MEE - Secured Transactions Flashcards
*What is attachment?
Attachment gives the creditor rights against the debtor in the collateral. To attach a security interest: (1) either the debtor must authenticate a security agreement granting the creditor a security interest in collateral that describes the collateral or the creditor must take possession or control of the collateral, (2) The creditor must give value, and (3) The debtor must have rights in the collateral.
*What is perfection?
To obtain rights against another claimant to a debtor’s collateral, a secured party must also perfect its security interest. A creditor can perfect its security interest in goods by: (1) filing, in the proper public office, a financing statement that is authorized by the debtor in an authenticated record, or (2) taking possession.
(A) Filing: The financing statement must: (1) identify the debtor by name (Needs to be accurate but as long as it isn’t seriously misleading it will suffice, may not use trade name or corporation name not on public organic record), (2) Identify the secured party/creditor , (3) contain an adequate description of collateral (does not have to be as specific as the security agreement). Authorization for filing must be obtained by debtor.
(B) Possession: Secured party may perfect a SI in many types of collateral simply by taking possession: Goods, negotiable documents, instruments (Non-disclosure Agreements). HOWEVER, certain intangibles may not be obtained by possession: accounts, electronic chattel paper, general intangibles.
(C) Automatic: PMSI
(D) Motor vehicles: Perfected by notation on vehicle’s certificate of title.
*What is automatic perfection??
(A) A PMSI arises where a creditor sells goods on credit to the debtor and or advances funds to the debtor to buy goods, reserving a security interest in the goods themselves.
-The bank in which a non consumer deposit account is maintained automatically has control over a deposit account. Perfection may also be obtained by (1) putting the deposit account in another secured part’s name, or (2) agreeing in an authenticated record with the debtor and the bank in which the deposit account is mailed that the bank will comply with the secured part’s orders regarding the deposit account without debtor’s further consent.
Automatic perfection only occurs for PMSIs in consumer goods; a PMSI in inventory or equipment can be perfected by filing or possession.
Limitations: Motor vehicles and fixtures: For motor vehicles, notation on the vehicle title is required for perfection. For Fixture filings: Consumer goods that are to become fixtures require a fixture filing to obtain priority over an interest in real property to which fixture is affixed.
(B) Small scale assignment of accounts: Automatic perfection when (1) Accounts or payment intangibles are assigned, and (2) Assignment does not transfer a significant portion of the assignor’s outstanding accounts or intangibles.
(C) The sale of payment intangibles or promissory notes automatically perfect.
*Which PMSI has priority over another?
(A) PMSIs in inventory: Has priority over other SIs in the inventory or certain proceeds (instruments, chattel paper, identifiable cash proceeds) if: (1) PMSI is perfected when debtor takes possession of inventory and; (2) Other parties who filed their SIs in inventory receive authenticated notification of the PMSI before the debtor takes possession of the inventory. The notice must state that PMSI will be taken in debtor’s inventory and describe kind and type of inventory.
(B) PMSI in goods other than inventory and livestock: has priority over other SIs in the same goods and their proceeds if PMSI is perfected before or within 20 days after debtor receives possession of the collateral. There is no notification requirement.
(C) Conflicting PMSI: Where there are multiple PMSIs in the same collateral, priority goes to: (1) Secured party who has PMSI as the seller of the collateral (as opposed to lender), or (b) otherwise, first secured party to file or perfect.
*How do you classify collateral?
Tangible Goods:
Farm Products: Items used/produced in farming
Consumer goods: Items bought for personal, family, or household purposes
Inventory: Goods held for sale or lease
Equipment: Catchall for tangible items that do not fit in above categories
Intangibles:
Instruments: Writings representing the right to be paid money (promissory notes, checks)
Documents: Writings representing the right to receive goods (Bills of lading, warehouse receipts)
Chattel paper: Record evidencing both an obligation to pay and SI in goods or lease of goods (Promissory note and security agreement)
Accounts: A right to payment of a monetary obligation for property sold or service rendered. (Accounts Receivable)
Deposit Accounts: Bank accounts
General Intangibles: Patent rights, software
*How do you create and attach a security interest?
Security interests are created by contract, and security agreements are typically in writing, signed by the debtor and include a description of the collateral. Under the original use test, a debtor’s original intended use of collateral governs the collateral’s classification.
Requirements to attach:
(1) Valid security agreement: May be evidenced by (1) authenticated written or electronic record of security agreement describing collateral or (2) creditors possession or control of collateral.
