A secured transaction is a transaction intended to create a security interest in personal property or fixtures. It involves a sale on credit or loan in which the seller or the lender obtains a lien on some or all of the debtor's property for payment.

Debtor: The person who owes payment or performance of the obligation secured

Secured Party: A lender, seller or other person whose favor there is a security interest.

Security agreement: The agreement between the debtor and the secured party that creates the security interest.

Security Interest: An interest in personal property or fixtures which secures payment or performance for an obligation.  It is a contingent property interest in the debtor's collateral that the debtor grants to the creditor. When the contigency, which is default, occurs, the property interest springs to life and the credtor has right's to the collateral.

Collateral: the property subject to a security interest. Collateral is property that the secured party can repossess upon default to insure that the debt is paid.

1. The secured party sells debtor collateral on credit and retains a security interest in the item sold.

2. An enabling loan, or a loan to a debtor that enables the debtor to buy specific  collateral, and the creditor takes a security interest in the specific collateral.

*The credit or loan proceeds must actually be used to acquire the collateral.

WHen the secured party wants to obtain a security interest not only in debtor's present property, but also in property that the debtor will obtain in the future.

1. General Rule: Without an explicit after-acquired property clause in the security agreement, the secured party's security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement.

A. Exception: Implied after-acquired clause will occur when collateral is of a type that is rapidly depleted and replenished (inventory or accounts).

B. Another exception: Security interest does not attach under after-acquired property clause to consumer goods unless the debtor acquires rights in them within 10 days after the secured party gives value.

C. Another one: An after-acquired clause is ineffective as to commercial torts claims

When a secured party contemplates making future loans to the debtor and wants to secure these future advances in the present security agreement. This has the effect of not needing a new security agreement.

Goods include all things which are movable at the time the security interest attaches, and includes the unborn young of animals and growing crops, and fixtures.

Consumer goods: Used or bought for use primarily for personal, family or household purposes

Equipment: Used or bought for use primarily in business (Catch-all category)

Farm Products: Crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states if they are in the possession of a debtor engaged in farming operations.

Inventory: Held by a person who holds them for sale or lease or to be furnished under service contracts; materials used or consumed in a business in a short period of time.

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Instruments: Negotiable instruments and any other writing which evidences a right to the payment of a monetary obligation, and which are in the ordinary course of business transferred by delivery with any necessary indorsement or assignment (Promissory notes, IOUs)

Documents: A document which in the regular course of business is treated as evidencing that the person in possession of it is entitled to receive, hold and dispose of the document and the goods it covers. (a receipt given to a farmer by a silo operator when farmer stored grain there).

Chattel Paper: A record or records which evidence both a monetary obligation and a security interest in or a lease of specific goods. It can be stored on a tangible medium or an electronic medium.

Investment property: Includes items such as stocks, bonds, mutual funds, and brokerage accounts.

Accounts:  A right to payment, not evidenced by an instrument or chattel paper, 1. for goods, 2. For services, 3. real property, 4. policy of insurance issued or to be issued, 5. for a secondary obligation incurred or to be incurred, 6. for energy provided or to be provided, 7. for the use or hire of a vessel, 8 . arising out of the use of a credit card, or 9. lottery winnings.  Health-care insurance receivables are included. A contractual obligation arising from a loan of money is not an account. (Accounts receivable, customer's obligations when things given on credit)

Deposit accounts: A account maintained with a bank (ONLY APPLIES to nonconsumer deposit accounts )

Commercial Tort Claims: A claim arising in tort with respect to which the claimant is an organization (partnership or corp), or where the claimant is an individual and the claim arose in the claimant's business or profession and does not include damages for personal injury or the death of an individual.

General intangibles: any personal property not coming within the scope of the other definitions (software, patent and trademark rights, copyrights, goodwill). (The catch-all category)

*1. Any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract

2. Agricultural liens

3. A sale of accounts, chattel paper, payment intangibles, or promissory notes (Unless sale is for collections or part of the sale of a business).

4. Consignments

*5. A secured sale disguised as a lease

A. At the time the parities entered the transaction, was it reasonably likely that the lessor would get the item back when it still had meaningful economic value?

1. At the end of lease, lessee becomes owner of machine for little or no consideration.

2. Lessee is bound to purchase the goods at end of lease or renew lease for remaining economic life of goods.

3. Lease is for the entire economic life of the leased goods.

Unless the collateral is in the possession or control of the secured party pursuant to an agreement (i.e. Pledge), a written or electronically stored security agreement is required in order to give the secured party a security interest in the collateral.

*Can occur in any order

1. Form of the security agreement when written.

A. Agreement must be evidenced by the record and must show an intent to create a SI.

B. Must be authenticated by the debtor. (i.e. signed).

C. Must contain a description of the collateral that can be reasonably identified (if timber or minerals, must describe land concerned). 

