UCC 9 Secured Transactions

Question 1

What are the different categories of collateral and what are the subcategories of each?

Answer 1

Categories of Collateral:

Subcategories:

Goods

Consumer Goods

Inventory

Farm Products

Equipment

Tangible Intangibles

Instruments

Documents

Chattel Paper

Intangible Intangibles

Accounts

Commercial Tort Claims

General Intangibles

Investment Property

Certificated and Uncertificated Securities

Securities Accounts

Commodity Contracts

Question 2

What is a Security Interest?

Answer 2

A creditor’s interest in collateral is called a security interest. A security interest arises when a party (the debtor) uses certain property as collateral to secure repayment of funds to another party (the secured party).

Question 3

What is a Guarantor?

Answer 3

A guarantor (or surety) is a person who promises to pay the obligation of the debtor only if the debtor defaults. A surety is liable only to the extent of the terms of the surety agreement.

Question 4

When does Article 9 apply to a transaction?

Answer 4

Article 9 of the UCC is codified in South Carolina in Article 9 of Title 36 of the South Carolina Code.

UCC 9 applies to:

1. Any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
2. Agricultural liens;
3. Sales of accounts receivable, chattel paper, negotiable instruments, promissory notes, and payment intangibles;
4. Consignments; and
5. Certain lease-purchase agreements.

Question 5

What is a Consignment?

Answer 5

A consignment is a transaction in which:

1. a person delivers goods to a merchant
2. for the purpose of sale
3. the merchant deals in goods of that kind
4. the aggregate value of each delivery is $1,000 or more
5. the goods are not consumer goods immediately before delivery; and
6. the transaction does not create a security interest that secures an obligation.

EXAMPLE: A motor vehicle that its owner stored on a dealership lot while attempting to sell the vehicle was held to be a “consumer good,” as the owner had purchased it for his personal use, rather than a consignment item that the dealership’s financing company could attach. The court noted that UCC § 36-9-102(20)(C) specifically excludes goods that are “consumer goods immediately before delivery” from the definition of “consignment” [Mackela v. Bentley, 614 S.E.2d 648 (S.C. Ct. App. 2005)].

Question 6

When does Article 9 NOT apply to a transaction?

Answer 6

UCC 9 is not applicable to:

1. landlord’s liens;
2. a lien, other than an agricultural lien, given by statute or other rule of law for services or materials;
3. assignment of a claim for wages, salary, or other compensation of an employee;
4. a sale of accounts, chattel paper, payment intangibles, or promissory notes as part of a sale of the business out of which they arose;
5. assignment of accounts, chattel paper, payment intangibles, or promissory notes which is for the purpose of collection only;
6. assignment of a right to payment under a contract to an assignee that is also required to perform under the contract;
7. assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of a preexisting indebtedness;
8. a transfer of an interest in, or an assignment of, a claim under an insurance policy, other than with respect to a health insurance receivable owed to a provider;
9. assignment of a right represented by a judgment, other than one taken on a right to payment that was collateral;
10. a right of recoupment or set-off;
11. an interest in or lien on real property, including a lease or rents thereunder;
12. assignment of a claim arising in tort, other than a commercial tort claim;
13. assignment of a deposit account in a consumer transaction;
14. in South Carolina, a transfer by a government or governmental unit;
15. security interests governed by other state or foreign law; or
16. security interests to the extent preempted by federal law.

Question 7

What are Goods?

Answer 7

Goods include all things that are movable at the time the security interest attaches. This generally includes fixtures and computer programs embedded in goods, if the program is associated with the goods so that it is customarily considered part of the goods or is an owner of the goods has a right to use the program in connection with the goods.

Question 8

What are explicitly NOT included within the term “goods”?

Answer 8

The term goods does not include:

1. accounts
2. chattel paper
3. commercial tort claims
4. deposit accounts
5. documents
6. general intangibles
7. instruments
8. investment property
9. letter-of-credit rights
10. letters of credit
11. money
12. a computer program embedded in goods that consist solely of the medium in which the program is embedded, or
13. oil, gas, or other minerals before extraction.

Question 9

What are the four (4) categories of Goods?

Answer 9

1. Consumer Goods;
2. Inventory;
3. Farm Products; and,
4. Equipment.

Question 10

What are Consumer Goods?

Answer 10

Consumer Goods are those “used or bought for primarily personal, family, or household use.”

