MEE themis Flashcards
Secured transaction under (UCC) Article 9
It involves loan or purchase secured by collateral. The relationship typically involves two
parties, a debtor and a creditor.
Debtor gives creditor a security interest in debtor’s
specific property (collateral) to assure the debtor will perform (repay the loan, pay the
purchase price).
Security interest
an interest in personal property or fixtures that secures
payment or performance of an obligation.
Secured party
the person in whose favor a security interest is created
under the security agreement. Usually, the secured party is the person who has loaned
money or extended credit to the obligor. ex) a bank that loans $ to a business is a typical secured party.
Obligor
person who must pay (or otherwise perform) with respect to the obligation that’s secured by a security interest in the collateral. ex) a business that receives a loan from the bank is a typical obligor.
Debtor
a person who has an interest, other than a security interest or other lien, in collateral, such as the sole owner of the collateral. Although the debtor is usually
also the obligor, the debtor need not be.
Collateral
Property subject to a security interest. The characterization of
collateral can affect the validity of a security interest, the way in which a security interest can be
perfected, and the rights of a 3P in the collateral, such as a buyer of collateral.
Tangible Collateral: Goods
encompasses anything that is “moveable at the time
that a security interest attaches.”
Consumer goods
those goods acquired primarily for personal, family, or household purposes.
Farm products
goods that are crops or livestock and include supplies that are used or produced in farming. To be considered farm products, the obligor must be engaged in a farming operation.
Inventory
includes goods, other than farm products, that are held for sale
or lease; are furnished under a service K; or consist of raw materials, works in
process, or materials used or consumed in a business. Usually refers to goods consumed in a business
Equipment
catchall class, consists of goods that are not consumer
goods, farm products, or inventory. Refers to goods that are used or bought
for use primarily in a business, such as employees’ desks or machinery used in
manufacturing.
Intangible Collateral
Accounts: right to payment for goods sold, property licensed, or
services rendered. Also right to payment for the issuance of an insurance policy, the use of a credit card, or winning a lottery.
Deposit account: savings, passbook, time, or demand
account maintained with a bank.
General rule for eligible transactions
Article 9 governs a transaction that creates, by agreement, a security interest in personal property or a fixture. A lease, consignment, agricultural lien, and even a purchase of personal property may be subject to Article 9.
Leases
covered under Article 9 when the transaction, although in the form of a lease, is
in economic reality or substance a secured transaction. It is generally determined on a case‐
by‐case basis.
Rules for if a lease can create a security interest
If
1) lease payments are made for the full term of the lease and are not subject to termination and
2) lessee has an option to become the owner of the goods for nominal (a small amount of $) consideration at the conclusion of the lease agreement.”
Attachement
a security interest that is enforceable against the debtor with respect to the collateral has “attached” to the collateral. To be enforceable against the debtor:
Value: given by secured party
Control: secured party/debtor has possession of collateral under authenticated sec agreement
Rights: debtor has rights
Value
Secured party must give value for the security interest. Value may be given:
o By providing consideration sufficient to support a simple K;
o By extending credit, either immediately or under a binding commitment to do so;
o By, as a buyer, accepting delivery under a preexisting K, thereby converting a contingent obligation into a fixed obligation; or
o In satisfaction of, or as security for, part or all of a preexisting claim.
Debtors rights in collateral
For the security interest to attach to the collateral, the debtor
generally must have rights in the collateral. A security interest attaches only to the rights that the debtor has. A debtor’s limited rights in collateral are sufficient for a security interest to attach.
After- acquired collateral
A security interest may apply not only to the collateral that the debtor owns at the time
the security is granted, but also to collateral that the debtor acquires in the future.
Exception to after-acquired collateral rule
An after‐acquired clause is not effective if the collateral is consumer goods,
unless the debtor acquires them within 10 days after the secured party gives value.
Proceeds from collateral
A security interest in collateral automatically attaches to
identifiable proceeds from the sale, exchange, or other disposition of the collateral.
