Episode 318: Secured Transactions: Collateral, Security Agreements, and Processes

Secured transactions involve the use of collateral to secure a financing agreement. In most cases, the obligor (the creditor) provides a loan to the obligee (the borrower) in exchange for first rights to the secured property, should the obligee fail to uphold their obligation.

Secured transactions may involve many types of collateral. Most states, including Texas, have a Uniform Commercial Code that dictates how this collateral is secured.

It is crucial to have a reputable Houston attorney on your side when any agreement of this nature is created to ensure you are informed, protected, and that terms within the agreement are enforced.

What Assets Can Be Used as Collateral for Secured Transactions?

 A variety of assets, both tangible and intangible, may be used as collateral to establish a security agreement. The Uniform Commercial Code (UCC) defines more than 20 categories of assets eligible for this purpose. Some examples include:

  • Equipment
  • Inventory
  • Machinery
  • Buildings
  • Land
  • Securities
  • Account receivables
  • Mineral rights
  • Farm products
  • Patents

The UCC defines how the above assets are managed during a secured transaction, but there are exceptions. Most notable is real property. Land and buildings are governed by the state’s property law. And in Texas, a deed of trust is used as the security agreement when real property is put up as collateral.

What is the Uniform Commercial Code in Texas?

The Uniform Commercial Code is one of the nation’s most expansive and oldest uniform acts, dating back to the 1950s. It is used to standardize certain aspects of commercial transactions. Specifically, the UCC governs the creation and administration of some business contracts and liens.

All 50 states have their own version of the UCC. There are minor variations between them, but in general, the UCC ensures commercial contracts and lien instruments are treated the same in every state.

Article 9 of the UCC addresses secured transactions and what requirements must be met before an obligor has established a security interest in the collateral. Most importantly, the obligor must submit a financing agreement and security agreement to the relevant government office – typically the Secretary of State.

The Role of Financing and Security Agreements in Secured Transactions 

Before a creditor can claim rights or security interests with the collateral, the transaction must be “perfected.” In this context, perfection means the obligor takes the steps necessary to make the transaction official. In doing so, the lender asserts their first priority over the collateral in the event that the debtor fails to make payments.

There are a few ways to achieve transaction perfection, but the most common way to do it is to file a financing statement and security agreement under UCC provisions. Here’s a brief explanation of each:

  • Financing statements – Also termed Form UCC-1, creditors file a financing statement to detail the parties involved in the transaction, along with the collateral that will be used to secure it. Form UCC-1 is used by government agencies and other creditors to track which assets have been secured by which creditors. Financing statements do not establish a security interest in the collateral. To do that, a security agreement must be submitted to the relevant government office.
  • Security agreement – Security agreements give creditors a security interest in the named collateral. With this interest, the creditor may take possession of the assets should the debtor fail to meet the agreement’s terms.To establish a security interest, there must first be a security agreement. Put simply, there must be a written record confirming that both parties – the obligor and obligee – agree to granting the obligor a security interest in the property.Further, there must be a specified value associated with the collateral. This is usually defined when the creditor lends money or when the debtor begins payment. Finally, the debtor must have partial or total rights to the collateral.If the above prerequisites are met, the security agreement will serve as notice to other creditors that the creditor has first rights to the collateral.

An important note – security agreements are based on a “first file, first serve” basis. In other words, whichever creditor submits the security agreement and UCC-1 form first will be considered the priority creditor should the collateral assets need to be liquidated.

How an Attorney Can Help with a Secured Transaction

 Secured transactions are an active part of law. As such, it’s highly recommended that both parties have legal counsel throughout the process.

A reputable attorney with experience in secured transactions should be on hand when the security agreement is initially formed, during closing, when payments are being made, and if any disputes arise while enforcing the contract. And disputes are extremely common.

