Lecture 10 Secured Transactions and priority rules Welcome to
week four of our bar prep master class.
In today's session, lecture 10, we will tackle one of the more
technical but heavily tested areas on the uniform Commercial
Code secured transactions This subject appears frequently on
the multi state essay examination and in some state
specific essay sections. Our lecture today focuses on the
nature and creation of security interests, the perfection of
those interests, and the rules governing priority among
competing claimants. Let us begin by defining what a
secured transaction is. A secured transaction is a
mutually agreed upon commercial arrangement in which a.
Debtor conveys. A security interest in specific
personal property or fixtures to a creditor also referred to.
As the. Secured party this legal
mechanism. Serves to secure the payment or
performance of an. Underlying obligation, typically
a. Loan or.
Line of credit the transaction allows the creditor to take.
Possession of or otherwise assert.
Rights in the identified collateral If the debtor
defaults on their obligation, the essence of a secured
transaction lies. In risk.
Mitigation for the lender while enabling the debtor to leverage
their assets to gain access to capital or credit lines.
The creditors interest. In the collateral is not.
Merely theoretical. It provides them with.
Actual enforceable property rights.
In the collateral that become paramount upon the.
Debtors. Default these.
Rights may include repossession, liquidation, or strict
foreclosure, depending on the terms of the agreement.
And the nature of the collateral these transactions.
Are comprehensively governed by Article 9 of the Uniform
Commercial. Code A.
Uniform law adopted by most US jurisdictions to regulate
commercial transactions involving personal property.
Article 9 establishes the framework for how these
interests are created, perfected, prioritized, and
enforced. These rules serve to balance the
interest of debtors, secured creditors, and third parties,
such as lien creditors and bankruptcy trustees.
Understanding Article 9 begins with the process by which a
security interest is brought into legal existence, a process
referred to as attachment. Attachment is essential because
without it, the security interest is not enforceable
against the debtor, even if the parties agreed to it in
principle. It is the legal foundation upon
which all other secured party rights rest.
Attachment is not merely a formal requirement, but a
functional threshold that marks the birth of the secured party's
legal right to act on the collateral in the event of
default. Without attachment, the creditor
is no more than an unsecured lender, despite any intentions
to the contrary. Let us break these down.
Further Value given this requirement is typically the
most straightforward of the three attachment elements and is
interpreted broadly under the UCC.
Value is defined to include any consideration sufficient to
support a simple contract. Common examples include a loan
of money, extension of existing credit, binding commitments to
lend in the future, or satisfaction of a pre-existing
debt. A secure party may also be
deemed to have given value if it acquires A promissory note or
other obligation of the debtor for less than face value.
Courts do not inquire into the adequacy of consideration,
focusing instead on the legal sufficiency of value debtors
Rights in the collateral. A debtor must have some legal
interest in the collateral at the time of granting the
security interest. While the debtor need not have
absolute ownership, they must possess A sufficient interest to
convey rights to a secured party.
Examples include leasehold interests, license rights, or
partial ownership. Significantly, a person cannot
grant a security interest in property to which they have no
present or future claim. However, Article 9 allows for
security interests in after acquired.
Property permitting. The creditor to reach collateral
the debtor will acquire in the future.
Such clauses are enforceable, particularly in inventory and
the counts receivable financing. Security agreement to satisfy
the Statute of Frauds under Article 9.
The agreement must be in a record authenticated.
By the debtor. This does not require a
traditional contract. It may be electronic or digital
as long as it is stored and retrievable.
The description of the collateral.
Must be sufficient to reasonably identify.
The asset. Class for example all inventory.
Or all. Equipment is acceptable.
However. Generic references such as.
All assets. Or all.
Personal property are insufficient unless used in a
financing statement. The agreement should specify the
obligations secured and may also contain covenants regarding use,
insurance, or maintenance of the.
Collateral, collateral. Includes an expansive range of
tangible and intangible property.
Tangible goods divided by the debtor's primary intended use.
Examples include consumer goods used primarily for personal,
family or household purposes, for example, personal vehicles,
electronics, inventory held for sale, lease, or furnished under
service contracts. For example, retail stock
supplies, equipment used primarily in business
operations. For example, machinery, office
computers, farm products. Crops.
Livestock. And products used or produced in
farming operations. Intangible and quasi intangible
property accounts. Rights to payment for goods and
services, for example, invoices. Chattel paper records showing
both a monetary obligation and a security interest in goods, for
example, installment sales deposit accounts.
Bank accounts, usually perfected by control instruments.
Negotiable notes and drafts. Investment property, stocks,
bonds and brokerage accounts. General intangibles,
intellectual property, goodwill, licenses and payment rights not
otherwise classified. The debtors intended use at the
time of attachment determines the classification and the
classification effects perfection and enforcement.
A piece of equipment used for both business and household
purposes may require factual inquiry and to its predominant
use. Perfection of the security
interest. Perfection ensures that the
secured party's rights are legally protected not only
against the debtor but also against third parties who might
claim an interest in the same collateral.
