CHAPTER 25 SECURED TRANSACTIONS: ATTACHMENT AND PERFECTION DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8

CHAPTER 25CHAPTER 25SECURED TRANSACTIONS: SECURED TRANSACTIONS:

ATTACHMENT AND ATTACHMENT AND PERFECTIONPERFECTION

CHAPTER 25CHAPTER 25SECURED TRANSACTIONS: SECURED TRANSACTIONS:

ATTACHMENT AND ATTACHMENT AND PERFECTIONPERFECTION

DAVIDSON, KNOWLES & FORSYTHE DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles Business Law: Cases and Principles

in the Legal Environmentin the Legal Environment (8 (8thth Ed.) Ed.)

2© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning

BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.

CREDIT FINANCING AND CREDIT FINANCING AND ARTICLE 9ARTICLE 9


Buyer gives owner of the goods a security Buyer gives owner of the goods a security interest, which is another method of interest, which is another method of commercial transaction.commercial transaction.

Article 9 deals with secured transactions.Article 9 deals with secured transactions.Secured transactions common in business.Secured transactions common in business.Security interest ensures payment by buyer, Security interest ensures payment by buyer,

if buyer does not pay seller can repossess if buyer does not pay seller can repossess good.good.

Buyer gives owner of the goods a security Buyer gives owner of the goods a security interest, which is another method of interest, which is another method of commercial transaction.commercial transaction.

Article 9 deals with secured transactions.Article 9 deals with secured transactions.Secured transactions common in business.Secured transactions common in business.Security interest ensures payment by buyer, Security interest ensures payment by buyer,

if buyer does not pay seller can repossess if buyer does not pay seller can repossess good.good.




Secured transaction allows buyer to receive Secured transaction allows buyer to receive good sooner than having to pay cash, seller good sooner than having to pay cash, seller has right to repossess if buyer does not pay.has right to repossess if buyer does not pay.

Buyer defaults, seller must comply with Buyer defaults, seller must comply with rules in Article 9, relating to perfection and rules in Article 9, relating to perfection and priorities. priorities.

Seller is called the secured party.Seller is called the secured party.Person who owes payment is the debtor. Person who owes payment is the debtor.




Agreement that creates security interest is a Agreement that creates security interest is a security agreement.security agreement.

Property subject to a security interest is the Property subject to a security interest is the collateral.collateral.

Article 9 unified approaches to secured Article 9 unified approaches to secured financing.financing.




Newest version of Article 9:Newest version of Article 9:– Expands scope of property available for Expands scope of property available for

secured transactions.secured transactions.– Eliminated need for multiple filings.Eliminated need for multiple filings.– Creditors will file where debtor is located.Creditors will file where debtor is located.– Clarifies place for filing if debtor is an Clarifies place for filing if debtor is an

international entity or individual.international entity or individual.– Permits electronic filings.Permits electronic filings.



SCOPE OF ARTICLE 9 SCOPE OF ARTICLE 9 SCOPE OF ARTICLE 9 SCOPE OF ARTICLE 9

Governs transactions intended to create Governs transactions intended to create security interest in personal property or security interest in personal property or fixtures. fixtures.

Security interest: an interest in personal Security interest: an interest in personal property/fixtures which secures payment or property/fixtures which secures payment or performance of an obligation.performance of an obligation.

UCC categorizes collateral according to UCC categorizes collateral according to nature or use.nature or use.



SCOPE OF ARTICLE 9SCOPE OF ARTICLE 9

Types of collateral on basis of nature:Types of collateral on basis of nature:– Documents.Documents.

Negotiable documents of title to goods bills of Negotiable documents of title to goods bills of lading/warehouse receipts.lading/warehouse receipts.

– Instruments.Instruments. Negotiable instruments: checks/promissory notes.Negotiable instruments: checks/promissory notes. Securities: stocks and bonds.Securities: stocks and bonds.



SCOPE OF ARTICLE 9SCOPE OF ARTICLE 9Types of collateral on basis of nature:Types of collateral on basis of nature:

– Proceeds: Whatever is received upon the sale, Proceeds: Whatever is received upon the sale, exchange, collection, or other disposition.exchange, collection, or other disposition.

– Chattel paper. A writing or writings that Chattel paper. A writing or writings that represent:represent:

Promise to pay money; or Promise to pay money; or Either a security interest in, or a lease of, specific Either a security interest in, or a lease of, specific

goods.goods.



SCOPE OF ARTICLE 9SCOPE OF ARTICLE 9SCOPE OF ARTICLE 9SCOPE OF ARTICLE 9

Types of collateral on basis of nature:Types of collateral on basis of nature:– Accounts.Accounts.

Right to payment for goods sold or leased.Right to payment for goods sold or leased. Services rendered not represented by an instrument Services rendered not represented by an instrument

or chattel paper.or chattel paper.

