Ch 24 Secured Transactions Flashcards
Article 9: Terms and Scope
Article 9 of the Uniform Commercial Code (UCC) governs secured transactions in personal property
Article 9 Vocabulary
- Fixtures are goods that have become attached to real estate. For example, elevators are goods when a company manufactures them and also when it sells them to a retailer.
- Security interest means an interest in personal property or fixtures that secures the performance of some obligation.
- Secured party is the person or company that holds the security interest.
- Collateral is the property subject to a security interest.
- Debtor and obligor. For our purposes, debtor refers to a person who has some original ownership interest in the collateral.
Both parties are obligors because both have agreed to repay the loan.
* Security agreement is the contract in which the debtor gives a security interest to the secured party.
* Default occurs when the debtor fails to pay money that is due,
* Repossession occurs when the secured party takes back collateral because the debtor has defaulted.
* Perfection is a series of steps the secured party must take to protect its rights in the collateral against people other than the debtor
* Financing statement is a document that the secured party files to give the general public notice that it has a secured interest in the collateral.
* Record refers to information written on paper or stored in an electronic or other medium.
* Authenticate means to sign a document or to use any symbol or encryption method that identifies the person and clearly indicates she is adopting the record as her own.
[An Example]
- The secured party intends (1) to give itself a legal interest in specific property of the debtor and (2) to establish a priority claim in that property, ahead of other
Scope of Article 9
(Types of Collateral)
[Types of Collateral]
-Instruments. Drafts, checks, certificates of deposit,
-Investment property, which refers primarily to securities and related rights.
-Documents of title. These are papers used by an owner of goods who ships or stores them.
-Account means a right to receive payment for goods sold or leased
-Deposit accounts. Article 9 also covers security interests in money held in bank accounts.
-Commercial tort claims. An organization that has filed a tort suit may use its claim as collateral.
-General intangibles. This is a catchall category, designed to include many kinds of collateral that do not appear elsewhere on the list,
-Chattel paper. This is a record that indicates two things:
1. an obligor owes money and
2. a secured party has a security interest in specific goods.
-Goods are movable things, including fixtures,..
—Consumer goods are those used primarily for personal, family, or household purposes.
—Farm products are crops, livestock, or supplies used directly in farming operations (as opposed to the business aspects of farming).
—Inventory consists of goods held by someone for sale or lease, such as all of the beds and chairs in a furniture store.
—Equipment refers to things used in running a business, such as the desks, telephones, and computers needed to operate a retail store.
-Software is distinguished from goods in Article 9.
as goods in two ways:
1.if it is customarily considered part of those goods, such as a toy robot, or
2.if, by purchasing the goods, the owner acquires the right to use the program, such as the operating system included in a personal computer purchase.
Attachment of a Security Interest
- Attachment: A three-step process that creates an enforceable security interest
-The two parties made a security agreement, and either the debtor has authenticated a security agreement describing the collateral or the secured party has obtained possession or control;
-The secured party has given value to obtain the security agreement; and
-The debtor has rights in the collateral
Agreement
-Without an agreement, there can be no security interest.
A security agreement at a minimum might:
=State that Happy Homes, Inc., and Martha agree that Martha is buying an Arctic Co. refrigerator and identify the exact unit by its serial number;
=Give the price, the down payment, the monthly payments, and interest rate;
=State that because Happy Homes is selling Martha the refrigerator on credit, it has a security interest in the refrigerator; and
=Provide that if Martha defaults on her payments, Happy Homes is entitled to repossess the refrigerator.
Control and Possession
(Control, Possession)
[Pessession]
-For deposit accounts, electronic chattel paper, and certain other collateral, the security interest attaches if the secured party has control.
-Deposit account (in a bank).
-Electronic chattel paper.
