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University of Missouri- Columbia
University of Missouri- Columbia
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Secured transactions (chattel mortgages)
Transactions where a debtor pledges personal property or fixtures to a creditor as security for a loan or another obligation.
A lien on personal property or fixtures, which secures payment or performance of an obligation, allowing repossession and sale of the collateral if there is a default on the obligation.
An interest in property which typically gives a creditor the right to sell property on default.
EX: mortgages, security interests, and some court judgements.
Items of personal property permanently attached to real estate.
Transfers a security interest in personal property and creates a secured transaction.
The personal property or fixtures subject to a security interest.
The creditor who is the holder of the security interest.
The party owing money or an obligation secured by the security interest.
The process which causes a security interest to be enforceable against a certain piece of collateral.
A process which fixes the secured party's level of priority to the collateral against others who also have a lien.
-- A written notice of a security interest filed with a government office.
-- It perfects the security interest to fix its priority as opposed to others who will take a later interest in the property.
Types of collateral governed under Article 9 of the UCC
Defined as things tangible and movable, such as furniture or business equipment.
Under Article 9, they also include fixtures.
Documents which in themselves evidence a legal right, such as negotiable instruments.
Covered under Article 9 of the UCC.
Items of personal property with no aspect of physical existence, such as accounts receivable or the goodwill of a business.
Covered under Article 9 of the UCC.
Motor vehicles and Article 9 of the UCC
Does NOT apply to real estate or to the perfection of security interests.
DOES apply to the attachment of security interests in, and repossession of.
Three requirements for attachment of a security interest
1.) A valid written security agreement OR the possession of the collateral. (Oral is enforceable if party takes possession of collateral).
2.) The secured party gives value.
3.) Debtor has rights in the collateral.
Attachment and security agreements
Written security agreement requires...
- Language transferring a security interest in collateral.
- Signature of debtor.
- Description of collateral sufficient to identify and separate it from other items.
Oral security agreement requires...
- Possession of the collateral
Three ways to perfect a security interest
1.) By possession
-- Common law pledge, pawn shop
2.) By attachment of security interest
-- Holder has PMSI in consumer goods (non-business use), other than motor vehicles or fixtures
3.) By filing a financing statement
-- Effective for 5 years; perfect for business transactions
Contents of financing statements
Name and address of debtor
Name and address of the secured party
Description of the type of collateral
Required method of perfecting for most business transactions.
Must file if no possession of collateral and no PMSI in consumer goods.
Generally filed at the Secretary of State's office.
Security interests which switch from one piece of collateral to another or which use the same collateral to secure more than one advance of money by a lender.
Three types of floating liens
Security interests in...
2.) After-acquired property
3.) Future advances
Floating liens that consist of whatever is received in exchange for the collateral.
EX: Farmer exchanging soybeans for animal feed - animal feed received would be proceeds. Floating lien cover crops would switch from crops to feed.
Floating liens which are purchased by the debtor after the attachment of the original security interest.
EX: In inventory, would float from sold inventory to purchased replacement inventory.
Floating liens which are loans (advances) to be made by a secured party in the future, after the original security agreement is signed.
EX: Business line of credit allows for advances up to a certain amount of money and typically the same collateral covers each advance or loan by the creditor.
Five Priorities to Collateral
1.) Buyer of goods in the ordinary course of business.
2.) PMSI perfected within 20 days of attachment.
3.) Secondhand purchaser of consumer goods will take title free of a security interest perfected by attachment (garage sale rule)
4.) First to perfect (possession, attachment, financing statement) or become a line creditor.
5.) First to attach if no secured parties have perfected.
-- A creditor who has obtained a judgement and an execution lien.
-- A creditor who obtains a lien upon property of the debtor because of a judgement.
