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Bar Prep > 05. Secured Transactions > Flashcards

05. Secured Transactions Flashcards

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1
Q

What governs secured transactions?

A

Article 9 of the Uniform Commercial Code (UCC)

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2
Q

What is a secured transaction?

A

An agreement between a debtor and a creditor that the debtor’s personal property will serve as collateral for a loan

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3
Q

What happens if a debtor defaults on a loan that is a secured transaction?

A

The creditor will have the rights to repossess the collateral and use it to satisfy the debt

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4
Q

What are the four main concepts of secured transactions?

A

1) Attachment
2) Perfection
3) Priority
4) Enforcement

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5
Q

What is attachment?

A

How security interests are created (i.e., the steps necessary for the security interest to be enforceable against the debtor)

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6
Q

What is perfection?

A

Providing notice of a security interest to establish a claim superior to other parties who may wish to claim an interest in the same collateral

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7
Q

What is priority?

A

Rules for resolving priority disputes between multiple claimants to the same collateral

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8
Q

What is enforcement?

A

Rights and duties of a secured party who enforces its interest in the collateral (repossession)

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9
Q

What is needed for enforcement?

A

Attachment only

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10
Q

How may a secured party obtain good standing in a priority dispute?

A

Attachment + Perfection

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11
Q

What are the 6 Steps for a secured transactions exam?

A

1) Determine that you have a secured transactions problem (trigger works = security agreement; security interest)
2) Identify and classify the property at issue (Hint: look at the call of the question)
3) Determine which parties have or claim an interest in the collateral
4) At least one will be a secured party with a security interest. For each security interest, assess 1) attachment and 2) perfection
5) Use this information to find the appropriate priority rule
6) Apply the priority rule to the facts and resolve the dispute

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12
Q

How do you assess attachment?

A

Has that security interest attached? To which collateral? When?

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13
Q

How do you assess perfection?

A

Has the secured party perfected its security interest? When? How? Has anything happened that might cause the secured party to lose perfection?

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14
Q

What is a security interest?

A

An interest in personal property or fixtures that secures payment or performance of an obligation

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15
Q

What is a security agreement?

A

A contract that creates a security interest

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16
Q

Who is a secured party?

A

A creditor who obtains a security interest in the debtor’s property

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17
Q

Who is an obligor?

A

A party that must pay or perform the obligation that the collateral secures

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18
Q

Who is a debtor?

A

A party that has an interest, other than a security interest, in the collateral (e.g., owner)

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19
Q

Who are the parties in a secured transaction?

A

1) Secured Party
2) Obligor
3) Debtor

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20
Q

T or F: The debtor and obligor are always the same person

A

False: The debtor and obligor are often the same person or entity, but they can be different people (e.g., your friend puts up their car as collateral on a loan for you = you are the obligor and friend is a secondary obligor and debtor)

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21
Q

What does Article 9 of the UCC govern?

A

Transactions, regardless of form, that create a security interest in personal property or fixtures by contract

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22
Q

What is the implication of a secured transaction being a contract?

A

They must be consensual

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23
Q

What is the implication of a secured transaction involving personal property or fixtures?

A

They do not apply to real estate

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24
Q

What is the implication of a secured transaction being “regardless of form”?

A

The courts will look to the substance of the transaction, not the labels the parties use

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25
Q

What else may Article 9 govern?

A

1) Agricultural liens
2) Sales of certain rights to payment
3) Certain consignments and leases

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26
Q

What is an agricultural lien?

A

An interest in farm products that secures payment or performance of an obligation for:
1) Goods or services furnished with respect to a farming operation; OR
2) Rent on real property in connection with a farming operation

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27
Q

Why does Article 9 govern sales of certain rights to payment?

A

To facilitate public notice that these sales have happened

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28
Q

In the sale of certain rights to payment, how do you categorize the parties?

A
  • Buyer = secured party
  • Seller = debtor
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29
Q

Sales of which types of collateral are treated like secured transactions?

A

1) Chattel Paper
2) Promissory Notes
3) Accounts
4) Payment Intangibles

“Cruel Poodles Poking Needles At Peaceful Iguanas”

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30
Q

What must a buyer of certain rights to payment do to have a superior claim to the collateral?

A

Buyer must perfect its interest in the purchased collateral

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31
Q

What is collateral?

A

Property subject to a security interest

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32
Q

Why is it important to classify collateral?

A

1) It can affect the validity of a secured interest (i.e., whether the security interest has attached)
2) It can also determine which perfection rules apply
3) It will affect which priority rules apply

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33
Q

How do you property classify collateral?

A

Look to the debtor’s principal use at the time the security interest is created

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34
Q

What are goods?

A

Anything moveable at the time a security interest attaches

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35
Q

What non-moveable collateral is included in the “goods” category?

A

1) Fixtures
2) Standing timber
3) Unborn animals
4) Growing or unharvested crops
5) Manufactured homes

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36
Q

What are the four mutually-exclusive sub-categories of goods?

A

1) Consumer Goods
2) Farm Products
3) Inventory
4) Equipment

“Champion Gecko Facing Poodles; Iguanas Escape”

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37
Q

What is a consumer good?

