Secured Transactions Flashcards
1
Q
Secured transaction
A
agreement between debtor and accreditor that debtor’s personal prop will serve as collateral for the loan
If debtor defaults, creditor has all rights to repossess the collateral and use it to satisfy the debt
2
Q
attachment
A
arrangement linking debt to a particular piece of collateral; how security interests are created; how the prop becomes liable for the debt; how creditors get repossession rights; all you need to get enforcement rights, no perfection needed
3
Q
perfection
A
providing notice of a security interest that allows creditor to establish a claim superior to other parties who may wish to claim an interest in the same collateral; Need attachment + perfection = to have good standing in a priority dispute
4
Q
priority
A
process of resolving priority disputes between multiple claimants to same collateral
5
Q
enforcement
A
rights and duties of a secured party who enforces its interest in collateral
6
Q
Steps for answering a question
A
- Who has priority?: 6-step approach
- Enforceable interest?: attachment
- Creditor perfect?: perfection
7
Q
Who has priority? 6-step approach:
A
- Determine that you have a secured transactions problem - “security agreement,” “security interest”
- Move to the call of the question, identify and classify the property at issue
- Determine which parties have or claim an interest in the collateral
- For each security interest, assess:
- Attachment: Has that security interest attached? To which collateral? When?
- Perfection: Has the secured party perfected its security interest? When? How? Has anything happened that might destroy perfection? - Use this information to find the correct priority rule
- Apply the priority rule to the fact and resolve the dispute
8
Q
security interest
A
interest in personal prop or fixtures that secures payment or perf of an obligation
9
Q
security agreement
A
Foundation of a security interest; contract that creates a security interest
10
Q
secured party
A
creditor who obtains security interest in debtor’s prop
11
Q
obligor
A
party that must pay or perform the obligation that collateral secures; usually same person as debtor
12
Q
debtor
A
party who has an interest other than security interest in the collateral; Usually debtor owns the collateral; usually same person as obligor
ex: friend helps you by co-signing loan and her car secures the loan - she is the debtor (you are the obligor and she is a secondary obligor)
13
Q
Article IX covers…
A
Governs transactions, regardless of form, that create a security interest in personal prop or fixtures by contract
14
Q
Does article IX apply to real estate/prop?
A
No, except to fixtures
15
Q
Agricultural liens
A
interest in farm products that secures payment or perf of an obligation for goods or services furnished with respect to farming ops or for rent on real prop in connection with a farming opp; covered by article IX
16
Q
Are sales of rights to payment covered by article IX?
A
Certain ones:
1) Chattel paper
2) Promissory notes
3) Accounts
4) Payment intangibles
Treat the buyer as a secured party and seller as the debtor.
Meaning buyer must perfect its interest in purchase collateral in order to have a superior claim.
17
Q
Are consignments covered by article IX?
A
Certain consignments
18
Q
collateral
A
prop subject to a security interest
19
Q
how to classify collateral?
A
Look at principal use at hands of debtor
20
Q
Goods
A
anything movable at the time the security interest attaches
But also includes fixtures, standing timber, unborn animals, growing or unharvested crops, manufactured homes
21
Q
Consumer goods
A
goods acquired primarily for personal, family or household purchases; subcategory of goods
Ex: electronics, furniture, boats, home appliances
22
Q
Farm products
A
crops, livestock, supplies used or produced in farming ops; subcategory of goods
Ex: animal feed, fertilizer, eggs, veggies
Not farm products: farming equipment—we treat this as equipment
23
Q
Inventory
A
Goods that are not farm products that are held for sale or lease. Also includes goods furnished under service contract, raw materials, works in progress, or materials used or consumed in business. Subcategory of goods.
Ex: anything out on shelf at stores
24
Q
equipment
A
Goods that don’t fit into other defs. Subcategory of goods.
Machinery, delivery vans, office equipment, farming equipment
25
Fixtures
Subcategory of goods???
If attached to real property in such a way that an interest arises in them under real prop law. Basically, once attached not going to take it with you when you move; kind of permanent.
