REG: Chapter 6 Flashcards
Security Interests and Attachment
When does attachment occur?
- Secured party has given value
- Debtor has rights to the collateral (i.e. has title to the truck that is the collateral)
- Debtor authenticated the security agreement
Security Interests and Attachment
What type of transactions can be attached?
- Consumer goods
- Equipment
- Personal property and fixtures created by contract that secures payment or performance obligation
- Farm and Agricultural products
- Consignments
- Inventory
**Does not apply to **
* Corporate debentures or corporate bonds
* Sale of accounts when part of a sale of the business
* Assignment of promissory notes for collection
Perfection of Security Interests
What are the five methods of perfection?
- Filing
- Taking control/possession of the collateral (i.e. pawn shop taking the collateral)
- Automatic perfection (PMSI)
- Temporary perfection
Perfection of Security Interests
What must be included in a financing statement to perfect its security interest?
- Name and address of the debtor
- Name of the secured party
- Covered Collateral
Perfection of Security Interests
When is filing not required for perfection of security interests?
- The security interest is perfected by control
- The security interest is a purchase money security interest (PMSI)
Perfection of Security Interests
What is perfected security interest by control?
- The secured party becomes the holder, or
- The securities intermediary agree to comply with the orders that originated by the secured party
Perfection of Security Interests
When does a PMSI occur?
- The person obtains credit
- The credit is used to acquire property
- The property is collateral for the debt
- Unless automatically perfected, the PMSI needs to be filed
Perfection of Security Interests
What is automatic perfection?
- PMSI in Consumer goods are ordinarily automated perfected without filing or possession
- Filing is not necessary in automatic perfection
- An assignment that does not transfer a signficant part of the assignor’s receivables
Exception
* If the PMSI on consumer goods is sold to a third-party, the creditor must file a financing statement within 20 days or less
It is not effective when a consumer is buying the consumer goods from another consumer
Perfection of Security Interests
What are the types of collateral where control perfects a security interest?
- Investment property, including securities (Certified and Non-Certified)
- Electronic chattel paper
- Letter-of-credit rights
- Deposit accounts
Perfection of Security Interests
How are security interests perfected?
Security interests (instruments, certified securities or negotiable documents)
* For the first 20 days after attachment, perfection is automatic
* After 20 days, the security is unperfected unless the party perfects in other ways
* If the secured party gives up the security to the debtor for certain purposes, then the perfected security will continue for 20 days
Perfection of Security Interests
What is the best way for a negotiable instrument to be perfected against another party?
Taking possession of the instrument
Priorities
How will collateral be distributed amont prioritized secured creditors?
Priority #1: Consumer purchased the collateral (i.e. inventory) from a merchant in the ordinary course of business (PMSI)
Priority #2: Properly perfected PMSI
Priority #3: Judicial and artisan liens that have become attached to the secured property
Priority #4: Non-PMSI parties (unperfected security by attachment)
Priority #5: General Creditors
Priorities
What happens if the creditor files a financing statement for a PMSI?
If a third party purchases goods through the normal course of business, and the goods are part of the PMSI
* If the creditor filed a financing statement, then the creditor can repossess the inventory that was purchased by the third-party consumer
* If the creditor did not file a financing statement, then the credit cannot repossess the inventory from the third party
Priorities
What are the various types of liens?
- Judicial
- Artisan
- Mechanic
- Materialman’s
- Possessory
Priorities
What is a judicial lien?
- If a court finds that a debtor owes money to a creditor and the agreement is unsatisified, then the creditor can ask the court to impose a lien on the collateral owned and possessed by the debtor
- If the creditor has PMSI, then the creditor obtain a judicial lien
- A judgment lien has priority over an unperfected security interest or if a security interest was perfected after attachment of the lien
Priorities
What is a mechanic’s lien?
- Liens that result from repairing property
- Usually filed by contractors, subcontractors or suppliers that never received payment for the work they performed or materials that they provided on the property
Priorities
What is an artisan’s lien?
A lien that permits a worker in a skilled trade to retain possession of a piece of work until it has been paid for
Priorities
What is a Materialman’s Lien?
- A security interest, or lien, that is placed on the title of property to those who are unpaid for work performed
- A materialman’s lien usually occurs for real property
Priorities
What is a possessory’s lien?
- A person who in the ordinary course of business furnishes services or materials with respect to goods may receive a common law or statutory lien to secure payment if the goods are in the person’s possession
- A possessory lien has priority of a security interest
Exceptions:
* Unless the lien is statutory
* The statute expressly provides otherwise
Bankruptcy Administration
What are the various types of bankruptcies?
Chapter 7: Liquidation
Chapter 9: Municipalities
Chapter 11: Reorganization for Companies
Chapter 12: Farmers
Chapter 13: Reorganizations for Individuals
Chapter 15: Cross-border insolvencies
Bankruptcy Administration
What are the requirements for filing an involuntary bankruptcy petition for Chapter 7 and 11?
- Less than 12 creditors: 1
- More than 12 creditors: 3
- Total unsecured claims: $18,600
Bankruptcy Administration
What are the conditions for a creditor to file an involuntary bankruptcy petition?
