Secured Party Transactions
"TREAD CAREFULLY WHEN ENFORCING."
A "secured party" is a typically a lender who, in exchange for making a loan, receives from the borrower a pledge of certain property known as "collateral." The collateral can take the form of real property (such as a residential home or commercial building), tangible personal property (such as motor vehicles, machinery or equipment) or intangible personal property (such as accounts receivable, patents, copyrights, and securities). After the lender "perfects" the security interest in the collateral, that is, creates a contingent legal right of ownership, the collateral remains in place as security for the underlying loan until the debt has been repaid in full. In the event the borrower commits a material default, usually by failing to make one or more of the required loan installment payments, the secured party may take possession of the collateral. After taking possession, if necessary, the lender may liquidate the collateral in order to satisfy the outstanding balance due on the loan in whole or in part
Pursuant to Article 9 of the Uniform Commercial Code (the "UCC"), which covers secured transactions, a creditor becomes a secured party if and when a security interest “attaches.” Under the UCC, a security interest generally does not attach unless the following three basic requirements are met: (1) value be given for the security interest; (2) the debtor has rights in the collateral (or power to transfer the collateral to a secured party); and (3) the debtor “authenticates” a security agreement. Once security interest attaches, the creditor must in all cases take further action to "perfect" the security interest.
Perfecting a security interest is not only necessary to repossess the collateral, but is also critically important to ensure that no other party, such as another creditor or a bankruptcy trustee, will be able to claim the same collateral in the event that the debtor becomes insolvent. By perfecting its security interest, a secured party establishes its position or "priority" over other parties regarding the same collateral. How a security interest is perfected depends on the type of collateral at issue. A security interest in real property is perfected by recording of a mortgage containing the "statutory power of sale" allowing the mortgagee (typically a bank or credit union) to sell the property at public auction should a default occur. Motor vehicles and boats are secured exclusively by the creditor being named as a "lien holder" on the certificate of title. All other forms of personal property must be perfected by filing a document known as a "financing statement" with the Secretary of State. By filing a financial statement, commonly known as a UCC-1, the secured party puts other creditors on notice of the secured party’s security interest in the collateral.
D. Baker Law Group, P.C. routinely advises clients on secured party transactions, most often in the context of a defaulted mortgage, motor vehicle loan, or business loan or line of credit. Foreclosing mortgages and repossessing motor vehicles involves a complex maze of rules and regulations that must be strictly adhered to. Failure to do so can often lead to disastrous results to the unknowing creditor.