Secured Transactions Flashcards
Under Article 9 of the UCC (adopted by Virginia), a creditor must take two steps to gain the full protection of secured transactions law:
- Attach a security interest to the collateral AND
2. Perfect the security interest
Attaching a security interest simply means
creating a valid security interest in collateral.
The most common way to attach a security interest is
with a signed security agreement.
The security agreement is
a written agreement that certain personal property will serve as collateral, usually for a loan.
For a security agreement to be valid,
(1) the security agreement must describe the collateral, (2) the party offering the collateral must have rights in it (that i, they must own it or have some other legal rights in it), AND (3) the party gaining the security interest (usually a bank or merchant) must give value in exchange for the security interest.
Generally, after-acquired collateral clauses are
valid in Virginia.
In Virginia, after-acquired collateral clauses are ineffective as to
consumer goods acquired more than 10 days after the creditor has given value
There are also two ways for a security interest to attach to collateral without a security agreement:
- Possession, and
2. Control
What does the holder of a security interest do by perfecting a security interest?
Puts the world on notice that the security interest exists
When done properly, a perfected security interest will
be superior to most (but not all) interests others might have in the collateral.
In other words, if the business defaults on the loan, the bank will be first in line to auction off the business’s collateral and recover the balance of the loan
Most security interests are perfected when
the holder of the security interest files a financing statement at a central filing location in the state where the debtor is located
In Virginia, financial statements are filed
with the State Corporation Commission
The financing statement is
a simple document that identifies the debtor and the creditor and describes the collateral.
Once a financing statement is properly filed, the security interest is
perfected and the world is considered to have notice of the security interest.
Security interests in motor vehicles can be perfected only
by a notation on the security interest of the vehicle’s title.
Security interests in things attached to land (e.g., timber or fixtures) usually must be perfected
with filing statements that describe the land and are filed in the county where the land is located.
Security interests in most types of collateral can be perfected by possession
by the party holding the security interest.
Security interests in a few types of collateral (e.g., business deposit accounts) can be perfected by
control.
Purchase money security interests in consumer goods are
automatically perfected.
The main issue in most secured transactions questions is
the order of priority of the security interests.
Perfected security interests have priority over
unperfected security interests.
Between two perfected security interests, ___ _____ __ ____ ____ __ _________ has priority.
the first to have been filed OR the first to file a valid financing statement
PMSI =
Purchase money security interests
PMSIs have priority over
non-PMSIs
Where the collateral in inventory, a PMSI will have super priority only if:
the creditor, before handing over possession of the inventory to the debtor: (1) sends a special written notice to other security interest holders, AND (2) takes steps to assure that its PMSI will be perfected at the time the debtor receives possession.
Perfected security interests have priority over creditors
in bankruptcy.
A buyer in the ordinary course of business usually takes goods
free of any security interest.
(e.g., if a store gets a loan from a bank and gives the bank a security
interest in its inventory of refrigerators, and then you buy a refrigerator from the
store, the bank loses its security interest because you are a buyer in the ordinary
course of business).
*knowledge of a financial statement filed by the holder of the security interest does not defeat this rule unless there is knowledge that the sale violated the terms of the agreement between the debtor and the security interest holder
Consumer goods are
goods used or bought for personal or household purposes.
Inventory are
goods held for sale or lease and supplies/materials quickly used up in business.
Equipment is
any physical goods other than consumer goods, inventory, or farm products
Accounts is
a right to payment (accounts receivable).
Deposit accounts is
a bank account.
A purchase money security interest (PMSI) is
a special type of security interest that gets higher than usual priority.
A PMSI arises when
the lender loans money to the borrower specifically for the buyer to purchase certain goods, and the lender takes a security interest in those goods.
For example, Lumber Mill owns a bunch of machines that saw wood. Bank 1 has a perfected security interest on all of Lumber Mill’s equipment (including these machines and any acquired in the future) due to an existing loan. Lumber Mill needs a new machine. Bank 2 gives Lumber Mill a loan to buy the new machine and takes a security interest in the new machine. Bank 2’s
security interest is a PMSI and, therefore, Bank 2’s security interest has priority over Bank 1’s (even though Bank 1’s interest was perfected first).
Generally, if a borrower defaults on a loan that is covered by a security interest, the secured party has a right to
sell the collateral and use the funds from the sale to pay itself the amount remaining on the loan.
When a borrower defaults on a loan and the secured party wants to sell the collateral, how does the secured party get the collateral?
Secured parties can simply take the collateral
if they can do so peacefully. OR they can file an action in court to force a public sale of the collateral.