-- EX: Trustee in bankruptcy
Four Rights/Duties of Parties upon Default
2.) Repossession of sale
3.) Retain collateral
4.) Ignore the security interest and sue on the promissory note
-- Right of secured party on default
-- Most common option for a secured creditor
-- Party may take possession of collateral for the loan
-- Must be done AFTER giving the debtor notice of the right to cure any default
-- Must be done WITHOUT breach of peace
Breach of peace
Occurs if the secured part breaks into a house, garage or other area with an expectation of privacy, or if the secured party uses violence or a threat of violence to obtain possession of collateral.
Repossession of sale
-- Right of secured party on default
-- After repossession of collateral, the secured party may dispose of collateral and apply the proceeds to the obligation.
-- Right of secured parties on default
-- Sometimes, secured parties may keep the collateral as satisfaction (full payment) of the obligation.
-- Requires notice, a right to redeem the collateral and proper protection of consumers.
Ignore the security interest and sue on the promissory note
-- Right of secured parties on default
-- Occurs when value of collateral has deteriorated to worthlessness.
-- Secured party may sue on the promissory note or installment contract to recover amount owed.
-- Once judgement is obtained, party may execute on the personal or real property of the debtor for the purpose of collecting the debt.
Transfer of good title
-- An effect of repossession sales
-- A purchaser at a valid repossession sale takes title free of ownership claims of the debtor and the secured party.
4 Priorities of Proceeds Distribution after Repossession Sale
1.) Expenses of the sale (possessing, holding, and preparing collateral for sale; attorney fees)
2.) Satisfaction/repayment of debt of first lienholder.
3.) Inferior lienholders who have notified secured party for order (2nd lien, 3rd lien, etc.)
4.) Debtor is entitled to any surplus or responsible for any deficiency to any party who hasn't paid.
-- Filed by secured party when a secured debt is paid or other obligations are satisfied.
-- Gives notice that the creditor no longer has a lien on the property.
Real estate (realty, real property or land)
Includes the land, minerals, vegetation, buildings, or other items permanently attached to the land.
An agreement authorizing a realtor to be the seller's agent for the purpose of soliciting offers on real estate.
Allows for other realtors in the community to show and entertain offers on the land.
Exclusive listing agreement
Standard from contract that realtors request because it gives the realtor the exclusive right to be the selling agent for the land.
Installment land contract
-- The seller finances the purchase and retains the title and deed until consideration is paid in full - often years down the road.
-- Buyer allowed to take possession.
-- Buyer makes continuous payments until full paid for.
Cash on closing contract
The entire purchase price is paid at closing; deed is transferred immediately.
A document which transfers title to land.
Person or entity who transfers title by deed.
Person who receives a deed and title to the real estate.
A deed under which the grantor guarantees that the title is good.
-- A deed under which the grantor transfers whatever ownership interest the grantor has in the land without any warranty of title.
-- Often used in situations where ownership of property is unclear.
Deed of release
A deed of a mortgagee releasing a mortgage.
Written, described property, signed, notarized, and delivered.
4 Ways a Grantee May Take a Title
1.) Tenancy in common
2.) Joint tenancy
3.) Tenancy by entireties
4.) Transfer on death provision
Tenancy in common
Means that each co-owner's share will go to his or her in the event of that co-owner's death.
Means that there is a right of survivorship, under which each co-owner's share will go to the other co-owner(s).
Tenancy by entireties
-- Only available for spouses
-- Protects the land from the creditors of only one of the spouses and includes a right of survivorship, where the surviving spouse will take in the event of a death.
Transfer of death provisions
The deed specifies whom the property will go to in the event of the grantee's death.
Fee simple absolute
Transfers the entirety of the ownership of the land to another party.
Fee simple defeasible
Transfers the entire ownership interest in the land, but subject to a condition.
The permanent right to use a portion of another's land without owning it.
EX: Utility easements (electrical, telephone, cable services)
A temporary, revocable right to use land.
Rights to enter the land of another and remove something of value from it.
EX: Mineral rights, timber rights
Gives a lender the right to foreclose on land if an obligation is breached.