A

Goods acquired primarily for personal, family, or household purposes.

Ex: electronics, furniture, boats, home appliances

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38
Q

What are farm products?

A

1) Crops
2) Livestock
3) Supplies used (e.g., animal feed, fertilizer) in farming operations
4) Supplies produced (e.g., eggs, vegetables) in farming operations

39
Q

What are NOT considered farm products?

A

Farming equipment (e.g., tractors and combines)

40
Q

What is inventory?

A
  • Goods that are not farm products that are held for sale or lease (items on the shelf)
  • Also includes:
    1) Goods that are furnished under a service contract
    2) Raw materials
    3) Works in progress
    4) Materials used or consumed in business
41
Q

What is equipment?

A

Goods that don’t fit into any of the other definitions

Examples:
- Machinery
- Delivery vans
- Office equipment
- Farm equipment

42
Q

What is a fixture?

A

A good that is attached to real property in such a way that an interest arises in them under real property law

Example: chandelier

43
Q

When does a good become a fixture?

A

Once the good is attached to the house, if you’re not going to take it with you when you move away, then it’s likely a fixture. It’s attached to the home in a way that is rather permanent (e.g., toilet, water heater, chandelier)

44
Q

What are rights to payment?

A

The right to be repaid money by a third party that the debtor then uses as collateral for a loan

45
Q

What are the four types of rights to payment?

A

1) Instrument
2) Chattel Paper
3) Accounts
4) Payment Intangible

“Impatient Cow Pushes Adorable Pony Inside”

46
Q

What are examples of an instrument?

A
  • Promissory notes
  • Checks
  • Drafts governed by Article 3 of the UCC
47
Q

What is Chattel paper?

A

A record (paper or electronic) with two components:
1) A monetary obligation; AND
2) A security interest or a lease

48
Q

What are accounts?

A

A right to payment of a monetary obligation for property that is sold, leased, or licensed, or for services rendered (includes a company’s accounts receivable, the right to be paid under insurance policies, and amounts owing on credit cards)

49
Q

What is payment intangible?

A

“Catch-all” of rights to payment

CAUTION: Account is very broad

Example: A right to be repaid a loan of money that does not itself qualify as an instrument or chattel paper (since Accounts do not include rights to be repaid loans of money)

50
Q

Attack Outline for Rights to Payment

A

1) Look for a transaction in which a third party (known as an account debtor)
2) Owes money to your debtor, AND
3) Your debtor uses that money (that right to payment or expectation of repayment) as collateral for the loan

51
Q

What are the “Other” types of collateral?

A

1) Documents
2) Investment Property
3) Deposit Accounts
4) Commercial Tort Claims
5) Letter of Credit Rights
6) General Intangibles

“D I P D A C T C L C R G I”
“DIP Double Apple Chips To CLearly CReate GoodIes”

52
Q

What are documents?

A

Documents of title that generally give the holder ownership rights in goods held by a bailee (ex: bills of lading or warehouse receipts)

53
Q

What is investment property?

A

Certificated and uncertificated securities, such as stock and bonds

54
Q

What are deposit accounts

A

Bank accounts (ex: a savings, passbook, time, or demand account made with a bank)

55
Q

T or F: Accounts and Deposit Accounts are the same thing

A

False: An account is the right to payment for goods sold or services rendered, whereas a deposit account is a bank account.

56
Q

What are Commercial Tort Claims?

A

Claims possessed by an organization or an individual that arose in the course of the organization or individual’s business

NOTE: Do NOT include claims for personal injury or death

57
Q

What are Letter of Credit Rights?

A

A right to payment or performance under a letter of credit

58
Q

What are General Intangibles?

A

A residual category for anything that doesn’t fit in another category of collateral

Examples:
- Blueprints
- Copyrights
- Trademarks
- Software

59
Q

What is attachment?

A

An arrangement linking a debt to a particular piece of collateral

60
Q

What happens upon attachment?

A

The security interest becomes enforceable against the debtor’s collateral (i.e., the lender has rights to sue the debtor and also seize the property)

61
Q

What are the requirement for attachment?

A

1) Value = value given by the secured party
2) Rights = debtor must have rights in the collateral (i.e., some property interest)
3) Security Agreement = there must be a security agreement meeting the necessary requirements

“Violet Roses Smell Amazing”

62
Q

What is required for a security agreement to be valid?

A

1) There is an authenticated security agreement that describes the collateral; OR
2) The secured party has possession or control of the collateral pursuant to an oral or unauthenticated security agreement

63
Q

What is required for the value given by the secured party to be valid?

A
  • Value can be given by providing the same consideration needed for a contract
  • No new value needs to be given
  • A binding commitment to extend credit is value
  • A security agreement may provide that the collateral secures future advances
64
Q

What does the security interest attach to?

A

The rights the debtor has in the collateral

65
Q

T or F: Thieves can grant security interests in stolen goods

A

False; thieves CANNOT grant security interests in stolen goods because they have no rights in the collateral

66
Q

How may a debtor create an enforceable security interests if he has voidable title?

