Secured Transactions ✔️ Flashcards
(109 cards)
1
Q
What is a security interest?
A
An interest in personal property or fixtures that secures payment or performance of an obligation
2
Q
Difference between obligor and debtor?
A
(Usually the same person, but:)
Obligor—the person who must pay (or otherwise perform) with respect to the obligation that is secured by the SI
Debtor—the person who has interest, other than the SI or other lien, in the collateral, such as its sole owner
3
Q
What are goods?
A
Anything that is moveable at time that the SI attaches.
4
Q
What determines the class of goods?
A
The debtor’s principal use at the time the SI attaches.
NB: The debtor’s use only matters for tangible collateral.
5
Q
What are consumer goods?
A
goods acquired primarily for personal, family, or household purposes
6
Q
What are farm products?
A
goods that are crops or livestock or products of crops or livestock, and supplies that are used or produced in farming
7
Q
What is inventory?
A
Goods, other than farm products, held for sale or lease; are furnished under a service contract; or consist of raw materials, works in process, or materials used or consumed in a business
Usually refers to goods that are consumed in a business (e.g., fuel)
8
Q
What is equipment?
A
Catchall class (everything-else-goods); goods that are not consumer goods, farm products, or inventory
9
Q
What is chattel paper?
A
one or more records that evidence both:
(i) a monetary obligation
and
(ii) a security interest in specific goods (or a lease of specific goods)
10
Q
What is a document?
A
a document of title, which confers on the holder ownership rights in goods held by a bailee
11
Q
What is an account?
A
the right to payment for property sold, leased, or licensed, or services rendered
12
Q
Difference between Account and Deposit account?
A
Account = the right to payment for property sold, leased, or licensed, or services rendered
Deposit account = bank account, basically
13
Q
What is a general intangible?
A
A residual category of intangible collateral, e.g. copyrights
NB: Very rare, unlikely to be in this group
14
Q
What is covered (and not) under Article 9?
A
Transactions that create a security interest in personal ppy or fixture.
This includes leases when they are in substance a secured transaction.
Liens are generally not covered, but agricultural liens are.
Sale of personal property is not covered.
Real property transactions generally not covered, but can apply to promissory note even if there is a (non-Article 9) mortgage.
15
Q
Definition of attachment?
A
Attachment is when a SI becomes enforceable against the debtor with respect to that collateral (the SI “attaches” to the collateral).
16
Q
⭐Requirements of attachment?⭐
A
“V-R-SA”
- Value = Value given by SP,
- Rights = Debtor has rights in the collateral, and
- Security Agreement = the debtor has either authenticated a security agreement describing the collateral, OR the SP has possession or control of the coll pursuant thereto
17
Q
General rule on future advances?
A
Future advances can be secured by collateral.
18
Q
What forms may value take?
A
Generally, it’s broader than just contractual consideration.
Value given by SP can be:
- Consideration sufficient to form a contract,
- extending credit,
- accepting delivery under a preexisting contract,
- or satisfaction of a preexisting claim
Can be:
- money,
- money’s worth in property, services, new credit, or
- release by transferee of an interest in property previously transfered to the transferee
19
Q
To what rights does a SI attach?
A
Generally, the SI attaches only to the rights that the debtor has in the collateral.
20
Q
Requirements of a security agreement?
A
A security agreement must satisfy the Statute of Frauds* and be:
in a record,
contain a description** of the collateral, and
be authenticated by the debtor.
* Possession or Control of the collateral by the SP can satisfy the SOF as long as it’s pursuant to the security agreement.
** NB: A super-generic description will NOT work for a security agreement (e.g. “all debtor’s assets”). A categorical description is okay (e.g. “all debtor’s equipment”).
21
Q
Can a SI cover after-acquired collateral?
A
Generally, yes.
⚠️ An after-acquired clause is not effective for consumer goods unless the debtor acquries them within 10 days after the SP gives value, or a commercial tort claim.
22
Q
General rule for attachment and proceeds?
A
An SI attaches automatically to identifiable proceeds.
(Proceeds are whatever is acquired upon disposition of the collateral.)
23
Q
What are the duties that arise when a SP possesses or controls collateral?
A
- Duty of care
- Duty to keep collateral identifiable
- Duty to relinquish possession or control of collateral
24
Q
What are the rights/risks arising from a SP possessing or controlling collateral?
A
- Right to charge for reasonable expenses,
- Right to use or operate collateral,
- Right to hold proceeds
⚠️ The risk of loss or damage is on the debtor, not the SP.
