SECURED TRANSACTIONS
THE NATURE OF TRANSACTIONS
Classification of Collateral: UCC 9 requires the secured creditor to classify the collateral based on the debtors’ intended, primary use at the time the security interest attaches.
• FARM PRODUCTS: Crops livestock, or supplies used or produced in farming operations; products of crops or livestock in their un-manufactured states if they are in the possession of a debtor engaged in raising, fattening, grazing or agriculture. (eggs, wool, berries on and off vine, milk, and gas for tractor. Wine, jelly or pasteurized milk is not considered farm products.
• INVENTORY: Goods held for sale or lease, raw materials, and supplies used up in a business, if not farm products.
• CONSUMER GOODS: Goods used primarily for personal, household, or family purposes.
• EQUIPMENT: Every other good. Durable goods used in a business or for farming.
ATTACHMENT – Did security interest attach?
Attachment creates an enforceable secured relationship between the creditor and the debtor. Attachment occurs when: (1) Secured party gives value, (2) Debtor has an interest in the collateral; and (3) Debtor either signs a Written Security Agreement identifying or describing the collateral OR ELSE gives possession of the collateral to Secured Party under an oral security agreement (a pledge).
Value: Is any consideration that would support a contract, including antecedent debt.
Adequate Description of Collateral: The description in the agreement must reasonably describe the collateral. For fixtures, the secured party must also reasonably identify the real estate on which the fixtures are located. *[The term “consumer goods” as description for collateral on Security Agreement is not specific enough for attachment to occur]
Effect of After Acquired Property or Future Advances Clause: A secured party can obtain a security interest in the debtor’s after acquired property only if the security agreement so provides. (It must also be included in the financing statement for perfection - see below).
Article 9 permits a debtor to grant a security interest in property to be acquired at a later time, except for consumer goods more than 10 days after the secured party give value.
Just say… UCC 9 validates after acquired property clauses.
When an interest attaches, the creditor becomes a secured party and has the right to repossess the collateral if the debtor defaults. In the absence of a signed written security agreement, the lender or seller’s interest never attached and therefore they are unsecured.
PMSI – Does lender or seller have a PMSI?
PMSI or Non-PMSI: A PMSI is created when the creditor provides funds (or a seller extends credit) to make the purchase of collateral possible; debtor grants a security interest in that collateral.
• Debtor must sign a security agreement in order for lender or seller to have a PMSI
• Lender’s loan must be intended for and actually used to purchase that particular collateral. (If problem says that bank perfected security interest in after acquired property, but does not say whether debtor actually used the borrowed funds to purchase the inventory it may not be a PMSI)
PMSI - Super-Priority: Under certain circumstances, a PMSI lender can achieve a “super-priority” upon proper perfection. (See below).
PERFECTION
1. If security interest has attached, has that interest been perfected?
2. Perfection makes the security interest enforceable against third parties and establishes priority.
3. Several methods of perfection exist and include automatic perfection, Perfection by Possession of Collateral, Motor vehicle Perfection and Perfection by Filing.
4. The method of perfection depends on the type of collateral, and always requires attachment..
Automatic Perfection
Consumer Goods: A PMSI for consumer goods is automatically perfected upon attachment and therefore has super-priority.
Non-PMSI
• Equipment, Inventory, Farm Products and General Intangibles: Requires central filing with the Department of Licensing.
• Timber, Gas and Minerals: Requires filing with the local County Auditor’s office AND central filing with the Department of Licensing.
PMSI - Super-Priority: Under certain circumstances, a PMSI lender can achieve a “super-priority” upon proper perfection.
• Consumer Goods: A PMSI for consumer goods is automatically perfected upon attachment and therefore has super-priority. (Exceptions: Certificate of Title, Fixtures.)
• Inventory: Before the debtor receives possession, the purchase money secured party must both 1) give notice to secured parties of record and 2) file. [This super priority defeats an earlier filed security interest in after-acquired property, or a floating lien. A purchase money lender who fails to satisfy these timing requirements will still be perfected upon filing but its priority will date from the time of filing, so it will be junior to the earlier lender.]
• Non-Inventory: To obtain super-priority in non-inventory, a properly perfected PMSI secured party must be perfected within 20 days of debtor receiving the collateral.
Perfection of Motor Vehicles
• A security interest in a non-inventory motor vehicle may be perfected only by endorsement on a certificate of title. If care is dealer’s inventory then financing statement must be filed.
Perfection by Possession of Collateral
• Usually if the creditor has possession of the collateral the security interest is perfected (Exceptions: Certificate of Title, Fixtures). Perfection of an instrument is by possession only. If have repossession at the end of fact pattern may be enough to perfect, but beware of other prior perfected interests.
Perfection by Filing
Requirements – Must be signed or authorized by debtor; give names and addresses of the secured party and debtor; and describe the collateral.
Filing / Financing Statement Considerations:
• *Signing – A debtor may either sign or authorize a financing statement. The debtor always authorizes the filing of a financing statement by signing a security agreement, therefore, if the debtor signs a security agreement, the creditor may file an unsigned financing statement, which will be fully effective so long as it contains the other information.
