Secured Transactions

Question 1

Definition of Secured Transactions

Answer 1

An agreement between a debtor an a creditor that the debtor’s personal property will serve as collateral for a loan.

If debtor defaults, the creditor will gain rights to satisfy the debt.

Question 2

Definition Security Interest

Answer 2

An interest in personal property or fixtures that secures payment or performance of an obligation.

Question 3

Definition of a Security Agreement

Answer 3

A contract that creates a security interest.

Parties to a Security Agreement

Secured: A creditor who obtains a security interest in the debtor’s property.

Obligor: A party that must pay or perform the obligation that the collateral secures.

Debtor: Has an interest, other that the security interest, in the collateral (i.e. the owner).

*The obligor and debtor are usually the same person, but not necessarily.

Question 4

Article 9 of the UCC and Security Interests

Answer 4

Article 9 governs transactions, regardless of the form, that create a security interest in personal property of fixtures by contract.

• Secured Transactions must be consensual.
• Secured Transactions involve personal property or fixtures. NOT REAL ESTATE (so not mortgages).
  
  • “Regardless of Form” = Courts will look at the substance of the transaction and not the labels the parties use. [Even if contract does not use legal terms or language to create a secured transaction–but it functionally is one–then it is treated as a secured transaction.]

Question 5

Agricultural Liens

Answer 5

An interest in farm products that secures payment or performance of an obligation form:

• Goods and services furnished with respect to farming operations OR
• Rent on real property in connection with a farming operations.

Article 9 also includes these types of transactions and may be tested in secured transactions.

Question 6

Sales of Certain Rights to Payment

Answer 6

Some sales are treated as secured transactions. In these instances treat buyer as the secured party and the seller as the debtor. Sales of the following collateral are treated as secured transactions.

1. Chattel Paper
2. Promissory Notes
3. Accounts
4. Payment Intangibles

Question 7

What is Collateral?

Answer 7

Generally, it is property subject to a security interest.

Classifying the type of collateral will affect analysis.

Look at the principal use of collateral at the time of debtor.

Question 8

Collateral as Goods

Answer 8

Goods: Anything that is moveable at the time a security interest attaches.

ALSO INCLUDES

• Fixtures
• Standing Timber
• Unborn Animals
• Growing or Unharvested Crops
• Manufactured Homes

Four Sub-Categories

1. Consumer Goods (Goods acquired for primarily personal, family, or household purposes)
2. Farm Products (crops, livestock, supplies). FARMING EQUIPMENT is not included.
3. Inventory: Goods that are not farm products that are held for sale. (What is on the shelf in a store). Includes raw materials, or goods furnished in a service contract.
4. Equipment: Everything else is “equipment”.
5. Fixtures: Can be a good is they are attached to real property in such as way that an interest is created in them. [Something that a person is not expected to take with them if they move.]

Remember, the classification of the collateral can change

Question 9

Collateral as Right to Payment

Answer 9

The right to be repaid money by a third party that the debtor then uses as collateral for a loan.

Four Types

1. Chattel Paper
2. Instrument
3. Accounts
4. Payment Intangible

Question 10

Instrument as Right to Payment

Answer 10

Examples: Promissory notes, checks, and drafts governed under Article 3 of the UCC

Question 11

Chattel Paper as Right to Payment

Answer 11

A record (paper or electronic) with two components:

• A monetary obligation AND
• A security interest or a lease

[Someone owns someone else money and there is a security interest or lease. If landlord uses lease to secure a loan, for example.]

Question 12

Accounts as Right to Payment

Answer 12

An account is a right to payment of a monetary obligation for a property that is sold, leased, licensed, or for services rendered.

This is a very broad category.

Question 13

Payment Intangibles as Right of Payment

Answer 13

Catchall category. If not the other three, then it is a payment intangible.

Question 14

Documents as Collateral

Answer 14

Documents of title that generally give the holder of the title ownership rights in goods held by a bailee.

Question 15

Investment Property as Collateral

Answer 15

Certificated and Uncertificated securities, such as stocks and bonds.

Question 16

Deposit Accounts as Collateral

Answer 16

Bank accounts.

Question 17

Commercial Tort Claims as Collateral

Answer 17

Claims possessed by an organization or an individual that arose in the course of the organization or individual’s business. Do not include claims for personal injuries or death.

