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UBE Rule Statements > 6. Secured Transactions > Flashcards

6. Secured Transactions Flashcards

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1
Q

What is a Purchase Money Security Interest (PMSI)?

A

The creditor lends money (either as seller OR third party financer) to buy specific goods and then RETAINS a security interest in the goods that were bought with the loan funds

  • Two kinds - seller financed PMSI and financer financed PMSI
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2
Q

What is the critical distinction between attachment and perfection?

A
  1. Attachment - when done per legal requirements officially SECURES the creditor and creates proper interest vis-a-vis the DEBTOR
  2. Perfection - when done per legal requirements creates valid interest vis-a-vis THE REST OF THE WORLD
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3
Q

What are the four types of goods that are collateral?

A
  1. Consumer goods - used or bought for use for personal, family, household purposes
  2. Equipment - used or bought for use in business (CATCH ALL)
  3. Farm products - things used for farming operations (including livestock)
  4. Inventory - held by debtor for sale or lease or equipment that has high consumption rate
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4
Q

What are the eight types of semi-intangible and tangible collateral?

A
  1. Instruments - negotiable instruments (promissory notes, deposit notes)
  2. Documents - right to receive GOODS (bill of lading or warehouse receipt)
  3. Chattel Paper - literally a written security interest that identifies collateral
  4. Investment property - stocks, bonds
  5. Accounts - these are accounts receivable, the right to receive money for services or products rendered
  6. Deposit Account - business deposit bank accounts
  7. Commercial tort claim - not personal injury or death
  8. General intangibles - patents, trademarks, copyrights (CATCH ALL)
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5
Q

What are the three requirements for an effective ATTACHMENT (aka security interest)?

A
  1. Valid security agreement
  2. Value given by Creditor
  3. Debtor has rights to the collateral
  • When all three established, the security right is ATTACHED
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6
Q

What are the three ways to establish a security agreement?

A
  1. In writing
  2. Possession of the collateral
  3. Control (three types of collateral only!)
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7
Q

What are the three types of collateral that can be perfected with control?

A
  1. Deposit accounts
  2. Investment property
  3. Electronic chattel paper
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8
Q

What are the three requirements for a valid written security agreement?

A
  1. Language of INTENT to create security interest;
  2. Authenticated by debtor (signed - any symbol)
  3. Description of Collateral - TEST - does it reasonably identify the collateral?
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9
Q

What are the rules for after acquired property and descriptions of collateral in a security agreement?

A

General rule – security agreement description does not extend to after acquired property absent EXPLICIT after acquired property clause

Exception – court implies after acquired property collateral for collateral with HIGH TURNOVER

This same rules apply to future advances (need a clause)

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10
Q

When do the proceeds of collateral fall under a description of collateral for security agreement purposes?

A

RULE – all IDENTIFIABLE proceeds are included in collateral description (unless specified otherwise) and creditor therefore has security interest in them

Identifiable = traceable to original collateral

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11
Q

What is the appropriate remedy to apply if there is commingling of proceeds with non proceeds?

A

Test - lowest intermediate balance test

The lowest identifiable balance of a bank account AFTER deposit is the traceable proceeds (and therefore security interest). Cannot exceed the amount that was deposited

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12
Q

Generally speaking, when has a security interest been perfected?

A

When both of the following occur:

  1. The security interest is attached; and
  2. One of five perfection methods are used
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13
Q

What are the five methods of protection?

A
  1. Automatic perfection - PMSI in customer goods is perfected at attachment
  2. Possession of collateral - perfection lasts as long as possession retained. Mandatory method for perfection of cash
  3. Control - Three types of collateral with three ways to control a deposit account (only way to perfect deposit account)
  4. Notation of lien on certificate of title - ONLY WAY to perfect interest in cars/trucks/vehicles
  5. Filing of Financing Statement (the big boy)
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14
Q

What are the three ways to perfect with “control” of deposit accounts?

