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Reference Guide

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

2 pages311 viewsFall 2015

Course Code
ACTG 2010

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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
Freedom of contract with respect to provisions allowed, although this may be
limited by certain regulatory statutes (i.e., usury, small loans, retail installment
• 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
• 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
• Financial statement is filed in public office; only a
notice is required
Includes negotiable documents, goods, and chattel
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)
• 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
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
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
• 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
• Sales or assignments of certain
accounts or chattel paper
• Claim transfer for employee’s
wages, salary or other
Lien for services or materials
Transfer by government or one of its
• Transfer of insurance policy claim or
• 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
Security Agreement
Perfection of Security Interest
• 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
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
• 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
• Automatic perfection upon attachment of security
Temporary perfection
• Perfection through pledge or possession of collateral by
secured party
• Filing of financial statement in one or more public filing
• 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
• 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
• 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
Bills of sale
Leases of personal property
intended as security
• Consignments of personal property
(unless they are not intended as
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