1、Secured Transaction Richard Colson I. Introduction In the business word, a promise to pay is rarely enough. The promise wants to be secured. This is the basis of the concept of the secured transaction. The best know security device is the mortgage on real (immovable) property. The mortgage secures t
2、he promise of real property owner to repay the loan of the financier. Personal (movable) property is used in a variety of methods to secure an indebtedness or a promise to pay in the future. Most of these methods are regulated by Article 9 of the Uniform Commercial Code (UCC),as amended in 1974, whi
3、ch has been adopted (with some modification) by all U.S. jurisdiction, except Louisiana. The codification has superseded most prior legislation and the earlier com mom law of secured transaction. Concept like conditional sale (in which the seller ownership) and chattel mortgage (in which personal pr
4、operty is mortgage) have become obsolete. This paper deals with security devices that, in accordance with UCC Article 9, are created by express agreement, so-called consensual liens. It does not deal with security devices that are created by law, such as a banks right to sell off a customers balance
5、 on deposit against claims that the bank may have against the customer, or the lien , That a warehouseman has against a party who owes storage fees, or a mechanics lien, an innkeepers lien, or lawyers lien. These security rights are created by law, not by agreement between the parties. Practically s
6、peaking, they do not arise unless asserted. There is, however, one security device that arises automatically, namely a court judgment. A court judgment creates a lien against the property of the party against whom the judgment is rendered. In most jurisdictions, the lien attaches automatically to re
7、al property owned by a judgment debtor, while some further administrative procedures are required to attach the to personal property. Article9 of the UCC is a very complex and detailed piece of legislation. Legal scholar and courts have devoted a great deal of attention to it. Here is an outline of
8、the topic in the most general terms. One who wishes to acquire a piece of a business must first inquire whether the property or business is encumbered with a statutory lien, or whether it is the subject of a secured transaction. This search, which must be conducted in various governmental offices, i
9、s generally entrusted by attorney for the buyer to one of a number of organizations in this filed. If a debtor becomes bankrupt, a secured creditor has a preferential position. This one of the principal reasons for securing a transaction. The property or property right that is used to secure a promi
10、se is called collateral property, or collateral, for short. Accounts receivable, chattel paper, and even growing crops may be collateral. The word chattel is an old English word that denotes personal (movable) property. The official comment to Sec.9-105 of the UCC illustrates the meaning of the term
11、 chattel paper. It is quoted here because it also illustrates other pertinent concept. “A dealer sells a tractor to farm on a conditional contract. The conditional sales contract is a security agreement, the farmer is debtor, the dealer is the secured party, and tractor is the collateral. But now de
12、aler transfers the contract to his bank, either by outright sale or to secure a loan. Since the conditional sales contract is a security agreement relating to specific equipment, the conditional sales contract is now the type of collateral called chattel paper.” Any property having value may be used
13、 as collateral .If the purchase of a property is financed, the very property may be used as collateral. For instance, if the shares of a corporation are sold, the seller may retain ownership of shares until they are fully paid for (in which case he is said to a purchase money security interest):or,
14、if the purchase is financed by a third party, the shares may be transferred as collateral to such third party. A security agreement must be in wringing in order to be binding between the parties. In order to be binding on third parties, it must be publicly disclosed by filing a financing statement (
15、See Section 3, below) or by physical manifestation of delivery. The subject matter of secured transactions is of interest to foreigners doing business in the U.S. in two instance : (a) if they wish to finance a transaction with or in the U.S., and (b) if they are unsecured creditors and find themsel
16、ves in conflict with creditors who claim to be secured. II.Guaranty The simplest security is a guaranty. It is not even mentioned in UCC Article 9. In many parts of the world, a creditor will ask for guaranty. American banks generally are not allowed to issue a guaranty. Instead, they will issue a s
17、tandby letter of credit, which is even better than guaranty because it constitutes a primary obligation of the bank. The Federal Comptroller of the Currency, who forbids bank guaranties, has expressly approved the standby letter of credit. If the obligor is a subsidiary of a financially strong paren
18、t company, the guaranty of the parent company may also be used as a security device. U.S. parent companies do not readily issue such guaranties because they expect their subsidiaries to stand on their own financial feet. A corporate guaranty is generally not available, and might not be valid under a
19、pplicable state law, unless the obligor is a subsidiary. A related security device, also not covered by UCC Article 9, is the performance bond. A performance bond is generally available form a type of insurer know as a surety company. The bond insures that the obligor will perform in accordance. It
20、is generally coupled with a penalty provision in case of delay. The bond issuer is liable if the obligor defaults. Performance bonds are customary in the construction industry, but they can also be used in other fields of business. The rest of this paper refers to security transaction embraced by UC
21、C Article 9. III.Perfection of the Security Interest In order to have a security interest that is good against third parties, the security interest must be perfected. This can be done in different ways, depending on the kind of collateral involved. A security interest may be perfected when it attach
22、es, or it may require the transfer of possession form the debtor to the secured party. Transfer of possession is necessary if, for example, one pledges stock as security for a loan. The usual manner of perfecting a security interest is the filing of a financing statement (see Section, below). Someti
23、mes, there are conflicting perfected security interests. In that case, the question of priority arises. The manner of the resolving that issue is addressed by the state. When either filing or the transfer of possession of collateral is necessary for perfection, that act may occur prior to the attach
24、ment of the security interest. The security interest is perfected when the last of the events necessary for attachment and perfection has occurred. As there is an advantage in securing priority by an early filing of the financing statement, the financier sometimes does not part with any value until
25、after the filing has occurred. The statute provides that a security interest will attach only if three requirements are met: (a) there must be security agreement,(b) the financier must give value, and (c) the debtor must have rights in the collateral. This last requirement seems simple. But recently
26、 a British bank ran afoul of this provision. The case involved the purchase of a yacht in California. The yacht dealers inventory was financed by Chrysler Corporation, which held a security interest in the inventory. The dealer sold the yacht to an individual, who financed the transaction through th
27、e British bank. Actually, the individual had no assignable rights in the yacht as it was part of Chryslers collateral security. The court ruled that the British bank had acquired no security interest and, therefore, that no interest was capable of being perfected. This ruling contradicts the general rule in inventory financing, (stated below in Section 7), but it serves as a cautionary signal to interested parties.
