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Reference Guide

Permachart - Marketing Reference Guide: Secured Transaction, Chattel Mortgage, Security Interest

2 Pages
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Fall 2015

Department
Accounting
Course Code
ACTG 2010
Professor
all
Chapter
Permachart

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Secured Transactions
• Security interest cannot attach, nor
be binding on debtor, without
security agreement
• Defined as an agreement (usually
written) which creates, or provides
for, a security interest
A contract is the total legal
obligation created by parties’
agreement as affected by U.C.C.
and other laws
Secured party must be in
possession of collateral or written
security agreement must meet
certain requirements
Requirement of writing is a
condition of enforceability and
nature of Statute of Frauds
• Without possession of collateral,
absence of required writing makes
security interest unenforceable even
against debtor
• Situations where writing is not
required include creation of a
security interest of a collecting bank
under Article 4, arisal of security
interest under Article 2 on Sales,
and security interest in investment
securities
Freedom of contract with respect to provisions allowed, although this may be
limited by certain regulatory statutes (i.e., usury, small loans, retail installment
sales)
• Debtor’s waiver of defenses with assignment of security interest
• Inclusion of future advances
• Obligations secured by after-acquired collateral (limits on consumer goods
and crops)
• Option to increase payments or require additional collateral
• Allow debtor to use or dispose of collateral (or collect on chattel paper
accounts)
• Subordination of security interest in favor of third party’s interest
• Provision or limit on sales warranties
Amount of debt and payment terms
• Debtor’s duties respecting collateral, etc.
Includes goods and collateral represented by writing that
may transfer a claim through delivery (and indorsement,
where required)
Excludes purely intangible collateral
Also applies to possessory security interest
• Secured party must be in possession of collateral (except
for temporary perfection and money as proceeds)
• Debtor, or person under debtor’s control, cannot act on
behalf of secured party
• Collateral (except goods under negotiable document) held
by third person as bailee is considered to be in secured
party’s possession where bailee is made aware of interest
• Debtor may pledge negotiable instrument to secured
party
• Financial statement is filed in public office; only a
notice is required
Includes negotiable documents, goods, and chattel
paper
Excludes instruments or money (not proceeds)
• Filing provisions do not apply where collateral is subject
to other law
• Alternatives for filing include central filing at single
public office, and local filing or filing at local county or
township office where either debtor or collateral is
physically located
• Central filing is preferred for all collateral (except that
which applies to real estate)
• Local filing is preferred for fixtures and other collateral
related to real estate
• Incorrect filing (e.g., filing at the wrong office) may
prevent perfection of interest, although filing in good
faith may offer some protection
• Filing is not harmed by change in debtor’s residence,
place of business, location or use of collateral
Financing statement must provide debtor’s
signature, parties’ names and addresses, and types or
descriptions of collateral (including land, where fixtures
or real estate apply)
Scope
DEFINITIONS
• Article 9 of the Uniform Commercial Code (U.C.C.)
Secured transactions in personal property and some sales of accounts and
chattel paper
• Any transaction intended to create security interest in one persons favor in
someone elses personal property
Involves a debt, debtor, creditor or secured party, personal property or fixtures
making up security or collateral, an agreement that provides that creditor has
a security interest in collateral, and debtor’s right to redeem collateral by
payment of debt
Debtor (i.e., borrower, obligor, buyer) owes payment or other performance
of secured obligation, whether or not rights exist in collateral (includes seller
of rights or chattel paper)
Account debtor is obligated on an account, chattel paper or intangible
Secured party (i.e., lender, obligee, financer) has security interest; includes
purchaser of accounts or chattel paper
Transaction includes loan, secured by personal property, made to owner of
personal property, and purchase of personal property on credit where buyer
gives security interest in property to seller or person providing loan (creates a
purchase money security interest)
Collateral refers to any property that is subject to a security interest
Chattel paper refers to writings which show monetary obligations and
security interest in, or lease of, specific goods
Security interest is an interest in personal property (or fixtures) that secures
payment or performance of an obligation; applies to security interest created
by contract
Contract includes pledge, assignment, chattel mortgage/trust, trust deed,
factor’s lien, equipment trust, conditional sale, trust receipt, other lien or title
retention contract, and lease or consignment; excludes statutory lien, which
arises by operation of law
Transaction agreement between debtor and secured party is consensual,
intended, and in writing
TYPES OF COLLATERAL
Goods include all things (or fixtures) which are movable when security
