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Bar Prep! > Secured Transactions > Flashcards

Secured Transactions Flashcards

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1
Q

secured transaction (definition)

A

a secured transaction is a transaction intended to create a security interest in personal property or fixtures

it generally involves a sale on credit or a loan in which the seller or the lender obtains a lien on some or all of the debtor’s property as a security for payment

to spot a secured transaction, look for (1) a credit transaction (a sale on credit or a loan) and (2) an agreement that create a lien in favor of the creditor in the debtor’s personal property to secure the debt

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2
Q

purchase money security interest

A

a special type of security interest, arising in two ways:

(1) the secured party sells the goods to the debtor on credit and retains a security interest in the goods sold; or
(2) the creditor loans the funds to the debtor to enable the debtor to acquire the specific collateral, and the creditor takes a security interest in that collateral

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3
Q

attachment (general definition)

A

deals with those steps legally required to give the secured party a security interest in the collateral that is effective against the debtor

once a security interest ATTACHES, it is effective against the debtor, and the creditor has all of the rights of a secured creditor under Article 9

a creditor is not a SECURED CREDITOR until attachment

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4
Q

perfection (general definition)

A

deals with those steps legally required to give the secured party an interest in the collateral that is effective as against the world

perfection is the process of giving public notice of the security interest to the world

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5
Q

financing statement (general definition)

A

a financing statement is the document generally used to provide public notice of the security interest, and so to PERFECT the interest

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6
Q

consumer goods

A

goods that are used or bought primarily for personal, family, or household purposes

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7
Q

equipment

A

goods that are used or bought for use in business

this is the DEFAULT category for goods

if the collateral is a good, and it doesn’t fit the definition of consumer goods, inventory, or farm products, it gets classified as equipment

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8
Q

farm products

A

crops or livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states if they are in the possession of a debtor ENGAGED in farming operations

a farmer must be involved for this definition to work

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9
Q

inventory

A

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

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10
Q

instruments

A

pieces of paper representing the right to be paid money, like PROMISSORY NOTES, DRAFTS (CHECKS), AND CERTIFICATES OF DEPOSIT

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11
Q

documents

A

a document that represents the right to receive goods (for example, a bill of lading, a warehouse receipt)

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12
Q

chattel paper

A

a record or records which evidence both (1) a monetary obligation and (2) a security interest in or a lease of specific goods

a “record” is information that is stored in either a tangible medium (written on paper) or an intangible medium (for example, electronically stored)

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13
Q

investment property

A

includes items such as stocks, bonds, mutual funds, and brokerage accounts containing such items

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14
Q

accounts

A

includes a right to payment for property sold or services rendered

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15
Q

deposit accounts

A

an account maintained with a bank

in general, article 9 only applied to security interests in NONCONSUMER deposit accounts and account monies that are claimed as proceeds of other collateral

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16
Q

commercial tort claims

A

a tort claim where (1) the claimant is an organization (for example, a partnership or corporation), or (2) the claimant is an individual, the claim arose out of the claimant’s business or profession, and the claim does not include damages for personal injury or the death of an individual (note that Article 9 also applies to noncommercial tort claims that are claimed as PROCEEDS of other collateral

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17
Q

general intangibles

A

any personal property not coming within the scope of the other definitions, such as patent and trademark rights, copyrights, and goodwill

a general intangible under which the account debtor’s principal obligation is a monetary obligation is a payment intangible

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18
Q

three requirements for attachment

A

(1) the parties must agree to create the security interest (that is, they must enter into a security agreement) as evidenced by (i) the creditor taking possession of the collateral, (2) an authenticated security agreement, or (2) the creditor taking control of nonconsumer deposit accounts, electronic chattel paper, and investment property;
(2) value must be given by the secured party; and
(3) the debtor must have rights in the collateral (such as ownership)

(1) security agreement;
(2) value given;
(3) debtor’s rights in collateral

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19
Q

authenticated security agreement (requirements)

A

evidenced by a record showing an INTENT to create a security interest
authenticated by some marking of the debtor
containing a description that “REASONABLY IDENTIFIES” the collateral

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20
Q

rule against supergeneric descriptions

A

a supergeneric description of collateral such as “all of the debtor’s assets” or “all of the debtor’s personal property” is not a sufficient description

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21
Q

T/F: A security interest in collateral automatically attaches to identifiable proceeds of the collateral.

