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UBE Prep > Secured transactions > Flashcards

Secured transactions Flashcards

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1
Q

Security Interest

A

Gives creditor (secured party) rights (e.g., to sell) in debtor’s personal property or fixtures to satisfy a debt.

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2
Q

Collateral

A

Property in which the security interest is created, extends to identifiable proceeds of the collateral

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3
Q

UCC Art. 9 Goods (Tangible Collateral)

A

All things that are moveable at the time the security interest attaches.

  • Consumer goods
  • Equipment
  • Farm products
  • Inventory
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4
Q

UCC. Art. 9 Consumer Goods

A

Goods that are used primarily for personal, family, or household purposes

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5
Q

UCC. Art. 9 Inventory

A

Goods that are kept for sale or lease.

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6
Q

Attachment

A
  1. Security agreement
    1. record showing intent
    2. signed by debtor
    3. reasonably identifying collateral
  2. Debtor’s obtains rights in collateral beyond mere possession (ownership rights)
  3. Creditor extends value to the debtor

Renders creditor’s interest in the collateral enforceable effective against the debtor. Requires security agreement, debtor’s rights in collateral, and extension of value by the creditor. All three must happen the order in which they do doesn’t matter.

NB. Oral security agreement is possible but rare. For non-consumer deposit accounts, electronic chattel paper, and investment property, control will evince the security agreement.

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7
Q

Perfection (Five different methods)

A
  1. Automatic Perfection (consumer goods; purchase money security interests; assignment of accounts that don’t transfer a sig. part of the assignor’s outstanding accounts)
  2. Phys. possession/Pledge (works only for money)
  3. Control - investment property, electronic chattel, non-consumer deposit accounts (ONLY way to perfect for these accounts)
  4. Notation of the lien on a certificate of title - usually for vehicles that are NOT inventory. ONLY way to perfect security interest in a car or truck (i.e., car may look like a PMSI but it’s not)
  5. Filing a financing statement

Enhances the creditor’s interest in the rights of the collateral after attachment. Attachment and perfection can occur simultaneously. Renders creditor’s interest in the collateral enforceable effective against the world.

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8
Q

Priority Rules

A
  1. Perfected wins v. unperfected
  2. Two perfected secured parties - first to file or perfect
  3. Two unperfected parties - first to attach
  4. Seller financed PMSI beats financer-financed
  5. If same type of financed PMSI, first to file or perfect
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9
Q

PMSI

A

Purchase-money secured interest.

  1. Seller-financed PMSI
    a) Secured party sells collateral on credit AND
    b) retains a security interest in the item sold
  2. Financer-financed PMSI
    a) Secured party gives debtor a loan to buy specific collateral
    b) Debtor uses loan to acquire that collateral
    c) Creditor takes security interest in that collateral
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10
Q

PMSI Rules

A
  1. PMSI in consumer goods is automatically perfected
  2. PMSI in equipment can be perfected by filing w/in 20 days of buyer obtaining possession
  3. PMSI in inventory MUST be perfected by the time the buyer gains possession and those with a previous filed security interest in the inventory must be given notice
    1. No 20 day grace period
    2. Perfection usually by filing
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11
Q

After-acquired Property Clause

A

Grant of security interest in the property obtained in the future (in addition to the interest in the present property).

Generally, has to be expressly included within the agreement UNLESS the property is of a type that rapidly depletes and replenishes (e.g., inventory, accounts).

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12
Q

Future Advance Clause

A

Grant of security agreement securing future loans with the same collateral

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13
Q

Financing Statement

A

Document conveying notice of security interest in order to perfect it. Generally, no signature req. since the security agreement will be signed. Can be filed before security agreement! Contains:

  1. Debtor’s name (trade name NOT ok)
    1. For individuals, match driver’s license
    2. Seriously misleading errors NOT ok
      1. Must be retrievable by searching Debtor’s correct name using standard search logic
  2. Reasonably identifiable description of the collateral
    1. Generality has implications for perfection of proceeds
    2. If debtor changes their use of the collateral, financing statement remains effective (no duty to monitor or amend)
  3. Secured Party’s name
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14
Q

Equipment

A

Good used or bought for use in a business. Default/catch-all category.

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15
Q

Farm Products

A

Crops (or their products), livestock, or supplies used or produced in farming operations IN POSSESSION of a debtor engaged in farming operations.

