UCC 9 Secured Transactions

Question 1

Governing Law: UCC 9

Answer 1

• Secured transactions are governed by Article 9 of the Uniform Commercial Code (UCC), which is codified in Florida Statutes.
• Article 9 applies to—

1. any transaction 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 2

Secured Transactions

Answer 2

• Secured transactions are those in which something of value belonging to the debtor is used to collateralize/secure payment of a debt to a lender.
• For a security interest to be enforceable, both attachment and perfection must occur.
• Perfection must take place in the state of the debtor’s principal place of business or residency (if an individual).
• Upon a debtor’s default, a secured creditor can repossess and sell collateral that secures the creditor’s interest.

Question 3

Attachment

Answer 3

A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, which requires

1. a properly executed security agreement;
2. the secured party must give value; and
3. the debtor must have rights in the collateral (may have rights or power without owning).

Question 4

Security Agreement Requirements

Answer 4

The security agreement must—

1. be in writing,
2. contain a “granting” clause granting the security interest,
3. contain a description of the collateral, and
4. be authenticated (signed) by the debtor.

Question 5

Perfection: Requirements

Answer 5

• Perfection requires the filing of a UCC-1 financing statement (unless there is an exception—e.g., interest in money is only perfected by possession; interest in bank account is only perfected through control) that gives notice to the public of the security interest, and which must contain—
  
  1. name of debtor;
  2. name of secured party or representative; and
  3. the collateral covered.
• A UCC-1 filing is valid for 5 years.
  
  • The lender must file a continuation statement within 6 months before the 5 year period lapses.

Question 6

Perfection: Priority

Answer 6

• The first to perfect a security interest has priority over subsequently acquired security interests, unless the after-secured interest is a PMSI.
• If the PMSI UCC- 1 is filed within 20 days of the date the debtor takes possession of the collateral, the PMSI has priority over any security interests perfected by previously filed UCC-1s (would have to relate to security agreements and UCC-1s that cover things such as “after-acquired property” or “all inventory of debtor”).

Question 7

Commingled Goods

Answer 7

When several goods are combined/commingled to make an entirely different and separately identifiable product, the end-result is a commingled good (e.g., wheat and other ingredients combined/commingled to make bread).

If a lender perfects a security interest in goods before they become commingled, the lender has a security interest in the commingled product.

Question 8

Unperfected Interests

Answer 8

• A perfected security interest has priority over an unperfected security interest.
• If two creditors each have unperfected security interests, the first to attach has priority.

Question 9

Fixture Filing

Answer 9

• Fixtures are tangible property that is so connected to real property that they become one with the real property.
• Fixtures must be—

1. attached to the real property;
2. adapted for use on the real property; and
3. intended to be permanently attached to the real property.

Question 10

Perfection: Fixtures

Answer 10

• In order to perfect a security interest in fixtures, the UCC-1 must be filed where the mortgage is recorded.
• A fixture filing will have priority over a subsequent real estate lien on fixtures.
• A fixture becomes covered by real property law once it is annexed to real property.

Question 11

Accession

Answer 11

An accession becomes identifiable as part of a larger good, and the security interest remains perfected in the accession (e.g., car part becomes part of car manufactured) and is enforceable.

Question 12

Purchase Money Security Interest (PMSI)

Answer 12

• A purchase money security interest (“PMSI”) is granted to the lender who provides the funds for purchase of goods, equipment, or inventory; and such interest has priority over any other secured creditors.
• A PMSI in inventory has priority over the first-in-time non-PMSI if—

1. the PMSI creditor perfects before the debtor takes possession, and
2. the PMSI creditor sends authenticated notification to the other creditor stating it expects to take a PMSI.

Question 13

Perfection: PMSI

Answer 13

• A PMSI perfection takes place at the time of filing or possession; however, there is a 20 day grace period to file the UCC-1.
  
  • If the UCC-1 is filed within 20 days of the debtor taking delivery of the collateral, the perfection relates back to the date of attachment.
    
    • Relation back is effective against—
      
      1. intervening buyers;
      2. lessees; and
      3. lien creditors.
    • Relation back is not effective against good faith purchasers (for value, in good faith, without knowledge of any lien).
• A PMSI in consumer goods does not need to be filed with the Secretary of State to be perfected; it is automatically perfected in goods that the debtor obtains within 10 days.

Question 14

Inventory

Answer 14

• Under the UCC, inventory is raw materials, work in progress, or materials used or consumed in the business.
• If the secured party has a security interest in inventory, there is also an interest in the raw materials.

Question 15

Perfection: Money

Answer 15

A security interest in money can only be perfected by possession.

Question 16

Perfection: Bank Account

Answer 16

A security interest in a bank account can only be perfected by control.

Question 17

After-Acquired Clause

Answer 17

• An after-acquired clause in a security agreement is valid and effective.
• However, it does not attach to consumer goods unless the goods are acquired within 10 days of the secured party giving value.

Question 18

Breach of Peace

Answer 18

Entry into someone’s home to repossess collateral is always a breach of the peace and is not permitted.

Question 19

Sale of Collateral

Answer 19

• A security interest remains attached when collateral is sold by the debtor.
  
  • However, under the garage sale exception, the security interest does not extend to the buyer if the buyer is without knowledge of the interest, unless the secured party filed a UCC-1 to cover the consumer goods.
  • A UCC-1 is ordinarily not filed for a PMSI in consumer goods; however, the sale of the collateral by the secured party to a good faith purchaser (for value, in good faith, without knowledge), discharges all security interests in the property.
• If collateral is sold to satisfy the secured claim, the proceeds from the sale are distributed—
  
  • first to pay the expenses of the sale;
  • second to pay the secured party’s claim;
  • third to pay any subordinate interests in the collateral; and
  • fourth, if any funds remain, to the debtor.

Question 20

Perfection: Automatic Permanent Perfection

Answer 20

Automatic permanent perfection of a security interest in a negotiable instrument occurs if new value is given after attachment.

Question 21

Secured Party Rights

Answer 21

The secured party has no more rights in the property than the debtor.

• For example, if goods are unshipped then they are not subject to the security interest of the bank when the goods are still in the seller’s possession and the buyer has not yet paid for them.

Question 22

Lease

Answer 22

• A lease is really a security interest when—

1. the debtor must make payments for the entire term,
2. the debtor cannot terminate the lease, and
3. the debtor owns the property at the end of the term.

• The creditor retaining title to the property does not automatically classify the transaction as a lease.

Question 23

Passage of Title from Seller to Buyer:

The Rights of Each

Answer 23

Under UCC-2, a reservation or retention of title by a seller to goods that have not yet been shipped or delivered to a buyer is a reservation of a security interest.

• If the goods remain unshipped to the buyer and the buyer has not paid the seller, the seller retains the rights to the goods.
• If the goods are shipped to the buyer but the buyer has not yet paid the seller for the goods, the seller has the same rights as those of any other secured creditor.