “document of title” (e.g., a warehouse receipt or a bill of lading).

iii. Chattel Paper refers to a writing or writings that contain both a promise to pay money and a security interest in or lease of chattels.

c. Intangible collateral: This type of collateral has no physical form

i. Account refers to a right to payment for goods or services sold or leased, which is not contained in an instrument or chattel paper. Note: Under the 1962 version, “account” referred only to obligations already earned by performance. Under the revised Code, “account” includes “contract rights” whether or not the right to payment has been earned by performance.

ii. General Intangibles refers to personal property used as collateral that does not fit into any other category.

d. Investment property collateral: These are given special treatment and include stocks and bonds, commodity contracts, and account in which such investments are held.

3. Types of Transactions: Any financing transaction may be subject to Art. 9 if the purpose is to create a security interest in collateral

a. Leases: Leases are not covered by Art. 9 unless the so-called “lease” is actually a disguised attempt to create a security interest in leased property that is being sold to the “lessee.”

i. True lease compared w/ security interest: Whether the transaction is a true leas or a disguised sale on credit depends on the facts of each case, but the following presumptions apply:

(a) If lessee has the option to purchase for little or no consideration, it is a sale;

(b) If lessee has the right to terminate the lease and return the goods, it is a lease;

(c) If at the end of the lease term, the goods will have no remaining economic value, it is a sale.

b. Consignments: To protect consigned goods from the consignee’s creditors, the consignor must comply w/ Art. 9 requirements or w/ any applicable state “sign” law, or prove that the consignee’s creditors knew the consignee dealt in consigned goods.

C. Transactions Excluded from Art. 9 [§ 9-109]

1. Federal statutes: Federal law supersedes state statutes (including Art. 9) to the extent it governs rights of parties to the security agreement or rights of third persons.

a. Federal loans: These are governed by the UCC.

2. Liens on Real Property Interest: Such liens, including landlord’s liens, are excluded from Art. 9, except for an agricultural lien which is included.

3. Mechanic’s and Artisan’s Liens: These statutory liens are excluded from Art. 9’s coverage (except for the priority rule of section 9-310).

4. Claims arising out of Judicial Proceedings: These are also excluded. [9-109]

5. Wage or Salary Claims: These are exempt.

6. Insurance Policies and Deposit Accounts: These are also excluded form Art. 9.

7. Assignments not for financing purposes: These assignments (such as assignments for collection; coupled w/ a performance obligation; or as part of a sale of a business) are isolated “one shot” transactions and so are not part of Art. 9.

8. Surety’s Subrogation Rights: These rights, entitling the surety to amount still due the debtor, are not Art. 9 security interests.

9. Subordination Agreements: Where creditors agree to change their priorities in collateral, these agreements are not w/in Code coverage.

10. Underlying Transactions not w/in the code: If the underlying transaction does not fall w/in the Code, this does not necessarily make subsequent transactions involving the same interest exempt.

11. Consumer Protections Statutes: the Federal government or the states may provide special rules for security interests in consumer goods, which rules override Art. 9 provisions. Article 9 of the enacting state defers to statutes of another state of foreign country only to the extent that the other statutes contain rules applicable specifically to security interests created by the particular governmental unit of the other jurisdiction.

III. Creation of a Security Interest

A. Intro:

1. Basic Policies: The Code guarantees protection to lenders complying w/ the UCC and prevents lenders form creating private systems outside the framework of the Code.

2. Creation of Security Interest—Overview

a. Attachment and perfection: Attachment is the process by which the debtor and creditor create a security interest in the debtor’s property effective between these two parties. Perfection is the process by which this security interest is made effective against most of the rest of the world.

b. Security agreement and financing statement: The security agreement is the contract signed by the debtor and creditor to create the security interest. The financing statement is the document filed in the place mandated by § 9-401 that notifies the world of the creditor’s interest in the debtor’s property.

B. Attachment of a Security Interest [§ 9-203]

1. Three Requirements: The parties must have (i) a security agreement; (ii) the secured party must give value; and (iii) the debtor must have rights in the collateral.

a. Coexistence required: Attachment occurs the moment all three requirements are met (regardless of their order). A security agreement attaches to collateral when it becomes enforceable against the debtor w/ respect to the collateral.

C. The Security Agreement—Debtor must authenticate the security agreement [9-203(b)(3)(A)]

1. Debtor’s Authentication—Necessity of a Writing

a. Collateral in possession of secured party: In this case, an oral agreement is sufficient.

b. Collateral not in possession of secured party: Where the secured party does not have possession of the collateral, a written agreement is required that the debtor must sign. [9-102(a)(7)(a) signing can be any symbol executed or adopted by a party w/ the present intention to authenticate a writing. A writing includes printing, typewriting or any other intentional reduction to tangible form. Code recognizes intangible security agreements providing that debtor authenticates a security agreement by executing or otherwise adopting a symbol, or by encrypting or similarly processing a record in whole or in part, w/ the present intention of adopting a record. 9-102(a)(7)(b). A record mean info that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. See 9-102(a)(69).

i. Can financing statement satisfy? A financing statement is usually not sufficient as a written security agreement b/c it generally fails to contain granting language.

