Secured Transactions Outline
I. INTRODUCTION......
A.What is Article 9?......
B.Pre-Code Security Devices......
1.Assignment of accounts......
2.Pledge......
3.Chattel mortgage......
4.Conditional sale......
5.Sale with right to repurchase......
6.Trust receipt......
7.Factor’s lien......
8.Field warehousing......
C.Pre-Code Problems......
II. SCOPE OF ARTICLE 9......
A.Importance of scope......
B.General scope provision......
1.Transaction......
2.Security interest......
3.Personal property......
4.By contract......
5.Regardless of form......
C.Other covered transactions......
1.Agricultural liens......
2.Sales of accounts, chattel paper, payment intangibles, and promissory notes......
3.Consignments......
4.Article 2 security interests......
D.Exclusions from A9......
1.Matters preempted by federal law......
2.Statutory liens......
3.Real estate interests......
4.Landlords’ liens......
5.Assignments of claims for wages......
6.Some sales of accounts......
7.Transfers of interests in insurance policies......
8.Assignments of rights under judgments......
9.Transfers of noncommercial tort claims......
10.Assignments of deposit accounts in consumer transactions......
III. CREATION OF A SECURITY INTEREST (ATTACHMENT)......
A.Attachment generally......
B.Categorizing collateral......
1.Goods......
2.Quasi-tangibles......
3.Intangible property......
C.Attachment of a security interest......
1.Signed writing (or possession by agreement)......
2.Value given......
3.Debtor has rights in collateral......
D.Timing of attachment......
E.Interpretation of security agreement......
F.Floating liens in consumer goods......
IV. PERFECTION OF A SECURITY INTEREST......
A.Perfection generally......
B.Methods of perfection......
1.Automatic perfection......
2.Filing......
3.Possession......
4.Certificate of title notation......
5.Control......
C.When filing required – Under § 9-310, creditors must file to perfect, unless:......
1.SI automatically perfects......
2.Creditor takes possession......
3.Creditor in control of collateral......
4.Collateral is certificate of title goods......
5.Collateral is proceeds......
6.Transaction is minor assignment of accounts......
D.Conflicts with other statutes......
E.Perfection by possession......
F.Goods in possession of bailee......
1.No document......
2.Negotiable document......
3.Non-negotiable document......
G.Temporary perfection......
1.Instruments and negotiable documents......
2.Goods in possession of bailee......
3.Instruments surrendered for presentation......
H.Automatic perfection......
1.PMSI in consumer goods......
2.SI in small portion of accounts......
3.Sale of promissory notes......
4.Supporting obligations......
I.Filling......
1.What constitutes filing......
2.Where to file......
3.What to file......
4.Timing and duration......
5.Spurious financing statements......
V. MULTISTATE TRANSACTIONS (CONFLICT OF LAWS)......
A.Conflicts of law......
B.What state’s law governs......
1.Perfection of non-possessory security interests......
2.Perfection of possessory security interests and effect of perfection and priority in tangible property
3.Certificate of title goods......
VI. PRIORITY & BANKRUPTCY......
A.Priority generally......
B.Unperfected creditor vs. prior lien creditor......
1.Examples of lien creditors:......
C.Perfected creditor vs. unperfected creditor......
D.Perfected creditor vs. perfected creditor......
1.Priority date......
2.Future advances......
E.Purchase money creditor vs. other secured parties......
1.Grace period......
2.PMSI in inventory, livestock, consigned goods......
3.Vendor vs. lender......
F.Creditor vs. buyer......
1.Creditor unperfected......
2.Creditor consents and releases......
3.Buyer in the ordinary course......
4.Garage sale exception......
G.A9 creditor vs. A2 creditor......
1.Rightful rejection or revocation......
2.Insolvency......
H.A9 creditor vs. statutory lien holder......
I.A9 creditor vs. real estate creditor......
J.Creditor vs. federal government......
K.Creditor vs. bankruptcy trustee......
1.Bankruptcy generally......
2.Tools of the trustee......
VII. PROCEEDS......
A.What are proceeds?......
B.Attachment of SI to proceeds......
1.“Identifiable” proceeds......
C.Transfers of cash or money in a bank account......
D.Perfection of SI in proceeds......
1.Perfect within 20 days......
2.Identifiable cash proceeds......
3.Filed for collateral and could have filed for proceeds category......
E.Priority......
VIII. DEFAULT & REMEDIES......
A.Effects of default......
1.A9 remedies......
2.Acceleration......
3.Interest rate increase......