25
What are the rights of the debtor?
The debtor has the right to an **accounting** and other info from the SP.
26
What is a PMSI?
A **purchase-money security interest** in goods exists when:
* a SP gave to the debtor value that's then used to incur an obligation enabling debtor to acquire goods, or
* a SP sold goods to the debtor who then incurred an obligation to pay the SP all/part of the purchase price
27
Difference between Accessions and Commingled goods?
Accession = Goods that are **physically united** with other goods such that the **identity** of the original goods is **not lost**.
Commingled goods = goods that are physically united with other goods such that their **identity is lost** in a product or mass.
28
What happens with an SI in collateral that then becomes an accession?
What about commingled goods?
SI in collateral that later becomes accession = The SI is **not lost** due to the collateral becoming an accession; also, an SI can be created in collateral that is an accession.
SI in collateral that later becomes commingled goods = SI is **transferred** to the **resulting product or mass**. There's no SI in specific goods that have been commingled, but an SI may attach to the product or mass that results when the goods are commingled
29
Methods of perfecting a SI?
Filing,
possession,
control, or
automatically
30
When is an SI perfected?
Upon **attachment** of that interest **and** compliance with a method of perfection (e.g. **filing**).
31
What does perfection of an SI do?
Perfection **creates superior rights** in the collateral for secured party over third parties’ rights in the collateral.
32
What does filing a financing statement do?
It gives interested parties **notice** of the **existence** of the SI.
33
What collateral can be perfected by filing?
Filing is a method of perfection for **any SI** ***except***:a deposit account, money, or letter-of-credit rights
34
What must a financing statement contain?
1. Debtor's **name**,
2. SP's **name**, and
3. a **description\*** of the collateral.
A financing statement is a notice filing.
\* Super-generic descriptions **are OK** in financing statements.
35
Which name should you use for the debtor on the financing statement?
(Individuals) Name on the **debtor's current driver's license** or state-issued ID.
(Organizations) Name on **public organic records** (e.g. articles of incorporation). Do not use trade name (insufficient by itself).
36
Rules surrounding the change of a debtor's name?
SP has **4 months** to amend the financing statement to account for debtor's changed name.
If they fail to amend, then collateral **acquired** by the debtor **after the 4-month period** is **not covered** by the financing statement.
37
Error in debtor's name on financing statement, what effect?
A financing statement is **not effective** unless a **standard search** under the debtor’s correct name **would disclose** the statement
38
Error in SP's name on financing statement, what effect?
Generally, **no effect on perfection**, but could subject the secured party to estoppel in favor of another claimant
39
Is a financing statement effective to cover after-acquired property?
What about future advances?
Yes, **if the property falls within the description** (regardless of whether contemplated at the time of the statement).
("A financing statement may be effective to cover after-acquired property if such property falls within the collateral described, whether mentioned or even contemplated by the parties at the time the financing statement was authorized.")
40
Rules re perfection of SI in proceeds?
An SI in proceeds **is perfected** even if not mentioned in the financing statement.
For perfected SI, the SI in proceeds remained perfected for **20 days from attachment**.
If the original financing statement is **broad enough** to cover proceeds, or **gets amended** to cover them within the 20 days, **perfection continues in proceeds** **indefinitely**.
41
Error in description on financing statement? What must SP do?
SP must prepare a **termination statement** with respect to the erroneous collateral.
42
Rules re authorization of financing statement?
Debtor has to **authorize** the financing statement (but this need not be a signature).
“**Ipso facto authorization**” = the debtor’s **authentication of the security agreement** serves as **authorization to file** the financing statement.
The debtor’s consent to the filing is **presumed** when the SP seeks to perfect an SI in any identifiable **proceeds** of collateral by filing.
43
Who can file a financing statement?
**Any person**. Signature of filer not required.
44
What is the right filing location for a financing statement?
(Real property-related collateral) = The **office for recording a mortgage** on the related RP (local filing)
(Everything else) = Secretary of state **where debtor is located** (central filing)
45
Where is a debtor located for filing purposes?
Individual debtor = state of **debtor's principal residence**
Partnership = state of partnership's **place of business** (and if \>1, at its **chief executive office**)
Corporation = state where **organized/incorporated**
46
What is the effective date of a filing?
Upon **delivery** to the filing office and tender of the filing **fee**
47
Rules re filing office refusals?
Justified refusal (e.g. no payment)? = Treated as **unfiled**
Unjustified refusal? = Treated as **filed**, statement is effective *except* as to purchaser who gives value in **reasonable reliance** on the **absence** of the record from the files.
