Secured Transactions Flashcards
Secured Transaction
Transaction intended to create a security interest in personal property or fixtures.
Debtor
The person who owes payment or performance.
Secured Party
A creditor with a special set of collection rights (a secured creditor)
Security Agreement
A contract between debtor and creditor with language that creates a security interest.
Pledge: Oral agreement is okay if collateral is in possession of secured party.
Can be evidenced by control for: non-consumer deposit account, electronic chattel paper, investment property.
- In Writing Requires:
1. Evidenced by record showing an intent to create a security interest (no magic language)
2. Debtor must sign (authenticate)
3. Description of collateral (reasonably identify - normal vocabulary is ok) - BUT NO GENERIC DESCRIPTIONS: “all property”
- In Writing Requires:
Security Interest
An interest in personal property or fixtures securing payment or performance of obligation. It is a contingent property interest in debtor’s collateral that springs to life if debtor defaults and then creditor will have rights to property.
Collateral
Property subject to a security interest to ensure debt is paid.
Purchase Money Security Interest (PMSI)
Two ways to create:
1) Seller-Financed PMSI: Secured party sells collateral on credit and retains security interest in the item sold.
2) Financer-Financed PMSI: (1) A loan to a debtor for the purpose of debtor to buy specific collateral; (2) debtor uses money from loan to acquire the collateral; (3) then they take a security interest in that collateral.
After-Acquired Property Clause
Grant of security interest in property obtained in future.
Implied clause when collateral is the type that is rapidly depleted and replenished (inventory, accounts).
Language “owned now or acquired in the future.”
Future Advance Clause
Grant of security agreement securing future loans with same collateral.
Attachment
The security interest has been created and is effective against the debtor, and creditor has all of the rights of secured creditor under UCC ART 9.
Requires:
1) Security Agreement
- - - Intent to create security interest
- - - Debtor signs (authenticates)
- - - Description of collateral (reasonably identify - Not generic)
2) Value has been Given (past consideration ok)
- - - Every Debtor gives value because implicitly promises to pay.
- - - Creditor must provide value.
3) Debtor’s Rights in Collateral (typically ownership of collateral)
When last of three requirements occurs, creditor attaches.
Perfection
Perfection is the process of giving public notice of the security interest to the world (other creditors).
Requires:
1) Attachment AND
2) Method of Perfection
Methods of Perfection
1) Automatically perfected upon attachment - PMSI in consumer goods
2) Possession by secured party - goods
3) Control - investment property and electronic chattel paper (deposit accounts can only be perfected by control).
- - - - Three ways to perfect by control:
- - - - 1) Automatic control by bank maintaining the bank account
- - - - 2) Putting account in secured parties name
- - - - 3) Control Agreement between debtor/creditor/bank account holder
4) Notation of lien on a certificate of title (only way to perfect security interest in vehicle UNESS car dealer holding as inventory, which requires a filing)
5) Filing a financing statement
Financing Statement
Document used to convey notice of the security interest.
Primary way to perfect a security interest.
Types of Goods
A good is tangible, movable personal property.
Classify goods by how the debtor uses the collateral:
1) Farming Goods - items used/produced in farming (crops, livestock, supplies if in possession of debtor engaged in farming activities)
2) Consumer Goods - items used or bought for use for personal, household purposes.
3) Inventory - goods kept for sale or lease, raw materials or business consumables (rental car, office supplies)
4) Equipment (catchall) - used or bought for use in business - the default category
Semi-intangible and Intangible Property
Instruments: writings representing right to be paid money (checks, promissory notes)
Documents: writings representing right to receive goods (bills of lading, warehouse receipts)
Chattel Paper: record evidencing (1) a monetary obligation AND (2) Security interest in goods or lease of goods (promissory note and security agreement). Electronic chattel paper is chattel paper stored in an electronic medium.
Investment property: (stocks, bonds)
Accounts (receivable): A right of payment for property sold or services rendered that are not evidenced by an instrument or chattel (accounts receivable)
Deposit Accounts: Account maintained by a bank.
Commercial Tort Claim: A tort claim where (1) clamant is organization or (2) claimant is an individual and the claim arose out of the claimant’s business or profession and does not include personal injury or death.
General Intangibles (DEFAULT CATEGORY): patent rights, software, goodwill, intellectual property, tax refund, security deposit
Proceeds
Proceeds are anything received from sale, exchange, collection, or other disposition of collateral or proceeds. A security interest automatically attaches and gives secured party a right to “identifiable” proceeds.
Perfected security interest in collateral extends to the proceeds for 20 days.
Beyond 20 days, secured party must take new action to perfect new “identifiable” proceeds, unless proceeds are identifiable cash; OR
SAME OFFICE RULE (swap transactions; inventory to accounts)
1) Original collateral perfected by filing; AND
2) Security interest in proceeds type would be perfected by filing in same place; AND
3) Proceeds not purchased with cash proceeds
IF not identifiable cash, and same office rule doesn’t apply, then creditor needs to perfect the proceeds within 20 day period to continue with perfection (amend financing statement to cover proceeds unless already broad enough?).
Co-mingled Proceeds in bank account
Lowest Intermediate Balance Test
Starting at balance at the time proceeds were deposited, and ending at test application, the lowest balance during that time period is the party’s identifiable proceeds (can’t exceed the amount of proceeds originally deposited).
Tells us what portion of co-mingled bank account is identifiable.
Supporting Obligation
A guarantee or a surety (a promise to pay the debt of another)
Financing Statement (UCC-1)
Effective for 5 years - can be extended by filing a continuation statement (filed in last 6 months).