2. Conveyance of Security Interest: The security agreement must create or grant a security interest in specific collateral

a. Test: Whether the agreement creates a security interest depends on the debtor’s intent as evidence by the language of the agreement.

b. Terminology: No particular words are required to create a security inters, and thus even an agreement that calls itself a “conditional sale” may still qualify. Note also that the security agreement is a contract and should therefore contain everything that the parties agree upon.

3. Description of Collateral [9-203]

a. Sufficiency of Description: The description is sufficient if it reasonably identifies what collateral the parties intended the security interest to cover

i. Errors in description: Errors are not fatal if other proof shows the parties intended particular collateral to be covered.

b. Proceeds: Cash or non-cash proceeds from the sale or exchange of collateral need not be expressly mentioned to be covered.

c. After-acquired property: Collateral that the debtor may acquire in the future may be covered by security agreement

i. Exceptions: Consumer goods are not subject ot after-acquired property clauses unless the debtor gets rights in the goods w/in 10 days after the creditor gives value. Also, under the Credit Practices Rule, a non-purchase money, non-possessory security interest cannot be created in household goods.

ii. Specificity Required: Express mention of after-acquired property is necessary except for inventory (“inventory” implies coverage of future inventory), accounts receivable, and farm equipment.

iii. Interest attaches when property acquired: The security interest in after-acquired property attaches only when the debtor actually acquires rights in that property.

d. Floating liens: Such liens attach to an aggregation of collateral (e.g., inventory) so that individual items may change (due to sales or purchases by debtor), but the collateral as a whole remains subject to the lien.

4. Signature of Debtor: the debtor must sign the security agreement, but the secured party need not.

5. Other Terms: The agreement usually states the parties’ rights, duties, etc.

D. Value: The creditor must give value for right in the collateral for attachment. This is usually an advance of money or delivery of goods, but “value” can be much more.

E. Debtor’s Rights in the Collateral

1. Rights in the Collateral: Attachment requires the debtor to have rights in the collateral (i.e., some ownership interest, right to possession, etc.).

a. Title Irrelevant: Full title to collateral is not required.

2. Effect of Restriction on Debtor’s Right to Transfer Collateral: Any such restriction is void and unenforceable. However, a provision accelerating the creditor’s right to payment in the event of the debtor’s transfer of the collateral may be valid.

IV. Perfection [§ 9-308—Under the new code you can also perfect by controlling the collateral. This applies to deposit account collateral (secured party is bank or agent of secured party) letter of credit right, electronic chattel paper (where secured party identified as assignee of chattel paper on the record of the secured party), or investment property. See 9-314.

A. Methods of Perfection

1. In General: The Code provides the following three methods of perfecting a security interest:

2. Filing a Financing Statement: The most common method of perfection is the filing of a financing statement in the place provided by UCC § 9-401. (This is the only method for accounts and intangibles).

3. Perfection by Possession: Possession of the collateral (a pledge) perfects the creditor’s security interest in the collateral as soon as all requirements for attachment have been met.

a. Types of Property Covered: Security interests in goods, money, documents, instruments, or chattel paper are perfected by possession.

b. Means of taking possession:

i. Inventory: The common method for possessing inventory is by field warehousing

ii. Goods in possession of bailee: Where the collateral is in the possession of a bailee, the creditor’s perfection occurs upon the bailee’s issuance of a receipt in the creditor’s name, or by notice to the bailee of the creditor’s name, or by notice to the bailee of the creditor’s interest.

c. Duration of Perfection: Perfection under this method lasts only as long as the secured party has possession.

d. Rights and duties of secured party in possession: A secured party in possession must take reasonable care to store and protect the collateral

i. Exculpatory clauses totally absolving the secured party from liability are void.

ii. The secured party is entitled to reimbursement for expenses incurred in storing and protection the collateral (including the cost of insurance.

iii. Rents, issues, profits (i.e., money received from the collateral) must be returned to the debtor or applied against the secured obligation.

iv. Risk of loss is on the debtor, but only to the extent of any deficiency in the creditor’s insurance coverage.

v. The secured party can re-pledge the collateral if this action does not impair the debtor’s ability to redeem.

vi. The secured party cannot use the collateral unless use is necessary to preserve the collateral.

4. Perfection w/ neither possession nor filing—“automatic perfection”: The 3rd method of perfection is “automatic”; i.e., perfection occurs in some situations w’/out filing once attachment of the security interest has happened. Automatic perfection is present in the following situations:

a. Purchase money security interest in consumer goods: A purchase money security interest in consumer goods other than vehicles required go be registered, or fixtures, is automatically perfected on attachment of the security interest.

i. Purchase money transactions: A purchase money security interest arises when the secured party sells the goods to the purchaser on credit or advances the purchaser the money used to purchase the goods.

