Basic Terminology at Play

Question 1

What is a Secured Transaction?

Answer 1

A secured transaction is a transaction intended to create a security interest in personal property or fixtures.

• It generally involves a sale on credit or a loan in which the seller or the lender obtains a lien on some or all of the debtor’s property as security for payment.

To spot a secured transaction, look for:

1. Credit transaction (a sale on credit or a loan)
2. An agreement that creates a lien in favor of the creditor in the debtor’s personal property to secure the debt.

Question 2

Typical Secured Transaction Situation

Answer 2

Question 3

What is a Debtor?

Answer 3

The debtor is the person who owes payment or performance of the obligation secured

Question 4

What is a Secured Party?

Answer 4

The secured party (also called the “creditor”) is a lender, seller, or other person in whose favor there is a security interest

Question 5

What is a Security Agreement?

Answer 5

The security agreement is the agreement between the debtor and the secured party that creates the security interest.

Question 6

What is a Security Interest?

Answer 6

A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation.

It’s a contingent property interest in the debtor’s collateral that the debtor grants to the creditor. When that contingency (which is default) occurs, the property interest springs to life and the creditor has rights in the debtor’s collateral.

Question 7

What is Collateral?

Answer 7

Collateral is the property subject to a security interest. It is property that the secured party can repossess upon default to ensure that the debt is paid.

Question 8

What is a Purchase Money Security Interest (PMSI)?

Answer 8

A purchase money security interest (“PMSI”) is a special type of security interest in goods.

A PMSI can arise in two ways:

1. The secured party sells the goods to the debtor on credit and retains a security interest in the goods sold, or
2. The creditor loans the funds to the debtor to enable the debtor to buy specific collateral, those funds are used by the debtor to acquire the specific collateral, and the creditor takes a security interest in that collateral.

2a. — The PMSI secures whatever portion of the purchase price still has to be paid.

Question 9

What is an After-Acquired Property Clause?

Answer 9

A secured party often will want to obtain a security interest not only in debtor’s present property, but also in property that the debtor will obtain in the future. This is permissible. Security agreements typically contain an after-acquired property clause.

Question 10

What is a Future Advance Clause?

Answer 10

A secured party often contemplates making future loans to the debtor and wants to secure these future advances in the present security agreement. This is permissible. Security agreements typically contain a future advance clause, in which case a new security agreement is not needed when a future advance is made.

Question 11

What is Attachment?

Answer 11

Attachment deals with those steps legally required to give the secured party a security interest in the collateral that is effective as against the debtor.

• Once a security interest attaches, it is effective against the debtor and the creditor has all of the rights of a secured creditor under Article 9.
• A creditor is NOT a secured creditor until attachment.

Question 12

What is Perfection?

Answer 12

Perfection deals with those steps legally required to give the secured party an interest in the collateral that is effective as against the world. In general, perfection is the process of giving public notice of the security interest to the world.

Question 13

What is a Financing Statement?

Answer 13

A financing statement is the document generally used to provide public notice of the security interest, and so to perfect the security interest.

Question 14

What are the Two Main Types of Collateral?

Answer 14

1. Goods (Tangible Collateral): All things which are movable at the time the security interest attaches (including unborn animals and growing crops). Goods also includes fixtures.The category into which the good is placed depends on how the debtor is using the collateral.
2. Intangible or Semi-Intangible Collateral: There are eight types of intangible or semi-intangible collateral. The category into which intangible or semi-intangible collateral is placed depends on the nature of the collateral (rather than its use)

Question 15

What are the Main Categories of Goods (Tangible Collateral)?

Answer 15

1. Consumer Goods — Goods used or bought primarily for personal, family, or household purposes
2. Equipment — Goods that are used or bought for use in a business.
3. Farm Products — Crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states (such as ginned cotton, wool-clip, maple syrup, milk, and eggs) if they are in the possession of a debtor engaged in farming operations
4. Inventory — Goods held for sale or lease, goods that are to be furnished under service contracts, and materials used or consumed in a business in a short period of time

Question 16

What is the Default Category for Goods?

Answer 16

The default category for goods is Equipment. In other words, if the collateral is a good, and it doesn’t fit the definition of consumer goods, inventory, or farm products, it gets classified as equipment.

Question 17

What are the Main Categories of Intangible or Semi-Tangible Collateral?

Answer 17

1) Instruments — Pieces of paper representing the right to be paid money, like promissory notes, drafts (for example, checks), and certificates of deposit

2) Documents — A document that represents the right to receive goods (for example, a bill of lading, a warehouse receipt)

3) Chattel Paper — A record or records which evidence both (1) a monetary obligation, and (2) a security interest in or a lease of specific goods.

• A “record” is information that is stored in either a tangible medium (for example, written on paper), or an intangible medium (for example, electronically stored).
• Chattel paper that is stored in an electronic medium is also called “electronic chattel paper.”

4) Investment Property — Includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items

5) Accounts — Includes a right to payment (that is not evidenced by an instrument or chattel paper) for property sold or services rendered.

• NOTE: A contractual obligation arising from a loan of money is not an account (it is a general intangible)

6) Deposit accounts — An account maintained with a bank.

• NOTE: In general, Article 9 only applies to security interests in nonconsumer deposit accounts and account monies that are claimed as proceeds of other collateral.

7) Commercial Tort Claims — A tort claim where (1) the claimant is an organization (a partnership or corporation), or (2) the claimant is an individual, the claim arose out of the claimant’s business or profession, and the claim does not include damages for personal injury or the death of an individual (note that Article 9 also applies to noncommercial tort claims that are claimed as proceeds of other collateral)

8) General Intangibles — Any personal property not coming within the scope of the other definitions, such as patent and trademark rights, copyrights, and goodwill. A general intangible under which the account debtor’s principal obligation is a monetary obligation is a payment intangible.

Question 18

What Kinds of Transactions does Article 9 of the UCC Apply to?

Answer 18

A. A transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract

B. Seller’s Retention of Title — If a seller and buyer of goods agree that the seller will retain title to the goods after they are delivered until the buyer has paid for them, the agreement will be treated as the seller’s retention of a security interest

C. Agricultural Liens — Nonpossessory liens on farm products that are created by state statute in favor of persons providing goods, services, or rental land to farmers

• NOTE — Only the perfection and priority of agricultural liens are governed by Article 9; creation and enforcement of the liens are governed by state statutes)

D. Sales of accounts, chattel paper, payment intangibles, and promissory notes

E. Commercial consignments of goods (where the consignor did not use the goods for personal, family, or household purposes) worth a total of $1,000 or more to persons who:

1. Deal in goods of that kind under a name other than the consignor’s
2. Are not auctioneers
3. Are not generally known by their creditors to be substantially engaged in selling the goods of others

F. A secured sale disguised as a lease— Leases that are intended to serve as security arrangements (but not true leases); and a lease where the rental obligation is not terminable by the lessee and either:

1. The lease term is equal to or greater than the remaining economic life of the goods
2. The lessee is bound to purchase the goods at the end of the lease or to renew the lease for the remaining economic life of the goods, OR
3. At the end of the lease, the lessee has an option to purchase the goods or renew the lease for the remaining economic life of the goods for no or nominal consideration