Question 11

What is Inventory?

Answer 11

Inventory are goods, other than farm products, that

1. Are leased by a person as lessor;
2. Are held for sale or lease or to be furnished under a contract of service;
3. Are furnished under a contract of services; or
4. Consist of raw materials, work in process, or materials used or consumed in business.

Question 12

What are Farm Products?

Answer 12

Farm products generally means “goods, other than standing timber, with respect to which the debtor is engaged in a farming operation,” including crops, livestock, products of crops or livestock in their unmanufactured state, aquatic goods produced in aquacultural operations, and supplies used or produced in a farming operation.

Question 13

What is Equipment?

Answer 13

Equipment is a catchall category, defined merely as goods “other than inventory, farm products, or consumer goods.”

Question 14

What are Fixtures and Accessions?

Answer 14

Fixtures are goods that become so related to particular real estate that an interest in those goods arises under real property law. A security interest in fixtures is generally subordinate to a conflicting interest in the related real estate by one other than the debtor. Ordinarily, building materials (e.g., nails or wood), when incorporated into an improvement on land, are regarded by the Code as inseparable from the structure itself.

Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost. A security interest may be created in an accession and continues in collateral which becomes an accession. If a security interest is perfected when the collateral become an accession, the security interest remains perfected.

Question 15

What are Commingled Goods?

Answer 15

Commingled Goods are goods that are physically united with other goods in such a way that their identity is lost in a product or mass. The term includes goods whose identity is lost through manufacturing or production (e.g., flour that has become part of baked goods) and through mere mixing with other goods from which they cannot be distinguished (e.g., ball bearings). A security interest does not exist in specific goods that have become commingled; however, a security interest may attach to a product or mass that results when goods become commingled. If a security interest in collateral is perfected before the collateral becomes commingled goods, the security interest that attaches to the commingled product or mass is perfected.

Question 16

What are Tangible Intangibles?

Answer 16

Certain intangibles, such as contractual obligations to hold or deliver goods or to pay money, and ownership in goods or business entities, are commonly reduced to tangible or written form. The intangibles are transferred by transferring the writing. Tangible Intangibles may be categorized as:

1. Instruments;
2. Documents; or
3. Chattel Paper.

Question 17

What are Instruments?

Answer 17

Instruments, as defined in UCC 9, means negotiable instruments, or any writing that evidences a right to payment of a monetary obligation, but is not itself a security agreement or lease.

Question 18

What are Documents?

Answer 18

Documents are documents of title, which include warehouse receipts or orders for the delivery of goods.

Question 19

What is Chattel Paper?

Answer 19

Chattel Paper means a record or records evidencing both a monetary obligation and a security interest in, or lease of, specific goods.

Question 20

What are Intangible Intangibles?

Answer 20

Many intangibles, such as monetary obligations or literary rights, while possible evidenced by writings, are treated as intangibles. The writings take on no commercial significance of their own, i.e., they are not indispensible. Such intangibles include:

1. Accounts;
2. Commercial Tort Claims; and
3. General Intangibles.

Question 21

What are Accounts?

Answer 21

Accounts are rights to “payment of a monetary obligation, whether or not earned by performance,” generally for property that have been transferred or otherwise disposed of, for services, or arising out of the use of a credit or charge card.

Question 22

What is a Commercial Tort Claim?

Answer 22

A commercial tort claim is a claim arising in tort where the π is an organization, or where the π is an individual by the claim arose in the course of the π’s business or profession and it does not include damages arising from personal injury or death.

Question 23

What is a General Intangible?

Answer 23

A general intangible is intangible collateral that fails to fit into any other category. It includes things (choses) in action, payment intangibles, and software. A payment intangible is a general intangible under which the account debtor’s principal obligation is a monetary obligation.

Question 24

What is Investment Property?

Answer 24

Investment property includes certificated and uncertificated securities, securities accounts, and entitlements, as defined in Article 8. It also includes commodity contracts and commodity accounts.

Question 25

What are Proceeds?

Answer 25

Collateral subject to a security interest may also be in the form of proceeds of the disposition of other collateral. There are two (2) kinds of proceeds: (1) Cash Proceeds (i.e., money, checks, deposit accounts and the like) and (2) Noncash Proceeds (all other proceeds). Proceeds include:

1. Whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral;
2. Whatever is collected on, or distributed on account of, collateral;
3. Rights arising out of collateral;
4. To the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference of rights in, or damage to, the collateral; or
5. To the extent of the value of the collateral and to the extent payable to the debtor or the secured party, insurance on the collateral.

