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Commercial Law > Article 9 > Flashcards

Article 9 Flashcards

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1
Q

Unsecured Debt Collection Process

A

-Request Payment
-Demand Payment (don’t violate other law)
-File lawsuit
-Obtain judgment (now a “judgment creditor”)
-Seek post-judgment writs from clerk, and deliver to sheriff for attempted levying of judicial lien ( e.g. seizing property)
-If successful, judgment creditor obtains judicial lien

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2
Q

What is a lien?

A

a type of security interest granted by a court.

Neither consensual nor obtained by contract. It’s a nonconsensual security interest.

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3
Q

Article 9 Scope

A

Applies to a transaction that creates a security interest in personal property by contract.

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4
Q

What does Article 9 doesn’t apply to?

A

-Real Property
-Non-consensual transactions
-A landlord’s lien
-A lien given by statute or other rule of law for services or materials, or
-The creation or transfer of an interest in or lien on real property (including a lease or rents thereunder)

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5
Q

What does “security interest” means?

A

An interest in personal property which secures payment or performance of an obligation.

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6
Q

What does “security agreement” means?

A

An agreement that creates or provides for a security interest.

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7
Q

Collateral

A

Property subject to a security interest

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8
Q

Secured Party

A

A person in whose favor a security interest is created or provided for under a security agreement, whether or not any obligations to be secured is outstanding.

The one who has the right to seize and repossess the collateral when there is a default in the debtor’s loan.

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9
Q

Debtor

A

A person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor.

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10
Q

Obligor

A

the party that owes the money on the secured loan. The one who is obligated to pay the debt or the loan.

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11
Q

Collateral: Goods (definition)

A

All things that are movable when a security interest attaches.

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12
Q

Collateral: Types of Goods

A
  1. Consumer Goods
  2. Inventory
  3. Farm Products
  4. Equipment
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13
Q

Goods: Consumer Goods

A

Goods that are used or bought for use primarily for personal, family, or household purposes.

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14
Q

Goods: Inventory

A

Goods sold, leased, or consumed (including raw materials, work in process) in the course of a business.

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15
Q

Goods: Farm Products

A

Goods, other than standing timber, with respect to which the debtor is engaged in a farming operation and which are:

a) crops grown, growing, or to be grown, including crops produced on trees, vines, and bushes;
b) livestock;
c) supplies used or produced in a farming operation; or
d) products of crops or livestock in their unmanufactured states.

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16
Q

Goods: Equipment

A

Goods other than inventory, farm products, or consumer goods.

Examples:
Office equipment: computers
Kitchen equipment: ovens

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17
Q

How is the debtor’s classification of goods determined as collateral?

A

The classification of goods is determined by the debtor’s use of it when the security interest is created and given as collateral.

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18
Q

Collateral: Accounts (definition)

A

an account is a right to payment for goods sold or services rendered
(or goods to be sold or services to be rendered).

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19
Q

Purchase Money Security Interest

A

When the debtor gives its purchase-money lender (creditor) a security interest in the very thing the lender enabled him to purchase.

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20
Q

Purchase Money Collateral

A

Goods that secure a purchase money obligation incurred with respect to that collateral.

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21
Q

Purchase Money Obligations

A

a loan or credit or other obligation incurred in order to purchase something.

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22
Q

Purchase Money Interest elements

A
  1. Purchase money obligation (for price, or value if so used, to purchase goods)
  2. Security interest granted in items purchased, to secure the Purchase money obligation
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23
Q

What is attachment?

A

Attachment is the creation of the security interest.

A security attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.

Attachment is all about enforceability of security interest against the debtor.

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24
Q

What are the three requirements for attachment

A
  1. Value has been given
  2. The debtor has rights in the collateral; and
  3. One of the following conditions is met:
    a. the debtor has authenticated a
    security agreement that
    provides a description of the
    collateral; orb. the collateral is in the
    possession of the secured party
    pursuant to the debtor’s
    security agreement.
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25
Q

Attachment: Value (1st element)

A

Value must be given by the secured party.

Types of value:
-credit
-to secure or satisfy a preexisting claim
-any consideration sufficient to support a contract

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26
Q

Attachment: Debtor’s right in the collateral (2nd element)

A

Debtor owns the property or has sufficient rights in it.

