{"id":99,"date":"2014-09-17T00:42:06","date_gmt":"2014-09-17T00:42:06","guid":{"rendered":"https:\/\/courses.candelalearning.com\/buslegalenv\/?post_type=chapter&#038;p=99"},"modified":"2015-04-21T21:17:34","modified_gmt":"2015-04-21T21:17:34","slug":"11-1-introduction-to-secured-transactions","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/chapter\/11-1-introduction-to-secured-transactions\/","title":{"raw":"Introduction to Secured Transactions","rendered":"Introduction to Secured Transactions"},"content":{"raw":"<div class=\"bcc-box bcc-highlight\">\r\n<h3>Learning Objectives<\/h3>\r\nBy the end of this section, you will be able to:\r\n<ul id=\"mayer_1.0-ch52_s02_l01\" class=\"im_orderedlist\">\r\n\t<li>Recognize, most generally, the two methods by which debtors\u2019 obligations may be secured.<\/li>\r\n\t<li>Know the source of law for personal property security.<\/li>\r\n\t<li>Understand the meaning of <em class=\"im_emphasis\">security interest<\/em> and other terminology necessary to discuss the issues.<\/li>\r\n\t<li>Know what property is subject to the security interest.<\/li>\r\n\t<li>Understand how the security interest is created\u2014\u201dattached\u201d\u2014and perfected.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">The Problem of Security<\/h2>\r\nCreditors want assurances that they will be repaid by the debtor. An oral promise to pay is no security at all, and\u2014as it is oral\u2014it is difficult to prove. A <span class=\"im_margin_term\"><span class=\"im_glossterm\">signature loan<\/span><\/span> is merely a written promise by the debtor to repay, but the creditor stuck holding a promissory note with a signature loan only\u2014while he may sue a defaulting debtor\u2014will get nothing if the debtor is insolvent. Again, that\u2019s no security at all. Real security for the creditor comes in two forms: by agreement with the debtor or by operation of law without an agreement.\r\n<div id=\"mayer_1.0-ch28_s01_s01_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">By Agreement with the Debtor<\/h2>\r\nSecurity obtained through agreement comes in three major types: (1) personal property security (the most common form of security); (2) suretyship\u2014the willingness of a third party to pay if the primarily obligated party does not; and (3) mortgage of real estate.\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s01_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">By Operation of Law<\/h2>\r\nSecurity obtained through operation of law is known as a <span class=\"im_margin_term\"><span class=\"im_glossterm\">lien<\/span><\/span>. Derived from the French for \u201cstring\u201d or \u201ctie,\u201d a <em class=\"im_emphasis\">lien<\/em> is the legal hold that a creditor has over the property of another in order to secure payment or discharge an obligation.\r\n\r\nIn this chapter, we take up security interests in personal property and suretyship. In the next chapter, we look at mortgages and nonconsensual liens.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Basics of Secured Transactions<\/h2>\r\nThe law of secured transactions consists of five principal components: (1) the nature of property that can be the subject of a security interest; (2) the methods of creating the security interest; (3) the perfection of the security interest against claims of others; (4) priorities among secured and unsecured creditors\u2014that is, who will be entitled to the secured property if more than one person asserts a legal right to it; and (5) the rights of creditors when the debtor defaults. After considering the source of the law and some key terminology, we examine each of these components in turn.\r\n\r\nHere is the simplest (and most common) scenario: Debtor borrows money or obtains credit from Creditor, signs a note and security agreement putting up collateral, and promises to pay the debt or, upon Debtor\u2019s default, let Creditor (secured party) take possession of (repossess) the collateral and sell it. Figure 11.1 \"The Grasping Hand\" illustrates this scenario\u2014the grasping <em class=\"im_emphasis\">hand<\/em> is Creditor\u2019s reach for the collateral, but the hand will not close around the collateral and take it (repossess) unless Debtor defaults.\r\n<div id=\"mayer_1.0-ch28_s01_s02_f01\" class=\"im_figure im_large im_editable im_block\">\r\n\r\n<span class=\"im_title-prefix\">Figure 11.1<\/span> The Grasping Hand\r\n\r\n<a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_14\/7437424f75f733061c5c741252aa1d81.jpg\" target=\"_blank\"><img src=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/images\/sm_7437424f75f733061c5c741252aa1d81.jpg#fixme\" alt=\"\" \/><\/a>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s03\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Source of Law and Definitions<\/h2>\r\n<div id=\"mayer_1.0-ch28_s01_s03_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Source of Law<\/h3>\r\nArticle 9 of the Uniform Commercial Code (UCC) governs security interests in personal property. The UCC defines the scope of the article (here slightly truncated):<span id=\"mayer_1.0-fn28_001\" class=\"im_footnote\">Uniform Commercial Code, Section 9-109.<\/span>\r\n\r\nThis chapter applies to the following:\r\n<ol id=\"mayer_1.0-ch28_s01_s03_s01_l01\" class=\"im_orderedlist im_editable\">\r\n\t<li>A transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;<\/li>\r\n\t<li>An agricultural lien;<\/li>\r\n\t<li>A sale of accounts, chattel paper, payment intangibles, or promissory notes;<\/li>\r\n\t<li>A consignment\u2026<\/li>\r\n<\/ol>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s03_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Definitions<\/h2>\r\nAs always, it is necessary to review some definitions so that communication on the topic at hand is possible. The secured transaction always involves a debtor, a secured party, a security agreement, a security interest, and collateral.\r\n\r\nArticle 9 applies to any transaction \u201cthat creates a security interest.\u201d The UCC in Section 1-201(35) defines <span class=\"im_margin_term\"><span class=\"im_glossterm\">security interest<\/span><\/span> as \u201can interest in personal property or fixtures which secures payment or performance of an obligation.\u201d\r\n\r\n<span class=\"im_margin_term\"><span class=\"im_glossterm\">Security agreement<\/span><\/span> is \u201can agreement that creates or provides for a security interest.\u201d It is the contract that sets up the debtor\u2019s duties and the creditor\u2019s rights in event the debtor defaults.<span id=\"mayer_1.0-fn28_002\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(73).<\/span>\r\n\r\n<span class=\"im_margin_term\"><span class=\"im_glossterm\">Collateral<\/span><\/span> \u201cmeans the property subject to a security interest or agricultural lien.\u201d<span id=\"mayer_1.0-fn28_003\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(12).<\/span>\r\n\r\n<span class=\"im_margin_term\"><span class=\"im_glossterm\">Purchase-money security interest<\/span><\/span> (PMSI) is the simplest form of security interest. Section 9-103(a) of the UCC defines \u201cpurchase-money collateral\u201d as \u201cgoods or software that secures a purchase-money obligation with respect to that collateral.\u201d A PMSI arises where the debtor gets credit to buy goods and the creditor takes a secured interest in those goods. Suppose you want to buy a big hardbound textbook on credit at your college bookstore. The manager refuses to extend you credit outright but says she will take back a PMSI. In other words, she will retain a security interest in the book itself, and if you don\u2019t pay, you\u2019ll have to return the book; it will be repossessed. Contrast this situation with a counteroffer you might make: because she tells you not to mark up the book (in the event that she has to repossess it if you default), you would rather give her some other collateral to hold\u2014for example, your gold college signet ring. Her security interest in the ring is not a PMSI but a pledge; a PMSI must be an interest in the particular goods purchased. A PMSI would also be created if you borrowed money to buy the book and gave the lender a security interest in the book.\r\n\r\nWhether a transaction is a lease or a PMSI is an issue that frequently arises. The answer depends on the facts of each case. However, a security interest is created if (1) the lessee is obligated to continue payments for the term of the lease; (2) the lessee cannot terminate the obligation; and (3) one of several economic tests, which are listed in UCC Section 1-201 (37), is met. For example, one of the economic tests is that \u201cthe lessee has an option to become owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.\u201d\r\n\r\nThe issue of lease versus security interest gets litigated because of the requirements of Article 9 that a security interest be perfected in certain ways (as we will see). If the transaction turns out to be a security interest, a lessor who fails to meet these requirements runs the risk of losing his property to a third party. And consider this example. Ferrous Brothers Iron Works \u201cleases\u201d a $25,000 punch press to Millie\u2019s Machine Shop. Under the terms of the lease, Millie\u2019s must pay a yearly rental of $5,000 for five years, after which time Millie\u2019s may take title to the machine outright for the payment of $1. During the period of the rental, title remains in Ferrous Brothers. Is this \u201clease\u201d really a security interest? Since ownership comes at nominal charge when the entire lease is satisfied, the transaction would be construed as one creating a security interest. What difference does this make? Suppose Millie\u2019s goes bankrupt in the third year of the lease, and the trustee in bankruptcy wishes to sell the punch press to satisfy debts of the machine shop. If it were a true lease, Ferrous Brothers would be entitled to reclaim the machine (unless the trustee assumed the lease). But if the lease is really intended as a device to create a security interest, then Ferrous Brothers can recover its collateral only if it has otherwise complied with the obligations of Article 9\u2014for example, by recording its security interest, as we will see.\r\n\r\nNow we return to definitions.\r\n\r\n<span class=\"im_margin_term\"><span class=\"im_glossterm\">Debtor<\/span><\/span> is \u201ca person (1) having an interest in the collateral other than a security interest or a lien; (2) a seller of accounts, chattel paper, payment intangibles, or promissory notes; or (3) a consignee.\u201d<span id=\"mayer_1.0-fn28_004\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(28).<\/span>\r\n\r\n<span class=\"im_margin_term\"><span class=\"im_glossterm\">Obligor<\/span><\/span> is \u201ca person that, with respect to an obligation secured by a security interest in or an agricultural lien on the collateral, (i) owes payment or other performance of the obligation, (ii) has provided property other than the collateral to secure payment or other performance of the obligation, or (iii) is otherwise accountable in whole or in part for payment or other performance of the obligation.\u201d<span id=\"mayer_1.0-fn28_005\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102 (59).<\/span> Here is example 1 from the Official Comment to UCC Section 9-102: \u201cBehnfeldt borrows money and grants a security interest in her Miata to secure the debt. Behnfeldt is a debtor and an obligor.\u201d\r\n\r\nBehnfeldt is a debtor because she has an interest in the car\u2014she owns it. She is an obligor because she owes payment to the creditor. Usually the debtor is the obligor.\r\n\r\nA <em class=\"im_emphasis\">secondary obligor<\/em> is \u201can obligor to the extent that: (A) [the] obligation is secondary; or (b) [the person] has a right of recourse with respect to an obligation secured by collateral against the debtor, another obligor, or property of either.\u201d<span id=\"mayer_1.0-fn28_006\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(71).<\/span> The secondary obligor is a guarantor (surety) of the debt, obligated to perform if the primary obligor defaults. Consider example 2 from the Official Comment to Section 9-102: \u201cBehnfeldt borrows money and grants a security interest in her Miata to secure the debt. Bruno cosigns a negotiable note as maker. As before, Behnfeldt is the debtor and an obligor. As an accommodation party, Bruno is a secondary obligor. Bruno has this status even if the note states that her obligation is a primary obligation and that she waives all suretyship defenses.