Ex: toilet, septic tank, chandeliers (vs. curtains)
26
Can classifications change?
Yes
27
Rights to payment
right to be repaid money by a third party that debtor uses as collateral for a loan.
Look for transaction where 3rd party owes money to debtor and that right to payment is the collateral for the loan.
Start by ruling out chattel papers or instruments. If not either of those, most likely an account. But those don’t encompass right to be repaid by a loan of money, so if it’s that, then consider payment intangibles.
28
Instrument
subcategory of right to payment
includes promissory notes, checks, and drafts(?). Governed by article 3 of UCC.
If you see a check or a promissory note and that is collateral for the loan, it’s an instrument.
29
Chattel paper
subcategory of right to payment
record with 1) a monetary obligation and 2) a security interest or a lease
Ex: article 9 secured transaction—if that contract used as collateral for diff loan
Ex: if landlord uses your apartment lease as collateral for loan
30
Accounts
subcategory of right to payment
Right to be repaid money for prop sold, leased, or licensed, or for services rendered. Also includes a company’s accounts receivable, right to be repaid under insurance, and amounts owing on credit cards.
31
Payment intangibles
subcategory of right to payment
Catch-all category. A right to be repaid a loan of money that does not itself qualify as an instrument or chattel paper.
Accounts does not include rights to be repaid a loan of money.
32
Documents
documents of title that give holder ownership rights in goods held by a bailee. Someone is holding the goods and there is a document representing the ownership rights to the goods.
Ex: bills of laiding(?) Warehouse receipts; Investment prop, r(?) certificated and uncertified securities, stocks and bonds
33
Deposit accounts
bank account (Vs. account: the right to payment for goods sold or services rendered)
34
Commercial tort claims
Claims possessed by an org or individual that arose in course of org’s or individual’s business.
Does not include claims for personal injury or death.
35
Letter of credit rights
right to payment for perf under a letter of credit
36
General intangibles
Residual category.
Ex: Blueprints, copyrights, trademarks, software
37
Attachment requirements
Violet Roses Smell Amazing
1. Value
2. Rights in the collateral
3. Security agreement
38
Value requirement for attachment
- Typically given by secured party—the loan that’s underlying secured transactions
- Can be given by providing the samed(?) consideration needed for the contract
- But no new value needs to be given
- Binding commitment to extend credit in the future is also value (line of credit)
- May provide for future advances
39
Rights in the collateral requirement for attachment
- Debtor must have this
- Often draws from property/sales law if complicated
- Security interest only attaches to the rights the debtor has in the collateral. Ex: if it’s a leasehold, joint tenants, etc.
- Thieves cannot grant security interests in stolen goods. But if debtor has voidable title to goods, may still have power to transfer good title to good faith purchaser for value. Then debtor can create an enforceable security interest. Secured party qualifies as a good faith purchaser for value.
- May come up in context of after acquired prop (prop acquired after loan signed). Security interest can attach, but does not occur until debtor obtains rights in the collateral.
40
Security agreement requirement for attachment
Most often, an authenticated security agreement describing collateral.
If not, secured party can get possession or control pursuant an oral or unauthenticated agreement. Could also transfer possession or control of the collateral to the secured party and that would satisfy this component. Must be pursuant to a security agreement. Person in possession or control must act with reasonable care wrt the collateral, must keep it identifiable, must relinquish it once obligation satisfied, and can charge debtor for reasonable expenses for storing and maintaining it.
41
Needed components for an authenticated security agreement describing the collateral:
RAD:
Record:
- Does not need to be written, but stored in a way that is retrievable (like email)
Authenticated (by the debtor):
- Signing, whatever symbol you’d attach to show intent of debtor to be bound
Describe (the collateral):
- Standard: Must reasonably ID the collateral.
- -> Ex: “all of the debtor’s inventory”; serial number; your Mazda (if you only have one; all the jeweler’s Rolex watches.
- -> Not ex: some of the Rolex watches; my favorite Rolex watches…
- Exception: For consumer goods and commercial tort claims, need more particularity.
- -> Ex: “all of my consumer goods” is NOT sufficient
- A super generic one (like all of the debtor’s assets) not reasonable.