(2) Value: Secured party must give value to create a SI. Almost any consideration is sufficient, even pre-existing debt.
(3) Rights in collateral: Debtor must have rights in property he offers as collateral. Ownership or possessory interest is usually sufficient.
*What is the priority of security interest?
Priority between parties:
(A) Secured Creditor vs. unsecured creditor: Secured creditor prevails.
(B) Perfected vs. unperfected SI: Perfected SI prevails. Applies even if perfected party takes interest with knowledge of earlier unperfected interest.
(C) Perfected vs. perfected SI: First to file or perfect prevails. When there are conflicting perfected SI, priority goes to the party that filed first or perfected. Where collateral is not subject to filing requirements, first to perfect obtains priority. Knowledge of a prior unperfected SI will not prevent a prospective secured party from filing first to obtain priority.
*What priority does a SI have versus a Judicial Lien Creditor?
(A) Perfected Party vs JLC: Prior perfected SI prevails.
A secured party who attaches a PMSI on the debtor’s collateral before a judicial lien creditor acquires an interest in the collateral will have priority over the judicial lien creditor if the secured party files a proper financing statement within 20 days after the debtor receives the collateral.
*What is a SI in Fixtures, Accessions, & Crops
(A) Fixtures: Goods that become attached to real property, such that an interest in them arises under real property law. Priority: first to file or record prevails. A fixture filing requires filing a financing statement where the mortgage on the real property would be recorded.
Exception: A PMSI made by secured parties who make a fixture filing within 20 days of affixation prevail over a real property interest recorded prior to affixation.
(B) Accession: Collateral that does not lose its identity when physically united with other goods. SI in item continues when attached. An example would be a hard drive installed in a computer.
SI in whole prevails over accession: If the accession becomes part of a whole that is subject to a security interest perfected in compliance with the requirements of a certificate-of-title statute, the security interest in the whole has priority over the SI in the accession. This is not however, what applies to real property.
(C) Crops: A perfected SI in crops has priority over an interest in the land on which crops are planted, regardless of time of filing or perfection.
*What is an after acquired property clause?
This extends the SI to property acquired by the debtor after signing the security agreement. Not needed for proceeds or SI in inventory.
*What is repossession and collection rights??
(A) Reclaiming Possession: If a debtor defaults on a secured transaction, the creditor generally has a right to repossess the collateral to which it has attached a security interest.
Article 9 provides that a secured party can use self-help to repossess collateral after there has been a default; the creditor need not seek an order from a court in order to repossess. However, a secured party can use self-help to repossess collateral only if it can do so without a breach of peace. Article 9 does not define what constitutes a breach of the peace, but generally violence, threats of violence, breaking and entering will likely constitute a breach of the peace. A simple trespass intoned to repossess property is permissible.
(B) Collection rights: When collateral is non-goods (accounts or instruments), non default the secured party can notify the person owing the debtor (account debtor). Secured party must send authenticated notification to account debtor stating that amount due has been assigned and payment must be made to secured party. Upon notification, account debtor can only discharge his obligation by payment to secured party.
*What is redemption?
Article 9 provides that a debtor has a right to redeem collateral after a default. This right can be waived but only after there has been a default.
*What is the right to redeem?
Until secured party has sold collateral or discharged debt by retaining collateral, debtor or any other secured party may redeem collateral by paying all remaining obligations plus reasonable expenses incurred for repossession.
*What liability is there for Article 9 violations by secured parties?
(A) Actual Damages: Debtor can recover damages reasonably calculated to put them in the position they would be in had no violation occurred.
(B) Damages for consumer goods: If collateral involved is consumer goods, debtor is entitled to at least 10% of the cash price of the goods plus interest charges to be paid over the life of the loan.
(C) Loss of deficiency judgment: Secured part may loss right to deficiency judgment. (A) In nonconsumer transactions there is a rebuttable presumption that the value of collateral seized is presumed equal to debt owed unless the secured party proves otherwise. (B) In consumer transactions Courts take one of three approaches (1) Follow rebuttable presumption rule, (2) Deny secured party deficiency judgment, or (3) Allow secured party to recover deficiency minus actual damages debtor can prove.
*When are leases actually purchases of real property?
If a transaction is characterized as a lease but is intended to have effect as security, it will be governed by Article 9 as a security interest. Whether a lease of a good is intended for security, rather than a true lease, depends on the economic realities of the transaction. A transaction will be deemed to create a security interest rather than a lease if the rental obligation is not terminable by the lease, and at the end of the lease, the lessee has an option to purchase the goods for no or nominal consideration.