Failure to perfect may leave the secured party vulnerable to
subsequent lien holders, bankruptcy trustees, or buyers.
Perfection may be achieved by several mechanisms.
Filing a financing statement UCC 1.
The most versatile method offering broad notice to the
public. Possession or control offers
strong legal grounding, particularly for negotiable
instruments or investment property.
Automatic perfection provided for certain low risk or high
volume consumer transactions. Temporary perfection allows a
brief window where rights are preserved without immediate
action. Filing a financing statement.
The UCC one must include the debtor's legal name for
registered entities. This must match the state's
public record. Exactly.
The secured party's name and the collateral description.
While the description need not be specific, it must put third
parties on notice of the claim. The filing is typically made in
the Central State filing office, usually the Secretary of State,
but local filings may be required for fixtures or timber.
A filing statement is effective for five years, renewable by a
continuation statement filed within six months before
expiration. Lapses can result in loss of
perfection and priority. Priority rules determine who
takes precedence when multiple parties claim interests in the
same collateral. The rules promote fairness and
commercial predictability. General rule between competing
perfected security interests. The first to file or perfect
prevails. This rule applies even if the
first filer later perfects by possession or control filing
before. Attachment can.
Establish priority, which is a critical exam point.
Perfected versus unperfected. A perfected interest defeats an
unperfected one. Between two unperfected
interests, priority goes to the party who first attached their
interest. PMSI Priority Rules A principal
money security interest in consumer Woods enjoys automatic
perfection and priority over earlier filed interests.
For inventory or livestock, the PMSI must be perfected before
the debtor receives the goods and requires advance written
notice to prior secured parties. For equipment, perfection must
occur within 20 days of the debtor receiving possession.
These rules incentivize timely action by lenders and prevent
secret liens from upsetting legitimate commercial
expectations. Proceeds.
A perfected security interest extends to identifiable
proceeds. The key is traceability.
If collateral is sold and funds are deposited into a bank
account, the proceeds must be segregated or otherwise
identifiable. Commingled funds are subject to
the lowest intermediate balance rule buyers in the ordinary
course of business or BIOCB. This class of buyer takes free
of a security interest even. If perfected.
A BIOCB must buy in good faith and without knowledge that the
sale violates the security agreement.
Buy from a seller in the business of selling goods of
that kind. Take the goods in the ordinary
course of business, not bulk sales.
This rule ensures fluid commerce and protects unsuspecting
consumers or retailers. Lien creditors and bankruptcy
trustees. A lien creditor, including a
bankruptcy trustee, prevails over unperfected security
interests. A perfected security interest
has priority. If a secured party's perfection
lapses, they risk subordination. The bankruptcy trustee as a.
Hypothetical lien. Creditor may avoid unperfected
interests. Fixture.
Filings and accessions fixtures require a fixture filing to
protect against real property interests.
These must be recorded in the local land records.
A PMSI and fixtures may still prevail if properly filed,
within 20 days of the goods becoming fixtures.
Accessions. Items attached to other goods
retain their security identity. The regular priority rules apply
unless a certificate of title system governs commingled goods.
When collateral is mixed with other goods, for example oil
grain, the security interest continues in the product or
mass, not the original item allocation.
Of value. May be needed in enforcement
default and enforcement overview.
On default, a secured party has robust enforcement rights.
Self help repossession permissible if it does not
breach the peace force or threats make repossession
unlawful disposition, sale, lease or licensing must be.
Commercially reasonable. In method, manner, time and
terms. Strict foreclosure allowed if
the debtor consents or fails to object within 20 days of notice.
Deficiency judgment available if sale proceeds.
Fall. Short of the obligation may be
barred if the sale was commercially unreasonable.
Notice. The debtor and any secondary
obligors or known secured parties must receive reasonable
notice of disposition for consumer goods.
The notice must include description of debtor and
collateral, method and timing of sale.
Explanation of. Liability for deficiency and.
Right to. Accounting Failure to provide
adequate notice or to conduct a commercially reasonable sale may
preclude deficiency. Recovery.
Or expose. The secured party to.
Damages. Debtor rights Right to redeem at
any time before sale or acceptance.
The debtor may redeem the collateral by tendering the full
obligation and expenses. Right to object.
The debtor may oppose strict foreclosure.
And demand. Public sale.
Right to. Damages.
If the secured party violates Article 9, the debtor may
recover actual and statutory damages.
Article 9's enforcement provisions aim to balance
creditor recovery with fairness and transparency for debtors.
Conclusion. Secured transactions.
Require. Attention to detail.
A strong grasp. Of the Article 9 framework.
And an. Ability to analyze priority
conflicts. Today's lecture reviewed the key
steps in creating, perfecting, and enforcing security interests
with a focus on competing claims, default remedies, and
real world applications. In our next session, we will
explore trusts and estates in greater depth, focusing on inte
state succession, will formalities and trust
administration.