Life estate (life tenancy)
Gives the holder the right to exclusive possession of land for a term based upon someone's life span.
Abstract of title
Summary of transactions pertaining to the land since the title came from the government.
A lawyer's opinion on marketability of the title after examining the abstract.
Insurance company guarantees good title.
Title theory of mortgages
-- Lender holds title until loan is paid.
-- Borrower remains in possession of property.
Lien theory of mortgages
-- Borrower retains title and possession of the real estate.
-- Gives lender the right to foreclose and sell property in the event of default on the loan.
-- Used today
Borrower/buyer who transfers the mortgage.
Lender/seller who receives and holds the mortgage.
Selection of financing vehicles for mortgages
Cash on closing with full payment,
installment land contract, or lease with option to buy.
Types of financing instruments
-- Mortgage - a lien on real estate where the holder (mortgagee) personally exercises foreclosure rights.
-- Deed of Trust - a lien on real estate where a third party, the trustee, exercises foreclosure rights on behalf of the holder.
Requirements for a valid mortgage
Signed, notarized, delivered, and in writing; as with the deeds.
-- Used to secure some type of a line of credit
-- Secures future advances
-- No fixed date for payment in full and usually no fixed amount for the payments
-- Often used to secure credit cards
-- Lower in priority and usually later in time than an open-end mortgage.
-- Mortgage with the highest property is the first mortgage, then the second, then the third, etc.
Five types of clauses in mortgages
1.) Acceleration clause
2.) Due on sale clause
3.) Power of sale clause
5.) Prepayment privileges
-- Used in mortgages
-- Allows the lender (seller) to declare that the entire loan balance is due if there is a default in payment on the loan.
EX: Allows skipping of lawsuits
Due on sale clause
-- Allows the holder of the mortgage to accelerate the balance due if any interest in the land is sold.
-- Allows bank to get paid when an interest in real estate is sold, making the mortgage non-assumable.
Power of sale clause
-- Allows the mortgagee (lender/seller) to have a private foreclosure sale.
-- Instead of suing to foreclose, lender can simply advertise the sale according to the relevant statute.
The trustee can sell the real property serving as collateral for a loan at public auction if the borrower defaults on the loan obligation.
-- Loan origination fees where one point equals one percent of the loan amount.
-- Used in order to make sure that the bank receives a profit on the loan.
-- Allow early payment without penalty, but are often limited if points are not charged.
Used in order to make sure that the bank receives a profit on the loan.
Creditor's rights when borrower defaults mortgage
2.) Private or judicial foreclosure
3.) Deficiency judgment
-- Right of creditor after borrower's default
-- Court order requiring the borrower to pay the amount still due after a foreclosure sale on real estate or after a repossession sale on personal property.
-- Limited in some states; require judicial foreclosure before obtaining amount.
Debtor's rights when mortgage is defaulted
1.) Statutory notice of foreclosure sale
2.) Equity of redemption
3.) Statutory redemption
Equity of redemption
Gives the mortgagor the right to repurchase the real estate by paying the entire balance due prior to foreclosure.
-- Allows the mortgagor to repurchase the foreclosed property after the foreclosure sale.
-- Very limited in Missouri; right only applies if the holder purchases the property at its own foreclosure sale.
-- The mortgagor must post bond to exercise this right.
-- Provides that the first to record a mortgage or deed with the recorder of deeds has priority to the real estate.
-- One who has notice of another's interest prior to receiving an interest in the land, cannot defeat the other's interest.
-- The first to record after taking an interest in the land without notice of another's interest has top priority to the land.
-- Slightly higher priority on recording your interest in the land first than a notice statute.
-- This is what Missouri uses.
Tenancy for years
-- A tenancy for any period of time, even if the time stated is less than one year.
-- Most common type of written tenancy.
A tenancy for automatically renewable periods of time, such as month-to-month.
Tenancy at will
A tenancy with no specific time frame; it is terminable by either party at any time.
