Secured Transactions - Lesson 4 - YouTube

Now when you attach, you can attach, it says attachment also covers the proceeds.

Let's say for example let's draw this again.

Here's the creditor, here's the debtor, you gave me some money, boom, I'm going to give

you legally the right to the collateral.

Let's say I sold the collateral and I got money.

If I no longer have the asset, you can attach to the collateral, you can attach to the assets,

and you can attach to the proceeds.

You also, if in the agreement you could say we also attach to after acquired.

If I go out and buy other stuff and I don't have the good that you would attach to.

You can attach to after acquired property as well.

If the debtor were to purchase inventory, equipment after the attachment, the creditor

could also attach to that.

Notice that when all three of these things happen, boom, they've attached.

Now, I do this on January 1st, January 3rd, and January 5th.

When all three happen, boom, we've attached on the fifth, all three of these.

What does attachment do?

It gives the creditors rights against only me, the debtor, but they also want to protect

themselves not only against me but against those other third parties.

That's where they have to go to the next step which is perfection.

If you look in your notes it says the law provides creditors with rights similar to

attachment like a judicial lien, a statutory lien which is an artisans or mechanic's lien

or they could garnish like garnishing your wages.

These are things that are similar to attaching.

Now when you're filing it, you file it with the state recording office in the UCC department

or the counting clerk but basically there's a UCC department, a uniform commercial code.

That's where you would file this paperwork.

Now what about perfection?

Perfection provides notice to third parties that a security interest exist.

It's basically providing notice.

Now, in order to do this, we have to do not all three but one of the three.

The first one says you file a financing statement.

Now a financing statement is a statement that describes the debt, the collateral and its

sign.

It says file a financing statement in the appropriate public office, like I said the

UCC department.

It has a listing or description of the types of collateral, either the signature and address

of the debtor, the person giving up their right, the name and the address of the creditor,

and then also it says must be done for accounts like accounts receivable, copyrights, trademarks,

goodwill.

It lasts for five years and we continued indefinitely as long as you refile it within six months

of expiring for another five years.

You can keep renewing it, renewing it, renewing it again and again and again.

That is called filing a financing statement.

The second one is called automatic perfection which I'll come back to.

Then the third one is take possession.

Take possession.

Now, taking possession, we've talked about that.

You can attach by taking possession.

You can perfect by taking possession.

For example my parents many years ago live next to this guy that owned a pawnshop.

Okay, so I come in and I go, "Hey, I need some money, I've got this beautiful Porsche.

It's worth 100 grand, it's paid for," so I go in and I say, "Can I borrow 20 grand on

it."

He goes, "Sure."

What does he take?

He takes owner, he takes the pink slip.

He takes the pink slip because that represents ownership of the car.

That's the pink slip but what else does he do to protect himself because if I were kind

of a fraudulent type person, what can I do?

I go here's the pink slip then I go the next day to the DMV and go I lost my pink slip

and they go, "Let's give you a new one."

I get a new one, I take the car and I sell it to someone else.

I got money here, got money here, I leave the country.

What do people do?

They go, "Okay, here's the pink slip and let me have the car as well," so he would take

the car but he didn't want to leave it at the office because they all come back with

his extra keys and steal his own car and then sell it.

He would hide it at my parent's house basically.

The neighbors would have cars parked all up and down the street, those were the cars they

took as collateral because the guy didn't know where he lived.

He can't just drive all over the city looking for his car.

That's what happened.

Taking possession satisfies what?

Both perfection and attachment.

Take possession, take possession, so that satisfies both.

A good example of that would be like a pawnshop, a pawn broker, someone who lends money.

It says take possession, must be done for negotiable and nonnegotiable instruments,

investment securities like stock certificates, promissory notes, money.

Example, a pawn broker lending money that would be a good example.

The second one in the middle that I haven't covered yet, that's what gets most of the

testing, automatic perfection.