NB. There always has to be a farmer involved for this to apply!

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16
Q

Inventory

A

Good held by debtor for sale, lease, or to be furnished under service contracts. materials used or consumed in a business in a short period of time.

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17
Q

Semi-Intangible and Intangible Property

A
  • Instruments (checks promissory notes)
  • Documents (bills of lading, warehouse receipts)
  • Chattel paper (records of a monetary obligation, e.g. a promissory note AND a security interest in a lease of specific goods (the security agreement)
  • Investment Property (stocks, bonds)
  • Accounts (right to payment FOR SERVICES rendered or PROPERTY sold)
  • Non-consumer deposit accounts (general business bank accounts)
  • Commercial tort claim (NB. This is really bad collateral)
  • General intangibles (intellectual property; good will)
    • This is the default.
    • Payment intangible - general intangible under which the account debtor’s principal is a monetary obligation (e.g., a settlement)
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18
Q

Consignment

A

A security interest involving a non-owner/consignee’s attempt to sell the goods of the owner (assignor).

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19
Q

Secured Sale Disguised as a Lease

A

NOT a true security interest because the leased property still has MEANINGFUL economic value (e.g. rental car)

Ask: At the time the parties entered into the transaction, was it reasonably likely that the lessor would get the item back with MEANINGFUL economic value?

Yes → True lease; not governed by Art. 9

No → Secured sale disguised as a lease; governed by Art. 9

NB. In a true sale, items are typically used until they are drained of their value.

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20
Q

Attachment Req. “Value Given”

A

Anything that would satisfy contractual consideration works, as would past consideration. Debtor and creditor must BOTH give consideration. Easy to meet, esp. from Debtor’s perspective b/c they give a promise to pay at a min.

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21
Q

Lowest Intermediate Balance Test

A

Used to determine the identifiable cash proceeds to which a creditor is entitled when they have been intermingled with non-collateral funds: The lowest account balance between the time proceeds are deposited and the time at which the creditor is collecting (can’t exceed value of the original deposit).

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22
Q

Proceeds

A

Anything received from the sale, exchange, collection, or other disposition of collateral or proceeds. Security interest automatically gives the secured party a right to identifiable proceeds.

If the proceeds are not identifiable cash proceeds or do not meet the same office rule, creditor must amend the financing statement to cover them unless it’s already broad enough.

NB. Perfected interest in collateral = automatic perfected interest in proceeds for 20 days. Continues w/o further action for identifiable cash proceeds and items that collateral that satisfy the same office rule.

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23
Q

Where to file Financing Statement (Generally)

A
  • Generally, Secretary of State’s office of the secretary of state where debtor
    • Individual resides
    • Registered org. (e.g., corporation, LLC, LLP) is organized
    • Unregistered org. (e.g., general p’ship) has place of business
  • Exceptionsroperty record of the county where the real estate is located (includes fixtures and timber to be cut).
  • Debtor moves out of state: 4 months to file
  • Collateral moves out of sate: 1 yr to file
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24
Q

Where to file Financing Statement (Exceptions)

A
  • Fixtures and timber to cut): record of the county where the real estate is located (includes fixtures and timber to be cut).
  • Goods covered by certificate of title: state issuing most recent certificate
  • Deposit accounts: state in which bank has CEO
  • Investment property:
    • Certificated security - where the certificates security is located
    • Uncertificated security - where the issuer was organized
    • securities account - where the securities intermediary’s CEO is located
    • EXCEPT: Perfected automatically or by filing → where debtor is located
  • Agricultural liens: where farm product is located
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25
Q

Duration of Financing Statement

A

Good for 5 years. May be extended by a continuation statement filed w/in 6 months of expiration for an additional 5 yrs.

26
Q

Termination Statement

A

Certifies conclusion of the creditor’s security interest in the collateral. Creditor must file w/in 1 mo. of satisfaction of the obligation or 20 days after the authenticated demand was received.

27
Q

Same Office Rule

A

Eliminates need for proceeds to be perfected IF:

  1. Original collateral perfected by financing statement
  2. Security interest in proceeds would be perfected by filing in same place AND
  3. Proceeds NOT purchased with cash proceeds

NB. Most often applies to “swap” transactions. Classic fact pattern involves buying something on credit since accounts are not cash.

