Secured Transactions Flashcards
Accessions
Goods that are physically united with other goods in such a manner that the identity of the original good is not lost
- E.g., tire on a car
After-acquired property clause
- Without an explicit clause, the secured interest only reaches collateral the debtor had rights in at the TIME of signing the security agreement
- Requires a CLAUSE indicating security interest in after-acquired property, e.g., “owned now or acquired later.”
- EXCEPTION: courts may imply one if the collateral is of a type rapidly depleted and replenished (inventory, accounts), i.e., without it, the security interest attaches to nothing
Grant of security interest in property obtained in the FUTURE
- Enforceable
- Contract b/w debtor creditor that allows creditor to take future property
ATTACHES whne debtor obtains an interest in property
Attachment, Generally
Gives the creditor rights against the debtor in the collateral.
To attach a security interest , requires ALL OF (in any order)
- The DEBTOR must AUTHENTICATE a SECURITY AGREEMENT granting the creditor a security interest in collateral that DESCRIBES the collateral OR the creditor must take POSSESSION of the collateral
- The CREDITOR must GIVE VALUE and
- The DEBTOR must have RIGHTS in the collateral
Security interest has been CREATED; steps necessary to create security interest effective against the DEBTOR
- All rights of secured creditor
** Not a secured creditor until ATTACHMENT
Change in use of collateral
Filed financing statement remains effective to protect the security interest
- No duty to monitor, amend, even if seriously misleading
Consumer-to-Consumer Sales
Buyer takes free of security interest if
- No knowledge
- For value
- Personal use
- No filed financing statement prior to purchase
- Consumer goods in hands of both buyer and seller
Beats out a PMSI for consumer goods unless the PMSI was also filed!
** Do PMSI automically attach?
ONLY IN CONSUMER GOODS!
** Name on financing statement
Debtor’s name must be listed on financing statement. Financing statement is only void if the name is seriously misleading.
Search with correct name using filing office’s standard search logic
- Would that still retrieve the financing statement?
- Cannot correct for SPELLING ERRORS!
** Order of attachment v. perfection
Cannot be perfected before attachment, but can happen simultaneously
Original Use Test
A debtor’s original intended use of collateral governs the collateral’s classification
** Perfected v. perfected
First to file financing statement OR perfect (whichever is earlier) wins
- Get whichever date is better for you
- Getting FINANCING STATEMENT filed ASAP (i.e. before security agreement is even entered into) is critical! Can save priority
- Knowledge of other interest does not matter
Not date of attachment!
Perfected v. unperfected
PERFECTED party wins
- Good strategy to challenge perfection of creditor
Perfection
A security interest is perfected when it has ATTACHED AND use method of PERFECTION
- Order does not matter
1. AUTOMATIC perfection upon attachment - PMSI in CONSUMER goods *** if not otherwise covered by a title statute
2. POSSESSION of the collateral by the secured party (not the debtor!) - Moment of possession; continues only so long as possession is retained
- Requires PHYSICAL possession, e.g., goods, not intangibles!
- Money: perfected ONLY by possession!
3. CONTROL - Investment property: taken whatever steps necessary to sell without further intervention from creditor
- Electronic chattel paper: system showing transfer of interest reliably establishes secured party as assignee
4. NOTATION of the lien on the certificate of title - ONLY way to perfect a security interest in property with TITLES, even if it is PMSI in a consumer goods!
- Must be done by relevant governmental authority
- E.g., cars and trucks, go to DMV
- If debtor was holding goods as INVENTORY, must perfect by filing a financing statement, instead of marking each and every certificate of title
5. By filing a FINANCING STATEMENT
** Perfection by Filing a Financing Statement
Aka UCC
Financing statement must contain notice indicating that person may have security interest in collateral
* Unlike security agreement, need not be signed by debtor, but must be AUTHORIZED, i.e., creditor is authorized to file financing statement
* Can use financing statement form, own document..anything with this info
Must contain -
1. Debtor’s NAME and filing address (indexed by name)
- Majority rule: name on unexpired driver’s license issued by state where statement will be filed
- If no applicable license, just their “name”…name by which you are known in the community
- If there is an error in the financing statement, just cannot be SERIOUSLY MISLEADING
- Cannot JUST be their trade name! E.g., unofficial company name
- Not responsible for filing office errors
- Describe the COLLATERAL
- Same rules as for security agreement, EXCEPT that here, SUPER GENERIC DESCRIPTIONS (e.g., all of debtor’s property) are VALID in financing statement
- Does NOT need to mention after-acquired property in financing statement as long as it is indicated in security agreement, and description in financing statement is broad enough to cover it - Secured party’s NAME and filing address
- Error is not seriously misleading
Perfection of a non-consumer deposit account
Only by CONTROL!
