Basic Uniform Commercial Code

Credit


Credit is giving money, goods, or services in exchange for receiving something back later.

Credit can be either secured or unsecured.

Secure

Secured credit is when credit is given, but a security interest is given in return via a security agreement.

Security Interest

A security interest is an interest in collateral, allowing them to be repossessed if the borrower defaults.

Collateral

Collateral is property in which an interest is taken by the lender in a secured transaction or by an agricultural lien.

Collateral is divided into specialty sui generis property and the two basic other categories:

A security interest will remain attached to the collateral through anything unless something specially removes it. UCC § 9-201(a).

  1. Except as otherwise provided in subsection (e), a buyer in ordinary course of business, . . . takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence.
  2. Except as otherwise provided in subsection (e), a buyer of goods from a person who used or bought the goods for use primarily for personal, family, or household purposes takes free of a security interest, even if perfected, if the buyer buys:
    1. without knowledge of the security interest;
    2. for value;
    3. primarily for the buyer's personal, family, or household purposes; and
    4. before the filing of a financing statement covering the goods.
Buyer in Ordinary Course of Business

"Buyer in ordinary course of business" means a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller's own usual or customary practices.

Financing Statement

A financing statement is a record that is publicly filed to put other people on notice of a security interest in the collateral.

A financing statement does not have to be very specific.

Security Interest Analyzing Framework

A retained interest creates a security interest. UCC § 2-401.

It attaches when value is given, the debtor has rights to the collateral, and something from UCC § 9-203(b)(3) occurs. UCC § 9-203.

Secured parties can collect the collateral via self-help or via sheriff.

Self-Help

A secured creditor has a right to go take property from his debtor as long as doing so would not breach the peace.

A creditor has a limited license to enter his debtor's property to enter property and retrieve the collateral.

Courts are mainly concerned about preventing violence.

Secured transactions are much easier to collect upon as it does not require a lawsuit to collect.

Secured parties get higher priority than unsecured parties.

Unsecure

Unsecured credit is when credit is given without requiring a security interest.

To collect on a defaulted unsecured credit (or technically if secured too), the creditor must sue, obtain a judgment, and get a writ of execution issued to the sheriff, who would then take sufficient nonexempt personal property from the debtor. (Or real property if personal is insufficient)

  • This is expensive and time-consuming and therefore often not worth it.
    • (This can be used to negotiate lesser payments. Often under 20¢ per dollar.)
Unfair Credit Practice
  1. ... [I]t is an unfair act or practice ... for a lender or retail installment seller directly or indirectly to take or receive from a consumer an obligation that:
    1. Constitutes or contains a cognovit or confession of judgment (for purposes other than executory process in the State of Louisiana), warrant of attorney, or other waiver of the right to notice and the opportunity to be heard in the event of suit or process thereon.
    2. Constitutes or contains an executory waiver or a limitation of exemption from attachment, execution, or other process on real or personal property held, owned by, or due to the consumer, unless the waiver applies solely to property subject to a security interest executed in connection with the obligation.
    3. Constitutes or contains an assignment of wages or other earnings unless:
      1. The assignment by its terms is revocable at the will of the debtor, or
      2. The assignment is a payroll deduction plan or preauthorized payment plan, commencing at the time of the transaction, in which the consumer authorizes a series of wage deductions as a method of making each payment, or
      3. The assignment applies only to wages or other earnings already earned at the time of the assignment.
    4. Constitutes or contains a nonpossessory security interest in household goods other than a purchase money security interest.
Household Good
  1. Clothing, furniture, appliances, one radio and one television, linens, china, crockery, kitchenware, and personal effects (including wedding rings) of the consumer and his or her dependents, provided that the following are not included within the scope of the term household goods:
    1. Works of art;
    2. Electronic entertainment equipment (except one television and one radio);
    3. Items acquired as antiques; and
    4. Jewelry (except wedding rings).
Purchase-Money Security Interest
  1. A security interest in goods is a purchase-money security interest:
    1. to the extent that the goods are purchase-money collateral with respect to that security interest;
    2. if the security interest is in inventory that is or was purchase-money collateral, also to the extent that the security interest secures a purchase- money obligation incurred with respect to other inventory in which the secured party holds or held a purchase-money security interest; and
    3. also to the extent that the security interest secures a purchase-money obligation incurred with respect to software in which the secured party holds or held a purchase-money security interest.
Purchase-Money Collateral

"purchase-money collateral" means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and

Purchase-Money Obligation

"purchase-money obligation" means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used.

You have to have an obligation to use the money in that way.

TL;DR: Someone gave you money to buy something, and you used the money to buy it.

Purchase-money security interests take over previously-filed security interests as long as the PMSI perfects within 20 days of the purchaser taking possession. UCC § 9-324.

Sellers with PMSIs prevail over lenders with PMSIs.