UCC Article 9 – Secured Transactions

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Uniform Commercial Code

UCC Article 9

Secured Transactions – debtor owes, then secures item to turn around and sell to make themselves whole

Security interest to secure payment or performance of obligation

Collateral – agreement in writing, reasonable description

4 Classes of Goods

  1. Consumer Goods
  2. Inventory
  3. Farm Products
  4. Equipment – something business would use

Creditor loans money and in return gets secured interest (collateral).

Accounts and Chattel Paper

Secure it! UCC 1!! File it! Get it on record.

Attachment

Attachment! Secured! – actually attaches to collateral, makes it binding

THREE STEPS

  • Value has to be given
  • Debtor must put up collateral
  • Parties enter into binding secured agreement

Points to know:

  • Property owned by the debtor
  • Interest is created (take possession of goods or signed security agreement (description of asset signed by the collateral- credit card, Purchase Money Security Interest (PMSI), company can possess goods
  • Have to give value to the debtor – a promise is NOT good enough

If no longer has asset, you can still attach, can attach to after acquired property if in the agreement.

Attachment gives rights to protect themselves

Perfection

Different ways to perfect, filing, automatic, possession, control

  • FILING – Financing Statement
  • AUTOMATIC – Consumer Goods only

Notice to third parties that a security interest exists – one of the three

  • Financing Statement – description, signature and address of the debtor, must be done for accounts, lasts for 5 years, file within 6 months.
  • Automatic perfection – PMSI in consumer goods, auto without having to file, as long as Purchase Money to buy asset – however loophole, consumer to consumer, because free of automatic perfection, but file financing statement within 20 days of attachment
  • Take Possession – satisfies perfection and attachment – i.e. pawn broker

Multiple creditors, usually real property, recording acts and mortgage

  • Buyer defaults, who gets paid first? whoever attached AND perfected
  • Rule is first to file or first to perfect has priority if silent then first to attach
  • Buyer in Ordinary Course of Business – free and clear of secured interest, thus consumer to consumer gets free of security
  • Default – what happens?
  • Rights of secured parties
  • Attach – PIG
  • Perfection – FAT
  • 4 months when secured interest moves to a new state to perfect

Inventory Rule – you get free of prior interest

  • Manufacturer- wholesaler – retailer – retailer – then consumer
  • Inventory – then Consumer Goods, Equipment
  • Whatever it is to the person buying it, free of the prior perfected interest.
  • INVENTORY- what it is to the seller selling it. The person buying it as inventory cannot take it back.
  • As long as paid cash then it is consumer goods yes and equipment
  • Automatic perfection only in PSMI to consumer goods
  • 20 day windows with consumer and equipment
  • CANNOT take back if Inventory
  • CONSUMER GOODS- PMSI – Auto perfect but 20 day window for equipment and consumer goods, no window with Inventory
  • Buyers claim is superior to all other claims, even if purchaser is aware
  • Filing is debtors location not where collateral is

PRIORITY

  • Inventory rule – buyer in the ordinary course of business
  • Hold of statutory lien P
  • PMSI when attached and perfected
  • Other perfections by filing, other perfected interests or judicial liens
  • And if no one perfects then the order of attachment

RESPONSIBILITIES OF CREDITOR

  • Reasonable care to preserve any collateral in possession
  • Confirm unpaid balance
  • File or send termination letter upon full payment

Fixtures

A fixture lender should act to perfect its security interest within 20 days of the goods being installed.

Perfection of fixtures is accomplished by filing a UCC-1 in the records office where the relevant property is located.

This provides notice to potential purchasers and mortgagees that this lien exists.

This satisfied the criteria putting the fixture lender in first place in terms of getting paid at the time of sale or foreclosure of the underlying  property.

This is a special priority because it enables a perfected fixture lender to jump ahead of a pre-existing lender.

Advance notice provides notice avoiding compromise and fraud.