Must Contain:
- Debtor’s name and mailing address (cannot be seriously misleading)
- Secured party’s name and mailing address; and
- Description of collateral (reasonably identify BUT unlike security agreement, generic descriptions are OKAY “all property” etc. - does not have to specify after acquired propery, but description must cover it)
Can be used to protect most collateral except deposit accounts and money (+ cert of title goods)
Mistakes in Financing Statement are OK if those errors are not “seriously misleading”. An error is seriously misleading if a search under the debtor’s correct name (DL name) using standard search logic would not find the financing statement.
Secured party is not responsible for filing errors, and security interest is still effective.
Name Change / Debtor Address Change: Keeps perfection on collateral acquired before name/address change and that acquired within 4 months. Fine UNLESS After acquired property that Creditor needs a security interest in.
Collateral moves: SI unperfected after 1 year unless new filing.
NO SIGNATURE REQUIRED, but must be authorized in any signed writing - ipso facto authorization if debtor signs security agreement, automatically authorizes.
File with secretary of state (where debtor is located); if timber to be cut or extracted collateral, or land, then must file as a real estate in county where located.
Priority for Creditors (generally)
Determines which creditor is first in line to get paid when collateral foreclosed on.
Perfected Secured Creditor Vs. Perfected Secured Creditor
- First to file OR perfect (whichever is earlier) wins
- PMSI in consumer goods = auto perfection on attachment
Unsecured Creditor vs. Unsecured = First to attach
Priority for Buyers
Secured Party vs. Buyer
Security interest is still on item unless:
- Secured creditor Authorized sale
- Buyer in the ordinary course of business if the interest was created by their seller (in good faith, w/out knowledge of violations, in ordinary course, from seller of goods in that kind).
Buyers NOT in the ordinary course of business:
- Take subject to perfected security interests - Perfected LIVES;
- Take free of unperfected sec interests - UNPERFECTED DIES unless they know of it
Consumer to consumer sales (garage sale rule): buyers takes consumer goods (both buyer and seller) free of SI if no knowledge, pays value, for personal use and no financing statement.
Priority for Judgment Liens
Judgment Lien creditor - an unsecured creditor who won a judgment in court and gets sheriff to seize property
Judgment Lien holder wins if levy arose before security interest was perfected
PMSI vs. judgment lien: if pmsi holder FILE w/in 20 days after debtor gets possession of the collateral, he takes priority over rights of judgment that arises in those 20 days
Priority for Future Advances
A perfected future advance can gain priority over a judicial lien if future advance is made:
1) within 45 days of lien arising; OR
2) made without knowledge of the lien.
Priority for Statutory Lien Claimant
Mechanic Lien Statute - wins if they maintain possession of the collateral.
They beat even a perfected interest.
Default
The right of the secured party to proceed against collateral is triggered by default.
Default is defined in the security agreement.
Method:
1) judicial process (writ of replevin); or
2) self-help repossession (with no breach of the peace).
Breach of the peace: conduct that can lead to violence (physical presence of debtor + objection); unauthorized entry into home
OK to make equipment unusable if collateral is not easily moveable.
Can send notice to persons owing money to accounts and get paid.
Strict Foreclosure
Creditor keeps collateral itself to satisfy debt (instead of selling).
Must give notice to all other creditors with liens; and they can object;
Also need debtor to agree (which can be assumed with notice).
If objected, must sell.
Resale of collateral
Public or private sale. Foreclosing and junior liens get wiped. The senior liens ride through the sale.
1) Reasonable notice required within reasonable time (10 days prior to sale)
2) Public notice must have time/place - Private sale notice after sale
3) EVERY aspect of the sale must be “commercially reasonable” - don’t screw the debtor, and if it’s not, then “creditor is penalized”.
If not commercially reasonable, then PENALTIES:
- Liable for actual damages for failure to follow rules;
- Minimum recovery for consumer goods = 10% min goes to debtor + interest charges
- No deficiency judgment for creditor!!
- -Rebuttable Presumption Rule: sale proceeds equal the debt.
Deficiency Judgment
Amount creditor can collect from debtor beyond value of the collateral.
Right to Redeem
Debtor has the ability to recover collateral by paying everything owed to creditor, and BEFORE foreclosure sale.
Acceleration clause: if debtor defaults, creditor can make the entirety of the note due.
Fixtures
Fixtures are goods that have become so related to real property that an interest in them arises under real property law.
How to perfect security interest in fixture:
- - need to have a “fixture filing” with COUNTY, including info from financing statement; description of real property; and name of owner
Secured party vs. Real Estate interest:
First in time wins (unless PMSI, which wins if perfected w/in 20 days)
** BUT CONSTRUCTION LENDER takes priority over subsequent pmsi - ALWAYS WINS **
Accessions
Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost (tires on a car).
Same priority rules for accessions, except SI in the accession is subordinate to a SI in the whole.
If accession and removed, must reimburse damages.
TOP FIVE
- UCC ART 9 Categories of collateral
- What is required to attach? Sec agreement, value, debtor has rights + sec agreement requirements
- 5 methods of perfection
- Basic Priority rules
- PMSI rules
PMSI Perfection requirements for Super Priority
Consumer goods: perfects automatically
Equipment: can be perfected w/in 20 days after debtor gets possession (file!)
Inventory OR Livestock: must be perfected before debtor gets possession (file!) + NOTICE required
Seller-financed PMSI beats a financer - financed PMSI.