-Investment property and letter-of-credit rights
Value
(Future Value)
The parties may also agree that some of the value will be given in the future. For example, a finance company might extend a $5 million line of credit to a retail store, even though the store initially takes only $1 million of the money. The remaining credit is available whenever the store needs it to purchase inventory. The UCC considers the entire $5 million line of credit to be the value
Debtor Rights in the Collateral
Attachment to Future Property
(After-Acquired Property, Proceeds)
[After-Acquired Property]
* After-acquired property: Items that the debtor obtains after the parties have made their security agreement
-The parties may agree that the security interest attaches to after-acquired property.
[Proceeds]
-The secured party automatically obtains a security interest in the proceeds of the collateral, unless the security agreement states otherwise.
Perfection
bank must perfect its interest.
There are several kinds of perfection:
-Perfection by filing,
-Perfection by possession,
-Perfection of consumer goods, and
-Perfection of movable collateral and fixtures.
-In some cases, the secured party will have a choice of which method to use; in other cases, only one method works.
Perfection by Filing
(Contents of the Financing Statement, Duration of Filing)
- financing statement
A statement that gives the names of all parties, describes the collateral, and outlines the security interest
perfect only by filing.
The most common problems that arise in filing cases are
1.whether the financing statement contained enough information to put other people on notice of the security interest and
2.whether the secured party filed the papers in the right place.
[Contents of the Financing Statement]
-A financing statement is sufficient if it provides the name of the debtor, the name of the secured party, and an indication of the collateral
[Place of Filing]
-A secured party must file in the state of the debtor’s location.
-Article 9 prescribes central filing within the state for most types of collateral.
[Duration of Filing]
Once a financing statement has been filed, it is effective for five years.Footnote After five years, the statement will expire and leave the secured party unprotected, unless she files a continuation statement within six months prior to expiration. The continuation statement is valid for an additional five years and, if necessary, a secured party may continue to file one periodically, forever
Perfection by Possession or Control
(Possession, Mandatory Possession, Control, Care of the Collateral)
- pledge: A secured transaction in which a debtor gives collateral to the secured party
[Possession]
When may a party use possession? Whenever the collateral is goods, negotiable documents, instruments, money, chattel paper that is tangible (as opposed to electronic), or most securities
[Mandatory Possession]
- A party must perfect a security interest in money by taking possession.
[Control]
-A security interest in investment property, deposit accounts, letter-of-credit rights, and electronic chattel paper may be perfected by control.
-In general, control means that the secured party has certain exclusive rights to dispose of the collateral.
(Mandatory Control.)
-Security interests in deposit accounts and letter-of-credit rights may be perfected only by control.
[Care of the Collateral]
- A secured party must use reasonable care in the custody and preservation of collateral in her possession or control.
Perfection of Consumer Goods
-The UCC gives special treatment to security interests in most consumer goods.
* purchase money security interest (PMSI): An interest taken by the person who sells the collateral or advances money so the debtor can buy it
- A PMSI in consumer goods perfects automatically, without filing
Perfection of Movable Collateral and Fixtures
(Movable Goods Generally, Motor Vehicles and the Like, Fixtures)
[Movable Goods Generally]
=Goods that are easily moved create problems for creditors.
[Motor Vehicles and the Like]
-The UCC’s provisions about perfecting generally do not apply to motor vehicles, trailers, mobile homes, boats, or farm tractors
[Fixtures]
=Fixtures, you recall, are goods that have become attached to real estate. A security interest may be created in goods that are fixtures and may continue in goods that become fixtures; however, the UCC does not permit a security interest in ordinary building materials, such as lumber and concrete, once they become part of a construction project.
=Common disputes concern:
-The status of the personal property when the security interest was created (Was it still goods, or had it already been attached to real estate and become a fixture?);
-The status of the real estate (Does the debtor also have a legal interest in the real property?);
-The type of perfection (Which was recorded first, the security interest in the fixture or the real estate? Does the secured party hold a PMSI?); and
-The physical status of the fixture (Can it be removed without damaging the real estate?).
Protection of Buyers
-Generally, once a security interest is perfected, it remains effective regardless of whether the collateral is sold, exchanged, or transferred in some other way