4.Shift of control to creditor......
B.What is default?......
1.Nonpayment......
2.Breach of SA warranty or promise......
3.Death of debtor/central employee......
4.Insolvency......
5.Going out of business......
6.Change in control......
7.Fraud in loan application......
8.Collateral lost/stolen/destroyed......
9.Bankruptcy......
10.Property attached by other creditor......
11.Guarantor on loan in default......
12.Cross-default clause......
13.Financial covenant broken......
14.Loss of key employee......
15.Warning period......
16.Insecurity clause......
17.Demand clause......
C.Remedies on default......
1.Repossession......
2.Selling collateral......
3.Enforce debt......
D.Duties of creditor in possession......
E.Violation of creditor’s duties......
1.Liability for damages......
2.Loss of right to sue for deficiency......
3.Liability for conversion......
4.Liability for breach of SA or debt instrument......
F.Exculpatory clauses and debtor’s unwaivable rights......
1.Accounting for surplus proceeds of collateral, if any......
2.Disposition of collateral......
3.Acceptance of collateral as discharge of obligation......
4.Redemption of collateral......
5.Secured party’s liability for failure to comply with A9......
G.Redemption......
H.Strict foreclosure......
1.60% rule......
2.Partial satisfaction in consumer transaction......
- INTRODUCTION
- What is Article 9? – Article 9 (A9) of the Uniform Commercial Code (UCC), a model statute enacted in all 50 states, provides parties with a flexible set of tools to finance transactions via secured debt. Secured creditors (that is, creditors with collateral securing the debtor’s obligation) may repossess collateral upon default, rather than resorting to litigation (getting a judgment, identifying assets, and getting a writ on the assets so that the sheriff may seize them, as unsecured creditors must), and are entitled to the value of their collateral, even if the debtor goes into bankruptcy (unlike unsecured creditors, who get whatever is left after the secured creditors are paid, which is usually nothing). The benefit to the debtor is that a creditor with some security is more likely to lend, and may lend at a lower interest rate. Almost any type of transaction may be secured, with almost any type of personal property as collateral.
- Pre-Code Security Devices – Before the enactment of A9, lawyers secured transactions through various devices, but without any particular legal form:
- Assignment of accounts – A business, for example, might assign its accounts receivable (that is, its right to payment by customers) to secure a loan.
- Pledge – Creditor takes collateral into possession until debt paid; if debtor defaults, creditor sells collateral (like a pawn shop). The pledge was a common device, but not helpful if the debtor needed to retain possession of the collateral (e.g. inventory, equipment, vehicles).
- Chattel mortgage – Acts just like a real property mortgage, allowing the debtor to retain possession of the collateral.
- Conditional sale – Phrased as a sales contract, with the seller agreeing to deliver goods, the buyer agreeing to make payments, and the sale made conditional on payment. If the buyer fails to make payments, seller has right to repossession. Ownership of goods does not pass to buyer until goods fully paid for.
- Sale with right to repurchase – Parties agree that buyer will pay for the goods, but the seller has the right to repurchase the goods some time in the future for a higher amount. Buyer retains possession until such time as seller exercises right to repurchase. In effect, this is a loan to the seller, with the goods acting as collateral.
- Trust receipt – Trustee appointed, and ownership of collateral transferred to the trust. If the debtor pays on time, the trustee conveys ownership back to the debtor. If not, trustee transfers ownership to creditor or sells the collateral and gives the proceeds to the lender.
- Factor’s lien – a lien against property held on consignment by a factor conferring the right to retain possession of the property until payment of the amount due.
- Field warehousing – Debtor needs possession of collateral, so a portion of debtor’s property is set off and an agent watches over the collateral such that creditor can take possession if debtor fails to pay.
- Pre-Code Problems – There were several problems with the patchwork of devices parties used to effect transactions before A9. Foremost among these problems was the problem of the secret lien—that is, a situation where a party appears to have certain assets, but in unbeknownst to other potential lenders, a creditor has a lien on the assets. See Benedict v. Ratner (refusing to enforce assignment of accounts to creditor as collateral because fraudulent as to other creditors). Cases like Ratner lead to uncertainty as to the enforceability of various security devices. Uncertainty also existed as to how to conduct transactions, priority problems, bankruptcy, what noticed was required to other parties, rights on default, and protections for the debtor from creditor overreaching. The goal of A9 (and the UCC generally), was to bring uniformity, predictability, and simplicity to commercial law.
