Secured Transaction Flashcards
Security Interest
Under the UCC, a security interest arises when a party uses certain property as collateral to secure repayment of funds to another party. Article 2 states that any retention or reservation by the seller of the title in goods that are shipped or delivered to the buyer is limited in effect to a reservation of a security interest.
Attachment
Attachment is the process by which the security interest is created. A security interest is created by a contract between the debtor and the secured party. There are two steps required to create a security interest: (1) a written security agreement or possession of the collateral by the secured party with the intent to secure a debt; and (2) attachment of the security interest to the collateral. The security interest must be in writing and (1) be authenticated by the debtor, which means either signing a written document or executing or otherwise adopting a symbol, or (to include electronic transmissions) encrypting or similarly processing a record in whole or in part, (2) contain a “granting clause,” i.e. state that it is creating a security interest, although the granting clause need not be formal and can be in a different document; and (3) contain a description of the collateral, a description is sufficient if it reasonably identifies what is described. The description of the collateral must not be supergeneric.
A written security agreement is not necessary if the secured party has possession of the collateral. When the secured party has possession, all that is needed is an agreement, which can be oral, that the secured party is to have a security interest.
Perfection
Perfection is the process by which the secured party gives notice to the entire world of its interest. Perfection is necessary for priority purposes. A security interest is perfected if it has attached, and if all of the requirements for perfection have been met. If the requirements are met before attachment, then upon attachment the security interest is perfected. Perfection of a security interest is most commonly done by filing, possession, control, or automatic perfection.
Security interest after sale of collateral
Generally, a security interest continues after the sale of the collateral. However, there is an exception for a buyer in the ordinary course of business. A buyer in the ordinary course of business is someone who obtains the collateral in good faith, without knowledge that the sale violates the rights of another person, in the ordinary course from a seller who is in business of selling that type of goods. Under the shelter principle, a subsequent transfer by a buyer in the ordinary course of business is also free of the security interest. This applies only when a person buys goods from a person who used or bought the goods for use primarily for personal, family, or household use without knowledge of the security interest; for value; primarily for the buyer’s personal, family, or household purposes; and before the filing of a financing statement covering the goods.
security interest + UCC + lease
A transaction is under the UCC if it creates a security interest regardless of its form. A lease is really a security interest where (a) the debtor must make payments for the entire term, (b) the debtor cannot terminate the lease, and (c) the debtor effectively owns the property at the end of the lease for a nominal fee. A creditor’s retention of title to the collateral does not automatically make the transaction a lease.
Interest in other assets
A security interest automatically extends to identifiable proceeds of the collateral. To perfect a security interest, thus making it good against other creditors, a financing statement must be filed with the secretary of state, or the creditor must have possession or control of the collateral. A security interest in collateral automatically creates a security interest in identifiable proceeds from that collateral, through sale, lease, or otherwise. A security interest in proceeds is automatically perfected for 20 days, after which a filing describing the proceeds must occur, unless the proceeds are identifiable cash.
After-acquired collateral
After-acquired collateral is property obtained after the security agreement is created. A security interest will attach to after-acquired collateral if the agreement specifically says it includes after-acquired collateral. Exceptions to this are when a security agreement specifies an interest in inventory or accounts receivable will create an interest in after-acquired collateral notwithstanding the fact that there is no explicit after-acquired property clause. Another exception is that a security agreement cannot provide that it covers after-acquired consumer goods, unless the debtor acquires rights in the consumer goods within 10 days of the secured party giving value.
Default
Generally, a default occurs whenever the debtor fails to tender an obligation when due. Upon default, a secured party may reduce a claim to judgment, foreclose, or otherwise enforce the claim.
If the collateral consists of accounts receivable, the secured party may, upon the debtor’s default, notify the person obligated on the collateral to make payment to the secured party. The notification must be authenticated by the secured party or the debtor, and reasonably identify the rights assigned. Article 9 provides that on a debtor’s default, a secured creditor can repossess and sell collateral. A secured party may repossess the tangible collateral if it can be done without a breach of peace. Actions likely to lead to violence or entering a private home are considered a breach of peace.
