In General Flashcards
What is a security interest?
An interest in personal property or fixtures that secures payment or performance of an obligation
UCC § 1-201(35)
What are the purposes of a security interest?
- Make debt more easily collectible if the debtor cannot or refuses to pay.
- Provide the secured party with a position superior to other creditors.
- Provide the secured party with rights to obtain the collateral if it’s sold or transferred.
What is a security agreement?
A consensual agreement that provides for a security interest
What is a security agreement?
A consensual agreement that provides for a security interest
What’s the difference between an agreement and a contract?
An agreement is a bargain-in-fact between parties.
A contract is the legal obligation that results from an agreement.
UCC § 1-201(3), (12)
What are the three types of parties in a secured transaction?
- Secured party
- Obligor
- Debtor
What is a secured party?
A creditor who obtains a security interest in the debtor’s property
What is an obligor?
A person who must pay or perform the obligation that the collateral secures
What is a debtor?
A person who has an interest in the collateral, other than a security interest or other lien (e.g. the owner of the collateral)
The debtor is usually the obligor, but doesn’t need to be.
What is collateral?
Property subject to a security interest
To classify collateral, what do you look to?
The debtor’s principal use at the time the security interest is created
Can the same property be classified differently for different debtors?
Yes
What are the classes of collateral?
- Goods
- Rights to payment
- Documents
- Investment property
- Deposit accounts
- Commercial tort claims
- Letter of credit rights
- General intangibles
What are goods?
Anything moveable at the time a security interest attaches
What are some goods that are not technically “moveable”?
- Fixtures
- Standing timber
- Unborn animals
- Growing or unharvested crops
- Manufactured homes
What are the four mutually exclusive subcategories of goods?
- Consumer goods
- Farm products
- Inventory
- Equipment
Mnemonic: Champion Gecko Facing Poodles; Iguanas Escaped
When are goods classified?
When the security interest attaches
Can the classification of a good change during the life of the good?
Yes
What are consumer goods?
Goods acquired primarily for personal, family, or household purposes
What are farm products?
Crops, livestock, supplies used or produced in farming operations
NOT farming equipment
For goods to be considered farm products, the debtor must be…
…engaged in a farming operation.
What is inventory?
Goods that are not farm products that:
- are held for sale or lease;
- are furnished under a service contract; or
- consist of raw materials, works in progress, or materials used or consumed in business.
What is equipment?
Catchall class for goods that are not consumer goods, farm products, or inventory
When does a good become a fixture?
When attached to real property such that an interest arises under real property law (e.g. when the good is attached to a house)
When can software be a good?
When embedded in goods (e.g. computer program contained in a car)
What is a right to payment?
The right to be repaid money by a third party that the debtor then uses as collateral for a loan
What are the four types of rights to payment?
- Instrument
- Chattel paper
- Accounts
- Payment intangible
Mnemonic: Impatient Cow Pushes Adorable Pony Inside
What are instruments?
- Negotiable instruments
- Promissory notes
- Checks
- Nonnegotiable instruments that evidence a right to the payment of a monetary obligation and are transferred in the ordinary course of business by delivery
- Certificate of deposit from a bank
What is chattel paper?
A record (paper or electronic) with:
- a monetary obligation, and
- a security interest or lease
What are accounts?
A right to payment of a monetary obligation for property that is sold, leased, or licensed, or for services rendered
Includes:
* A company’s accounts receivable
* Right to be paid under insurance policies
* Amounts owed on credit cards
* Winning a lottery
What are payments intangible?
Catchall for rights to payment
⚠️ “Accounts” is very broad!!
How do you spot a right to payment?
- A transaction in which a third party (account debtor)
- Owes money to your debtor
- Your debtor uses that money (that right to payment or expectation of repayment) as collateral for the loan
What are the steps for classifying rights to payment?
- Is it chattel payment or instruments?
- If not, it’s probably an account. But, does it encompass the right to be repaid a loan of money?
- If yes, then maybe it’s a payment intangible (rare).
What is a document?
A document of title that gives the holder ownership rights in goods held by a bailee
What is investment property?
Certificated and uncertificated securities (e.g. stocks, bonds)
What are deposit accounts?
Bank accounts
Excludes investment property and accounts evidenced by instruments
What are commercial tort claims?
Claims possessed by an organization or an individual that arose in the course of the organization or individual’s business
Excludes claims for personal injury or death
What is a letter of credit right?
A right to payment or performance under a letter of credit
What are general intangibles?
Catchall category
(e.g. blueprints, copyrights, trademarks, software)
What does Article 9 cover?
- Secured transactions
- Agricultural liens
- Sales of certain rights to payment
- Certain consignments
If the substance of a transaction is the creation of a security interest, then Article 9 applies…
…regardless of the form or name of the transaction.
When is a lease a secured transaction?
- The lessee must pay consideration to the lessor for the right to possess and use the goods for the term of the lease
- The payment obligation cannot be terminated by the lessee
- One of the following four conditions:
- The original term of the lease is equal to or greater than the remaining economic life of the goods
- The lessee is bound to renew the lease for the remaining economic life of the goods or bound to become the owner of the goods
- The lessee has an option to renew the lease for the remaining economic life of the goods for no or nominal additional consideration
- The lessee has an option to become the owner of the goods for no or nominal additional consideration
What does a protective filing do?
Allows the lessor to be accorded perfected status even if a court later determines that the transaction does not constitute a lease
What is a consignment?
- A party (the consignor) has ownership of goods
- But gives possession of the goods to another party (the consignee)
- For the purpose of allowing the consignee to sell the goods
What are the requirements for a consignment to fall under Article 9?
- A person (the consignor) must deliver goods to a merchant for the merchant to sell;
- The merchant (the consignee) must:
- Deal in goods of that kind,
- Not operate under the name of the consignor,
- Not be generally known by its creditors to be substantially engaged in selling the goods of others, and
- Not be an auctioneer;
- For each delivery, the value of the goods are at least $1,000; and
- The goods are not consumer goods immediately before delivery
Are statutory or common-law liens for services or materials subject to Article 9?
No, except for determining priority of such liens
What is an agricultural lien?
An interest in farm products that secures payment or performance of an obligation for:
- Goods or services furnished with respect to farming operations, or
- Rent on real property in connection with a farming operation
Sales of which types of collateral are treated like secured transactions?
- Chattel paper
- Promissory notes
- Accounts
- Payment intangibles
Mnemonic: Cruel Poodles Poking Needles At Peaceful Iguanas
When are sales of rights to payment NOT subject to Article 9?
When the sale is part of a sale of the business out of which they arose
When is the assignment of accounts, chattel paper, payment intangibles, or promissory notes NOT subject to Article 9?
When only for the purpose of collection
When is the assignment of a single account, payment intangibles, or promissory notes NOT subject to Article 9?
When in full or partial satisfaction of a preexisting indebtedness
When is the assignment of a right to payment under a contract to an assignee NOT subject to Article 9?
When the assignee is also obligated to perform under the contract
How may value be given?
- By providing consideration sufficient to support a simple contract;
- By extending credit, either immediately or under a binding commitment;
- By, as a buyer, accepting delivery under a preexisting contract (converting a contingent obligation to a fixed obligation); or
- In satisfaction of, or as security for, part or all of a preexisting claim
What are the steps for approaching a priority question?
- Determine that you have a secured transaction
What are the steps for approaching a priority question?
- Determine that you have a secured transaction problem
- Identify and classify the property at issue
- Determine which parties have or claim an interest in the collateral
- For each security interest, assess:
- attachment
- perfection
- Find the appropriate priority rule
- Apply the priority rule to resolve the dispute