A

In order of perfection strength:

  1. Account placed in creditor’s name;
  2. Creditor is hosting bank of the account;
  3. Assignment agreement that passes rights to creditor not debtor
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15
Q

What are the contents of the financing statement?

A
  1. Debtor’s name (special rules)
  2. Describe collateral (special rules)
  3. Secured Party’s Name
  4. Real-property financing statements (if applicable)
  5. Debtor authorization (special rules)

See pgs 7-9 of outline for essential traits of financing statements

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16
Q

What are the rules for debtor’s name requirements in filing of public financing statement?

A

Must file according to name on driver’s license in same state, otherwise use community name

RULE - if error in name, still binding if name error not misleading (i.e., third parties can still see the debt)

RULE - if name change, creditor has four months to amend filing before losing perfection

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17
Q

What are the rules for collateral description in financing statement?

A

Must “reasonably identify” the collateral

TIP - less strict than security agreement rules because super generic descriptions WILL satisfy and will therefore also satisfy after acquired property as security

18
Q

What are the rules for debtor authorization of a financing statement?

A

Debtor will authorize EITHER by:

  1. signing; or
  2. authenticating a security agreement

Tip - different from authentication requirements for SA because must have some form of mark or writing

19
Q

What are the location filing requirements for a financing statement?

A

General rule - secretary of state office; BUT

If real property attached (fixture) - in the county office of location of property

20
Q

What are the considerations of having multiple states involved in a perfected security interest through financing statement?

A
  1. if individual = file in state of residence
  2. If corporation = state of incorporation
  3. If non corporate entity = state of business operations

If debtor moves, must amend within four months to maintain perfection

If collateral moves, must amend within 1 yr to maintain perfection

21
Q

What are the perfection rules for proceeds?

A

RULE - Proceeds are automatically perfected for 20 days IF source collateral was already perfected

How to extend the perfection?

  1. Automatically extended if proceeds are cash
  2. Automatically extended under Same Office Rule IF
    (a) source collateral had financing statement; and
    (b) can the proceeds be perfected in the same place (i.e., office) as the source?
  3. Otherwise amend the financing statement within 20 days
22
Q

What is the exam steps to analyzing a priority of claim problem?

A
  1. Classify the creditor types; and
  2. Determine who has priority

BE MECHANICAL DON’T JUMP THE GUN ON THE FIRST

23
Q

Who wins if both creditors are perfected and secured?

A

First creditor to either:

(a) record financing statement; or
(b) perfect

24
Q

Who wins of both creditors are secured but NEITHER is perfected?

A

The first creditor to attach

25
Q

Who wins between a perfected creditor and a non-perfected creditor?

A

The perfected one, dumbass

26
Q

What is the special rule for priority of a PMSI in goods OTHER than inventory and livestock?

A

Rule - has priority over other perfected security interests SO LONG AS perfected by debtor within 20 days of possession by debtor

Otherwise follow first to file/perfect

27
Q

What is the special rule for priority of a PMSI in inventory or livestock?

A

Rule - has priority over other perfected security interests SO LONG AS:

  1. Perfection BEFORE possession;
  2. Notice sent to competing security holders;
  3. Notice is received within 5 yrs of possession
28
Q

What is the special rule for priority of competing PMSIs?

A

Seller financed always beats financer financed

29
Q

what is the special rule for priority of perfection of investment property?

A

Perfection by control takes priority over other forms of perfection

Otherwise, use general rule for perfection

30
Q

What is the hierarchy of priority for methods of control over non-consumer deposit accounts?

A

General rule - control beats other perfected PROCEEDS placed in account

But if two competing control perfections:

  1. account in name of creditor;
  2. creditor is the maintaining bank of the account;
  3. control agreement btwn debtor, creditor, and bank
31
Q

What are the rules for a secured party’s rights vs a buyer of the collateral?

