Secured Transactions Flashcards
1
Q
If someone owes you money, to feel more “secure” that you will be paid, you will want the other side to agree that some of their personal property will be ____________ for the debt owed to you.
A
collateral
2
Q
If the debtor fails to pay you, you will want to be able to…
A
repossess the collateral, sell it, and apply the proceeds to your expenses and the debt owed to you (and any excess would go back to the debtor)
3
Q
How do you establish priority as a creditor?
A
In general, each State has a filing system, usually overseen by the Secretary of State’s Office in each State, where a creditor can file.
4
Q
What do you file as a creditor?
A
One Page (Form UCC1***)
5
Q
Who makes the shipping agreements?
A
Seller unless otherwise agreed to
6
Q
In general, can the buyer reject a late shipment?
A
Not unless buyer faces material delay or loss.
7
Q
Standards preferred by?
A
realists
8
Q
rules preferred by
A
formalists
9
Q
UCC Article 9 concerns
A
personal property secured financing
10
Q
Fast N. Furious misses a few car payments, and the bank’s agent repossess the car. Although the bank did not have to provide notice before it took the car, after the repo it has to give Fast reasonable notice of a future sale of the car (it likely has to be at least
A
10 days notice
11
Q
When the bank sells the car and collects the proceeds, it has to apply the proceeds as follows:
A
First, to cover the expenses of the repossession;
Second, to cover the expenses of the sale (such as the cost of the auctioneer);
Third, to cover any attorney fees;
Fourth, the bank can apply the proceeds against the debt owed, and
Fifth, the bank must pay any excess to the debtor [Frank N. Furious]
12
Q
If Frank N. Furious sends a request, the bank must send a statement explaining the disposition of the proceeds from the sale within ___ days?
A
14
13
Q
The parties can agree to apply the law of any State “when the transaction [has] a
A
reasonable relation [or relationship] to the State.” UCC 1-301(a)
14
Q
Does the UCC define “transaction”?
A
no
15
Q
Since a transaction can be within the scope of Article 9 “regardless of its form,” we should focus on
A
the substance of the transaction
16
Q
security interest
A
An interest in personal property or fixtures which secures payment or performance of an obligation.”
17
Q
Conditional Sales Contract
A
When the contract provides that the seller will deliver possession of the goods to the buyer, but retain title to the goods until the buyer pays the total purchase price.
18
Q
Thus, the “substance” of a Conditional Sales Contract is
A
a sale of the goods, with the seller retaining a security interest in the goods to secure payment of the purchase price.
19
Q
Another transaction within the Scope of Article 9
A
a “sale of accounts, chattel paper, payment intangibles, or promissory notes”
20
Q
a Form UCC-1 is only effective to establish priority for
A
5 years.
21
Q
a Form UCC-1 is only effective to establish priority for
A
5 years.
22
Q
A continuation Form UCC-1 can be filed
A
6 months before the expiration.
23
Q
Deb-Jo Construction case: The failure of an attorney to file a financing statement (also called a “Form UCC-1”) in the manner required to perfect the security interest is
A
malpractice as a matter of law
24
Q
Before Article 9, this area of the law was described as
A
chaos because (i) different rules applied depending on the type of collateral, and (ii) there was no agreed-upon central filing system.
Item #2: Article 9 is often praised because it created an orderly system of prioritizing
25
one area still outside Article 9 is taking a security interest in intellectual property, such as
patents, copyrights, and trademarks.
26
the difficulty of collecting if you are an unsecured creditor (such as a creditor making a “signature loan”) when the debtor refuses to pay.
First, you would need to file a lawsuit and prevail, thereby obtaining a judgment; at that point, you have become a judgment creditor, but you are still an unsecured creditor.
Second, with the judgment, you would have to get a type of “writ” (or similar document) from the clerk of the court;
Third, you would need to deliver that writ to the Sheriff’s Office, and they would need to seize or otherwise secure part of the debtor’s property for you. This may be difficult because a substantial part of the debtor’s assets may qualify for exemptions from seizure, garnishment or levy. Assets exempt from seizure would include part of the value of a residence, one or more cars, as well as the debtor’s household furnishings (or furniture), appliances, and other belongings.
Fourth, you would need to prove that no other creditor had superior rights in that property being held by the Sheriff’s Office.