- Bank where maintained automatically has control over account
- Putting deposit account in secured party’s name
- Control agreement: contract b/w debtor, creditor, and bank to give bank account to creditor
** Perfection of a PMSI
- Consumer goods: automatically perfected
- Equipment: usually by filing; any time within 20 days after the debtor gets POSSESSION of the collateral
- Inventory: usually by filing; by the time the debtor gets the collateral (no 20 day period) and others with a previously filed secuirty interest in the inventory must be given notice
** Perfection of a PMSI in Consumer Goods
Automatically perfected upon attachment
** Perfection of a security interest in goods
A creditor can perfect a security interest in goods by
- FILING, in the proper public office, a financing statement that is authorized by the debtor in an authenticated record or
- Taking POSSESSION
** Perfection of PMSI in equipment
Has priority if the PMSI is perfected when the debtor receives possession of the equipment (or within 20 days thereafter)
Perfection of security interest in accession
If a security interest is perfected when the collateral becomes an accession, the security interest remains perfected in the collateral.
Perfection, Generally
To obtain rights against another CLAIMANT to a debtor’s collateral, a secured party must also perfect its security interest.
Steps necessary to create security interest effective against the WORLD (i.e., other creditors)
- C.f. attachment…debtor
- Process of giving PUBLIC NOTICE of security interest
Rights as between the secured party and third parties (e.g., other creditors)
** Unperfected ≠ Unsecured!
- Creditor is unperfected….but that has nothing to do with security. Unperfected secured creditor
Priority of accessions
Generally, same rules. If the accession becomes PART of a whole that is subject to a security interest that has been perfected in compliance with a CERTIFICATE OF TITLE statute, the security interest in the whole has priority over the security interest in the accession.
- Want people to be able to rely on certificate of title without having to check whether parts of the car, etc. are encumbered
- VEHICLES: a security interest in an accession (e.g., tire) is subordinate to a security interest in a whole (e.g., car) which is perfected in compliance with statute
** Purchase money security interest **
A PMSI arises whe
- A creditor sells the goods to the debtor on credit, retaining a security interest in the goods for all or part of the purchase price
- A creditor advances funds that are used by the debtor to purchase the goods
“A PMSI arises when a creditor sells goods to a debtor on credit, retaining a security interest in the goods for the purchase price.”
Special KIND of security interest…on credit + secured interest
SELLER FINANCED PMSI
1. Secured party sells debtor collateral on CREDIT
3. Retains security INTEREST in collateral (items sold)
FINANCER-FINANCED PMSI (someone other than seller)
1. Loan to purchase SPECIFIC collateral
2. LOAN used to acquired THAT collateral
3. Creditor takes security interest in that collateral
* Must use THAT money for THAT item
** Requirements for Attachment
The instant these requirements are met, ATTACHMENT occurs
- SECURITY AGREEMENT
- Writing
- Oral, if the collateral is in the possession of the secured party [PLEDGE]
- Control, if collateral is a non-consumer deposit account, electronic chattel paper, investment property - VALUE HAS BEEN GIVEN
- By secured party
- Very liberal, any consideration sufficient to support a simple contract
- Also includes PAST consideration
- Every debtor has given value to the creditor…promise to repay loan
- ** Creditor gave value to debtor? - DEBTOR HAS A RIGHT IN THE COLLATERAL
- E.g., must actually own the thing you give as collateral
** Types of Collateral under Article 9
- Goods
- Semi-intangible and intangible property
Unperfected secured party v. Unperfected secured party
First to ATTACH wins
** Where are filing statements filed?
For collateral other than real estate, filed centrally with the secretary of state
** Which collateral can be perfected with a filing statement?
All but accounts and money
** Which interests may be automatically perfected?
- PMSI in consumer goods
- Small scale assignments of accounts
- Sales of payment intangibles and promissory notes
- Beneficial interests in consumer accounts
- Certain investment property transactions
***Goods under Art 9
Tangible, movable personal property. *Classify based on how COLLATERAL is USED by DEBTOR. These categories are mutually exclusive, can only be one.
