M - 6 - Secured Transactions

Question 1

What is a secured transaction?

Answer 1

This is when a loan is backed by collateral that is not real property. This collateral include things such as personal property which includes accounts receivable, stocks, bonds, etc.

Question 2

What is repossessing?

Answer 2

This is if the debtor defaults on the loan, then the creditor can take the property to fulfill the debtor’s obligations.

Question 3

Explain Step 1 which is attachment for the debtor and creditor?

Answer 3

The first step, is once security interest is attached (collateral), if the debtor defaults, then the creditor can take that property to fulfill the loan.

The only problem, is that if the debtor used this collateral on multiple different loans with different creditors, then this step does not protect the creditor in getting that collateral. Step 2 helps with this.

Question 4

Explain Step 2 which is “perfection” for the debtor and creditor?

Answer 4

This is where the creditor gains rights over third parties basically saying that the collateral is promised to me if the loan defaults. This is a notice that the creditor has security interest, and has superiority over other creditors when collecting the collateral.

Question 5

Are fixtures (personal property attached to real property) considered personal property?

Answer 5

Under Article 9 of the UCC, yes

Question 6

What is Purchase Money Security Interest (PMSI)?

Answer 6

This is when a creditor, such as a bank, gives you money specifically to buy some real or personal property. For example, a bank gives you money to buy a house, that house is collateral and if you don’t pay, you have to give the bank that house. Same with car, if you don’t pay your car payments, the car dealership will take the car.

Question 7

Who would have a favored position in obtianing the collateral? A PMSI creditor, or other third party creditors?

Answer 7

PMSI is favored. They gave you the money for that collateral, so they have more rights to collect on it if you don’t pay.

Question 8

What is collateral under UCC Article 9?

Answer 8

Goods - Things you can move and touch

Intangible and semi-intangible - Not for accounting purposes, but just things you cannot touch like AR

Investment Property - Stocks and Bonds

Proceeds - You get a stereo on credit, and then you trade if for a bike. The bike or the proceeds from the sale of the stereo can be used as collateral.

Question 9

What do goods include?

Answer 9

Consumer goods (personal use)

Inventory (for sale)

Equipment (for business use)

It depends on how the debtor is using the goods, for business, personal, or for sale.

Question 10

What are examples of intangible collateral accounts?

Answer 10

Any right to payment for goods, servcies, real property, credit card etc.

Question 11

What are examples of investment collateral accounts?

Answer 11

Stocks, bonds, mutual funds, etc.

Question 12

What are examples of proceeds collateral accounts?

Answer 12

Proceeds from sale or exchange of goods.

Question 13

What are the three requirements that need to be satisfied for an attachment to come into place.

Answer 13

Attachment is completed once all three requirements are satisfied:

Agreement - The creditor and debtor come to an agreement on the loan.

Creditor gives value - Basically creditor gives the debtor something of value, which is normally money.

Debtor has rights to collateral - Debtor has right to ownership of the property.

Question 14

Can an agreement be in writing? What is the downfall to this?

Answer 14

Yes, it can be in writing on oral? Can be document, text, email, etc.

It can also be oral, but a pledge has to occur. For example, if you give a loan and want some personal property as collateral, you have to keep the debtor’s personal property for the length of the loan and not give it back until paid. This is called a pledge.

Question 15

If the security agreement is in writing, does it have to be signed by both the debtor and creditor?

Answer 15

Just the debtor signature is needed.

Question 16

What is an “After Acquired Property Clause”?

Answer 16

The creditor always want’s their collateral to be at least the value of the loan or more than the value of the loan, never under.

So for example, if the creditor gives a loan and the debtor uses their inventory as collateral, the creditor knows the value of that inventory will probably go down in the future. This means the collateral will not cover the loan. They put this clause in the contract, that basically states, the inventory now and the inventory you acquire in the future, will serve as collateral.

Question 17

What are the duties of a secured party after attachment?

Answer 17

• If the loan is paid, send the debtor a termination statement when the debt is paid.
• Confirm with the debtor the unpaid amount left on the debt.
• If the agreement was oral, and you are holding their property. You have to treat that property with due car, and beat it up.

Question 18

Can the date of perfection be earlier than the date of attachment?

Answer 18

No

Question 19

What are the five methods of perfection?

Answer 19

Filing - You file some paperwork, saying that you have secured interest in the collateral letting all other third parties know.

Take possession of the collateral - If the agreement is oral, you just keep the collateral with you. Only tangible, not intangible. Or a pawn shop works the same way.

Control - This is the term used for stocks and bonds. For goods we use possess, for stocks and bonds we use control.

Automatic Perfection - This is if you are a PMSI, both attachment and perfection happen at the same time.

