Secured Transactions Flashcards
Scope:
-UCC Article 9 applications
-applies to
(1) consensual security interests in (i) personalty & (ii) fixtures;
(2) agricultural liens;
(3) sale of accounts, chattel paper, payment intangibles, or promissory notes;
(4) certain consignments; and
(5) secured sales disguised as a lease
*only applies to voluntary collateralizations – note statutory or mechanics liens
debtor
-an entity that owes payment or performance
secured party / secured creditor; security agreement
-entity that has security interest
-security agreement: contract agreement between the D and secured party that creates the security interest
security interest
-interest in personal property or fixtures which secures payment or performance of obligation
collateral
fixtures or personality subject to security interest which creditor can look to for satisfaction
purchase money security interest (2 kinds)
(1) seller financed PMSI: the secured party sells D collateral on credit and retains security interest in the item sold
(2) Enabling loan: a loan to D enabling D to buy specific collateral, and creditor takes security interest in specific collateral
after-acquired property claise
-permissible, and allows secured party to obtain a security interest in D’s future property
future advance clause
-permissible, and allows secured party to contract to make future advances secured by present security agreement
attachment
-steps legally required to give a secure party a security interest in the collateral that is effective against debtor
*creditor is not secured creditor until attachment
perfection
-steps legally required to give a secured party interest in collateral effective against the world
-generally, perfection = providing public notice of a security interest
financing statement
-the document used to provide public notice of security interest
Creating an Enforceable Security Interest: Attachment
-attachment makes the security interest enforceable.
-Three requirements (VCR):
(1) Value: must be given by the creditor. Any consideration to support a simple contract is enough;
(2) Contract: the contract must evidence secured transaction, UNLESS the secured party has taken possession of the collateral (security agreement).
—the contract must be (i) authenticated, and (ii) must reasonably identify the collateral;
(3) Rights: the D must have a right to encumber the collateral
Perfection of a Security Interest:
-methods of perfection
-perfection of the security interest puts the world on record or constructive notice of the secured party’s existence.
There are several ways to perfect a security interest:
(1) possession
(1) possession: security interest is perfected as soon as the Secured party takes possession of the physical collateral;
method of perfecting a security interest:
(2) Control
(2) Control: when collateral is investment property and electronic chattel paper;
method of perfecting a security interest:
(3) Notation of lien on certificate of title
(3) Notation of lien on certificate of title: where collateral is an automobile
method of perfecting a security interest:
(4) Secured party files a notice in public records
(4) Secured party files a notice in the public records (MOST COMMON method):
-must only provide enough info to enable others to make inquiries
-Must only be “simple and sparse”, but MUST include D’s and creditor’s name and address, plus a description of the collateral
-the notice is filed with the SoS where the D is located
(Individual: then the state of principal residence)
(registered org: then the state under whose laws organized)
(if collateral related to land: then the county where the land is located)
method of perfecting a security interest:
(5) Purchase money security interests (PMSI) in consumer goods
AUTOMATIC perfection
perfection as to proceeds
-if a secured party has perfected security interest in collateral, they automatically have perfected security interest for 20 days in proceeds D receives in exchange for collateral
*after 20 days, must take steps to perfect new interest, UNLESS
(a) identifiable cash proceeds; or
(b) security interest in original collateral perfected by filing financing statement, security interest for new collateral/proceeds would be filed in the same place as the financing statement for original collateral, and proceeds not purchased with cash proceeds of collateral
change in the use of the collateral
-does not change the effectiveness of a filed financial statement to perfect the security interest
Priority:
-generally
-if multiple secured parties claim the same collateral, the first to file OR perfect has priority
-each claimant is entitled to payment in full before a subordinated claimant is entitled to take
Hierarchy of Priorities
(1) Buyer in the Ordinary Course: a buyer who purchases goods from a merchant in good faith, without knowledge that the sale violates the rights of another party in the goods, and in ordinary course from a person in the business of selling such goods
Hierarchy of Priorities cont’d
(2) perfected attached creditor: an Article 9 creditor who attains perfection
(3) lien creditor: a general creditor who gets a judicial lien on the collateral
Hierarchy of Priorities cont’d
(4) non-ordinary course buyer: purchases collateral outside the ordinary stream of commerce (eg. buying a stereo from a florist): therefore takes the collateral subject to perfected security interests
*BUT takes free from un-perfected security interests IF no knowledge
Hierarchy of Priorities cont’d
(5) Attached unperfected creditor: an Article 9 creditor who attaches security interest, but the creditor either (i) never perfects; or (ii) tries to perfect, but fails
Hierarchy of Priorities cont’d
(6) General Unsecured Creditor: a lender that fails to take collateral
specific contests of priority:
Attached unperfected creditor v. the world
-enforceable against D, and defeats subsequent AUPC and any GUC
-AUPC loses to PAC, to LC, and any buyer without knowledge of security interest
specific contests of priority:
Perfected attached creditor v. the world
-PAC defeats all.