- CONSUMER GOODS: used or bought for use primarily for personal, family, or household purposes
- EQUIPMENT: used or bought for use in business
- Default / catchall (even if it doesn’t meet this definition!) - FARM PRODUCTS: crops, livestock, supply
- Must be in the possession of a FARMER / debtor - INVENTORY: held by a debtor who holds them for sale lease
- Materials used/consumed in a business in a short period of time, e.g., raw materials, office supplies
***Semi-intangible and intangible property under Art 9
- INSTRUMENTS: represent right to be paid money, e.g., checks, promissory, notes
- DOCUMENT: represents right to receive goods, e.g., bill of lading, warehouse receipts
- CHATTEL PAPER: evidence BOTH monetary obligation and security interest in / lease of specific goods, e.g., promissory note + security agreement
- Electronic: electronic chattel paper - RECORD: information stored in either tangible / intangible medium
- INVESTMENT PROPERTY, e.g., stocks and bonds
- ACCOUNTS: right to payment for PROPERTY sold / SERVICES rendered
- E.g., selling goods on credit - DEPOSIT ACCOUNTS (bank accounts)
- Generally, can only take security interest in business bank account - COMMERCIAL TORT CLAIM where claimant is organization, claimant o/b/o business
- GENERAL INTANGIBLES: everything else, e.g., IP, goodwill
- Default / catch-all
- E.g., settlement money
Authorization for Filing a Financing Statement
Can be contained in any signed writing by the debtor
- If signed writing is security agreement for the collateral –> IPSO FACTO AUTH financing statement
* As long as debtor signed security agreement, all good for financing statement!
Breach of peace
Conduct that has the potential to lead to violence
- Physical presence + verbal objection = breach of peace
- Objection does not need to be violent / forceful
- Unauthorized entry into HOME = breach of peace, even if there is a contract provision consenting. Need consent at time of entry.
- Business, less likely to be a breach of the peace. However, picking lock and not re-locking on the way out is a breach.
Buyers Not in the Ordinary Course
- Take subject to perfected security interests
- Take free of unperfected security interests, unless they know of interest
Choice of law in secured transactions
File financing statement w/ SoS of state where DEBTOR is located
- Individual: located at principal residence
- Registered org: where organized, i.e., probably Delaware
- Unregistered org (general partnerships, LLPs): place of business. If multiple, chief executive office.
Collateral
Property subject to security interest
- Secured party can repossess upon default to make sure debt is paid
Construction mortgage
Always wins over subsequent security interest!
- Even over PMSI
Debtor’s right to redeem
Recover collateral by paying everything owed to creditor BEFORE foreclosure sale
- Acceleration clause: if you default, can call in entire loan balance
- E.g., miss payment, can’t just make that payment. Instead, must pay off entire debt.
Default
Event causing security interest to spring to life
- Not defined by statute
- Terms usually specified in security agreement
- In absence of specification, failure to perform obligation (e.g., late or missed payments)
Deposit accounts
- Control has priority over proceeds
- If control v. control, first to control
- Control by putting deposit in own name has priority over all other secured parties with control
- Best: co-owner - Bank that has control over the account has priority over other parties with control
- Next best: maintain account - Worst: control agreement
- If debtor transfers funds, transferee takes free of security interest unless they act in collusion with the debtor
Does a security interest in goods continue after the goods have been attached to another good where another creditor has security interest?
ACCESSION issue
Filing statement for real-property related collateral
If it covers real-property related collateral, e.g., timber or minerals, must indicate
- To be filed in real property records, describe real property, name record owner if other than debtor
Financing Statement
Document used to convey notice of security interest
- Most common way to perfect security interest
- Filed in the public record
Fixture filing unnecessary
Readily removable
1. Factory or office machines
2. Equipment that is not primarily used or leased for use in the operation of real estate
3. Replacement of domestic appliances which are consumer goods
* Any method of perfection before such goods become fixtures entitles the secured party to priority
Fixtures
Started off as personal property, and then became integrally attached to real estate. Treated as part of the real estate.