48
Indexing error by filing office, what effect?
**No effect** on effectiveness of filed statement. Risk of such error rests on those searching files, not the filer(s).
49
How long is a financing statement effective for?
**5 years**.
50
How do continuation statements work?
Continuation statements are effective to **extend perfection** for an **additional 5 years**; no need for the debtor’s signature; if not filed, the SI is treated as never having been perfected as against a purchaser of the collateral for value.
A continuation can only be filed **within the last 6 months** of the original filing period.
51
How do amendments to a financing statement work?
An amendment is filed to **add or delete collateral** covered by the statement; effective from the **date of filing**; **does not extend** period of effectiveness of the financing statement
52
What can be perfected only by possession?
**Money**.
53
How long are security interests perfected by possession or control good for?
Perfection exists only **during the period of possession or control**.
54
What can be perfected only by control?
**Deposit accounts** (and letter-of-credit rights not serving as a supporting obligation for other collateral).
55
Rules re automatic perfection?
A **PMSI in consumer goods** is automatically perfected **upon attachment**.
A SP does not need to file a financing statement.
56
How does temporary perfection work?
If **new value** is given under an authenticated security agreement, an SI in certificated securities, negotiable documents, or instruments is **automatically perfected for 20 days** from attachment.
Or if the collateral is **delivered to the debtor** for the **purpose of selling** or exchanging it, the SI in the collateral remains **temporarily perfected for 20 days**.
57
Perfected SI: Debtor or collateral moves to new state, what effect?
Debtor moves to another state? **4-month grace period** for perfected SI.
Collateral moves to debtor in another state? **1-year grace period** for perfected SI.
58
Cash proceeds perfection rule?
If SI in original collateral is perfected, then SI continues to be **perfected indefinitely** in **identifiable cash proceeds**.
NB: Same Office Rule does not apply to collateral acquired with cash proceeds.
59
What is the Same Office Rule?
When a **filed** financing statement covers original collateral, and the proceeds are collateral **perfectable** by filing in the **same office**, then **perfected SI in proceeds** may continue indefinitely.
⚠️ Does not apply to proceeds **acquired with cash** proceeds.
⚠️ If original filing becomes ineffective after the 20-day period, the SI in proceeds **also ceases** to be auto perfected.
60
Perfection rule for vehicles?
A non-article 9 statute controls how to perfect vehicles.
Filing is not sufficient if a **statute requires** a **notation** of the SI on the **certificate of title**.
61
Timing of perfection when perfection method changes?
SI is perfected upon attachment and compliance with a method of perfection.
If there is a change in the method of perfection **without a lapse**, then the perfection dates from the **date of first perfection**.
62
General priority rule?
**First to file-OR-perfect.**
63
Can you agree to subordinate your interest to someone else's?
**Yes**.
64
General creditor (aka unsecured), what result? (Priority)
An SI **always prevails** over a general/unsecured creditor's rights in the debtor's collateral.
65
Judicial lien creditor, what result? (Priority)
A perfected SI **has priority over** a judicial lien, and
a judicial lien has priority **over an unperfected SI** (⚠️ unless the only reason the SI was unperfected was that SP hadn't given value yet).
⚠️ PMSI Exception: If a PMSI is perfected within **20 days of debtor receiving possession**, then the PMSI has priority over a creditor's **rights that** **arose between attachment and filing**.
Generally: PSI \> JL \> USI
66
Statutory or CL lien creditor, what result?
Possessory lien **has priority over any SI** if the lien secures pmt for goods/services furnished in the ordinary course of business (e.g. mechanic's lien), unless a statute provides otherwise.
67
Judicial lien creditor vs. SI securing an advance, what result?
A lien creditor's rights **have priority over** an SI securing an advance when the advance is made **more than 45 days** after the lien is created,
⚠️ unless the advance or commitment is made **without knowledge of the lien**.
68
Transferee v. SP with an SI? (Priority)
The SI **generally continues in the collateral** unless the secured party **authorized** the transfer free of the SI.
69
Buyer’s rights v. unperfected SI? (Priority)
The buyer **takes free** of the SI if the buyer:
(i) give **value**, and (ii) receives **delivery**, (iii) **without knowledge** of the SI.
70
Buyer’s rights v. perfected SI (general rule)? (Priority)
The buyer generally takes the collateral **subject to** the SI.
⚠️ There are several exceptions (BOCB, garage sale, etc.)