Tenancy at sufferance
-- A wrongful possession of land by a tenant - either wrongful initial possession or a wrongful holding over after a lease term.
-- EX: Moving to a random cabin you find on a hike or violating a lease and staying in an apartment after the new tenant was supposed to move in.
Missouri rule regarding tenancies
Periodic tenancy, tenancy at will, tenancy at sufferance, or an oral lease are all converted to month-to-month unless the lease is for agricultural land, they they are converted to year-to-year.
-- Gives a tenant a right to temporary exclusive possession of real estate.
-- Landlord has a future interest requiring the return of possession to landlord.
-- A material or important agreement in the lease
-- A breach releases the nonbreaching party from all duties under the lease.
-- EX: Tenant not paying rent or landlord not placing tenant in possession of property.
-- An immaterial or unimportant agree in the lease
-- A breach does NOT release the other party from the lease.
-- EX: Dirty condition, failure to make minor repairs, etc.
-- A standard which the tenant must meet in order to continue occupancy of the property.
-- EX: If lease specifies no more than 3 adults in apartment and 6 live there, this would be a breach of the condition.
Landlord's rights to possession once property is delivered to the tenant
1.) Reversionary interest - future interest which allows landlord return of possession at end of lease
2.) Eviction - right to remove tenant in the event of a breach of a dependent covenant or a lease condition.
Landlord's duties as to possession of the property
1.) Landlord must give possession of the property to the tenant.
2.) Landlord must prevent interference with tenant's possession.
-- Followed by the majority of states
-- Requires that the landlord give actual possession of the property to the tenant as part of the dependent covenant to provide possession.
-- Only requires the landlord to give a legal right to possession.
-- Places burden on tenant.
The removal of the tenant by the landlord in the event of a breach of a dependent covenant or a lease condition.
Occurs by eviction notice or legal action.
The abandonment by a tenant of residential real estate because the landlord's actions give no reasonable alternative.
Three things a tenant must prove for constructive eviction
1.) There is a substantial defect in the premises or interference with possession that causes substantial interference with the tenant's ability to live there.
2.) Tenant notifies landlord of the problem, but landlord fails to remedy the situation.
3.) Tenant abandons the real estate.
Causes of eviction
Nonpayment of rent
Waste (damage) to property
Landlord's duties to repair
For the modern rule in Missouri...
-- Housing codes
-- Implied warranty of habitability (keep property fit for human habitation)
-- Duty to keep common areas safe
-- Contractual duties
Lease clauses as to payment
Taxes and insurance
-- A dependent covenant.
-- If not paid, tenant may be evicted.
A type of liquidated damages - if too high they become an unenforceable penalty.
Secure against nonpayment of rent and against damages.
Taxes and insurance
Usually the landlord pays, but in commercial leases or leases with options to buy, the tenant frequently pays all or part of these expenses.
A transfer by tenant of all first tenant's rights to second tenant.
The first tenant
The second tenant
A transfer of part of tenant's rights to second tenant.
The first tenant in a sublease.
The second tenant in a sublease.
Agreement to release by landlord is necessary to release first tenant from liability where sublease or assignment.
Notice to quit
A notice by the landlord or tenant of the lease to terminate a periodic tenancy.
Month-to-month notice to quit
Notice must be given before the first day of the month to terminate the lease at the end of the month.
Year-to-year notice to quit
Notice must be given 60 days prior to the end of the lease year to terminate the lease at the end of the year.
Holding over after lease term
-- With landlord's approval, the lease reverts back to month-to-month.
-- Without landlord's approval, the tenant is responsible for double rent.
Allow a landlord to evict a tenant quicker by providing for a quicker trial date and fewer defenses.
-- Allows a landlord to keep tenant's property as security for nonpayment or damages to the real estate.
-- Only landlord's lien in Missouri is for crops.
Duty to mitigate
-- Landlord's duty to lessen tenant's damages, usually by seeking new tenant.
-- No duty of landlord in Missouri to mitigate unless the landlord keeps the security deposit.
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