\u201d\r\n\r\nAgain, usually the debtor is the obligor, but consider example 3 from the same Official Comment: \u201cBehnfeldt borrows money on an unsecured basis. Bruno cosigns the note and grants a security interest in her Honda to secure her [Behnfeldt\u2019s] obligation. Inasmuch as Behnfeldt does not have a property interest in the Honda, Behnfeldt is not a debtor. Having granted the security interest, Bruno is the debtor. Because Behnfeldt is a principal obligor, she is not a secondary obligor. Whatever the outcome of enforcement of the security interest against the Honda or Bruno\u2019s secondary obligation, Bruno will look to Behnfeldt for her losses. The enforcement will not affect Behnfeldt\u2019s aggregate obligations.\u201d\r\n\r\n<span class=\"im_margin_term\"><span class=\"im_glossterm\">Secured party<\/span><\/span> is \u201ca person in whose favor a security interest is created or provided for under a security agreement,\u201d and it includes people to whom accounts, chattel paper, payment intangibles, or promissory notes have been sold; consignors; and others under Section 9-102(a)(72).\r\n\r\n<span class=\"im_margin_term\"><span class=\"im_glossterm\">Chattel mortgage<\/span><\/span> means \u201ca debt secured against items of personal property rather than against land, buildings and fixtures.\u201d<span id=\"mayer_1.0-fn28_007\" class=\"im_footnote\">Commercial Brokers, Inc., \u201cGlossary of Real Estate Terms,\u201d <a class=\"im_link\" href=\"http:\/\/www.cbire.com\/index.cfm\/fuseaction\/terms.list\/letter\/C\/contentid\/32302EC3-81D5-47DF-A9CBA32FAE38B22A\" target=\"_blank\">http:\/\/www.cbire.com\/index.cfm\/fuseaction\/terms.list\/letter\/C\/contentid\/32302EC3-81D5-47DF-A9CBA32FAE38B22A<\/a>.<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Property Subject to the Security Interest<\/h2>\r\nNow we examine what property may be put up as security\u2014collateral. Collateral is\u2014again\u2014property that is subject to the security interest. It can be divided into four broad categories: goods, intangible property, indispensable paper, and other types of collateral.\r\n<div id=\"mayer_1.0-ch28_s01_s04_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Goods<\/h3>\r\nTangible property as collateral is goods. <em class=\"im_emphasis\">Goods<\/em> means \u201call things that are movable when a security interest attaches. The term includes (i) fixtures, (ii) standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) the unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes. The term also includes a computer program embedded in goods.\u201d<span id=\"mayer_1.0-fn28_008\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(44).<\/span> Goods are divided into several subcategories; six are taken up here.\r\n<div id=\"mayer_1.0-ch28_s01_s04_s01_s01\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Consumer Goods<\/h4>\r\nThese are \u201cgoods used or bought primarily for personal, family, or household purposes.\u201d<span id=\"mayer_1.0-fn28_009\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(48).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04_s01_s02\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Inventory<\/h4>\r\n\u201cGoods, other than farm products, held by a person for sale or lease or consisting of raw materials, works in progress, or material consumed in a business.\u201d<span id=\"mayer_1.0-fn28_010\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(48).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04_s01_s03\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Farm Products<\/h4>\r\n\u201cCrops, livestock, or other supplies produced or used in farming operations,\u201d including aquatic goods produced in aquaculture.<span id=\"mayer_1.0-fn28_011\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(34).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04_s01_s04\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Equipment<\/h4>\r\nThis is the residual category, defined as \u201cgoods other than inventory, farm products, or consumer goods.\u201d<span id=\"mayer_1.0-fn28_012\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(33).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04_s01_s05\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Fixtures<\/h4>\r\nThese are \u201cgoods that have become so related to particular real property that an interest in them arises under real property law.\u201d<span id=\"mayer_1.0-fn28_013\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(41).<\/span> Examples would be windows, furnaces, central air conditioning, and plumbing fixtures\u2014items that, if removed, would be a cause for significant reconstruction.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04_s01_s06\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Accession<\/h4>\r\nThese are \u201cgoods that are physically united with other goods in such a manner that the identity of the original goods is lost.\u201d<span id=\"mayer_1.0-fn28_014\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(1).<\/span> A new engine installed in an old automobile is an accession.\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Intangible Property<\/h3>\r\nTwo types of collateral are neither goods nor indispensible paper: accounts and general intangibles.\r\n<div id=\"mayer_1.0-ch28_s01_s04_s02_s01\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Accounts<\/h4>\r\nThis type of intangible property includes accounts receivable (the right to payment of money), insurance policy proceeds, energy provided or to be provided, winnings in a lottery, health-care-insurance receivables, promissory notes, securities, letters of credit, and interests in business entities.<span id=\"mayer_1.0-fn28_015\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(2).<\/span> Often there is something in writing to show the existence of the right\u2014such as a right to receive the proceeds of somebody else\u2019s insurance payout\u2014but the writing is merely evidence of the right. The paper itself doesn\u2019t have to be delivered for the transfer of the right to be effective; that\u2019s done by assignment.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04_s02_s02\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">General Intangibles<\/h4>\r\nGeneral intangibles refers to \u201cany personal property, including things in action, other than accounts, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction.\u201d General intangibles include payment intangibles and software.<span id=\"mayer_1.0-fn28_016\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(42).<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04_s03\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Indispensable Paper<\/h3>\r\nThis oddly named category is the middle ground between goods\u2014stuff you can touch\u2014and intangible property. It\u2019s called \u201cindispensable\u201d because although the right to the value\u2014such as a warehouse receipt\u2014is embodied in a written paper, the paper itself is indispensable for the transferee to access the value. For example, suppose Deborah Debtor borrows $3,000 from Carl Creditor, and Carl takes a security interest in four designer chairs Deborah owns that are being stored in a warehouse. If Deborah defaults, Carl has the right to possession of the warehouse receipt: he takes it to the warehouser and is entitled to take the chairs and sell them to satisfy the obligation. The warehouser will not let Carl have the chairs without the warehouse receipt\u2014it\u2019s indispensable paper. There are four kinds of indispensable paper.\r\n<div id=\"mayer_1.0-ch28_s01_s04_s03_s01\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Chattel Paper<\/h4>\r\n<em class=\"im_emphasis\">Chattel<\/em> is another word for goods. Chattel paper is a record (paper or electronic) that demonstrates both \u201ca monetary obligation and a security interest either in certain goods or in a lease on certain goods.\u201d<span id=\"mayer_1.0-fn28_017\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(11).<\/span> The paper represents a valuable asset and can itself be used as collateral. For example, Creditor Car Company sells David Debtor an automobile and takes back a note and security agreement (this is a purchase-money security agreement; the note and security agreement is chattel paper). The chattel paper is not yet collateral; the automobile is. Now, though, Creditor Car Company buys a new hydraulic lift from Lift Co., and grants Lift Co. a security interest in Debtor\u2019s chattel paper to secure Creditor Car\u2019s debt to Lift Co. The chattel paper is now collateral. Chattel paper can be tangible (actual paper) or electronic.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04_s03_s02\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Documents<\/h4>\r\nThis category includes documents of title\u2014bills of lading and warehouse receipts are examples.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04_s03_s03\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Instruments<\/h4>\r\nAn \u201cinstrument\u201d here is \u201ca negotiable instrument (checks, drafts, notes, certificates of deposit) or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in the ordinary course of business is transferred by delivery with any necessary indorsement or assignment.\u201d \u201cInstrument\u201d does not include (i) investment property, (ii) letters of credit, or (iii) writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card.<span id=\"mayer_1.0-fn28_018\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(47).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04_s03_s04\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">Investment Property<\/h4>\r\nThis includes securities (stock, bonds), security accounts, commodity accounts, and commodity contracts.<span id=\"mayer_1.0-fn28_019\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(49).<\/span> Securities may be certified (represented by a certificate) or uncertified (not represented by a certificate).<span id=\"mayer_1.0-fn28_020\" class=\"im_footnote\">Uniform Commercial Code, Section 8-102(a)(4) and (a)(18).<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s04_s04\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Other Types of Collateral<\/h3>\r\nAmong possible other types of collateral that may be used as security is the <span class=\"im_margin_term\"><span class=\"im_glossterm\">floating lien<\/span><\/span>. This is a security interest in property that was not in the possession of the debtor when the security agreement was executed. The floating lien creates an interest that floats on the river of present and future collateral and proceeds held by\u2014most often\u2014the business debtor. It is especially useful in loans to businesses that sell their collateralized inventory. Without the floating lien, the lender would find its collateral steadily depleted as the borrowing business sells its products to its customers. Pretty soon, there\u2019d be no security at all. The floating lien includes the following:\r\n<ul id=\"mayer_1.0-ch28_s01_s04_s04_l01\" class=\"im_itemizedlist im_editable im_block\">\r\n\t<li><em class=\"im_emphasis\">After-acquired property<\/em>. This is property that the debtor acquires after the original deal was set up. It allows the secured party to enhance his security as the debtor (obligor) acquires more property subject to collateralization.<\/li>\r\n\t<li><em class=\"im_emphasis\">Sale proceeds<\/em>. These are proceeds from the disposition of the collateral. Carl Creditor takes a secured interest in Deborah Debtor\u2019s sailboat. She sells the boat and buys a garden tractor. The secured interest attaches to the garden tractor.<\/li>\r\n\t<li><em class=\"im_emphasis\">Future advances<\/em>. Here the security agreement calls for the collateral to stand for both present and future advances of credit without any additional paperwork.Here are examples of future advances:\r\n<ul id=\"mayer_1.0-ch28_s01_s04_s04_l02\" class=\"im_itemizedlist\">\r\n\t<li>Example 1: A debtor enters into a security agreement with a creditor that contains a future advances clause. The agreement gives the creditor a security interest in a $700,000 inventory-picking robot to secure repayment of a loan made to the debtor. The parties contemplate that the debtor will, from time to time, borrow more money, and when the debtor does, the machine will stand as collateral to secure the further indebtedness, without new paperwork.