Secured Transactions Templates
The writing templates of this subject are presented in the following outline, which is organized according to the chronology of a typical secured transactions fact pattern.
1. Original Security Agreement
Debtor 1 and Creditor 1 will execute Security Agreement 1.
Note: The signing of the security agreement is one of three elements required for a security interest to attach to collateral. Attachment may occur either (1) at the signing of the security agreement or (2) afterward, when the other elements of attachment are satisfied.
2. Typical Actions of Parties Following the Original Security Agreement
After the original security agreement is signed, the following are typical actions of the debtor and creditors.
a. Debtor's Potential Actions
Following the original security agreement, Debtor will typically make one or more of the following actions:
- Sell or dispose of the collateral, creating Proceeds and potentially creating a buyer in the ordinary course of business (BOCB).
- Acquire more property (After-Acquired Property).
- Request an advance against the same collateral (Future Advance).
- Use collateral to secure an existing obligation or new value from Creditor 2.
- Move jurisdictions or change their name, raising the issue of perfection maintenance.
b. Creditors' Potential Actions
Following the original security agreement, creditor 1, and other creditors the debtor creates, will typically take the following actions.
- Attach a Security Interest (SI) or Purchase Money Security Interest (PMSI) to the collateral, making it enforceable against Debtor 1.
- Perfect the SI or PMSI, making it enforceable against other creditors.
- Creditors must maintain perfection for it to be enforced.
c. Debtor's Eventual Default
The debtor will typically default (i.e., fail to perform an obligation) according to one of the security agreements.
Helpful Setup for the Essay
Usually, the problem requires determining the priority of competing security interests and the proper distribution of the collateral or its proceeds. At the start of your response, it is helpful to briefly address the following:
1. Which creditor’s secured obligation (security agreement) did the debtor default on?
2. What collateral secures the obligation in question?
3. Which other creditors or parties have a claim to the collateral (e.g., other secured creditors, lienholders, buyers in the ordinary course of business)?
Then, proceed to analyze the following topics that are at issue.
3. Default
Most fact patterns plainly state the debtor defaulted. However, if there is a question of whether the debtor defaulted, analyze:
Upon the debtor’s default, the creditor with which the debtor defaulted must provide notice to the debtor and other creditors. If there is a question of whether this was done properly, analyze:
- Notice
The debtor has the right to redeem. If there is a question as to whether the debtor properly redeemed the default, analyze:
4. Priority
The priority of the creditors’ rights to the collateral implicated in the debtor’s default must be determined. To have rights, each creditor must have a security interest that is enforceable against (1) the debtor (by attachment) and (2) other creditors (by perfection).
1. Attachment
To have a security interest enforceable against the debtor, each creditor must have attached the security interest to the collateral.
Based on the security agreement and the ensuing actions of the debtor, the creditor may have rights to proceeds, after-acquired property, or future advances.
2. Perfection
To have a security interest enforceable against other creditors, each creditor must have perfected the security interest in the collateral.
The rules of perfection depend on (1) the type of security interest and (2) the type of collateral.
Perfection of PMSIs of Consumer Goods:
Perfection of Regular SIs and of PMSIs of Non-Consumer Goods:
a. Perfection Maintenance
The secured party must take steps to maintain perfection when (1) the debtor changes their name, (2) the debtor relocates to another state, or (3) the financing statement approaches expiration. Failure to act in these circumstances can result in the security interest becoming unperfected, meaning it loses priority and enforceability against third parties.
3. Priority
The overarching order of priority is as follows:
5. Distribution of Property
If the debtor defaults, the creditor provides proper notice, and the debtor does not redeem, the collateral may be distributed based on the determination of the creditor’s priority. If the fact pattern includes details about the distribution, you may also evaluate whether the distribution was proper.
Did the secured party repossess, sell, dispose, or retain the property properly?
Was there a deficiency or surplus? If so, was it handled properly?
Challenges concerning whether the collateral falls under the scope of Article 9
Determine if the transactions fall under the scope of Article 9 of the UCC.
See the following for more granular discussion of transactions and collateral that fall within the scope of Article 9, and incorporate them into the above analysis as needed.
- Transaction, and
- Collateral
Determine SI or PMSI: (1) existing collateral secures an existing obligation, (2) existing collateral secures new value (e.g., a loan or credit), or (3) new value is used to purchase collateral. Options 1 and 2 create a regular security agreement. Option 3 creates a PMSI.
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