R7.2 – Secured Transactions (UCC Article 9) Flashcards
Purchase Money Security Interests (PMSI)
PMSI = Special type of security interest
Properly Perfected PMSI has priority over all other types of security interest in the collateral
PMSI arises when
– creditor sells collateral to debtor on credit, retaining a security interest for purchase price, or
– Creditor advances funds used by debtor to purchase collateral
PMSI Often tested
– simply ask if debtor received collateral with creditor’s money or credit, if yes = PMSI
UCC Article 9 (Secured Transactions)
Secured transaction governed by Article 9 of the UCC
Secured transaction = debt secured by collateral
Security interest = right of creditor to repossess collateral upon default by debtor
Security interest becomes effective as soon as parties take steps to attach the interest
Attachment does not provide creditor with rights against 3rd parties with interest in collateral
Perfection of the security interest gives the creditor rights over 3rd parties
Article 9 applies to most contractual security interest in personal property or fixtures and outfights sales of Accounts Receivable
Article 9 does not apply to:
– Security interest in land (mortgages)
– Wage claims
– Statutory liens e.g. mechanic’s lien
Types of Collateral
Goods
– Consumer goods = goods used for personal, family of household purposes
– Inventory = held for sale or lease, or goods used up quickly in business
– Equipment = goods that don’t fit other two categories, including durable goods use or bought for use primarily in a business
Intangible and semi-intangible collateral accounts
– Account = any right to payment for goods, services, real property, or use of a credit card, not evidenced by an instrument or chattel paper
Investment property = tocks, bonds, mutual funds, and brokerage accounts containing such items
Proceeds from the sale, exchange, collection or other disposition of collateral
Duties of Secured Party
File or send debtor a termination statement when the debt is paid
Confirm for the debtor the unpaid amount left on the secured debt
Use reasonable care to preserve any collateral in the secured party’s possession
Attachment of Security Interest
Article 9 concerns secured party’s right vs. both debtor and 3rd parties
Debtor = via attachment
3rd parties = via perfection
A security interest is not enforceable unless it has attached to the collateral
Attachment of Security Interests – Requirements
- Agreement creating security interest evidenced by:
i. Authenticated record of security agreement, or
ii. Creditor taking possession or control of the collateral (pledge) - Value given by secured party in exchange for the security interest
- Debtor must have rights in the collateral; doesn’t have to own it
Attachment of Security Interests – Requirements: Authenticated Record
Authenticated by debtor not creditor
Authentication = written signature, or electronic mark made with intent to identify the authenticating person and adopt the agreement
Record = written security agreements and intangible records such as computer files
Attachment of Security Interests – Requirements: Control
Control = power to make or prevent dispositions of the collateral
Perfection
Perfection establishes the secured party’s rights vs a 3rd party who may also have an interest in the same collateral
Perfection cannot be completed until these is attachment, but attachment and perfection may be simultaneous
Methods of Perfection
- Filing a financing statement
- Taking possession of collateral (not accounts or intangibles)
- Control (investment property)
- Automatic perfection
- Temporary perfection
Methods of Perfection – Filing a financing statement
Financial statements must contain the following elements:
- Name and address of debtor and secured party
- Indicate collateral covered by financial statement
- If collateral relates to real property, describe real property
Debtor must authorize filing of financial statements in an authentic record
– Cannot be oral
– Debtor deemed to have authorized the filing if the debtor authenticates a security agreement covering the collateral that is covered by the financial statement
Financial statements filed with Secretary of state
Financial statements effective for 5 years
– can renew for 5 more years by filing continuation statement
Methods of Perfection – Taking possession of collateral (not accounts of intangibles)
Can’t take perfect the following by possession – accounts – deposit accounts – nonnegotiable documents – Intangibles
Secured party must use reasonable care in storing and preserving the collateral
– Can charge debtor for storage, insurance etc. expenses
Methods of Perfection – Control (investment property)
For security interest in investment property
Control = secured party has taken steps to be able to have investment property sold without further action from owner.
Taking control
– take possession of stock or bond certificates
– have non-bearer securities endorsed to him
– Uncertified securities = get owner to notify issuer to reregister securities in name of secured party or have issuer agree to follow secured party’s instructions regarding the security.
– Securities Accounts = Get owner to contact broker or mutual fund company and instruct broker that secured party has right in the account that owner has or that broker is to comply with secured party’s instructions
Methods of Perfection – Automatic perfection
Small scale assignment of accounts (e.g. assignment of a few A/R) automatically perfects
PMSI in CONSUMER GOODS automatically perfects
Note: PMSI in INVENTORY or EQUIPMENT does not automatically perfect – perfect by filing
Methods of Perfection – Temporary perfection
Proceeds from original collateral
– Security interest continuously perfected for 20 days from debtor’s receipt of proceeds
Interstate shipments = Collateral taken from one state to another
– Perfection in first state valid for 4 months after collateral enters second state
– To maintain priority, perfect in new state within 4 month period.
Priority Rankings – Highest Priority
Buyer in ordinary course of business of inventory that serves as collateral for a security agreement created by seller
– Exception: buyer knows sale is in violation of prior security agreement
Holders in due course of negotiable instruments
Holders of possessory liens
Priority Rankings – 2nd Highest Priority
Properly perfect PMSI
– PMSI in consumer goods perfects upon attachment
– PMSI in inventory of equipment perfected by filing
Priority Rankings – 3rd highest Priority
Perfected security interest is and judicial liens that has attached to the collateral
If there is a conflict between perfected security interests - the first to file or perfect wins.
If there is a conflict between a perfected security interest and a judicial lien that has attached, the first to perfect (if security interest) or attach (if judicial lien) has priority.
Priority Rankings – 4th Highest Priority
Unperfected Security Interest
If two unperfected security interests conflict, then the first to attach has priority.
Priority Rankings – Lowest Priority
Lowest priority = debtor
Creditor’s Rights on Default
- The creditor may take possession of collateral and keep it or sell it
- Retention of collateral in satisfaction of the debt
- Judicial action against debtor:
Creditor’s Rights on Default – Taking Possession of Collateral
No judicial action required – Creditor can take possession by himself as long as can do so without a breach of the peace
For collateral such as accounts and instruments – upon default, secured party notifies account debtor to make payments to secured party
Secured party can take possession of collateral by replevin
– Replevin = a judicial action seeking the transfer of personal property
Creditor’s Rights on Default – Sale of Collateral
Sale must be commercially reasonable
Must give notice of sale to debtor
Sale wipes out all subordinate interests; superior interest still valid
Sale terminates debtor’s right to redeem by paying off indebtedness
Process for sale distributed in following order
- Expenses of repossession and sale
- Pay creditors with security interests in order of priority
- Any surplus goes to debtor
If sale proceeds don’t cover expenses of sale and debt, secured party can bring court action to recover delinquency
Creditor’s Rights on Default – Retention of collateral in satisfaction of the debt
If debtor is a consumer it will be considered full satisfaction
If debtor is nonconsumer, the secured party can still collect any deficiency
Secured party cannot retain the collateral if the debtor has paid at least 60 percent – Must sell collateral within 90 days after repossession
Creditor’s Rights on Default – Judicial action against debtor
Secured party can bring judicial action for amounts due and levy on collateral after judgement
Secured party can have collateral seized at same time that he begins judicial action
Debtor’s Right of Redemption
Up until sale or discharge of debt through retention of collateral, debtor can redeem collated by paying all of the obligations secured by the collateral plus all reasonable expenses incurred related to the repossession