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27
Q

Attachment: (3rd element) authentication

A
  1. Signed writing
  2. Security agreement
  3. Description of the collateral
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28
Q

Authentication: Reasonable description of collateral

A

-Consumer goods cannot be identify simply as “consumer goods”
secured party is not allowed to use the term “consumer goods” in a secured transaction with a consumer for consumer purposes

-“Supergeneric” descriptions (“all assets” or “all property) are a no-no

-But “all goods” may be sufficient, since “all goods” is more specific than “all assets” or “all property” and thus presumably is not supergeneric.

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29
Q

After-Acquired Collateral

A

-Courts normally assume that after-acquired property in inventory or accounts is included within the security interest

-Security agreement must expressly provide an after-acquired class: “now owned or hereafter acquired.”

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30
Q

Possession of collateral

A

A security agreement can be oral if possession of collateral is transferred to the secured party.

cannot breach the piece

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31
Q

Future Advance Clause

A

-Parties can include a future advance clause, just like they can include an after-acquired clause.

“as well as any future advances that X makes thereafter”

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32
Q

Proceeds of Collateral

A

A security interest continues in collateral notwithstanding sale, lease, license, exchange or other disposition (unless secured party authorizes dispositon)

AND

a security interest attaches to any identifiable proceeds of collateral.

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33
Q

What are proceeds?

A

-whatever is acquired upon sale, lease, license, exchange, or other disposition of collateral

-whatever is collected on account of collateral; or

-insurance payable by reason of the loss of, defects in, or damage to the collateral.

anything of value arising from collateral is proceeds of the collateral

cash must be traceable

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34
Q

What is Perfection for?

A

Perfection is designed to give the world notice of the secured party’s interest in the debtor’s collateral.

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35
Q

When is a security interest perfected?

A

Is perfected by:

attachment + filing; or
attachment + Possession; or
attachment + Automatic Perfection

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36
Q

Perfection: Filing

A

Default Perfection Method

A financing statement must be filed to perfect all security interests

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37
Q

Perfection: Filing

Where to file?

A

the office of the Secretary of State

In Florida: Florida Secured Transaction Registry.

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38
Q

Law Governing Perfection and Priority of Security Interests

A

While a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection of a security interest in collateral.

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39
Q

Rules that determines the debtor’s location

A

If debtor is:

  1. individual then: individual’s principal residence
  2. Organization and has only one place of business: then its place of business
  3. Organization and has more than one place of business: then its chief executive office.
  4. Registered organization (corporation): then under the law of a State the state that is registered.
40
Q

Contents of Financing Statement

A

A financing statement is sufficient only if it:

  1. provides the name of the debtor
  2. provides the name of the secured party; and
  3. indicates the collateral covered by the financing statement
41
Q

Financing Statement: Name of the Debtor

A

For individuals: the name on the driver’s license or state ID

For corporations or partnerships: the name specified in the articles of incorporation or partnership agreement. If partnership unnamed, then real names of individual partners should be used.

**Trade names (or d/b/a) are insufficient by themselves.

42
Q

Financing Statement: Indication of Collateral

A

A financing statement sufficiently indicates the collateral that it covers if the financing statement provides:
1. reasonable identification :
a. specific
b. category; or
c. UCC type (except consumer goods-if it’s a consumer transaction)

OR

  1. an indication that the financing statement covers all assets (supergeneric is ok)
43
Q

Mistakes in Financing Statements

A

Minor errors or omissions are ok except if they are seriously misleading.

Seriously misleading: financing statement fails to provide the name of the debtor

44
Q

Mistakes in Financing Statement: Seriously Misleading Exception

A

Search Logic Exception

If a search of the records of the filing would bring in the result the financing statement.

45
Q

4 Post Filing Events Impacting Perfection

A
  1. Lapse of time
  2. Change of debtor’s name
  3. Change of debtor’s location
  4. Sale or other disposition of collateral in exchange for proceeds
46
Q

Post-Filing: Lapse of Time

A

-A filed financing statement is effective for a period of 5 years after the date of filing.

-Upon lapse, financing statement ceases to be effective and the security interest becomes unperfected.

-The effectiveness of a filed financing statement lapses on the expiration of the period of its effectiveness unless a continuation statement is filed within six months before the expiration of the five year period.

-Upon timely filing of continuation statement, the financing statement continues for a period of 5 years commencing on the day on which the financing statement would have become ineffective in the absence of the filling.

47
Q

Post-Filing event: Change of Debtor’s Name

A

Debtor’s name change trigger the four-month rule:

-After 4 months, the security interest in any collateral acquired more than 4 months after the name change will not be perfected unless:

An amendment updating the name was filed sometime in the 4-month period.