27
in the Mark LaCasse case, seller failed to make a reasonable contract with the common carrier because:
First Reason: The seller insured goods worth $1,663 for only $200.
Second Reason: The seller misaddressed the package.
Third Reason: The seller sent the package fourth class with the U.S. Postal Service.
Fourth Reason: The seller shipped the valuable calculators in a box clearly proclaiming the contents.
Because the seller failed to make a reasonable contract with the common carrier, the risk of loss remained on the seller until the goods were actually delivered to the buyer.
28
* Which one is by land (truck)?
FOB
29
* Which one is by sea (ship)?
* FAS
30
The place designated after the fancy abbreviations is where the risk of loss shifts from the seller to the buyer. [For example, if the seller is in Buffalo, the buyer is in Boston, and the contract provides “F.O.B. Buffalo,” while the goods are in transit the risk of loss will be on the [choose one: buyer/seller].
buyer
31
UCC 2-510 basically provides that if the shipment fails to conform to the contract specifications, the buyer can reject the goods,
and the risk of loss will stay with the seller.
POLICY: Since the goods shipped were not the goods the customer ordered, the customer should not have to pay, even if the goods were damaged in transit.
32
if the buyer had insurance on the goods and collected on the insurance when the goods were lost, stolen, or destroyed in transit, the buyer could
only sue the seller for damages in excess of the insurance coverage.
33
In order for a seller to take advantage of the general rule that the risk of loss is on the buyer (while the goods are in transit), the seller must
“duly deliver” the goods to the carrier.
Test #1: Make a reasonable contract with the carrier (e.g. refrigerate the strawberries; “water the livestock”);
Test #2: Promptly deliver any documents necessary to ensure the buyer can take possession of the goods (e.g. if the goods will be delivered to a port or dock, provide bills of lading); and
Test #3: Promptly notify the buyer of the shipment (POLICY—This is essential so that the buyer can purchase insurance covering the goods in transit)
34
* Is the test of “promptly notifying” better described as a rule or standard?
standard
35
“The majority of transactions involving Article 9 [which involves a security interest in personal property in both substance and form] are
(i) lonas (by a bank or other creditor), or (ii) sales on credit ,” where the seller is allowing the buyer to make payments over time.”
36
no collateral, Steps Needed to Collect on a Signature Loan, also Called a Personal Claim:
Step #1: When the debtor fails to voluntarily pay, you sue to obtain a judgment for money damages.
Step #2: If you win a judgment, you have become a judgment creditor (but you are still unsecured). At this point, to try to collect, you need to use a “legal process” to obtain, through the court clerk’s office, a document or “writ” for attachment, garnishment, replevin, etc.).
Step #3: You then deliver the document/writ to the Sheriff’s Office with a request to seize any of the debtor’s available property.
37
Things that may prevent the Sheriff’s Office from seizing property:
exemptions from garnishment, levy, or other collection procedures.
38
Things that may prevent you from being entitled to the seized items
claims of other creditors (specifically secured creditors).
39
The “exemptions” from collection can include
some amount of value of the debtor’s residence, at least one or more cars, a substantial amount of household furnishings [or furniture] and belongings, and their retirement accounts.
40
A loan that is unsecured (for which there is no collateral)
Signature Loans
41
Often the seller of the goods extends credit to the buyer (ex. payments over time)
Equipment & Fixture financing
42
Often acquired when making a loan (or other financing arrangement) secured by A/R or inventory
Floating Lien in After Acquired property
43
Historically “factors” purchased these assets, but today the lender may use the form of a loan and security agreement.
Accounts Receivable Loan
44
The security interest in particular goods will vanish as the debtor sells assets to purchasers in the ordinary course of business
Inventory Loans
45
A financing arrangement frequently used for car dealerships; as each car is sold, a portion of the proceeds is used to pay off the loan made for that particular car.
Floor Planning
46
Federal loans may grant a super-priority to those who finance these particular activities (including raising livestock
Agricultural financing
47
It’s often said the “acid test” for a security interest is
bankruptcy
48
an enforceable security interest is created between
creditor and debtor
49
default
An action (or inaction) by the borrower that grants the creditor the right to take a collection action.