A

TRUE

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22
Q

lowest intermediate balance rule

A

in the case of commingled cash proceeds, the identifiable proceeds can be traced using this rule.

you will look at the bank account starting at the time the proceeds are deposited and ending at the time you are applying the rule. the lowest balance during that time period is the secured party’s identifiable proceeds (but the amount cannot exceed the value of the cash proceeds originally deposited)

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23
Q

automatic perfection—PMSI in consumer goods

A

A PMSI in consumer goods is PERFECTED as soon as it attaches

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24
Q

perfecting security interests in nonconsumer deposit accounts

A

security interests in nonconsumer deposit accounts can ONLY be perfected by CONTROL

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25
Q

methods of obtaining control (nonconsumer deposit accounts)

A

(1) the bank in which a nonconsumer deposit account is maintained AUTOMATICALLY has control over the deposit account

if the secured party is not such a bank, it may obtain control over a nonconsumer deposit account by either:

(2) putting the deposit account in the secured party’s name; or
(3) agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that the bank will comply with the secured party’s orders regarding the deposit account without requiring the debtor’s consent (a control agreement)

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26
Q

perfection for motor vehicles

A

under the state’s certificate of title law, security interests in motor vehicles required to be titled can ONLY be perfected by notation on the certificate of title issued by the state

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27
Q

perfection for motor vehicles EXCEPTION

A

security interests created by dealers in vehicles held in inventory for sale or lease are perfected by filing a financing statement under the ordinary Code rules EVEN IF a certificate of title covering the vehicle is outstanding

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28
Q

perfection by filing (requirements)

A

a secured party may obtain perfection by filing (either in writing or electronically) a financing statement

The financing statement must contain:

(1) the debtor’s name and mailing address;
(2) the secured party’s name and mailing address; and
(3) a description of the collateral covered by the financing statement

a security interest may be perfected by filing as to all kinds of collateral EXCEPT deposit accounts and money

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29
Q

debtor’s name in the filing statement

A

if the debtor is an individual with an unexpired driver’s license issued by the state where the financing statement is to be filed, the debtor’s name on the financing statement must match the license

if the debtor doesn’t have a driver’s license, then the financing statement may include the debtor’s individual name or the debtor’s personal name and surname

USE OF THE DEBTOR’S TRADE NAME IS INSUFFICIENT

30
Q

effect of error in debtor’s name

A

minor errors in the debtor’s name won’t invalidate a financing statement, but SERIOUSLY MISLEADING ERRORS (like spelling errors) will.

a financing statement is not seriously misleading if it would be discovered by a financing office search under the debtor’s correct name, using the filing office’s standard search logic

31
Q

debtor’s name change

A

if the debtor’s name as indicated on the filed financing statement becomes insufficient and thus seriously misleading because the debtor CHANGED THEIR NAME. the financing statement is effective only against the collateral acquired by the debtor BEFORE THE NAME BECAME INSUFFICIENT and w/in FOUR MONTHS after

32
Q

description of the collateral—filing statement

A

unlike the requirements for an authenticated security agreement, the financing statement may contain a supergeneric description of the collateral, such as “all assets”

33
Q

which state law governs perfection?

A

the law of the state where the debtor is located generally governs perfection of the security interest (and thus the filing statement must be filed there)

if the debtor is an…

(1) individual –> located in the state of principal residence
(2) registered organization –> state of organization
(3) unregistered organization –> state of chief executive office

34
Q

relocation of the debtor (effect on perfection)

A

if the perfection of a security interest is governed by the law of the state in which the debtor is located, and the debtor MOVES from one state to another, the security interest generally will become UNPERFECTED 4 months after the debtor’s move unless the secured party files a financing statement in the new jurisdiction BEFORE that 4 month period is up

35
Q

collateral transferred to new owned in a different state (effect on perfection)

A

if collateral is transferred to a new owner who is located in a different state, the security interest will become unperfected ONE YEAR after the collateral moves unless the secured creditor files a financing statement in the new jurisdiction before the one-year period is up

36
Q

continuation statements

A

a financing statement is valid for FIVE YEARS

a continuation statement may be filed, making the statement good for an additional five years

the continuation statement can ONLY be filed within 6 months before the lapse of the filing statement

the authorization of the debtor is not required

37
Q

perfection of proceeds

A

if a secured party has a perfected security interest in collateral, the secured party AUTOMATICALLY has a perfected security interest in any proceeds of the collateral for TWENTY (20) DAYS after receipt of the proceeds

the security interest in the proceeds will continue to be perfected BEYOND the 20 days if:

(1) the proceeds are identifiable cash (the “cash proceeds” rule); or
(2) the security interest in the original collateral was perfected by filing a financing statement, security interest in the type of collateral constituting the proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not PURCHASED with cash proceeds of the collateral (the “same office” rule) (this is most commonly associated with inventory, the proceeds of which are accounts or equipment (the “swap” rule)); OR
(3) the security interest in the proceeds is perfected within the 20-day period.

