Secured Transactions

Question 1

What does UCC Article 9 apply to?

Answer 1

UCC Article 9 applies to secured transactions, which is a transaction intended to create a security interest in personal property or fixtures.

Question 2

What is collateral and what are the types?

Answer 2

Collateral is the property subject to a security interest. There are three types of collateral:

• (a) Goods (tangible),
• (b) Quasi-intangible property,
• (c) Intangible property.

Question 3

What are the types of tangible collateral (goods)?

Answer 3

“Goods” include all things which are movable at the time the security interest attaches (including unborn animals and growing crops). Goods also include fixtures. There are 4 types of goods. The category into which the good is placed depends on how the debtor is using the collateral.

• (1) Consumer goods are used or bought primarily for personal, family, or household purposes
• (2) Equipment is used or bought for use in business (default category for goods)
• (3) Farm products are supplies used or produced in farming operations, or products of crops or livestock in their manufactured state if in the possession of a debtor engaged in farming operations
• (4) Inventory are held for sale or lease and includes materials to be used or consumed in a business in a short period of time

Question 4

What are the types of intangible and quasi-intangible property?

Answer 4

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):

• (1) Instruments are pieces of paper representing the right to be paid money (promissory notes, checks, drafts, etc.)
• (2) Documents represent the right to receive goods
• (3) Chattel paper evidences both a monetary obligation and a security interest or lease of specific goods
• (4) Investment property includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items
• (5) Accounts are a right to payment for property sold or services rendered
• (6) Deposit accounts are accounts maintained with a bank
• (7) Commercial tort claims where the claimant is an organization or is an individual and the claim arose out of the business or profession and does not include damages for personal injury or death
• (8) General intangibles are anything not fitting within the scope of other definitions, such as trademark rights and copyrights

Question 5

What is the process of attachment?

Answer 5

Attachment is the process by which a security interest in favor of the creditor becomes effective against the debtor. (It is about rights to the property.) Attachment requires three steps:

• (1) Parties agree to create a security interest, as evidenced by
  
  • (a) Creditor taking possession or control of the collateral, or
  • (b) Debtor authenticates (signs) a written security agreement,
• (2) The creditor must give value for the security interest, and
• (3) The debtor must have some rights in the collateral

A written security agreement must be evidenced by a record and must show intent to create a security interest.

Question 6

What is the process of perfection and how does it differ from attachment? What are the ways to perfect?

Answer 6

Attachment establishes the secured party’s rights to the collateral as against the debtor. However, other parties may also have rights in the collateral (for example, subsequent purchasers, unsecured creditors, other priority creditors). To acquire maximum priority in the collateral over most such third parties, the secured party must “perfect.” There are 5 methods of perfection:

• (a) filing a financing statement
• (b) taking possession of the collateral
• (c) control over the collateral
• (d) automatic perfection
• (e) temporary perfection

Perfection cannot occur until attachment occurs.

Question 7

How does perfection by filing occur? What is required for the financing statement? Which types of collateral can obtain perfection by filing?

Answer 7

A secured party may obtain perfection by filing a financing statement with the Florida Secured Transaction Registry, which must contain:

• (1) the debtor’s name and mailing address,
• (2) the secured party’s name and mailing address, and
• (3) a description of the collateral covered by the financing statement.

A security interest may be perfected by filing as to all kinds of collateral except deposit accounts and money.

For a financing statement to be effective, the debtor must authorize the filing in any signed writing, before or after it is filed. Authentication of a security agreement will automatically authenticate the financing statement.

Question 8

What are proceeds? What happens to a security interest when the collateral is disposed of? What is done with cash proceeds commingled in a deposit account?

Answer 8

Proceeds are anything received upon sale, exchange, collection, or other disposition of the collateral or other proceeds.

A secured party’s security interest in collateral survives disposition (e.g., sale) of that collateral, and extends automatically to reasonably identifiable proceeds. The secured party may seek either the proceeds of the disposition (e.g., the money from the sale) or the collateral itself, but the secured party cannot get both.

In the case of commingled cash proceeds, the identifiable proceeds can be traced using the lowest intermediate balance rule. Under that rule, you will look at the bank account starting at the time the proceeds are deposited and ending at the time you are applying the rule. The lowest balance during that time period is the secured party’s identifiable proceeds (but the amount cannot exceed the value of the cash proceeds originally deposited).

Question 9

What is a purchase money security interest and how are they created?