interest attaches
• Applies to consumer goods, equipment bought or used primarily in business,
non-profit organizations or government, farm products, inventory, fixtures
related to real estate, and accessions (i.e., goods firmly affixed to other
goods)
Indispensable paper covers types of paper which are, or are dealt with as
if, negotiable
• Also known as semi-intangibles or commercial specialties (includes
documents of title, negotiable instruments or investment securities, and
chattel paper)
Intangibles are not evidenced by indispensable writing but may be subject
of commercial financing transaction
• Applies to accounts (i.e., receivable), general intangibles (i.e., not in account),
and contract rights
Also covers items such as timber to be cut, minerals, motor vehicles, mobile
goods, and money
SECURITY DEVICES
• A pledge (or possessory security interest) is a bailment or delivery of
goods or property that is used as security for a debt, engagement or
performance of an act
Also a security interest in a chattel or intangible represented by an
indispensable instrument
• Requires agreement to pledge and delivery of possession to pledgee or
secured party
• Used where collateral consists of instruments (e.g., stock certificates) or
negotiable documents (e.g., bills of lading)
Field warehousing exists where pledgor may have required access to
pledged goods, while goods are in custody and control of third person, who
acts as warehouse person on pledgor’s premises
• Space should be separated from the rest of borrower’s premises
Chattel mortgage involves debt owed and agreement subjecting specific
personal property as debt security
Instrument must be filed; instrument describes covered property and
obligation secured by mortgage
• A conditional (or retain title) sale is a sale where title is reserved in seller
until purchase price is paid off
• May only be used by seller of goods
• A purchase money security interest must be taken or kept by seller of
collateral to secure all or part of price, or taken by person who (by incurring
obligation) allows debtor to acquire rights in (or use of) collateral
• Other devices include trust receipts, factor’s liens, assignments of accounts
receivable, leases and consignments of goods, bailment leases, and
equipment trusts
Security interests governed by
federal law
• Landlord’s lien (except where lease
gives landlord a security interest in
tenant’s personal property on
premises)
• Sales or assignments of certain
accounts or chattel paper
• Claim transfer for employee’s
wages, salary or other
compensation
Lien for services or materials
Transfer by government or one of its
agencies
• Transfer of insurance policy claim or
interest
• Rights represented by a judgment;
setoff right
• Creation or transfer of interest in, or
lien on, real estate
• Transfer of a tort claim or deposit
account
EXCLUDED TRANSACTIONS
Security Agreement
OTHER TERMS
Perfection of Security Interest
BY PLEDGE ATTACHMENT
• Perfection is automatic in some cases
• Does not rule out filing as an option, as it may be
necessary or beneficial in other cases
• Applies to a purchase money security interest in
consumer goods
Excludes fixtures and motor vehicles
• Applies to isolated assignments of accounts
(i.e., does not transfer major amount of assignors
outstanding accounts)
• Security interest created by assignment of beneficial
interest in a trust or decedent’s estate
• Security interest of a collecting bank in an item taken
for collection (e.g., deposited check)
• Security interest which arises under Article 2 of Sales
where debtor-buyer does not have possession of goods
• Security interest in investment securities
• Assignment for benefit of transferor’s creditors, as well
as subsequent assignee transfers
Temporary perfection covers instruments or
documents for up to 21 days or proceeds for up to
10 days
• No limitation on purpose for which debtor is in
possession; however, secured party must have given
new value under written security agreement
• Loss of perfection upon expiry if there is no filing or
possession
Proceeds include that which is received upon sale,
exchange, collection or other disposition of collateral
• In cases where original collateral is covered by
financing statement, perfection applies to proceeds
• Filing does not always cover proceeds
DESCRIPTION
• Security interest has attached and all applicable steps
have been taken
• Allows secured party to maximize rights against third
party with claim to collateral
• When debtor is bankrupt, security interest is superior to
those that are not perfected
• Filing is not required where secured party assigns
perfected security interest
• Continuous where it occurs through different methods
and when there is no intervention
• Perfection cannot take place before attachment of
security interest
• Additional steps are usually required for perfection
before or after attachment of security interest
• Individual methods that can be used in perfecting
security interest depend upon type of property being
used as collateral in secured transaction, as well as
nature of transaction
Methods
• Automatic perfection upon attachment of security
interest
Temporary perfection
• Perfection through pledge or possession of collateral by
secured party
• Filing of financial statement in one or more public filing
offices
• Compliance, filing or registration with certificate of title
requirement by law
• Compliance with state certificate of title law under
statute outside of U.C.C.