Accessions
goods that are physically united with other goods in a way that the identity of OG goods isn’t lost, such as computer memory in a
computer, or car tires . A security interest that is created in collateral that becomes an accession is not lost due to the collateral becoming an accession
Security Agreement or Possession/Control of Collateral
Debtor has authenticated a security agreement that describes the collateral, or the
secured party has control of the collateral pursuant to a security agreement.
Agreement must:
be in a record, such as a written or typed doc,
Contain a description of the collateral (such as “all of debtor’s equipment”; and
Be authenticated (typically signed) by the debtor.
PMSI
gives lenders a security
interest in goods that have been purchased with funds borrowed from them or purchased
on credit from them. Aubject to special rules with respect to perfection and priority A PMSI may exist only with respect to two types of collateral—
goods (including fixtures) and software.
. A PMSI in goods exists when:
- A secured party gave value (e.g., made a loan) to debtor and debtor uses loan to acquire rights in or use of collateral; or
- secured party sells collateral to debtor, and debtor enters an agreement requiring it to pay secured party all or part of the purchase price (i.e., a sale of goods
on credit).
“Perfection” of a security interest
generally necessary for the secured party to have rights in the
collateral that are superior to any rights claimed by 3Ps. A security interest is “perfected” upon
attachment of that interest and compliance with one of the methods of perfection.
Methods of perfection
Under Article 9, a secured party can perfect a security interest by:
o Filing of a financing statement
o Possession of the collateral
o Control over the collateral
Automatic perfection (either temporary or permanent)
o Statute: If there’s another statute that governs perfection of a security interest, that statute
may provide another way to perfect=.
Filing a financing statement
A security interest in any collateral, except a deposit account, money, or letter‐of‐credit rights that are not a supporting obligation, may be perfected by filing a financing
statement to give interested parties notice of the
existence of the security interest.
Must contain :
debtor’s name;
name of the secured party or a representative of secured party; and
collateral covered by the financing statement.
Timing for filing a financing statement
financing statement will be effective on the date of filing. A financing statement is generally effective for 5 years and may be continued for another 5
years by filing a continuation statement within 6 months prior to the expiration of the
statement.
Error in debtor’s name
A financing statement that fails to accurately contain the debtor’s name may be
“seriously misleading” and therefore not effective to perfect the security interest.
Exception to the rule against errors in debtor’s name
If a standard search of the filing office records under the debtor’s
correct name would disclose the financing statement, the erroneous name does not
make the financing statement seriously misleading and it will be valid.
Control over collateral
A secured party may perfect a security interest in in
investment property, deposit accounts, letter‐of‐credit rights, electronic chattel paper, or electronic documents by taking control of the collateral. The security interest remains
perfected only while the secured party retains control
Deposit acct
A security interest in a deposit account can be
perfected only by control. A secured party has control of a deposit account if:
The secured party is the bank with which the deposit account is maintained;
The bank, secured party, and debtor agreed in writing to follow the instructions of
the secured party; or
The secured party becomes the bank’s customer with respect to the deposit
account
Automatic perfection
A PMSI gives lenders a special security interest in goods that have been bought with funds borrowed from them or purchased on credit from them.A PMSI in consumer goods is automatically perfected upon attachment. A secured
party doesn’t need to file a financing statement or have possession to have a
perfected PMSI in consumer goods. A PMSI in other types of goods (e.g., inventory,
equipment) or in automobiles is not automatically perfected
Prceeds of sale of collateral
—If a security interest in collateral is perfected, and then the
collateral is sold for cash proceeds (or checks or deposit account), the secured party will have a
perfected security interest in the proceeds.
Timing of perfection
A security interest is perfected upon (i) attachment of that interest and (ii) compliance with
one of the methods of perfection (such as filing a financing statement).
