Commercial Paper/Security Devices Flashcards
Security interest?
Secured party’s [creditor] interest in collateral
to secure repayment of funds
to another party [debtor].
Collateral?
prop a secured party may take possession of
& apply toward balance owed on debt;
PROPERTY SUBJECT TO A SECURITY INTEREST
UCC Article 9 catagories?
- certain lease-purchase agreements;
- consignments;
- sales of accounts receivable, chattel paper, negotiable instruments, promissory notes, & payment intangibles;
- agricultural liens; &
- any transaction that creates a security interest in personal prop or fixtures by K.
Goods?
Movables at time security interest attaches &
fixtures
if movable when fixture filing covering them is made.
Types:
- consumer goods:
- inventory;
- farm products; &
- equipment
Consumer goods?
goods used for primarily
personal, family or household purposes.
Inventory?
Goods, other than farm products, that are:
- Held for sale or lease;
- Goods furnished or to be furnished under contract of service; or
- Raw mat’l, work in progress or mat’ls used or consumed in a business.
Farm products?
crops, livestock, unmanufactured products of livestock,
& supplies
used or produced in farming operations i
f in the possession of the farmer
Equipment?
goods that are
NOT
consumer goods,
farm products,
or
inventory
Fixtures?
Goods so related
to a particular real estate
that an interest in those goods
arise under real prop law.
[good incorp. into real property]
Accession?
Perfection re: same?
Priority re: same?
Good physically united w/ another good
where the identity of original good is NOT LOST.
[good incorporated into another good]
- Perfection doesn’t matter if it is before or after its attachment
- Priority determined in same manner as in any other collateral, except: security interest in an accession subordinate to a security interest in whole that is perfected by compliance w/ the requirements of a certificate of title statute [e.g., motor vehicle]
Commingled goods?
Secuity Interest re: same?
Multiple Security Interest re: same?
Goods physically united w/ other goods where their IDENTITY is LOST in a product/mass. [good incorporated into an end product, but is unidentifiable as its original form]
- security interest does not exist per se in commingled goods, but attaches to product that results when goods become commingled goods.
- Multiple security interests in commingled goods: will rank equally in proportion to the value of the collateral at time it became commingled goods.
Tangible Intangibles?
tangible items that represent an intangible
- instruments: negotiable instrument or writing evidencing right to payment of monetary obligation.Ex. promissory note, collateral mortgage note, or CD.
- documents: doc of title that represent right to receive goods Ex. Bill of lading
- chattel paper: record(s) evidencing both:
- Monetary obligations &
- Security interest in or lease of specific goods, excluding charter of vessel.
- Electronic chattel paper: chattel paper stored in electronic instead of tangible form
Intangible Intangibles?
intangible rights that need not be represented in tangible form
- general intangibles: intangible not previously listed, ex. copyrights, goodwill
- tort claim: both consumer & commercial tort claims w/in its scope
- accounts: right to payment of monetary obligation, not evidenced by an instrument or chattel paper. Includes:
- Property that has been or to be sold, leased or disposed of
- Services rendered or to be rendered
- Insurance policy issued or to be issued
- Secondary obligation incurred or to be incurred
- Use or hire of a vessel under charter or K
- Energy provided
- Use of credit card
- Lottery winnings
Investment Property?
Stocks, bonds, mutual funds
(not collateral mortgage note)
Proceeds?
Types?
what is received upon sale, lease, exchanged, license, collection, or other disposition of collateral or proceeds
- Types: cash or noncash
- Can go through several transformations (Bank has security interest in debtor’s car. Debtor trades car for truck. The truck is a proceed. Debtor trades pickup for boat. Boat is still a proceed of the original collateral (car) (*2nd generational proceed)
- Claims arising out of loss of, defects in or damage to collateral are proceeds
Security Agreement?
agreement creating/providing for
security interest in certain collateral
Security interest MUST be in writing and:
- contain a granting clause [e.g., state that it is creating a security interest];
- contain a description of the collateral; &
- be authenticated by debtor.
Pledge?