71
⭐Buyer in the ordinary course of business exception (BOCB)?⭐
A buyer **takes free** of any SI in goods **given by buyer's seller** when:
1. buys goods (not farm products) by giving **new value** (cash, etc., not satisfaction of existing debt)
2. in the **ordinary course**
3. from a **seller in the business** of selling goods of that kind
4. in **good faith**; and
5. **without actual knowledge** that the sale **violates another’s** **rights** in the goods.
72
⭐Consumer buyer / Garage sale exception?⭐
A consumer buyer takes free of any SI in consumer goods , when he:
1. **buys consumer goods** for value;
2. for **use as consumer goods** (i.e. for his own personal, family, or household use);
3. from a **consumer seller**; and
4. **without knowledge** of the security interest.
⚠️ Garage sale exception fails if a SP **has filed a financing statement** covering the goods
73
Purchaser of chattel paper rule?
A buyer of chattel paper **has priority over** an SI in the chattel paper when he:
1. gives **new value** and **has possession/control** of collateral;
2. purchase is made in **good faith** and in the **ordinary course of business**, and
3. the chattel paper **does not indicate:**
1. **an assignment** to an identified assignee (for an SI claimed as proceeds of inventory), or
2. a **purchase made without knowledge** that the purchase violates SP's rights (for all other SIs)
74
Purchaser of negotiable instrument or document rule?
Buyer of negotiable instrument (like a check/CD) or document **takes free** of any SI.
75
Buyer of future advances rule? (Priority)
The buyer generally **takes free** of any SI that secures an advance **made after the earlier of:**
* the time the secured party **acquires knowledge** of purchase or
* **45 days** after purchase
The buyer takes **subject to** the SI if the advance is made pursuant to a commitment entered into **without knowledge** of the buyer’s purchases and **before the end** of the 45-day period
76
Rule re buyer of vehicle (certificate of title)? (Priority)
A buyer **without knowledge of a prior SI** that is **not noted** on the title **takes free** of that SI. ("Clean" certificate of title)
77
Perfected SI v. Perfected SI? (Priority)
**First to file or perfect** has priority.
A **lapse** in filing or perfection **restarts the clock.**
1st PSI \> 2nd PSI
78
Perfected SI v. Unperfected SI? (Priority)
A perfected SI **has priority over** an unperfected SI.
PSI \> USI
79
Unperfected SI v. Unperfected SI? (Priority)
**First to attach** has priority ("first in time, first in right").
80
PMSI v. non-PMSI? (Priority)
Generally, a **PMSI has priority** over a non-PMSI.
81
PMSI in goods (not inventory or livestock) v. any SI? (Priority)
A PMSI **has priority** if it is **perfected within 20 days** after the **debtor receives possession**.
82
PMSI in inventory or livestock v. any SI? (Priority)
A **PMSI has priority** if:
1. **perfected** by the time the **debtor receives possession** of the collateral, and
2. the purchase-money SP sends an **authenticated notice** of the PMSI to the **holder** of any conflicting SI **before** the debtor receives possession of the collateral (notification is required only when the SI was perfected by filing)
83
Perfected PMSI v. Perfected PMSI? (Priority)
The **first to file or perfect** has priority.
⚠️ Except: a **seller** with a PMSI **has priority over a lender** with a PMSI.
84
Proceeds from PMSI in goods? (Perfection)
Priority of a PMSI in goods generally **extends to the proceeds** of the original collateral if the SI is perfected when **debtor receives possession** or within **20 days**.
85
SI in fixtures v. RP interest? (Priority)
An SI in fixtures **has priority over** an interest in the RP the fixtures are associated with, if the SI in fixtures is **perfected by a fixture filing before** the RP interest is recorded.
(For the fixture SI to have priority, the SI in the fixture has to be fixture-filed before the RP interest is recorded.)
86
Perfected SI in fixtures v. subsequent judicial lien? (Priority)
A **perfected SI in fixtures** has priority.
87
PMSI in fixtures v. prior RP interest? (Priority)
A PMSI in fixtures has priority **if** it is perfected by a **fixture filing** **before the goods become fixtures** or **within 20 days** thereafter.
88
SI in fixtures v. prior construction mortgages? (Priority)
A prior construction mortgage **has priority** if it is **recorded before the goods become fixtures**.
89
Proceeds priority rules?
“First to file or perfect” rule applies.
The **filing or perfection date** for the **original** collateral is the filing or perfection date for the proceeds.
Priority of the original collateral **generally continues in the proceeds** if the SI in the proceeds is **perfected** and the proceeds are **cash proceeds** OR proceeds **of same type** as the original collateral
90
Investment property / deposit account priority rule?