Question 18

Letter of Credit Rights as Collateral

Answer 18

A right to payment or performance under a letter of credit.

Question 19

General Intangibles as Collateral

Answer 19

Catch all classification. [Blueprints, trademarks, software.]

Question 20

Attachment

Answer 20

For a secured party to have a valid interest in collateral is must first attach.

In general, attachment is the arrangement linking a debt to a particular piece of collateral.

Once attached, security interest becomes enforceable.

Three Requirements for Attachment

1. Value: Typically given by secured party (loan)
2. Rights: Debtor must have rights in the collateral (some property interest in the collateral)
3. Security Agreement: There must be a security agreement meeting one of the following:
   
   1. There is an authenticated security agreement that describes the collateral OR
   2. The secured party has possession or control of the collateral pursuant to an oral or unauthenticated security agreement.

Question 21

Value in Attachment

Answer 21

Value can be given by providing the same consideration needed for a contract. [No new value is needed aside from consideration.]

A binding commitment to extend value in the future can be considered as “value”. [i.e. a line of credit]

May be used to secure future advances

Question 22

Rights in Attachment

Answer 22

A security interest only attaches to the rights the debtor has in the collateral (consider ownership: leasehold, joint tenancy, full ownership, etc.)

[Probably not going to be tested, usually given.]

If you don’t own something (thief, non-owner) then cannot grant a security interest.

Question 23

Security Agreement in Attachment

Answer 23

A security agreement is usually an authenticated record. (Piece of paper signed by the debtor). Security agreements are RAD:

• Record: A record is something that is stored in a way that is retrievable. Does not always need to be written on paper.
• Authenticated: Must be authenticated by debtor. (Signed, or email–sign off, etc.)
• Describe: The security agreement must describe the collateral. Has to reasonably identify the collateral.

Question 24

Security Agreement without Authenticated Record

Answer 24

Rule: If no authenticated record that describes the collateral, the secured party’s possession or control of the collateral pursuant to the security agreement can also be sufficient for the “security agreement” requirement of Attachment.

[Use it for collateral that is something that can be held. Or controlled–think bank accounts, electronic paperwork, etc.]

Rights and Duties of the Secured Party in Possession

• Secured party must act with reasonable care in respect to the collateral
• Must keep the collateral identifiable
• Must relinquish the collateral once obligation is satisfied
• May charge the debtor for reasonable expenses for storing and maintaining the collateral

Question 25

After-Acquired Property Clause

Answer 25

Rule: A security interest attaches to collateral available at the time the security agreement is entered into. Collateral generated after the this point in time is outside the scope of the security agreement.

However, if there is an “after-acquired property clause” in the agreement then it can extend to these instances.

Exception: An exception to the general rule (state law) are security agreements that describe inventory or accounts. The exception creates a presumption that security agreement extends beyond the collateral that existed at the time agreement was executed.

Question 26

Accession

Answer 26

Occurs when goods that are physically united with other goods but the original good is not “lost”.

[I have an interest in a stereo and that stereo gets installed in a car.]

Look to terms of security agreement to see if the interest attaches to the additional goods.

Question 27

Commingled Goods

Answer 27

Goods that are physically united with other goods and their identity is lost.

Security interest does not continue in original, but will attach to larger product or mass that results.

Question 28

Proceeds

Answer 28

Proceeds are whatever results when collateral is sold, leased, licensed, exchanged, or otherwise disposed of.

[Important topic]

Rule: If a security interest attaches to original collateral, it then attaches to the proceeds.

Question 29

Purchase Money Security Interest [Tested Hevily]

Answer 29

A PMSI is a special type of security interest subject to its own perfection and priority rules.

• A security interest qualifies as a PMSI only if the collateral goods or software

Two Elements:

• The value given allows the debtor to acquire the goods or software, AND
• the goods or software acquired secure the loan

[The loan allows the purchase of collateral, and collateral secures the loan.]

Question 30

Lender PMSI

Answer 30

The lender loans money to the debtor so that the debtor can acquire goods.

• The value provided must actually be used to acquire the goods.
• The lender takes a security interest in those same goods used to secure the loan

Question 31

Seller PMSI

Answer 31

Applies to goods bought on credit.