Additionally, a security interest that is perfected by one method and later perfected by
another method without a lapse in perfection is continuously perfected despite the change
in method. The date of perfection is the date on which the security interest first became
perfected
Determination of priority (2 steps)
1) ID status of each claimant then
2) apply appropriate priority rule
Potential claimants
Creditors
o Transferees/buyers
o Other secured parties
General creditor
one who has a claim, including a judgment,
but who has no lien or security interest with respect to the property in question (i.e., the
collateral). This type of creditor does not have a claim to particular property owned by the
debtor. A secured party will always prevail over a general creditor with respect to the debtor’s
collateral.
Judicial lien creditor
creditor who acquires a lien on the collateral
by a judicial process, rather than by operation of law. A perfected security interest has priority
over a judicial lien creditor, but the judicial lien creditor had priority over an unperfected
security interest.
transferee
Transferees of the collateral are persons who obtain full title to the
goods as a result of a transfer of the collateral from the debtor
Transferee vs secured party with a security interest—
If collateral is transferred from debtor to transferee and transferee is NOT a buyer, security interest continues in collateral UNLESS the secured party authorized transfer free of the security interest.
In
other words, the secured party still has a security interest in the collateral.
Buyer vs secured party with an unperfected security interest—
A buyer, other than a
secured party, of collateral that is goods, tangible chattel paper, tangible docs or a
security certificate takes free of an unperfected security interest in collateral if buyer:
o Gives value; and
o Gets delivery of collateral;
o w/o knowledge of existing security interest.
Buyer vs secured party with a perfected security interest
A buyer of collateral subject to
a perfected security interest generally takes collateral subject to that interest, unless the
secured party has authorized its sale free of the security interest.
Buyers in the Ordinary Course of Business
(BOCB) takes goods free of a security interest that the seller gave to the creditor in the goods, even if the security interest is perfected and the buyer knows of its existence.
A BOCB:
o Buys goods (not including farm products);
o In the ordinary course of business;
o From a merchant who sells goods of that kind;
o In good faith; and
o w/o knowledge that the sale violates rights of another in the same goods.
Consumer Buyer
Buys consumer goods free of a security interest, even if perfected,
unless before purchase, the secured party filed a financing statement covering
goods.
A consumer buyer:
- Buys consumer goods for value;
- For his own personal, family, or household use;
- From a consumer seller; and
- Without knowledge of the security interest.
Perfected security interest vs perfected security interest
If 2+ perfected secured parties with rights in same collateral, the first to party to either file a
financial statement or perfect has priority
Perfected security interest vs unperfected security interest
If only one security interest is
perfected and the other is not, then the perfected interest takes over the unperfected one.
Unperfected security interest vs unperfected security interest
If neither interest is
perfected, then the first party to have attached their interest has priority.
PMSI (Purchase Money Security Interest) Rules
Preference is generally given to a PMSI over a non‐PMSI security interest
A PMSI in goods other than inventory or livestock prevails over all other security
interests in the collateral, even if the other security interests perfected earlier, if…
PMSI is perfected before or within 20 days after the debtor receives possession of
the collateral.
A PMSI in inventory or livestock—
prevails over all other security interests in same
collateral, even if previously perfected, if
(i) PMSI is perfected by the time the debtor receives possession of the collateral, and
(ii) the purchase‐money secured party sends an authenticated notification of PMSI to holder of any conflicting security interest before debtor receives possession of collateral.
(notification must state that purchase‐money secured party has or expects to
have a PMSI in debtor’s inventory or livestock and it must include a description)
PMSI versus PMSI—
If there 2+ competing PMSIs, the first to party to either
file a financial statement or perfect has priority.
Proceeds from a PMSI in goods—
priority of a PMSI in goods generally extends to the
identifiable proceeds of the OG collateral, but only as to proceeds in which the security
interest is perfected when the debtor receives possession of the collateral or within 20 days
thereafter.
Construction Mortgage
Secures an obligation incurred for construction of an improvement on land, including
cost of acquiring land, and that indicates it is a construction mortgage in real property
records) has priority over a subsequent security interest in a fixture, including a PMSI in a
fixture.
Construction mortgage must be recorded before goods become fixtures, and it
covers only goods that become fixtures before completion of the construction
