Secured Transactions Flashcards
Definition of Secured Transactions
An agreement between a debtor an a creditor that the debtor’s personal property will serve as collateral for a loan.
If debtor defaults, the creditor will gain rights to satisfy the debt.
Definition Security Interest
An interest in personal property or fixtures that secures payment or performance of an obligation.
Definition of a Security Agreement
A contract that creates a security interest.
Parties to a Security Agreement
Secured: A creditor who obtains a security interest in the debtor’s property.
Obligor: A party that must pay or perform the obligation that the collateral secures.
Debtor: Has an interest, other that the security interest, in the collateral (i.e. the owner).
*The obligor and debtor are usually the same person, but not necessarily.
Article 9 of the UCC and Security Interests
Article 9 governs transactions, regardless of the form, that create a security interest in personal property of fixtures by contract.
- Secured Transactions must be consensual.
- Secured Transactions involve personal property or fixtures. NOT REAL ESTATE (so not mortgages).
- “Regardless of Form” = Courts will look at the substance of the transaction and not the labels the parties use. [Even if contract does not use legal terms or language to create a secured transaction–but it functionally is one–then it is treated as a secured transaction.]
Agricultural Liens
An interest in farm products that secures payment or performance of an obligation form:
- Goods and services furnished with respect to farming operations OR
- Rent on real property in connection with a farming operations.
Article 9 also includes these types of transactions and may be tested in secured transactions.
Sales of Certain Rights to Payment
Some sales are treated as secured transactions. In these instances treat buyer as the secured party and the seller as the debtor. Sales of the following collateral are treated as secured transactions.
- Chattel Paper
- Promissory Notes
- Accounts
- Payment Intangibles
What is Collateral?
Generally, it is property subject to a security interest.
Classifying the type of collateral will affect analysis.
Look at the principal use of collateral at the time of debtor.
Collateral as Goods
Goods: Anything that is moveable at the time a security interest attaches.
ALSO INCLUDES
- Fixtures
- Standing Timber
- Unborn Animals
- Growing or Unharvested Crops
- Manufactured Homes
Four Sub-Categories
- Consumer Goods (Goods acquired for primarily personal, family, or household purposes)
- Farm Products (crops, livestock, supplies). FARMING EQUIPMENT is not included.
- Inventory: Goods that are not farm products that are held for sale. (What is on the shelf in a store). Includes raw materials, or goods furnished in a service contract.
- Equipment: Everything else is “equipment”.
- Fixtures: Can be a good is they are attached to real property in such as way that an interest is created in them. [Something that a person is not expected to take with them if they move.]
Remember, the classification of the collateral can change
Collateral as Right to Payment
The right to be repaid money by a third party that the debtor then uses as collateral for a loan.
Four Types
- Chattel Paper
- Instrument
- Accounts
- Payment Intangible
Instrument as Right to Payment
Examples: Promissory notes, checks, and drafts governed under Article 3 of the UCC
Chattel Paper as Right to Payment
A record (paper or electronic) with two components:
- A monetary obligation AND
- A security interest or a lease
[Someone owns someone else money and there is a security interest or lease. If landlord uses lease to secure a loan, for example.]
Accounts as Right to Payment
An account is a right to payment of a monetary obligation for a property that is sold, leased, licensed, or for services rendered.
This is a very broad category.
Payment Intangibles as Right of Payment
Catchall category. If not the other three, then it is a payment intangible.
Documents as Collateral
Documents of title that generally give the holder of the title ownership rights in goods held by a bailee.
Investment Property as Collateral
Certificated and Uncertificated securities, such as stocks and bonds.
Deposit Accounts as Collateral
Bank accounts.
Commercial Tort Claims as Collateral
Claims possessed by an organization or an individual that arose in the course of the organization or individual’s business. Do not include claims for personal injuries or death.
Letter of Credit Rights as Collateral
A right to payment or performance under a letter of credit.
General Intangibles as Collateral
Catch all classification. [Blueprints, trademarks, software.]
Attachment
For a secured party to have a valid interest in collateral is must first attach.
In general, attachment is the arrangement linking a debt to a particular piece of collateral.
Once attached, security interest becomes enforceable.
Three Requirements for Attachment
- Value: Typically given by secured party (loan)
- Rights: Debtor must have rights in the collateral (some property interest in the collateral)
- Security Agreement: There must be a security agreement meeting one of the following:
- There is an authenticated security agreement that describes the collateral OR
- The secured party has possession or control of the collateral pursuant to an oral or unauthenticated security agreement.
Value in Attachment
Value can be given by providing the same consideration needed for a contract. [No new value is needed aside from consideration.]
A binding commitment to extend value in the future can be considered as “value”. [i.e. a line of credit]
May be used to secure future advances
Rights in Attachment
A security interest only attaches to the rights the debtor has in the collateral (consider ownership: leasehold, joint tenancy, full ownership, etc.)
[Probably not going to be tested, usually given.]
If you don’t own something (thief, non-owner) then cannot grant a security interest.
Security Agreement in Attachment
A security agreement is usually an authenticated record. (Piece of paper signed by the debtor). Security agreements are RAD:
- Record: A record is something that is stored in a way that is retrievable. Does not always need to be written on paper.
- Authenticated: Must be authenticated by debtor. (Signed, or email–sign off, etc.)
- Describe: The security agreement must describe the collateral. Has to reasonably identify the collateral.
Security Agreement without Authenticated Record
Rule: If no authenticated record that describes the collateral, the secured party’s possession or control of the collateral pursuant to the security agreement can also be sufficient for the “security agreement” requirement of Attachment.
[Use it for collateral that is something that can be held. Or controlled–think bank accounts, electronic paperwork, etc.]
Rights and Duties of the Secured Party in Possession
- Secured party must act with reasonable care in respect to the collateral
- Must keep the collateral identifiable
- Must relinquish the collateral once obligation is satisfied
- May charge the debtor for reasonable expenses for storing and maintaining the collateral
After-Acquired Property Clause
Rule: A security interest attaches to collateral available at the time the security agreement is entered into. Collateral generated after the this point in time is outside the scope of the security agreement.
However, if there is an “after-acquired property clause” in the agreement then it can extend to these instances.
Exception: An exception to the general rule (state law) are security agreements that describe inventory or accounts. The exception creates a presumption that security agreement extends beyond the collateral that existed at the time agreement was executed.
Accession
Occurs when goods that are physically united with other goods but the original good is not “lost”.
[I have an interest in a stereo and that stereo gets installed in a car.]
Look to terms of security agreement to see if the interest attaches to the additional goods.
Commingled Goods
Goods that are physically united with other goods and their identity is lost.
Security interest does not continue in original, but will attach to larger product or mass that results.
Proceeds
Proceeds are whatever results when collateral is sold, leased, licensed, exchanged, or otherwise disposed of.
[Important topic]
Rule: If a security interest attaches to original collateral, it then attaches to the proceeds.
Purchase Money Security Interest [Tested Hevily]
A PMSI is a special type of security interest subject to its own perfection and priority rules.
- A security interest qualifies as a PMSI only if the collateral goods or software
Two Elements:
- The value given allows the debtor to acquire the goods or software, AND
- the goods or software acquired secure the loan
[The loan allows the purchase of collateral, and collateral secures the loan.]
Lender PMSI
The lender loans money to the debtor so that the debtor can acquire goods.
- The value provided must actually be used to acquire the goods.
- The lender takes a security interest in those same goods used to secure the loan
Seller PMSI
Applies to goods bought on credit.