(a) Extent of security interest: The purchase money security interest applies only to the extent of value advanced by the secured party.

ii. Consumer goods: In determining whether the goods are truly to be used for consumer purposes (and hence qualify for automatic perfection), the creditor may believe what the debtor says.

b. Beneficial interests: Perfection is also automatic in the assignment of a beneficial interest in a trust or decedent’s estate.

c. Certain accounts: Automatic perfection occurs in the assignment of an insignificant portion of the debtor’s outstanding accounts

d. Temporary perfection—Security interest in certificated securities, negotiable documents, or instruments is perfected w/out filing or the taking of possession for a period of 20 days from the time it attaches. However, the temporary perfection applies only to the extent the security interest arises for new value given under an authenticated security agreement, 9-312. : Temporary “automatic” perfection is allowed as to certain proceeds of collateral and as to documents and instruments

i. Proceeds

(a) Collateral of same type: A security interest is automatically perfected in proceeds received on the sale or disposition of collateral. Generally, this security interest remains perfected if perfection of a security interest in the type of collateral that constitutes the proceeds could be accomplished by filing in the same place as for the original collateral.

(b) Proceeds of different type: If a security interest in the proceeds could not be perfected by filing in the same place s for the original collateral, perfection continues in the proceeds for only 10 days following disposition of the collateral (after which new filing or possession is required).

ii. Documents and instruments: Documents of title (e.g., warehouse receipts) and instruments (e.g., promissory notes) in the possession of the creditor may be surrendered to the debtor for a legitimate commercial purpose (such s to reclaim the goods represented by a warehouse receipt or to present a promissory note for payment) for 21 days w/out a loss of perfection. Similarly, a creditor as to documents or instruments who advances new value enjoys a 21 day grace period of automatic perfection.

B. Time of Perfection

1. Completion of Necessary Requirements: Perfection occurs when (i) the interest has attached and (ii) all required steps for the particular method of perfection (e.g., filing, possession) have been taken. If the steps for perfection are taken before attachment (e.g., the financing statement is filed before the security agreement is signed), perfection occurs when attachment finally occurs—i.e., when both requirement are met.

2. Effect of Secondary Perfection: Perfection first by one means and then another relates back to the time of the first perfection as long as there was never a period in which the security interest was unperfected.

C. Place of Perfection—Multistate Transactions [9-301-9-307, 9-316, 9-337] principal place of debtor’s residence, corp. place of incorporation, neither chief executive office.

1. Introduction: UCC § 9-103 deals w/ the problems of multistate transactions and removal of collateral from one state to another.

2. General Rule—Last Event Test: In multistate transaction, the Code generally applies the law of the state in which the collateral is located when the last event occurs on which is based the assertion that the security interest is perfected (filing is usually the last event).

3. Removal of Collateral to Another State—Four-Month Rule: Where the collateral is perfected in one state and then moved to another, the original perfection lapses unless re-perfection occurs in the second state w/in four months.

a. “Relates Back”: A new perfection w/in the four months relates back to the date of the original perfection.

b. Effect of failure to re-perfect: If the secured party fails to re-perfect w/in the four months, the interest becomes unperfected and any later perfection does not relate back.

c. Effect of lapsing perfection: Where the financing statement lapses before the four-month period ends, the grace period for re-perfection ends as well.

d. Exception to four-month rule: the four-month rule is inapplicable where the collateral is perfected automatically.

e. Intrastate moves: Such moves are not subject to re-perfection rules.

4. Special Rules

a. Goods intended for use in another state—thirty day rule: Perfection of a purchase money security interest in goods must be accomplished in the state of destination where: (i) both parties understand at the time of the attachment that the goods are to be moved to another state, and (ii) the goods are moved there w/in 30 days after the debtor receives possession.

b. Goods covered by a certificate of title: these are governed by different rules

c. Accounts, intangibles, goods w/out a home base: For accounts, general intangibles, and goods that routinely move from state to state (e.g., construction equipment), perfection is accomplished according to the law of the debtor’s location (chief place of business, or if none, residence).

i. Note: If the debtor changes location to a new jurisdiction, the creditor has four months to re-perfect.

d. Chattel paper: Where perfection is accomplished by filing, the same rules apply as for general intangibles

e. Minerals: A security interest in minerals is perfected according to the law of the state containing the point of extraction.