38
Q

change in use of the collateral

A

if the debtor changes its use of the collateral (for example, from equipment to inventory), the filed financing statement (with the description “equipment”) remains effective to perfect the security interest

the secured creditor has no duty to monitor the collateral or to amend the financing statement, even if the creditor knws that the description is seriously misleading

39
Q

priority between perfected secured parties (secured party v. secured party)

A

when there are conflicting perfected security interests in the same collateral, priority goes to whichever party was the FIRST to either file or perfect—whichever is earlier—provided that there is neither filing nor perfection

40
Q

priority between unperfected secured parties

A

when two UNPERFECTED security interests conflict, the first to ATTACH has priority

41
Q

priority between unperfected and perfected secured parties

A

a perfected security interest generally prevails over an unperfected security interest

42
Q

PMSI superpriority (generally)

A

PMSIs enjoy a superpriority—they’re superior to prior perfected security interests in the same collateral if certain conditions are met

43
Q

PMSI in goods other than INVENTORY and LIVESTOCK (superpriority rule)

A

a PMSI in goods other than inventory and livestock (for example, equipment) has priority over conflicting security interests in the same goods OR THEIR PROCEEDS if the interest is perfected before or within 20 days after the debtor receives possession of the goods

44
Q

PMSI in inventory and livestock (priority rule)

A

a PMSI in inventory collateral has priority over a conflicting security interest if

(1) it is perfected at the time the debtor gets possession of the inventory (the filing must take place before the inventory is delivered to the debtor); and
(2) any secured party who has filed their security interest in the same inventory receives authenticated notification of the PMSI before the debtor receives possession of the inventory, and the notification states that the purchase money party has or expects to take a PMSI in inventory of the debtor described by kind or type

the notification is effective for 5 years

45
Q

conflicting PMSIs (priority rules)

A

if more than one party has a PMSI superpriority in collateral, the secured party who has a PMSI in collateral as a seller (seller-financed PMSI) has priority over a secured party who has a PMSI in the same collateral as a lender (a financer-financed PMSI)

otherwise, the first secured party to file or perfect prevails

46
Q

Special Priority Rule for Conflicting Security Interests in Investment Property

A

A security interest PERFECTED BY CONTROL has priority over a security interest perfected by any other method (that is, by filing or automatic perfection)

47
Q

Special Priority Rule for Conflicting Security Interests in Deposit Accounts

A

A security interest in a deposit account that is perfected by control has priority over a conflicting security interest that is perfected by another method (namely, as proceeds of other collateral)

if there are conflicting security interests that are perfected by control, they rank according to the time of obtaining control, subject to the following exceptions:

(1) a secured party who has obtained control by putting the deposit account in the party’s name has priority over ALL other secured parties with control; and
(2) a bank that has control because it maintains the deposit account has priority over all secured parties with control, other than the party who has obtained control by putting the account in their name

48
Q

secured party v. buyer or other transferee

A

generally, when a buyer (or lessee) buys or leases something with a security interest on it, the security interest says on the item

49
Q

authorized sale exception

A

if the sale or lease of the collateral is AUTHORIZED by the secured party free of the security interest, the transferee takes free of the security interest

authorization may be express or implied (for example, there is implied authorization to sell inventory to ordinary consumers)

50
Q

unauthorized sale exceptions

A

a buyer in the ordinary course of business takes free of a nonpossessory security interest in the goods created by the buyer’s seller, even though the security interest is perfected and even though the buyer knows of the security interest

51
Q

buyer in the ordinary course (definition)

A

a “buyer in the ordinary course” is in the ordinary course of business from one who buys goods (1) in good faith, (2) without knowledge that the sale violates the rights of another person in the goods, and (3) in the ordinary course of business from the seller in the business of selling goods of the kind purchased

the typical case of a buyer knowing that the sale violates the rights of others is when the buyer knows that the sale violates the security agreement

52
Q

buyers not in the ordinary course of business

A

take subject to PERFECTED security interests

take free from UNPERFECTED security interests unless they know of the security interest when they give value or take delivery

53
Q

consumer-to-consumer sales rule

A

in the case of consumer goods, a buyer takes free of a security interest, even though it’s perfected, if the buyer buys (1) without knowledge of the security interest; (2) for value; (3) for the buyer’s own personal, family, or household purposes; and (4) before a financing statement covering the goods has been filed.

note that the goods must be consumer goods in the hands of both the buyer and the seller