Answer 9

A PMSI is a special type of security interest and can arise in two ways:

• (a) The secured party sells the goods to the debtor on credit and retains a security interest in the goods sold, or
• (b) The creditor loans 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. The PMSI secures whatever portion of the purchase price still has to be paid.

Question 10

What is the requirement for description of collateral in a security agreement?

Answer 10

The agreement must contain a description of the collateral. The description must reasonably identify the collateral. Collateral can be described broadly by category or type (for example, “all of the debtor’s equipment”) or specifically (for example, by serial number or by saying “the debtor’s television” if the debtor has only 1 television). However, consumer goods, consumer securities accounts, and commercial tort claims cannot be described by type alone; a more specific description is needed.

Supergeneric descriptions such as “all assets” or “all personal property” are not sufficient for a security agreement.

Question 11

What is an after-acquired property clause and how does it affect a security agreement? How does it affect consumer goods and commercial tort claims?

Answer 11

Without an explicit after-acquired property clause in the security agreement, the secured party’s security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement. If the security agreement has an explicit after-acquired property clause, the security interest will attach to new property as soon as the debtor acquires an interest in it.

Even without an after-acquired property clause, a security interest will attach automatically to collateral of a type that’s rapidly depleted and replenished, such as accounts and inventory. A security interest will also automatically attach to identifiable proceeds of collateral, even without an after-acquired property clause.

An after-acquired property clause does not apply to consumer goods unless the debtor acquires rights in the goods within 10 days after the creditor gives value. In addition, an after-acquired property clause does not apply to any commercial tort claims.

Question 12

What happens when there is a PMSI in consumer goods?

Answer 12

In certain situations, a security interest is automatically perfected upon attachment. The most common such situation is a PMSI in consumer goods. A PMSI in consumer goods is perfected as soon as it attaches.

Question 13

How are security interests in motor vehicles perfected?

Answer 13

Under the state’s certificate of title law, security interests in motor vehicles required to be titled can only be perfected by notation on the certificate of title issued by the state. Perfecting by another method won’t work.

Exception: Security interests created by dealers in vehicles held in inventory for sale or lease are perfected by filing a financing statement under the ordinary Code rules, even if a certificate of title covering the vehicle is outstanding.

Question 14

How does perfection by possession occur? What happens if a bailee has possession?

Answer 14

Security interests in most types of collateral can be perfected simply by taking possession of the collateral. Where the secured party takes actual possession of the collateral, the security interest is perfected from the moment of possession and continues as long as possession is retained.

If a bailee is in possession, the secured party is deemed in possession when the bailee authenticates a record acknowledging that it is holding the collateral for the secured party’s benefit.

Question 15

How does perfection by control occur? How is control gained in a deposit account?

Answer 15

Security interests in investment property, nonconsumer deposit accounts, and electronic chattel paper may be perfected by “control.” Note that security interests in nonconsumer deposit accounts can only be perfected by control unless they’re perfected as proceeds of collateral.

The bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account. If the secured party is not that bank, it may obtain control over the deposit account by either:

• (a) putting the deposit account in the secured party’s name, or
• (b) agreeing in an authenticated record with the debtor and the bank that the bank will comply with the secured party’s orders regarding the deposit account.

Question 16

What name of the debtor must be used on the financing statement? What happens if there is an error in the debtor’s name on the financing statement?

Answer 16

Financing statements are indexed under the debtor’s name. If the debtor is an individual with an unexpired driver’s license or identification card issued by the state of Florida, the debtor’s name on the financing statement must match the license or identification card. If the debtor is a registered organization, the debtor’s name must match its most recent public organic record (that is, the publicly available record that forms or organizes the organization). Note: Use of the debtor’s trade name is insufficient.

Minor errors in the debtor’s name do not invalidate the financing statement but seriously misleading errors will. An error is not seriously misleading if it would be discovered in the filing office search under the correct name. Errors made unilaterally by the filing office will not impact the effectiveness of a financing statement.

Question 17

What happens to a filed financing statement if the debtor changes their name after filing?

Answer 17

If the debtor changes their name and the name on the financing statement becomes seriously misleading, the financing statement is effective only against collateral acquired by the debtor before the name became insufficient and within 4 months after. For collateral acquired after the 4-month period, the secured party must refile using the debtor’s correct name.

Question 18

What is required for the description of collateral on the financing statement?