- SCOPE OF ARTICLE 9
- Importance of scope – The risk creditors face in misjudging the scope of A9 (or being totally unaware that A9 might apply) is that they might not comply with the requirements of A9 as to creation of an effective security interest, perfection of that security interest, or debtor’s rights on default. Thus, the unwary creditor might lose as against the debtor or as against later perfected creditors.
- General scope provision – § 9-109(a)(1) provides that A9 applies to any transaction that creates a security interest in personal property by contract, regardless of form. This definition is broken down below:
- Transaction – Two parties voluntarily doing business. This excludes wills, trusts, or other unilateral actions.
- Security interest – § 1-201 defines a security interest (SI) as “an interest in personal property or fixtures which secures payment or performance of an obligation.”
- Personal property – Excludes real property, which is not governed by A9.
- By contract – A9 does not apply to security interests arising by operation of law (i.e. under a statute or common law doctrine) rather than by the parties’ agreement. This is because existing law already governs these interests. Examples of security interests arising by operation of law are tax liens, judgment liens, or subrogation.
- Regardless of form – A9 applies regardless of the words the parties use to describe their transaction, as § 9-109 looks to the substance of the transaction rather than its form. Thus, parties cannot “opt out” of A9 by not referring to creditor, debtor, collateral, and other such terms in their agreement. This is because A9 ensures debtors certain protections, and notice to third parties. Thus, A9 may apply to such transactions as trusts, loans, bailments, licenses, and other transactions discussed in more detail below:
- Conditional sale – Retention of title by seller is a security interest.
- Sale with option to repurchase – Sale price is really a loan to the seller/debtor, with the transfer of title to the buyer/creditor (subject to the debtor’s right to repurchase upon paying off the loan) acting as a security interest.
- Lease – Some leases may be secured sales, rather than true leases. § 1-203 sets out factors to be considered in determining whether a transaction creates a lease or a security interest subject to A9:
- Terminability – If the “lessee” has the right to terminate, transaction looks more like a true lease. Conversely, the absence of a right to terminate makes a transaction look more like a secured sale.
- Term – If the term of the “lease” is the useful/economic life of the goods, it looks more like a secured sale.
- Option to buy for nominal price – If the “lessee” can buy the goods for a nominal price, this looks more like a secured sale. An option to purchase for the expected market value of the goods is not a nominal price.
- Payments vs. price – If the present value of the payments under the “lease” is greater than or equal to the purchase price of the goods, this looks more like a secured sale.
- Risk of loss – If the “lessee” does not assume the risk of loss of the goods, this indicates that the parties believe the “lessor” to be the owner of the goods, and thus makes the transaction look more like a true lease.
- Other covered transactions – § 9-109(a) also specifically includes other types of transactions with the scope of A9:
- Agricultural liens – In many jurisdictions, one who sells goods or services to a farmer gets a statutory lien on the farmer’s crops. Although these liens arise by operation of law, they were explicitly included within the scope of A9.
- Sales of accounts, chattel paper, payment intangibles, and promissory notes – The “secret lien” problem can arise even in an outright sale (rather than a transaction creating a security interest), so A9 applies to certain sales, so as to ensure that creditors receive notice, where appropriate.
- Consignments – Owner gives personal property to someone who will hold the property, try to sell it, and return it to the owner if he or she cannot. Again, the property here is not used as collateral, but such a situation might still deceive creditors who think the consignee is the owner, and lend to the consignee with the consigned property as collateral. For A9 purposes, § 9-102 defines a consignment as a delivery of goods to a merchantfor sale for $1000 or more per delivery, unless the merchant has a similar name (e.g. a sister corporation of the same name), is an auctioneer, or is generally known by its creditors to deal in the goods of others. The logic behind this definition and its carve-outs is that in some circumstances, creditors are effectively on notice, or the transaction is so small that A9 need not be followed.
- Article 2 security interests – Article 2 grants aggrieved parties in sales transactions very limited security interests in goods identified to the contract (discussed below).
- Exclusions from A9 – § 9-109 (c) and (d) exclude several categories of transactions from the scope of A9:
- Matters preempted by federal law – A9 does not apply to the extent that it is preempted by federal law. Philko Aviation (FAA recording requirements applied to sale of airplane). It is unclear whether federal law regulating intellectual property (federal patent, copyright, and trademark statutes govern recording of IP rights and dictate parties’ rights) preempts state law (A9) where IP is used as collateral. It is thus unclear whether a security interest in IP can be perfected by filing in either the state UCC office or the USPTO/Copyright Office alone, so creditors should file in both locations to be safe.
