Secured Transactions Flashcards
What is the law that applies in secured transactions problems?
Article 9
What does Article 9 apply to?
All security interests in personal property or fixtures by contract. The words “security agreement” do not have to be specifically stated for one to exist.
Article 9 also applies to lease agreements that are not true leases (but instead, security interests).
Four classifications of goods
- consumer goods
- inventory
- equipment
- farm products
Consumer goods
Goods that are bought for use primarily for personal, family, or household purposes.
Inventory
Goods, other than farm products, that are held by a person for sale or lease to be furnished under a contract of service; or raw materials, work in process, or materials used or consumed in a business.
Equipment
Goods other than inventory, farm products, or consumer goods
Farm products
Crops, livestock, supplies produced in a farming operation or products of crops or livestock in their unmanufactured state in possession of debtor who is engaged in a farming operation.
Attachment is a prerequisite to:
A security interest arising.
Requirements of attachment
(1) value must be given by the secured party to the debtor (e.g., a loan); (2) the debtor must have rights in the collateral; and (3) there must be a binding security agreement which requires (AID): Authentication, Intent to create a security agreement, and a Description of the collateral.
What is required for a binding security agreement?
(AID): Authentication, Intent to create a security agreement, and a Description of the collateral.
Can a security agreement cover after-acquired property?
General rule: a security agreement can cover after-acquired property and does not need to specifically reference it to be effective.
Methods of perfection
- filing a financing statement
- automatic (PMSI in consumer goods)
- possession
- control
When two secured parties have a security interest in the same collateral, which party has priority?
The first to file or perfect. If no party perfects, then the first to attach has priority.
A ___ security interest beats a ___ security interest.
Perfected; unperfected—even if one has an unperfected PMSI.
What happens when a debtor sells collateral subject to a security interest or a judicial lien creditor acquires an interest?
A buyer in the ordinary course of business generally does not take the collateral subject to the security interest, whereas a buyer not in the ordinary course of business generally does (unless the interest was not perfected and he does not otherwise know about it).
A buyer in the ordinary course of business generally takes…
Generally takes free of any security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.
Note: the buyer is not in the ordinary course of business if he knows that the sale is in violation of a term in the security agreement.
A buyer not in the ordinary course of business takes…
Collateral subject to a perfected interest. Generally, he does not take subject to an unperfected interest if he gives value and does not know about the interest.
Note: garage sale exception
Garage sale exception:
A buyer not in the ordinary course of business takes free of a security interest even though perfected if he buys without knowledge of the security interest, for value, and for his own personal, family, or household purposes UNLESS, prior to the purchase, the secured party has filed a financing statement covering the goods.
The goods must be consumer goods both when the seller has them and when the buyer buys them for this to apply.
The general rule is that, as between a secured party and a lien creditor, priority belongs to:
The secured party, provided it perfects before the lien arises. If the interest was unsecured or only perfected after the lien creditor served the writ, then the lien creditor has priority.
Default
If a default occurs, the lender can demand payment or use self-help to reclaim the goods so long as it does not breach the peace.
Breach of peace: factors, including whether the repossession took place at the debtor’s premises and whether the debtor objected. Some courts look at whether trickery was used. Some say that any objection (even if slight and even if only verbal) amounts to a breach of the peace.
Resale
The secured party may sell or dispose of the collateral in a commercially reasonable way. The security interest is discharged when this occurs, but the debtor is liable for any deficiency. The obligation owed to the disposing secured party and any junior liens are paid off. (Senior liens remain on the collateral.)
Debtor’s means of protecting himself:
The sale must be commercially reasonable;
The debtor must receive written notification of the sale. The debtor and perfected secured parties must know when the chance to redeem the collateral is going to pass.
- timeliness of notification: generally a notification sent 10 days before sale is reasonable
- content of notification: nonconsumer transactions—describe debtor and secured party and collateral, method of disposition, and state that the debtor is liable for unpaid indebtedness a well as a charge for accounting; consumer transactions—additionally contain a description of any liability for a deficiency, a telephone number that the consumer can call to discover the amount owed, and a telephone number or mailing address from which the consumer can get additional information about the disposition and the obligation.
Remedies if secured party fails to comply with requirements of commercially reasonable sale and debtor’s receipt of written notification of sale.
Damages (including consequential, but debtor has a duty to mitigate) and statutory damages for consumer goods.
Sale.
Rebuttable presumption: nonconsumer transaction—collateral is worth the amount of the debt and the debtor’s deficiency is nothing; consumer transaction—absolute bar rule (creditor’s noncompliance bars any recovery of deficiency) or rebuttable presumption rule (collateral worth the amount of the debt and the debtor’s deficiency is nothing).
Debtor’s right to redeem
The debtor can redeem prior to the disposition of the collateral by paying everything due and owing to the creditor.
Definition of Secured Transaction
A secured transaction is a transaction intended to create a security interest in personal property or fixtures. It generally involves a sale on credit or a loan in which the seller or the lender obtains a lien on some or all of the debtor’s property as security for payment.
Look for (1) a credit transaction and (2) an agreement that creates a lien in favor of the creditor in the debtor’s personal property to secure the debt.
Debtor
The person who owes payment or performance of the obligation secured
Secured party
A lender, seller, or other person in whose favor there is a security interest
Security agreement
The agreement between the debtor and the secured party that creates the security interest
Security interest
An interest in personal property or fixtures which secures payment or performance of an obligation. Contingent property interest in the debtor’s collateral that the debtor grants to the creditor. When the contingency, which is default, occurs, the property interest springs to life and the creditor has rights in the debtor’s collateral.
Collateral
The property subject to a security interest. Property that the secured party can repossess upon default to ensure that the debt is paid.
Purchase money security interest (2 kinds)
- Seller-financed PMSI: secured party sells debtor collateral on credit and retains a security interest in the item sold
- Financier-financed PMSI: a loan to a debtor for the purpose of enabling the debtor to buy specific collateral, which is used by the debtor to acquire the specific collateral, and the creditor takes a security interest in that collateral.
After-acquired property clause
Secured party often will want to obtain a security interest not only in debtor’s present property, but also in property that the debtor will obtain in the future. This is permissible. Security agreements typically contain these clauses.