- -> But fine when describing collateral in financing statement.
42
Possession vs. control:
Possession: If you can hold it
Control: Things you can’t hold
43
After-acquired prop
Prop acquired by debtor after security interest attaches (after loan is closed)
44
After-acquired prop rule re: attachment
Because a security interest only attaches to collateral described in security agreement, a creditor that wants to have a security interest in prop acquired by debtor after agreement authenticated, they must include an after-acquired prop clause.
Language: “all of the debtors existing and after-acquired…,” “all of the X now owned or hereafter acquired”
If no reference to it, then gen rule is that interest only attaches to collateral that existed at time agreement executed. Exception: in most states, agreement that describes inventory or accounts, rebuttable presumption that it includes after-acquired inventory or accounts.
45
Accessions
goods physically united with other goods so that ID of original goods is not lost
Ex: security interest in car stereo installed in car, stereo now accession to the car
46
What happens if accession?
if collateral becomes this, security interest not lost, it continues in the accession
Does it expand it? Look to terms of security agreement to see whether lender with security interest in prop to which accession is united obtains a security interest in rest of the goods.
47
Comingled goods
Also united, but ID is lost.
48
What happens if comingled goods?
Security interest does not continue in OG goods when comingled, but will attach to larger product/mass that results.
Ex: Security interest in flour and eggs, mixed together to make cookies. Interest in flour/eggs will not continue. Creditors have proportional interest in cookies that resulted.
49
Proceeds
Whatever results when collateral sold, leased, licensed, exchanged, or otherwise disposed of. Not just money.
50
Rule for proceeds and attachment:
If security interest attaches to original collateral, also attached to proceeds automatically (whether stated or not)
51
Purchase money security interest (PMSI)
Special type of security interest subject to its own perfection and priority rules.
Qualifies as one only if collateral is goods or software.
Has two components:
1. Value that allows debtor to acquire goods or software
2. And the goods or software that’s acquired secures the loan
52
Lender PMSI
lender loans money to debtor for them to acquire goods. Value must actually be used to acquire the goods. Lender takes security interest in those same goods to secure the loan.
53
Seller PMSI
applies to goods bought on credit
54
Article 9 consignment is treated as a
PMSI in inventory
55
Dual status rule
Applies to partial PMSI. For non-consumer goods transactions, business transactions: partial PMSI are permitted.
UCC does not specify a rule for consumer goods transactions, so courts can decide whether to apply the dual status rule, or they can conclude that it destroys the PMSI status if other collateral associated with the transaction.
56
To be perfected, a security interest must first...
attach to the collateral, always.
57
Methods of perfection
Famous People Can't Avoid Attention:
1. Filing
2. Possession
3. Control
4. Alternate state/fed perfection systems
5. Automatic perfection
58
Filing process
File a financing statement in the central filing office of the appropriate state
59
Filing applicable to...
Applicable to perfect interests in all collateral except deposit accounts, money, letters of credit and collateral subject to other methods of perfection (like state cert of title law)
Deposit accounts and cars = most commonly tested; can’t file a financing statement for those
Exception: cars that are inventory can be perfected by filing
60
Where do you file?
Often secretary of state’s office.
Go to state where debtor is located. If corp, located in its state of incorp. If not registered org, look to state in which it operates its business. If multiple, look to chief exec office.
Individuals: in state of their principal residence.
If filed in wrong location, not perfected.
Exception: if lender taking security interest in real prop related collateral, file it in the local real prop records in county where prop located. Includes fixtures, as extracted collateral, oil, gas, timber to be cut.
