Secured Transactions Flashcards
Security Agreement
The security agreement is the agreement between the debtor and the secured party that creates the security interest.
Security Interest
A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. It’s a contingent property interest in the debtor’s collateral that the debtor grants to the creditor.
Purchase Money Security Interest (PMSI)
A purchase money security interest (“PMSI”) is a special type of security interest. A PMSI can arise in two ways:
(1) Seller-Financed PMSI: (i) The secured party sells the goods to the debtor on credit, and (ii) retains a security interest in the goods;
OR
(2) Financer-Financed PMSI: (i) The creditor loans the funds to the debtor to enable him to purchase the specific collateral; (ii) those funds are used by the debtor to acquire the specific collateral; and (iii) the creditor takes a security interest in that collateral.
After-Acquired Property Clause
Grant of a security interest in debtor’s property obtained in the future. If the security agreement has an explicit after-acquired property clause, the security interest will attach to the property as soon as the debtor acquires an interest in the collateral.
W/o an explicit after-acquired clause in the security agreement, the secured party’s security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement.
–Exception: Even w/o an after-acquired property clause, a security interest will attach automatically to collateral of a type that’s rapidly depleted and replenished, such as accounts and inventory. A security interest will also automatically attach to identifiable proceeds of collateral, even w/o an after-acquired property clause.
-An after-acquired property clause will NOT apply to consumer goods unless the debtor acquires rights in the goods within 10 days after the creditor gives value.
–An after-acquired property clause will NOT apply to any commercial tort claims.
Future Advance Clause
Grant of security agreement securing future loans w/ same collateral
–Creditor secures future advances to debtor in the present security agreement
Perfection
Maximizes secured party’s rights in the collateral as against third parties.
–It’s the process of giving public notice of the security interest
–The secured party’s rights against third parties are established by perfection
–Perfection does not occur until: (1) you attached; and (2) you did 1 of the 5 methods of perfection
Financing Statement
Document used to provide public notice of the security interest
–One of the methods used to perfect the security interest
Goods (Tangible Collateral)
Include all things that are tangible, movable personal property at the time the security interest attaches. (This includes unborn animals, growing crops, and fixtures)
There are 4 types of goods. They are classified based on how the collateral is used by the debtor:
(1) Consumer Goods - goods used or bought primarily for personal, family, or household purposes;
(2) Equipment - goods that are used or bought for use in a business (Note: this is also the default category for goods they don’t fit in any other category);
(3) Farm Products - crops or livestock or supplies used or produced in farming ops (these must include a farmer);
(4) 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 (e.g., raw materials and consumables).
Intangible or Semi-Tangible Collateral
There are 8 types of intangible or semi-intangible collateral. The category into which intangible or semi-intangible collateral is placed depends on the nature of the collateral:
(1) Instruments - pieces of paper representing the right to be paid money (e.g., promissory notes, drafts, checks, certificates of deposit);
(2) Documents - a document that represents the right to receive goods (e.g., a bill of lading [shipping receipt], a warehouse receipt);
(3) Chattel Paper - a record (writing) or records which evidence both (1) a monetary obligation, and (2) a security interest in a lease of specific goods. [“Record” is info stored in either a tangible medium (e.g., on paper) or an intangible medium (e.g., electronically stored = “electronic chattel paper”);
(4) Investment Property - includes items such as stock, bonds, mutual funds, and brokerage accounts containing such items;
(5) Accounts - includes a right to payment for property sold or services rendered (think “accounts receivable”);
(6) Deposit Accounts - an account maintained w/ a bank (nonconsumer + account monies claimed as proceeds of other collateral);
(7) Commercial Tort Claims - claimant must be either an organization or an individual, and the claim must arise out of the claimant’s business or profession, and doesn’t include damages for personal injury or death (can also apply to noncommercial tort claims that are claimed as proceeds of another collateral) (these are lawsuits)
(8) General Intangibles - any personal property not coming within the scope of the other definitions (e.g., patents, trademarks, copyrights, and goodwill)
Note: A general intangible under which the account debtor’s principal obligation is a monetary obligation = a payment intangible (e.g., a claim arising in tort that has been settled and reduced to a contractual obligation to pay)
Scope of Article 9
Article 9 applies to the following transactions:
(1) A transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
(2) A seller’s retention of title - if the seller and buyer agree that the seller will retain title to the goods after they are delivered until the buyer has paid for them, the agreement will be treated as the seller’s retention of a security interest
(3) Agricultural liens - nonpossessory liens on farm products that are created by state statute in favor of persons providing goods, services, or rental land to farmers (only the perfection and priority of these liens are governed by Art 9) [farmers get a lien on their inventory];
(4) Sales of accounts, chattel paper, payment intangibles, and promissory notes;
(5) Commercial consignment of goods - worth a total of $1000 or more to persons who (i) deal in goods of that kind under a name other than the consignor’s, (ii) are not auctioneers, and (iii) are not generally known by their creditors to be substantially engaged in selling the goods of others.
