Secured Trans Flashcards
Requirement to create an enforceable and attached security interest
All three elements of enforceability and attachment under UCC § 9-203 are: value was given (the loan), the debtor had rights in the inventory, and the debtor authenticated a security agreement containing a description of the collateral.
Perfected security interest in business equipment
First, value must be given. UCC § 9-203(b)(1). This criterion is fulfilled by the loan made by the bank to the business. Second, the debtor must have rights in the collateral. UCC § 9-203(b)(2). Clearly, the business has rights in its equipment. Third, either the secured party must take possession of the collateral or the debtor must authenticate a security agreement containing a description of the collateral. UCC § 9-203(b)(3). The agreement that the business owner signed is a “security agreement” because it is an agreement that creates or provides for a security interest. UCC § 9-102(a)(74). By signing the security agreement, the business owner authenticated it. UCC § 9-102(a)(7).
A security interest is perfected when it has attached and when any additional steps required for perfection have occurred. UCC § 9-308(a). Generally speaking, the additional steps will either be possession of the collateral by the secured party or the filing of a financing statement with respect to the collateral.
The financing statement may be filed before the security agreement is created. UCC § 9-502(d).
Perfection through possession
In the case of security interests in goods, one method of perfection is for the secured party to take possession of the goods. UCC §§ 9-310(b)(6), 9-313(a).
Security interest perfected before judgment creditor lien
Except as otherwise provided in the UCC, a security agreement is effective against creditors. UCC § 9-201(a). UCC § 9-317 provides such an exception, however. That section indicates that a security interest is subordinate to the rights of a person who became a lien creditor before the security interest was perfected. UCC § 9-317(a)(2)(A).
A security interest is not perfected unless it has “attached.” UCC § 9-308(a). A security interest attaches when it becomes enforceable unless the time of attachment has been postponed by agreement. UCC § 9-203(a).
Priority of perfected security interest
Priority between competing perfected security interests is generally determined by the “first to file or perfect” rule of UCC § 9-322(a)(1).
Security interest in collateral continues notwithstanding its sale unless an exception applies
As a general rule, a security interest continues notwithstanding the sale of collateral. UCC § 9-315(a)(1). But this general rule is subject to several exceptions. In particular, a “buyer in ordinary course of business” (BIOCOB) takes free of a security interest created by its seller even if the security interest was perfected. UCC § 9-320(a).
Shelter Principle
Under the “shelter principle,” once a buyer acquires consumer goods free of the finance company’s security interest, any subsequent transfer of the property by the buyer to someone else was also free of the finance company’s security interest.
Disposal of collateral
When collateral is disposed of, a secured party automatically obtains a security interest in identifiable proceeds of the collateral. UCC § 9-315(a)(2).
Security interest in the check as proceeds is perfected for a 20 day period unless one of the three criteria in UCC § 9-315(d) is satisfied.
Sale of an account
Sale of “accounts” as that term is defined in Article 9 of the Uniform Commercial Code.
A sale of accounts is governed by UCC Article 9 even though the transaction is not one in which property secures an obligation. UCC § 9-109(a)(3). (There are a few exceptions to Article 9’s coverage of sales of accounts, but they are not germane to this problem. See generally UCC § 9-109(c)–(d).) Because Article 9 governs a sale of accounts, Article 9 vocabulary is applied to the sale, so that the rights of the buyer of the accounts are referred to as a “security interest,” the sold accounts are “collateral,” the seller (the garment manufacturer in this problem) is the “debtor,” and the buyer (the finance company in this problem) is the “secured party.”
Unperfected security is subordinate to perfected security
An unperfected security interest is subordinate to a perfected security interest in the same property (see UCC §§ 9-317(a)(1) and 9-322(a)(2)).
A purchase-money security interest in collateral other than inventory has priority over a competing non-purchase-money security interest (even if it was perfected before the purchase-money security interest) if the purchase-money interest was perfected when the purchaser received possession of the collateral or within 20 days thereafter. UCC § 9-324(a).
Authentication of assignment of accounts to a bank
Under UCC § 9-406(a), an account debtor with respect to assigned accounts is entitled to discharge its obligation by paying the assignor only until the account debtor receives notice of the assignment to the assignee, authenticated by either the assignor or the assignee, directing the account debtor to make payment to the assignee. Once such a notice has been received, the account debtor is entitled to discharge only by paying the assignee
Secured party disposal of secured property
After default by the debtor, a secured party may dispose of the collateral. UCC § 9-610(a). If it does so, the proceeds of that disposition will be applied first to the expenses of that process and then to the satisfaction of the debtor’s obligation to the secured party. UCC § 9-615(a). Before disposing of the collateral, however, the secured party must send the debtor a “reasonable authenticated notification of disposition.” UCC § 9-611(b). The only exception to this notification requirement is if the collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. UCC § 9-611(d).
Security interest denominated as a “lease”
Under the UCC, “[a] transaction denominated as a ‘lease’ of goods is sometimes really a lease and sometimes a sale with a retained security interest.”
Section 1-203 determines whether a transaction that is in the form of a lease nonetheless is a sale of the leased goods, with the “lessor” retaining a security interest in the goods to secure the obligation of the “lessee” to make the required payments for it. Under § 1-203, a transaction in the form of a lease creates a security interest if the lessee’s obligation to pay is not subject to termination by the lessee and the lessee has the option to become the owner of the goods for no additional consideration upon compliance with the lease agreement. UCC § 1-203(b)(4).