61
Financing statement required info
1. Name of debtor
2. Name of the secured party
3. Description of the collateral
Additional reqs for real property-related collateral:
1. Indicates it covers this type of collateral
2. Place to note you are filing it in local real prop records
3. Must describe real prop to which collateral relates
4. Name record owner of real prop if debtor is not person who as interest in the real prop
5. Describing the land??
6. [If mortgage, can just record that in the real prop records and this satisfies this if it has all info listed here, except does not need to note its filed in the local real prop records]
[if any of this info is missing, secured party is not perfected]
Required but non-essential info: if you miss one of these things, still perfected:
1. Addresses for both debtor and secured party
2. Indication of whether debtor is individual or org
62
Filing authorization
debtor must authorize a financing statement in an authenticated record; debtor does not need to sign, but must authorize the file
If debtor authenticates security agreement, that counts and authorizes secured party to file financing statement
Failure to obtain this can result in secured party being liable for actual and statutory damages.
63
Details regarding debtor's name in filing
Must contain correct legal name:
- If org: use names on articles of incorp or last public organic record filed with state. If secured party uses debtor’s trade name NOT GOOD.
- Individuals:
- -> Majority: If debtor has non-expired driver’s license or state issued ID, it’s the name on that doc. Ignore legal filings, passports, birth certs. If no state issued ID, revert back to gen principle that we use legal name of debtor
- -> Minority: driver’s license or state ID is safe harbor, but other names may qualify too
64
Describing the collateral in the filing
2 options:
1. Use same types of descriptions used for the security agreement
2. But unlike security agreement, can have a super generic description (ex: all assets; all personal prop --> enough to perfect)
Does not need to mention proceeds, after-acquired prop or future advances
Remember you need a description in both security agreement and financing statement for attachment and perfection. Can’t have perfection without attachment.
65
How do minor errors in financing statement affect perfection?
Minor errors do not affect perfection unless they make financing statement seriously misleading.
Errors in debtor’s name almost always seriously misleading. Exception: If the search for debtor’s correct name would uncover the financing statement with the error, then not seriously misleading. Ex: forgetting the middle initial, punctuation, etc.
66
What if the filing office makes a mistake in the financing statement?
Should refuse a financing statement that lacks the required info or if debtor fails to pay filing fee or submit the sheet in improper manner.
If filing office arbitrarily refuses to accept a financing statement or tech glitch, we treat it as having been filed, still perfected. Exception: ineffective against a purchaser or security party who gave value in reasonable reliance upon absence of the record from the files.
If filing office indexes record inappropriately --> no effect, still perfection.
67
Duration of financing statements
Lapse 5 years after date of filing unless continued.
To continue, file a continuation statement within 6 months before it lapses.
If lapses, secured party loses perfection. Can file a new financing statement, but may lose their place in priority context.
When obligation is paid back, termination statement voids the financing statement.
68
Possession requirements (for perfection)
in tangible collateral, may be perfected if secured party takes possession; Only way to perfect security interest in money
Need actual physical possession of the prop
Ex: money, goods, instruments, negotiable docs, and tangible chattel paper
As soon as they have possession, it’s perfect and will remain so as long as secured party retains possession
Exceptions that allow them to remain temp perfected even if they lose possession
69
Control requirements (for perfection)
can perfect certain intangible collateral by taking control; Only way to perfect security interest in deposit accounts and letter of credit rights
Deposit accounts, investment prop, electronic docs, electronic chattel paper, letter of credit rights
To obtain control over deposit account:
1) If secured party is bank that has the deposit account (so lender and bank are same party), bank auto has control
2) Secured party, bank and debtor can agree in authenticated record that lender (secured party) has control over the deposit account (controlled agreement). Secured party can now make decision over the account.
3) secure party can become bank’s customer with respect to the deposit account.
70
Alternate state/fed perfection systems
When another statute governs how a security interest is perfect, must follow the rules of that other statute; If one of these apply, any other perfecting method will be ineffective
Most likely: perfection under a state cert of title statute
Applies to vehicles in that state that have a title. Exception: cars that are inventory can be perfected by other means, like financing statement covering inventory.
Must perfect by noting the security interest on the cert of title.
71
Automatic perfection
Upon attachment
Most common: PMSI in consumer goods. Also casual or isolated assignments of accounts that do not transfer a significant part of the outstanding accounts receivable. Also sales of payment intangibles and promissory notes.
Exception: when cert of title statute governs
72
If debtor changes legal name…
If it causes the financing statement to become seriously misleading, 4 month window to discover the change and file an amendment to financing statement listing debtor’s new name.