• Following necessary steps to perfect with respect to
investment securities
BY FILING
• Both debtor and secured party must sign amendment
to financing statement
• Secured party may sign alone under certain
circumstances (e.g., when second filing is made after
commencement of financing and original filing and
debtor is uncooperative)
• Description of collateral does not need to be specific
(i.e., blanket description is allowed); proceeds are
included, but omitted property is left out
Continuation statement extends time of perfection
when filed by secured party
• May be filed within 6 months prior to expiration date of
previous filing (usually 5 years)
• Does not need to be signed by debtor
• Original financing statement may disclose an
assignment, although this is optional
Separate statement must be filed if continuation
statement, statement of release or termination
statement is not signed by secured party
Filing Officers
• Mark financing and continuation statements with file
number and time of filing
• Provide schedules of filing fees (other duties)
Formal Requirements
• Debtors signature (no formal
requirements regarding form,
witnesses, etc.)
• Description of collateral
• Description of real estate (where
required)
• Creation of, or provision for, a
security interest
Note: Reference to proceeds is no
longer required
Acceptable Forms
Disguised security agreements,
where formal requirements are met
and certain types of transactions
are covered by written agreement
Transactions involving sale of goods
where seller expressly retains title
until buyer pays for goods being
received
Bills of sale
Leases of personal property
intended as security
• Consignments of personal property
(unless they are not intended as
security)
DESCRIPTION
TM
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Description
permacharts TM S e c u r e dT r a n s a c t io n s Scope Security Agreement DEFINITIONS TYPES OF COLLATERAL D ESCRIPTION • Article 9 of the Uniform Commercial Code (U.C.C.) • interest attaches things (or fixtures) which are movable wh• Security interest cannot atFormal Requirements • Secured transactions in personal property and some sales of accounts and be binding on debtor,withou• Debtor’s signature (no formal chattel paper • Applies to consumer goods,equipment bought or used primarily in business,eement rquirements regarding form, • Any transaction intended to create security interest in one person’s favor inizations or government,farm products,invent• Defined as an agreement (usuawitnesses,etc.) someone else’s personal property rlated to real estate,and accessions (i.e.,goods firmly affixwritten) which creates,or p• Description of collateral •Involves a debt,debtor,creditor or secured party,personal property or fixtures fr,a security interest • Description of real estate (where making up security or collateral,an agreement that provides that creditor hasaper covers types of paper which are,or are •eA contract is the total legalrequired) a security interest in collateral,and debtor’s right to redeem collateral by obligation created by parti• Creation of,or provision for,a payment of debt • Also known as semi-intangibles or commercial specialties (includesment as affected by U.C.scurity interest •Debtor (i.e.,borrower,obligor,buyer) owes payment or other performances of title,negotiable instruments or investment securities,and laws Note: Reference to proceeds is no of secured obligation,whether or not rights exist in collateral (includes seller • Secured party must be in longer required of rights or chattel paper) • Intangibles are not evidenced by indispensable writing but may be subjectf collateral or written • Account debtor is obligated on an account,chattel paper or intangiblercial financing transaction security agreement must meeA cceptable Forms • Secured party (i.e.,lender,obligee,financer) has security interest; includesunts (i.e.,receivable),general intangibles (i.e.,not in account),s • Disguised security agreements, purchaser of accounts or chattel paper and contract rights • Requirement of writing is a where formal requirements are met •Transaction includes loan,secured by personal property,made to owner ofrs items such as timber to be cut,minerals,motor vehicles,mobile enforceability aand certain types of transactions personal property,and purchase of personal property on credit where buyeroney nature of Statute of Frauds are covered by written agreement gives security interest in property to seller or person providing loan (creates a • Without possession of colla•eTransactions involving sale of goods purchase money security interest) SECURITY DEVICES absence of required writing mwhere seller expressly retains title •Collateral refers to any property that is subject to a security interestor possessory security interest) is a bailment or delivery ofnterest unenforceabuntil buyer pays for goods being goods or property that is used as security for a debt,engagement ort debtor rceived •Chattel paper refers to writings which show monetary obligatioperformance of an act • Situations where writing is•nBills of sale security interest in,or lease of,specific goods • Also a security interest in a