- The debtor is not paying the undisputed debts as they become due
- 120 days before the filing, a custodian has been appointed, or took possession of the property
Bankruptcy Administration
What type of costs can a debtor receive if they successfully contests an involuntary bankruptcy petition?
- Court and attorney costs
- Compensatory Damages
- Punitive Damages
Bankruptcy Administration
What industries are ineligible for involuntary bankruptcy petitions?
- Farmers
- Banks
- Insurers
- Non-profit organizations
- Railroads
- Persons owing less than $18,600
Bankruptcy Administration
What type of industries are not eligible to file under Chapter 7?
- Insurance companies
- Banks
- Municipalities
- Railroads
- Credit Unions
- Savings and Loan Associations
Bankruptcy Administration
What industries are not eligible to file under Chapter 11?
- Shareholders
- Commodities and Stock Brokers
- Insurers
- Banks
- Credit Unions
- Savings and Loan Associations
Bankruptcy Administration
When voluntary filing for bankruptcy, is insolvency a requirement?
No
Bankruptcy Liquidations
What is the order of distribution under liquidation provisions?
- Secured Claims
- Priority Claims
- General Creditors/Unsecured claims
Bankruptcy Liquidations
What are the order of priority claimants?
- Alimony/Child Support
- Administrative Expenses
- Claims from the ordinary course of business after the filing but before the relief was granted
- Wages up to $15,150/employee within 180 days before filing
- Employee benefit plan claims
- Claims of grain farmers or fisherman up to $7,475
- Claims of undelivered goods up to $3,350 each
- Tax claims
- Death and injury claims
Bankruptcy Liquidations
What are the types of voidable preferences?
- To or for the benefit of a creditor
- For or on account of a pre-existing debt
- During the debtor’s insolvency
- Within 90 days prior of filing the petition
- To allow the credit to receive a large portion of its claim than for them having to wait for the bankruptcy distribution
Bankruptcy Liquidations
When will a claim not be discharged in bankruptcy?
Debts that were incurred under false representations will not be discharged
Bankruptcy Liquidations
What are the maximum exemptions of a debtor’s estate?
Tools of the Trade: $2,800
Household Goods (Furniture, instruments, etc): $14,875 or $700 per item
Jewelry: $1,8750
Motor vehicle: $4,450
If the asset is less than the maximum amount, the lesser amount is used to determine the calculation
Reorganizations
What is the process of a Chapter 11 reogranization?
- A chapter 11 reorganization is not to liquidate
- 50% of the creditors claims that represent 2/3 of the total amount of the claims must accept the reorganization plan
- A class of equity shareholders accepts the plan if holders of at least 2/3 of the total amount approve the plan
- The plan must include full payment of the administrative expenses
- A creditor’s committee will be created, which will consist of unsecured creditors
- A trustee is not necessary but one may be appointed by the court
Reorganizations
What is included in a Chapter 11 reorganization plan?
- Designated Classes of claims and owners interest
- The treatment that will be given to each class
- Which classes will or will not be impaired
- Allow for treatment of equal members within a class, unless they agree otherwise
- Adequate method of payment
All classes are not to be treated the same
Reorganizations
What other components are included in a Chapter 11 reorganization plan for a corporation?
- The plan must protect the voting rights
- State that no nonvoting stock will be issued
- Require that the selection of officers and directors be effected that will protect the parties’ interest
Sureties
What is a cosurety?
- A cosurety is when more than one person acts a guantor for the debt to a creditor
- They are bound to answer for the same debt or duty of a debtor
- They do not have the sign the same contract
- They do not have to be aware of the other cosureties existence
Sureties
What is a requirement of a guarantee/surety?
- The surety is primarily liable for the debtor’s obligation
- The guarantee/surety must be in writing
- A surety cannot force the creditor to collect from the principal debtor
- A surety cannot force the creditor to proceed in obtaining the debtor’s collateral
Sureties
What is a guarantor of collection?
- A guarantor of collection is condition that is established by the surety
- The creditor is required to obtain collection first from the debtor
- The guarantor is not liable until the creditor performs due diligence in collection from the debtor
Sureties
What happens a surety gurantees a loan based on fraudulent information?
- If the creditor knew about the fraudulent information, then the surety does not need to repay the loan
- If the creditor did not know about the fraudulent information, then the surety must repay the loan
Sureties
What is contribution?
Contribution allows the right of a cosurety who has paid more than their share to recover their share for the other cosureties
Sureties
What are the legal rights to a surety?
- Right to the principal debtor’s collateral
- Priority in bankruptcy
- Rights against other parties indebted in the same obligation
- Rights against cosureties
Sureties
What happens with regard to a surety when the creditor releases collateral/security?
- The creditor interferes with the rights of the surety with respect to the collateral/security
- The surety is released to the extent of the value of the collateral/security
Sureties
What is subrogation?
- Subrogation is the best method of collection from the debtor when the surety pays the entire obligation
- If the debtor defaults, the surety succeeds to the legal rights of the creditor against the principal, debtor, cosureties or any collateral