A

If the debtor has voidable title but could transfer full title to a good faith purchaser for value, then the debtor can create an enforceable security interest

67
Q

When may security interests attach to after-acquired property?

A

When the debtor obtains rights in the collateral

68
Q

What is needed for an authenticated record?

A

1) Record = need not be written on paper, but must be stored in a record (e.g., something that others can retrieve)
2) Authenticated = authenticated by the debtor (e.g., need a signature or other symbol that shows the intent of the debtor to be bound)
3) Describe = describe the collateral (NOTE: the security interest will only attach to the described collateral UNLESS the lender has possession/control of additional collateral)

“RAD”

69
Q

What is needed to describe collateral?

A
  • Reasonably identify the collateral
  • EXCEPTION: for consumer goods and commercial tort claims, the collateral must be identified with more particularity
  • A super-generic description, such as “all the debtor’s assets” or “all of the debtor’s personal property” does NOT reasonably identify the collateral for attachment
70
Q

Must the description in a security agreement and a financing statement be the same?

A

No; super-generic descriptions are adequate to perfect a security interest when described in a financing statement, but the security agreement must be more specific

71
Q

What happens if there is no authenticated record that describes the collateral?

A

The secured party’s possession or control of the collateral pursuant to a security agreement can also be sufficient for the “security agreement” requirement of attachment

72
Q

What types of collateral may be attached by possession pursuant to a security agreement?

A
  • Consumer goods
  • Equipment
  • Farm products
  • Chattel paper
  • Tangible documents
  • Certificated securities
  • Instruments
  • Money

You can hold it in your hand

73
Q

What types of collateral may be attached by control pursuant to a security agreement?

A
  • Electronic chattel paper
  • Investment property
  • Letter of credit rights
  • Deposit accounts

You CANNOT hold it in your hand

74
Q

When is attachment by possession or control allowed?

A

When pursuant to an oral or unauthenticated security agreement

75
Q

What are the rights and duties of the secured party in possession?

A

DUTIES: The secured party must:
- Act with reasonable care with respect to the collateral
- Keep the collateral identifiable
- Relinquish the collateral once the obligation has been satisfied

RIGHTS: The secured party may charge the debtor for reasonable expenses for storing and maintaining the collateral

76
Q

What is after-acquired property?

A

Property acquired by the debtor after the security interest attaches

77
Q

What must a lender include in the security agreement to have a security interest in after-acquired propety?

A

An after-acquired property clause

78
Q

Why is an after-acquired property clause needed?

A

Because a security interest only attaches to the collateral described in the security agreement

79
Q

What is typical language of an after-acquired property clause?

A
  • “All of the debtor’s existing and after-acquired [collateral]”
  • “All of the [collateral] now owned or hereafter acquired”
80
Q

What happens if the security agreement does not reference after-acquired property?

A

The security interest only attaches to the collateral that existed at the time that the security agreement was executed

81
Q

What is the exception to needing an after-acquired property clause?

A

In most states, if the security agreement describes inventory or accounts, there is a rebuttable presumption that the description includes after-acquired inventory or accounts

82
Q

What are accessions?

A

Goods that are physically united with other goods so that the identity of the original goods is NOT lost

Ex: Security interest in a car stereo that has been installed in a car

83
Q

What happens if collateral becomes an accession?

A

A security interest in that collateral is NOT lost; the security interest continues in the accession.

NOTE: language in the security agreement may create a security interest in the accession for the lender of the property with which the accession is united (e.g., “any accessories now or hereafter installed”)

84
Q

What are commingled goods?

A

Goods that are physically united with other goods to the point that their identity IS lost in a product or mass (e.g., flour turned into cookies)

85
Q

What happens to a security interest in a commingled good?

A

A security interest does not continue in the original goods that have been commingled, but it will attach to the larger product or mass that results

86
Q

What are proceeds?

A

Proceeds are whatever results when collateral is sold, leased, licensed, exchanged, or otherwise disposed of

87
Q

What is the attachment rule for proceeds?

A

If a security interest attaches tot he original collateral, it also attached to the proceeds automatically whether or not the security interest states that it covers proceeds

88
Q

What is a purchase money security interest?

A

A PMSI is a special type of security interest subject to its own perfection and priority rules

89
Q

What collateral is needed for a security interest to qualify as a PMSI?

A

1) Goods OR
2) Software

90
Q

What are the 2 components of a PMSI?

A

1) The value given allows the debtor to ACQUIRE the goods or software; AND
2) The goods or software acquired SECURE the loan

91
Q

What are the 2 classic PMSI fact patterns?

A

1) Lender PMSI = the lender loans money to the debtor so that the debtor can acquire goods
2) Seller PMSTI = goods bought on credit

92
Q

What are the elements of a lender PMSI?

A

1) The value is actually used to acquire the goods
2) The lender takes a security interest in those same goods to secure the loan

93
Q

How is an Article 9 consignment treated?

A

As a PMSI in inventory

94
Q

What is the dual-status rule?

A

For non consumer goods transactions (e.g., business transactions), partial PMSI’s are permitted

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