<\/li>\r\n\t<li>Example 2: A debtor signs a security agreement with a bank to buy a car. The security agreement contains a future advances clause. A few years later, the bank sends the debtor a credit card. Two years go by: the car is paid for, but the credit card is in default. The bank seizes the car. \u201cWhoa!\u201d says the debtor. \u201cI paid for the car.\u201d \u201cYes,\u201d says the bank, \u201cbut it was collateral for all future indebtedness you ran up with us. Check out your loan agreement with us and UCC Section 9-204(c), especially Comment 5.\u201d<\/li>\r\n<\/ul>\r\n<\/li>\r\n<\/ul>\r\nSee Figure 11.2 \"Tangibles and Intangibles as Collateral\".\r\n<div id=\"mayer_1.0-ch28_s01_s04_s04_f01\" class=\"im_figure im_large im_editable im_block\">\r\n\r\n<span class=\"im_title-prefix\">Figure 11.2<\/span> Tangibles and Intangibles as Collateral\r\n\r\n<a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_14\/34174eefc49ea47496736fcbffb81bb0.jpg\" target=\"_blank\"><img src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/140\/2014\/09\/20045926\/sm_34174eefc49ea47496736fcbffb81bb0.jpg\" alt=\"\" \/><\/a>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s05\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Attachment of the Security Interest<\/h2>\r\n<div id=\"mayer_1.0-ch28_s01_s05_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">In General<\/h3>\r\n<span class=\"im_margin_term\"><span class=\"im_glossterm\">Attachment<\/span><\/span> is the term used to describe when a security interest becomes enforceable against the debtor with respect to the collateral. In Figure 11.1 \"The Grasping Hand\", \u201dAttachment\u201d is the outreached hand that is prepared, if the debtor defaults, to grasp the collateral.<span id=\"mayer_1.0-fn28_021\" class=\"im_footnote\">Uniform Commercial Code, Section 9-203(a).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s05_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Requirements for Attachment<\/h3>\r\nThere are three requirements for attachment: (1) the secured party gives value; (2) the debtor has rights in the collateral or the power to transfer rights in it to the secured party; (3) the parties have a security agreement \u201cauthenticated\u201d (signed) by the debtor, or the creditor has possession of the collateral.\r\n<div id=\"mayer_1.0-ch28_s01_s05_s02_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Creditor Gives Value<\/h3>\r\nThe creditor, or secured party, must give \u201cvalue\u201d for the security interest to attach. The UCC, in Section 1-204, provides that a person gives \u2018value\u2019 for rights if he acquires them\r\n<ol class=\"im_orderedlist im_editable\">\r\n<ol class=\"im_orderedlist im_editable\">\r\n\t<li>in return for a binding commitment to extend credit or for the extension of immediately available credit whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection; or<\/li>\r\n\t<li>as security for or in total or partial satisfaction of a pre-existing claim; or<\/li>\r\n\t<li>by accepting delivery pursuant to a pre-existing contract for purchase; or<\/li>\r\n\t<li>generally, in return for any consideration sufficient to support a simple contract.<\/li>\r\n<\/ol>\r\n<\/ol>\r\nSuppose Deborah owes Carl $3,000. She cannot repay the sum when due, so she agrees to give Carl a security interest in her automobile to the extent of $3,000 in return for an extension of the time to pay. That is sufficient value.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s05_s02_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Debtor\u2019s Rights in Collateral<\/h3>\r\nThe debtor must have rights in the collateral. Most commonly, the debtor owns the collateral (or has some ownership interest in it). The rights need not necessarily be the immediate right to possession, but they must be rights that can be conveyed.<span id=\"mayer_1.0-fn28_022\" class=\"im_footnote\">Uniform Commercial Code, Section 9-203(b)(2).<\/span> A person can\u2019t put up as collateral property she doesn\u2019t own.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s05_s02_s03\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Security Agreement (Contract) or Possession of Collateral by Creditor<\/h2>\r\nThe debtor most often signs the written security agreement, or contract. The UCC says that \u201cthe debtor [must have] authenticated a security agreement that provides a description of the collateral.\u2026\u201d \u201cAuthenticating\u201d (or \u201csigning,\u201d \u201cadopting,\u201d or \u201caccepting\u201d) means to sign or, in recognition of electronic commercial transactions, \u201cto execute or otherwise adopt a symbol, or encrypt or similarly process a record\u2026with the present intent of the authenticating person to identify the person and adopt or accept a record.\u201d The \u201crecord\u201d is the modern UCC\u2019s substitution for the term \u201cwriting.\u201d It includes information electronically stored or on paper.<span id=\"mayer_1.0-fn28_023\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102, Official Comment 9. Here is a free example of a security agreement online: Docstoc, \u201cFree Business Templates\u2014Sample Open-Ended Security Agreement,\u201d <a class=\"im_link\" href=\"http:\/\/www.docstoc.com\/docs\/271920\/Free-Business-Templates%E2%80%94-Sample-Open-Ended-Security-Agreement\" target=\"_blank\">http:\/\/www.docstoc.com\/docs\/271920\/Free-Business-Templates\u2014-Sample-Open-Ended-Security-Agreement<\/a>.<\/span>\r\n\r\nThe \u201cauthenticating record\u201d (the signed security agreement) is <em class=\"im_emphasis\">not<\/em> required in some cases. It is not required if the debtor makes a <span class=\"im_margin_term\"><span class=\"im_glossterm\">pledge<\/span><\/span> of the collateral\u2014that is, delivers it to the creditor for the creditor to possess. For example, upon a creditor\u2019s request of a debtor for collateral to secure a loan of $3,000, the debtor offers up his stamp collection. The creditor says, \u201cFine, have it appraised (at your expense) and show me the appraisal. If it comes in at $3,000 or more, I\u2019ll take your stamp collection and lock it in my safe until you\u2019ve repaid me. If you don\u2019t repay me, I\u2019ll sell it.\u201d A creditor could take possession of any goods and various kinds of paper, tangible or intangible. In commercial transactions, it would be common for the creditor to have possession of\u2014actually or virtually\u2014certified securities, deposit accounts, electronic chattel paper, investment property, or other such paper or electronic evidence of value.<span id=\"mayer_1.0-fn28_024\" class=\"im_footnote\">Uniform Commercial Code, Section 9-203(b)(3)(B-D).<\/span>\r\n\r\nAgain, Figure 11.1 \"The Grasping Hand\" diagrams the attachment, showing the necessary elements: the creditor gives value, the debtor has rights in collateral, and there is a security agreement signed (authenticated) by the debtor. If the debtor defaults, the creditor\u2019s \u201chand\u201d will grab (repossess) the collateral.\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s06\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Perfection of the Security Interest<\/h2>\r\nAs between the debtor and the creditor, attachment is fine: if the debtor defaults, the creditor will repossess the goods and\u2014usually\u2014sell them to satisfy the outstanding obligation. But unless an additional set of steps is taken, the rights of the secured party might be subordinated to the rights of other secured parties, certain lien creditors, bankruptcy trustees, and buyers who give value and who do not know of the security interest. <span class=\"im_margin_term\"><span class=\"im_glossterm\">Perfection<\/span><\/span> is the secured party\u2019s way of announcing the security interest to the rest of the world. It is the secured party\u2019s claim on the collateral.\r\n\r\nThere are five ways a creditor may perfect a security interest: (1) by filing a financing statement, (2) by taking or retaining possession of the collateral, (3) by taking control of the collateral, (4) by taking control temporarily as specified by the UCC, or (5) by taking control automatically.\r\n<div id=\"mayer_1.0-ch28_s01_s06_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Perfection by Filing<\/h3>\r\n\u201cExcept as otherwise provided\u2026a financing statement must be filed to perfect all security agreements.\u201d<span id=\"mayer_1.0-fn28_025\" class=\"im_footnote\">Uniform Commercial Code, Section 9-310(a).<\/span>\r\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">The Financing Statement<\/h3>\r\nA <span class=\"im_margin_term\"><span class=\"im_glossterm\">financing statement<\/span><\/span> is a simple notice showing the creditor\u2019s general interest in the collateral. It is what\u2019s filed to establish the creditor\u2019s \u201cdibs.\u201d\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Contents of the Financing Statement<\/h3>\r\nIt may consist of the security agreement itself, as long as it contains the information required by the UCC, but most commonly it is much less detailed than the security agreement: it \u201cindicates merely that a person may have a security interest in the collateral[.]\u2026Further inquiry from the parties concerned will be necessary to disclose the full state of affairs.\u201d<span id=\"mayer_1.0-fn28_026\" class=\"im_footnote\">Uniform Commercial Code, Section 9-502, Official Comment 2.<\/span> The financing statement must provide the following information:\r\n<ul id=\"mayer_1.0-ch28_s01_s06_s01_s02_l01\" class=\"im_itemizedlist im_editable im_block\">\r\n\t<li>The debtor\u2019s name. Financing statements are indexed under the debtor\u2019s name, so getting that correct is important. Section 9-503 of the UCC describes what is meant by \u201cname of debtor.\u201d<\/li>\r\n\t<li>The secured party\u2019s name.<\/li>\r\n\t<li>An \u201cindication\u201d of what collateral is covered by the financing statement.<span id=\"mayer_1.0-fn28_027\" class=\"im_footnote\">Uniform Commercial Code, Section 9-502(a).<\/span> It may describe the collateral or it may \u201cindicate that the financing statement covers all assets or all personal property\u201d (such generic references are not acceptable in the security agreement but are OK in the financing statement).<span id=\"mayer_1.0-fn28_028\" class=\"im_footnote\">Uniform Commercial Code, Section 9-504.<\/span> If the collateral is real-property-related, covering timber to be cut or fixtures, it must include a description of the real property to which the collateral is related.<span id=\"mayer_1.0-fn28_029\" class=\"im_footnote\">Uniform Commercial Code, Section 9-502(b).<\/span><\/li>\r\n<\/ul>\r\nThe form of the financing statement may vary from state to state, but see Figure 11.3 \"UCC-1 Financing Statement\" for a typical financing statement. Minor errors or omissions on the form will not make it ineffective, but the debtor\u2019s signature is required unless the creditor is authorized by the debtor to make the filing without a signature, which facilitates paperless filing.<span id=\"mayer_1.0-fn28_030\" class=\"im_footnote\">Uniform Commercial Code, Section 9-506; Uniform Commercial Code, Section, 9-502, Comment 3.<\/span>\r\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s02_f01\" class=\"im_figure im_large im_editable im_block\">\r\n\r\n<span class=\"im_title-prefix\">Figure 11.3<\/span> UCC-1 Financing Statement\r\n\r\n<a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_14\/8ee0b06d7d2ee70326cf397a9c94f340.jpg\" target=\"_blank\"><img src=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/images\/sm_8ee0b06d7d2ee70326cf397a9c94f340.jpg#fixme\" alt=\"\" \/><\/a>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s03\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Duration of the Financing Statement<\/h2>\r\nGenerally, the financing statement is effective for five years; a <span class=\"im_margin_term\"><span class=\"im_glossterm\">continuation statement<\/span><\/span> may be filed within six months before the five-year expiration date, and it is good for another five years.<span id=\"mayer_1.0-fn28_031\" class=\"im_footnote\">Uniform Commercial Code, Section 9-515.<\/span> Manufactured-home filings are good for thirty years. When the debtor\u2019s obligation is satisfied, the secured party files a <span class=\"im_margin_term\"><span class=\"im_glossterm\">termination statement<\/span><\/span> if the collateral was consumer goods; otherwise\u2014upon demand\u2014the secured party sends the debtor a termination statement.<span id=\"mayer_1.0-fn28_032\" class=\"im_footnote\">Uniform Commercial Code, Section 9-513.