Secured Transactions Flashcards
When does a security interest arise
when a party (Debtor) uses certain property as collateral to secure repayment of funds to another party or the (secured Party)
A security interest is?
The creditor’s interest in the collateral
By using the property as collateral, if the debtor defaults on repayment of the funds, the creditor may:
take possession of the collateral and apply the collateral to the balance owed.
UCC Article 9 applies to
- any transaction, regardless of its form, that creates a: security interest in personal property or fixtures by contract.
- leases, if the lease if for: the entire economic life of the item. Its more like a financing transaction
- sales of: accounts receivable, chattel paper, negotiable instruments, and payment intangibles
UCC Article 9 is not applicable to:
a. landlord’s liens
b. an interest in or lien on: real property including a lease or rent thereunder.
“Goods” includes all things that are:
movable at the time of the security interest attaches.
“Goods” are further broken down into several categories depending on in what capacity and how the debtor primarily uses them:
Note: This generally includes fixtures and computer programs imbedded in goods in computers.
consumer goods
Consumer goods are those used or bought primarily for: personal, family, or household purposes.
Inventory
Inventory is goods, other than farm products, that:
are held for sale or lease or to be furnished under a contract of service or
(b) Inventory also consists of: raw materials, work in process, or materials used or consumed quickly in the course of business.
“goods, other than standing timber, with respect to which the debtor is engaged in a farming operation,” including crops, livestock, products of crops or livestock in their unmanufactured state, aquatic goods produced in aquacultural operations, and supplies used or produced in a farming operation
Farm products
Equipment: Equipment is a catch-all category, defined merely as: goods other than inventory, farm products, or consumer goods. This term usually refers to goods that are used or bought for use?
primarily in a business (e.g., machinery used in farming operations or manufacturing, tools of a mechanic or repairman, delivery trucks, forklift).
T or F A debtor may use the same goods in more than one capacity, but it is the primary use that determines the characterization.
True
Tangible intangibles
contractual obligations to hold or deliver goods or to pay money, and ownership in goods or business entities, are commonly reduced to tangible or written form; by transferring the writing, the intangibles are transferred.
Instruments, under UCC 9, means:
negotiable instruments, or any writing that evidences a right to the payment of a monetary obligation but is not itself a security agreement or lease. ie. drafts and notes as defined in Article 3,
NOTE: The writing must be “of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment.”
Documents under UCC 9 are documents of title (as provided in Article 7) which include bills of lading, dock receipts, warehouse receipts, delivery orders, and any other document which, in the regular course of business or financing, is treated as adequately evidencing that the person in possession of it is entitled to?
entitled to receive, hold, and dispose of the document and the goods it covers.
To be a document of title, a document must purport to be issued by, or addressed to, a bailee and
purport to cover goods in the bailee’s possession that are either identified or fungible portions of an identified mass.
Chattel paper
Chattel paper means a record or records evidencing both a monetary obligation and a security interest in or a lease of specific goods.
General intangibles
intangible collateral that: fails to fit into any other category. It includes things in action, payment intangibles, and software
Accounts
Accounts are right of payment of a monetary obligation,
generally for: property that has been transferred or otherwise disposed of, for services, or arising out of the use of a credit or charge card.
Investment property
Investment property includes certificated and uncertificated: securities, securities accounts and entitlements as defined in Article 8
Collateral subject to a security interest may also be in the form of proceeds. Proceeds are defined as
two kinds of proceeds?
proceeds is anything obtained from the disposition of collateral. In other words, it includes whatever is received upon the: sale, lease, license, exchange, or other disposition of collateral, including payment of insurance proceeds.
a. cash, eg. money, checks, deposit accounts, and the like, and
b. non-cash, which includes all other proceeds.
2 steps to create a security interest
a written security agreement or possession of the collateral by the secured party with the intent to secure a debt; and
b. attachment of the security interest to the collateral.
A security agreement is an agreement that creates or provides for a:
security interest in certain collateral.
What are the requirements for a valid security agreement?
The security interest must be in writing and: must be
(1) be authenticated by the debtor.
(2) must contain a granting clause. or granting language. eg. state that it is creating a security interest Note: The granting clause need not be formal and can be in a different document.
(3) must contain a sufficient description of the collateral Note: A description is sufficient if it reasonably identifies what is described [§ 9-108(a)].
authenticated means?
(a) Authentication 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.