• Name Change - A financing statement that is correct when filed will remain effective if the debtor later changes her name, except for collateral she acquired more than 4 months after the name change.
• If debtor’s true name would be located using the filings search logic then financing statement is valid.
• *A financing statement that is filed only in debtor’s trade name is invalid.
• All financing statements should be filed with Dept. of licensing except fixtures. File those at local county auditor’s office.
• Like the security agreement, the financing statement must describe the collateral, either by item or type. In order for perfection to occur, the description in the financing statement must both match the description in the security agreement and match the actual collateral in question. Do not have to mention after acquired; F.S. sufficient if describe collateral as “all of debtor’s personal property.”
• If the debtor changes the use of the collateral, the financing statement will remain effective.
Fixtures - Fixtures are goods that are affixed to real property in a way that manifests an intention that the affixation be permanent. E.g. furnaces, boilers, elevators, doors, and other bldg. parts.
• Article 9 requires a secured party to file a financing statement as a “fixture filing” to perfect its security interest against buyers and mortgagees of the real estate.
• A valid fixture filing must contain a “legal” description of the realty to which the fixtures will be affixed and be filed with the county auditor’s office where the realty is located.
• If file a financing statement in the wrong place or fail to file it at all, the creditor or lender’s security interest is unperfected.
Post-perfection Events
• General rule: Security interest remains valid even if change in name, use of collateral or type of business.
• Financing Statements will lapse after 5 years unless a continuation statement is filed within 6 months before lapse.
PRIORITY
Generally, the first secured creditor to file OR perfect their security interest has priority. Absent perfection, the rule is first in time - first in right.
1. Unperfected v. Perfected - Between two unperfected security interests, the first to attach has priority.
2. Perfected v. Unperfected – A perfected security interest always beats out any unperfected security interest
3. Perfected v. Perfected – Between two perfected secured parties, the first to file or perfect wins if the second one does not have a PMSI. The other “junior” creditor will still have a perfected security interest in the collateral, but will not have priority.
4. Perfected v. Purchase Money Security Interest –
• Inventory: Before the debtor receives possession, the purchase money secured party must both 1) give notice to secured parties of record and 2) file. [This super priority defeats an earlier filed security interest in after-acquired property, or a floating lien. A purchase money lender who fails to satisfy these timing requirements will still be perfected upon filing but its priority will date from the time of filing, so it will be junior to the earlier lender.]
• Non-Inventory: To obtain super-priority in non-inventory, a properly perfected PMSI secured party must be perfected within 20 days of debtor receiving the collateral.
Priorities in Fixtures
A fixture filing will defeat subsequent buyers or mortgagees of the realty to which the collateral is fixed.
If it is a PMSI fixture filing within 20 days of affixation, it will even defeat prior mortgagees. If a secured party fails to file a fixture filing, she will lose in priority to real estate claimants, but if she perfects in any other way she will defeat any other claimants to the fixture.
BUYERS OF THE COLLATERAL
• Generally, Unless an exception applies, if the collateral is sold without the secured parties consent: 1) A buyer in good faith will take collateral free from an unperfected security interest in the collateral; and 2) A buyer in good faith will take collateral subject to a perfected security interest.
• Exception 1: PMSI Relation Back defeats Gap BFP
Seller delivers equipment to buyer taking back PMSI. Seller secured party files 18 days later – within 20 day grace period, but on 15th day a good faith purchaser, unaware of the security interest buys the equipment. Filing within grace period causes the perfection to relate back to the date the debtor received possession, so the secured party seller is perfected and the buyer is out of luck.
• Exception: A Buyer in the Ordinary Course: Takes free of a security interest created by his seller. To qualify as such, a buyer must prove he in good faith bought the goods in the ordinary course from someone in the business of selling that kind. *This does not apply to Buyers of Farm Products. Buyers in the ordinary course do not take free of security interests. Such a buyer can take free under federal law, if the buyer satisfies its requirements involving notice to the secured party. Just mention the federal statute.
• Exception: Consumer to Consumer Transactions: If goods are consumer goods in both buyer’s and seller’s hands, the buyer will take free of an unfilled (automatically perfected) security interest.
Proceeds: Generally, a secured party automatically has a secured interest in the identifiable proceeds of the collateral. Proceeds include whatever is received when the collateral is sold, exchanged, or otherwise disposed of.
• A security interest perfected by filing will remain perfected in cash proceeds for as long as they remain “identifiable.” They cease being identifiable when they become untraceable or the debtor spends them.
DEFAULT AND REMEDIES
Creditor Rights: When a debtor defaults in its obligations to the secured creditor, the creditor can seek a judicial foreclosure judgement or Repossess the collateral under the security agreement, provided there is no breach of the peace when repossessing. After repossession, the secured may:
(1) Sell the collateral and get a deficiency if applicable, so long as the sale was commercially reasonable and the debtor was notified of the sale; OR
(2) Keep the collateral in satisfaction of the debt so long as debtor was notified of proposal and did not object, or if consumer goods and over 60% paid, then the goods must be sold.
Debtor Rights:
• Prior to sale, a debtor has a right to redemption.
• If the creditor does not follow the above procedures, the creditor will be liable for damages caused by such and may loose the right to a deficiency.
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