<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s04\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Debtor Moves out of State<\/h3>\r\nThe UCC also has rules for continued perfection of security interests when the debtor\u2014whether an individual or an association (corporation)\u2014moves from one state to another. Generally, an interest remains perfected until the earlier of when the perfection would have expired or for four months after the debtor moves to a new jurisdiction.<span id=\"mayer_1.0-fn28_033\" class=\"im_footnote\">Uniform Commercial Code, Section 9-316.<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s05\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Where to File the Financing Statement<\/h3>\r\nFor most real-estate-related filings\u2014ore to be extracted from mines, agricultural collateral, and fixtures\u2014the place to file is with the local office that files mortgages, typically the county auditor\u2019s office.<span id=\"mayer_1.0-fn28_034\" class=\"im_footnote\">Uniform Commercial Code, Section 9-501.<\/span> For other collateral, the filing place is as duly authorized by the state. In some states, that is the office of the Secretary of State; in others, it is the Department of Licensing; or it might be a private party that maintains the state\u2019s filing system.<span id=\"mayer_1.0-fn28_035\" class=\"im_footnote\">Uniform Commercial Code, Section 9-501(a)(2).<\/span> The filing should be made in the state where the debtor has his or her primary residence for individuals, and in the state where the debtor is organized if it is a registered organization.<span id=\"mayer_1.0-fn28_036\" class=\"im_footnote\">Uniform Commercial Code, Section 9-307(b).<\/span> The point is, creditors need to know where to look to see if the collateral offered up is already encumbered. In any event, filing the statement in more than one place can\u2019t hurt. The filing office will provide instructions on how to file; these are available online, and electronic filing is usually available for at least some types of collateral.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s06\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Exemptions<\/h3>\r\nSome transactions are exempt from the filing provision. The most important category of exempt collateral is that covered by state certificate of title laws. For example, many states require automobile owners to obtain a certificate of title from the state motor vehicle office. Most of these states provide that it is not necessary to file a financing statement in order to perfect a security interest in an automobile. The reason is that the motor vehicle regulations require any security interests to be stated on the title, so that anyone attempting to buy a car in which a security interest had been created would be on notice when he took the actual title certificate.<span id=\"mayer_1.0-fn28_037\" class=\"im_footnote\">Uniform Commercial Code, Section 9-303.<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s06_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Temporary Perfection<\/h2>\r\nThe UCC provides that certain types of collateral are automatically perfected but only for a while: \u201cA security interest in certificated securities, or negotiable documents, or instruments is perfected without filing or the taking of possession for a period of twenty days from the time it attaches to the extent that it arises for new value given under an authenticated security agreement.\u201d<span id=\"mayer_1.0-fn28_038\" class=\"im_footnote\">Uniform Commercial Code, Section 9-312(e).<\/span> Similar temporary perfection covers negotiable documents or goods in possession of a bailee, and when a security certificate or instrument is delivered to the debtor for sale, exchange, presentation, collection, enforcement, renewal, or registration.<span id=\"mayer_1.0-fn28_039\" class=\"im_footnote\">Uniform Commercial Code, Section 9-312(f) and (g).<\/span> After the twenty-day period, perfection would have to be by one of the other methods mentioned here.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s06_s03\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Perfection by Possession<\/h3>\r\nA secured party may perfect the security interest by possession where the collateral is negotiable documents, goods, instruments, money, tangible chattel paper, or certified securities.<span id=\"mayer_1.0-fn28_040\" class=\"im_footnote\">Uniform Commercial Code, Section 9-313.<\/span> This is a pledge of assets (mentioned in the example of the stamp collection). No security agreement is required for perfection by possession.\r\n\r\nA variation on the theme of pledge is <span class=\"im_margin_term\"><span class=\"im_glossterm\">field warehousing<\/span><\/span>. When the pawnbroker lends money, he takes possession of the goods\u2014the watch, the ring, the camera. But when large manufacturing concerns wish to borrow against their inventory, taking physical possession is not necessarily so easy. The bank does not wish to have shipped to its Wall Street office several tons of copper mined in Colorado. Bank employees perhaps could go west to the mine and take physical control of the copper, but banks are unlikely to employ people and equipment necessary to build a warehouse on the spot. Thus this so-called field pledge is rare.\r\n\r\nMore common is the field warehouse. The field warehouse can take one of two forms. An independent company can go to the site and put up a temporary structure\u2014for example, a fence around the copper\u2014thus establishing physical control of the collateral. Or the independent company can lease the warehouse facilities of the debtor and post signs indicating that the goods inside are within its sale custody. Either way, the goods are within the physical possession of the field warehouse service. The field warehouse then segregates the goods secured to the particular bank or finance company and issues a warehouse receipt to the lender for those goods. The lender is thus assured of a security interest in the collateral.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s06_s04\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Perfection by Control<\/h3>\r\n\u201cA security interest in investment property, deposit accounts, letter-of-credit rights, or electronic chattel paper may be perfected by control of the collateral.\u201d<span id=\"mayer_1.0-fn28_041\" class=\"im_footnote\">Uniform Commercial Code, Section 9-314.<\/span> \u201cControl\u201d depends on what the collateral is. If it\u2019s a checking account, for example, the bank with which the deposit account is maintained has \u201ccontrol\u201d: the bank gets a security interest automatically because, as Official Comment 3 to UCC Section 9-104 puts it, \u201call actual and potential creditors of the debtor are always on notice that the bank with which the debtor\u2019s deposit account is maintained may assert a claim against the deposit account.\u201d \u201cControl\u201d of electronic chattel paper of investment property, and of letter-of-credit rights is detailed in Sections 9-105, 9-106, and 9-107. Obtaining \u201ccontrol\u201d means that the creditor has taken whatever steps are necessary, given the manner in which the items are held, to place itself in a position where it can have the items sold, without further action by the owner.<span id=\"mayer_1.0-fn28_042\" class=\"im_footnote\">Uniform Commercial Code, Section 8-106, Official Comment 1.<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s06_s05\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Automatic Perfection<\/h3>\r\nThe fifth mechanism of perfection is addressed in Section 9-309 of the UCC: there are several circumstances where a security interest is perfected upon mere attachment. The most important here is <span class=\"im_margin_term\"><span class=\"im_glossterm\">automatic perfection<\/span><\/span> of a purchase-money security interest given in consumer goods. If a seller of consumer goods takes a PMSI in the goods sold, then perfection of the security interest is automatic. But the seller may file a financial statement and faces a risk if he fails to file and the consumer debtor sells the goods. Under Section 9-320(b), a buyer of consumer goods takes free of a security interest, even though perfected, if he buys without knowledge of the interest, pays value, and uses the goods for his personal, family, or household purposes\u2014unless the secured party had first filed a financing statement covering the goods.\r\n<div id=\"mayer_1.0-ch28_s01_s06_s05_f01\" class=\"im_figure im_large im_editable im_block\">\r\n\r\n<span class=\"im_title-prefix\">Figure 11.4<\/span> Attachment and Perfection\r\n\r\n<a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_14\/72471aaee987f10b5b214c82a7d36dcc.jpg\" target=\"_blank\"><img src=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/images\/sm_72471aaee987f10b5b214c82a7d36dcc.jpg#fixme\" alt=\"\" \/><\/a>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch28_s01_s06_s05_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\r\n<h3 class=\"im_title\">Key Takeaway<\/h3>\r\nA creditor may be secured\u2014allowed to take the debtor\u2019s property upon debtor\u2019s default\u2014by agreement between the parties or by operation of law. The law governing agreements for personal property security is Article 9 of the UCC. The creditor\u2019s first step is to attach the security interest. This is usually accomplished when the debtor, in return for value (a loan or credit) extended from the creditor, puts up as collateral some valuable asset in which she has an interest and authenticates (signs) a security agreement (the contract) giving the creditor a security interest in collateral and allowing that the creditor may take it if the debtor defaults. The UCC lists various kinds of assets that can be collateralized, ranging from tangible property (goods), to assets only able to be manifested by paper (indispensable paper), to intangible assets (like patent rights). Sometimes no security agreement is necessary, mostly if the creditor takes possession of the collateral. After attachment, the prudent creditor will want to perfect the security interest to make sure no other creditors claim an interest in the collateral. Perfection is most often accomplished by filing a financing statement in the appropriate place to put the world on notice of the creditor\u2019s interest. Perfection can also be achieved by a pledge (possession by the secured creditor) or by \u201ccontrol\u201d of certain assets (having such control over them as to be able to sell them if the debtor defaults). Perfection is automatic temporarily for some items (certified securities, instruments, and negotiable documents) but also upon mere attachment to purchase-money security interests in consumer goods.\r\n\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\">\r\n<h3>Exercises<\/h3>\r\n<section id=\"self-check-questions\">\r\n<ol>\r\n\t<li>Why is a creditor ill-advised to be unsecured?<\/li>\r\n\t<li>Elaine bought a computer for her use as a high school teacher, the school contributing one-third of its cost. Elaine was compelled to file for bankruptcy. The computer store claimed it had perfected its interest by mere attachment, and the bankruptcy trustee claimed the computer as an asset of Elaine\u2019s bankruptcy estate. Who wins, and why?<\/li>\r\n\t<li>What is the general rule governing where financing statements should be filed?<\/li>\r\n\t<li>If the purpose of perfection is to alert the world to the creditor\u2019s claim in the collateral, why is perfection accomplishable by possession alone in some cases?<\/li>\r\n\t<li>Contractor pawned a power tool and got a $200 loan from Pawnbroker. Has there been a perfection of a security interest?<\/li>\r\n<\/ol>\r\n<\/section><\/div>\r\n<div id=\"mayer_1.0-ch52_s02_s06_n02\" class=\"im_exercises im_editable im_block\"><\/div>\r\n<\/div>\r\n<\/div>","rendered":"<div class=\"bcc-box bcc-highlight\">\n<h3>Learning Objectives<\/h3>\n<p>By the end of this section, you will be able to:<\/p>\n<ul id=\"mayer_1.0-ch52_s02_l01\" class=\"im_orderedlist\">\n<li>Recognize, most generally, the two methods by which debtors\u2019 obligations may be secured.<\/li>\n<li>Know the source of law for personal property security.<\/li>\n<li>Understand the meaning of <em class=\"im_emphasis\">security interest<\/em> and other terminology necessary to discuss the issues.<\/li>\n<li>Know what property is subject to the security interest.<\/li>\n<li>Understand how the security interest is created\u2014\u201dattached\u201d\u2014and perfected.