Article IX of Uniform Commercial Code (UCC): Law of Secured Transactions
Debtor: The entity who owes the money
Secured Party: aka the creditor: the entity who loans money
Security Agreement (aka contract or record): The security interest or statue that the creditor has in personalty or fixtures.
Security Interest: A lien
Collateral: Personalty or fixtures the creditor can look to for satisfaction
Tangible Collateral: goods
Intangible and semi-tangible goods: intellectual property, stocks, bonds, mutual funds, proceeds from sale of collateral, accounts (right to payment for goods or services), promissory notes and drafts (rights to payment)
Fixtures: Items attached to the home
Soccer Gear in a family garage: goods
Soccer Gear for Mia Hamm: Equipment
Soccer Gear at Sports Authority: Inventory
Attachment: Creation of Security Agreement.
To attach is to make a security interest enforceable thereby making the collateralization legally binding.
The creditor must give a value. USAA Loans Mandy $15,000. The Value is $15,000.
•A Security agreement is aka a contract and a record.
•If the secured party (creditor) is in possession of the collateral. There is no need for a security agreement.
•If the debtor is in possession of the collateral. Need a security agreement.
•The debtor must authenticate the security agreement. This is done via signature or electronic mark.
•The contract must reasonably identify the collateral.
•A debtor must have the rights in the collateral.
•Perfection: Publicity Device to put the world on record (or constructive notice) that secured parties exist.
•Example: Mandy loans Emily $10,000 and takes a security interest in her vehicle. In addition to protect herself from other creditors who might stake a claim. Emily defaults. Mandy perfects. Mandy has first priority in vehicle.
•The creditor who properly perfects first is supreme.
3 ways to perfect
The secured party takes possession of collateral (taking possession is perfection)
Automatic perfection for PMSI applies only when collateral is a consumer good (to encourage lending to consumers)
PMSI: Purchase Money Security Interest- Security interest that enables the debtor to purchase the encumbered goods. Or, an extension of money by a lender which enables the consumer to buy.
Example: Mandy purchases a bed from Bed, Bath, and Beyond on a payment schedule (security agreement) with the Store. Bed, Bath, and Beyond has a PMSI.
Upon attachment, perfection is automatic.
•What needs to be filed to perfect? A UCC-1 Financing Statement or the security agreement itself (usually the former is filed).
•Priority: Who has priority if more than one party is seeking a claim against a debtor?
•The creditor (secured party) seeks to subordinate all other creditors; they do not want to share the collateral with anyone. Each claimant creditor is entitled to satisfaction in full before a subordinated claimant is entitled to take.
•The priority of claimants is as follows:
•Buyer in the Ordinary Course: A consumer buying goods from a store.
•Perfected Attached Creditors: Creditor attached but did not perfect
•Lien Creditor: General Unsecured Creditor who did not collaterize. This creditor then gets a judicial lien.
•Non Ordinary Course Buyer: A consumer who bought goods indirectly.
•Attached Unperfected Creditor: Creditor attached but did not perfect.
•General Unsecured Creditor: Creditor who never bothered to take collateral.
•Example: Mandy loans Emily $10k with security interest in her car. Later Eric loans Emily $5k with security interest in same car. Both Mandy and Eric perfected properly. Mandy has priority because she perfected first.
•First in time, first in right.
•All Eric had to do was check the public records to learn that Mandy was the senior creditor.
•Article IX gives special effect to filing: priority will relate back to the earliest filing date. You ARE allowed to file even before the contract has been completed.
•Default: Debtor has breached the contract (aka security agreement, aka record)
•Self Help Repo: Creditor repossesses property as long as they do not “breach the peace.”
•Breach the Peace: When Secured parties actions are likely to cause violence of ANY kind. If debtor protests even the smallest amount, repo must stop immediately.
•Debtor Protective Standards
•Debtor's Home enjoys zone of privacy and repo my not be made without voluntary and contemporaneous consent.
•Repo outside Home
•Creditor can take collateral as long as there is no debtor objection.
•Repo by Judicial Action: Judicial writ: Orders sheriff to obtain possession of collateral and deliver it to creditor.
•What can creditor do when they take collateral?
•Strict Foreclosure: Secured party retains collateral in full satisfaction and debt is cancelled.
•Example: Mandy borrows 50k from USAA with a security interest in her car. Mandy defaults on her loan owing $40k. USAA repo’s her car and strictly forecloses. The bank retains her car and the debt is discharged.
•Works best when the value of the collateral approximates the value of the outstanding debt.
•How to strictly foreclose:
•For consumer goods, written proposal is sent to both debtor and secondary obligors (co-signers)
•Non-consumer goods: written proposal is sent to debtor, secondary obligors, and other secured parties.
•If any notified party objects within 20 days, strict foreclosure will not be allowed. And must be foreclosed by sale. Can be objected even without cause.
•Consumer goods and 60% rule: Article IX gives special protection to consumer debtors: if at least 60% has been paid back, strict foreclosure is not allowed. Secured party must sell collateral within 90 days or be liable in conversion.
•Example: Mandy buys a phone from T-mobile as PMSI from T-mobile. After paying 70% of phone, Mandy defaults. T-mobile cannot strictly foreclose.
•Creditor may re-sell the collateral and apply sale proceeds to debt.
•Can be sold via private or public
•Private Sale: Secured party (creditor) may not buy goods (protection against self dealing)
•Public Sale: Creditor may buy goods.
•The sale must be commercially reasonable.
•Prior to the sale, reasonable notice must be sent. Article IX provides standardized notice forms.
•If consumer goods: notice forms must be sent to both debtor and secondary obligors.
•Additional consumer protection provisions are mandatory in the notice form including how the deficiency between sale price and debt owed was calculated and how the debtor can redeem the goods. Time given before sale must be commercially reasonable.
•All other types of goods: notice forms must be sent to debtor, secondary obligors, and perfected creditors showing the time and place of the sale.
•Time before sale must be 10 days or more from date of notice form.
•Example: Mandy takes a $10,000 loan from USAA to buy a car and uses her coin collection as collateral. Mandy pays off $4,000 of her loan and then defaults on her loan. Mandy currently owes $6,000 so USAA takes her coin collection and sells it for $3000. USAA (the creditor) can file an action for deficiency in order to seek a deficiency judgment for the remaining $3,000 owed.
•Debtor's right of redemption is cut off when collateral is sold or strictly foreclosed. To redeem, the debtor must pay missed payments + accrued interest + creditors reasonable expenses including attorneys fees.
•If security agreement contains acceleration clause (which permits creditor to declare entire balance due immediately), debtor must pay off the entire debt + interest.