Secured Transactions Outline - Secured Transactions (Article 9)

Secured Transactions Outline

FOR THE PURPOSES OF THIS OUTLINE THE DEFINITIONS AND ABBREVIATIONS ARE AS FOLLOWS:

“SI” security Interest

“SP” Secured Party

“GFPV” Good faith purchaser for value

Obligor- debtor the one who took out the debt (person who owes the obligation)

Obligee- creditor, who is owed the money (person to whom the obligation is owed)

“dunning” persistent attempt to collect a debt

“set off” both parties have debt to each other

“mature” it is due and owed

“mutual” owed in the same capacity

Bankruptcy

Chapter 7 Liquidation- individual and business

Trustee appointed to sell property, manage debt pay off

Chapter 11- Individual and Corporate Reorganization

Trustee appointed, plan of reorganization, court confirms plan, trustee sees plan out

Chapter 13- Individual Reorganization

Trustee appointed (sometimes), plan of reorganization presented, CREDITORS vote on plan, court approves plan, payments occur

What is credit?

Credit is a contractual agreement where a borrower or a buyer receives something of value (money or resources) and agrees to pay the Lender or Seller later.

A secured transactions is: (agreement)

An agreement where a buyers or borrower grants a security interest in property (collateral) to a seller or lender, to guarantee payment of an underlying obligation to be paid LATER

These promote borrowing and buying

It is backed by personal property to cover the obligation in event of default

Two types of secured credit:

1. A seller extends credit to a buyer to purchase property from the seller and pay the seller later, with the seller taking a security interest in the property sold

2. A lender extends credit to a borrower, loaning money to the borrower for a variety of reasons, with the borrower agreeing to pay the lender later and securing the promise of future payment with the borrower’s property.

What is unsecured credit?

Credit extended where no property is pledged by the obligor to cover the obligation until paid in full (credit card, medical services, student loans)

In personam relief- obligor can sue personally for payment

Three advantages to a secured transaction-

1. In Rem Relief- Obligee has personal property to satisfy the obligation

Relief against the THING, purchase car from Baker Motors, purchase car (car is the rem) personal obligation/ debt (personam) (Rem is against the thing, Personam against the personal obligation)

2. Collection of the obligation by obligee is easier- compared to an unsecured obligation and its complications

Think about dentist example and how long it took to get paid, (sheriff, resell, writ) (has to foreclose on the property, if property is in another jurisdiction have it transferred, LONG PROCESS TO GET PAID)

May immediately repossess collateral granted and sell it

3. Priority advantage for the obligee- who is the first in time to properly record the security interest INCLUDING notice, check to see if a security interest is in the property before claiming a new one

4. If security interest that consented and pledged collateral, exemptions DO NOT MATTER (so if the van was pledged as collateral, then it does NOT matter if it was 5,000 vehicle exemption, etc)

Attachment- how a lender can create enforceable security interest (3 steps to attach)

Perfection- put the rest of the world on notice of the security interest (2 steps to perfect)

Priority- who gets the personal property when there are multiple parties involved

Nine Step Classification- end goal, who has priority to piece of property

Who are the parties?

Debtor §9-102(a)(28)

Person who has an interest in the personal property or fixture that acts as collateral

Secured Party (the beneficiary) §9-102(a)(73)

Person in whose favor the security interest is created, a person who holds an agricultural lien, certain cosigners, certain lessors and a person who buys accounts, chattel paper, and promissory notes

Collateral §9-102(a)(12)

The property or fixture subject to the security interest and more

Obligor

Person who is responsible for the underlying OBLIGATION whether monetary or non-monetary (NOT ALWAYs the debtor)

Security interest §1-201(b)(35)

Generally, an interest in personal property or fixtures which secures payment of an obligation or performance of a service until the obligation is paid in full or the performance is completed

Step 1- Identify the personal property AT ISSUE

To know what personal property they have, you need to see it

Know who the debtor is, their interest in the property

How the debtor uses the property

Can be goods, intangibles or quasi-intangibles

1. Can the party pledge the interest?

2. To what extent do they own the property?

3. What is the value of the debtors interest in this property?

4. Will the value of the property cover the obligation of the loan over its life?

5. Should the secured party take several TYPES of property?

Step 2- Classify the personal property- from debtors perspective

Can classify as UCC Types or individual items

Need sufficient description of the collateral- types can be sufficient

“existing and after acquired”- includes all current and future

• Goods (moveable at the of identification to the contract) (good can transform types- dairy)

  • Inventory- stuff being sold, leased or used up in the business

  • Equipment- default category, rule all other goods out first, vehicles, tools, etc

  • farm products- goods in “farming operation” used to harvest or animals

  • consumer goods- household or family purposes

• Intangibles

  • Deposit Account- means a demand, time, savings, passbook, or similar, account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument.

  • Accounts (riskiest)-

  • Investment Property

    • Certified Security (electronic)

    • Uncertified Security

    • Commodity Account- means an account maintained by a commodity intermediary in which a commodity contract is carried for a commodity customer

    • Securities Account

  • General Intangibles- means any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.

    • Breach of Contract Claims

  • Letter of Credit Right- means a right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. The term does not include the right of a beneficiary to demand payment or performance under a letter of credit.

  • Commercial Tort Claims- means a claim arising In tort with respect to which:

1. The claimant is an organization; or

2. The claimant is an individual and the claim:

   1. Arose in the course of the claimant’s business or profession; and

   2. Does not include damages arising out of personal injury to or the death of an individual

• Quasi- Intangibles

  • Instruments- means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment. This term does not include (i) investment property, (ii) letters of credit, or (iii) writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card

  • Chattel Paper (least risky)

  • Document

  • Investment Property (certified security)

Security agreement: calls for a “reasonable description” of collateral

Step 3- Identify all possibly claimants with an interest in this personal property

Step 4- Scope (explain IF and HOW each transaction is within article 9)

-Creation and enforcement and priority of consensual liens on PERSONAL property

-You can create an enforceable security interest through contract, but the interest can also be created via the nature of the transaction when the deal is MORE like a secured transaction than other things

Other types of article 9 transactions:

1. Conditional sales contract

Can have a conditional clause in the Sales Agreement that allows seller to retain “title” in the good until obligation is paid in full- (not actually a title, they are basically taking a security interest)

The conditional clause allows the seller (SP) to reclaim the collateral in the event the Buyer (debtor) does not pay for the goods in full

STILL HAS TO PREFECT AND NOTICE the SI and follow all the other conditions of Article 9, just without the separate security agreement

2. Leases that are more like sales

A TRUE LEASE is governed by article 2A

A sale disguised as a LEASE where typically the lessor retains the title to the goods leased and can easily reclaim the goods if Lessee defaults on the lease

*If the consideration to be paid is for a term and the Lessee must still pay the obligation EVEN IF they return the property then if one of the following

1. The term of the lease is greater than the economic life of the goods OR

2. Lessee is bound to renew the lease for the rest of economic life of the goods OR is BOUND to purchase the goods OR

3. Lessee has the option to renew the lease for the economic life of the goods for little to no additional moolah

4. Lessee has option to buy the goods for little to no additional moolah

*If true and if one of a-d exist then the lease is more like a credit sale disguised as a lease with the lessor retaining title to good and a right to reclaim it

*Economic reality test- does not want goods back if...