Answer 18

As with an authenticated security agreement, the description of collateral in a financing statement is sufficient if it reasonably identifies the collateral, which can be broadly by category or type (for example, “equipment”) or specifically (for example, by serial number). However, unlike the requirements for an authenticated security agreement, a financing statement may contain a supergeneric description of the collateral, such as “all assets.”

The financing statement need not mention after-acquired property to perfect a security interest in such property if the description in the financing statement is broad enough to cover the after-acquired property.

Financing statements covering real property (for example, fixtures) must contain a description of the property, the name of the record owner, and an indication that it is to be filed in the real property records.

Question 19

How long is a financing statement valid? What are continuation and termination statements?

Answer 19

A financing statement is valid for 5 years. A continuation statement may be filed, good for an additional 5 years. The continuation statement can only be filed within 6 months before the lapse of the filed statement. The authorization of the debtor is not required for a continuation statement; the secured party may authorize it.

Generally, a secured party is not obligated to terminate a financing statement. However, if there is no outstanding obligation of the debtor and no commitment on the part of the secured party to make further advances, or if the debtor didn’t authorize the filing of the initial financing statement, the secured party must, on demand of the debtor, within 20 days, file a termination statement or provide one to the debtor.

Question 20

How does temporary perfection occur and how can it be extended?

Answer 20

If a secured party has a perfected security interest in collateral, the secured party automatically has a perfected security interest in any proceeds of the collateral for 20 days after receipt of the proceeds. The security interest in proceeds will continue to be perfected beyond the 20 days if:

• (a) The proceeds are identifiable cash proceeds (the “cash proceeds” rule),
• (b) The security interest in the original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting the proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral (the “same office” rule), or
• (c) The security interest in the proceeds is perfected within the 20-day period

Question 21

What is the hierarchy of interests for secured parties in collateral?

Answer 21

The general hierarchy of interests in collateral is:

• (1) Buyers in the ordinary course, holders in due course, etc.
• (2) PMSI holders with superpriority
• (3) Perfected secured creditors (first to file or perfect) and lien creditors (first to perfect or attach lien)
• (4) Unperfected secured creditors (first to attach)
• (5) Debtor

Question 22

What is the PMSI “superpriority” and what type of collateral does it apply to? What happens if there is more than one PMSI in collateral?

Answer 22

PMSIs enjoy a superpriority—they’re superior to prior perfected security interests in the same collateral if certain conditions are met:

• A PMSI in consumer goods is automatically perfected,
• A PMSI in equipment can be perfected (usually by filing) any time within 20 days after the debtor gets possession of the collateral, and
• A PMSI in inventory must be perfected (usually by filing) by the time the debtor gets possession of the collateral—there is no 20-day grace period—and others with a previously filed security interest in the inventory must be given notice

If more than one party has a PMSI superpriority in collateral, the following rules apply:

• (1) Seller-financed PMSIs prevail over financer-financed PMSIs
• (2) Otherwise, the first secured party to file or perfect prevails

Question 23

What are the priority rules for conflicting security interests in deposit accounts?

Answer 23

A security interest in a deposit account that is perfected by control has priority over a conflicting security interest that is perfected by another method (namely, as proceeds of other collateral). If there are conflicting security interests that are perfected by control, they rank according to the time of obtaining control, subject to the following exceptions:

• (1) A secured party who has obtained control by putting the deposit account in the party’s name has priority over all other secured parties with control, and
• (2) A bank that has control because it maintains the deposit account has priority over all secured parties with control, other than the party who has obtained control by putting the account in their name.

Question 24

What happens if someone purchases something that has a security interest on it? What is a buyer in the ordinary course (BIOC)?

Answer 24

When a buyer (or lessee) buys or leases something with a security interest on it, the security interest stays on the item. There are a few exceptions to this rule:

• (1) If the sale is authorized by the secured party, the transferee takes free of the security interest. This may be express or implied.
• (2) A BIOC (good faith, without knowledge of violation of the secured party’s rights, in the ordinary course of the seller’s business) takes free of security interests created by the seller of the collateral (watch out for multiple sale issues).
• (3) Buyers not in the ordinary course take free of unperfected security interests, but are subject to perfected security interests.
• (4) In consumer-to-consumer sales of consumer goods (for example, garage sale) the buyer takes free of the security interest if they buy consumer goods, without knowledge of the interest, for value, and before the financing statement has been filed (must be consumer goods in hands of both buyer and seller).

Question 25

What is a default and what are a secured party’s rights when the debtor defaults?

