Collateral

Question 1

Why is classifying collateral important?

Answer 1

Because many provisions of Article 9 make legal distinctions based on the type of collateral.

Question 2

Types of collateral

Answer 2

Tangible
Intangible
Semi-Intangible

Question 3

Tangible Collateral

Answer 3

“Goods” include all things which are movable at the time the security interest attaches. Can also include fixtures. There are four types.

Question 4

How do you categorize tangible collateral?

Answer 4

Depends on how the debtor is using the collateral.

Question 5

Four types of tangible collateral

Answer 5

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

Question 6

Consumer Goods

Answer 6

Goods used or bought primarily for personal, family, or household purposes

Question 7

Equipment

Answer 7

Goods that are used or bought for use in business.

This is the default category for goods. So, if you know a collteral is a good but it doesn’t fit in the other categories, classify it as equipment.

Question 8

Farm Products

Answer 8

Crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states if they are in the possession of a debtor engaged in farming operations

Question 9

Inventory

Answer 9

Goods:
(1) held for sale or lease;
(2) goods that are to be furnished under service contracts; and
(3) materials used or consumed in a business in a short period of time.

Question 10

Intangible or Semi-Intangible Goods

Answer 10

Classified depending on the nature of the collateral (and not their use)

Eight types:
1. instruments
2. documents
3. chattel paper
4. investment property
5. accounts
6. deposit accounts
7. commercial tort claims
8. general intangibles

Question 11

instruments

Answer 11

pieces of paper representing the right to be paid money (promissory notes; drafts; and certificates of deposit)

Question 12

documents

Answer 12

a document that represents the right to recieve goods (bill of lading; warehouse receipt)

Question 13

chattel paper

Answer 13

a record or records which evidence both (1) a monetary obligation; and (2) a security interest in or a lease of specific goods

a ‘record’ is information that is stored in either a tangible medium or an intangible medium. Chattel paper that is stored in an electronic medium = electronic chattel paper

Question 14

investment property

Answer 14

includes all items such as stocks, bonds, mutual funds, and brokerage accounts containing such items

Question 15

accounts

Answer 15

includes a right to payment (not evidenced by an instrument or chattel paper) for property sold or services rendered

Note: a contractual obligation arising from a loan of money is NOT an account - it is a general intangible

Question 16

deposit accounts

Answer 16

an account maintained with a bank

Note: in general, article 9 only applies to security interests in non-consumer deposit accounts and account monies that are claimed as proceeds of other collateral.

Question 17

commercial tort claims

Answer 17

a tort claim where (1) the claimaint is an organization; or (2) the claimant is an individual, the claim arose out of the claimant’s business/profession; and the claim does not include damages for personal injury or death of an individual

Question 18

general intangibles

Answer 18

any personal property not coming within the scope of other definitions (patent/trademark rights, copyrights, goodwill)

A general intangible under which the account debtor’s principal obligation is a monetary obligation is a payment intangible.

Question 19

scope of article 9

Answer 19

Article 9 applies to the following transactions:
* a transaction that creates a security interest in personal property or fixtures by contract
* a seller’s retention of title
* argicultural liens (nonpossessory liens on farm products created by statute in favor of persons providing goods, services, or rental land to farmers) (*note: only the perfection and priority of agricultural liens are governed by Article 9; creation and enforcement of liens are governed by state statute)
* sales of accounts, chattel paper, payment intangibles, and promissory notes
* commercial consignment of goods worth a total or more of $1k to persons who (1) deal in goods of that kind under a name other than the consignor’s; (2) are not auctioneers; and (3) are not generally known by their creditors to be substantially engaged in selling the goods of others
* a secured sale disguised as a lease (leases that are intended to serve as security arrangements; and a lease where the rental obligation is not terminable by the lessee and either (1) the lease term is equal to or greather than the remaining economic life of the goods; (2) the lessee is bound to purchase the goods at the lease’s end or renew the lease for the remaining economic life of the goods; or (3) at the end of the lease, the lessee has an option to purchase the goods or renew the lease for the remaining economic life of the goods for no or nominal consideration