- E.g., elevator
- Difficult to dislodge
For how long is a financing statement effective?
5 years from date of filing
- Can be extended by filing a CONTINUATION statement within last 6 months of life of filing statement. Extends it for another 5 years.
- After loan is paid off, can demand that creditor files TERMINATION STATEMENT within 20 days. If consumer goods, 1 month / within 20 days of demand.
Foreclosure sale
- Foreclosing lien and junior liens get wiped, but senior liens do not
- Needs reasonable notice.
- Non-consumer, 10 days or more before time of sale.
- Content of notice depends on type of sale, type of collateral.
- Public sale: notice of time and place
- Private: notice of the time after which sale will occur
** EVERY single aspect of the sale must be “commercially reasonable.” Cannot screw over the debtor / try to get the best price.
*** If it’s not creditor is penalized
Future Advance Clause
Grant of security agreement securing FUTURE LOANS with same collateral
- New security agreement is not needed when future advance is made
Future advance clause priority
Has priority over lien creditor if made without knowledge of lien, w/in 45 days of lien arising, or pursuant to commitment entered into without knowledge of lien
Garage sale rule
If a buyer of CONSUMER GOODS resells them to another CONSUMER for VALUE, that second consumer takes free of the security interest of which he has no knowledge, provided he makes the purchase before any financing statement covering the goods has been filed.
How do you determine which co-mingled cash is proceeds?
What portion of a co-mingled bank account is identifiable?
- Lowest Intermediate Balance Test: look at balance looking at time proceeds were deposited, and then at the time of doing test Lowest balance during that time period = proceeds and cannot exceed cash deposited
How to do a “perfection contest” problem
A creditor with a perfected security interest has priority over a creditor with an unperfected security interest in the same collateral.
- Identify the kind of collateral
- How is that kind of collateral perfected?
- Are there any statutes that add additional requirements?
How to perfect a security interest in proceeds?
** If you have a security interest in PROCEEDS, i.e. original collateral was perfected and proceeds are identifiable, automatically have 20 days of perfection in the proceeds
- Continues BEYOND 20 days if -
1. Proceeds are identifiable cash
2. Same office rule: (i) the security interest in the original collateral was perfected by filing and (ii) the security interest in the proceeds would be filed in the same place (personal property v. real property) and (iii) proceeds not purchased with cash (e.g., swap transactions)
* If not applicable, perfect proceeds by amending the financing statement to cover the new proceeds (if not already broad enough)
** Classic scenario: debtor has inventory that is sold on credit and accounts are produced (proceeds)
If self-help is unavailable
E.g., debtor is always going to cause violence
- Secured party can use judicial process
Investment Property
Control beats other perfection methods
- Earlier control beats later control
- Debtor’s intermediary (e.g., broker) beats other creditors
- Otherwise, first to file or perfect
Ipso Facto Authorization
The debtor automatically authorizes the financing statement if she authorizes authenticates a security agreement covering the same collateral
Is there a clause prohibiting transfer?
If the secured party consents to a sale, lease, or other transfer of collateral free of security interest transferee will take free of interest.
- Clause, cannot do so
Judgment lien creditor
Loaned money to debtor, sued, has judgment
** Becomes at the time of LEVY (compare to time of perfection)
Money from foreclosure sale
- Repay cost of repo and sale
- Pay debt of foreclosing creditor
- Pay debts of junior creditors
- Debtor gets surplus
Need not perfect fixtures at all if….