1. Terms cannot be supergeneric.

2. Secured party must have given value (very broadly construed and includes past consideration. Debtor always gives value, because at minimum they promise to pay).

3. Debtor must have rights to the collateral.

Occurs when a security interest is transferred into money (sold) and put into a bank. Problem is that cash proceeds are frequently commingled with cash non-proceeds such that it becomes impossible to determine which part of the cash proceeds.

1. If proceeds are identifiable (traceable), then secured party can reach the money.

2. If not, look at the balance in a commingled bank account starting at the time the proceeds are deposited and ending at the time the test is applied. The law deems that the lowest balance during that time period is the secured party's identifiable proceeds. (Cannot exceed the value of cash proceeds originally deposited).

Whatever is received upon the sale, exchange, collection of collateral. If collateral is insured or a claim arises and money is received from the insurance company on account of loss or damage to collateral, the money is a proceed of the collateral (up to collateral's value) unless it is payable to someone other than the debtor. 

1. Unless otherwise agreed, a security agreement automatically gives secured party a right to identifiable proceeds.

A secured party's security interest attaches to supporting obligations (i.e. Surety's)

Perfection of the Security Interest

Steps legally required to give a secured party an interest in the collateral that is effective as against the world. Giving public notice of the security interest to the world.

1. Automatic: a security interest is perfected when it has attached and when some additional step (possession or filing) is taken. However, if there is a PMSI in consumer goods, the SI is automatically perfected upon attachment.

2. Possession of Collateral by Secured Party:  perfects at moment of possession and only so long as possession is retained. CANNOT take possession of intangibles.

3. Control: Interests in investment property and electronic chattel paper may be perfected by control. Security interest in deposit accounts can ONLY be perfected by control.

a. Investment property: Control exists when party has taken whatever steps necessary to be able to have the investment property sold without further action from owner.

b. Deposit Accounts: Bank in which account is maintained automatically has control over deposit account. Otherwise, Secured party needs to put account in its name or agree with debtor and bank that bank will follow secured party's orders without owner's consent.

4. Notation of lien on Certificate of Title (ONLY way for Autos): UNLESS debtor (dealer) is holding auto as inventory.

5. Filing a Financing Statement (see other card for further detail).

The notice must indicate merely that a person may have a security interest in the collateral indicated.

1. Contents

A. Debtor's name: individual's name or corporate/partnership name (No trade names)

1. If a name error is seriously misleading (if a standard search under the correct name would not bring up the erroneous one), then it is ineffective.

2. However, not responsible for office filing errors.

3. a change in name that becomes seriously misleading must be amended within 4 months of change.

B. Description of collateral: supergeneric terms ok in financing statement.

1. For real-property related, must reasonably identify realty and indicate that it will be filed in the real property records.

C. Secured Party's name: error in name will not be seriously misleading, though may give rise to an estoppel.

D. Debtor must authorize the filing, which is automatic if debtor authenticates security agreement.

E. Authenticated security agreement itself may be filed, but must contain all elements discussed above.

General Rule: Secretary of the State, unless real-estate or fixture related, then in office where a mortgage on the real estate would be filed or recorded (usually real estate records of coutny where property is located)

Multiple State transactions: Where the debtor is located. If individual = Principle residence, registered organization = where organized, un-registered = place of business or Chief Executive office.

1. If debtor moves, then unperfected after 4 months unless it files a financing statement in the new jurisdiction.

2. If collateral is transferred to a new debtor, then 1 year.

Duration of Perfection

1. Five years from the date of filing, but can be extended by filing a continuation statement filed in the last 6 months of the five year life.

2. When no more outstanding obligations exist for either party, the secured party, upon receiving authenticated demand by debtor, must within 20 days provide debtor with termination statement. If consumer goods, then within one month after there is no obligation or within 20 days of demand. Failure to comply can result in $500 penalty and for any loss caused to debtor.

Automatic perfection in whatever proceeds the debtor receives in exchange for that collateral for 20 days. To remain perfected, the secured party must take new action to perfect unless:

1. Proceeds are identifiable cash proceeds OR

2. Security in original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral.

* If the debtor changes the use of the collateral, secured party still has a security interest in it.

First to file or perfect, whichever occurs first.  If neither party has perfected, First to attach.

*Remember that PMSI in consumer goods automatically perfects.

1. Special Rules

A. A PMSI in goods other than inventory or livestock has priority over conflicting SI in the same goods or its proceeds if the PMSI is perfected at the time the debtor received possession of the collateral or within 20 days.

B. A PMSI in inventory or livestock requires perfection at time debtor received possession and notice to other holders within 5 years before debtor receives possession.