– General intangibles.General intangibles. Other personal property, such as goodwill of a Other personal property, such as goodwill of a

business and trademarks.business and trademarks.



SCOPE OF ARTICLE 9SCOPE OF ARTICLE 9SCOPE OF ARTICLE 9SCOPE OF ARTICLE 9Types of collateral on use by debtor: Types of collateral on use by debtor:

– Consumer goods.Consumer goods. Goods used/bought for personal, family, or household Goods used/bought for personal, family, or household

purposes.purposes.

– Equipment.Equipment. Goods used/bought primarily in business. Goods used/bought primarily in business.

– Farm products.Farm products. Crops, livestock, or supplies used/produced in Crops, livestock, or supplies used/produced in

farming operations.farming operations. Products of crops or livestock in their Products of crops or livestock in their

unmanufactured states held by farmers.unmanufactured states held by farmers.



SCOPE OF ARTICLE 9SCOPE OF ARTICLE 9SCOPE OF ARTICLE 9SCOPE OF ARTICLE 9

Types of collateral on use by debtor: Types of collateral on use by debtor: – Inventory.Inventory.

Goods held for sale or lease.Goods held for sale or lease. Raw materials, work in process, and materials Raw materials, work in process, and materials

consumed in a business. consumed in a business.

– Fixtures.Fixtures. Goods that become a part of real estate. Goods that become a part of real estate.



SCOPE OF ARTICLE 9SCOPE OF ARTICLE 9

Classes of goods mutually exclusive.Classes of goods mutually exclusive.Article 9 applies to all consensual security Article 9 applies to all consensual security

interests in personal property and fixtures.interests in personal property and fixtures.Article 9 does not apply to a security Article 9 does not apply to a security

interest that arises by operation of law.interest that arises by operation of law.



ATTACHMENT: CREATION OF A ATTACHMENT: CREATION OF A SECURITY INTEREST SECURITY INTEREST

ATTACHMENT: CREATION OF A ATTACHMENT: CREATION OF A SECURITY INTEREST SECURITY INTEREST

An interest in personal property/fixtures An interest in personal property/fixtures that secures payment or performance of an that secures payment or performance of an obligation.obligation.

Important to distinguish between a true Important to distinguish between a true lease and a lease used as a security interest.lease and a lease used as a security interest.

Article 9 applies to a lease intended as Article 9 applies to a lease intended as security.security.

Facts of each case determine if a lease is Facts of each case determine if a lease is intended.intended.



ATTACHMENTATTACHMENT

Lessee: person who is leasing.Lessee: person who is leasing.Lessor: person leasing the property to Lessor: person leasing the property to

another.another.Lease intended as security is subject to Lease intended as security is subject to

Article 9’s filing requirement.Article 9’s filing requirement.True lease not subject to Article 9’s filing True lease not subject to Article 9’s filing

requirement.requirement.



ATTACHMENTATTACHMENT

Lease intended as security treats bankruptcy Lease intended as security treats bankruptcy trustee as a lien creditor.trustee as a lien creditor.

Trustee has superior rights than original Trustee has superior rights than original owner. owner.



SECURITY AGREEMENTSECURITY AGREEMENTSECURITY AGREEMENTSECURITY AGREEMENT

Security interest must be valid and Security interest must be valid and enforceable.enforceable.

First step in creation and enforcement of a First step in creation and enforcement of a security interest requires attachment.security interest requires attachment.

Attachment: process by secured party and Attachment: process by secured party and debtor create security interest and confer debtor create security interest and confer secured party certain enforceable rights secured party certain enforceable rights collateral vis-à-vis the debtor.collateral vis-à-vis the debtor.



Attachment does not give secured party rights Attachment does not give secured party rights superior to other creditors. superior to other creditors.

Attachment occurs when secured party does all:Attachment occurs when secured party does all:– Enters into security agreement and debtor agrees Enters into security agreement and debtor agrees

security interest will attach.security interest will attach.– Possesses security agreement signed by debtor.Possesses security agreement signed by debtor.– Ascertains that debtor has rights in collateral.Ascertains that debtor has rights in collateral.– Gives value.Gives value.




Transaction involving a pledge attachment Transaction involving a pledge attachment has occurred.has occurred.

A signed security agreement must:A signed security agreement must:– Be in writing.Be in writing.– Create or provide for a security interest.Create or provide for a security interest.– Reasonably identify the collateral.Reasonably identify the collateral.– Be signed by the debtor.Be signed by the debtor.