A secured party needed not perfect at all to have priority if
- The encumbrancer or owner of the real estate, has in an authenticated record, consented to the security interest or has disclaimed an interest in the goods as fixtures
- Debtor has a right to remove the goods as against the real estate claimant
Owner
Doesn’t matter if you purchase with debt, you still own it
- All normal ownership / property agreements
Parties
- Debtor: person who owes payment or performance of the obligation secured / owes money
- Secured party / secured creditor: lender / seller in whose favor there is a security interest; person who the money is owed to with special set of collection rights…security interest (c.f., unsecured creditor)
Penalties for unreasonable sale
- Secured party is liable
- There is a statutory penalty for consumer goods
- No commercially reasonable sale = NO deficiency judgment; rebuttal presumption that sale proceeds = debt
Perfect security interest in fixtures
“Fixture filing” (not just financing statement) normally needed
- Requires info from financing statement + description of real property + name of owner
- File with the COUNTY where located (real estate)
PMSI in Inventory/Livestock
Takes priority if conflicting security interest if BEFORE debtor receives possession
- Secured party perfects
- Sends authenticated notice to other holders
- Notice received within 5 years of debtor getting possession
- Includes consignor’s interest in consigned goods
- If fails, go back to general rules
PMSI v. Lien-holder
If secured party files w/r/t PMSI w/in 20 days of debtor receiving possession of collateral, takes priority over lien creditor which arises between attachment and filing
Priority
Multiple creditors (secured party, third party) may have interest in collateral
- If foreclosed, matters a lot where you are in line of priority
- Fight between creditors
Priority for PMSI in goods OTHER than inventory or livestock
E.g., equipment, consumer goods; has priority over all conflicting security interest in same good or identifiable proceeds if PMSI is perfected at the time debtor receives possession of the collateral or within 20 days thereafter
- If not, then goes to other default rules
Proceeds
ANYTHING received from sale, exchange, collection, or other disposition of collateral or proceeds
- E.g., security interest in bike. Bike is sold for $1000. Buy widgets with the $1000. Widgets swapped for pig. ALL are proceeds.
- Unless otherwise agreed, a security interest AUTOMATICALLY gives a security interest in the IDENTIFIABLE proceeds of the collateral, i.e., secured creditor can prove that proceeds can be traced back to creditor’s original collateral
- Cash proceeds are frequently co-mingled such that it is not identifiable. May require separate accounts.
Receive collateral as gift
Probably still subject to liability
Removing an accession
A secured party may remove an accession if the security interest in the accession has priority over the claims of every person having an interest in the whole.
- Responsible for costs of repairs
- May be refused permission to remove by person entitled to reimbursement until adequate assurances of payment are given
Repossession
Secured creditor can repossess
- With judicial process, file suit for replevin
- Self-help, if it can be done without breach of the peace
- Bank hires a repossession company
- Breach of peace, then he’s liable for torts
- Can peacefully trespass, convert your car, etc. “Repo man” (not into your house). E.g., taking car from driveway. Simple trespass.
- Can make equipment unusable and leave on property, e.g. cut wires of bulldozer, taking keys
- For accounts, can notify people making payments to debtor to start making payments to secured party instead. Upon notification, MUST pay secured creditor and not to debtor
Requirements for Written Security Agreement ***
- Record showing INTENT to create security interest
- No magic words
- Debtor grants contingent property interest to creditor - Authenticated by the DEBTOR
- Signed, any symbol with present intent to authenticate the record - DESCRIBE collateral
- If timber, land concerned
- “Reasonably identify”
- Can use plain language, article 9 categories, including “all of debtor’s chattel papers,” etc.
- Super generic: “All of debtor’s property” / “all of debtor’s interest…” NOT acceptable
Resale of collateral
Secured party must show that they made an effort to obtain the best price for the collateral
- every aspect of the sale must be commercially reasonable
* Low price alone is not enough…but if price is very low, court will scruitinize
Right to deficiency judgment
Creditor can collect from debtor
- If debtor is consumer, must send calculations of deficiency / surplus
Rights on default
Holder of security interest in fixture can remove the fixture from the property
- If they don’t own the real estate, they have to pay for damages in removing collateral
- If creditor has priority over all other interests in the home, can repo fixtures whenever, even if it would make the home uninhabitable
Sale on credit
A sale where the buyer does not pay the full purchase price at the time of the sale
Scope of Art 9
A transaction, regardless of its form, that creates a security interest
- No specific language needed stating that it’s a “security interest,” substance over form
- E.g., retention of title over goods, liens
- Consignments: consignor, owner of goods, retains title and delivers to consignee, retailer, for sale to public. If not sold, returned. If not clear who owns, need to notify creditors.