5. Motor Vehicles

a. Perfection of interest: If state law requires a security interest in motor vehicles to be noted on a certificate of title, the UCC perfection rules do not apply, and all states now require sue notation.

b. Interstate transfers of motor vehicles

i. Four-month grace period: A security interest noted on a certificate of title generally remains perfected for at least four months after the vehicle is moved to a new state, even if the vehicle is re-registered in the new state.

ii. Perfection continues absent new registration: If the vehicle is not re-registered in the new jurisdiction, perfection continues until re-registration.

iii. Where rule not applicable: If the secured party gives the debtor the certificate of title and the debtor uses the certificate to re-register in the new jurisdiction, the grace period is cut off. Similarly, if a new certificate of title is issued during the grace period and it fails to show the existence of any liens, a prior perfected security interest becomes subordinate to the rights of a non-professional (i.e., not a dealer, bank, or loan company), innocent purchaser for value.

V. Filing [§ 9-502—filing is effective to perfect a security interest in instruments, but the creditor must take possession of money to perfect a security interest therein §9-312.

A. The Financing Statement

1. Notice Filing: Parties may file a copy of the security agreement or a financing statement. The financing statement is less detailed but it gives notice that a security agreement is in effect. It is filed under the debtor’s name.

2. Required contents of Financing Statement: The financing statement must contain the names and addresses of both parties, a description of the collateral, and the signature of the debtor.

3. Sufficiency of Financing Statement

a. “Minor errors . . . not seriously misleading”: A financing statement substantially complying w/ the contents requirement is effective even though it contains minor errors that are not seriously misleading.

b. Name and address of secured party: This information must be included on the financing statement to give sufficient notice of where to go for more information.

c. Name and address of debtor: This information must be included on the financing statement to give notice to other creditors of the debtor.

i. Trade names: The debtor must be listed under his real name and not under any trade name.

ii. Partnership: A partnership debtor may be listed under the partnership name.

iii. Change of name: A change in the debtor’s name or form of identity that is seriously misleading requires a refiling w/in four months or the creditor’s perfection ceases as to new collateral acquired after the four-month period has lapsed.

iv. Change of debtor’s address or location of collateral: If the change is intrastate, perfection is not affected (in most states). In some states, a four-month re-perfection rule applies.

(a) Note: A change in use of the collateral is immaterial.

d. Description of collateral: The description of the collateral in the financing statement is sufficient if reasonable identification is given.

i. After-acquired property: The financing statement may cover after-acquired property. Express mention is not necessary if the types of collateral are sufficiently described.

e. Signature of debtor: The financing statement must include the debtor’s signature.

4. Effect of Financing Statement Signed by Secured Party Only: Normally, a financing statement signed only by the secured party (and not by the debtor) is invalid. However, the statement will be effective whenever the debtor’s name or location changes, collateral is moved to a new state, collateral is proceeds, or the filing is made as a continuation statement.

5. Amendments: Amendments to the financing statement that add collateral are effective only from the date the amendment is filed, and they required the signatures of both parties.

B. Where to File [§9-501—Filing occurs at a central location except for real-estate-related collateral where local filing still occurs. To perfect a security interest or agricultural lien by filing under the new code you file at the office designated for filing or recording a mortgage on related real property if the collateral is as-extracted collateral (i.e., oil, gas, minerals) or timber to be cut or the filing statement is filed as a fixture filing and the collateral is goods that are or are to become fixtures. In all other cases filing occurs in a central location designated by the state. principal place of debtor’s residence, corp. place of incorporation, neither chief executive office.

1. General Policy: UCC § 9-401 provides three alternatives for states to adopt.

a. Alternative 1 (four states): Filing is to be in the office of the secretary of state (except for realty filings for minerals, standing timber, and fixtures).

b. Alternative 2 (majority of states): Local filing is required for consumer goods, farm equipment, and farm products. Filing at location is required for fixtures, minerals, timber, or growing crops, and filing w/ the secretary of state is required for al other collateral.

c. Alternative 3 (substantial minority): These states follow the second alternative but add the requirement that statewide filings also be filed in the county of the debtor’s business or residence.

2. Fixture Filing: W/ respect to fixtures, filing must be made locally in the real estate records.

3. Improper filing: A good faith misfiling is effective against any person who had knowledge of the contents of the misfiled financing statement.

4. Federal Filing Acts: Federal acts supersede state filing requirements for certain security interests (e.g., railroad equipment filing, aircraft, etc.).

C. Mechanics of Filing

1. When effective: A financing statement becomes effective upon tender of the statement and fee to the filing officer. The filing officer indexes the statement by the debtor’s name, and any errors in the officer’s filing or indexing do not affect the validity of the security interest.

2. Duration of filing: The financing statement lapses after five years unless renewed by the filing of a new statement or a continuation statement. [9-515]

3. Continuation Statement: A continuation statement adds five more years to the effectiveness of the financing statement. The statement must be signed by the secured party (not necessary to get debtor to sign), identify the original statement by file number, and state that the original is still effective. The continuation statement may be filed in the six-month period before lapse of the original.