chattel or intangible represented by aninclude creation of•aLeases of personal property • Security interest is an interest in personal property (or fixindispensable instrument security interest of a collecintended as security payment or performance of an obligation; applies to security• Requires agreement to pledge and delivery of possession to pledgee oricle 4,arisal of se• Consignments of personal property by contract secured party iterest underArticle 2 on Sal(unless they are not intended as •Contract includes pledge,assignment,chattel mortgage/trust,t• Used where collateral consists of instruments (e.g.,stock certificates) orinterest in invesecurity) factor’s lien,equipment trust,conditional sale,trust receipt,onegotiable documents (e.g.,bills of lading) securities retention contract,and lease or consignment; excludes statutory lien,which arises by operation of law • pledged goods,while goods are in custody and control of third person,who •Transaction agreement between debtor and secured party is consacts as warehouse person on pledgor’s premises intended,and in writing • limited by certain regulatory statutes (i.e.,usury,small loans,retail installment • Space should be separated from the rest of borrower’s premisesales) EXCLUDED TRANSACTIONS • Chattel mortgage involves debt owed and agreement subjecting specific •Security interests governed •Lien for services or materials personal property as debt security • Debtor’s waiver of defenses with assignment of security interest federal law •Transfer by government or one of itstrument must be filed; instrument describes covered property andion of future advances • Landlord’s lien (except wheragencies obligation secured by mortgage • Obligations secured by after-acquired collateral (limits on consumer goods gives landlord a security interest in • A conditional (or retain title) sale is a sale where title is reserved in seller tenant’s personal property oninterestr of insurance policy clauntil purchase price is paid off • Option to increase payments or require additional collateral premises) • May only be used by seller of goods • Allow debtor to use or dispose of collateral (or collect on chattel paper • Sales or assignments of certainghts represented by a judgme• A purchase money security interest must be taken or kept by seller of) m accounts or chattel paper setoff right collateral to secure all or part of price,or taken by person who (by incurring o • Claim transfer for employee’sCreation or transfer of interestobligation) allows debtor to acquire rights in (or use of) collateralation of security interest in favor of third party’s interest wages,salary or other lien on,real estate • Provision or limit on sales warranties c compensation • Transfer of a tort claim or deporeceivable,leases and consignments of goods,bailment leases,andunt of debt and payment terms . account equipment trusts • Debtor’s duties respecting collateral,etc. s t Perfection of Security Interest r a DESCRIPTION BY PLEDGE ATTACHMENT • Security interest has attached and all appli• Includes goods and collateral represented • Debtor,or person under debtor’s control,cannot act onction is automatic in some cases h have been taken may transfer a claim through delivery (and inbehalf of secured party • Does not rule out filing as an option,as it may be • Allows secured party to maximize rights against thirdquired) • Collateral (except goods under negotiable document) held or beneficial in other cases c party with claim to collateral • Excludes purely intangible collateral by third person as bailee is considered to be • Applies to a purchase money security interest in • When debtor is bankrupt,security interest is•Also applies to possessory security interest party’s possession where bailee is made aware oconsumer goods a those that are not perfected • Debtor may pledge negotiable instrument to sec• Excludes fixtures and motor vehicles • Filing is not required where secured party asfor temporary perfection and money as proceeds)rty (except m perfected security interest • Applies to isolated assignments of accounts r BY FILING (i.e.,does not transfer major amount of assignor’s •and when there is no interventiongh different• Financial statement is filed in public off• Both debtor and secured party must sign amendmenttstanding accounts) e notice is required to financing statement • Security interest created by assignment of beneficial • Perfection cannot take place before attachme• Includes negotiable documents, goods, and chatteled party may sign alone under certain interest in a trust or decedent’s estate p security interest paper circumstances (e.g., when second filing is made afterity interest of a collecting bank in an item taken • Additional steps are usually required for pe• Excludes instruments or money (not proceeds)commencement of financing and original filing andr collection (e.g.,deposited check) before or after attachment of security interest debtor is uncooperative) • Security interest which arises underArticle 2 of Sales • Individual methods that can be used in perfectinging provisions do not apply where colla• Description of collateral does not need to be specificebtor-buyer