A

General rule - attached lien remains with the collateral bought by third party

Exceptions:

  1. Authorized Sale Exception
  2. Unauthorized Sale Exceptions
32
Q

What is the authorized sale exception to the general rule that a buyer takes subject to an attached security interest?

A

Creditor can authorize sale of goods without the attached security either EXPRESSLY or IMPLIEDLY

Express - it’s contained in the security agreement

Implied - sale of INVENTORY is presumed to be sellable to an ordinary CONSUMER (person) without attached security UNLESS expressly forbidden by creditor; OR
- Creditor has ACQUIESCED to repeated non-attached sales in the past

33
Q

What are the unauthorized sales exceptions to the general rule that a buyer takes subject to an attached security interest?

A

There are THREE

  1. Buyer in Ordinary Course Rule - good faith buyer in the ordinary course of business takes free of security interest CREATED BY SELLER so long as the seller IS IN THE BUSINESS of selling those goods.
    - Cannot claim good faith BIOC if knows that the sale violates someones security rights (but its okay to know about the lien)
  2. Non buyer in ordinary course - always takes perfected security interest but NOT unperfected security agreement UNLESS they know about the lien
  3. Consumer to Consumer sales (garage sale rule) - IF the goods are CONSUMER GOODS in the hands of BOTH buyer and seller, buyer takes free of security interest UNLESS - perfected by financing statement or buyer has knowledge
34
Q

What is the priority rule between a perfected and secured creditor and a judgment lienholder?

A

If creditor perfects BEFORE lienholder has sheriff levy on property (seize) then creditor wins and vice versa

BUT beware of PMSI creditors - will beat ANY judgment lien if perfected within 20 days of possession by debtor

35
Q

What is the rule on self help repossession?

A

RULE - Secured creditor can repossess collateral so long as can be done without breach of the peace

Breach of the peace = any conduct that has potential to lead to violence

  • Physical conduct by debtor + verbal objection
  • unauthorized entry into a HOME
  • failure to re-lock a business after entering
36
Q

When may a debtor retain collateral (strict foreclosure and not sale)?

A
  1. Notice to competing lienholders and no objection within 20 days; and
  2. Notice to debtor and no objection within 20 days
37
Q

What are the requirements for a valid resale of collateral by a seizing creditor?

A
  1. Notice Requirements - notice a REASONABLE time before sale (at least 10 days for non-consumer goods) to:
    - Debtor
    - Secured parties perfected
    - Secured parties who notified creditor
    * note no notice requirements for perishable goods
  2. The sale must be COMMERCIALLY REASONABLE in manner, method, time, place, and terms
    - Test = did the creditor harm the debtor by screwing up the sale?
38
Q

What order to proceeds from a collateral sale go to?

A
  1. Costs of repossession and sale
  2. Pay off seizing debtor’s balance in full
  3. Balance to junior creditors
  4. Any balance to debtor
  • senior creditors not extinguished
    • remember right to deficiency judgment
39
Q

What is the result if seizing creditor fails notice or sale requirements?

A
  1. Actual damages
  2. Statutory damages for consumer goods
  3. Rebuttable presumption that no right to deficiency judgment (sale proceeds paid entirety of debt)
40
Q

How does a creditor perfect a security interest in a fixture?

A
  • Financing statement in the county where the real property is located INCLUDING:
    (a) Identity of real property; and
    (b) identity of the real property owner

Exceptions:

  • Readily removable property
  • Not primarily used on property
  • consumer goods
41
Q

What are the priority rules for a security interest in a fixture?

A

General rule = first in time for perfected fixture interest vs. interest in the property

PMSI exception = PMSI for fixture will jump ahead if perfected within 20 days of installation of fixture

Construction mortgage exception = ALWAYS beats fixture security interest (same as statutory liens)

42
Q

What is the priority rule for an accession?

A

A security interest in an accession is subordinate to a security interest in the whole, unless the accession is distinguishable and readily removable

UBE Rule Statements (14 decks)

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