- Statutory liens – Liens created by statute are not governed by A9. Nevertheless, possessory liens created by statute inwhich the secured party added value to the goods have priority over prior security interests, unless the governing statute provides otherwise. § 9-333. So, for example, if a car dealer sells a car to buyer on credit, retaining a security interest in the car, and buyer then takes the car to a mechanic for work, the mechanic may have a mechanic’s lien on the car under a statute. If so, the mechanic has priority over the dealer.
- Real estate interests – A9 applies only to security interests in personal property. But A9 can apply to notes, mortgages themselves (which are personal property, see Prob. 273, p 788), and fixtures.
- Landlords’ liens – Note that landlords’ liens are created by operation of law, not simply security interests created by agreement that happen to belong to landlords. See Prob. 270 (p 787).
- Assignments of claims for wages – Note that an assignment of future commissions may be treated as an assignment of accounts subject to A9, rather than an assignment of wages. See Prob. 271 (p 787).
- Some sales of accounts – The general rule that sales of accounts are subject to A9 does not apply in several situations (see Prob. 272, p 788):
- Sales of accounts as part of sale of entire business (doesn’t harm creditors because no one being misled).
- Assignments of accounts for collection purposes only (doesn’t harm creditors because account replaced with money).
- Transfer of an account along with the contract the account is associated with/earned out of (e.g. painter commissioned to create work sells contract to third party, and assigns account receivable) (doesn’t deceive creditors because debtor no longer has contract).
- Assignments of single account to satisfy preexisting debt (doesn’t harm creditors who knew debtor had debt).
- Transfers of interests in insurance policies – Except where healthcare provider gets assignment of right to collect from insurer directly, eliminating the middleman (the policy holder).
- Assignments of rights under judgments
- Transfers of noncommercial tort claims
- Assignments of deposit accounts in consumer transactions – But if deposit account is a business account or consumer account used for business transaction, A9 applies. See Prob. 274 (p 789).
- CREATION OF A SECURITY INTEREST (ATTACHMENT)
- Attachment generally – Attachment is the creation of a security interest that will be effective as between the parties to the transaction. This is done via a security agreement. Note that the mere attachment of a SI will not necessarily protect the creditor as against other creditors, buyers, or a bankruptcy trustee (see materials regarding perfection and priority, below).
- Categorizing collateral – A9 applies to many types of transactions, and thus exhaustively classifies any and all types of collateral. A9 also has a number of specialized rules for different types of collateral (generally in perfecting a SI, not creating a SI). See Probs. 275-81 (p 792-800).
- Goods—Goods are tangible, movable things (at the time of the creation of the SI). Real estate, intangibles (e.g. IP, bank accounts), and software (except embedded in goods) are not goods. There are a number of subcategories of goods, based on debtor’s announced intended use:
- Consumer goods – Goods acquired for personal, family, or household use.
- Farm products – Crops, livestock, supplies, with respect to which debtor is engaged in a farming operation (see § 9-102 for definitions).
- Inventory – Goods held by business for sale or lease; raw materials or goods used up in operations.
- Equipment – Any goods that aren’t consumer goods, farm products, or inventory (catch-all goods category).
- Quasi-tangibles – Pieces of paper representing intangible rights. Subcategories:
- Instruments – Checks, promissory notes.
- Investment property – Stocks and bonds.
- Documents – Pieces of paper representing rights to get goods held by another for storage or transportation (e.g. bills of lading, warehouse receipts).
- Chattel paper – Pieces of paper representing (1) right to payment of money and (2) security interest in goods to back up that obligation. An example would be a loan agreement with goods as collateral—that agreement itself (the piece of paper) has value and can itself be used as collateral.
- Intangible property
- Accounts – Rights to payment for various things. A9 used to define accounts as right to payment for goods or services, but now § 9-102 provides a broader definition, including heath care insurance receivables, lottery winnings, and credit car receivables.
- Deposit accounts – Bank accounts (not “accounts”).
- Commercial tort claims
- General intangibles – Catch-all category including payment intangibles and software. Examples would be IP rights or rights to payment of money that are not “accounts.”
- Attachment of a security interest – In order for a creditor to have an effective security interest in any type of collateral under A9, the creditor must meet 3 one-size-fits-all requirements, pursuant to § 9-203:
- Signed writing (or possession by agreement) – The debtor must authenticate a security agreement (SA) containing a description of the collateral, OR the creditor must be in possession of the collateral by agreement (either of these options are good evidence that the debtor intended to convey an interest to creditor).