Section 20 Secured Transactions Flashcards
List the types of collateral.
Tangibles:
1) Inventory
2) Equipment
3) Consumer Goods
4) Chattel Paper - Writings that evidence both a monetary obligation (buy equipment on credit, the loan agreement then becomes the collateral for another loan by the previous creditor) and security interest in specific goods or equipment.
Intangibles
1) Accounts - Any right to payment for goods or services that is not evidenced by an instrument
2) Negotiable Instruments - warehouse receipts, bills of lading
NOTE: Items may change from one category to another depending on who has possession.
(Roger page 20-1)
Describe PMSI
Purchase Money Security Interest (PMSI)
When the Creditor gives the Debtor the purchase money or the credit to acquire the collateral. This gives the creditor priority over all other types of security interests in the same collateral.
PMSI - an interest in personal property or fixtures that secures payment of an obligation that is:
- taken by the seller of the collateral to secure all or part of its price, OR
- taken by a person who loans money or extends credit to enable the debtor to acquire the collateral.
(Roger page 20-1)
Explain DOTS (who the Creditor would like to protect their interest from)
Debtor (only needs attachment)
Other creditor claiming an interest in the same collateral
Trustee in Bankruptcy
Subsequent purchaser from the debtor without knowledge of perfection
NOTE: for the creditor to protect themselves from the debtor (D), they must only attach; to protect themselves from the other parties (OTS) they must first Attach and then Perfect.
(Roger page 20-1 to 20-2)
Describe the 3 things that must occur in order to attach.
In order to attach, ALL 3 must occur. When the last of the 3 occurs, the interest is considered to have attached.
1) Property owned by the debtor (rights) (this may involve ownership of the collateral or other claims, such as royalty rights).
2) Interest is created (one of 2 ways)
- Signed security agreement (contains a reasonable description of the collateral and signed by the debtor) OR
- Take possession (pledge as collateral)
3) Give value to the debtor (a promise to give value in the future is NOT sufficient).
- A line of credit is value when given authority, not when money is distributed.
NOTE: PIG
Attachment also covers:
1) Can attach to the proceeds from the sale of the collateral, if debtor sells the property.
2) A security agreement may also apply to after-acquired property. If the debtor were to purchase inventory or equipment after the attachment occurred, the creditor may attach to these items.
Once all 3 (PIG) conditions are satisfied, the creditor has a security interest that can be enforced against the debtor. In some cases, the creditor was the one who provided the debtor with the financing (money) that allowed the debtor to purchase the collateral. In such cases, the creditor has a PMSI.
(Roger page 20-2)
Once attachment has occurred, the creditor has a non-possessory right in the debtor’s collateral. This means the creditor has rights but not ownership.
In the event the debtor defaults on the debt, what may the credit do?
The creditor may demand the asset, and then may sell it in either a public or private sale.
The creditor may retain the asset in some cases to satisfy the debt, but may not do so if the collateral is consumer goods and the debtor has paid at least 60% of the purchase price of the collateral before default. The creditor is entitled to keep only the amount owed to them, and the remaining value must be returned to the debtor.
The debtor may redeem the property (demand its return) after the creditor has seized it but prior to sale to a third party by paying the amount owed to the creditor and any reasonable expenses incurred by the creditor.
Once a sale has taken place to a third party, the debtor will no longer be able to redeem it. The third party is not liable for any of the claims against the property by the creditors of the debtor as long as they purchased it without knowledge of any defects in title.
(Roger page 20-3)
The law provides creditors with rights similar to attachment in various circumstances: Judicial Lien, Statutory Lien, and Garnishment. Explain…
Judicial Lien - A court orders certain property to be made available to the plaintiff to satisfy a claim against the defendant in a case. Under Article 9 of the UCC, security interests in tort claims already assessed by a court of law are available to satisfy plaintiff’s judgments.
Statutory Lien - A service person who repairs personal property is given rights by legal statute in the property in the form of an artisan’s lien until the owner pays for the repairs (this is called a mechanic’s lien when work is done in connection with real property).
Garnishment - A creditor obtains a judicial order allowing them to be paid a portion of the debtor’s wages out of each paycheck directly from the debtor’s employer.
In general, these types of claims have priority over creditors who have attached to the same property, unless the creditors perfected their interests before these claims arose.
A statutory lien has priority over all other claims, including prior perfected claims, unless the statute expressly denies this.
(Roger page 20-3)
Perfection gives the creditor legally enforceable rights against the debtor (D) and all other parties (OTS) claiming an interest in the same collateral.
What must a creditor due to perfect?
To perfect, a creditor must satisfy any ONE of the following:
1) File a financing statement in the appropriate public office. The financing statement must contain a listing or description of the types of collateral, a signature and address of debtor (jurisdiction for filing), and the name and address of the creditor. This must be done for accounts (A/R, copyrights, trademarks, and goodwill). The filing lasts for 5 years and can be continued indefinitely if refiled within 6 months of expiring for another 5 years.
2) Automatic Perfection
- A PMSI in consumer goods is automatically perfected without filing or taking possession as soon as it attaches.. There is loophole however… if the debtor sells the consumer goods to another good faith consumer, the new purchaser takes the property free of the automatic perfection (“garage sale” rule). To close the loophole, the creditor must file a financing statement within 20 days of attachment (retroactive to date of attachment if within 20 days). The 20 day rule also applies to equipment, but NOT to inventory.
3) Take possession of the collateral
- Must be done for negotiable and nonnegotiable instruments, investment securities (stock certificates or promissory notes) and money. Example: a pawnbroker lending money must take possession of the collateral.
Of course, a security interest can only be perfected if it has been attached. If a creditor files a financing statement prior to the 3 requirements for attachment being satisfied, the perfection will occur once attachment occurs.
(Roger page 20-3 to 20-4)
Explain jurisdiction and what happens with the financing statement if the jurisdiction of the debtor changes.
Filing a financing statement is a way of informing other potential claimants against the property of the creditor’s claim. The statement is filed in the jurisdiction of the debtor. If the property was acquired by the debtor for personal use (consumer goods), the jurisdiction is based on the debtor’s principal residence. If the property was acquired by the debtor for resale (inventory) or use in their trade or business (equipment), the jurisdiction is based on the debtor’s principal place of business.
If the jurisdiction of the debtor changes, the financing statement remains valid for 120 days before the creditor must refile in the new jurisdiction.
When collateral is taken from one state to another, the creditor must perfect in the new state within 4 months (120 days) or lost their priority. (Roger page 20-5)
To summarize, the jurisdiction for almost all filings is determined by the Debtor’s location, rather than the collateral’s location.
(Roger page 20-4)
Explain the 20 day rule and what it applies to.
Normally, perfection occurs at the time the financing statement is filed. If, however, a creditor with a PMSI files within 20 days of the debtor’s acquisition of the collateral, the perfection will become effective retroactively to the date of attachment, unless the collateral is inventory.
The 20 day rule only applies to consumer good and equipment.
The 20 day rule does not apply to inventory.
(Roger page 20-4 and 20-6)
Perfections against inventory are not as complete as those against other types of property. Explain why…
(Inventory Rule) Since inventory is acquired by the debtor for the specific purpose of being sold, a perfection against inventory will not protect the creditor after the debtor sells the inventory in the ordinary course of business, even if the buyer knows of the security interest and even if the buyer is not a consumer. However, the creditor will have rights against the proceeds from sale, and the perfection against inventory will give the creditor priority over other creditors and the trusteee-in-bankruptcy.
(Roger page 20-4)
