Secured Transactions Flashcards
Article 9
Article 9 applies to all security interests in personal property or fixtures by contract. The words “security agreement” do not have to be specifically stated for one to exist. Article 9 also applies to lease agreements that are not true leases (but instead, security interests).
Consumer goods:
goods that are bought for use primarily for personal, family, or household
purposes (e.g., a computer in the hands of a consumer).
Inventory:
goods held for sale or lease, goods that are to be furnished under service contracts, and materials used or consumed in a business in a short period of time )
Equipment:
goods that are used or bought for use in a business.
Note: This is also the default category for goods.
Farm products:
crops, livestock, supplies produced in a farming operation or products of crops or livestock in their unmanufactured state in possession of debtor who is engaged in a farming operation.
Attachment Purpose
creates security interest
Attachment Requirements:
- Security Agreement by possession, control, or authentication
- Value ( any consideration including past by Debtor and Creditor)
- Debtor has rights in collateral
Security Agreement Requires:
- Record showing intent to create security interests
- Authenticated (Signed by Debtor)
- Describes Collateral - Reasonably Identifiable
After-acquired property:
the general rule is that a security agreement can cover after-acquired property and does not need to specifically reference it to be effective.
Perfection requires:
- attachment and
- one of the following
- Possession ( most common = goods and only way to perfect $)
- Control ( only way to perfect deposit account)
- Filing of finance agreement
- Automatic ( PMSI in consumer goods)
- Temporary
Perfection - Choice of Law
state of law where debtor is located governs
An individual Debtor’s location:
principal residence
A Registered Business Debtor’s location:
state of incorporation
An Unregistered Business Debtor’s location:
Principal place of business
Priority between perfected and unperfected secured party.
Know that a perfected security interest beats an unperfected one—even if one has an unperfected PMSI.
Priority between Two Unperfected parties
then the first to attach has priority.
Priority between two Perfected Secured Parties
the first to file or perfect has priority.
A buyer in the ordinary course of business:
buyer in the ordinary course of business generally takes free of any security interest created by the buyer’s seller, even if the security interest is
perfected and the buyer knows of its existence.
Note: that the buyer is not in the ordinary course of business if he knows that the sale is in violation of a term in the security agreement.
A buyer not in the ordinary course of business:
A buyer not in the ordinary course of business takes collateral subject to a perfected interest.
Generally, he does not take subject to an unperfected interest if he gives value and does not know about the interest.
Consumer to consumer goods (garage sale) exception to the buyer not in the ordinary course of business rule:
a buyer not in the ordinary course of business takes free of a security interest even though perfected, if he buys without knowledge of the security interest; for value; and for his own personal, family, or household purposes unless:
prior to the purchase, the secured party has filed a financing statement covering the goods. The goods must be consumer goods both when the seller has them and when the buyer buys them for this to apply.
Secured Party vs a lien creditor
- The general rule is that, as between a secured party and a lien creditor, priority belongs to the secured party, provided it perfects before the lien arises.
- If the interest was unsecured or only perfected after the lien creditor served the writ, then the lien creditor has priority.
The steps that a secured creditor takes to foreclose on its collateral:
If a default occurs the lender can demand payment or self help to reclaim the goods as long as it does not breach the peace.
Default
if a default occurs, the lender can demand payment or use self-help to reclaim the goods so long as it does not breach the peace.
Breach of Peace
Any conduct that has the potential to lead to violence.
There are several factors to examine to determine if the lender has breached the peace, including:
- whether the repossession took place at the debtor’s premises and
- whether the debtor objected
- Some courts also look at whether trickery was used.
- Some courts say that any objection (even if slight and even if only verbal) amounts to a breach of the peace.
Resale after Default
The secured party may sell or dispose of the collateral in a commercially reasonable way.
- The security interest is discharged when this occurs, but the debtor is liable for any deficiency.
- The obligation owed to the disposing secured party and any junior liens are paid off. (Senior liens remain on the collateral.)
Debtor’s means of protection #1 and #2 under a Resale
- the sale must be commercially reasonable.
- The debtor must receive written notification of the sale.
The debtor and perfected secured parties (or secured parties who have notified the secured party of their interest) must know when the chance to redeem the collateral is going to pass. (This is not necessary if the collateral threatens to decline rapidly.)
Timeliness of notification in Debtor Protection
this is generally a question of fact, but in a nonconsumer transaction, a notification sent 10 days or more before the disposition (sale) is considered reasonable.
Debtors Means of Protection - Content of notification:
Nonconsumer Transactions -> the notification of disposition should describe the debtor and the secured party and the collateral, state the method of disposition, and state that the debtor is liable for unpaid indebtedness as well as a charge for accounting.
Consumer Transactions –> the notification must additionally contain a description of any liability for a deficiency, a telephone number that the consumer can call to discover the amount owed, and a telephone number or mailing address from which the consumer can get additional information about the disposition and the obligation.
Remedies if secured party fails to comply with above requirements
- Remedy #1: Damages (including consequential damages, but the debtor has a duty to mitigate). If the collateral constitutes consumer goods, statutory damages are awarded.
- Remedy #2: Sale. A court may order a sale.
- § Remedy #3: Rebuttable presumption
Rebuttable Presumption Remedy
- Nonconsumer transaction: if there is a failure to comply with these requirements and the secured party fails to show that the sale was commercially reasonable, then there is a rebuttable presumption that the collateral is worth the amount of the debt and the debtor’s deficiency is nothing. (July 2005)
- Consumer transaction: There are two approaches that courts follow: the absolute bar rule (the creditor’s noncompliance bars any recovery of deficiency) or the rebuttable presumption rule (same as previous bullet point).
Debtor’s right to redeem:
the debtor can redeem prior to the disposition of the collateral by paying everything due and owing to the creditor.