Where the secured party has possession, all that is needed is an agreement, which can be: oral that the secured party is to have a ?
oral, that the secured party is to have a security interest. Such security interests are frequently referred to as pledges
A security agreement is generally binding and effective between the:
parties, against purchasers of the collateral, and against creditors.
A security interest in goods is a Purchase Money Security Interest PMSI if it pertains to goods that are?
are purchase-money collateral.
purchase money collateral
Goods that secure a purchase-money obligation that a debtor incurs to purchase the goods
Thus, to qualify as a PMSI, the security interest must be
in goods that are given as collateral for an obligation the debtor incurred for the purchase of the goods, and actually used to purchase the goods.
EXAMPLE: John wants to buy a $500 stove from Ed’s Appliance Emporium, but does not have $500 in cash. John pays $100 in cash and signs a promissory note to Ed’s Appliance Emporium for the remaining $400. John grants Ed’s Appliance Emporium a security interest in the stove to secure the repayment of the $400. This will be a PMSI
A debtor incurs a purchase-money obligation if the obligation is incurred:
(1) as all or part of the: price of the collateral (as when seller finances the purchase) or
(2) for value given to enable the debtor to:
acquire rights in or use of the collateral if the value is in fact so used. (like as a third party, such as a bank, finances the purchase.)
What is attachment and its legal effect?
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.
Once the security interest has attached, the secured party has all of the: enforcement rights provided by article 9 including the rights to repossess the collateral upon the debtor’s default
The security interest attaches when?
a. the secured party gives value
b. the debtor has rights in the collateral.
c. the debtor has authenticated a security agreement that sufficiently describes the collateral.
A collateral description is sufficient if it reasonably identifies what is described A description of collateral by UCC type is sufficient unless:
the collateral is consumer goods and the transaction is a consumer transaction. can’t use “all consumer goods”
NOTE: A super generic description: is not sufficient in a security agreement. cant use “all debtor’s property”
After-acquired collateral
is property obtained after the security agreement is created.
RULE: A security interest will attach to after-acquired collateral If the agreement
specifically:
says it includes after acquired collateral.
EXAMPLE: “Debtor grants to Secured Party a security interest in all of Debtor’s equipment now owned or hereafter acquired.” Equipment that the debtor acquires after the security agreement is signed will be covered by the secured party’s security interest because there is an after-acquired property clause.
A security agreement specifying an interest in inventory or accounts receivable will create an interest in after-acquired collateral even if
there is no explicit after acquired property clause
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.
EXAMPLE: Bank makes a loan to Consumer. Consumer signs a security agreement that covers “all of Consumer’s furniture, now owned or hereafter acquired.” This agreement will be ineffective to cover the after-acquired furniture.
T or F A security agreement may also provide that the collateral secures future advances [§ 9-204]. For instance, a security agreement may secure all advances under a revolving credit agreement.
True
A security interest in collateral automatically extends to:
identifiable proceeds of the collateral.
A secured party’s security interest in collateral will continue regardless of a sale, lease, or other disposition of the collateral, unless:
A secured party may end up with both:
the secured party authorized disposition of the property free of the security interest.
a security interest in the original collateral and the identifiable proceeds of the collateral.
Perfection establishes a secured party’s rights in the collateral against third parties. A security interest is perfected if:
it has attached and if all of the requirements for perfection have been met.
What are the common Methods of perfection depending on the type of collateral:
Perfection of a security interest is most commonly done by: (method)
a. filing of a financing statement
b. possession of the collateral
c. control of the collateral; or
d. automatic perfection
Filing a financing statement in a public office is the most common way to perfect a security interest.
- Filing can be done:
a. usually in the:
b. in limited circumstances (when the collateral consists of fixtures), in the:
secretary of state’s office
office of the county clerk (land records) in the county where the land to which the collateral is attached is located.
T or F If the secured party is perfecting by filing a financing statement, the security interest is perfected only if the financing statement is filed in the correct office in the correct state
True
The law governing perfection of a security interest is:
the law of the jurisdiction where the
debtor is located.
(1) A debtor who is an individual is located at the individual’s
(2) A debtor that is a non-registered organization is deemed to be located at?
(3) A debtor that is a registered organization is deemed to be located in?
(1) principal residence.
(2) its place of business. If the debtor has more than one place of business, it is deemed located at its chief executive office.
(3) its state of organization. NOTE: (a) A registered organization is one as to which a state must maintain a public record showing the organization to have been organized.