4. Termination Statement and Release of Collateral: Where the debt is paid, the debtor may make a written demand for a termination statement, and the creditor must send such w/in 10 days or be liable for the debtor’s actual damages plus $100.

a. Necessity of Demand: For consumer goods, the secured party must file a termination statement w/in one month of repayment regardless of the debtor’s demand. In all other cases, debtor must make the written demand.

b. Who can demand: Only the debtor can force the secured party to give such a statement.

c. Releases: The secured party may also release collateral by a signed release.

5. Assignment: The secured party may assign rights under a financing statement by filing a statement of assignment.

D. Request for Statement of Account or List of Collateral

1. Request by Debtor: The debtor may send the creditor a statement of the amount owed or collateral covered and request the creditor’s approval. The creditor must correct and return the debtor’s statement w/in two weeks or be liable for any loss caused.

2. Protection of Secured Party: The creditor may impose a charge for requests made more often than once every six months.

3. Third Party Problems: Third parties cannot compel the secured party to disclose information. However, the secured party may be estopped to deny misstatements made to third parties.

VI. Priorities

A. Competing Interests in Collateral—the Claimants

1. Introduction: When more than one person claims a security interest in collateral, the Code decides who has priority on the basis of each person’s status.

2. Debtor: The person owing payment or other performance of the secured obligations and usually the owner of the collateral.

3. Unsecured (General) Creditor: A creditor who has no security interest in the collateral but only a personal claim against the debtor.

4. Judicial “Lien Creditor”: A creditor who has acquired a lien on the debtor’s property through the judicial process. In most states, the lien arises at the time of levy (e.g., when the sheriff seizes the property).

5. Secured Creditor: A creditor w/ a security interest in the debtor’s collateral, which interest has attached.

6. Perfected and Secured Creditor: A creditor who has taken the step necessary to perfect the security interest.

7 Statutory Lien Creditor: A creditor who has an automatic statutory or common law lien (e.g., landlord, mechanic, etc.).

8. Buyers of Property: Note that a good faith buyer of the collateral is often favored over the debtor’s creditors.

B. Priority—Unperfected Creditors

1. Other Unperfected Creditors—First to Attach: Where there are two conflicting security interests in collateral, neither of which has been perfected, priority is determined according to the first to attach rule.

2. Perfected Creditors have Priority: A perfected creditor has priority over an unperfected creditor. This rule applies regardless of which creditor’s interest attached first and regardless of the perfected creditor’s knowledge of the misfiled financing statement before becoming perfected.

3. Judicial Lien Creditors: A judicial lien creditor who levies before the unperfected creditor perfects his interest has priority over an unperfected creditor.

4. Statutory Lien Holders: Unless the statute creating the lien states otherwise, the statutory lien holder has priority over the unperfected creditor.

5. Buyers: Purchaser for value w/out knowledge of the unperfected interest take free of such interest.

a. Purchase of Inventory: The purchaser of inventory in the ordinary course of business takes free of all security interests regardless of knowledge.

C. Priority Among Perfected Creditors—General Rule: As between two perfected security interests, priority goes to the creditor whether filed first or perfected first (except as modified by the special rules below). Knowledge of another creditor’s interest and time of attachment is irrelevant.

D. Priority among Perfected Creditors—Special Rules for Purchase Money Security Interests [9-317, 9-324; PMSI can be in goods, inventory, livestock, software]

1. Non-Inventory Purchase Money Security Interests: A PMSI has priority over conflicting security interests in the collateral if it is perfected when the debtor takes possession of the collateral or w/in 20 days (many state have changed this to 20 days) thereafter.

a. Effect: This priority supersedes the general rule of first to file or perfect both as to time and manner of perfection.

b. Knowledge of prior interest immaterial: Knowledge of the conflicting security interest is irrelevant.

c. Limitation to “purchase money”: Priority is limited to the extent of the purchase money used to acquire the collateral.

2. Purchase Money Security Interests in Inventory: The rule of super-priority of a PMSI is modified where the PMSI is in inventory. To have priority, the purchase money creditor must send notice of the transaction to the other perfected creditors and perfect before the debtor receives possession.

3. Consignments: To have priority, the consignor must comply w/ the filing provisions of Art. 9 and give notice (as w/ PMSI in inventory).

E. Priority among Perfected Creditors—Special Rules for Certain Types of Collateral

1. Crop production loans: A perfected interest taken to let a farmer produce crops and given for new value no more than three months before the crops start growing prevails over prior perfected security interests due more than six months before the crops were planted.

2. Fixtures

a. Fixtures defined: Fixtures are goods permanently attached to real property. This does not include materials incorporated into a building (e.g., bricks, lumber etc.). Neither are mobile homes on leased land or readily removable factory equipment, office machines, or domestic consumer appliances subject to fixture filing rules if perfected prior to installation.

b. Priority rules [9-309]: A PMSI in goods that will be attached to realty must be perfected by a fixture filing in the real estate records prior to affixation, or w/in 10 days thereafter, to be perfected against all future and prior perfected interests.

i. Limitation—construction mortgages: A recorded construction mortgage takes priority over a perfected PMSI in fixtures.