<\/li>\n<\/ul>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">The Problem of Security<\/h2>\n<p>Creditors want assurances that they will be repaid by the debtor. An oral promise to pay is no security at all, and\u2014as it is oral\u2014it is difficult to prove. A <span class=\"im_margin_term\"><span class=\"im_glossterm\">signature loan<\/span><\/span> is merely a written promise by the debtor to repay, but the creditor stuck holding a promissory note with a signature loan only\u2014while he may sue a defaulting debtor\u2014will get nothing if the debtor is insolvent. Again, that\u2019s no security at all. Real security for the creditor comes in two forms: by agreement with the debtor or by operation of law without an agreement.<\/p>\n<div id=\"mayer_1.0-ch28_s01_s01_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">By Agreement with the Debtor<\/h2>\n<p>Security obtained through agreement comes in three major types: (1) personal property security (the most common form of security); (2) suretyship\u2014the willingness of a third party to pay if the primarily obligated party does not; and (3) mortgage of real estate.<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s01_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">By Operation of Law<\/h2>\n<p>Security obtained through operation of law is known as a <span class=\"im_margin_term\"><span class=\"im_glossterm\">lien<\/span><\/span>. Derived from the French for \u201cstring\u201d or \u201ctie,\u201d a <em class=\"im_emphasis\">lien<\/em> is the legal hold that a creditor has over the property of another in order to secure payment or discharge an obligation.<\/p>\n<p>In this chapter, we take up security interests in personal property and suretyship. In the next chapter, we look at mortgages and nonconsensual liens.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Basics of Secured Transactions<\/h2>\n<p>The law of secured transactions consists of five principal components: (1) the nature of property that can be the subject of a security interest; (2) the methods of creating the security interest; (3) the perfection of the security interest against claims of others; (4) priorities among secured and unsecured creditors\u2014that is, who will be entitled to the secured property if more than one person asserts a legal right to it; and (5) the rights of creditors when the debtor defaults. After considering the source of the law and some key terminology, we examine each of these components in turn.<\/p>\n<p>Here is the simplest (and most common) scenario: Debtor borrows money or obtains credit from Creditor, signs a note and security agreement putting up collateral, and promises to pay the debt or, upon Debtor\u2019s default, let Creditor (secured party) take possession of (repossess) the collateral and sell it. Figure 11.1 &#8220;The Grasping Hand&#8221; illustrates this scenario\u2014the grasping <em class=\"im_emphasis\">hand<\/em> is Creditor\u2019s reach for the collateral, but the hand will not close around the collateral and take it (repossess) unless Debtor defaults.<\/p>\n<div id=\"mayer_1.0-ch28_s01_s02_f01\" class=\"im_figure im_large im_editable im_block\">\n<p><span class=\"im_title-prefix\">Figure 11.1<\/span> The Grasping Hand<\/p>\n<p><a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_14\/7437424f75f733061c5c741252aa1d81.jpg\" target=\"_blank\"><img decoding=\"async\" src=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/images\/sm_7437424f75f733061c5c741252aa1d81.jpg#fixme\" alt=\"\" \/><\/a><\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s03\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Source of Law and Definitions<\/h2>\n<div id=\"mayer_1.0-ch28_s01_s03_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Source of Law<\/h3>\n<p>Article 9 of the Uniform Commercial Code (UCC) governs security interests in personal property. The UCC defines the scope of the article (here slightly truncated):<span id=\"mayer_1.0-fn28_001\" class=\"im_footnote\">Uniform Commercial Code, Section 9-109.<\/span><\/p>\n<p>This chapter applies to the following:<\/p>\n<ol id=\"mayer_1.0-ch28_s01_s03_s01_l01\" class=\"im_orderedlist im_editable\">\n<li>A transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;<\/li>\n<li>An agricultural lien;<\/li>\n<li>A sale of accounts, chattel paper, payment intangibles, or promissory notes;<\/li>\n<li>A consignment\u2026<\/li>\n<\/ol>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s03_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Definitions<\/h2>\n<p>As always, it is necessary to review some definitions so that communication on the topic at hand is possible. The secured transaction always involves a debtor, a secured party, a security agreement, a security interest, and collateral.<\/p>\n<p>Article 9 applies to any transaction \u201cthat creates a security interest.\u201d The UCC in Section 1-201(35) defines <span class=\"im_margin_term\"><span class=\"im_glossterm\">security interest<\/span><\/span> as \u201can interest in personal property or fixtures which secures payment or performance of an obligation.\u201d<\/p>\n<p><span class=\"im_margin_term\"><span class=\"im_glossterm\">Security agreement<\/span><\/span> is \u201can agreement that creates or provides for a security interest.\u201d It is the contract that sets up the debtor\u2019s duties and the creditor\u2019s rights in event the debtor defaults.<span id=\"mayer_1.0-fn28_002\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(73).<\/span><\/p>\n<p><span class=\"im_margin_term\"><span class=\"im_glossterm\">Collateral<\/span><\/span> \u201cmeans the property subject to a security interest or agricultural lien.\u201d<span id=\"mayer_1.0-fn28_003\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(12).<\/span><\/p>\n<p><span class=\"im_margin_term\"><span class=\"im_glossterm\">Purchase-money security interest<\/span><\/span> (PMSI) is the simplest form of security interest. Section 9-103(a) of the UCC defines \u201cpurchase-money collateral\u201d as \u201cgoods or software that secures a purchase-money obligation with respect to that collateral.\u201d A PMSI arises where the debtor gets credit to buy goods and the creditor takes a secured interest in those goods. Suppose you want to buy a big hardbound textbook on credit at your college bookstore. The manager refuses to extend you credit outright but says she will take back a PMSI. In other words, she will retain a security interest in the book itself, and if you don\u2019t pay, you\u2019ll have to return the book; it will be repossessed. Contrast this situation with a counteroffer you might make: because she tells you not to mark up the book (in the event that she has to repossess it if you default), you would rather give her some other collateral to hold\u2014for example, your gold college signet ring. Her security interest in the ring is not a PMSI but a pledge; a PMSI must be an interest in the particular goods purchased. A PMSI would also be created if you borrowed money to buy the book and gave the lender a security interest in the book.<\/p>\n<p>Whether a transaction is a lease or a PMSI is an issue that frequently arises. The answer depends on the facts of each case. However, a security interest is created if (1) the lessee is obligated to continue payments for the term of the lease; (2) the lessee cannot terminate the obligation; and (3) one of several economic tests, which are listed in UCC Section 1-201 (37), is met. For example, one of the economic tests is that \u201cthe lessee has an option to become owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.\u201d<\/p>\n<p>The issue of lease versus security interest gets litigated because of the requirements of Article 9 that a security interest be perfected in certain ways (as we will see). If the transaction turns out to be a security interest, a lessor who fails to meet these requirements runs the risk of losing his property to a third party. And consider this example. Ferrous Brothers Iron Works \u201cleases\u201d a $25,000 punch press to Millie\u2019s Machine Shop. Under the terms of the lease, Millie\u2019s must pay a yearly rental of $5,000 for five years, after which time Millie\u2019s may take title to the machine outright for the payment of $1. During the period of the rental, title remains in Ferrous Brothers. Is this \u201clease\u201d really a security interest? Since ownership comes at nominal charge when the entire lease is satisfied, the transaction would be construed as one creating a security interest. What difference does this make? Suppose Millie\u2019s goes bankrupt in the third year of the lease, and the trustee in bankruptcy wishes to sell the punch press to satisfy debts of the machine shop. If it were a true lease, Ferrous Brothers would be entitled to reclaim the machine (unless the trustee assumed the lease). But if the lease is really intended as a device to create a security interest, then Ferrous Brothers can recover its collateral only if it has otherwise complied with the obligations of Article 9\u2014for example, by recording its security interest, as we will see.<\/p>\n<p>Now we return to definitions.<\/p>\n<p><span class=\"im_margin_term\"><span class=\"im_glossterm\">Debtor<\/span><\/span> is \u201ca person (1) having an interest in the collateral other than a security interest or a lien; (2) a seller of accounts, chattel paper, payment intangibles, or promissory notes; or (3) a consignee.\u201d<span id=\"mayer_1.0-fn28_004\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(28).<\/span><\/p>\n<p><span class=\"im_margin_term\"><span class=\"im_glossterm\">Obligor<\/span><\/span> is \u201ca person that, with respect to an obligation secured by a security interest in or an agricultural lien on the collateral, (i) owes payment or other performance of the obligation, (ii) has provided property other than the collateral to secure payment or other performance of the obligation, or (iii) is otherwise accountable in whole or in part for payment or other performance of the obligation.\u201d<span id=\"mayer_1.0-fn28_005\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102 (59).<\/span> Here is example 1 from the Official Comment to UCC Section 9-102: \u201cBehnfeldt borrows money and grants a security interest in her Miata to secure the debt. Behnfeldt is a debtor and an obligor.\u201d<\/p>\n<p>Behnfeldt is a debtor because she has an interest in the car\u2014she owns it. She is an obligor because she owes payment to the creditor. Usually the debtor is the obligor.<\/p>\n<p>A <em class=\"im_emphasis\">secondary obligor<\/em> is \u201can obligor to the extent that: (A) [the] obligation is secondary; or (b) [the person] has a right of recourse with respect to an obligation secured by collateral against the debtor, another obligor, or property of either.\u201d<span id=\"mayer_1.0-fn28_006\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(71).<\/span> The secondary obligor is a guarantor (surety) of the debt, obligated to perform if the primary obligor defaults. Consider example 2 from the Official Comment to Section 9-102: \u201cBehnfeldt borrows money and grants a security interest in her Miata to secure the debt. Bruno cosigns a negotiable note as maker. As before, Behnfeldt is the debtor and an obligor. As an accommodation party, Bruno is a secondary obligor. Bruno has this status even if the note states that her obligation is a primary obligation and that she waives all suretyship defenses.\u201d<\/p>\n<p>Again, usually the debtor is the obligor, but consider example 3 from the same Official Comment: \u201cBehnfeldt borrows money on an unsecured basis. Bruno cosigns the note and grants a security interest in her Honda to secure her [Behnfeldt\u2019s] obligation. Inasmuch as Behnfeldt does not have a property interest in the Honda, Behnfeldt is not a debtor. Having granted the security interest, Bruno is the debtor. Because Behnfeldt is a principal obligor, she is not a secondary obligor. Whatever the outcome of enforcement of the security interest against the Honda or Bruno\u2019s secondary obligation, Bruno will look to Behnfeldt for her losses. The enforcement will not affect Behnfeldt\u2019s aggregate obligations.\u201d<\/p>\n<p><span class=\"im_margin_term\"><span class=\"im_glossterm\">Secured party<\/span><\/span> is \u201ca person in whose favor a security interest is created or provided for under a security agreement,\u201d and it includes people to whom accounts, chattel paper, payment intangibles, or promissory notes have been sold; consignors; and others under Section 9-102(a)(72).