Secured Transactions
· What is the purpose of Revised Article 9?
o 4 major goals to the revision:
§ (1): Simplicity
§ (2): Uniformity
§ (3): Stability
§ (4): Certainty
o Revised article 9 brings the 4 goals to secured transactions in PERSONAL property.
§ Everything that is not land.
· 3 steps to Article 9 Secured Transactions
o (1): Attachment
o (2): Perfection
o (3): Priority
· Secured transactions just make sense
o If you are not a secured party, it does not matter whether you were the first or the last lender, you lose to other secured parties…except
o Knox Court Exception
§ If the secured party acquiesces
§ If the third party was essential to the preservation of the collateral
· Cattle Case/ Cotton Case
o Cattle Case:
§ The third party workers fed and tended to the cattle.
§ The secured party encouraged the third party workers to continue working to preserve the collateral.
· Third party workers can take priority over the secured party for payment.
o Cotton Case
§ Third party workers harvested the crops but did not get paid.
§ Third party was essential to preserving the collateral and can thus jump ahead of the secured party.
§ § 1-103
· Equity will ‘supplement’ the law in certain instances where the Knox Exception would apply.
· Necessary Definitions (§ 9-102):
o Security Agreement (73):
§ An agreement that creates or provides for a security interest.
o Secured Party (72):
§ A party in whose favor a security interest is created or provided for under a security agreement.
§ A person that holds an Ag lien
§ Person to which accounts, chattel paper, payment intangibles or promissory notes have been sold.
o Collateral (12):
§ Property subject to the security interest
§ Includes proceeds
o Proceeds (64):
§ Whatever is acquired upon the sale, lease, license, exchange or other disposition of the collateral.
§ Rights arising out of the collateral
§ Claims arising out of the loss, nonconformity, interference with the use of, defects, infringements of rights or damages to collateral
§ Insurance payable by reason of the loss, nonconformity, defects, etc. to the collateral.
Attachment
· If you have a right to recover what has been given as collateral, that is a ‘Security Interest’
o When the debtor agrees to give back what was given upon repayment, the interest has ‘attached’.
o When does the security interest attach?
§ When the interest becomes enforceable.
· § 9-203
o The security interest is enforceable against the debtor only if:
§ (1): value has been given
· § 1-204 Value Defined
o (1): a binding commitment is value (a contract)
o (4): if a small monetary amount is given in advance, that is value.
§ (2): The debtor has rights in the collateral or the right to transfer rights.
· Basic property law:
o You cannot give interest in property you do not have a right in.
§ (3): The debtor has authenticated a security agreement that provides a description of the collateral.
· § 9-102(a)(69):
o Due to the international means of creating a security interest, the agreement does not have to be in tangible writing, it can also be electronically created.
§ It only need be “retrievable in perceivable form”
· These include:
o Magnetic media
o Optical discs
o Digital voice message systems
o Electronic mail
o Audio tapes
o Photographic media
§ The agreement does not have to be “signed”, only authenticated.
· Composite Document Rule:
o When there is not one document that alone satisfies the agreement and description requirements, several documents may be compiled to evidence the security agreement in the collateral.
o Parole Evidence Rule:
§ Can outside evidence be brought in to demonstrate the intent of the parties?
· If there is sufficient ambiguity in the note and no financing statement and/or security agreement exist then there is the possibility of bringing in outside documentation to evidence the intent of the parties.
· Bollinger Corp.
o The presence of the note and the financing statement together satisfy § 9-203(b)(3)(A).
· If the note refers to a ‘security agreement’ and there is no present agreement, it may show a lack of meeting of the minds and therefore show a lack of value given.
§ If the secured party takes possession of the collateral at the time of the creation of the security arrangement, then no signed documentation is needed.
· Collateral Report:
o The reporting by the debtor of the current status of the collateral being used to secure the consideration.
§ If the report is the only other document available, beside the note, the court MAY look at it, otherwise not a satisfactory tool to determine a secured interest.
· After Acquired Property § 9-204(a)
o When an interest attaches to the collateral it will usually also attach to after-acquired collateral.