- oral security agreement coupled w/
- possession
[only time security agreement can be oral]
Collateral description in the security agreement is sufficient if it reasonably identifies?
the collateral
- Security agreement must I.D. collateral by using collateral categories such as inventory, equipment, general intangibles, but not consumer goods
- Consumer goods: must denominate such specifically [e.g., my flat screen or my foreman grill.]
- Super generic description: insufficient [Ex: “All debtor’s prop.”]
- Security interest attaches to whatever debtor received for OR on account of collateral (proceeds), like money or another thing, if proceeds are identifiable/linked to original collateral.
Validity?
security agreement binding b/w parties,
against purchasers of collateral, and against creditors
Attachment?
Security interest attaches to collateral
when it becomes enforceable
against Borrower w/ respect to collateral.
- VALUE must have been given by secured party [creditor];
- Debtor has RIGHTS in collateral; &
- Parties must AGREE create security agreement.
How is ATTACHMENT evidenced?
- Creditor takes POSSESSION of collateral
- creditor must use reasonable care in storing & preserving
- Right to reimbursement
- Risk of lost or damage is on the debtor
- Must accnt for collateral profits(except money that must be given to debtor)
- Right to replege (must not impair debtor’s right of redemption)
- AUTHENTICATED SECURITY AGREEMENT: writing (1) contain granting clauses; (2) description of the collateral; & (3) authenticated by debtor.
- Creditor CONTROLs collateral
- Deposit account
- Electronic chattel paper/docs (needs authoritative copy)
- Investment property
- Creditor must account for profits
- Right to replege (can’t impair debtor’s right of redemption)
After-acquired collateral?
valid security agreement may create security interest in prop to be acquired in future that will attach to prop as soon as Debtor acquires interest in prop.
(Must specifically include in agreement an after-acquired property clause: “this security agreement is secured by debtor’s equipment now owned or acquired in the future”).
After-acquired collateral:
Inventory and accounts receivable?
Security interest in constantly depleted & replenished, automatically attaches to the new individual items
After-acquired collateral:
Consumer goods?
After acquired property clause
ineffective re: consumer goods,
UNLESS, debtor acquires rights in goods w/in 10-days after creditor gives value.
After-acquired collateral:
Future advances?
Security agreement can cover future advances on present or future collateral;
New security agreement is NOT needed
w/ respect to the future advances/loans.
Does a securirty agreement need
to provide for proceeds?
NO
security interest attaches to identifiable proceeds of collateral whether OR not security agreement specifically provides for it
A secured party’s security interest in collateral will continue regardless of whether the collateral is ________.
SOLD
Secured party ends up w/ both: a security interest in the original item and the proceeds of the sale, BUT may only chose one to satisfy the debt
Purchase-Money Security Interest?
Security interest in goods
that are PURCHASE-MONEY COLLATERAL.
[Automatic Perfection: security interest perfected simply by attachment of security interest.]
Purchase-Money Security Interest
in Consumer Goods?
Security interest in consumer goods
that are PURCHASE-MONEY COLLATERAL.
- Attaches: when debtor receives goods.
- Perfected: when it attaches
PMSI arises when creditor: sells goods to debtor on credit & reserves a security interest [e.g., buy dryer from Sears, it doesn’t have to file stmt; it’s automatically perfected] OR advance funds used to purchase goods & reserve security interest.
PERFECTION?
- Process by which creditor’s security interest becomes effective against 3rd parties;
- occurs ONLY
- when attachment has occurred &
- requirements for perfection are met.
4 Methods for Perfection?
FPCA
- Filing Financing Statement
- Possession[Pledge]
- Control
- Automatic Perfection
Perfection:
Filing Financial Statement?
Financing statement MUST be filed to perfect security interest, which must provide:
- Name & mailing address of debtor;
- Name & mailing address of secured party; &
- Indicate collateral covered by financing statement.
May identify specifically OR by types, category, or quantity OR Indicate that it covers “all assets” or “all personal property”
Perfection:
Filing Financing statement:
Special Rules for Fixtures?