Now what is automatic perfection?

Automatic perfection is the following.

Let me drop this down, take possession.

All right, automatic perfection is when you're a PMSI in consumer goods, A PMSI in consumer

goods means a purchase money, secured creditor in consumer goods.

What it says is you will automatically perfect without having to file.

As long as I gave you the purchased money to buy the asset then we will automatically

perfect without having the file, however there's a loophole.

If we sell it from a consumer to a consumer, that second consumer gets it free of the automatic

perfection.

However we can close the loophole.

How do you close the loophole?

By filing a financing statement within 20 days of attachment.

That's how you close the loophole.

All right, so how do you perfect?

One way is to file, let's back up.

Why are we perfecting?

To protect ourselves from dots.

The debtor attaches other creditors, trustees and a bankruptcy, a trustee and bankruptcy.

How do you protect yourself?

By either filing or taking possession.

Another way without filing or taking possession is automatic.

If you give the purchase money and its consumer goods only.

Not equipment, not inventory.

Consumer goods only then it's automatic, it will automatically perfect.

Let me show you.

Let's say for example over here, here's the creditor and the creditor loans me money to

the debtor so I can buy a TV and it's a TV that I'm going to use at home and have a great

time with and I'm using my Sears credit card to get it.

All right, they're going to take that TV as collateral.

Now, they didn't actually take possession but they have the legal right to it.

Did they give me the purchase money?

Yes.

Is the TV consumer goods in the hands of the consumer?

Yes.

Therefore they gave me the purchase money to buy the TV, the TV is what's collateral.

They automatically perfect.

What's the loophole?

The loophole is if I sell it to another consumer.

They cannot go and take it back but if they want to protect themselves, what can they

do?

They need to file either before they get it or within 20 days of attachment.

Let's say for example they gave me the TV and everything happened on the first and let's

say I sold them the TV on the 15th.

Let's say they filed on the 30th.

Is that within 20 days of attachment?

No, therefore they attached on the first, they perfected on the 30th.

He got the TV on the 15th, he gets to keep it.

Okay, let's change it.

Let's say I file on the 20th.

Is that within 20 days?

Yes, therefore it's retroactive to the first which is before the 15th, they can take the

TV back.

How do you close the loophole?

By filing before they get it or within what?

20 days of attachment.

How do you perfect?

Automatic is if it's a PMSI, purchase money secured creditor and consumer goods.

The loophole is consumer to consumer.

How do you close the loophole?

File before they get it or within 20 days.

How do you attach?

All three of these.

How do you perfect?

This, this or this.

All right, now a good way to remember this.

Collateral sounds like cholesterol, collateral cholesterol.

Collateral is this, cholesterol is you eat fatty foods and high in cholesterol, bad for

your heart, you die and so on.

When you think about it like pork, pig, pig, it has a lot of cholesterol so a good way

to remember this in order to attach, what do we do?

Pig fat, pig fat, pig fat.

Look at this, property owned, boom.

Interest created, give value, pig, and file, automatic, take possession, pig fat.

Pig fat has a lot of cholesterol which sounds like collateral.

Love it.

All right, so let's come back over this way.

How do you attach?

PIG, P-I-G.

How do you perfect?

FAT, F-A-T.

Again, PIG FAT.

Property owned, interest created, give value.

How do you perfect?

File, automatic, take possession, PIG FAT.

PIG FAT, a lot of cholesterol, a lot of collateral.

Loving it.

Okay, so that's PIG FAT attachment perfection.

Now as far as all the rules that we're looking at, there are different types of rules that

we need to know.

There are different types of things that relate to all of this.

In a minute, I want to cover a very important rule that talks about perfection and inventory.

Let's look at one thing though, it says special rules for perfection.

When collateral is taken from one state to another, the creditor must perfect in the

new state within four months or lose their priority.

That's just a little note but in a minute we'll talk about what?

The inventory rule.