3. Accessions: These are goods affixed to other goods

a. Where security interest precedes installation: If a security interest in an accession has attached prior to affixation, the creditor prevails over prior perfected interests.

b. Where security interest subsequent to installation: If the security interest attaches after the goods have become accession, the secured party prevails over those who acquire interests in the whole subsequent to attachment, but generally not over those who had such interests at the time of affixation.

c. Exceptions: The security interest in the affixed goods must be perfected to prevail over subsequent buyers or creditors who acquire their interest w/out knowledge of the original creditor’s security interest.

4. Commingled and Processed Goods: A perfected security interest in commingled or processed goods extends to the ultimate product or mass.

a. Competing interests in ultimate product: Where there are competing interests, each creditor takes a pro rata share in the total product or mass.

5. Proceeds

a. Introduction: Proceeds includes anything received by the debtor on the sale or disposition of the collateral, whether or not the disposition violates the security agreement.

i. Definitions

(a) Cash proceeds include money, checks, deposit accounts, and the like;

(b) Noncash proceeds include everything else; and

(c) Insurance proceeds are proceeds.

ii. Express reference to proceeds not required: The security agreement or the financing statement need not expressly mention proceeds for the secured party’s rights to arise.

iii. Secured party’s option regarding proceeds or collateral: Th secured party has the option of asserting his interest in the proceeds, the collateral, or both (but is limited to one satisfaction of the debt).

b. Rules regarding attachment and perfection of security interest in proceeds: A perfected interest in collateral continues automatically in identifiable proceeds from the deposition of the collateral.

i. Limitations: Where the proceeds are of a type for which filing is not an appropriate means of perfection (or the place of the original filing is not appropriate for proceeds), the security interest terminates unless it is re-perfected w/in 10 days.

ii. Extension of security interest by new perfection: Re-perfection w/in 10 days relates back to the date of the original perfection.

c. Rules of priority: The general rule (first to file or perfect) governs most disputes. Special rules are the following:

i. Accounts as proceeds of inventory: Priority between a secured party w/ a perfected interest in accounts and a perfected inventory financer claiming the accounts as proceeds is generally determined by the usual first to file or perfect rule. But as to cash proceeds of the inventory, an inventory purchase money secured party who complies w/ § 9-312(3) has priority over the accounts financer.

ii. Promissory notes: If the sale of collateral generates promissory notes as proceeds, the financer must take possession of the instruments w/in 10 days to continue the original perfection.

iii. Chattel paper as proceeds: the purchaser of chattel paper giving new value and buying in the ordinary course of business has priority over a perfected security interest in the chattel paper as the proceeds of inventory—even if the chattel paper purchase knew of the prior interest.

(a) Note: If the prior security interest is in other than inventory, a chattel paper financer must buy w/out knowledge of the existing perfected security interest to have priority.

d. Cash proceeds in insolvency proceedings: In the debtor’s insolvency proceedings, a perfected secured party has a perfected interest in identifiable noncash proceeds , undeposited cash proceeds, and bank accounts in which case proceeds have been commingled (but subject to he bank’s right to set-off and limited to the amount of cash proceeds received by the debtor in the 10 days preceding insolvency to which the creditor was entitled but not paid).

e. Returned goods: On the voluntary or involuntary return of goods to the debtor, the original security interests reattach. If not perfected, the creditor must file or take possession to perfect.

i. Conflicting security interests: As to returned goods, a perfected inventory financer is junior to the purchaser of chattel paper, but prevails over an accounts receivable financer.

F. Priority among perfected creditors—as affected by terms of security agreement

1. Future advances: The original security agreement can create a security interest in future loans by the creditor to the debtor as well as in the current loan.

a. Advances under later agreements: The secured party’s original priority will also extend to loans under later security agreements where the original interest was perfected by filing or possession. Intervening creditors lose out on the theory that the original perfection put them on notice of the secured party’s claim.

2. Dragnet Clauses: The security agreement may provide that the collateral secures the current loan and all other debts owed by the debtor to the creditor, now or in the future. These clauses are valid except where the future debt is totally unrelated to the original loan.

3. Consent and Waiver Clauses: Priority can be lost where the secured party’s failure to enforce the security agreement is found to constitute a waiver (e.g., permitting the debtor to sell the collateral in violation of the security agreement).