C. PMSI v. PMSI: Seller PMSI has priority over lender PMSI.

D. Security interest perfected by control in investment property has priority over any other method.

E. Security interest perfected by control in deposit accounts has priority over any other method

Authorized sales: If the sale is authorized by the secured party, the buyer takes free of the security interest. Authorization may be express or implied from type of sale or from seller's conduct (i.e. inventory sales, acquiescence).

Unauthorized Sales: A buyer in the ordinary course of business (other than a person buying farm products) takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence.

A. A buyer in ordinary course means person who buys in good faith, without knowledge that the sale violates rights of another, and in the ordinary course from a person in the business of selling goods of that kind.

Buyer's not in ordinary course: Subject to perfected SI, but take free from unperfected SI unless they know of it.

Consumer to Consumer Sales: in the case of consumer goods, buyer takes free of a security interest even though it is perfected if he buys without knowledge of the SI, for value, and for his own personal, family, or household purposes, unless prior to the purchase the secured party has filed a financing statement covering such goods.

An unperfected SI is subordinate to a judgment lien holder. A perfected SI has priority over a judgment lien holder, which iis someone who has acquired a lien on the property involved by attachment (judgment) and levy, if it is perfected before the levy.

1. Special rule: PMSI v. Lien Creditor, PMSI gets priority if it files within 20 days after debtor receives possession over that of a lien creditor that arises between time the security interest attaches and the time of filing.

Statutory

The right of the secured party to proceed against collateral is normally triggered by default, which is usually defined under the security agreement, which is usually a failure to perform or pay the obligation when it's due.

After default the secured party is entitled to take possession of collateral without judicial process if this can be done without breach of the peace. When a secured party breaches the peace, he loses the authorization to repo, may be sued for converstion and other torts, and is liable for actual (sometime punitive) damages.

1. Breach of the peace: Any conduct by the secured party that has the potential to lead to violence. 

A. Presence by debtor and verbal objection is enough.

B. unauthorized entry into a home

C. Taken from garage depends on whether garage is attached or closed.

D. Commercial property is less likely to be a BOP unless debtor leaves property unprotected.

After default and repo, the secured party may propose retaining the collateral in full or partial satisfaction of the debt.

1. Must send proposal to any other secured party, and if notified party objects within 20 days after the notice was sent, collateral must be disposed of by sale.

2. Must also obtain debtor's consent by either agreeing in writing after default or  in the case of full strict foreclosure, failing to make an authenticated objection within 20 days after notice.

After default, secured party may sell, lease, license, or dispose of collateral in its condition when repoed or after reasonable preparation. Can be either public or private, and may be by one or more contracts. Sale discharges security interest under which the sale is being made and all subordinate security interest. Purchaser, however, is still subject to superior security interests.

1. Reasonable notification: must be given to the debtor and any sureties on the debt, and (except in the case of consumer goods) to any other secured parties, unless collateral is perishable or threatens to decline rapidly. Debtor, after default, may waive right to notice.

A. Must be sent within a reasonable time before sale. If a nonconsumer transaction, notice is deemed to be reasonable if 10 days before sale.

B. Public sale: time and place

C. Private sale: notice of time after which the sale will occur.

2. Sale must be commercially reasonable.

3. Secured party may buy at a public sale, but can only buy at a private sale if the collateral is of the type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations.

4. Ater sale, can seek any deficiency or give surplus.

5. Failure to comply results in a rebuttable presumption that the sale proceeds equal the amount of the debt.

Any time before secured party has resold collateral, the debtor may redeem. Usually, however, debtor must tender fullfilment of all obligations secured by the collateral due to acceleration clause.

goods that have become so related to particular real property that an interest in them arises under real property law (AC units, elevators, etc).

1. Perfection: Fixture filing made in office where mortgage on real estate would be filed. Must reasonably identify real estate and show name of owner.

A. Need not fixture file as to readily removable factory or office machines, equipment not primarily used or leased for the use in the operation of real estate, or replacements of domestic appliances which are consumer goods. Any method of perfection before goods become fixtures entitles secured party to priority.

2. Default: Secured party can repo on default.

3. Priority: SI in fixtures has priority over any real estate interest that arises subsequent to the perfection of the security interest by fixture filing. However, a real estate interest that is properly recorded has priority over a security interest that subsequently arises.

A. Exception: PMSI takes priority over an earlier in time realty interest if it is perfected by fixture filing before goods become fixtures or within 20 days.

1. Exception: Construction mortgages take priority over PMSI

Accessions are goods that are physically united with other goods in such a manner that the indentity of the original goods are not lost (tires on a car)

1. Perfection: If a security interest is perfected when the collateral becomes an accession, the SI remains perfected in collateral.

2. Priority: Rules of priority previously discussed, except that a security interest in an accession is subordinate to a security interest in the whole which is perfected by compliance with the requirements of a certificate of title statute.

3. Removal: Secured party may remove accession from other goods if it has priority over those with interest in the whole, but is responsible for cost of repair of any physical injury to the whole or other goods.