In this video, I introduce important concepts in secured transactions such as attachment, perfection and purchase money security interest (OMSI).
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Secured transactions are a type of financial arrangement where a creditor (the party lending money or providing credit) and a debtor (the party receiving the loan or credit) are involved. In such transactions, the debtor buys something from the creditor but doesn't pay for it immediately; instead, they promise to pay later. To reduce the risk of not getting paid, the creditor takes a security interest in some of the debtor's personal property, known as collateral.
A security interest is like a safety net for the creditor. It's a legal right to specific items that belong to the debtor. If the debtor doesn't pay back what they owe according to the agreed terms, the creditor can take (or repossess) these specific items to recover the debt.
In the context of secured transactions, there are two key concepts: attachment and perfection.
Attachment refers to the point when the security interest becomes enforceable between the creditor and the debtor. For a security interest to attach, certain conditions must be met, such as an agreement between the parties and the debtor having rights in the collateral. Once the interest attaches, if the debtor fails to fulfill their obligation, the creditor can seize the collateral to settle the debt. However, attachment alone does not protect the creditor's interest against claims from third parties who may also have interests in the same collateral.
Perfection is the next step, which safeguards the creditor's interest against third-party claims. By perfecting a security interest, the creditor publicly records or announces their claim to the collateral. This process typically involves filing a financing statement or taking possession of the collateral. Perfection essentially tells the world that the creditor has a priority claim over the collateral, making their rights superior to certain third parties who might also claim an interest in the same property.
Article 9 of the Uniform Commercial Code (UCC) primarily governs security interests in personal property and fixtures. Personal property refers to movable items, while fixtures are personal property that has been attached to real estate so significantly that they become part of it. Additionally, Article 9 covers outright sales of accounts receivable, which are debts owed to a business.
However, Article 9 does not cover everything. It doesn't apply to security interests in real estate (like mortgages), wage claims, or statutory liens, such as mechanic's liens which are rights granted to workers who have repaired or improved property.
A notable aspect of Article 9 is the concept of a Purchase Money Security Interest (PMSI). A PMSI is a special kind of security interest that, when properly perfected, takes precedence over other security interests in the same collateral. This priority status is significant because it can determine who gets paid first in cases where assets are limited.
A PMSI occurs in two main situations:
Seller-financed PMSI: This happens when a creditor (who may also be the seller) provides the item to the debtor on credit and retains a security interest in that item for the amount of the purchase price. For example, if a business sells a computer to a customer on credit and retains a security interest in the computer until it's fully paid off, that's a seller-financed PMSI.
Third-party-financed PMSI: This occurs when the creditor is not the seller but provides funds to the debtor specifically for purchasing the item, and the creditor retains a security interest in the item. For instance, if a bank loans money to a person to buy a car and retains a security interest in the car, this is a third-party-financed PMSI.
The critical aspect of a PMSI is that the credit or funds provided are directly used to acquire the collateral, and the creditor retains a security interest specifically for the value of that collateral. This special status of a PMSI, when perfected, allows the creditor to claim the collateral before other creditors, even if those other creditors have general security interests in the debtor's assets
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