Fixture filing must:
- Describe immovable to which it is attached;
- State that it covers component parts (fixtures);
- File in separate real estate records;
- All elements of financing statement; &
- Filing made BEFORE component parts becomes affixed, or no security interest at all.
Financing statement MUST NOT contain ________________ errors.
SERIOUSLY MISLEADING
-
failure to provide debtor’s ACCURATE name: seriously misleading
- Exception: Standard search logic: misspelling still lead to accurate name in system [Note facts have to tell you this, do not assume it]
- Minor errors in secured party’s name: NOT seriously misleading; will not invalidate it
Changes that can affect the effectiveness of a financing statement?
- Proceeds: 20 days to update filing if not listed exception
- Name changes: if new name seriously misleading, then only effective 4 months after change, during which time financing statement can be amended.
- Debtor moves: creditor must file in new state’s filing office w/in 4 months of move
Financing statement effective ____ years, but can file continuation during last ____ months of effective period in same office of original filing. Continues for another ____ years, & only the secured party needs to authorize
Financing statement effective 5 years, but can file continuation during last 6 months of effective period in same office of original filing. Continues for another 5 years, & only the secured party needs to authorize
Filing a financing statement can be done where?
What jurisdiction governs the securirty interest?
Secretary of State’s office.
Real estate related [fixtures]: county mortgage records
- Jurisdiction: where debtor is located
- Debtor is located:
- a) debtor’s principal residence [human being]
- b) where its registered [corp]
- c) partnership that doesn’t require registration [at PPB]
Filing a financing statement is not required for perfection when?
certificate of title,
deposit account,
letter-of-credit &
money.
Exception: If collateral is a titled motor vehicle NOT held as inventory for sale or lease, filing is to be w/ Department of Public Safety & Corrections, Office of Motor Vehicles.
Perfection: Possession [Pledge]?
Taking possession of collateral is possible only when collateral is tangible, but MUST
- take reasonable care of collateral &
- may add expenses to maintain collateral to debtor.
Ex. (1) Negotiable docs; (2) Goods; (3) Instruments; (4) Money; & (5) Tangible chattel paper
Perfection:
Possession [Pledge]:
Actual possession?
security interest perfected at moment of possession,
&
continues as long as possession is retained
Perfection:
Possession[Pledge]:
Collateral in hand of person other than debtor (Bailee)?
secured party deemed in possession at moment
Person in possession authenticates record acknowledging he’s holding collateral for secured party’s benefit
OR
takes possession of collateral after having authenticated a record.
Perfection:
Control?
Security interests in (1) investment ; (2) nonconsumer deposit accounts, & (3) electronic chattel paper may be perfected by “control”.
-
deposit account/letter-of-creditor rights (savings or passbook accounts)
- secured creditor is bank
- get control agreement w/ bank to follow
- creditor’s instructions
- become a control account holder
-
life insurance policy
- creditor is ins. co that issues policy
- ins co. authenticates a record acknowledging grant of S.I to creditor
-
investment property (stocks & bonds) (may be perfected by filing or possession, but control is better)
- certificated securities held directly: perfect either by filing, possession or control
- indirect holdings (held by a broker – Charles Schwab): same as deposit account
-
electronic chattel paper secured party has control of electronic chattel paper if the records comprising the chattel paper are created, stored, and assigned so that:
- 1) single authoritative copy that is unique, identifiable & unalterable exists
- 2) authoritative copy identifies secured party as assignee of records
- 3) copies are readily identifiable as copies
- 4) authoritative copy is communicated to and maintained by the secured party
Perfection:
3 Types of Automatic Perfection?
- Permanent Automatic Perfection;
- Temporary Automatic Perfection; &
- Purchase Money Security Interests
Permanent Automatic Perfection?
If S.I. is PMSI in consumer goods:
perfect automatically &
permanently once attached
Temporary Automatic Perfection?
Proceeds: If secured party has perfected security interest in collateral & debtor sells, exchange or disposes of collateral, secured party has
temporally perfected interest for 20-days
in whatever proceeds debtor receives.