Legal representation is especially important for creditors, for a couple of reasons:

  • Protecting the creditor’s rights – An attorney can preserve as many protections as possible for both the debtor and creditor. On the creditor’s side, this protection is necessary to prevent any exposure to legal liability.For example, the UCC does not determine when a secured transaction has entered into default. This is something that must be specified in the security agreement so the creditor can engage in collections without violating UCC provisions.Another example – if a creditor does opt to liquidate collateral, it must do so in a “commercially reasonable” fashion. In other words, the creditor must make reasonable, provable efforts to extract maximum value out of the collateral.This is a gray area that regularly provokes litigation from the debtor’s side. An attorney can guide creditors through this process so they can demonstrate commercially reasonable efforts and avoid a lawsuit. Secured transactions are littered with potential legal liabilities like this, which is a primary reason why creditors seek legal counsel before executing one.
  • Ensuring the security agreement is enforceable – A security agreement is not enforceable until it is properly drafted, written and perfected. Any minor mistake during this process can have major consequences. An attorney will provide counsel through this process to ensure the agreement is enforceable.For example, if the security agreement is not attached to the UCC-1 form when the contract is finalized, the collateral is not secured. Another creditor could jump in with their own security agreement claiming the same assets and attain first rights. Until the agreement is perfected, the debt is unsecured – which is a risky position to be in for a creditor.

An Attorney Can Help Your Organization Make Sense of Secured Transactions

Secured transactions are complex. If they aren’t executed in accordance with UCC provisions and aren’t perfected, it could expose your organization to excessive, and unnecessary, liability.

It’s important to work with a reputable attorney that is experienced with establishing secured transactions, including developing the security agreement terms and ensuring they are enforced. In short, this will ensure your organization is protected and entitled to the assets it has secured.

Episode 317: Bankruptcy Code 727 and 523 from the Creditor’s Perspective

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Today we will be addressing Section 727 523 of the bankruptcy code and how creditors can deploy these to their advantage.

U.S. bankruptcy law is designed to give honest debtors a chance to start over with a clean financial slate. It’s a merciful and laudable alternative to the debtor’s prisons that once ran rampant in England, but it’s a complex law with many exceptions.

During a Chapter 7 filing, determining which debts are dischargeable and which are not is a major part of the process. It takes about six months for the courts to officially discharge an individual’s debts, and during this time, creditors will have the opportunity to review the debtor’s disclosures and file any motions that will improve their chances of recovering lost assets.

What is a Non-dischargeable Debt in Bankruptcy Law?

The point of filing Chapter 7 bankruptcy is to “discharge” as much debt as possible from the individual’s obligation. In other words, the debtor is no longer legally obligated to pay discharged debts, and creditors are legally barred from pursuing them.

The majority of debts are dischargeable through Chapter 7, but not all of them. These “non-dischargeable” debts cannot be removed from the debtor’s obligation, even with a successful Chapter 7 filing.

As for what debts fall into this non-dischargeable category, the specifics are detailed in Section 523. Further, Section 727 may also be used to deny debt discharge, in general, but there are notable differences between 523 and 727, and these differences are relevant to creditors tied to the case.

What Debts are Exempted from Discharge Under Section 523?

Section 523 references more than a dozen specific instances where a debt is not dischargeable through Chapter 7. Some examples include:

  • Tax and customs debts, with some exceptions
  • Student loans, with some exceptions
  • Consumer debts incurred for luxury goods and services, over a $550 threshold and incurred within 90 days of filing bankruptcy
  • Cash advances in excess of $825 taken out within 70 days of filing bankruptcy
  • Domestic obligations (child support and alimony)
  • Debt incurred as a result of willful and malicious injury or damage
  • Debt incurred as a result of causing injury or death with a vehicle, if alcohol or drug intoxication was confirmed as a factor in the accident
  • Debt, property, or services acquired as a result of fraud or misrepresentation.

There are additional discharge exceptions, but the above represent the bulk of Section 523 actions.

What is Section 727 and How Does it Affect Debt Discharging During Bankruptcy?

Section 727 also concerns whether debts qualify for discharge or not. The primary difference between Sections 727 and 523 is the scale at which they are applied. Section 523 motions are targeted at a particular instance of debt, while Section 727 motions consider all of the debtor’s debts at once. Put another way, if a Section 727 motion succeeds against a debtor, then all of their debts are not dischargeable through Chapter 7 – effectively eliminating the only reason why an individual would declare bankruptcy to begin with.

Section 727 motions may be filed for many reasons, including:

  • Failure to provide tax documentation
  • Destruction or concealment of accounting documentation
  • Attempts to transfer or conceal property in an attempt to avoid creditors
  • Failure to complete a financial management course prior to filing bankruptcy
  • Commission of perjury or fraud related to the bankruptcy case\

In general, if the debtor does not act in good faith from the start of the bankruptcy process, Section 727 may be used to invalidate their attempt to discharge debts.

