Secured Transaction Checklist



I.                  INTRODUCTION

    1. Overview of the Statutory Scheme
      1. Secured transactions involve credit transactions – typically the debtor buys something on credit from the creditor (or secured party) but does not pay immediately.
      2. To ensure payment, the creditor takes a security interest in specific personal property (the collateral) of the debtor, which allows the creditor to take the property if the debtor fails to fulfill the credit obligation.
      3. For the security interest to be effective between the parties, certain steps known as attachment must be taken.  After attachment, if the debtor defaults, the creditor has a right to take the property to satisfy the obligation.
      4. To gain rights against other parties who might also have an interest in the same collateral, the creditor must take additional steps to perfect the security interest. When more than one creditor has an interest in the same collateral, rules of priority determine whose interest is superior.
    2. Scope of Article 9
      1. Contractual security interests (interests in personal property or fixtures that secure payment or performance of an obligation);
      2. Sales of accounts, chattel paper, payment intangibles, and promissory notes
      3. Commercial consignments of goods worth a total of $1000 or more.
      4. Agricultural liens
      5. Leases that are intended to serve as security arrangements.
    3. Security Interests
      1. security interest is the right to keep or sell the collateral if the debtor defaults on his obligation to the creditor.
      2. PMSI – a special type of security interest in goods.  A person who holds a PMSI has priority over other security interests in the same goods if certain requirements are met.
        1. 2 Ways to Get a PMSI:
          1. The creditor sells the goods to the debtor on credit, retaining a security interest in the goods for the purchase price, OR
          2. The creditor advances the debtor the funds used to buy the goods, and the creditor takes a security interest in the goods
    4. Collateral
      1. DEF – Property that is subject to the security interest
      2. The List – the first 15 are mutually exclusive. In the same person’s possession, w/ but one exception, the type of collateral doesn’t change:
        1. Consumer goods – good bought or sold for family purposes
        2. Farm Products – goods used or produced in farming that are in possession of or used by a farmer.
        3. Inventory – goods held for sale or lease and goods consumed by a business (short term)
        4. Equipment – goods used in business – long term
        5. Instruments – notes, drafts, and certificates of deposit (“Money Paper”)
        6. Documents – bills of lading, warehouse receipts, and delivery orders (“commodity paper”)
        7. Accounts – rights to payment for goods, services, etc. (i.e., accounts receivable, credit card debts)
        8. Deposit Accounts – accounts maintained w/ a bank (excludes instruments and consumer transactions)
        9. Health Care Insurance Receivables – right to payment, under insurance, for health care goods or services provided.
        10. Chattel Paper – records evidencing both a monetary obligation and a security interest in or lease of goods, such as a promissory note and written security agreement.
        11. Electronic Chattel Paper – chattel paper evidenced by info stored in an electronic medium
        12. Letter of Credit Right – right to payment under a letter of credit
        13. Commercial Tort Claims – trot claims filed by a business that arose out of business (excluding personal injuries)
          1. Requires specificity and there can be no “after-acquired tort clauses.”
        14. General Intangibles – Anything else.  “Catchall” category for non-goods (i.e., copyrights and goodwill)
          1. Problems: “Documents” is a term of art; it is NOT “a piece of paper.” (A lawyer’s collection of signatures, or blueprints and inventions are not documents; they’re general intangibles)
        15. Investment Property – stocks, bonds, mutual funds, brokerage accounts, etc.
          1. Certificated Securities – held by you in paper form
          2. Uncertificated Securities – held by you computerized
          3. Securities Account – intermediary holding the account (Smith Barney)
      3. Proceeds – include whatever is received upon the disposition of collateral.
        1. Usually, proceeds are 1 of 4 things:
          1. An account (charge account)
          2. An instrument (e.g., a check)
          3. Chattel Paper (writing evidencing debt and S.I.)
          4. Cash (never initially collateral, but can be a proceed)
        2. Proceeds include second generation proceeds
        3. Security interests generally continue in proceeds.