–In a typical consignment, the consignor (who’s the owner of the goods) retains title to them but delivers them to a consignee (usually a retailer), for sale to the public. If the goods aren’t sold, the consignee may return them to the consignor. In cases where the creditors of the consignee would have difficulty distinguishing inventory that a consignee is selling on consignment vs. inventory that the consignee actually owns, Art 9 considers the consignment to be a security interest and requires consignors to comply w/ it by giving notice to the consignee’s creditors.
(6) A secured sale disguised as a lease - parties may try to disguise what really is a sale w/ a security interest as a lease (either for tax purposes or to avoid the requirements of Art 9, etc). Ask: Is this transaction in substance a lease or a sale? At the time the parties entered into the transaction, was it reasonably likely that the lessor would get the item back when it still had meaningful economic value?
- –If yes, that’s a real lease.
- –If no, it’s a sale w/ a security interest (governed by Art 9)
- –Examples: At end of lease term, lessee becomes owner for little or no consideration; or, the lessee is bound to purchase at the end of the lease or to renew the lease for the remaining economic life of the property; or, the lease is for the entire economic life of the property, w/ or w/o renewal.
Attachment
Establishes secured party’s rights in the collateral as against the debtor.
–A security interest is NOT enforceable until it has attached.
Requirements for Attachment
To attach a security interest:
(1) Either 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 or control of the collateral;
(2) The creditor must give value; and
(3) The debtor must have rights in the collateral. (e.g., right to ownership or possession)
Note: An oral security agreement (a “pledge”) is ok if the secured party takes possession of the collateral.
–Any consideration sufficient to support a simple contract is “value”; even past consideration will suffice as long as the security interest is intended as security for the past consideration.
Requirements for Authenticated Security Agreement
There are three requirements to create a valid written security agreement:
(1) A record (written or ESI) showing an intent to create a security interest;
(2) Authenticated (signed) by the debtor; and
(3) The agreement must contain a description of the collateral (and if the security interest covers timber to be cut, a description of the land concerned).
Note: The description of the collateral must reasonably identify the collateral. It can be described broadly by category or type (e.g., all of the debtor’s equipment) or specifically (e.g., by serial number or by saying “the debtor’s tv” if he only has one).
–Exception: Consumer goods, consumer securities accounts, and commercial torts claims cannot be described by type alone; a more specific description is needed.
–A supergeneric description of collateral (e.g., “all of the debtor’s assets” or “ all of the debtor’s personal property”) is NOT a sufficient description.
Rights and Duties of Secured Party in Possession or Control
The secured party in possession must use reasonable care in storing and preserving the collateral, but is entitled to reimbursement for reasonable expenses in caring for the collateral.
–Risk of loss of property in the secured party’s possession is on the debtor to the extent of any insurance deficiency.
–The secured party in possession or control may hold any increase in value of, or profits from, the collateral (except money) as additional security, but money so received must be given to the debtor or applied against the secured obligation. The secured party in possession or control may also pledge the collateral.
Proceeds
Include whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds. (includes 2nd generation proceeds; insurance payable by loss or damage to the collateral unless it’s payable to someone other than the debtor or secured party; and includes claims arising out of the loss of, defects in, or damage to collateral)
–Unless otherwise agreed, a security interest automatically gives the secured party a right to identifiable proceeds. (proceeds must be identifiable)
-“Identifiable” means that the proceeds can be traced back to the original collateral
Commingled Cash Proceeds
In the case of commingled cash proceeds (e.g., in a bank account), the identifiable proceeds can be traced using the Lowest Intermediate Balance Rule.
–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.)
Time of Perfection
A security interest is not enforceable against anyone until it has attached to the collateral.
If all the steps for perfection are taken before the security interest has attached, perfection will occur upon attachment.
–Remember: A security interest can’t be perfected before it attaches to the collateral.
Methods for Perfecting a Security Interest
(A) Attachment; and
(B) One of the following:
–(1) Filing (in the proper place) of a financing statement describing the collateral;
–(2) Taking possession of the collateral;
–(3) Taking control of the collateral;
–(4) Automatic perfection (e.g., of a PMSI in consumer goods); or
–(5) Temporary perfection (e.g., of a security interest in proceeds received from the sale of collateral).
Automatic Perfection
The only type of PMSI that is automatically perfected is a PMSI in consumer goods. (it is perfected as soon as it attaches)
Perfection By Taking Possession
Security interests in most types of collateral can be perfected simply by taking possession of the collateral. (e.g., consumer goods, equipment, farm products, inventory)
–Where the secured party takes actual possession of the collateral, the security interest is perfected from the moment of possession and continues as long as possession is retained.
–Security interests in general intangibles, deposit accounts, nonnegotiable documents, electronic chattel paper, certificates of title goods, and accounts CANNOT be perfected by possession. (there’s nothing to take possession of since they’re intangible goods)
–Note: You can ONLY perfect a security interest in money via possession.