Note -> A security interest in collateral automatically extends to identifiable proceeds of the collateral.

Question 26

How is a Security Interest created?

Answer 26

A security interest is created by a written security agreement or by the secured party’s taking possession, delivery, or control of the collateral with the intent to secure a debt, plus attachment of the security interest to the collateral.

Question 27

What is a security agreement?

Answer 27

A security agreement is an agreement that creates or provides for a security interest in certain collateral. The security interest must be (1) in writing and (2) contain a granting clause (i.e., state that it is creating a security interest. It must also contain (3) a description of the collateral and (4) be authenticated by the debtor.

Note → the granting clause need not be formal and can be in a different document.

Question 28

Is the creation of a Financing Statement sufficient to constitute the existence of a Security Agreement?

Answer 28

Cases have uniformly held that a financing statement (UCC-1) is not*** sufficient as a security agreement ***unless*** the financing statement itself, or some other writing, ***contains a “granting clause,” indicating that the debtor intends to give a security interest to the secured party.

Question 29

What qualifies as a sufficient description of the collateral for a security agreement?

Answer 29

A description of collateral is sufficient if it reasonably identifies what is described, whether or not the description is specific.

Question 30

What does it mean for a security agreement to be Authenticated by the Debtor?

Answer 30

Authentication means either signing a written document or (to include electronic transmissions) executing or otherwise adopting a symbol, or encrypting or similarly processing a record in whole or in part, with the present intent of the authenticating person to identify the person and adopt or accept the record.

Question 31

What is a financing statement?

Answer 31

A financing statement is the document that is filed to give notice of the security interest – to perfect the security interest.

Question 32

Is a written security agreement always required?

Answer 32

No. A written security agreement is necessary for the creation of a security interest UNLESS the secured party has possession of the collateral. Where the secured party has possession, all that is needed is an agreement, which can be oral, that the secured party is to have a security interest.

Additionally, the security agreement may be evidenced by control IF the collateral is deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights, and the secured party has control of the collateral.

Question 33

What is attachment?

Answer 33

Attachment is the process by which the security interest is created. A security interest is created by a contract between the debtor and the secured party. Once the security interest has attached, the secured party has all of the enforcement rights provided by Article 9, including the right to repossess the collateral upon the debtor’s default.

Question 34

So when does a security interest attach?

Answer 34

The security interest attaches when the following elements exist simultaneously:

1. The secured party gives value;
2. The debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and
3. The debtor has authenticated a security agreement that sufficiently describes the collateral.

Question 35

For attachment, what counts as a “sufficient description” of the collateral?

Answer 35

A description of collateral is sufficient if it reasonably identifies what is described; however, a description by type is not sufficient if the collateral is consumer goods and the transaction is a consumer transaction. A more specific description is required in this case.

Also, South Carolina requires that the collateral be described with specificity when the collateral is a commercial tort claim.

A super generic description (e.g., “all the debtor’s personal property”) is not sufficient in a security agreement.

Question 36

What is after-acquired collateral?

Answer 36

After-acquired collateral is collateral that the debtor acquires or comes into ownership of after the security agreement has been signed. The security agreement may specifically provide for an interest in after-acquired collateral.

Inventory and Accounts Receivable are unique and do not require a specific provision granting the secured party rights in after-acquired collateral. By their very nature, they are constantly being depleted and replenished. Therefore, a security agreement specifying an interest in inventory or accounts receivable will create an interest in after-acquired collateral, notwithstanding the fact that there is no explicit after-acquired property clause.

Consumer Goods Rule → A security agreement cannot provide that it covers after-acquired consumer goods, unless the debtor acquires rights in the consumer goods within ten (10) days of the secured party giving value.

Question 37

What is a Future Advance Clause in a security agreement?

Answer 37

A future advance clause generally indicates that the collateral secures future debt. A security agreement may provide that collateral secures future advances; for instance, a security agreement may secure all advances under a revolving credit agreement, such that no additional security agreement is needed to secure the future advances.

Question 38

What is a Purchase Money Security Interest (PMSI)?

Answer 38

A security interest in goods is a purchase money security interest (PMSI) if it pertains to goods that are purchase money collateral.