    1. Rights against the debtor are established by attachment.
    2. Creation of a Security Interest
      1. Creditor must take Possession or Control of Collateral; OR

ii.                    Authenticated Security Agreement

        1. Authenticated record (writing)
        2. Signed by Debtor
        3. Describing collateral – must reasonably identify the collateral.
          1. It can be by category of collateral, so long as it’s objectively determinable.
          2. A supergeneric description (e.g., “all of my assets”) is NOT effective.
        4. Control by creditor of certain types of collateral (deposit accounts, electronic chattel paper, letter of credit right, or investment property)
    1. Attachment
      1. Must have a SECURITY INTEREST (above)
      2. Secured party must give VALUE
        1. Preexisting debt is deemed value, but attachment will not occur by gift.
      3. The debtor must have RIGHTS IN THE COLLATERAL
    2. Rights & Duties of Secured Party in Possession or Control
      1. The secured party in possession must use reasonable care in storing and preserving the collateral, but is entitled to reimbursement for reasonable expenses in caring for the collateral.
      2. Risk of loss of property in the secured party’s possession is on the debtor to the extent of any insurance deficiency.
    3. Property that Debtor Acquires in Future
      1. After-Acquired Property – A security agreement may create a security interest in property to be acquired in the future. The security interest will attach to the property as soon as the debtor acquires an interest in the collateral.
        1. Generally, such an interest may be created only by including an after-acquired property clause in the security agreement.
        2. Exception – a S.I. will attach automatically to proceeds from the disposition of collateral and to accounts and new items of inventory collateral, even w/o an after-acquired property clause.
      2. Future Interests – a security agreement may provide that the collateral will serve as security not only for the present obligation, but also for advances the creditor makes to the debtor in the future.



    1. To acquire maximum priority in the collateral over most third parties who may also have rights in the collateral (e.g., subsequent purchasers, unsecured creditors, other priority creditors), the security party must “perfect.”
    2. Five Methods of Perfection
      1. Filing – a secured party may obtain perfection by filling (either in writing or electronically) a financing statement.  This is effective to all kinds of collateral except deposit accounts and money. The financing statement must contain names, addresses, and description of the collateral:
        1. Names
          1. Name of debtor IS required
          2. Signature of debtor is NOT required
          3. Trade name of debtor is insufficient
          4. Effect of error In Debtor’s name – if minor, that’s ok, but seriously misleading errors will invalidate the fin stmt
            1. Debtor Name Change – if debtor makes a “seriously misleading” name change after a financing stmt is filed, the financing stmt is only effective against collateral acquired by the debtor before the name change and w/in 4 months after the change.
              1. For, collateral acquired after 4-mo. period, the secured party must re-file using new name of debtor.
        2. Addresses
          1. If a financing stmt that does not contain debtor’s and/or secured party’s address is accepted by the filing office, the financing stmt is effective despite the lack of addresses.
        3. Description
          1. A supergeneric description (e.g., “all assets”) is effective.
          2. TEST – Is the description seriously misleading?
            1. Yes – filing ineffective
            2. No – filing effective
        4. *Debtor Must “Authorize” Filing of Financing Statement
          1. For a financing statement to be effective, the debtor must authorize it in an authenticated record either before or after its filed.
          2. Debtor authorizes it if she authenticates the financing statement or a security agreement covering the same collateral as the financing statement.
        5. After-Acquired Property
          1. Financing statement need NOT mention the after-acquired property to perfect a security interest in such property IF the description in the financing statement is broad enough to cover the after-acquired property.
        6. Place of Filing
          1. Gen Rule – filing must be done “centrally” in the office of the secretary of state.
          2. Exception – Filing for security interests in timber to be cut, minerals, and fixtures is “local”, in the county where a lien on real estate is filed.
        7. Period for which Filing is Effective
          1. 5 YEARS
          2. A continuation statement may be filed, good for an additional 5 years, but it can only be filed w/in 6 months before the lapse of the filed statement.
      2. Possession
        1. Collateral that Cannot be Perfected (Pledged) by Possession
          1. Accounts, deposit accounts, electronic chattel paper, letter of credit rights, and general intangibles.
          2. Filing or control is necessary
        2. Time of Perfection
          1. Where the secured party takes actual possession of the collateral, the security interest is perfected from the moment of possession and continues as long as possession is retained.
        3. **EXAM TIP – not that taking possession can simultaneously satisfy the requirements for attachment and possession; i.e., possession may be the last thing needed for attachment, and attachment plus possession results in perfection.
      3. Control
        1. Security interests in investment property, deposit accounts, and letter of credit rights can be perfected by control
        2. Deposit Accounts – deposit bank agrees that it will act on secured party’s instructions w/o any further debtor action. Control is the exclusive method of perfection of deposit accounts
        3. Letter of Credit Rights – control occurs when issuer of letter consents in writing to assignment of proceeds.
        4. Investment Property-
          1. Certificated Security – bearer: secured party needs possession. Registered: needs possession plus indorsement
          2. Uncertificated Security – secured party must be registered as owner; or owner acknowledges he is holding for secured party; or issuer agrees he will comply w/ the secured party’s instructions.
          3. Security Accounts – secured party must be entitlement holder, or intermediary agrees it will comply w/ his orders.
      4. Automatic Perfection
        1. PMSI in consumer goods is perfected as soon as it attaches; neither filing nor possession by the creditor is necessary.
        2. Recall that a seller has a PMSI when the security interest was retained to secure at least part of the purchase price.
      5. Temporary Perfection
        1. Four Months
          1. Goods and debtor move to a different state
          2. Organization changes its name (not a new legal entity) – see above
        2. Twenty Day Period for Proceeds
          1. A S.I. in proceeds from original collateral is continuously perfected for 20 days from the debtor’s receipt of the proceeds.  This security interest becomes unperfected on the 21st day after the debtor’s receipt of the proceeds unless the statutory requirements are complied with.
          2. The security interest in proceeds will continue to be perfected beyond the 20 days IF:
            1. The SI in the original collateral was perfected by filing a financing stmt, a SI in the type of collateral constituting the proceeds would be filed in the same place as the financing stmt for the original collateral, AND the proceeds were not purchased w/ cash proceeds of the collateral (“same office” rule);
            2. The proceeds are identifiable cash proceeds (“cash proceeds” rule); OR
            3. The SI in the proceeds is perfected w/in the 20-day period
        3. Twenty Day Period for Instruments, Negotiable Documents, and Certificated Securities (*NOT ON EXAM*)
          1. New Value Given – perfection valid for 20 days after attachment; neither filing nor possession is necessary
          2. Delivery of Collateral to Debtor for Disposition – perfection is valid for 20 days, after which the creditor must reperfect (by filing or taking possession) or lose his perfection.