If fails to do that, collateral acquired after 4-month expiration date is not covered by financing statement, but everything acquired before and during 4-month window remains perfected under original financing statements.
73
If debtor moves out of state...
Will remain perfected for 4 months after move, unless it was already going to lapse earlier. Will cover collateral purchased within that 4 month period, but must refile in new state within that 4 month window to stay continuously perfected (important for priority).
If failure, security interest ceases to be perfected, lost prospectively, and when priority dispute against another secured party or purchaser for value, security interest deemed to have never been perfected (retroactive). Can file new financing statement, but priority dates from then.
74
If collateral itself moves out of state...
Less of a big deal since what matters is the debtor, that’s where we file.
If debtor still owns the collateral, no refiling necessary. But if collateral is transferred to new debtor out of state, secured party has one year to file a financing statement listing new debtor.
If failure, security interest ceases to be perfected, lost prospectively, and when priority dispute against another secured party or purchaser for value, security interest deemed to have never been perfected (retroactive). Can file new financing statement, but priority dates from then.
75
If secured party perfected by possession and then return possession to debtor…
Perfection doesn’t happen again until it’s regained. Date of regaining possession is what’s used in priority dispute.
Exception: if it’s an instrument, negotiable doc, a certificated security, or goods stored by bailee, can give it back to debtor for limited purposes: to sell, exchange, or to enforce debtor’s rights in the collateral. Then temp perfected for 20 days. Within those 20 days, must file financing statement or repossess to remain continually perfected.
76
Proceeds attachment rule
automatic, whether or not security agreement lists proceeds
77
Proceeds perfection rule
initially perfected for 20 days, and may be perfected afterwards in some circs. Lapses unless one of these three circs apply:
1) Secured party can amend financing statement, or original one is broad enough to encompass proceeds. Then perfected beyond 20 days. Perfecting independently in the proceeds.
2) Cash proceeds rule: if collat sold, licensed, leased, or otherwise disposed of and that generates cash proceeds, perfection continues indefinitely as long as remain identifiable (ex: segregated bank account)
3) Same office rule: Perfected as long as original financing statement remains effective when 3 elements present:
1. financing statement covers original collat
2. proceeds are collat in which the security interest may be perfected by filing in same office as original financing statement, and
3. proceeds are not acquired with cash proceeds
- So basically look for collat that can be perfected by filing, turning into proceeds that can also be perfected by filing.
- Watch out for any time the collat is bought with cash proceeds…safe office rule DOES NOT apply then
78
Proceeds priority rule
Dating from time of perf in original collat if they have remained continuously perfected. If continuously perfected, can measure status based on time of filing or perf as to the original collat.
Exceptions:
- Proceeds of PMSI in inventory
- Proceeds of non-filing collat: if collat of type typically perfected other than by filing, priority continues in proceeds provided that interest is perfected and proceeds are either cash proceeds or same type of collat as original collat
79
Unsecured creditors
Those without a security interest in the collat. They have no rights against the prop, but likely contract rights against the debtor.
Can obtain rights in prop by getting security interest by agreement, or lien (non-consensual) on the collat. So if see unsecured creditor obtain judgment against debtor and execute, levy, or get lien on prop, that execution makes them a lien creditor. Liens can be judicial or statutory.
80
How to treat purchaser of chattel paper, promissory notes, accounts or payment intangibles:
Remember to treat this as secured transaction who has just gotten an attached security interest. Look for perfection. Pay attention to auto perfection rules.
If no perfection, seller or debtor then has rights in collat sufficient to grant security interest to another party.