Purchase-money collateral means goods or software securing a purchase-money obligation that a debtor incurs to purchase the goods.

A debtor incurs a purchase-money obligation if the obligation is incurred:

1. As all or part of the price of the collateral (as when a seller finances the purchase); or
2. For value given to enable the debtor to acquire rights in, or the use of, the collateral, if the value is in fact so used (as when a third party, such as a bank, finances the purchase).

Question 39

A security interest in goods is a PMSI:

[3 requirements]

Answer 39

A security interest in goods is a PMSI:

1. to the extent the goods are given as collateral for an obligation the debtor incurred for the purchase of the goods and actually used to purchase the goods;
2. if the security interest is in inventory that is or was purchase-money collateral, also to the extent that the security interest secures a purchase-money obligation incurred with respect to other inventory in which the secured party holds or held a PMSI; and
3. also to the extent that the security interest secures a purchase-money obligation incurred with respect to software in which the secured party holds or held a PMSI.

Question 40

What is Perfection?

Answer 40

Perfection is the process by which the secured party gives notice to the entire world of its security interest. Perfection is necessary for priority purposes.

A security interest is perfected if it has attached and if all of the requirements for perfection have been met. If the requirements are met before attachment, then upon attachment, the security interest is perfected.

Question 41

What are the three (3) primary methods of perfection?

Answer 41

1. Filing;
2. Possession; and
3. Control.

Question 42

In order to perfect a security interest by filing, what must be filed and where?

Answer 42

Filing a financing statement in a public office is the most common way to perfect a security interest. Generally, filing can be done:

1. In the secretary of state’s office;
2. In limited circumstances, when the collateral consists of fixtures, in the office of the county clerk (land records) in the county where the land to which the collateral is attached is located; or
3. If the secured party is perfecting by filing a financing statement, the security interest is perfected only if the financing statement is filed in the correct office in the correct state.

Question 43

What types of collateral may not be perfected by filing?

Answer 43

Filing is not effective for the following types of collateral:

1. A deposit account, which may be perfected only by control;
2. A letter-of-credit right, which may be perfected only by control; and
3. Money, which may be perfected only by possession.

Question 44

Perfection by possession only applies to the following five (5) types of collateral:

Answer 44

1. Negotiable documents;
2. Goods;
3. Instruments;
4. Money; or
5. Tangible chattel paper.

Question 45

Perfection by possession is NOT permitted for the following five (5) listings of collateral:

Answer 45

1. Accounts / Deposit Accounts;
2. Commercial tort claims;
3. Investment property;
4. Letters of Credit / Letter-of-Credit Rights
5. Oil, gas, or other minerals before extraction.

Question 46

What is the standard of care required of a secured party in possession of collateral?

Answer 46

A secured party who has taken possession of collateral must use reasonable care in its custody and preservation.

Question 47

Perfection by control only applies to the following four (4) types of collateral:

Answer 47

1. Investment securities;
2. Letter-of-credit rights;
3. Deposit accounts; and
4. Electronic chattel paper.

Question 48

Is permanent perfection of a security interest ever automatic? If so, when?

Answer 48

If the security interest is a PMSI in Consumer Goods, perfection is automatic as soon as the security interest attaches and remains effective permanently (excluding motor vehicles and fixtures).

The secured party need neither file nor have possession to have a perfected PMSI in Consumer Goods.

EXCEPTION: Automatic Perfection of a PMSI in Consumer Goods DOES NOT APPLY to property subject to a certificate of title statute (other than inventory) or fixtures, even if they are consumer goods.

Question 49

Is it possible for a security interest to be automatically perfected temporarily? If so, what are the rules?

Answer 49

A security interest attaches to any identifiable proceeds of collateral upon disposition of the collateral. A perfected security interest in proceeds is provided by the Code automatically when the security interest in the original collateral is perfected, unless the security agreement specifically provides that proceeds are not covered.

This automatic perfection for proceeds continues for only twenty (20) days after attachment (i.e., receipt of the proceeds by the debtor) UNLESS:

1. A filed financing statement covers the original collateral, the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed, and the proceeds are not acquired with cash proceeds;
2. The proceeds are identifiable cash proceeds; or
3. The security interest in proceeds is otherwise perfected when the security interest attaches to the proceeds or within twenty (20) days thereafter.