<\/p>\n<p><span class=\"im_margin_term\"><span class=\"im_glossterm\">Chattel mortgage<\/span><\/span> means \u201ca debt secured against items of personal property rather than against land, buildings and fixtures.\u201d<span id=\"mayer_1.0-fn28_007\" class=\"im_footnote\">Commercial Brokers, Inc., \u201cGlossary of Real Estate Terms,\u201d <a class=\"im_link\" href=\"http:\/\/www.cbire.com\/index.cfm\/fuseaction\/terms.list\/letter\/C\/contentid\/32302EC3-81D5-47DF-A9CBA32FAE38B22A\" target=\"_blank\">http:\/\/www.cbire.com\/index.cfm\/fuseaction\/terms.list\/letter\/C\/contentid\/32302EC3-81D5-47DF-A9CBA32FAE38B22A<\/a>.<\/span><\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Property Subject to the Security Interest<\/h2>\n<p>Now we examine what property may be put up as security\u2014collateral. Collateral is\u2014again\u2014property that is subject to the security interest. It can be divided into four broad categories: goods, intangible property, indispensable paper, and other types of collateral.<\/p>\n<div id=\"mayer_1.0-ch28_s01_s04_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Goods<\/h3>\n<p>Tangible property as collateral is goods. <em class=\"im_emphasis\">Goods<\/em> means \u201call things that are movable when a security interest attaches. The term includes (i) fixtures, (ii) standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) the unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes. The term also includes a computer program embedded in goods.\u201d<span id=\"mayer_1.0-fn28_008\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(44).<\/span> Goods are divided into several subcategories; six are taken up here.<\/p>\n<div id=\"mayer_1.0-ch28_s01_s04_s01_s01\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Consumer Goods<\/h4>\n<p>These are \u201cgoods used or bought primarily for personal, family, or household purposes.\u201d<span id=\"mayer_1.0-fn28_009\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(48).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04_s01_s02\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Inventory<\/h4>\n<p>\u201cGoods, other than farm products, held by a person for sale or lease or consisting of raw materials, works in progress, or material consumed in a business.\u201d<span id=\"mayer_1.0-fn28_010\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(48).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04_s01_s03\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Farm Products<\/h4>\n<p>\u201cCrops, livestock, or other supplies produced or used in farming operations,\u201d including aquatic goods produced in aquaculture.<span id=\"mayer_1.0-fn28_011\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(34).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04_s01_s04\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Equipment<\/h4>\n<p>This is the residual category, defined as \u201cgoods other than inventory, farm products, or consumer goods.\u201d<span id=\"mayer_1.0-fn28_012\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(33).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04_s01_s05\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Fixtures<\/h4>\n<p>These are \u201cgoods that have become so related to particular real property that an interest in them arises under real property law.\u201d<span id=\"mayer_1.0-fn28_013\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(41).<\/span> Examples would be windows, furnaces, central air conditioning, and plumbing fixtures\u2014items that, if removed, would be a cause for significant reconstruction.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04_s01_s06\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Accession<\/h4>\n<p>These are \u201cgoods that are physically united with other goods in such a manner that the identity of the original goods is lost.\u201d<span id=\"mayer_1.0-fn28_014\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(1).<\/span> A new engine installed in an old automobile is an accession.<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Intangible Property<\/h3>\n<p>Two types of collateral are neither goods nor indispensible paper: accounts and general intangibles.<\/p>\n<div id=\"mayer_1.0-ch28_s01_s04_s02_s01\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Accounts<\/h4>\n<p>This type of intangible property includes accounts receivable (the right to payment of money), insurance policy proceeds, energy provided or to be provided, winnings in a lottery, health-care-insurance receivables, promissory notes, securities, letters of credit, and interests in business entities.<span id=\"mayer_1.0-fn28_015\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(2).<\/span> Often there is something in writing to show the existence of the right\u2014such as a right to receive the proceeds of somebody else\u2019s insurance payout\u2014but the writing is merely evidence of the right. The paper itself doesn\u2019t have to be delivered for the transfer of the right to be effective; that\u2019s done by assignment.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04_s02_s02\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">General Intangibles<\/h4>\n<p>General intangibles refers to \u201cany personal property, including things in action, other than accounts, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction.\u201d General intangibles include payment intangibles and software.<span id=\"mayer_1.0-fn28_016\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(42).<\/span><\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04_s03\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Indispensable Paper<\/h3>\n<p>This oddly named category is the middle ground between goods\u2014stuff you can touch\u2014and intangible property. It\u2019s called \u201cindispensable\u201d because although the right to the value\u2014such as a warehouse receipt\u2014is embodied in a written paper, the paper itself is indispensable for the transferee to access the value. For example, suppose Deborah Debtor borrows $3,000 from Carl Creditor, and Carl takes a security interest in four designer chairs Deborah owns that are being stored in a warehouse. If Deborah defaults, Carl has the right to possession of the warehouse receipt: he takes it to the warehouser and is entitled to take the chairs and sell them to satisfy the obligation. The warehouser will not let Carl have the chairs without the warehouse receipt\u2014it\u2019s indispensable paper. There are four kinds of indispensable paper.<\/p>\n<div id=\"mayer_1.0-ch28_s01_s04_s03_s01\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Chattel Paper<\/h4>\n<p><em class=\"im_emphasis\">Chattel<\/em> is another word for goods. Chattel paper is a record (paper or electronic) that demonstrates both \u201ca monetary obligation and a security interest either in certain goods or in a lease on certain goods.\u201d<span id=\"mayer_1.0-fn28_017\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(11).<\/span> The paper represents a valuable asset and can itself be used as collateral. For example, Creditor Car Company sells David Debtor an automobile and takes back a note and security agreement (this is a purchase-money security agreement; the note and security agreement is chattel paper). The chattel paper is not yet collateral; the automobile is. Now, though, Creditor Car Company buys a new hydraulic lift from Lift Co., and grants Lift Co. a security interest in Debtor\u2019s chattel paper to secure Creditor Car\u2019s debt to Lift Co. The chattel paper is now collateral. Chattel paper can be tangible (actual paper) or electronic.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04_s03_s02\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Documents<\/h4>\n<p>This category includes documents of title\u2014bills of lading and warehouse receipts are examples.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04_s03_s03\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Instruments<\/h4>\n<p>An \u201cinstrument\u201d here is \u201ca negotiable instrument (checks, drafts, notes, certificates of deposit) or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in the ordinary course of business is transferred by delivery with any necessary indorsement or assignment.\u201d \u201cInstrument\u201d does not include (i) investment property, (ii) letters of credit, or (iii) writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card.<span id=\"mayer_1.0-fn28_018\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(47).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04_s03_s04\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">Investment Property<\/h4>\n<p>This includes securities (stock, bonds), security accounts, commodity accounts, and commodity contracts.<span id=\"mayer_1.0-fn28_019\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102(a)(49).<\/span> Securities may be certified (represented by a certificate) or uncertified (not represented by a certificate).<span id=\"mayer_1.0-fn28_020\" class=\"im_footnote\">Uniform Commercial Code, Section 8-102(a)(4) and (a)(18).<\/span><\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s04_s04\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Other Types of Collateral<\/h3>\n<p>Among possible other types of collateral that may be used as security is the <span class=\"im_margin_term\"><span class=\"im_glossterm\">floating lien<\/span><\/span>. This is a security interest in property that was not in the possession of the debtor when the security agreement was executed. The floating lien creates an interest that floats on the river of present and future collateral and proceeds held by\u2014most often\u2014the business debtor. It is especially useful in loans to businesses that sell their collateralized inventory. Without the floating lien, the lender would find its collateral steadily depleted as the borrowing business sells its products to its customers. Pretty soon, there\u2019d be no security at all. The floating lien includes the following:<\/p>\n<ul id=\"mayer_1.0-ch28_s01_s04_s04_l01\" class=\"im_itemizedlist im_editable im_block\">\n<li><em class=\"im_emphasis\">After-acquired property<\/em>. This is property that the debtor acquires after the original deal was set up. It allows the secured party to enhance his security as the debtor (obligor) acquires more property subject to collateralization.<\/li>\n<li><em class=\"im_emphasis\">Sale proceeds<\/em>. These are proceeds from the disposition of the collateral. Carl Creditor takes a secured interest in Deborah Debtor\u2019s sailboat. She sells the boat and buys a garden tractor. The secured interest attaches to the garden tractor.<\/li>\n<li><em class=\"im_emphasis\">Future advances<\/em>. Here the security agreement calls for the collateral to stand for both present and future advances of credit without any additional paperwork.Here are examples of future advances:\n<ul id=\"mayer_1.0-ch28_s01_s04_s04_l02\" class=\"im_itemizedlist\">\n<li>Example 1: A debtor enters into a security agreement with a creditor that contains a future advances clause. The agreement gives the creditor a security interest in a $700,000 inventory-picking robot to secure repayment of a loan made to the debtor. The parties contemplate that the debtor will, from time to time, borrow more money, and when the debtor does, the machine will stand as collateral to secure the further indebtedness, without new paperwork.<\/li>\n<li>Example 2: A debtor signs a security agreement with a bank to buy a car. The security agreement contains a future advances clause. A few years later, the bank sends the debtor a credit card. Two years go by: the car is paid for, but the credit card is in default. The bank seizes the car. \u201cWhoa!\u201d says the debtor. \u201cI paid for the car.\u201d \u201cYes,\u201d says the bank, \u201cbut it was collateral for all future indebtedness you ran up with us. Check out your loan agreement with us and UCC Section 9-204(c), especially Comment 5.\u201d<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>See Figure 11.2 &#8220;Tangibles and Intangibles as Collateral&#8221;.