A financing statement must include:
(1) the name of the debtor
(2) the name of the secured party
(3) a description of the collateral covered by the financing statement
A financing statement sufficiently describes the collateral it covers if it provides [§ 9-504]:
1) a description of the collateral that reasonably identifies what is described including by UCC type. “all inventory” “all equipment”
2) an indication that the financing statement covers all assets or personal property
a) Note that this rule differs from that of security agreements. A supergeneric collateral description in a financing statement is sufficient.
T or F A financing statement must be authorized by the debtor.
(1) A security agreement is authorization for the financing statement.
True
What are fixtures and how are they perfected?
Fixtures are goods that are so related to real property that an interest in them passes under real estate law
perfected by a fixture filing
In addition to the requirements of a financing statement mentioned above, a fixture filing must also?
(a) indicate that it: covers fixtures
(b) indicate that it is to be: filed in the real property records.
(c) provide a description of the: real property to which the fixture is related
(d) provide the real property owner’s name, if:
different than the article 9 debtor.
If a financing statement is filed in the wrong place, does not include the required information, or is not authorized by the debtor, it is ineffective. An ineffective financing statement does not perfect a security interest.
However, A financing statement containing minor errors will still be effective, unless:
the errors make the financing statement seriously misleading.
Failure to provide the name ( or correct name) of the _________ is seriously misleading
What is the exception
the name of the debtor
Standard search logic exception: If a search of the records of the financing office under the debtor’s correct name, using the office’s standard search logic, would disclose a: financing statement that fails sufficiently to provide the name of the debtor, the financing statement is not misleading.
Changes that can affect the effectiveness of a financing statement
Proceeds temporary automatic perfection only 20 days
Name Changes
debtor moves to another state
Proceeds: A perfected security interest in proceeds is provided by the Code automatically when the security interest in the original collateral is perfected, unless the security agreement specifically provides that proceeds are not covered. This automatic perfection for proceeds continues for only 20 days after attachment (i.e., receipt of the proceeds by the debtor), unless:
(1) 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 in which the financing statement has been filed, and the proceeds are not acquired with cash proceeds;
2) the proceeds are identifiable cash proceeds; or
3) the security interest in proceeds is otherwise perfected when: the security interest attaches to the proceeds or within 20 days thereafter. (eg. can update financing statement to add the collateral)
If a debtor changes his name, resulting in a financing statement that is seriously misleading, the financing statement will only be effective to perfect security interests in collateral acquired within ______ ______ of the name change, unless an amendment to the financing statement correcting this is filed within four months of the name change
four months
A financing statement can also become ineffective if the debtor moves [§ 9-316]. If the debtor moves to another state, the secured party must file a new financing statement in the new state within:
If the secured party files in the debtor’s new state, the security interest is continuously perfected, and its priority will relate back to the date it filed in the debtor’s original state.
If the secured party does not file in the debtor’s new state within four months of the debtor’s move, the secured party becomes?
four months of the debtor’s move.
becomes unperfected in all of the collateral covered by the financing statement.
A filed financing statement is effective for five years after the date of filing [§ 9-515].
(1) If the financing statement expires without a continuation statement being filed, the financing statement will lapse. Upon lapse the financing statement becomes?
A continuation statement must be filed within _____ months before the expiration of the five-year period.
What is the effect of a continuation statement?
Upon lapse, the filing statement becomes ineffective, and any security interest that was perfected by the filing statement becomes unperfected.
6 months before expiration
A continuation statement extends the effectiveness of the original filing statement for another five-year term from the date the financing statement would have become ineffective absent the filing of the continuation statement.
note: Continuation statements may be filed repeatedly to extend the effectiveness of the financing statement.
A secured party may also perfect a security interest by taking possession of the collateral. Perfection by possession only applies to the following types of collateral:
(1) tangible negotiable documents
(2) goods
(3) instruments (eg. promissory note)
(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.
A secured party may also perfect a security interest by taking control of the collateral.
Taking control of the collateral applies only to what types of collateral? Mnemonic LIED
Letter of credit rights
Investment securities
Electronic chattel paper
Deposit accounts
A person has control of a certificated security in bearer form (perfection) if:
he has possession of the security. (security certificate with no name on it) eg. bearer has 100 shares of McDonalds
A person has control (for perfection) of a certificated security in registered form if he has possession of the security, and:
(normally in debtor’s name) then
the certificate is endorsed to the purchaser or registered in the name of purchaser (secured party)
A secured party has control (for perfection) of a letter-of-credit right if the issuer has:
consented to an assignment of proceeds of the letter of credit.
(1) 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?
1) 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.)