G. Priority among Art. 9 perfected Creditors and other Claimants

1. Buyers of the Collateral

a. Buyers in the ordinary course of business: Buyers of inventory in the ordinary course of business take free of perfected interests create by the seller unless they know that the sale violates the security interests.

i. Buyer of farm products: Under federal law, such buyers must comply w/ notices received from the secured party in order to take free of perfected interests in the farm products.

ii. Other collateral: Buyers of goods other than inventory also take subject to the prior security interest.

b. Buyers not in the ordinary course of business—future advances: A purchaser of non-inventory takes free of a prior interest to the extent increased by future advances except for advances made w/in 45 days following sale and w/out knowledge of the sale or pursuant to a commitment.

c. Buyers of consumer goods from other consumers: These buyers take free of security interests unless the interests are known or perfected by filing.

d. Buyers of quasi-tangible collateral: Buyers of instruments or documents take free of unknown perfected security interests. The same is true for chattel paper or non-negotiable instrument buyers who give value in the ordinary course of business.

2. Statutory Lien Holders: Possessory statutory liens for materials or services furnished prevail over perfected security interests unless the statute creating the lien provides otherwise.

a. Note: only the priority of possessory liens is governed by Art. 9.

3. Federal Tax Lien: Once filed, a federal tax lien prevails over most security interests except security interests perfected before the tax lien was filed. It also prevails over security interests in after-acquired property or those enlarged by advances made after the filing, unless the advances were made w/out knowledge of the tax lien filing in the 45-day period following the filing.

4. Judicial Lien Creditors: A judicial lien creditor (defined to include a trustee in bankruptcy or an assignee for the benefit of creditors) is junior to perfected security interests holders and to future advances unless such advances were made w/in 45 days after the lien attached or were made thereafter w/out knowledge of the lien creditor’s interest or pursuant to a commitment made w/out such knowledge.

5. Art. 2 claimants—buyers and sellers

a. Automatic Art. 2 security interests: These arise in buyers and sellers of goods in certain sales transactions (e.g., buyer’s rejection of defective goods tendered by the seller). Possession alone is the means of perfection for such interests. No security agreement or financing statement is required.

b. Priorities between Art. 2 claimants and Art. 9 creditors: When the same goods are subject to conflicting claims under Art. 2 and Art. 9, priority depends on the first to file or perfect rule.

i. Special rule where buyer insolvent: In this case, the buyer’s trustee in bankruptcy is subject to the seller’s written demand for return of the good w/in 10 days of delivery.

VII. Bankruptcy Proceedings and Art. 9

A. Introduction: The acid test of the validity of a security interest is its ability to w/stand attack by a trustee in bankruptcy, b/c a trustee in bankruptcy can assert the rights of almost everyone who challenges the validity of a security interest.

B. Bankruptcy Code Provisions

1. In general: Bankruptcy is a federal procedure initiated by filing a petition in bankruptcy and tried before a bankruptcy judge. A trustee takes title to all of the debtor’s property and investigates the claims to the property.

a. Effect of Bankruptcy on Secured Party’s Rights: Even when the secured interest is fully perfected, the bankruptcy of the debtor may interfere w/ the secured party’s rights; possession passes to the trustee and a secured creditor must seek permission of the court or trustee to enforce his rights. The filing of the bankruptcy petition creates an automatic stay against any creditor collection activity.

VII. Default Proceedings

A. Introduction: When the debtor is unable to meet the obligations set under the security agreement, there is a default. Thus, default is defined by the terms of the parties’ security agreement.

B. Occurrence of default

1. In General: W/in limits, the parties are free to establish any conditions they like in the agreements. The following clauses are frequently used in agreements.

2. Acceleration Clauses: Clauses permitting acceleration of the entire debt on the happening of an event or “at will” or when the creditor feel ”insecure” are permitted if exercised in good faith.

3. Waiver of Defenses Against Assignees: A clause waiving defenses against an assignee is generally valid in the hands of an assignee who purchases in good faith and w/out notice of any defenses the buyer has against the seller.

a. Real Defenses not affected: The waiver does not cut off real defenses (i.e., those good against a holder in due course).

b. Consumer goods limitation: The waiver is not valid in consumer transactions if prohibited by other statutes.

C. Remedies in General

1. Cumulative Remedies: Remedies under Art. 9 are cumulative, and thus, the creditor is not forced to make an election of remedies.

2. Three Basic Remedies: These are (i) sale, (ii) retention of the collateral, and (iii) an action for the debt.

3. Documents as collateral: In this case, the secured party may proceed agiastn the documents or underlying collateral.

4. Collateral involving real property: If the collateral involves other real and personal property interests, the secured party may use the procedure governing real property as to all of the collateral or may use UCC remedies as to the personal property.

D. Right of Possession upon Default

1. In General: Upon default, the creditor may use court proceedings to collect the debt or self help to repossess the collateral.

2. Is judicial process necessary?

a. No breach of peach: Self help is permitted if it can be done w/out a breach of the peace (meaning any disturbance, threat of disturbance, constructive force, or breaking and entering). However, trickery is permitted.

b. Requirement of notice: Unless required by the security agreement, the creditor need not give notice to the debtor.

c. Constitutionality: So far, self-help repossession has w/stood attacks on tits constitutionality.