IV.             PRIORITIES

    1. Security Party v. Lien Creditor
      1. KEY – perfection!!
      2. QUESTION BECOMES: Did the secured party perfect?
      3. Unperfected Secured Party v. Judicial Lien Creditor
        1. A judicial lien creditor prevails over the holder of a security interest in collateral IF the lien creditor becomes such before the security interest is perfected.
        2. PMSI Grace Period- secured party who attaches a PMSI in the debtor’s collateral before a judicial lien creditor acquires an interest in the collateral will have priority over the lien creditor if she files w/in 20 days after debtor receives the collateral.
      4. Perfected Secured Party v. Judicial Lien Creditor
        1. Generally, a prior perfected security interest has priority over a lien.
        2. Exception – Future Advances
      5. Bankruptcy Note: secured party does NOT take priority over a trustee in bankruptcy when security interest was given for antecedent debt w/in 90 days of declaration of bankruptcy.
    2. Perfected Secured Party v. Purchaser (Buyer of Goods)
      1. Unperfected Secured Party v. Buyer or Lessee
        1. A person who buys or leases the collateral from the debtor generally has an interest in the collateral superior to a person who has an unperfected security interest in the collateral IF the buyer or lessee, without the knowledge of the SI, gives value and receives delivery of the collateral.
      2. Perfected Secured Party v. Buyer or Lessee
        1. Generally, a holder of a perfected SI in goods has rights in goods superior to those of a subsequent buyer or lessee.  EXCEPTIONS –
          1. Consumer Purchaser to Consumer Purchaser – purchaser prevails (takes free of claim of secured party) unless financing stmt has been filed or purchaser knows of SI
            1. Automatic perfection is ineffective
          2. Business Purchaser – secured party prevails
            1. Automatic perfection is effective
          3. Purchaser from a Business (BIOC) – purchaser wins even if filing by secured party
      3. Secured Party v. Holder in Due Course
        1. A HDC of a negotiable instrument takes free of personal defenses and claims (even on earlier perfected security interest
      4. Future Advances (*Won’t be on exam*)
        1. Generally, if a creditor makes a future advance, the time of perfection of the future advance relates back to the time of perfection of the original advance.
        2. Buyer not in ordinary course of business – a buyer NOT in the ordinary course of business can gain priority over a secured party who makes a future advance on collateral after the buyer purchases the collateral. Such a buyer has priority over a future advance made (i) after the secured party learned of the purchase, OR (ii) more than 45 days after the purchase.
          1. Exception – if secured party made future advance pursuant to a commitment.
    3. Secured Party v. Secured Party
      1. Priority Between Unperfected Secured Parties
        1. First to attach has priority
      2. Priority Between Unperfected and Perfected Secured Parties
        1. A perfected SI generally prevails over an unperfected SI
      3. Priority Between Perfected Secured Parties
        1. Conflicting perfected SIs rank in priority according to time of filing OR time of perfection
        2. RULE – first to file or perfect
        3. EXCEPTIONS:
          1. PMSI – Inventory (and chattel paper or instruments proceeds)
            1. A PMSI in inventory has priority over a conflicting SI in the same inventory or proceeds of the inventory that are chattel paper, instruments, or cash IF:
              1. Notice (given by creditor to earlier perfected secured party)
              2. No Grace (must be perfected before debtor gets possession)
          2. PMSI – Equipment (and proceeds)
            1. A PMSI in equipment has priority over conflicting SIs in the same goods or their proceeds IF:
              1. Grace (can be perfected before or w/in 20 days after debtor gets possession)
              2. No Notice
          3. Purchaser of Chattel Paper (w/ possession) – takes priority over non-possessory secured party claiming as proceeds of inventory
        4. Special Priority Rules for Conflicting SIs of Investment Property
          1. Secured party w/ control (or w/ possession) prevails over secured part who filed – even if control was later, and the secured party knew of the prior perfected (by filing) SI.
          2. Thus, a SI perfected by control has priority over a SI perfected by any other method (filing or automatic possession)
        5. Priority in Proceeds (*Won’t be on exam*) – look to pg. 13 of lecture notes
        6. SIs in Fixtures & Accessions
          1. Fixtures – goods that become so attached to real property that an interest in them arises under real property law.
            1. Gen Rule – first to file prevails
            2. Exception – PMSI secured party who makes fixture filing w/in 20 days will prevail over prior real estate filing
            3. Exception-to-Exception – a construction mortgagee prevails so long as recorded before the goods became fixtures, and goods became fixtures before the completion of construction.
          2. Accessions – goods that are physically united w/ other goods in such a manner that the identity of the original goods is not lost; added value to personal property (e.g., new pedals on a bike)
            1. Gen Rule – first to file or perfect, w/ PMSI superiority applicable
            2. Exception – if accession (e.g., motor) became part of the whole assets subject to certificate of title law (automobiles), the SI in the whole (car) has priority over the SI in the accession