2) the debtor, secured party, and bank have agreed in an authenticated record that the bank will follow the secured party’s instructions directing the: the disposition of the funds in the deposit account without further consent by the debtor; or
3) the secured party becomes:
the bank’s customer with respect to the deposit account. (signing the debtor’s bank account in the name of the bank)
There are limited instances in which perfection is automatic. The most common is when the security interest is a PMSI in ________ _________, which perfects upon attachment.
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
What is another instance where automatic perfection occurs?
Automatic perfection also sometimes occurs in other situations, including the assignment of accounts or payment intangibles that does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts or payment intangibles.
T or F If a security interest is perfected by one method, and later perfected by another method, without an intermediate period of: being unperfected, the security interest is perfected continuously.
True
The general rule regarding priority under Article 9 is “first in time, first in right.”
2. Among unperfected security interests:
the first security interest to attach will prevail.
Between a perfected security interest and an unperfected security interest: who will prevail or have priority?
a perfected security interest will prevail.
Between two perfected security interests, which security interest will prevail in priority
the security interest with the earliest time of filing or of perfection, which has continued without interruption, will prevail
first to file or perfect rule
T or F When the collateral is an instrument or chattel paper, the secured party who perfects by taking possession will have priority over the secured party who perfects by filing.
True
A perfected PMSI will prevail over a conflicting security interest if the PMSI is perfected when the debtor receives:
possession of the collateral or within 20 days thereafter. In other words, if the requirements of § 9-324 are met, the holder of a PMSI has “second-in-time, first-in-right” priority.
However, when the collateral is inventory, the purchase-money PMSI secured party has to take additional steps to acquire priority over the first-in-time secured party. The most important extra steps are:
(1) the purchase-money secured party must notify the:
first secured party in an authenticated record that it expects to obtain a PMSI in the debtor’s collateral. AND
(2) the PMSI must be perfected at the time:
the debtor receives possession of the inventory
Who will prevail: lien creditor v secured party
The first-in-time, first-in-right rule applies to priority contests between lien creditors and secured parties
Lien Creditor
A lien creditor is a creditor that has acquired an interest in the property by: attachment, levy, or similar judicial collection procedures, and also a bankruptcy trustee.
a secured party will have priority over a lien creditor if the secured party:
(1) perfects before the lien creditor’s interest arises; or
(2) files a financing statement and evidences a security agreement (by authentication, possession, or control) before the lien creditor’s interest arises.
PMSI v lien creditor priority
If the PMSI is perfected within 20 days after the debtor: receives the collateral, the PMSI will take priority over an intervening lien creditor.
“_________” refers to goods that are physically united with other: goods in such a manner that the identity of the original goods is not lost.
Accession
The priority of a security interest in an accession is determined in the same manner as with any other collateral, except that a security interest in an accession is subordinate to:
a security interest in the whole, which is perfected by compliance with the requirements of a certificate of title.
“__________ _______” are goods that are physically united with other: goods in such a manner that their identity is lost
Commingled goods
note: A security interest does not exist per se in commingled goods, but attaches to the product that results when goods become commingled goods.
Multiple security interests in commingled goods will rank equally in proportion to the:
value of the collateral at the time it became commingled goods.
General Rule: A security interest survives a sale of the collateral. What are the exceptions?
(1) The secured party: authorizes the sale free of the security interest.
* *(2) The buyer is a: buyer in the ordinary course of business (BIOCOB) buyer will take free of security interest
(3) The sale qualifies as a consumer-to-consumer or “garage sale” exception.
(4)A buyer of chattel paper has priority over a security interest in proceeds of inventory subject to a security interest
To determine whether a buyer is a buyer in the ordinary course of business BIOCOB, look at the business of the seller/debtor. A BIOCOB is a person who:
1) buys in good faith
2) without knowledge that the sale: violates the rights of another person in the goods.
3) in the ordinary course of business; and
4) from a person in the business of selling goods of that kind.
takes free of SI
If a sale qualifies as a consumer-to-consumer or “garage sale”, the buyer will take free of the security interest. This exception applies only when a person buys goods for personal, family, or household use from someone who used the goods for that purpose.
Such a buyer takes free of a security interest created by his seller if:
1) buys for value
2) without notice/knowledge of the security interest
3) before a financing statement is filed.
note: Remember that a PMSI in consumer goods can be perfected without filing a financing statement.