Creditors Can File a 523 or 727 to Claim Losses from a Debtor, but Considerations Apply

Bankruptcy trustees and creditors may file for a 523 or 727 motion if they suspect the debtor does not qualify for debt discharge under those sections. As for which motion to choose – and whether it’s worth filing a motion to begin with – there are some important considerations:

  • The creditor has the burden of proof – If the fight over discharging a debt results in a trial, the creditor is responsible for proving the motion. This will necessitate an organized legal offense, with documentation and knowledge of bankruptcy code required. 
  • If provable, a 523 motion is usually more beneficial to a creditor – In some cases, either a 727 or 523 motion may be available to creditors. Generally speaking, it’s more beneficial for creditors to demonstrate a 523, if possible.Here’s why – if a 727 is granted and all the debtor’s obligations aren’t discharged, the debtor may have a crowd of other creditors to deal with. You’ll be competing with them for whatever recompense the debtor can afford.

    As a 523 motion only addresses a particular debt, creditors can work to only have their debt barred from discharge. If the debtor has fewer creditors to deal with, they’ll be more likely to resolve their remaining debts in full. That’s good news for any creditor left standing after the bankruptcy process is complete.

     

  • The debtor’s circumstances are also relevant to the decision – Filing a 523 or 727 is an investment – in time, money, and mental bandwidth. In some instances, this investment may not be worth it to the creditor. For example, if the debtor is unlikely to financially recover and be able to afford their non-discharged debts, there may be little reason for a creditor to pursue action.Of course, it can be difficult for creditors to know what the right decision is in this regard – a common reason for creditors to seek out professional legal assistance. 

Bankruptcy Law is Extremely Complex, So Speak with a Trusted Bankruptcy Attorney First

Bankruptcy is complicated on both sides of the process. From the creditor’s perspective, there’s a brief window to act, organize a legal strategy, and build a case for rejecting a discharge. The surest way to develop an effective response is with an experienced bankruptcy attorney’s assistance.

Bankruptcy experts help their clients weigh all potential options and determine which is most likely to render success. A bankruptcy attorney will also ensure their client acts in a timely fashion and acquires the documentation needed to demonstrate a 727 or 523 motion.

The U.S. bankruptcy process serves a noble purpose for individuals, but there are, of course, bad actors who leverage the system to their benefit. With proper legal maneuvering, however, creditors can hold debtors accountable – and potentially gain back their losses in the process.

Episode 316: Intestate in Texas: Succession and Property Considerations

If an estate owner dies intestate (legalese for dying without a will), the state’s intestate succession laws determine who the beneficiaries are, and what they are entitled to receive. This is also the case in Texas, which has its own intestate succession order. Further, because Texas is a community property state, there are additional provisions dictating how a decedent’s property is to be divided among beneficiaries.

However, the state’s intestate succession order may not be considered ideal. If this is the case, it’s essential for the estate owner to author a will prior to death. Wills are used to name beneficiaries and allocate assets to those beneficiaries as the estate owner sees fit. In effect, they replace the state’s judgment regarding who receives what.

With a will, the estate owner can ensure their loved ones are sufficiently provided for, and that difficult decisions regarding property division are answered.

What Assets are Passed Through the Intestate Succession Process?

The assets that pass through intestate succession are the same assets that pass through probate. Probate is the court-mandated and guided process during which an estate’s assets are gathered, inventoried, and allocated to beneficiaries. Probate assets are a matter of public record, and it can take months (even years) before everything is resolved through the court. As such, estate planning attorneys will frequently develop trusts and other instruments that allow the estate’s assets to pass outside of probate and directly to beneficiaries.

Non-probate assets – and therefore assets not affected by intestate succession – include the following:

  • Any property placed in a trust
  • Life insurance policies
  • Retirement investment policies, such as 401(k)s and IRAs
  • Payable-on-death or joint owned bank or brokerage accounts
  • Any property that is jointly owned, including vehicles and real estate

Assets that cannot be placed in one of the above categories will be subject to intestate succession.

Intestate Succession in Texas – Who Gets a Share of the Decedent’s Property?

Let’s say an estate owner dies without a will in Texas. What happens then? The Texas succession laws take over. This law determines who the estate’s beneficiaries will be – and what share each beneficiary is entitled to.