-EXCEPT:
(i) another PAC who filed first;
(ii) certain PMSI holders (after-acquired collateral financier: secured creditor who takes as collateral “all of D’s xx” and Holder of PMSI: security interest enabling D to purchase goods); and
(iii) a BIOC
Default: definition
when D breaches security agreement, secured party has a right to proceed against the Debtor
self-help repossession
-allowed to repossess the collateral without judicial process as long as the creditor doesn’t “breach the peace” (conduct likely to cause violence
self-help repossession:
-physical presence of D + verbal objection
-if collateral is in D’s home
-if collateral is outside the home
-the physical present of D + verbal objection is generally enough to cause breach of the peace
-if the collateral is in D’s home, the creditor may not enter without a voluntary and contemporaneous consent
-if the collateral is outside the home, the creditor may take if no objection by D
repossession by judicial action
-the secured party can go to court to get a judicial writ, ordering the sheriff to obtain possession and deliver it to the secured party
Strict Foreclosure: generally
-Upon default or repossession, the secured party retains collateral in full satisfaction of the debt
-the secured party MUST send written proposal to retain collateral
Strict Foreclosure:
-if the collateral is consumer goods
-give notice to (1) the debtor; (2) any secondary obligors (ie. co-signers)
Strict Foreclosure:
-if not consumer goods
-give notice to: (1) the debtor; (2) any other secured party from whom foreclosing party has received notice of a claim to the collateral; and (3) any other perfected 3rd party that filed a financing statement or made notation on a certificate of title
Strict Foreclosure: if not consumer goods: objections
-if any party objects within 20 days after the notice is sent: NO strict foreclosure
-the collateral must then be disposed of by sale
*may object for any and no reason
Strict Foreclosure: Consumer Goods 60% Rule
-NO strict foreclosure IF D paid at least 60% of cash price in the case of PMSI;
-or 60% of the loan in other cases
*the secured party must sell collateral within 90 days after repossession
Sale of Collateral: generally
-upon default, the secured party may sell, lease, or license the collateral, and apply profit to the debt
Sale of Collateral: requirements
(1) the sale must be commercially reasonable as to the method, manner, time, place and terms;
(2) Reasonable Authenticated Notice: must be sent within a reasonable period of time before the sale (eg. 10 days)
-consumer goods: notice to D and secondary obligors
-non-consumer goods: notice to D, other secured parties, perfected creditors and secondary obligors
Sale of Collateral: requirements cont’d
(3) Content of the notice must include:
-for non-consumer goods: (a) description of D & secured party; (b) description of the collateral, (c) method of sale (public or private); (d) statement that debtor is entitled to accounting for the unpaid debt; and (e) time and place of the public sale or when the private sale will take place
-for consumer goods: same as above + how D can calculate D’s deficiency and redeem collateral
action for deficiency judgment
-if the proceeds from the collateral are less than the amount owed, the secured party can proceed against the D for a deficiency judgement
-BUT if the collateral is sold cheap to inside buyer, then deficiency is calculated using a price that an independent 3rd party would have paid
Debtor’s Right to Redeem
-right to redeem before the collateral is resold or strict foreclosure
-D must tender amount owed + reasonable expenses
-acceleration clause may require D to tender the entire balance to redeem
Fixtures: definition
-goods that have become so attached to real property that an interest in them arises under real property law (eg. built in appliances, central air, elevators, etc.)
-Ordinary building materials NOT considered fixtures
-interests in fixtures may arise under UCC and real estate law
Fixtures: perfection
-must make “fixture filing” in the office where the mortgage on the real estate would be filed
-same requirements as financing statement + reasonable ID of real estate, and name of the owner
Fixtures: Priority
-secured party v. subsequent real estate interest
-security interest in fixtures is greater than the real estate interest arising after perfection of security interest by fixture filing
Fixtures: Priority
-secured party v. prior real estate interest
-prior real estate interest properly recorded is greater than later security interest
*EXCEPT: PMSI takes priority if perfected by fixture filing before the goods become fixtures or within 20 days thereafter
When Filing is NOT Required
-no fixture filing is necessary if the fixtures are readily removable (1) factory or office equipment; (2) equipment not primarily used in the operation of the real estate; or (3) replacements of domestic consumer appliances
Accessions: definition
-Good physically united with other goods in a manner that the identity of the original goods is not lost (eg. tires on a car)
Accessions: perfection
-if security interest perfected when the collateral becomes accession, it remains perfected in the collateral
Accessions: priority
-same priority rules as fixtures
*special rule: security interest in accession is subordinate to security interest in the whole which is perfected by compliance with requirements of a certificate of title
Accessions: removal
-secured party may remove accession if security interest has priority over the claims of every person with interest in the whole.
-secured party is responsible for injury to whole or other goods resulting from removal