81
Perfected security interest v. perfected security interest over any collat (neither is a PMSI)
First in time to file or perfect takes priority
82
Perfected security interest v. unperfected security interest over any collat
perfected one beats unperfected
83
Unperfected v. unperfected
first one to attach or become effective takes priority
84
Security interest v. judicial lien creditor in any collat
Perfected security interest > lien creditor
Lien creditor > unperfected security interest
- Exception: filed but unattached security interest – if debtor has authenticated security agreement listing collat and financing statement filed, but secured party has not yet given value, still > lien creditor
85
Statutory lien vs. security interest
Statutory lien > security interest (even if perfected) as long as…
- Effectiveness of lien depends on lien-holders possession of the goods
- Lien secures payment or perf of obligation for services or materials furbished in ordinary course of person’s business
- And statute does not provide otherwise
86
Priority over future advances: Secured party v. secured party:
First party to file or perfect wrt future advances, even if they have knowledge of competing security interest when future advances is made
87
Priority over future advances: Secured party v. lien creditor:
If secured party’s advance made within 45 days of lien creditor’s lien arising, security party > lien creditor. If made more than 45 days after they become a lien creditor, lien creditor > secured party, unless advance made without knowledge of the lien or pursuant to a commitment entered into without knowledge of the lien.
88
Secured parties v. buyers
In general, ask did buyer take collat free of security interest or subject to it?
89
Buyer v. perfected security interest
In general, buyer v. perfected security interest, unless secured party authorizes sale free and clear of security interest, buyer takes subject to a perfected security interest.
But exceptions:
- Buyer in ordinary course of business (BOCB)
- Garage sale/consumer-to-consumer exception
90
Buyer in ordinary course of business exception
Buyer takes free of security interest even if perfected and even if they know about security interest if…
- Buyer buys goods from a merchant
- In the ordinary course of merchant’s business
- Buyer acts in good faith
- And without knowledge that sale violates rights of others in same goods
- And seller must be engaged in selling goods of the kind, and not be a pawnbroker
91
Garage sale/consumer-to-consumer exception
buyer of consumer goods will take free of security interest even if perfected if they
- buy consumer goods for value,
- for own personal, family, or household use,
- from a consumer seller
- without knowledge of security agreement
- unless secured party has filed financing statement covering goods before purchase occurred
Remember that consumer goods are auto perfected (like PMSI), so this rule allows purchaser of consumer goods to take free of a security interest if secured party relied on auto perfection.
92
Buyer v. unperfected security interest
unless secured party authorizes sale free and clear of security interest, buyer takes subject to
Buyer will take free of an unperfected security interest if he:
- Gives value
- Receives delivery of the collat
- With knowledge of preexisting interest
BOCB and garage sale exceptions technically apply here too.
93
if you have buyer taking subject to a security interest and then after sale secured party makes future advance to debtor and debtor is the seller in the sale transaction...
buyer takes free of future advance if secured party had knowledge of buyer’s purchase when it made the advance or if the future advance is made 45 days or more after that purchase
94
Secured party v. buyer of chattel paper or instruments
Remember, sales of chattel paper and promissory notes treated as secured transactions and assume attachment has occurred
Usually possession a better way to perfect
Purchasers or secured parties who take possession of chattel paper or instruments without knowledge of competing security interest will often have priority over competing secured parties
Basically we give a leg up to people who perfect by possession
95
Secured party v. transferee of funds
Rule: transferee of money or funds from a deposit account (person who received money subject to a security interest) takes free of security interest unless transferee acts in collusion with debtor to violate rights of secured party
96
Secured party v. buyers and sellers article 2 security interest
Sometimes article 2 gives certain parties security interests. That interest will have priority over an article 9 security interest as long as buyer or seller retains possession of the goods.
97
PMSI v. lien creditor in goods or software
Follow general priority rule for lien creditors and security interests except that a PMSI has a 20-day grace period from when debtor gets possession of collat to perfect.
So if purchase money secured party perfects within 20 days of debtor receiving possession of collat, PMSI will take priority over lien that arose within that 20 day period.
98
PMSI v. security interest in goods of software
Other than inventory or livestock: PSMI in this takes priority over all other security interests no matter when those security interests are perfect if secured party perfects within 20 days of debtor receiving goods. If they fail, simply apply secured party v. secured party rules (first in time). Super-priority for PMSI. Tip: bc PMSI in consumer goods auto perfected, 20 day rule is always met.