An **SP with control** over the collateral **has priority** over a SP without control.
91
What is default?
Whatever the **parties say it is**.
It is not defined in Art. 9.
92
What are the general consequences of default?
SP may **seek possession** to sell or keep it, or may **sue for a judgment** based on the obligation.
93
What if a SP ignores a default?
It may be **treated as waiver** of SP's rights.
94
SI in fixtures, debtor defaults, what can SP do?
SP may **remove the fixture** from the RP if the SI has priority.
SP will be **liable for any repair costs** from the removal.
95
SI in accession, debtor defaults, what can SP do?
SP may **remove the accession** if the SI in the accession has priority.
96
Requirements for repo?
SP must not **breach of the peace**.
SP can **render equipment unusable** instead of physically removing.
SP not required to give notice of default nor of intent to repo.
97
Standard for post-default disposition of collateral?
All aspects of the disposition must be **commercially reasonable** (method, manner, time, & place).
98
Post-default, rules about price from SP's sale?
No specific price must be obtained.
Mere fact that higher price could have been obtained **does not establish unreasonableness**.
99
Post-default, rules about type of disposition?
Public or private sale **both allowed**.
⚠️ But at **private** sale, **SP cannot purchase** the collateral.
100
Notice requirements for post-default disposition?
SP is generally **required to send authenticated notification** of disposition to:
debtor, any secondary obligor, any other SP or lienholder who has an SI perfected by filing, and any party who notified SP of a claim/interest in the collateral.
Must notify **at least 10 days out** from disposition.
⚠️ No need to notify when: collateral is **perishable** (or threatens to decline speedily in value), is of a type **customarily sold** on a recognized market (e.g. NYSE), or the person has **waived his right** to be notified in an authenticated writing.
101
Proceeds from post-default disposition, what payout order?
1st: Reasonable disposition **expenses**,
2nd: Satisfy the **secured obligation** (SP doing the disposition),
3rd+: Satisfy **subordinate/junior SIs** (if the SP made an authenticated demand before distribution ends),
Remainder/Surplus: Goes to the **debtor**
NB: Senior creditors are not paid out from a disposition, because their interest just **continues** in the collateral.
102
Post-default disposition, a balance remains after sale, what effect?
**Debtor is liable** for any deficiency.
(For **consumer goods**, SP must send **written notice** re deficiency or surplus to debtor upon demand).
⚠️ Not true for sale of accounts, chattel paper, payment intangibles, or promissory notes.
The amount of the deficiency may be adjusted to reflect a **higher price the SP could have realized** from another person.
103
Post-default disposition, what kind of title transfer?
Disposition includes **warranties of title, possession, and quiet enjoyment**.
These warranties may be disclaimed or modified.
104
Strict foreclosure requirements?
Acceptance of collateral as **partial** satisfaction allowed when:
* debtor **consents** post-default in an authenticated record
Acceptance of collateral as **full** satisfaction allowed when:
* debtor **consents** post-default in an authenticated record, OR
* the debtor **does not object** to SP's proposal to do this **within 20 days** after proposal is sent.
In either case, SP must **notify** any other SP or lienholder of record, or person who timely notified SP of a claim/interest in the collateral.
⚠️ An SP **cannot** accept collateral as **partial** satisfaction for a **consumer transaction**; SP can only accept as **full** satisfaction for the obligation!
105
Strict foreclosure of consumer goods rule?
If the consumer goods are **in SP's possession**, the SP **cannot** do strict foreclosure if
* the debtor has paid at least **60%** of the cash price (PMSI), or
* **60%** of the obligation (non-PMSI).
⚠️ The goods **must be sold**, not kept in satisfaction.
**Waiver permitted**, but only after default and in an authenticated agreement.
106
What is the time limit on redemption?
Redemption must take place **before disposition/foreclosure**.
It is not permitted after.
107
Can the right of redemption be waived?
**Yes**, but **only after default and by authenticated agreement**.
108
What is the right of redemption?
How to exercise it?
The right of a debtor to **pay up** in full **after default** instead of the property being foreclosed on.
Redeemer must fulfill **all obligations** secured by the collateral and **reasonable expenses** incurred by SP (in repoing/readying sale)
An **acceleration clause** can require the redeemer to **tender the entire balance** of the secured obligation.
109
If a SP fails to comply with Article 9, what remedy?
Debtor can sue for **injunctive** relief and any **actual damages**.
If SP improperly repo's, debtor can sue under **conversion**.