Temporary Automatic Perfection:
Continuation of perfection of interest in proceeds?
security interest will continue to perfect beyond 20 days if:
- Filed financing statement covering original collateral, proceeds are collateral that can be perfected by filing in same office original financing statement was filed, and proceeds are not acquired w/ cash proceeds;
- Proceeds are identifiable cash proceed; OR
- New security interest in proceeds perfected w/in 20-day period.
Perfection: Automatic Perfection:
Purchase Money Security Interests?
perfection relates back to date S.I. attached
if financing statement is filed w/in 20 days
- Lien creditors: the relation back is only applicable against intervening buyers, lessees, and lien creditors.
- Other secured creditors: it still prevails over all other security interest, provided that it was perfected w/in 20 days of the time of possession is given to Debtor
If a security interest is perfected by one method, and later perfected by another method: w/o an intermediate unperfected period, the security interest is ______________?
If a security interest is perfected by one method, and later perfected by another method: w/o an intermediate unperfected period, the security interest is perfected continuously.
Priorities?
Generally, “First in time, first in right.”
- Unperfected security interest – 1st to attach
- Perfected vs. Unperfected – Perfected party wins
- 2 Perfected Interest – 1st to file or perfect
If collateral is an instrument or chattel paper: secured party who perfects by taking possession will have priority over the secured party who perfects by filing
PRIORITIES: EXCEPTION:
SUPERPRIORITY?
PMSI perfected w/in 20 days of debtor’s receiving collateral beats all other secured creditors. (PMSI: extends to proceeds)
PRIORITIES: EXCEPTION:
Perfected PMSI?
Perfected PMSI will prevail over a conflicting security interest
PRIORITIES:
PMSI in inventory?
creditor must do 2 things before collateral delivered:
- perfect PMSI w/in 5 years BEFORE debtor RECIEVES POSSESSION of inventory AND
- authenticated notification to any conflicting secured creditors in writing that PMSI creditor has/expects to have PMSI priority in described inventory
PMSI in inventory only extends to proceeds that are instruments, chattel paper & identifiable cash proceeds. NOT proceeds that are account.
Buyers vs. Secured Parties?
security interest survives a sale of collateral; Exceptions:
- 1) buyer of an instrument;
- 2) buyer who takes delivery;
- 3) buyer in ordinary course of business;
- 4) buyer of consumer goods;
- 5) buyer of chattel paper has priority over a security interest in proceeds of inventory subject to a security interest
Perfection:
Special Rules for Fixtures?
General priority rule: mortgage interest will succeed, b/c its almost always 1st to be recorded.
However, PMSI can trump mortgage
if w/in 20 days of goods becoming fixtures
there is a fixture filing [in mortgage records]
Buyers vs. Secured Parties: Exceptions:
Buyer in ordinary course of business?
Exception to priority in S.I.; factors:
- GF;
- w/o knowledge sale violates another’s rights in goods; &
- buys in the ordinary course of business from a person in the business of selling goods of that kind
Buyers vs. Secured Parties: Exceptions:
Buyer of consumer goods?
security interest survives a sale of collateral, exception:
- w/o knowledge;
- for value:
- for use as a consumer good; &
- before filing of financing statement covering goods
Buyers vs. Secured Parties: Exceptions:
Buyer of chattel paper has priority over a security interest in proceeds of inventory subject to a security interest?
Buyer of chattel paper has priority over a security interest in proceeds of inventory subject to a security interest if:
- GF
- give value
- take possession
- doesn’t on its face state that someone else has rights to it
Upon default, a secured party may?
- reduce a claim to judgment, foreclose, otherwise enforce the claim, OR
- repossess tangible collateral if it can do so w/o breach of the peace
Default:
If collateral consists of accounts receivable, instruments, or chattel paper:
(1) _________; and (2)_________.
- contact account debtor directly &
- inform them of the repossession
Default:
Debtor’s Right to Redeem?
by tendering to Secured Party amount of obligation, interest, w/ reasonable expenses & atty’s fees caused by default. [have until sold OR collected upon]
Waiver: can only waive after default in writing