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SECURED TRANSACTION: BAR CHECKLIST
GENERAL DEBTOR-CREDITOR RELATIONSHIPS
1) Creditor must get a lien by process of execution (judgment)
2) Exceptions
a) Statutory liens (construction liens and artisan’s liens)
b) Consensual Agreements (mortgages and Art. 9 Security Interests in Personal Property)
UCC ARTICLE 9
1) Attachment (Secured party’s rights in collateral as against the debtor)
a) Three Requirements
i) Value given (any debt)
ii) Debtor has rights in the collateral
iii) Security
agreement
created
b) Evidence of Security Agreement (Statute of Frauds)
i) Agreement and creditor has possession of the collateral (IF value has been given and debtor has rights, once
creditor possesses the collateral, he has attached and perfected)
ii) Agreement in an Authenticated Record (signed writing)
c)
Authenticated Record
i) Description of Collateral: Reasonably identifies the collateral (NO SUPERGENERIC DESCRIPTIONS such as
“all debtor’s assets/property)
ii) Language indicating that the collateral described is security for a debt (no magic words needed)
iii) Security interest attaches to after-acquired collateral by agreement (“all debtor’s existing and after-acquired
equipment)
iv) Security interest attaches to identifiable proceeds
v) Agreement can provide for future advances
d) General Rules
i) Debtor can transfer rights to the collateral (i.e., sell, grant another security interests, etc.)
ii) Typically, the security interest follows the collateral even if the debtor disposes of it unless Creditor
authorized the debtor to transfer free of the security interest
iii) Generally, the original secured party wins except as provided by the priority rule (see below)
2) Perfection (Secured party’s rights against 3d parties) (Attachment must be established before you can perfect)
a) Perfection by filing a financing statement in the office of the secretary of state
i)
What?
(1) Debtor’s name (minor errors OK; if debtor changes his name, it’s seriously misleading and you need to
file new FS)
(2) Secured party’s name
(3) Indication of the collateral (supergeneric OK)
ii) Where?
(1) Individuals: state of debtor’s principal residence
(2) Organizations
(a) Principal place of business
(b) If more than one, in the chief executive office
iii) Authorized by debtor in an authenticated record (if there’s a security agreement, it’s authorized)
b) Perfection by Possession of Collateral
i) Tangible goods
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ii) Chattel paper
iii) Negotiable instruments
c)
Perfection by Control (investment property, deposit accounts, electronic chattel paper, letters of credit)
d) Automatic Perfection
i) PMSI in consumer goods
ii) PMSI is (1) money lent to the debtor to buy the actual collateral or (2) seller financing
iii) Consumer goods: personal, family, or household use
e) Temporary
i) 20 days for proceeds
ii) Beyond 20 days
(1) “Same office” Rule (proceeds could be filed in the same office as original collateral)
(2) Identifiable cash proceeds
(3) Creditor perfects within the 20-day temporary period (filing, possession, etc.)
iii) Four months after debtor relocates if debtor’s location governs perfection
3) Priorities (More than one creditor has rights in the debtor’s collateral after debtor defaults)
a) General Rules
i) Between unperfected secured parties: first to attach
ii) Between perfected and unperfected: perfected secured party wins
iii) Between two perfected secured creditors: first to file or perfect
iv) Purchase Money Security Interests have superpriority
b) PMSI in Inventory wins IF:
i) Perfected when debtor gets possession of inventory and
ii) Notice to prior creditors
c)
PMSI in Equipment wins IF:
i) Perfected before or within 20 days after debtor gets possession of the equipment
d) Conflicting PMSI
i) If the PMSI is seller financing, seller wins
ii) Otherwise, first to file or perfect wins
e) Purchaser of Chattel Paper
i) Good faith purchaser of chattel paper takes priority over proceed interests in the chattel paper and any other
security interest in the chattel paper if purchased without knowledge of any violation of the secured party’s
rights
f)
Buyers
i)
Regular buyer takes free of a security interest if he gives value and receives delivery without knowledge of
the security interest and before perfection
ii) Buyer in the ordinary course of business take free even if perfected if
(1) Buyer buys in the ordinary course of his business
(2) Seller (debtor) is engaged in the business of selling goods of that kind
(3) Buyer has no knowledge that the sale violates the secured party’s rights (buyer can know about the
security agreement)
iii) Consumer to Consumer Sales (E.g., yard sales): Buyer takes free eve if perfected if:
(1) Buyer has no knowledge of the security interests
(2) Gives value
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(3) Goods are consumer goods
(4) Before secured party filed
g) Lien Creditors
i) General rule: lien creditors beat unsecured creditors
ii) Exceptions: Security interest beats lien creditor if
(1) Secured party is perfected before the lien attaches or
(2) Secured party files first and meets one of the attachment requirements (value given; agreement or debtor
has rights)
h)
Bankruptcy
i) Perfected secured creditors beat the trustee in bankruptcy
ii) Unperfected secured creditors lose to the trustee in bankruptcy
4) Rights on Default
a) Repossession
i) After default
ii) Cannot “breach the peace”
b) Sale of Collateral
i) Commercially reasonable
ii) Private or public
iii) Notice of the sale to debtor or surety (if applicable)
iv) Order of Distribution
(1) Expenses
(2) Secured debt is paid
(3) Junior liens and interests are paid
(4) If there is a surplus, debtor gets the balance
(5) If there is a deficiency, creditor can sue for deficiency
c)
Retaining the Collateral (Strict Foreclosure)
i) Proposed to the debtor
ii) Acceptance by the debtor or acquiescence
iii) Complete satisfaction:
(1) Fully satisfies the debt
(2) Not allowed for consumer goods where debtor has paid 60% of the secured debt
iv) Partial Satisfaction for Non-consumer goods
(1) Partial satisfaction of the debt
(2) Debtor is liable for the balance
(3) Not allowed for consumer goods
d) Debtor’s Right of Redemption
i) Any time before disposition
ii) Pay all obligations plus reasonable expenses
e) Failure to Comply with the Code
i) Creditor is liable for actual damages
ii) Court presumes that the value of the collateral is presumed equal to the amount of the debt
5) Surety/Accommodation Party
a) Surety (answers for the debt of another) is liable to the extent of the obligation he commits to pay
b) Special Rules
i) Surety can always recover from the primary debtor
ii) Surety is subrogated to any lien that the principal gave to the payee or secured party
iii) If the creditor has impaired the collateral, surety’s obligation is reduced
iv) Surety has the same rights under Art. 9 as the principal debtor