Temporary Perfection - When you sell the collateral, the PMSI would have temporary perfection, which is limited in time. Or if you bought a car in Nebraska, and moved to Rhode Island, the creditor has a certain amount of time they are on top of the list compared to other creditors.

Question 20

What if there were multiple perfected creditors, who would get the priority on the collateral?

Answer 20

The creditor with the earliest perfected date.

Question 21

For filing, what form needs to be filled out?

Answer 21

It’s called a financial statement, it’s just some type of writing. Debtor has to give the creditor express or implied authorization to file this statement. Needs name of both parties, addresses, type of collateral, and has to be authorized by the debtor.

If there was a signed security agreement, then it is implied the creditor can file this form.

Question 22

Can you file the form prior to making the loan? Why?

Answer 22

Yes, if there were multiple perfected creditor, the first to file or perfect wins. Improves your position in priority. Remember, you cannot perfect before the agreement.

Question 23

How can a creditor get perfection over a debtor’s stocks and bonds?

Answer 23

Getting perfection over stocks and bonds is called “control”. One way to do this, is by holding the stock certificate, but most brokerage statements do not offer these certificates anymore.

The other way is by informing the debtor to call their brokerage company, and tell them that this creditor wants to have the right to get the stock or bond if he defaults on the loan.

Question 24

What is the exception where automatic perfection does not occur if you are a PMSI?

Answer 24

This only applies to personal use goods and not business, or inventory. If it is business or inventory, then the creditor has to file.

Question 25

What are examples of temporary perfection and what is the timeline?

Answer 25

If the creditor perfected their security interest in some collateral, and the collateral was sold or traded. The perfection the creditor had, will only last for 20 days after the sale. You have 20 days to refile.

If you file paperwork for a loan in one state with collateral, and move to another state with that collateral, perfection in the first state is normally valid for four months and then you have to refile.

Question 26

What are the rights of secured creditors (remember, secured creditors are the ones that completed attachment)?

Answer 26

If the debtor defaults, the creditor has the right to take the property, sell it, and use the proceeds to satisfy the debtor’s portion of the loan.

Self Help - You can take the property without any court order or getting police involved. Only time you need the law is if the debtor is fighting you or breaching peace, then you have to go to court.

Question 27

After you get the property, do you have to sell it?

Answer 27

You can sell or even it lease it, or even keep it. It’s yours now.

Question 28

If you sell the property after collection, do you have to notify the debtor?

Answer 28

Yes, you have to notify the debtor and third parties. You can sell in a public, auction, or private sale.

Question 29

What is subordinate interest?

Answer 29

If a creditor sells property to satisfy debt, any creditors with lower priority interest on that property will have their interest wiped out. Any creditors with higher priority interest, their interest is still available.

Question 30

If the debtor manages to find some money, and they want to stop the sale of their collateral, can they if they pay the creditor?

Answer 30

As long as the sale has not happened yet, and you pay all of your creditors who have interest in that property, along with any auction costs, you can get the property back. But this has to occur before the sale. You have to pay off all the expenses incurred as well.

Question 31

Once you get the proceeds from the sale of collateral, in what order are the proceeds distributed?

Answer 31

First you pay any expenses - For example the repo guy to repo the property, and the auctioneers to sell the property.

Second - You pay the creditors that have higher interest on that property than you do. So if you foreclosed, but some other creditor had that property as collateral and had higher interest, you have to pay them first. Then whatever is left goes the to the creditor with the next higest interest.

Last - If there is anything left over, it goes to the debtor.

Question 32

What happens if you sell the collateral, and it does not cover the debt of the loan?

Answer 32

Then you have to go to court and get other collateral from the debtor to satisfy the loan.

Question 33

If the creditor decides to keep the property, what is the difference between transactions involving consumers and transactions not involving consumers?

Answer 33

If you got collateral via inventory of business goods, and you decide to keep the property, one of two things may happen. If you keep the property and the value is worth the same amount of the loan, you can satisfy the debt.

If you keep the property but it is not worth as much as the debt, then you can go to court to get more property.

If the debtor is a consumer, and you decide to keep the property, even if the property does not satisfy the loan, you cannot sue for more property since it was a consumer.

Question 34

If you decide to keep the collateral, who do you have not notify?

Answer 34

The debtor and the other creditors with secured interest.

Question 35

When can you not keep the collateral?

Answer 35

If consumer goods, and the consumer paid more than 60% of their debt, then you have to sell it, can’t keep it. Unless the consumer waved their right to do so.

Question 36

Can you go to the court instead of getting self help as the creditor getting the collateral?

Answer 36

Yes, you can go to the court right away.