Minor Errors in Perfection
Minor errors, which are not seriously misleading, do not invalidate a financing statement. A financing statement must contain the name of the debtor, the name of the secured party, and an indication of the collateral. Incorrectly stating the name of a debtor is considered seriously misleading unless a safe harbor applies. If a standard search logic of the records using the debtor’s correct name discloses the financing statement that would otherwise fail, the financing statement is not seriously misleading. The UCC does not forgive a situation in which a search of the records under a debtor’s correct name, using standard logic, would not disclose the financing statement in question.
Purchase Money Security Interest
A purchase money security interest can be perfected by filing a financial statement within 20 days of delivery of the collateral. This would make it superior to pre-existing security interest
A security interest is a purchase-money security interest if the funds are given to purchase the goods. A PMSI may be second in time but first in right, if the PMSI is for a fixture and a fixture filing is completed. A fixture is: (a) attached to real estate; (b) adapted to the use of the real estate; and (c) intended to be a permanent attachment. The fixture filing must be made in the county office where land records are kept, describing the land involved. A purchase-money mortgage (PMM) is a mortgage given to secure a loan that enables the mortgagor to acquire title to the property. Mortgages, to give notice, are filed in the county office where land records are kept.
Perfection by possession
Perfection by possession only applies to the following types of collateral: (1) tangible negotiable documents, (2) goods, (3) instruments, (4) money, or (5) tangible chattel paper. The secured party normally perfects by taking possession of the collateral itself. However, the Code provides for the secured party to have a third party possess the collateral on its behalf, so long as the third-party authenticates a record acknowledging that it is holding the collateral for the secured party’s benefit.
Perfection by control
A secured party may also perfect a security interest by taking control of the collateral. Taking control of the collateral applies only to: investment securities - a person has control of a certificated security in bearer form if he has possession of the security; a person has control of a certificated security in registered form if he has possession of the security; and the certificate is indorsed to the purchaser or registered in the name of the purchaser; letter-of-credit rights - a secured party has control of a letter of credit right if the issuer has consented to an assignment of proceeds of the letter of credit; deposit accounts; and automatic perfection. A security interest in a deposit account is perfected only by control. Such perfection is effective only when, and, for as long as, the secured party has control. A secured party has control of a deposit account if: the secured party is the bank with which the deposit account is maintained (this is a form of automatic perfection; all creditors of the debtor are on notice that the bank with which the debtor’s deposit account is maintained may assert a claim against that deposit account); the debtor, secured party, and bank have agreed in an authenticated record that the bank will follow the secured party’s instructions directing the deposition of the funds in the deposit account without further consent by the debtor; or the secured party becomes the bank’s customer with respect to the deposit account.
Automatic Perfection
There are limited instances in which perfection is automatic, including when the security interest is a PMSI in consumer goods. If the security interest is a PMSI in consumer goods, perfection is automatic as soon as the security interest attaches and remains effectively permanently (excluding motor vehicles and fixtures).
The UCC permits automatic perfection where assignments of accounts do not transfer a significant part of the assignor’s outstanding accounts. Unfortunately, the UCC does not provide any guidance on the meaning of “significant part.”
Priority
The general rule regarding priority is “first-in-time, first-in-right.” Among unperfected security interests, the first security interest to attach will prevail. Between two perfected security interests, the security interest with the earliest time of filing or perfection, whichever is earlier, which has continued without interruption, will prevail. A perfected security interest has priority and will prevail over an unperfected security interest.
A secured party will have priority over a lien creditor if the secured party perfects before the line creditor’s interest arises. An interest cannot be perfected until it has attached.
Proceeds
Proceeds include whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral. When collateral is disposed of, the secured party automatically obtains a security interest in the identifiable proceeds of the collateral. A perfected security interest in proceeds is automatic when the security interest in the original collateral is perfected. This perfection will only continue for 20 days, unless a filed financing statement covers the original collateral, the proceeds are collateral in which a security interest may be perfected by filing in the office where the financing statement has been filed, and the proceeds are not acquired with cash proceeds; the proceeds are identifiable cash proceeds; or the security interest in proceeds is otherwise perfected when security interest attaches to the proceeds or within 20 days thereafter.