PMSI over inventory or livestock: another super-priority rule – PMSI in this will have priority over all other security interest in that same inventory if secured party: Perfects before inventory is delivered to debtor and send authenticated notification of the PMSI to other secured parties. Notification is effective for 5 years.
If PMSI is perfected but does not satisfy these two rules, just don’t get super priority, just apply secured party v. secured party rules there.
99
PMSI vs. proceeds:
If it has priority over competing secured party in goods other than inventory, that will extend to proceeds of collat. But if it has priority over inventory, will only extend to proceeds that are up-front cash payments for the inventory sold.
100
2 PMSIs battling over same collat
Seller PMSI > lender PMSI. Otherwise apply first in time rule.
101
Security interest in fixtures v. interest in real prop
Security interest in fixtures > interest in real prop if secured party files fixture filing before real prop interest is recorded.
Fixture filing = financing statement filed in local real prop records
Exception: a PMSI in fixtures > real prop interest if debtor has interest in record in the real prop or is in possession of it and security interest is perfected by a fixture filing before they became fixtures or within 20 days of when they did become fixtures
--> Exception: construction mortgage/mortgage satisfying construction payments > any subsequent security interest in fixtures, including PMSIs in fixtures, if recorded before the goods become fixtures and they do so before completion of the construction.
102
Some leases are per se secured transactions if...
1) lessee of prop is obligated to pay the full obligation under lease whether or not they terminate it early
- “contract that may not be terminated early” sometimes
2) whether lessor gets anything meaningful back at end of the lease term
- Ex: if original term of lease is equal to or greater than remaining econ life of the goods.
- Ex: lessee is bound to renew lease for remaining econ life of the goods
- Ex: lessee could have option to renew lease for remaining econ life of goods for no or nominal additional consideration
- Ex: lessee has option to become owner of goods for no or nominal consideration
If bright line test not met, not necessarily a lease still, courts will look at the facts. Also ask yourself if lessor gets something of value back at the end of the lease. If lessee uses up goods or keeps them at end, likely to be a secured transaction.
103
When a lease is really a disguised secured transaction, who is the secured party?
The lessor, so needs to file or otherwise perfect in the goods
104
Consignment
One party (consignor) has ownership of goods, but give possession of them to another party (consignee) to allow them to sell the goods
Treated as article 9 to facilitate public notice. Consignor treated as secured party that must perfect.
105
Perfection rules for consignment
Use rules applicable to PMSI in inventory.
But only apply in cases where this risk is very clear. Requirements for when to apply:
- Consignor must deliver goods to merchant who deals in goods of the kind for merchant to sell
- Merchant not generally known by creditors to be sub engaged in business of selling goods of others
- Value of the goods must be at least $1000 in each delivery
- Must not be consumer goods immediately before delivery
So this rule does not apply to your average consignment. It’s for big ticket stuff, inventory, where consignee could easily be mistaken for owning the collat.
106
Secured party enforcement rights--they can...
1. Seek possession of tangible collat and either sell it or retain it in satisfaction of obligation owed
2. Could abandon article 9 rights and obtain judgment against debtor or obligor on the obligation
3. Could pursue other courses of actions they have agreed to
107
When can secured party seek possession?
Applies to goods and other tangible collats
108
How can secured party repossess:
1. Judicial process – filing a replevin action
2. Self-help repossession action. When using this, secured party cannot breach the peace. Breach of the peace examples: Secured party brings officer and he is not there pursuant some judicial authority (like a rent-a-cop) = breach of peace; if they break into home or garage; if they commit a crim act, some physical confrontation, or some form of deception or trickery. Non-breaches examples: Repossession agent trespasses (without breaking and entering); If it occurs in dead of night without confrontation. Courts split on whether oral protest breaches peace or not.
109
Equipment that is hard to repossess can...
be rendered unusable and sell it on-site
110
After repossession, secured party can…
Dispose of collat in an article 9 disposition sale or accept it in satisfaction of all or part of the obligation (acceptance of collat/strict foreclosure).
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What standard are article 9 disposition sales governed by?
Governed by commercially reasonable standard:
- Meets standard if collat sold in usual manner in a recognized market, sold at price current in that market, or otherwise in conformity with reasonable commercial practices among dealers in that type of collat.