28
Q

Perfected Secured Party v. Perfected Secured Party

A

First to file OR perfect wins.

  • NOT affected by knowledge of other lienholder’s interest
  • PMSI in consumer goods → automatic perfection
29
Q

Priority Rules: Perfected Secured Party v. Unperfected Secured Party

A

Perfected party wins

NB. In a fact pattern like this, make a case for why a purportedly “perfected” party is not (e.g., their financing statement is seriously misleading; continuation statement filed outside appropriate window)

30
Q

Special Rules: PMSI in Goods Other than Inventory or Livestock (usu. equipment)

A

PMSI wins, including as to proceeds, if the PMSI is perfected at the time the DEBTOR receives possession of the collateral or w/in 20 days thereafter

31
Q

Special Rules: PMSI Superpriority

A

PMSI in goods perfected immediately or w/in 20 days wins

32
Q

Special Rules: PMSI in Inventory/Livestock (less likely to be tested)

A

PMSI takes priority over conflicting security interests IF before debtor takes possession:

  1. Secured party perfects,
  2. Sends authenticated notice to other holders, AND
  3. Notice is received w/in 5yrs of debtor taking possession
33
Q

Special Rules: Consignor’s Interest

A

Consignor’s interest in consigned goods is considered to be a PMSI inventory. Consignor can acquire superpriority by applying the special inventory rule.

34
Q

Seller-Financed PMSI v. Financer-Financed PMSI

A

Seller-Financed PMSI wins

35
Q

Special Rules: Investment Property

A

Control wins. Earlier control beats later. Debtor’s intermediary (e.g., broker) beats other creditors.

36
Q

Priority Rules of Perfected Accounts

A
  • Best: Control via account in name beats all others
  • Second: Control via maintenance of the account
  • Control beats perfection by proceeds (i.e., control agreement)
  • If all have control → ranked by time control was obtained
37
Q

Secured Party v. Buyer

A

Secured party wins UNLESS sale authorized (expressly or impliedly) that the buyer would take free of the interest or the buyer purchased in the ordinary course of business

38
Q

Buyer in the Ordinary Course of Business

A

Buyer purchases:

  1. In good faith
  2. w/o knowledge that the sale violates the creditor’s security interest
  3. in the ordinary course
  4. from a seller of goods of that kind

Buyers NOT in the ordinary course take free of the security interest ONLY if it was unperfected and they were not aware of it.

39
Q

Consumer to Consumer Sales (“Garage Sale” Rule)

A

Buyer takes free of the security interest (even if it is perfected) if:

  1. Unaware of the security interest
  2. purchase the good for value
  3. for their personal use AND
  4. no financing statement
40
Q

Secured Party v. Judgment Lienholder

A

Judgment lienholder v. Unperfected Secured Party → Judgment lienholder

Perfection before levy → Secured party wins

Levy before perfection → Judgment lienholder wins

41
Q

PMSI v. Liencreditor

A

Secured party that has filed within 20 days of debtor taking possession of the collateral wins

42
Q

Special PMSI Rules

A
  1. PMSI in consumer goods are automatically perfected upon attachment
  2. Equipment
  3. Inventory
  4. PMSI v. Lien creditor
43
Q

Secured Party v. Statutory Lien Claimant

A

Statutory lienholder wins if they maintain possession of the collateral EVEN against a PMSI (e.g., mechanic can hold car for non-payment)

44
Q

Default

A

Failure to perform obligation when it’s due, causes the security interest to spring to life (unless security agreement defines otherwise)

45
Q

Creditor Self-Help in Repossession

A
  • Replevin action by cts w/ sheriff
  • Repossession that does NOT breach the peace
    • Breach the peace = conduct that can lead to violence
    • Businesses have fewer protections than residences
    • Phys. presence of a debtor/affiliate + verbal protest → breach
    • Unauthorized entry into a home → breach
    • Taking a car from its driveway or simple trespass does not, alone, breach (But curtilage?) the peace
    • Picking a lock that’s not relocked may breach
  • Rendering equipment unusable
46
Q

Creditor Self-Help in Accounts

A

Creditor can notify person making payments to the debtor (account debtor) to may creditor directly. Upon notification, account debtor must comply. Payment to the debtor will NOT discharge the obligation.

