"Secured Transaction".

A secured transaction is generally defined as a transaction which gives the creditor, the person or business entity which has extended a loan or other property for another person or business' use, a security interest in that loan or in the property provided to another person or business. The concept in this instance is to give the lender or creditor (property owner) some type of assurance that if there is a default in the payments on the loan or other agreement, the lender can recover the sums due under the agreement. As such the creditor in a secured transaction is usually referred to as the "secured party". It is important to understand that in many cases the secured party will not have an ownership interest in the secured property. The secured creditor rather has a property right or property interest in the secured property.

Creating a Secured Transaction

In order to create a secured transaction there must be a contract which known as a "Security Agreement". The Statute of Frauds (which was discussed in an earlier lecture) is found within the New York General Obligations Law, requires that a security agreement be evidenced in writing. One of the more common situations where a secured transaction will be created is in the purchase of a cooperative apartment, what is commonly referred to as a co-op.

The purchase of a cooperative apartment (co-op) is not considered under the law to be an actual purchase of real estate, as would be wither the purchase of land, a house or a condominium residence. The purchase of a co-op is actually the purchase of stock in a cooperative corporation, which is the titled owner of an apartment building with a number of of living units, which are generally referred to as apartments. The purchase of this type of stock will entitle the purchaser to a proprietary lease which then entitles the purchaser to actually reside in the apartment unit, to which the stock certificate and proprietary lease are linked to.

Most purchasers of cooperative apartments are unable to complete the purchase without the financial assistance of a loan or a co-op mortgage, which is usually obtained from a bank or other mortgage lender. The lender's issue in these purchases in these transactions is that the lender cannot secure themselves in the manner that a mortgage lender would secure themselves in an ordinary real estate purchase, such as by recording a mortgage. As was stated earlier in this lecture the purchase of a co-op apartment is a purchase of stock, not real estate. The lender in this situation must therefor secure itself with collateral. The collateral in this type of transaction is the stock certificate and the proprietary lease.

The lender in this situation will use the stock certificate and proprietary lease as the collateral for the mortgage. Specifically what will occur at the sale of cooperative apartment is that the lender will receive the original stock certificate and proprietary lease linked to the apartment being sold or purchased and the lender will retain the matter until the mortgage is satisfied or the apartment is sold to another purchaser. If there was an existing mortgage on the apartment involved in the transaction, that mortgage will be satisfied in the context of the ongoing transaction.

The problem the lender faces in this type of transaction is creating a security interest in the transaction so that the lender will have secured itself in the event that the purchaser of the cooperative apartment defaults on the obligations the purchaser has relative to the purchase, specifically the payment of monthly maintenance to the cooperative corporation and the purchaser's monthly mortgage payment to the lender.

In order to create a security interest which will allow a lender to foreclose on this type of mortgage, the lender will enter into a security agreement with the purchaser and borrower of the co-op mortgage. In New York the lender will also file a document with the appropriate official authority depending on the specific county of New York where the has taken place, known as a UCC-1. It should be noted that a UCC-3 will also be filed in this type of sale to cancel out any prior UCC-1 which may have been filed relative to the cooperative apartment, if there was an unsatisfied mortgage on that cooperative apartment.

Describe circumstances when you want to create a secured transaction and how you might go about doing so.