48
Q

Post-Filing event: Change of Debtor’s Location

A

-When debtor moves to a different state, the secured party has 4 months to file a NEW financing statement (not an amendment)

-If a NEW financing statement is timely filed, the secured party remains continuously perfected.

-However, if the secured party fails to file within the 4-month window, the ENTIRE security interest in all collateral becomes unperfected.

49
Q

Post-Filing event: Proceeds

A

If a security interest in original collateral is perfected, then a security interest in proceeds is automatically perfected, albeit only for 20 days.

However, there are rules for when a security interest in proceeds remains perfected beyond 20 days.

50
Q

Post-Filing event: Proceeds rules for beyond 20 days

A
  1. Same financing office/no cash
  2. Cash proceeds
  3. Otherwise perfected
51
Q

Proceeds Beyond 20-days:
Rule 1 - Same financing office/no cash

A

Rule 1: Same financing office/no cash

Elements:
1. A filed financing statement covers the original collateral.

  1. The proceeds are collateral in which a security interest could be perfected by filing in the office in which the financing statement has been filed; AND
    this element not met if swapping collateral for a vehicle (would need certificate of title, not filing)
  2. The proceeds are not acquired with cash proceeds
52
Q

Proceeds Beyond 20-days:
Rule 2 - Cash Proceeds

A

Rule 2 - Cash Proceeds

-The proceeds are identifiable cash proceeds.

Cash must stay put:
-be directly traced to the sale
-debtor must not spend it

For purposes of this rule “cash proceeds” = cash money, checks and bank deposit accounts.

53
Q

Proceeds Beyond 20-days:
Rule 3 - Otherwise perfected

A

Rule 3 - Otherwise perfected

If neither the first or second rule are satisfied then:

Either the secured party’s financing statement collateral description already includes the proceeds, or it must be amended within 20 days to include the proceeds

54
Q

Perfection: Possession (2 types)

A

Possession by Secured Party can be:

-Direct (held by secured party); or
-Indirect (held by third party on behalf of secured party)

55
Q

Direct Possession

A

Secured Party perfects via possession when:

  1. takes physical possession of the collateral.
  2. Collateral is goods (except vehicles; can’t also be accounts)
  3. Commences when the secured party actually obtains possession and lasts while the secured party has it.
56
Q

Direct Posession: different perfection methods

A

Over the life of a security interest, more than one perfection method might be used.

As long as there is no gap between methods, perfection of a security interest can be accomplished by different methods in sequence over its lifetime.

57
Q

Perfection: Indirect Possession

A

Third Party Possession Requirements:

  1. 3rd party must be independent: not the Secured Party, the Debtor, or a lessee in the ordinary course from the Debtor.
  2. Authenticated record (by 3rd party) acknowledging possession for benefit of Secured Party OR acknowledging that the 3rd party will possess the collateral for the benefit of the Secured Party
58
Q

Perfection: Automatic

A

Certain security interests are perfected as soon as they attach-no need to file or take possession of the collateral:

  1. PMSI in consumer goods
  2. An assignment of accounts which does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts
    case by case
  3. A security interest created by the assignment of a health-care insurance receivable to the provider of the health-care goods or services
59
Q

Automatic Perfection: PMSI

A

A secured party with a purchase money security interest (PMSI) in consumer goods (except vehicles), is perfected simply upon attachment.

No need to file, no need to possess.

Consumer goods: goods for personal, family or household purposes (non business)

60
Q

Automatic Perfection: Assignment of Accounts

A

No need to file if the debtor grants a security interest in a small, “insignificant” amount of the debtor’s accounts.

“how much” of the debtor’s accounts becomes significant is a fact issue that would be handled by courts on a case-by-case basis.

61
Q

Automatic Perfection: Assignment of heath care insurance receivable

A

A security interest created by the assignment of health care insurance receivable to the provider of the health care goods or services

62
Q

What is Priority?

A

Priority is the concept whereby property that is collateral is distributed to secured creditors in a particular order.

63
Q

4 Priority contexts

A

Priority between…
1. two perfected security interests
2. perfected and unperfected security interests
3. two unperfected security interests
4. a security interest and a judicial lien

64
Q

Priority: Two perfected security interests

A

Conflicting perfected security interests rank according to priority in time of filing or perfection.

First in time, first in right. The first secured creditor to do either one of those: perfection OR filing.

Secured party can file before attachment.

Secured party has to be the first to file or perfect, be perfected, and stay continuously perfected (no gaps).