Answer 25

The right of a secured party to proceed against collateral is triggered by default, which is defined by the security agreement. Generally, default means failure to pay.

After default, the secured party can take possession either by self-help (repossession without breach of peace) or through judicial process.

Question 26

What constitutes a breach of the peace during repossession? What is the effect of breach?

Answer 26

Secured parties are only entitled to repossess collateral without a breach of the peace, which is not precisely defined. Generally, any conduct with the potential to lead to violence constitutes a breach. Typically, this involves physical presence of the debtor plus a verbal objection by the debtor.

Breaking and entering into a private residence (even through an open entryway) is probably a breach of the peace. However, entry into a commercial property is less likely to constitute a breach.

Question 27

What are the alternative methods other than repossession that a secured party can take after default?

Answer 27

If self-help is unavailable, the secured party may seek to use the judicial process to get the goods.

Without removal, the secured party may also make equipment unusable and dispose of it on the debtor’s property if the secured party can do so without a breach of the peace. This right is directed toward the problem of taking possession of heavy, bulky equipment that is not easily movable (for example, a crane).

If the debtor defaults and the collateral is an account, the secured party can notify the person owing money to the debtor (that is, the account debtor) to make payment to the secured party, rather than to the debtor. Upon notification the account debtor must pay the secured party, rather than the debtor. Payment to the debtor will not discharge the obligation.

Question 28

What are the rules for valid resale of repossessed collateral? What is the effect of a resale?

Answer 28

After default, the secured party may sell, lease, license, or otherwise dispose of the collateral in its condition when repossessed or after reasonable preparation. The sale may be either public (auction) or private, and may be by one or more contracts. The sale discharges the security interest under which the sale is being made and all subordinate security interests. The purchaser, however, is still subject to superior security interests.

Every aspect of the sale (including the method, manner, time, place, and terms) must be commercially reasonable.

Secured parties are liable for any actual damages caused by failure to follow Code rules during resale. Generally, if the secured party fails to follow Code rules, there is a rebuttable presumption that the sale proceeds equal the amount of the debt. In other words, the secured party presumptively waives their right to a deficiency judgment (can be rebutted).

Question 29

What is a fixture? How is a security interest in fixtures perfected?

Answer 29

Fixtures are goods that have become so related to real property that an interest in them arises under real property law. In general, personal property attached to real estate with the intent that it become a permanent part of the real estate is a fixture (for example, central air conditioning, built-in appliances, elevators, etc.). The distinctive aspect of a fixture is that interests in it may arise under both the Code and under the law of real estate. Note: No security interest can exist in ordinary building materials (for example, bricks, lumber, shingles, etc.) that are incorporated into an improvement on land.

To perfect a security interest in fixtures, a fixture filing must be made in the office of the clerk of the circuit court. In addition to the usual requirements for a financing statement, a fixture filing financing statement must reasonably identify the real estate and must show the name of the owner (if the debtor does not have an interest of record in the real estate).

Question 30

What rights does a secured party of fixtures have on default?

Answer 30

When the security interest in the fixture has priority over all interests in the real property, the holder of the security interest in the fixture may, upon default, remove the fixture from the real property. If the debtor does not own the property from which the collateral is removed, the creditor must reimburse the owner of the property for the cost to repair damage to the property caused by removal, but not for any other diminution in value.

Question 31

What are the rights of creditors in fixtures against the rights of creditors in the real property where the fixture is attached?

Answer 31

By statute in Florida, a security interest in fixtures generally is not valid against someone with a conflicting interest in the real property unless (1) the security interest was perfected by fixture filing, and (2) the real property interest arose after either the goods were affixed or the security interest was perfected, whichever occurred later.

A prior real estate interest that is properly recorded has priority over a security interest that subsequently arises, except that a PMSI takes priority over an earlier in time realty interest if it is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter.

Question 32

What are accessions and what are the perfection and priority rules of accessions?

Answer 32

Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost (for example, tires on a car). If a security interest is perfected when the collateral becomes an accession, the security interest remains perfected in the collateral.

As a general rule, the rules for priority (for example, first to file or perfect, special PMSI rules) apply to accessions. A security interest in an accession is subordinate to a security interest in a whole (for example, a car) which is perfected by compliance with the requirements of a certificate-of-title statute.

If the secured party of the accession has priority over a secured party of the whole, the party may remove the accession from the property but is liable for the cost of repair of any physical injury caused by the removal.