Secured Transactions Flashcards
What is a security interest?
A security interest in generally an interest in personal property or fixtures that secures payment or performance of an obligation.
Who are the three parties with respect to a secured transaction?
Secured party — person whose favor a security interest is created
Obligor — An obligor is the person who must pay
Debtor —- A debtor is the person who has an interest in the collateral
What are goods?
Goods are anything movable at the time the security interest attaches.
What are the four classes of goods?
Consumer goods
Farm products
Inventory
Equipment
What if there are multiple uses of the property to be used as collateral?
When the debtor uses the property for multiple uses, the principal use to which the debtor puts the property determines the class of the goods.
What does Article 9 govern?
Article 9 governs a transaction that creates, by agreement, a security interest in personal property or a fixture. A lease, consignment, agricultural lien and even a person property may be subject to Article 9 if disguised.
When is a lease treated as an Article 9 transaction?
A transaction in the form of a lease is treated as creating a security interest if the lessee must pay consideration to the lessor for the right to possess and use the goods for the term of the lease, the payment obligation cannot be terminated by the lessee, and one of the following four conditions is also met:
i) The original term of the lease is equal to or greater than the remaining economic life of the goods;
ii) The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become owner of the goods;
iii) The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement; or
iv) The lessee has an option to become the owner of the goods, for no additional consideration or nominal additional consideration, upon completion of the lease agreement.
When will consignments fall under Article 9?
In order for a consignment to be subject to Article 9, the following requirements must be met:
i) A person (i.e., the consignor) must deliver goods to a merchant for the merchant to sell;
ii) The merchant (i.e., the consignee) must:
a) Deal in goods of that kind,
b) Not operate under the name of the consignor,
c) Not be generally known by its creditors to be substantially engaged in selling the goods of others, and
d) Not be an auctioneer;
iii) With respect to each delivery, the value of the goods delivered must be at least $1,000 at the time of the delivery; and
iv) The goods must not be consumer goods immediately before the delivery.
Are agricultural liens subject to Article 9?
An agricultural lien is subject to Article 9. Included within the definition of an “agricultural lien” is an interest in farm products (e.g., crops, livestock) that secures payment or performance of an obligation for either (i) goods or services furnished with respect to the debtor’s farming operation (e.g., livestock feed sold to a cattle rancher) or (ii) rent on real property leased by a debtor in connection with a farming operation.
How does a security interest become enforceable (attach)?
For the security interest to be enforceable against the debtor, three conditions must coexist:
i) Value has been given by the secured party;
ii) The debtor has rights in the collateral; and
iii) The debtor has authenticated a security agreement that describes the collateral, OR the secured party has possession or control of the collateral pursuant to a security agreement.
Does a cosignee have rights in the cosigned goods?
When the consignment is covered by Article 9, the consignee is treated as having the consignor’s rights in the consigned goods. If not covered by article 9 no rights in goods
How must a secured party satisfy the Article 9 statute of frauds?
Security agreement must be established by the debtors authentication of the agreement, or the parties possession or control of the collateral.
The most common means by which to evidence the debtor’s assent to the security agreement is by an authenticated record. To satisfy this requirement, the security agreement must:
i) Be in a record;
ii) Contain a description of the collateral; and
iii) Be authenticated by the debtor.
Description or identification of the collateral
The agreement must describe the collateral in sufficient detail to make it possible to identify the collateral. The description of the collateral need only reasonably identify the collateral.
NOTE: Notice difference from financing agreement; financing agreement can be generic security agreement description can not.
When is after acquired property included?
No new security agreement is necessary when the collateral is acquired later if the original security agreement provides that it applies to after-acquired collateral.
When the parties have left out after-acquired language in situations that suggest they intended to include it (e.g., when the collateral is of a type that rapidly changes, such as inventory or accounts), the courts are split on whether to imply it, but the majority of courts have adopted a rebuttable presumption that after-acquired property is included.
When does a security interest attach to proceeds?
A security interest in collateral automatically attaches to identifiable proceeds.