65
Q

Priority: Perfected v. Unperfected

A

A perfected security interest has priority over a conflicting unperfected security interest.

Perfection beats unperfection.

66
Q

Priority: Two Unperfected security interests

A

The first security interest to attach or become effective has priority if conflicting security interests are unperfected.

First to attach has priority.

67
Q

Priority: Security Interest v. Judicial Lien

A

The Secured Party beats a lien creditor if:

a) the security interest is perfected, or
b) authenticated security agreement (even if no value) + financing statement

before the sheriff levies on and takes possession of, property pursuant to a writ.

68
Q

What is a lien creditor?

A

A creditor that has acquired a lien on the property involved by attachment, levy, or the like (i.e. judicial lien creditor)

69
Q

Priority: Special Rules

A
  1. PMSI secured party v. non-PMSI secured party (no inventory)
  2. PMSI v. Non PMSI-inventory, and
  3. Buyer rules
70
Q

Priority: PMSI Special Rule

A

A PMSI in goods other than inventory has priority over a conflicting security interest in the same goods if the PMSI is perfected when the debtor receives possession of the collateral or within 20 days thereafter.

71
Q

Priority: PMSI v. Non-PMSI
Inventory Rule

A
  1. PMSI in inventory must be perfected on or before the date the debtor receives the inventory , and
  2. PMSI secured party must send an authenticated notification to any other conflicting security interests in the inventory, and the other ones MUST receive it before debtor gets inventory.
    * notification must be sent before debtor receives possession
    * notice is good for 5 years
    * notice describes the particular inventory in which a PMSI will be claimed, and that the debtor has or expects to have PMSI in the inventory.
72
Q

Priority: Special Rule
Buyer’s Rule

A

Buyer takes subject to the security interest, unless the secured party consents to a sale of the collateral free of its security interest.
* Consent can be express or implied over time

73
Q

Exceptions to the Buyer’s Rule

A

Two exceptions:
1. Buyer in the ordinary course of business
2. Buyer v. an Unperfected Secured Party

74
Q

Buyer’s Rule: Exception 1

A

Buyer in the ordinary course of business

Elements:

  1. Buyers in the ordinary course of business buy from a seller in the business of selling goods of that kind. (almost always inventory, not equipment)
  2. Buyer must buy in good faith. (it doesn’t matter if buyer knows of SI existence, but knowledge of loan agreement or contract being violated)
  3. Buyer must generally take possession of the goods to be a buyer in the ordinary course of business.
  4. “Transfers in bulk” are excluded from buyer in ordinary course of business, and
  5. Only ordinary payment arrangements-not forgiveness of debt.
75
Q

Buyer’s Rule: Exception 2

A

Buyers take free of security interests, so long as the buyer:
1. gives value,
2. receives delivery
3. without knowledge of (existence of) the security interest and
4. before the security interest is perfected

Knowledge is important here

76
Q

What is Default?

A

Whatever the contract or security agreement says it is.
Examples:
* Non-payment
* Loss or damage to the collateral
* Failing to keep insurance on the collateral
* Failing to keep collateral in good condition and repair
* Failing to inform party of any name change or change of debtor’s location
* Death, dissolution or bankruptcy of the debtor

Until there’s a default, the secured party does NOT have right to enforcement

77
Q

Judicial Enforcement by the secured party

A

Two Basic Remedies:
1. Right to reduce a claim to judgment (In personam)
2. Foreclose the claim (In rem)

Can be cumulative or exercised simultaneously

78
Q

Judicial Enforcement: Right to reduce a claim to judgment

A

Upon default a secured party can usually sue the debtor in court, and get a money judgment for the amount of the debt.

A caveat is whether or not the full balance is owed yet – i.e., whether the debt balance has
been fully accelerated or not.

79
Q

Judicial Enforcement: Foreclosure

A

Getting the collateral with court help. Once the property is collected by the sheriff, then it can be noticed for a sale, and the money from the sale can be used to pay off the debt.

80
Q

Self Help

A

Another route for taking possession of the collateral.

The secured party can go repossess the collateral on its own, without invoking the court process.

