Introduction and Definitions Flashcards
“Secured Transaction” Definition
transaction that 1) is intended to create a security interest in personal property or fixtures and 2) generally involves sale on credit or loan in which the creditor obtains a lien on some/all of debtor’s property as security for the payment.
“Sale on Credit”
Sale where at time of sale buyer does not pay full purchase price.
“Security Agreement”
The agreement between the debtor and the secured party (the creditor) that creates the security interest.
It’s a contract!
“Security Interest”
An interest in personal property or fixtures that secures payment or performance of an obligation. It is a contingent property interest, in the debtor’s collateral, that the debtor grants to the creditor. The contingency is DEFAULT. When default occurs, the property interest springs to life and t_he creditor has rights in the debtor’s collateral_.
Collateral
Property subject to a security interest, iow, property secured party can repossess upon default to ensure debt is paid.
Purchase Money Security Interest
(2 kinds)
- Seller-financed PMSI: secured party sells debtor collateral on credit and retains a security interest in the item sold.
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3rd Party Financed PMSI:
- 3rd party financer loans money to debtor to buy item
- 3rd party financer takes a security interest in that item
- debtor actually USES the money to buy that item
“After-acquired property clause”
Common - clause by which secured party obtains a security interest not only in present property, but also in property debtor acquires in the future.
e.g. lien on inventory owned “and in addition, all other inventory hereafter acquired”
Future Advance Clause
Clause (commonly used) in which secured party secures future loans to the debtor against the current collateral/in the current security agreement.
Where included, new security agreement NOT needed when future advance is made.
e.g. “to secure this loan and any future indebtedness of debtor to creditor”
“Attachment”
- Steps legally required to give the secured party an effective security interest in the collateral as against the debtor.
- Once security interest attaches, it is effective against debtor and creditor has all the rights of an Art. 9 secured creditor.
- IOW: NO SECURITY INTEREST until Attachment complete
“Perfection”
- Steps required to give secured party an interest in collateral that is effective as against OTHER creditors.
- Generally it’s the process of giving public notice of teh security interest.
“Financing Statement”
Document used to provide public notice of security interest, so as to perfect it.
Scope of Article 9
Applies to:
- any transaction, regardless of form, that creates a security interst in personal property or fixtures by contract
- an agricultural lien (generally created by statute)
- a sale of accounts, chattel paper, payments intangibles or prommissory notes (unless sale for collection purposes only or part of sale of business)
- certain consignments
- Consignment = actual owner of goods gives them to someone else to sell
- unless seller is known by creditors to be substantially engaged in selling goods of others, owner must conform w/ Art. 9 if wants goods (worth more than $1k) to be protected against seller’s creditors.
- Secured Sale Disguised as Lease
When is a Lease actually just a disguised secured sale?
- A “true lease” is not covered by article 9 but a lease that is really a sale with security interest IS.
- Difference?
- in a lease, the item still has meaningful economic value when the lessor gets it back at the end of the lease term
- In a sale, the buywer is the owner and will drain all economic value
- Ask: At the time the parties entered into the transaction, was it reasonably likely that the lessor would get the item back when it still had meaningful economic value?
- examples: 1) at end of lease period lessee becomes owner for nominal consideration ($1) or 2) the lessee is BOUND to purcahse the goods/renew the lease for remaining economic life or 3) lease is for entire economic life of leased goods.