3. Right of Assemblage: If the collateral is scattered, the creditor may required the debtor to assemble it.

4. Disabling Equipment: Bulky equipment may be constructively repossess by disabling it.

5. Duties of Secured Party in Possession: The possessor must take reasonable care of the collateral and must return all personal items seized w/ it.

E. Realizing on the Collateral

1. Strict Foreclosure: After repossession, the creditor may elect to keep the goods in full satisfaction of the debt (strict foreclosure).

a. Exception for consumer goods: Where the collateral is consumer goods and the debtor has repaid 60% of the principal debt, the creditor must resell the collateral w/in 90 days of repossession. This debtor’s right to resale may be waived only after default.

b. General notice requirement: A creditor electing strict foreclosure must send written notice to the debtor and other creditors w/ interests in the collateral. Those notified have 21 days in which to object and force the creditor to sell the collateral.

2. Disposition of Collateral by Sale: The creditor may sell, lease, or otherwise dispose of the collateral. Sale is the most common method b/c sale can be by public or private sale, and after the sale, the creditor may pursue the debtor for any deficiency.

a. Commercial reasonableness standard: The creditor may sell the collateral in any commercially reasonable manner and must act in good faith.

b. Notice requirement: notice must be given to the debtor, sureties, and junior secured parties unless the collateral is perishable or of a type sold in a recognized market (e.g., stocks and bonds).

i. Oral notice: Generally, oral notice is sufficient.

c. Secured party’s right to bid for collateral: The creditor may buy at a public (auction) sale. Bidding at a private sale is permitted only if the goods are of the type sold in a recognized market or are subject to a standard price quotation.

d. Application of proceeds: Proceeds of the sale pay the expenses of the sale, the debt owed to the selling secure party, and then to any other secured parties.

e. Surplus and deficiency: Any surplus or deficiency (except where the collateral was accounts or chattel paper) is the responsibility of the debtor .

i. Note: Most jurisdictions deny the right to recover the deficiency to a creditor who did not conduct a proper resale.

f. Rights of purchaser of collateral: The purchaser takes all the debtor’s rights and those of the secured party/seller.

3. Allowing Debtor to Retain Collateral an Suing on Debt: The secured party may allow the debtor to keep the collateral and sue on the debt. The secured party’s j/ment lien dates back to the perfection of the original security interest.

F. Debtor’s right of Redemption

1. In General: Prior to resale, the debtor may redeem the collateral by tendering the expenses of repossession and the total amount due the creditor.

2. No waiver prior to default: A debtor cannot waive the right of redemption prior to default.

G. Effect of Failure to Comply w/ Default Provisions

1. In General: If the secured part does not comply w/ the default provisions of the Code, the debtor may seek judicial direction as to disposition of the collateral, or may wait until the goods have been disposed of and proceed against the secured party for damages.

2. Standard for Reviewing Secured Party’s Conduct: Again, commercial reasonableness is the basic requirement. The following are deemed commercially reasonable:

a. Sale in the usual manner in any recognized market.

b. Sale at a price current in a recognized market.

c. Sale of the collateral in accordance w/ practices common among those who are dealers in the collateral.

Higher price obtainable: The fact that a higher price could have been obtained is not sufficient itself to establish that the disposition was commercially unreasonable.

3. Penalty for Secured Party’s Noncompliance: If the creditor fails to conduct a commercially reasonable resale, the courts may deny the creditor the right to a deficiency, shift to the creditor the burden of proving what amount a proper resale would have brought, or award the debtor damages.

4. Penalty where Collateral is Consumer Goods: In this case, damages include a punitive award of the finance charge plus 10% of the principal.

H. Nonwaivable rights under the security agreement

1. In General: Debtors may not waive the following rights in advance of default, although the parties may agree on standards for performance of these rights.

2. Accounting for Surplus: the parties may not dispense w/ the obligation to account for any surplus.

3. Notice requirements: the secured party must comply w/ notice requirements; these cannot be waived.

4. Discharge upon retention: the debtor is entitled to a discharge of the obligation if the creditor retains the collateral.

5. Right of redemption: The agreement may not eliminate the debtor’s right to redeem the collateral.

6. Liability for failure to comply: the secured party may not disclaim or lime liability for failing to comply w/ UCC default provisions.

7. Waiver of Rights by Guarantor: Most courts read UCC § 9-501 to invalidate pre-default waivers by guarantors of the right to notice and a commercially reasonable sale (b/c the definition of the term “debtor” under the Code seems to include guarantors).

I. Special Default rules for intangibles and fixtures

1. Intangibles: Where the collateral is accounts or chattel paper, the creditor may give notice to and collect directly from the account or chattel paper obligors.

2. Fixtures and Related Interests: A creditor w/ priority may remove the fixture or accession but must pay the parties other than the debtor for any damage caused to their interests by the removal.

J. Relations of default provisions to other state legislation: Art. 9’s provisions do not apply to the repossession of consumer goods if that subject is covered by special state legislation.

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