does not have possession of goods security interest depend upon type of property beinger law (i.e., blanket description is allowed); proceeds arerity interest in investment securities used as collateral in secured transaction,as well asatives for filing include central filiincluded, but omitted property is left out • Assignment for benefit of transferor’s creditors,as well nature of transaction public office, and local filing or filing a• Continuation statement extends time of perfection subsequent assignee transfers Methods township office where either debtor or collatwhen filed by secured party • Automatic perfection upon attachment of securitysically located •documents for up to 21 days or proceeds for up to interest • Central filing is preferred for all collateral (except thatthin 6 months prior to expiratio10 daysof which applies to real estate) previous filing (usually 5 years) •Temporary perfection • Local filing is preferred for fixtures and other collateralo be signed by debtor • No limitation on purpose for which debtor is in • Perfection through pledge or possession of corelated to real estate • Original financing statement may disclose an new value under written security agreemente given secured party • Incorrect filing (e.g., filing at the wrong office) may although this is optional • Filing of financial statement in one or more prevent perfection of interest, although filing in goodtatement must be filed if continuationLoss of perfection upon expiry if there is no filing or offices faith may offer some protection statement, statement of release or termination possession • Compliance,filing or registration with certi• Filing is not harmed by change in debtor’s residence, is not signed by secured party • Proceeds include that which is received upon sale, requirement by law place of business, location or use of collaFiling Officers exchange, collection or other disposition of collateral • Compliance with state certificate of title l• Financing statement must provide debtor’s • In cases where original collateral is covered by statute outside of U.C.C. signature, parties’ names and addresses, and types orancing and continuation statements withfinancing statement,perfection applies to proceeds • Following necessary steps to perfect with respect totions of collateral (including land, where fixturesme of filing • Filing does not always cover proceeds investment securities or real estate apply) • Provide schedules of filing fees (other duties) permacharts TM Priorities UNPERFECTED SECURITY INTEREST SECURED PARTY & LIEN CREDITOR SECURITY INTEREST IN FIXTURES • Priority over holder of unperfected security • Priority given to secured party that files or • Priority over real estate interests determined by Default of Security Interest interest given to (i) anyone having priority over perfects before creditor obtains a lien fixture filing (or perfection) SECURED PARTY’S RIGHTS perfected security interest (ii) other secured • Priority given to subsequent lien creditor to the • Holder of purchase money security interest • Include reduction of judgment claim; foreclosure or enforcement of party with perfected security interest (iii) parties extent of certain future advances has a grace period after installation of fixture security interest using judicial means; proceeding as to documents or that become lien creditors before perfection of • Perfected security interest has priority over within which to make an effective fixture filing goods thereby covered; repossession,sale,and/or disposal of collateral; security interest (iv) certain buyers of tangible subsequently filed federal tax lien • Debtor must be in possession of (or have an making direct collection from account debtor or obligor on instrument and or semi-tangible collateral (with no knowledge of taking control of proceeds; and taking collateral in satisfaction of debt security interest) (v) certain transferees of • Artisans and repair persons with lien have interest of record in) real estate itangible collateral (with no knowledge of priority over perfected security interest • Secured party does not need to file for priority • Right of repossession allows removal of collateral without debtor’s security interest) (epending on possession of goods) w hen fixtures are readily removable factory or knowledge or objection,or with consent,from street,parking lot or third office machines person’s property • Unperfected security interest has priority over BETWEEN TWO SECURED PARTIES • Improper where removal of collateral occurs over debtor’s express (i) general creditors of debtor without lien on • Priority based on time of filing or perfection • Security interest has priority over liens obtained objection,from debtor’s premises without that person’s consent,after threat collateral (ii) certain buyers of goods, after perfection or appearance of violence,and/or through improper use of law documents,instruments,and chattel paper with • Lacking perfection,time of attachment is used • Priority given to security interest where opposing enforcement garb knowledge of security interest (iii) certain • Applies
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