<\/p>\n<div id=\"mayer_1.0-ch28_s01_s04_s04_f01\" class=\"im_figure im_large im_editable im_block\">\n<p><span class=\"im_title-prefix\">Figure 11.2<\/span> Tangibles and Intangibles as Collateral<\/p>\n<p><a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_14\/34174eefc49ea47496736fcbffb81bb0.jpg\" target=\"_blank\"><img decoding=\"async\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/140\/2014\/09\/20045926\/sm_34174eefc49ea47496736fcbffb81bb0.jpg\" alt=\"\" \/><\/a><\/p>\n<\/div>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s05\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Attachment of the Security Interest<\/h2>\n<div id=\"mayer_1.0-ch28_s01_s05_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">In General<\/h3>\n<p><span class=\"im_margin_term\"><span class=\"im_glossterm\">Attachment<\/span><\/span> is the term used to describe when a security interest becomes enforceable against the debtor with respect to the collateral. In Figure 11.1 &#8220;The Grasping Hand&#8221;, \u201dAttachment\u201d is the outreached hand that is prepared, if the debtor defaults, to grasp the collateral.<span id=\"mayer_1.0-fn28_021\" class=\"im_footnote\">Uniform Commercial Code, Section 9-203(a).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s05_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Requirements for Attachment<\/h3>\n<p>There are three requirements for attachment: (1) the secured party gives value; (2) the debtor has rights in the collateral or the power to transfer rights in it to the secured party; (3) the parties have a security agreement \u201cauthenticated\u201d (signed) by the debtor, or the creditor has possession of the collateral.<\/p>\n<div id=\"mayer_1.0-ch28_s01_s05_s02_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Creditor Gives Value<\/h3>\n<p>The creditor, or secured party, must give \u201cvalue\u201d for the security interest to attach. The UCC, in Section 1-204, provides that a person gives \u2018value\u2019 for rights if he acquires them<\/p>\n<ol class=\"im_orderedlist im_editable\">\n<li>in return for a binding commitment to extend credit or for the extension of immediately available credit whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection; or<\/li>\n<li>as security for or in total or partial satisfaction of a pre-existing claim; or<\/li>\n<li>by accepting delivery pursuant to a pre-existing contract for purchase; or<\/li>\n<li>generally, in return for any consideration sufficient to support a simple contract.<\/li>\n<\/ol>\n<p>Suppose Deborah owes Carl $3,000. She cannot repay the sum when due, so she agrees to give Carl a security interest in her automobile to the extent of $3,000 in return for an extension of the time to pay. That is sufficient value.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s05_s02_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Debtor\u2019s Rights in Collateral<\/h3>\n<p>The debtor must have rights in the collateral. Most commonly, the debtor owns the collateral (or has some ownership interest in it). The rights need not necessarily be the immediate right to possession, but they must be rights that can be conveyed.<span id=\"mayer_1.0-fn28_022\" class=\"im_footnote\">Uniform Commercial Code, Section 9-203(b)(2).<\/span> A person can\u2019t put up as collateral property she doesn\u2019t own.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s05_s02_s03\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Security Agreement (Contract) or Possession of Collateral by Creditor<\/h2>\n<p>The debtor most often signs the written security agreement, or contract. The UCC says that \u201cthe debtor [must have] authenticated a security agreement that provides a description of the collateral.\u2026\u201d \u201cAuthenticating\u201d (or \u201csigning,\u201d \u201cadopting,\u201d or \u201caccepting\u201d) means to sign or, in recognition of electronic commercial transactions, \u201cto execute or otherwise adopt a symbol, or encrypt or similarly process a record\u2026with the present intent of the authenticating person to identify the person and adopt or accept a record.\u201d The \u201crecord\u201d is the modern UCC\u2019s substitution for the term \u201cwriting.\u201d It includes information electronically stored or on paper.<span id=\"mayer_1.0-fn28_023\" class=\"im_footnote\">Uniform Commercial Code, Section 9-102, Official Comment 9. Here is a free example of a security agreement online: Docstoc, \u201cFree Business Templates\u2014Sample Open-Ended Security Agreement,\u201d <a class=\"im_link\" href=\"http:\/\/www.docstoc.com\/docs\/271920\/Free-Business-Templates%E2%80%94-Sample-Open-Ended-Security-Agreement\" target=\"_blank\">http:\/\/www.docstoc.com\/docs\/271920\/Free-Business-Templates\u2014-Sample-Open-Ended-Security-Agreement<\/a>.<\/span><\/p>\n<p>The \u201cauthenticating record\u201d (the signed security agreement) is <em class=\"im_emphasis\">not<\/em> required in some cases. It is not required if the debtor makes a <span class=\"im_margin_term\"><span class=\"im_glossterm\">pledge<\/span><\/span> of the collateral\u2014that is, delivers it to the creditor for the creditor to possess. For example, upon a creditor\u2019s request of a debtor for collateral to secure a loan of $3,000, the debtor offers up his stamp collection. The creditor says, \u201cFine, have it appraised (at your expense) and show me the appraisal. If it comes in at $3,000 or more, I\u2019ll take your stamp collection and lock it in my safe until you\u2019ve repaid me. If you don\u2019t repay me, I\u2019ll sell it.\u201d A creditor could take possession of any goods and various kinds of paper, tangible or intangible. In commercial transactions, it would be common for the creditor to have possession of\u2014actually or virtually\u2014certified securities, deposit accounts, electronic chattel paper, investment property, or other such paper or electronic evidence of value.<span id=\"mayer_1.0-fn28_024\" class=\"im_footnote\">Uniform Commercial Code, Section 9-203(b)(3)(B-D).<\/span><\/p>\n<p>Again, Figure 11.1 &#8220;The Grasping Hand&#8221; diagrams the attachment, showing the necessary elements: the creditor gives value, the debtor has rights in collateral, and there is a security agreement signed (authenticated) by the debtor. If the debtor defaults, the creditor\u2019s \u201chand\u201d will grab (repossess) the collateral.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s06\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Perfection of the Security Interest<\/h2>\n<p>As between the debtor and the creditor, attachment is fine: if the debtor defaults, the creditor will repossess the goods and\u2014usually\u2014sell them to satisfy the outstanding obligation. But unless an additional set of steps is taken, the rights of the secured party might be subordinated to the rights of other secured parties, certain lien creditors, bankruptcy trustees, and buyers who give value and who do not know of the security interest. <span class=\"im_margin_term\"><span class=\"im_glossterm\">Perfection<\/span><\/span> is the secured party\u2019s way of announcing the security interest to the rest of the world. It is the secured party\u2019s claim on the collateral.<\/p>\n<p>There are five ways a creditor may perfect a security interest: (1) by filing a financing statement, (2) by taking or retaining possession of the collateral, (3) by taking control of the collateral, (4) by taking control temporarily as specified by the UCC, or (5) by taking control automatically.<\/p>\n<div id=\"mayer_1.0-ch28_s01_s06_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Perfection by Filing<\/h3>\n<p>\u201cExcept as otherwise provided\u2026a financing statement must be filed to perfect all security agreements.\u201d<span id=\"mayer_1.0-fn28_025\" class=\"im_footnote\">Uniform Commercial Code, Section 9-310(a).<\/span><\/p>\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">The Financing Statement<\/h3>\n<p>A <span class=\"im_margin_term\"><span class=\"im_glossterm\">financing statement<\/span><\/span> is a simple notice showing the creditor\u2019s general interest in the collateral. It is what\u2019s filed to establish the creditor\u2019s \u201cdibs.\u201d<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Contents of the Financing Statement<\/h3>\n<p>It may consist of the security agreement itself, as long as it contains the information required by the UCC, but most commonly it is much less detailed than the security agreement: it \u201cindicates merely that a person may have a security interest in the collateral[.]\u2026Further inquiry from the parties concerned will be necessary to disclose the full state of affairs.\u201d<span id=\"mayer_1.0-fn28_026\" class=\"im_footnote\">Uniform Commercial Code, Section 9-502, Official Comment 2.<\/span> The financing statement must provide the following information:<\/p>\n<ul id=\"mayer_1.0-ch28_s01_s06_s01_s02_l01\" class=\"im_itemizedlist im_editable im_block\">\n<li>The debtor\u2019s name. Financing statements are indexed under the debtor\u2019s name, so getting that correct is important. Section 9-503 of the UCC describes what is meant by \u201cname of debtor.\u201d<\/li>\n<li>The secured party\u2019s name.<\/li>\n<li>An \u201cindication\u201d of what collateral is covered by the financing statement.<span id=\"mayer_1.0-fn28_027\" class=\"im_footnote\">Uniform Commercial Code, Section 9-502(a).<\/span> It may describe the collateral or it may \u201cindicate that the financing statement covers all assets or all personal property\u201d (such generic references are not acceptable in the security agreement but are OK in the financing statement).<span id=\"mayer_1.0-fn28_028\" class=\"im_footnote\">Uniform Commercial Code, Section 9-504.<\/span> If the collateral is real-property-related, covering timber to be cut or fixtures, it must include a description of the real property to which the collateral is related.<span id=\"mayer_1.0-fn28_029\" class=\"im_footnote\">Uniform Commercial Code, Section 9-502(b).<\/span><\/li>\n<\/ul>\n<p>The form of the financing statement may vary from state to state, but see Figure 11.3 &#8220;UCC-1 Financing Statement&#8221; for a typical financing statement. Minor errors or omissions on the form will not make it ineffective, but the debtor\u2019s signature is required unless the creditor is authorized by the debtor to make the filing without a signature, which facilitates paperless filing.<span id=\"mayer_1.0-fn28_030\" class=\"im_footnote\">Uniform Commercial Code, Section 9-506; Uniform Commercial Code, Section, 9-502, Comment 3.<\/span><\/p>\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s02_f01\" class=\"im_figure im_large im_editable im_block\">\n<p><span class=\"im_title-prefix\">Figure 11.3<\/span> UCC-1 Financing Statement<\/p>\n<p><a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_14\/8ee0b06d7d2ee70326cf397a9c94f340.jpg\" target=\"_blank\"><img decoding=\"async\" src=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/images\/sm_8ee0b06d7d2ee70326cf397a9c94f340.jpg#fixme\" alt=\"\" \/><\/a><\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s03\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Duration of the Financing Statement<\/h2>\n<p>Generally, the financing statement is effective for five years; a <span class=\"im_margin_term\"><span class=\"im_glossterm\">continuation statement<\/span><\/span> may be filed within six months before the five-year expiration date, and it is good for another five years.<span id=\"mayer_1.0-fn28_031\" class=\"im_footnote\">Uniform Commercial Code, Section 9-515.<\/span> Manufactured-home filings are good for thirty years. When the debtor\u2019s obligation is satisfied, the secured party files a <span class=\"im_margin_term\"><span class=\"im_glossterm\">termination statement<\/span><\/span> if the collateral was consumer goods; otherwise\u2014upon demand\u2014the secured party sends the debtor a termination statement.<span id=\"mayer_1.0-fn28_032\" class=\"im_footnote\">Uniform Commercial Code, Section 9-513.<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s04\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Debtor Moves out of State<\/h3>\n<p>The UCC also has rules for continued perfection of security interests when the debtor\u2014whether an individual or an association (corporation)\u2014moves from one state to another. Generally, an interest remains perfected until the earlier of when the perfection would have expired or for four months after the debtor moves to a new jurisdiction.<span id=\"mayer_1.0-fn28_033\" class=\"im_footnote\">Uniform Commercial Code, Section 9-316.<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s05\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Where to File the Financing Statement<\/h3>\n<p>For most real-estate-related filings\u2014ore to be extracted from mines, agricultural collateral, and fixtures\u2014the place to file is with the local office that files mortgages, typically the county auditor\u2019s office.