54
Q

secured party v. judicial lien creditor

A

a judicial lien creditor is a person who has acquired a lien on the collateral through judicial attachment, levy, or the like

a judicial lien creditor prevails over the holder of a security interest in collateral if the lien creditor becomes a lien creditor BEFORE the security interest is perfected

on the other hand, a prior perfected security interest has priority over a judicial lien

55
Q

timing of a judicial lien creditor

A

a creditor who has won a judgment in court becomes a judicial lien creditor at the time of LEVY—that is, seizure of the collateral by the sheriff)

look to see when the sheriff levies on the collateral and when the security interest is perfected to determine a judicial lien holder v. secured creditor priority dispute

56
Q

prior filed (but not perfected) security interest v. judicial lien holder (narrow rule)

A

the secured party has priority if the secured party perfected before the judicial lien arose

however, the secured party will ALSO have priority if the secured party obtained a security agreement and filed a financing statement (but did not attach and perfect) before the judicial lien arose, as long as the secured party eventually attaches and perfects

57
Q

PMSI v. judicial lien holder

A

if the secured party files a financing statement with respect to a PMSI within 20 days after the debtor receives the collateral, the secured party will have priority over a judicial lien arising between the time the security interest attaches and the time of the filing

58
Q

perfected future advances v. judicial lien holders

A

for a perfected future advance to gain priority over a subsequent judicial lien, the future advance must be made (1) without knowledge of the lien, (2) within 45 days of the lien arising, or (3) pursuant to a commitment entered into without knowledge of the lien

59
Q

secured party v. possessory (statutory) lien holder

A

a possessory lien imposed by other state law in favor of those who supply goods or services has priority over a security interest as long as the goods or services were provided in the ordinary course of business and the collateral remains int he lien holder’s possession

example:
Bank has a perfected security interest in D’s car. D takes the car to Bubba for repairs. Bubba makes repairs; D refuses/fails to pay for them. Bubba, by statute and common law, has a lien on the car.
Bubba must remain in possession, but he has priority over the bank’s perfected security interest.

60
Q

default (definition)

A

generally construed as failure to pay or perform

61
Q

self-help repossession

A

after default, the secured party is entitled to take possession of the collateral without judicial process (that is, with “self help”) if this can be done without breach of the peace

when a secured party breaches the peace, the secured party loses the authorization to repossess, may be sued for conversion (and possibly assault, battery, trespass, etc.) and is liable for actual (and frequently punitive) damages

62
Q

breach of the peace (definition)

A

any conduct by the secured party that has the potential to lead to violence is a breach of the peace

physical presence of the debtor plus a verbal objection over the repossession is enough to create a breach of the peace

63
Q

breaking and entering (breach of the peace)

A

residence? not ok

commercial property? less likely to be not ok

64
Q

rendering equipment unusable

A

without removal, the secured party can also make equipment unusable and dispose of it on the debtor’s property IF the secured party can do so without a breach of the peace

65
Q

commercial reasonableness rule

A

every aspect of a foreclosure sale must be commercially reasonable

the secured party must show that they made an effort to obtain the best price for the collateral

factors:
the sufficiency of the advertising
if the collateral had a limited market, whether people in that market were contacted;
whether the collateral needed cleaning or repair; and
if the sale was by public auction, the convenience of the time and place

66
Q

when the secured party may buy the collateral

A

the secured party may buy the collateral at any public sale but may buy at a private sale only if the collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations

67
Q

failure to comply with code rules—minimum recovery for consumer goods

A

if the collateral is consumer goods and the secured creditor violates the code’s rules on default (for example, the sale wasn’t commercially reasonable). the debtor is entitled to a minimum of 10% of the cash price of the goods plus an amount equal to all the interest charges to be paid over the life of the loan

68
Q

fixture (definition)

A

personal property attached to real estate with the intent that it become a permanent part of the real estate is a fixture

for example, central air conditioning, built-in appliances, and elevators are typically fixtures

the distinctive aspect of a fixture is that interests in it may arise under both the Code and under real estate law

69
Q

perfection of a security interest in fixtures

A

to do so, a FIXTURE FILING must be made in the office where a mortgage on the real estate would be filed

a fixture filing financing statement must reasonably identify the real estate and must show the name of the owner

70
Q

secured party (fixture) v. subsequent real estate interest

A

a security interest in fixtures has priority over any real estate interest that is recorded subsequent to the perfection of the security interest by fixture filing

71
Q

PMSI fixtures

A

a PMSI takes priority over an earlier in time realty interest if its perfected by a fixture filing before the goods become fixtures or within 20 days thereafter

March 1: D grants mortgage on D’s real property
June 1: S sells D on credit a new furnace for his real property, retaining a security interest in the furnace.
June 5: Fixture filing by S.
Priority?
S.

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