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I.
CREATION & CHARACTERISTICS
A.
Uniform means of obtaining security for payment of debts
1. Prior to UCC, many different types of security arrangements
2.
UCC provides simple, uniform rules
B.
Terms
● security interest
● debtor
● secured party
● security agreement
● collateral
● financing statement
● P urchase M oney S ecurity I nterest ● inventory
● equipment ● consumer goods
● attach[ment]
● default
● perfect[ion]
● value
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C.
Attachment
1.
Is when the security agreement becomes effective between the debtor and creditor, requires: a.
Either
(1) debtor has possession of collateral, OR
(2) written (authenticated) security agreement b.
Debtor has legal interest in collateral, and c.
Creditor gives “value” to debtor
2.
When the last of the three happens, security interest “attaches” to the collateral
NOTE: There is another definition of “attachment” in the same general field of law. A court can issue a writ of attachment that tells the sheriff to take possession of a debtor’s property for the purpose of selling it to pay off a judgment.
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3.
From the moment of attachment, the creditor and debtor have all of the rights and obligations provided in the security agreement.
4.
Collateral a.
Essentially anything that can be owned can be collateral
(1) Tangible personal property
(2) Intangible personal property, e.g.:
» Stocks & bonds
» Accounts receivable
» Negotiable instruments
» Patents, copyrights, royalty contracts
» Etc.
b.
Art. 9 does NOT apply to security interests in real property
5.
“Types” of collateral:
» Inventory
» Equipment
» Farm equipment
» Consumer goods
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D.
Perfection (UCC article 9 definition)
1.
The step necessary to make the security agreement effective with respect to third parties a.
A creditor’s “priority” generally depends on the date of perfection b. The action that results in perfection can happen before attachment
» Not effective until attachment
2.
The action necessary to perfect depends on the type of collateral a.
Possession by the creditor always works b.
Some items (bearer-type instruments) must be possessed
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3.
Most frequent perfection method = filing financing statement a.
Standard form used in all states b.
Must be authenticated by debtor c.
Must describe the collateral, can use “super generic terms” d. Intent = to provide notice that security interest exists e.
Details of collateral included, terms, etc., are in the security agreement
4.
Inconsistency in collateral description a.
Priority is determined by the description in financing statement (but not greater than in security agreement) b.
Specific collateral covered is determined by the description in the security agreement
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4.
Included in collateral a.
“Proceeds” from disposition of collateral (permitted or not) b.
“Products” of collateral
» Things made using collateral
» Things made by the collateral (wool, offspring, etc.)
5.
Debt/obligation secured by the collateral a.
Whatever the parties agree b.
Can be
» Prior debt
» Contemporaneous debt
» Future debt (“future advances”)
6.
Special rule for consumer credit purchases
» A consumer purchase money security interest is automatically perfected at attachment, nothing else needed
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E. Floating Liens
1.
The most frequent type of commercial financing for general operations (esp. if debtor has inventory)
2.
The parties’ agreement: a.
Creditor “gives” debtor a “line of credit” (with maximum) b.
Debtor grants a security interest in everything it owns c.
Agreement secures all funds lent by the creditor, presently and in the future (“future advances”) d.
Security interest attaches to all property now owned and interests later acquired by the debtor (“after-acquired property”) e.
Normally requires debtor to automatically deposit cash proceeds and assign sale/purchase contracts
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3.
The result a.
The debtor has a continuing source for financing operations b.
The creditor has a security interest in any collateral in which the debtor has a legal interest (“insurable interest” from Art. 2, Sales) c.
Purchasers from the debtor take free of the security interest d.
The creditor becomes very interested in the debtor’s operations
»
Creditor has legal interest in all income, production
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F.
Purchase Money Security Interests (PMSI) & Priority
1.
Created when the creditor provides credit that enables the debtor to purchase the collateral a.
Seller-financing (down payment + installment payments) b.
Straight loan specifically for particular purchase
» Creditor is not the seller
» Creditor usually makes the loan check out to both the debtor and the seller (may pay direct to seller)
2.
Purchase money security interests can have a “super priority” a.
PMSI for by consumer for consumer goods
» Automatic perfection (without any filing)
» Priority over any past security agreements that might otherwise attach
NOTE: These rules were made for consumer goods to cut administrative costs. A very significant number of consumer PMSI. The collateral usually has little resale value.
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b.
PMSI for “inventory”
(1) Must be perfected by filing BEFORE the debtor receives possession of the collateral
(2) If there are prior security interests perfected by filing, creditor must give notice to those creditors BEFORE debtor takes possession
(3) If everything done correctly, PMSI creditor has priority as to the collateral over previously perfected security interest
(4) Very important when the debtor’s primary assets are part of its inventory
» Manufacturers
» Wholesalers
» Retailers
(5) Makes it possible for a debtor to avoid total control by creditor with floating lien
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c.
PMSI in equipment
(1) PMSI creditor must perfect by filing before, or within
20 days after, debtor obtains possession of equipment collateral
(2) No special notice requirements
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II.
ENFORCEMENT
A.
PRIORITIES & ENFORCEMENT
1.
Priority between competing secured creditors a.
If both perfected, first to perfect b.
Perfected has priority over unperfected c.
If both unperfected, first to attach d.
If same attachment date, priority to earlier agreement
2.
See special rules re PMSI
3.
Priorities carry over to any proceeds from the debtor’s sale of collateral
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B.
Enforcement of Security Interests
1. “Default” gives creditor right to proceed against collateral a.
Not defined in UCC b. “Parties” can agree on what is default (meaning creditor usually decides) c. Common defaults – in addition to not paying when due
» Failure to maintain insurance coverage
»
Failure to maintain the collateral
» Selling the collateral (if not permitted in agreement)
» Granting any other security interest in the collateral
» Filing bankruptcy or taking other debt-relief actions
» Preventing creditor from inspecting collateral
» Not performing even minor duties under the agreement
» “Any other act or event that makes the creditor feel insecure.”
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2.
After default, creditor has option of:
» Repo through “self-help” or
» Filing suit to obtain court’s assistance
3.
Self-help: a.
Security agreement normally requires debtor to assemble and make collateral available for repo
» Usually a good idea to do that b.
Creditor (or agents) can take possession of collateral so long as there is no “breach of the peace”
»
No assault & battery, unlawful imprisonment, etc.
» Minor trespass is okay (car from driveway)
-- Not through fence, inside closed structure
4. Most states allow foreclosure through court proceedings a. Creditor does not necessarily give up secured position b.
Court officials seize and keep the collateral c. May limit options concerning disposition
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5.
Disposition of Collateral a.
Creditor can retain collateral in satisfaction of the debt
» Must give notice to debtor and other potential/real secured parties, lien holders
» If someone objects, must proceed with sale b.
Retention of collateral is not possible if collateral is consumer goods and purchaser has paid 60% of the original debt (even if debtor does not object) c.
Disposition must be in a “commercially reasonable” manner
(1) Public sale at recognized auction for that type of thing
(2) Private sale – especially if in the normal course of the creditor’s business
(3) So long as the sale is at something like FMV, debtor cannot successfully object
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6.
Disposition of sale proceeds a.
To costs and expenses of repo and sale b.
To the debt owed to the creditor c.
To debts owed to junior (lower priority) creditors (if they have made proper requests) d.
Remainder to the debtor
7.
Results of the process: a.
If the secured party does not receive full payment, it can obtain a judgment for the deficiency b.
Junior creditor’s rights in the collateral are extinguished c.
Debtor’s rights in the collateral are extinguished
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