  • If the secured party chooses to use self-help, it cannot breach the peace.
  • Duty is non-delegable
  • Could be liable of conversion if inadvertently takes item that is not part of the collateral and do not return them promptly
81
Q

Things that probably breaches the peace

A
  • Physical violence, or threaths of physical violence, by either debtor or secured party
  • Noisy protests by debtor or family member
  • Entry into enclosed area like garage or home
  • Breaking locks for entry
  • Constructive force (sheriff off duty goes to repossess in uniform)
82
Q

Things that probably don’t breach the peace

A
  • Peaceable persuasion of debtor to run to turn collateral over
  • Taking from open garage without incident
  • Taking from street or parking lot or driveway without incident
  • Using some amount of trickery or sneakiness
  • Breaking the collateral itself in
    order to take it has generally been upheld.
83
Q

Collecting Account Collateral
(intangible)

A

If so agreed, and in any event after default, a secured party may notify an account debtor or other person obligated on collateral to make payment to the secured party.

  • such demand is generally required to be authenticated and in writing, not oral.
  • account debtor is entitled to demand proof of the actual assignment/grant of security interest in the account being demanded to pay.
84
Q

What is Redemption?

A

When secured party let the debtor have the collateral back.

SP gives back collateral to debtor

85
Q

Who and How can redeem the collateral

A

WHO
a. A debtor or any other secured party or lienholder may redeem collateral.

HOW
b. To redeem collateral, a person shall tender:
1. fulfillment of all obligations secured by the collateral; and
2. the reasonable expenses and attorney’s fees (incurred by the secured party)

86
Q

When can collateral be redeemed

A

Redemption can occur beginning anytime after the secured party has repossed the collateral.

Deadline:
* Once the secured party has already conducted the foreclosure sale and sold it to a buyer, it’s too late to redeem.
* If collateral is accounts, the deadline is once the secured party has collected the collateral (debtor’s customer paid secured party).

87
Q

Selling Collateral: Commercial Reasonableness

A

-Secured party is entitled to sell the collateral either “in its present condition or following any commercially reasonable preparation or processing.”

Commercially reasonable = every aspect of a disposition of collateral, including method, manner, time, place, and other terms.

*Advertising-not required by the Code but most courts would find unreasonable.

-Secured party may proceed to sell collateral by either public (auction) or private sale.

88
Q

Selling Collateral: Notice

A
  1. Must be in writing
  2. Must be sent to the debtor, obligors and other secured party.
89
Q

Selling Collateral: Notice (in addition to debtor, obligor and other secured parties)

Three categories of secured parties
(other than consumer goods)

A
  1. those who have sent an authenticated notice of a claim of an interest in the collateral
  2. those that have filed a financing statement (actual notice)
  3. those that are listed on the certificate of title of a car or truck (if that’s what the collateral is). (constructive notice)
90
Q

Selling Collateral: Notice Exception

A

No notice if collateral is perishable or may decline speedily in value (Fruits and vegetables).

91
Q

Does secured party has to sell all of the inventory at once, or can it sell the items a few at a time?

A

SP can sell it all at once, or a few items at a time. Section 9-610(b) specifically states
that disposition can occur “by one or more contracts, as a unit or in parcels. . . .”

92
Q

Selling Collateral: Timeliness of Notice

A

Reasonable time-question of fact

For commercial transactions - “safe harbor”:
Notice sent after default AND 10 days or more before the earliest time of sale in the notice is deemed to be a reasonable time.

93
Q

Selling Collateral: What must Notice say

A

Basic information

Identify:
-the debtor and secured party
-collateral being sold
-how is going to be sold
-when is going to be sold

Information about the amount of the debt generally must be provided as well.

94
Q

Two Primary Effects of Foreclosure Sale

A
  1. Application of sale proceeds and calculation of amount owed from/to debtor, and
  2. Title conveyance and discharge of security interests.
95
Q

Effects of Foreclosure Sale:
Application of sale proceeds ad calculation of amount owed from/to debtor

A
  1. Foreclosing secured party’s expenses come off the top (attny fees, repo fees, advertising).
  2. payment of foreclosing secured party’s debt and expenses is next,
  3. payment of secured parties junior in priority to the foreclosing secured party comes after that (but only if the secured party receives an authenticated demand from the juniors) and
  4. debtor gets the leftover money (if none, debtor still owes deficiency to all secured creditors who haven’t been paid)
96
Q

Effects of Foreclosure Sale:
Title Conveyance

A

Generally after foreclosure sale:

  1. title transfers from debtor to buyer
  2. the foreclosing secured party’s security interest is discharged, and
  3. the security interests junior in priority to the foreclosing security interest are discharged as well.

AND

transferee that acts in good faith, takes free of the rights and interests of other secured parties, even if the secured party fails to comply with this article or the requirements of any judicial proceeding.

Commercial Law (6 decks)

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