<span id=\"mayer_1.0-fn28_034\" class=\"im_footnote\">Uniform Commercial Code, Section 9-501.<\/span> For other collateral, the filing place is as duly authorized by the state. In some states, that is the office of the Secretary of State; in others, it is the Department of Licensing; or it might be a private party that maintains the state\u2019s filing system.<span id=\"mayer_1.0-fn28_035\" class=\"im_footnote\">Uniform Commercial Code, Section 9-501(a)(2).<\/span> The filing should be made in the state where the debtor has his or her primary residence for individuals, and in the state where the debtor is organized if it is a registered organization.<span id=\"mayer_1.0-fn28_036\" class=\"im_footnote\">Uniform Commercial Code, Section 9-307(b).<\/span> The point is, creditors need to know where to look to see if the collateral offered up is already encumbered. In any event, filing the statement in more than one place can\u2019t hurt. The filing office will provide instructions on how to file; these are available online, and electronic filing is usually available for at least some types of collateral.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s06_s01_s06\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Exemptions<\/h3>\n<p>Some transactions are exempt from the filing provision. The most important category of exempt collateral is that covered by state certificate of title laws. For example, many states require automobile owners to obtain a certificate of title from the state motor vehicle office. Most of these states provide that it is not necessary to file a financing statement in order to perfect a security interest in an automobile. The reason is that the motor vehicle regulations require any security interests to be stated on the title, so that anyone attempting to buy a car in which a security interest had been created would be on notice when he took the actual title certificate.<span id=\"mayer_1.0-fn28_037\" class=\"im_footnote\">Uniform Commercial Code, Section 9-303.<\/span><\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s06_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Temporary Perfection<\/h2>\n<p>The UCC provides that certain types of collateral are automatically perfected but only for a while: \u201cA security interest in certificated securities, or negotiable documents, or instruments is perfected without filing or the taking of possession for a period of twenty days from the time it attaches to the extent that it arises for new value given under an authenticated security agreement.\u201d<span id=\"mayer_1.0-fn28_038\" class=\"im_footnote\">Uniform Commercial Code, Section 9-312(e).<\/span> Similar temporary perfection covers negotiable documents or goods in possession of a bailee, and when a security certificate or instrument is delivered to the debtor for sale, exchange, presentation, collection, enforcement, renewal, or registration.<span id=\"mayer_1.0-fn28_039\" class=\"im_footnote\">Uniform Commercial Code, Section 9-312(f) and (g).<\/span> After the twenty-day period, perfection would have to be by one of the other methods mentioned here.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s06_s03\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Perfection by Possession<\/h3>\n<p>A secured party may perfect the security interest by possession where the collateral is negotiable documents, goods, instruments, money, tangible chattel paper, or certified securities.<span id=\"mayer_1.0-fn28_040\" class=\"im_footnote\">Uniform Commercial Code, Section 9-313.<\/span> This is a pledge of assets (mentioned in the example of the stamp collection). No security agreement is required for perfection by possession.<\/p>\n<p>A variation on the theme of pledge is <span class=\"im_margin_term\"><span class=\"im_glossterm\">field warehousing<\/span><\/span>. When the pawnbroker lends money, he takes possession of the goods\u2014the watch, the ring, the camera. But when large manufacturing concerns wish to borrow against their inventory, taking physical possession is not necessarily so easy. The bank does not wish to have shipped to its Wall Street office several tons of copper mined in Colorado. Bank employees perhaps could go west to the mine and take physical control of the copper, but banks are unlikely to employ people and equipment necessary to build a warehouse on the spot. Thus this so-called field pledge is rare.<\/p>\n<p>More common is the field warehouse. The field warehouse can take one of two forms. An independent company can go to the site and put up a temporary structure\u2014for example, a fence around the copper\u2014thus establishing physical control of the collateral. Or the independent company can lease the warehouse facilities of the debtor and post signs indicating that the goods inside are within its sale custody. Either way, the goods are within the physical possession of the field warehouse service. The field warehouse then segregates the goods secured to the particular bank or finance company and issues a warehouse receipt to the lender for those goods. The lender is thus assured of a security interest in the collateral.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s06_s04\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Perfection by Control<\/h3>\n<p>\u201cA security interest in investment property, deposit accounts, letter-of-credit rights, or electronic chattel paper may be perfected by control of the collateral.\u201d<span id=\"mayer_1.0-fn28_041\" class=\"im_footnote\">Uniform Commercial Code, Section 9-314.<\/span> \u201cControl\u201d depends on what the collateral is. If it\u2019s a checking account, for example, the bank with which the deposit account is maintained has \u201ccontrol\u201d: the bank gets a security interest automatically because, as Official Comment 3 to UCC Section 9-104 puts it, \u201call actual and potential creditors of the debtor are always on notice that the bank with which the debtor\u2019s deposit account is maintained may assert a claim against the deposit account.\u201d \u201cControl\u201d of electronic chattel paper of investment property, and of letter-of-credit rights is detailed in Sections 9-105, 9-106, and 9-107. Obtaining \u201ccontrol\u201d means that the creditor has taken whatever steps are necessary, given the manner in which the items are held, to place itself in a position where it can have the items sold, without further action by the owner.<span id=\"mayer_1.0-fn28_042\" class=\"im_footnote\">Uniform Commercial Code, Section 8-106, Official Comment 1.<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s06_s05\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Automatic Perfection<\/h3>\n<p>The fifth mechanism of perfection is addressed in Section 9-309 of the UCC: there are several circumstances where a security interest is perfected upon mere attachment. The most important here is <span class=\"im_margin_term\"><span class=\"im_glossterm\">automatic perfection<\/span><\/span> of a purchase-money security interest given in consumer goods. If a seller of consumer goods takes a PMSI in the goods sold, then perfection of the security interest is automatic. But the seller may file a financial statement and faces a risk if he fails to file and the consumer debtor sells the goods. Under Section 9-320(b), a buyer of consumer goods takes free of a security interest, even though perfected, if he buys without knowledge of the interest, pays value, and uses the goods for his personal, family, or household purposes\u2014unless the secured party had first filed a financing statement covering the goods.<\/p>\n<div id=\"mayer_1.0-ch28_s01_s06_s05_f01\" class=\"im_figure im_large im_editable im_block\">\n<p><span class=\"im_title-prefix\">Figure 11.4<\/span> Attachment and Perfection<\/p>\n<p><a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_14\/72471aaee987f10b5b214c82a7d36dcc.jpg\" target=\"_blank\"><img decoding=\"async\" src=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/images\/sm_72471aaee987f10b5b214c82a7d36dcc.jpg#fixme\" alt=\"\" \/><\/a><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch28_s01_s06_s05_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\n<h3 class=\"im_title\">Key Takeaway<\/h3>\n<p>A creditor may be secured\u2014allowed to take the debtor\u2019s property upon debtor\u2019s default\u2014by agreement between the parties or by operation of law. The law governing agreements for personal property security is Article 9 of the UCC. The creditor\u2019s first step is to attach the security interest. This is usually accomplished when the debtor, in return for value (a loan or credit) extended from the creditor, puts up as collateral some valuable asset in which she has an interest and authenticates (signs) a security agreement (the contract) giving the creditor a security interest in collateral and allowing that the creditor may take it if the debtor defaults. The UCC lists various kinds of assets that can be collateralized, ranging from tangible property (goods), to assets only able to be manifested by paper (indispensable paper), to intangible assets (like patent rights). Sometimes no security agreement is necessary, mostly if the creditor takes possession of the collateral. After attachment, the prudent creditor will want to perfect the security interest to make sure no other creditors claim an interest in the collateral. Perfection is most often accomplished by filing a financing statement in the appropriate place to put the world on notice of the creditor\u2019s interest. Perfection can also be achieved by a pledge (possession by the secured creditor) or by \u201ccontrol\u201d of certain assets (having such control over them as to be able to sell them if the debtor defaults). Perfection is automatic temporarily for some items (certified securities, instruments, and negotiable documents) but also upon mere attachment to purchase-money security interests in consumer goods.<\/p>\n<\/div>\n<div class=\"bcc-box bcc-info\">\n<h3>Exercises<\/h3>\n<section id=\"self-check-questions\">\n<ol>\n<li>Why is a creditor ill-advised to be unsecured?<\/li>\n<li>Elaine bought a computer for her use as a high school teacher, the school contributing one-third of its cost. Elaine was compelled to file for bankruptcy. The computer store claimed it had perfected its interest by mere attachment, and the bankruptcy trustee claimed the computer as an asset of Elaine\u2019s bankruptcy estate. Who wins, and why?<\/li>\n<li>What is the general rule governing where financing statements should be filed?<\/li>\n<li>If the purpose of perfection is to alert the world to the creditor\u2019s claim in the collateral, why is perfection accomplishable by possession alone in some cases?<\/li>\n<li>Contractor pawned a power tool and got a $200 loan from Pawnbroker. Has there been a perfection of a security interest?<\/li>\n<\/ol>\n<\/section>\n<\/div>\n<div id=\"mayer_1.0-ch52_s02_s06_n02\" class=\"im_exercises im_editable im_block\"><\/div>\n<\/div>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-99\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Business and the Legal Environment. <strong>Authored by<\/strong>: Anonymous. <strong>Provided by<\/strong>: Anonymous. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/\">http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\/\">CC BY-NC-SA: Attribution-NonCommercial-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":5,"menu_order":76,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Business and the Legal Environment\",\"author\":\"Anonymous\",\"organization\":\"Anonymous\",\"url\":\"http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/\",\"project\":\"\",\"license\":\"cc-by-nc-sa\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-99","chapter","type-chapter","status-publish","hentry"],"part":773,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/99","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/users\/5"}],"version-history":[{"count":5,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/99\/revisions"}],"predecessor-version":[{"id":1307,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/99\/revisions\/1307"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/parts\/773"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/99\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/media?parent=99"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapter-type?post=99"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/contributor?post=99"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/license?post=99"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}