§ Sufficient language to grant after-acquired collateral:
· “interest in all __ now existing or hereafter acquired”
· Exceptions:
o A secured party cannot take an interest, regardless of whether a clause exists for it, in
§ Consumer goods § 9-204(b)(1)
· Unless the consumer gains rights in them within 10 days after the secured party gives value.
o Ex: a bank cannot take a secured interest in a persons microwave as collateral…unless the person buys the microwave within 10 days after the bank has given value to the loan.
§ Commercial Tort Claims § 9-204(b)(2).
§ “After-Acquired” must be mentioned in the Security agreement – does not have to be mentioned in the financing statement, although it is good practice to include it.
§ Because inventory and accounts are revolving in nature, there is a presumption of an “after-acquired” agreement.
· The presumption is rebutted if there is language to the contrary in the security agreement or financing statement.
o Consumer goods CANNOT be used as after-acquired collateral…unless:
§ The goods are purchased and within 10 days of the purchase security is given in them.
· “Dragnet Clauses”
o Any indebtedness that the debtor may subsequently take out. (within the same institution)
§ If the debtor takes out further credit it is acceptable if the dragnet clause is included and specifically states that future obligations are also secured.
· Always make sure to include chattel paper with accounts in the event that the account converts into chattel paper.
· § 9-203(b)(3)(A):
o The security agreement must have a description of the collateral.
o § 9-108 Sufficiency of Description
§ (a): normally, a description of real or personal property is sufficient if it reasonably identifies what is described. It does not have to be specific.
§ (b): examples of ways to describe the collateral.
· (3): the most commonly used provision (description by type)
o The type must be one that is defined in § 9-102
§ (c): the use of super-generic terms do not constitute reasonable identification of the collateral.
· HOWEVER, you can use a super-generic description ONLY in the financing statement (§ 9-504) if the debtor has given permission to use a super-generic description (§ 9-509).
· § 9-203(f):
o Rights to Proceeds
§ The attachment of a security interest in collateral gives the secured party the right to proceeds.
· Proceeds (§ 9-102(64))
o Whatever is acquired upon the sale, lease, license, exchange, or other disposition of the collateral
o Rights arising out of the collateral.
o Claims arising out of the loss, deformation or interference of the use of the collateral or damage to the collateral.
o Insurance payable upon the loss, nonconformity or damage to the collateral.
§ A security agreement does not have to include “together with all proceeds” because you automatically get proceeds…
· So long as the proceeds are identifiable (§ 9-315(a)(2))
o Proceeds of proceeds…so long as they are identifiable.
· Types of Collateral
o “Goods” (tangibles)
§ 4 types of “goods”
· (1): Consumer Goods (§ 9-102(23))
o Any item purchased and whose primary use if for personal, family or household purposes.
· (2): Inventory (§ 9-102(48))
o NOT farm products
§ Even if the product would constitute inventory, if it is farm product it is NOT inventory.
o Items the seller holds out to be purchased or used by a consumer.
· (3): Farm Products (§ 9-102(34))
o The debtor has to be a farmer for this type to apply.
o NOT standing timber
o Crops (growing or to be grown), livestock (born or unborn).
§ products of crops or livestock in their unmanufactured form.
· (4): Equipment (§ 9-102(33))
o The “catch-all”
§ Everything that does not fall under the previous three.
§ The types of goods are mutually exclusive, if an item falls into one of the categories it CANNOT fall into another.
· The principle use of the good is determinative.
§ Certain classification can change over time:
· Ex. grapes into wine, corn in a silo
§ Software is included as a good so long as it is removable from the equipment it is attached to.
· Ex. on a floppy disk, pin drive etc.
· If the software is embedded in the machine, it is no longer a separate good is part of the good that it is embedded in.
o “Non-Goods” (intangibles)
§ Accounts (§ 9-102(2))
· The right to payment of a monetary obligation.
o What I was involved in at CED.
§ Chattel Paper (§ 9-102(11))
· Can be in either paper or electronic form.