V.               **RIGHTS UPON DEFAULT (On last 5 July Exams)**

    1. Collection and Enforcement by Secured Party
      1. Generally, a secured party gets rights as against the debtor, and any other person obligated to make payment (e.g., guarantor)
      2. Collection Rights of Secured Party – w/ non-goods collateral (e.g., accounts), where agreed, the secured party is entitled to notify the account debtor to make payment to her rather than the debtor in default.
    2. Right to Take Possession and Sell Collateral
      1. The secured party has the right to either (i) sue on the debt itself; or (ii) take possession of the collateral, sell it by public or private sale, and then sue to collect deficiency.
      2. Possession
        1. Self-help – this is the standard, but you must do so only if it can be done without a breach of the peace.
        2. Replevin (sequestration)
      3. Sell
        1. All aspects of the sale must be commercially reasonable
        2. Debtor, any sureties on the debt, and, in the non-consumer goods cases, other secured parties generally are entitled to notice.
          1. Notice must be sent w/in a reasonable time (10 days before the sale)
          2. Must contain details about the parties, the collateral, the time, the place, and the method of sale, etc.
          3. For consumer goods, must also include: (i) liability for deficiency judgment; (ii) telephone number for redemption; and (iii) telephone number for additional information.
        3. The sale gives the buyer the rights of the debtor had in the collateral
    3. Noncompliance
      1. Secured party is liable for damages of loss caused by failure to comply (plus $500 for each case of noncompliance)
      2. If there is consumer goods:
        1. Debtor may recover, at a minimum, 10% of the ash price of the goods, AND
        2. All interest charges to be paid over the life of the loan (credit service charge)
    4. Acceptance of Collateral in Full (or partial) Satisfaction (Strict Foreclosure)
      1. In non-consumer goods cases, parties can agree to voluntary turnover in return for an agreed credit against the debt w/ the debtor acknowledging remaining deficiency.
      2. In consumer goods cases, parties can agree to voluntary turnover in return for full satisfaction ONLY.
    5. Application of Proceeds of Sale (What do we do with the money?)
      1. Expenses of retaking, holding, preparing, and disposing of collateral (including attorney’s fees)
      2. Satisfaction of obligation secured by SI
      3. Satisfaction of obligation secured by subordinate SI if secured party received demand
      4. Debtor or trustee