- If doesn’t meet this, could still be reasonable, but fact-specific
- Price alone is not determinative, but a very low price will trigger increased scrutiny by court
Timing must be commercially reasonable under circs
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Public vs. private article 9 disposition sales
Secured party allowed to buy collat at public sale but not private one unless price of collat fixed (like NY stock exchange) or subject to widely distributed standard price quotes
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Notice reqs for article 9 disposition sales
Secured party must send authenticated notice of the disposition to certain parties. But not required if collat is perishable or threatens to decline speedily in value, if sold on recognized market (like stock exchange), or if notice waived after default.
Parties that must receive notice: debtor, secondary obligors (like cosigners and guarantors), other secured parties, and anyone else from whom secured party has received a notice of claim or interest in collat.
Timing of notice must be commercial reasonable…do they have time to act. Safe harbor: reasonable if notification sent 10 days at least before disposition sale.
Must include names of the debtor and secured party; description of collat; how, when and where it will be disposed of; a statement that debtor is entitled to accounting for unpaid indebtedness.
For consumer goods transactions, additional reqs: describe that debtor will be liable for deficiency; number that debtor can call to obtain additional info including amount they would need to pay to redeem collat.
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What happens with the proceeds of a disposition sale?
Distributed first to reasonable expenses for collection and enforcement; second to pay debt of foreclosing secured party; third to pay subordinate secured interests, provided they make formal demand prior to distribution; last, surplus returned to debtor.
Senior security interests survive sale.
If not enough money, secured party can seek deficiency judgment against obligor for remaining amount.
Remember that secured party before the person foreclosing has their security interest continue in whoever bought it.
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acceptance of collat/strict foreclosure
Can do this in full or partial satisfaction of debt as long as…
1. If full: debtor must consent after default to acceptance in authenticated record. By silence permitted if debtor does not object within 20 days after proposal sent. Consumer goods additional reqs: Can only accept in full satisfaction; 60% rule: if debtor has paid 60% or more of value of collat, goods must be sold, acceptance not permitted (but debtor can waive after default in authenticated record).
2. Partial: debtor must consent after default to acceptance in authenticated record. By silence not permitted. Will not work in consumer transactions.
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right to redemption before default
Debtors, secondary obligors or other secured parties may redeem collat by paying entire secured obligation and expenses, including attorney’s fees incurred in repossessing and preparing it for sale
Must occur before secured party has sold collat or accepted it in satisfaction
Cannot waive right to redemption before default
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Repossessing fixtures
If secured party wants to repossess, may remove from the real estate. But will be liable for cost of repairing damage to real estate, but not diminution in value resulting from removal.
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Repossessing accessions
Secured party with priority in accession can remove it from other goods
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Collecting rights to payment
Secured party can step into debtor’s shoes to collect amounts owing to debtor by 3 parties (account debtors). Once account debtors get notice, cannot discharge debt by paying debtor directly, must pay secured party.
They may raise defenses against debtor against secured party.
If it’s a sale of accounts, chattel paper, promissory notes or payment intangibles treating as article 9, rules governing surplus and deficiency will not apply.
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Remedies for secured party’s failure to comply
1. Can first face injunctive relief
2. If ongoing, debtor can ask court to halt
3. Damages?
4. Court may also prevent secured party from claiming deficiency
5. Could be liable for tort of conversion
6. If the failure to comply is ongoing the debtor cannot ask the court to increase the improper enforcement activity??
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What damages available for secured party's failure to comply??
Actual damages: debtor or secured party can be compensated for loss resulting from secured party’s violations, statutory damages, min damages in consumer goods transactions
Statutory damages exist for Article 9 violations.
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rebuttable presumption rule (wrt commercial transactions vs. consumer transactions)
Commercial transactions: apply rebuttable presumption rule: if secured party did not sell goods in commercial reasonable manner, not entitled to deficiency unless can prove that sale that complied would have created a deficiency
Consumer transactions: Some courts use rebuttable presumption rule. Some use absolute bar rule.