· One or more records that when taken together evidence the indebtedness and what is owing.
o The note and the security agreement together make up chattel paper.
· An installment sales contract.
o An equipment lease is also chattel paper, if used by the holder to secure further indebtedness.
§ Commercial Tort Claim (§ 9-102(13))
· CANNOT be described as a “type”
· Must be specified in detail if used as collateral AND claim must already be in existence when security interest is acquired.
o No after-acquired tort claims.
· Must be a commercial tort claim, cannot be a personal/private tort claim.
§ DDA (Direct Deposit Accounts)(§ 9-102(29))
· Accounts you have at financial institutions (even the unholy credit unions!)
· Does not include investment accounts or IRA’s.
§ Document (§ 9-102(30))
· A very technical term.
· Bills of lading, warehouse receipts.
§ Instrument (§ 9-102(47))
· Items that can be negotiated that evidence a right of payment (check)
· Unless otherwise discovered, all instruments are tangible…not electronic.
o Ex. promissory note.
§ Investment Property (§ 9-102(49))
· A stock or stock entitlement
· Brokerage account
· A security, whether certified or uncertified.
§ General Intangibles (9-102(42))
· The “catch-all”.
· All intellectual property is a general intangible.
o How is collateral categorized?
§ What is the collateral in the eyes (or hands) of the debtor?
Perfection
· 5 methods of perfection:
o § 9-309 (Automatic Perfection)
o § 9-310 (Filing)
§ This section is the starting point for all perfection issues.
o § 9-311 (Compliance w/ other Statutes)
o § 9-313 (Possession)
o § 9-314 (Control)
· § 9-309:
o What collateral perfects upon attachment:
§ A PMSI in consumer goods.
§ Security interest arising in the delivery of a financial asset.
§ Security interest in investment property created by a broker or intermediary.
§ An assignment of accounts:
· As long as the number of accounts is small in proportion to the number of accounts held by the debtor.
· If the security interest is in all or a substantive amount of the debtor’s accounts, filing is required to perfect (§ 9-310).
§ Sale of a Promissory Note
· § 9-310:
o The starting point for perfection:
§ All exceptions stem form this section.
o In order to perfect a security interest a financing statement must be filed in the proper office (except for the exceptions)
§ Although not required in some cases it is still a good idea.
o Accounts can ONLY be perfected by filing.
· § 9-311:
o A filing of a financing statement is not necessary or effective to perfect a security interest in collateral that is subject to a statute, regulation or treaty of the U.S. government.
§ Ag liens, intellectual property.
· § 9-312:
o Perfection Rules generally.
§ (b)(1): a security interest in DDA can only be perfected by control.
· Filing is not even permitted.
· 3 ways to “take control” and be perfected in DDA:
o (1): the secured party is the bank with which the deposit account is maintained.
o (2): if the debtor, the secured party, and the bank have agreed in an authenticated record that the bank will comply with the instructions of the secured party in regards to the funds in the deposit account, w/o further consent from the debtor.
§ This is achieved through a control agreement.
o (3): the secured party is put on the account as an owner or joint owner.
§ Most banks are hesitant to open joint-business accounts, however.
· § 9-109(d)(13):
o In order for a DDA to apply to article 9 it must meet the “Consumer Test”
§ (1): was the indebtedness incurred for personal, family or household purposes?
§ (2): is the collateral itself (deposit account) maintained at the bank for personal, family or household purposes?
· Must fail BOTH prongs for Art. 9 NOT to apply.
§ (a): a security interest in Chattel Paper may be perfected by filing.
· Chattel Paper:
o Tangible:
§ § 9-313(a): a security interest may be perfected by taking possession.
· § 9-330(b): If a party uses the same chattel paper to secure 2 debts, the second secured party takes priority if:
o They take possession or their security interest was taken “in good faith”
· § 9-330(f):
o If chattel paper indicates that it has been assigned to an identified secured party, the purchaser of the chattel paper has knowledge and violates the right of the 1st secured party – takes in “bad faith”