- For tax and other reasons, parties may try to disguise a sale with a security interest as a lease. In a lease, the lessor receives item BACK at end of lease term when the item still has meaningful economic VALUE. In a sale, the buyer, as owner, will drain all economic value from item. At the time party entered into transaction, was it reasonably likely that the lessor would get the item back with value? E.g., option to purchase at end for tiny consideration…very unlikely to get goods back; bound to purchase goods at end of lease…sales with security interest.
Scope of the security interest
- Future advances
- After acquired property
Secured party buying collateral
Any public sale.
May buy at private sale only if the collateral is a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations.
Secured party v. buyer
- If the buyer wins, they take free of the security interest
Secured party wins unless,
1. Authorized sale: authorized by secured creditor to be sold free of security interest - Express, usually in security agreement
- Implied: INVENTORY (in ORIGINAL debtor’s hands) sold to an ordinary consumer when sale is not expressly prohibited; acquiescence to debtor selling items with security interest on it
2. A buyer in the ordinary course of business (BIOC) takes free of a security interest / lien CREATED by his SELLER, i.e., seller is debtor - BIOC: buyer in good faith, without knowledge that sale violates rights of another, in the ordinary course of business from SELLER of goods of that kind. ** Can know there is a security interest on the item…need to know that buying the item violates the secured creditor’s rights (assume sale was authorized)
Secured party v. lien-holders
Judgment lienholder wins if lien arose BEFORE security interest was perfected
- Perfection before levy, secured party wins
Secured party v. prior real estate interest
Prior real estate interest that is properly recorded has priority over subsequent security interest. I.e., first in time wins, unless security interest is PMSI, then PMSI wins if it is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter.
Secured party v. subsequent real estate interest
A security interest in fixtures has priority over any real estate interest that is recorded after the perfection of the security interest by fixture filing
Secured transaction
Transaction intended to create a security interest in personal property or fixtures
Security agreement
Agreement b/w debtor and secured party that CREATES the security interest
- Contract, “security agreement,”
- Look for language “debtor grants a security interest to X in item that debtor just purchased”
- C.f. mere promissory note, unsecured
Security interest
Dormant property interest. No rights at all unless default.
- When default occurs, property interest springs to life and creditor has interest in your property
- E.g., can repossess and sell
Seller financed PMSI v. financer-financed PMSI
seller financed wins
Strict foreclosure
Creditor KEEPS collateral itself to satisfy debt (instead of selling it)
1. Must notify any other creditor that has a lien in the same collateral. If they object within 20 days, cannot do it.
2. Must obtain debtor’s consent
- Authenticated record after default
- Failing to object within 20 days
- No PARTIAL strict foreclosure, i.e., keep collateral, and take portion off debt
* Any objections, must sell it
Supergeneric descriptions
Invalid in security agreement
Valid in financing statements for perfection
Supporting obligation
A guarantee / surety, i.e., promise to pay debt of another
- Security interest automatically attaches
Third party v. statutory lien claimant
Statutory lien-holder wins if they maintain POSSESSION of collateral
- Even wins over perfected security interest!
Top 5 Things to Remember
- Categories of collateral
- 3 Attachment requirements / sub-requirements for security agreement
- 5 Perfection methods
- Priority rules
- PMSI rules
What happens if the debtor changes their name?
Financing statement under old name is still good on collateral received four months or less after change
- More than 4 months after change, need to use their new name
- Especially important for AFTER-ACQUIRED property!
When can a financing statement be filed w/r/t security agreement?
A financing statement can be filed before a security agreement is entered into
- As long as authorized
Where do you file a financing statement?
Unless otherwise provided, filed with the SoS
- If real estate related collateral, make county filing with clerk where located
- Everything else, SoS of state’s law that applies to your secured transaction (choice of law)
- If the debtor MOVES states, secured party is unperfected 4 months after move unless it files financing statement in new jxn before period is up
- If the COLLATERAL is moved to another state to a new owner…1 year, unless file financing statement in new jxn before period is up
Which collateral may NOT be perfected by filing statement?
- Deposit accounts
- Money
** Security interest in a non-consumer deposit account is perfected by CONTROL