In Texas, this is what the succession order looks like:

  • If there is a surviving spouse, but no children, parents, or siblings – The spouse inherits everything.
  • If there are children, but no surviving spouse – The children inherit everything.
  • If there are surviving parents, but no spouse, children, or siblings – The parents inherit everything.
  • If there are surviving siblings, but no spouse, children, or parents – The siblings inherit everything.

If there are multiple children or siblings, they receive equal shares of the decedent’s estate. That may spark some spirited conversations about who receives what, but the above scenarios are fairly simple. It gets more complicated when there is a surviving spouse (or more than one), children, grandchildren, parents, and other relatives all involved in succession.

Here are what those scenarios look like, from a succession standpoint:

  • If there is a surviving spouse and children, and the children are also the children of the surviving spouse – The surviving spouse inherits all community property and 1/3 of the decedent’s personal property. The spouse also retains the right to use any shared real property (the family home, most notably) for the remainder of their life, or until they move out of the property or abandon it. The children get everything else.
  • If there is a surviving spouse and children, but the children are not the children of the surviving spouse – The surviving spouse inherits 1/2 of all community property and 1/3 of the decedent’s personal property. They also retain the right to use any shared real property for life. The children get everything else, including the other half of the decedent’s community property.
  • If there is a surviving spouse and parents – The surviving spouse inherits all community property and the decedent’s personal property. They also receive 1/2 of the decedent’s real property. The parents get everything else.
  • If there is a surviving spouse and parents – The surviving spouse inherits all community property and all of the decedent’s personal property. They also receive half of the decedent’s real property. The parents get everything else.
  • If there is no surviving spouse, but a surviving parent and siblings – The parent receives 1/2 of the decedent’s personal property, and the siblings receive the rest.
  • If there is a surviving spouse and siblings, but no parents – The surviving spouse receives all community property and all of the decedent’s personal property. They also receive 1/2 of the decedent’s real property. The siblings get everything else.

What If There Isn’t a Surviving Close Relative?

If the estate owner dies intestate and has no living close relative, the decedent’s property may be claimed by the state to use as it sees fit. This is only the case if an heir cannot be identified through genealogical research. As you might expect, though, states differ greatly in how much effort they’ll put forth in tracking down beneficiaries.

However, Texas stands out in this regard. While some states won’t track a decedent’s genealogy beyond cousins, Texas courts tend to recognize very distant relatives when naming beneficiaries. These could be heirs completely unknown to the decedent, which may influence estate planning. Again, a will can be used to halt this process and dictate how the estate’s assets will be distributed – which may be to close friends, charity, or other institutions, as the estate owner sees fit.

How Is Community Property Handled During Intestate Succession?

As a community property state, Texas courts consider timing when determining whether an asset is owned by a single spouse, or jointly owned by both. As already detailed, community property is categorized differently during intestate succession.

The question is, what qualifies as community property? It comes down to timing.

Any assets owned by one of the spouses prior to marriage retains sole ownership over those assets following marriage. If the asset is acquired following marriage (even if both spouses are not named on the title, in some cases), it’s considered community property and belongs to both spouses.

Assets governed by community property laws include:

  • A primary residence and any other real property
  • Vehicles, including boats and aircraft
  • Personal and household items, like clothing, furniture, and jewelry
  • Life insurance policies
  • Retirement and employment benefits, including pensions
  • Bank and brokerage accounts

Because Texas is a community property state, the above assets are largely passed on to the spouse, as described above. In addition to pre-marriage property, the only exceptions to the state’s community property provisions are gifts, inheritances, and certain funds awarded from legal judgments, such as personal injury awards.

Community property provisions can be nullified through a prenuptial or postnuptial agreement. In effect, such an agreement can be used to define who owns what assets, and any assets defined as personal property in this way will not be considered community property for the purposes of intestate succession.

Wills Overrule Intestate Succession

If an estate owner dies without a will, the situation can quickly escalate into an expensive, drawn out, and often emotionally charged process. We’ve seen it happen plenty of times – family members that get along just fine are suddenly embroiled in arguments over inheritance rights.

If you own significant assets, this all-too-common outcome can be avoided by authoring a will. Fortunately, it’s not difficult to put a will together, but it may be difficult to ensure everything is covered by your will. This is where an estate planning attorney can help. An experienced attorney can identify the best estate planning tools to ensure your assets are handled the way you want them to be handled – without the confusion and conflict that often accompanies estate divisions.