Can taking by possession and attachment occur simultaneously?
Yes. Taking possession can simultaneously satisfy the requirements for attachment and perfection; that is, possession may be the last thing needed for attachment, and attachment plus possession results in perfection.
Perfection By Control
Security interests in investment property, nonconsumer deposit accounts, and electronic chattel paper may be perfected by “control.”
–Note: The only way to perfect a security interest in deposit accounts is by control.
What is the only way to perfect a security interest in deposit accounts?
By control.
What is the only type of PMSI that is automatically perfected?
A PMSI in consumer goods.
What is the only way to perfect a security interest in money?
By possession.
How do you perfect a security interest in a nonconsumer deposit account?
There are three ways to perfect by control of a non-consumer deposit account:
(1) Automatic control by the bank maintaining the account (if the bank is the creditor);
(2) Putting the account in the secured creditor’s name;
(3) By control agreement (agreeing in an authenticated record w/ the debtor and the bank in which the deposit account is maintained that the bank will comply w/ the secured party’s orders regarding the deposit account w/o requiring the debtor’s consent).
Perfection for Motor Vehicles
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.
–In other words, the secured party must get the relevant governmental authority (e.g., DMV) to note the secured party’s lien on the certificate of title.
–This most commonly applies to cars and trucks. (but don’t forget about the exception)
Exception to Perfection for Motor Vehicles
Security interests created by DEALERS in vehicles held in inventory for sale or lease MUST be perfected by filing a financial statement. (can’t perfect any other way)
Perfection By Filing
A secured party may obtain perfection by filing (either in writing or electronically) a financing statement (“UCC-1”). 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.
–Note: A security interest may be perfected by filing as to all kinds of collateral EXCEPT deposit accounts and money.
–Secured Party’s Name: B/c searches aren’t conducted under the secured creditor’s name, an error in the secured party’s name will NOT make the financing statement seriously misleading.
–Effect of Missing Address: If a financing statement that doesn’t contain the debtor’s and/or secured party’s mailing address is ACCEPTED by the filing office, then the financing statement is effective despite the lack of the address(es).
Debtor’s Name in Financing Statement
Financing statements are indexed under the debtor’s name. In most states, the debtor’s name should match his unexpired driver’s license (if the debtor is an individual w/ an unexpired driver’s license issued by the state where the financing statement is being filed).
–If the debtor doesn’t have such a license, then the financing statement may include the debtor’s “individual name” or the debtor’s personal name and surname.
–If the debtor is a registered organization (e.g., a corp or LP), the debtor’s name must match its most recent public organic record (that is, the publicly available record that forms or organizes the organization).
–Note: Use of the debtor’s trade name is insufficient.
Effect of Error in Debtor’s Name in Financing Statement
Minor errors in the debtor’s name won’t invalidate a financing statement, but seriously misleading errors will.
A financing statement is not seriously misleading if it would be discovered in a filing office’s search under the debtor’s correct name, using the filing office’s standard search logic. (Note: There is no search logic that corrects for spelling errors)
–If the filing easily could be found despite the error, the financing statement will stand.
–Errors by Filing Office: The failure of the filing office to correctly index a financing statement does NOT impact its effectiveness (the secured creditor is not responsible for filing office error).
What happens if the debtor changes his name after filing a financing statement?
The financing statement is effective only against collateral acquired by the debtor BEFORE the name became insufficient and within 4 months after.
–For collateral acquired after the 4-month period, the secured party must refile using the debtor’s correct name.
Description of Collateral in Financing Statement
The description of collateral in a financing statement is sufficient if it reasonably identifies the collateral, which can be broadly by category or type (e.g., “equipment”) or specifically (e.g., by serial number).
–Note: Unlike in authenticated security agreements, a financing statement MAY contain a supergeneric description of the collateral, such as “all assets.”
–The financing statement need not mention after-acquired property to perfect a security interest in such property if the description in the financing statement is broad enough to cover the after-acquired property.
Real Property-Related Financing Statements
In addition to having the names and addresses of the debtor and secured party and a description of the collateral, financing statements that cover real property-related collateral (e.g., minerals, timber to be cut, fixtures) must also contain:
(1) A description of the related real property;
(2) The name of the record owner (if not the debtor); and
(3) An indication that it is to be filed in the real property records.
Does the debtor have to authorize the filing of the financing statement?
Yes. For a financing statement to be effective, the debtor must authorize the filing in any signed writing either before or after it is filed.
In addition, the debtor automatically authorizes the financing statement if the debtor authenticates the financing statement OR authenticates a security agreement covering the same collateral as the financing statement. (“ipso facto” authorization)
–The financing statement need not be signed, but must be authorized.
–Any signed writing by the debtor will authorize the creditor to file a financing statement.
Can the authenticated security agreement itself be filed as the financing statement?
Yes. The authenticated security agreement itself may be filed as the financing statement if the parties so desire. If it’s filed, it must contain all of the elements necessary for the filing statement (names/addresses of both parties + description of collateral).