Security agreement may contain:Security agreement may contain:– Amount of indebtedness/terms of payment.Amount of indebtedness/terms of payment.– Liability in event of risk of loss to collateral.Liability in event of risk of loss to collateral.– Requirement of insurance on maintenance and repair of Requirement of insurance on maintenance and repair of

collateral.collateral.– Warranty by debtor, owns collateral free from liens or Warranty by debtor, owns collateral free from liens or

security interests.security interests.– Statement of debtor’s rights.Statement of debtor’s rights.– Description events constitute default by debtor.Description events constitute default by debtor.




Security agreement may extend security Security agreement may extend security interest of secured party to all collateral that interest of secured party to all collateral that is subject to agreement and debtor amy is subject to agreement and debtor amy acquire after entering into agreement.acquire after entering into agreement.




PERFECTIONPERFECTIONPERFECTIONPERFECTION Process used by secured parties protect collateral Process used by secured parties protect collateral

from attachment by third parties.from attachment by third parties. Date of perfection determines priorities over Date of perfection determines priorities over

competing claims among other creditors.competing claims among other creditors. Perfection occurs in one of three ways:Perfection occurs in one of three ways:

– Creditor’s filing a financing statement.Creditor’s filing a financing statement.– Creditor taking possession of collateral.Creditor taking possession of collateral.– Creditor refraining from doing anything beyond Creditor refraining from doing anything beyond

attachment. (automatic attachment)attachment. (automatic attachment)



PERFECTION BY FILINGPERFECTION BY FILINGPERFECTION BY FILINGPERFECTION BY FILING

If collateral consists of accounts or general If collateral consists of accounts or general intangibles.intangibles.

Financing statement used by UCC to give Financing statement used by UCC to give notice of the security interest.notice of the security interest.

Another method of filing involves Another method of filing involves registering the security interest according to registering the security interest according to the requirements of statutes other than the the requirements of statutes other than the UCC.UCC.



PERFECTION BY FILINGPERFECTION BY FILINGPERFECTION BY FILINGPERFECTION BY FILING Financing statement must contain: Financing statement must contain:

– Names and addresses of debtor and secured party.Names and addresses of debtor and secured party.– Debtor’s signature.Debtor’s signature.– Description of the collateral.Description of the collateral.

Provides public notice of a claimed interest in the Provides public notice of a claimed interest in the collateral.collateral.

Financing statement effective if contains enough Financing statement effective if contains enough information to cause the party searching records to information to cause the party searching records to look further.look further.



PERFECTION BY FILINGPERFECTION BY FILING

Insufficient filing when debtor uses trade or Insufficient filing when debtor uses trade or business name rather than legal name.business name rather than legal name.

Filing before attachment does not constitute Filing before attachment does not constitute perfection.perfection.

Financing statement effective for five years, Financing statement effective for five years, then security interest lapses unless secured then security interest lapses unless secured party files continuation statement before party files continuation statement before lapse.lapse.



PERFECTION BY FILINGPERFECTION BY FILING

UCC imposes secured party must comply UCC imposes secured party must comply within two weeks when debtor requests a within two weeks when debtor requests a statement of account or a list of collateral statement of account or a list of collateral from secured party.from secured party.

UCC limits debtor to one list every six UCC limits debtor to one list every six months.months.

No outstanding obligation on financing No outstanding obligation on financing statement, UCC, may require secured party statement, UCC, may require secured party to file termination statement.to file termination statement.



PERFECTION BY POSSESSIONPERFECTION BY POSSESSIONPERFECTION BY POSSESSIONPERFECTION BY POSSESSION

Method used for perfecting security Method used for perfecting security interest.interest.

Security interest in negotiable instruments Security interest in negotiable instruments perfected only by secured party taking perfected only by secured party taking possession of the collateral. possession of the collateral.

Secured party may perfect security interest Secured party may perfect security interest in tangible collateral by physical possession in tangible collateral by physical possession of collateral.of collateral.



AUTOMATIC PERFECTIONAUTOMATIC PERFECTIONAUTOMATIC PERFECTIONAUTOMATIC PERFECTION

Method ordinarily used for perfecting Method ordinarily used for perfecting purchase money security interests in purchase money security interests in consumer goods.consumer goods.

Perfection occurs upon attachment.Perfection occurs upon attachment.Security interest in consumer goods Security interest in consumer goods

perfected automatically (PMSI).perfected automatically (PMSI).– Secured party is not required to do anything to Secured party is not required to do anything to

perfect it.perfect it.



PROCEEDSPROCEEDSPROCEEDSPROCEEDS

Secured party has lien that floats over the Secured party has lien that floats over the collateral and includes proceeds.collateral and includes proceeds.

Proceeds: whatever is received on the sale, Proceeds: whatever is received on the sale, exchange, collection, or other disposition of exchange, collection, or other disposition of collateral.collateral.– Extends to identifiable money proceeds.Extends to identifiable money proceeds.– Realized from the sale of the collateral.Realized from the sale of the collateral.