A buyer of chattel paper has priority over a security interest in proceeds of inventory subject to a security interest if:
(a) the buyer buys in good faith and in the ordinary course of business;
(b) the buyer gives value and takes possession or control of the chattel paper; and
(c) the chattel paper does not indicate that it has been assigned to another party.
When the collateral consists of a fixture, the creditor with a security interest in the fixture will want priority over the creditor who holds the mortgage on the real property to which the fixture is attached. The only way that such a creditor can obtain priority over the mortgagee is by:
filing a fixture filing
note: A secured party with priority over a mortgagee has the right to remove the fixture from the real property upon the debtor’s default
The general priority rule is first-in-time, first-in-right. Therefore, if the mortgage is recorded before the security interest in the fixture is:
perfected by a fixture filing, then the mortgage has priority.
, if the security interest in the fixture is a PMSI, then second-in-time, first-in-right priority applies, so long as the security interest is perfected by:
a fixture filing before the goods become fixtures or within 20 days thereafter.
Generally, a default occurs whenever the debtor fails to tender an obligation when due. Thus, if a debtor fails to meet an installment payment, there is a default.
Upon default, a secured party may:
reduce a claim to judgment, foreclose, or otherwise enforce the claim.
Upon default, a secured party has the right to repossess tangible collateral if:
it can do so without
a breach of the peace.
A breach of the peace is not defined. However, what is conduct from the secured party that would be considered breach of peace?
An act that is likely to lead to violence will be considered to breach the peace.
An entry into a home to repossess collateral will always be considered a breach of the peace.
EXAMPLE: Bank hires Repo, Inc. to repossess the inventory of Sam’s Shoes. The Repo, Inc. employee responsible for the repossession takes a gun with him to Sam’s Shoes, and shows the gun when he requests entry to Sam’s Shoes. Bank’s repossession will likely be held to breach the peace.
If the secured party cannot obtain the collateral without a breach of the peace, the secured party will be required to
bring an action for replevin. A court will issue a writ of replevin, under which the sheriff can seize the property for the secured party.
The debtor has a right to redeem the collateral by tendering to the secured party the: amount of the obligation including interest together with reasonable expenses and attorney’s fees caused by the default. There is no right to waiver of the debtor’s redemption rights under the UCC unless
all parties to the security agreement agree to the waiver in: writing and do so immediately following the default. It may not occur in advance of default, or at the inception of the secured transaction.
After default and repossession, a secured party may sell, license, or otherwise dispose of any or all of the collateral in its present condition. All aspects of disposition must be:
commercially reasonable and disposal may occur by public or private sale
Before disposing of collateral, the secured party must send to the debtor, to any filed secured parties, and to any other person from whom the secured party has received notification of an interest in the collateral, a:
reasonable authenticated notice of disposition. (must be in writing and signed) Notice is an element of commercial reasonableness.
Notice is an element of commercial reasonableness. Therefore, if no notice is sent, or if the notice is
not sent within a: reasonable time before disposition, the sale may be considered commercially unreasonable. 10 days is always enough notice in commercial transactions.
Commercial reasonableness: In a non-consumer transaction, the notification must include [§ 9-613(1)]:
In a consumer-goods transaction, the notice must additionally include:
(a) a description of the debtor and secured party;
(b) a description of the collateral;
(c) the method of intended disposition;
(d) a statement that the debtor is entitled to an accounting of all unpaid indebtedness; and
(e) the time and place of a public disposition or the time after which the collateral will be sold in a private disposition.
in a consumer goods transaction the notice must additionally include
(a) a description of any liability for a deficiency;
(b) a telephone number the debtor can call to obtain the amount required to redeem the collateral; and
(c) a telephone number or mailing address from which additional information is available.
If the collateral does not bring enough at sale or collection to pay all outstanding obligations, the secured party is entitled to a judgment for the deficiency, which is the difference between:
the amount of debt and the foreclosure sale proceeds.
If the sale is conducted in a commercially unreasonable manner: however, the deficiency can be _______.
reduced
In a non-consumer transaction, the deficiency can be reduced according to the “rebuttable presumption rule.” If the debtor proves that the sale was commercially unreasonable, then the deficiency will be reduced to:
How can the secured party rebut the presumption?
the difference between the outstanding amount of the loan and the amount that the collateral would have sold for in a commercially reasonable sale.
NOTE: For the purpose of this calculation, the amount that the collateral would have sold for in a commercially reasonable sale is: presumed to be the outstanding amount of the debt thus the deficiency would be 0.
The Secured Party can rebut the presumption with evidence that the collateral is worth less than the outstanding amount of debt.