47
Q

Creditor Self-Help in Strict Foreclosure

A

Strict Foreclosure - creditor keeps collateral itself to satisfy debt rather than selling it.

Strictly foreclosing creditor must:

  1. Send notice to and obtain consent from fellow creditors
  2. Obtain consent from debtor

NB. Sale is the preferred remedy of creditors, most would not exercise strict foreclosure.

48
Q

Ride through the Sale (unlikely to be tested)

A

Continued attachment of senior liens on collateral after foreclosure extinguished junior liens

49
Q

Foreclosure Sale

A

Every aspect must be reasonable; otherwise, the creditor is subject to penalties (actual damages, statutory penalty for consumer goods entitling debtor to 10% of the sale, ineligibility for deficiency judgment). Requires:

  1. Reasonable notice* to debtor, sureties, relevant secured parties
  2. Reasonable time
  3. Reasonable place
  4. Reasonable manner

*Notice req. excused when collateral is perishable, threatens to decline rapidly in value, or is of a kind ordinarily sold in a recognized market

50
Q

Secured Party Buying Collateral

A

May purchase at:

  • ANY public sale.
  • Private sale only IF collateral is of a type customarily sold in a recognized market or which is the subject of widely distributed standard price quotations.
51
Q

Priority of Proceeds of Foreclosure Sale & Deficiency Judgment

A
  1. Cost of the sale
  2. Foreclosing creditor
  3. Debt of creditors junior to the foreclosing creditor
  4. Debtor

Deficiency judgment allows a creditor to collect against the debtor personally where proceeds of the sale were insufficient. However, this is useless against an insolvent debtor.

52
Q

Debtor’s Right to Redeem

A

Ability to recover collateral by paying everything owed to creditor BEFORE the foreclosure sale.

NB. Acceleration clauses give the creditor the option to declare the entire loan balance due when there is any default

53
Q

Perfection of Fixtures

A

Filing made in the office where a mortgage on the real estate would be filed; NOT the secretary of state’s office.

Fixture filing req. info of the financing statement, description of the real property, and name of the owner.

54
Q

Fixture v. Holder of Real Property

A

If the fixture itself has higher priority than all other interests in the property, holder of the fixture may remove it upon default. If the debtor is not the owner of the property, the creditor is liable for and damage caused by removal.

NB. Construction mortgage takes priority over a subsequent PMSI in fixtures/ always wins

55
Q

Secured Party v. Subsequent Real Estate Interest

A

Secured party wins

56
Q

Secured Party v. Real Estate Interest

A

First in time wins UNLESS security interest is a PMSI. PMSI wins if there is also a filing.

57
Q

Fixture Filing Unnecessary

A

For:

  • Readily removable factory or office machines
  • Equipment NOT primarily used or leased for use in the operation of real estate
  • Replacements of domestic appliances (which are consumer goods).
    • Any method of perfection before such goods become fixtures entitles creditor to priority

Perfection NOT req. for priority IF:

  • The encumbrancer or owner of the property has in an authenticated record:
    • Consented to the security interest,
    • Disclaimed an interest in the good as a fixture, OR
    • Debtor has a right to remove the goods as against the owner of the real estate
58
Q

Accession

A

Goods phys. united in other goods in such a manner that the original identity of the goods is not lost (e.g,, tires in a car). A secured party may remove an accession from other goods if the security interest in the accession has priority over the claims of EVERY creditor’s interest in the whole.

59
Q

Accession

A

Goods phys. united in other goods in such a manner that the original identity of the goods is not lost (e.g,, tires in a car). A secured party may remove an accession from other goods if the security interest in the accession has priority over the claims of EVERY creditor’s interest in the whole.

60
Q

Priority for Accessions

A

If security interest in the collateral is perfected when it becomes an accession, the interest remains perfected.

Generally, priority rules apply EXCEPT:

  • The security interest of the accession is subordinate to that of the whole
  • Accessions are perfected by compliance w/state statute
61
Q

Collateral in Hands of Bailee

A

When collateral other than certificated securities and goods covered by a document are in the hands of a bailee, secured party is deemed to be in possession form the moment bailee authenticates a record acknowledging that they are holding the collateral for the creditor (i.e., bailee can secure possession on behalf of creditor).

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