50
Priority Dispute
When creditors have conflicting claims in the same collateral
51
Consumer goods
goods used primarily for personal, family or household use immediately before delivery.
52
A preliminary definition of “perfection"
obtaining priority over competing creditor claims.
53
5 Transactions that may not be a “security interest in form, but will be treated as within the scope of Article 9:
Item #1: Agricultural Liens
Item #2: Disguised Rental Agreements [Prof Note: The parties may call it a “rental agreement” or “lease,” but Article 9 will treat it as a sale and the retention of a security interest.]
Item #3: Sale of Accounts (historically referred to as “factoring the receivables”)
Item #4: Conditional Sales Agreements
Item #5: Consignments
54
The consignment will not be treated as creating a security interest in the following situations:
Situation #1: The consignee is not a merchant.
Situation #2: The consignee does not deal in goods of that kind.
Situation #3: The consignee is an auctioneer.
Situation #4: The consignee is known by its creditors to be regularly engaged in the selling of other people’s goods.
Situation #5: For each delivery, the aggregate value of the goods is less than $1,000.
55
Item #1: Under UCC 1-203(a), “Whether a transaction in the form of a lease creates a [true] lease [or is a disguised sale with a ] security interest is [a question of (choose one: fact or law)].
fact
56
the relevant rules of UCC 1-203(b) for purposes of Marhoefer Packing are as follows:
It may be a disguised sale (with a security interest) if the renter/lessee is obligated to pay rent for the right of possession for a fixed term (without an ability to terminate) if
* The term of the lease is equal to or greater than the remaining economic life of the goods; OR
* The renter/lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement
UCC 1-203(d): “Additional consideration” is nominal if it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised.
Additional consideration is NOT nominal if . . . when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.
57
there are 4 special transactions that do not appear to create a security interest in form, but they are treated as creating a security interest in substance (and therefore are subject to Article 9).
Sale of Accounts Receivable (A/R), Promissory Notes, Chattel Paper, and Payment Intangibles (specifically included under Article 9 by UCC 9-109(a)(3))
Conditional Sales Contracts.
Consignments:
58
Sale of Accounts Receivable (A/R), Promissory Notes, Chattel Paper, and Payment Intangibles (specifically included under Article 9 by UCC 9-109(a)(3))
Historically, a purchaser of accounts receivables was called a factor.
The details may vary from deal-to-deal, but generally a purchaser of A/R, in form, would be the owner of the A/R. Conflicts could arise because another creditor, in form, could loan money and agree to take a security interest in the same A/R. (see page 37 top) UCC 9-109(a)(3) specifically applies Article 9 to a “sale of accounts,” so both creditors would be subject to the filing, priority, and other rules of Article 9.
Item #11: The same rule (UCC 9-109(a)(3)) applies to the sale of promissory notes, chattel paper (such as a retail installment payment contract when you purchase a car), and payment intangibles (such as a tax refund).
59
Conditional Sales Contracts.
As we have discussed before, these are transactions when a seller of goods delivers possession of the goods to the buyer, but the parties agree that the seller will retain title to the goods until the buyer makes all the payments to the seller required under the deal.
UCC 2-401(1) provides that “Any retention or reservation by the seller of the title in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest.” [Prof Note: These are specifically made subject to Article 9 under UCC 9-109(a)(5) and UCC 9-110.]
60
Consignments:
In a consignment, the owner of the goods transfers possession of the goods to a merchant that agrees to try to sell the goods. If the party is successful and sells the goods, it typically will retain a fee and remit the balance of the sale proceeds back to the consignor. UCC 9-109(a)(4) specifically brings a consignment into the scope of Article 9.
Item #14: Again, the policy is that other potential creditors may be misled if these transactions were not treated as security interests. The goods on consignment may be commingled with the merchant’s regular inventory, so a potential creditor might over-estimate the extent of the merchant’s inventory.
61
Consignments Excluded from Article 9:
* the merchant [choose one: does not] deal in goods of that kind; [In the Fabers case, this exception was narrowly interpreted; specifically an ordinary seller of rugs could be treated as dealing in expensive Persian rugs because they are in the “floor covering” business.]
* the merchant is an auctioneer
* the merchant is generally known by its creditors to be substantially engaged in the business of selling goods on consignment
* with respect to each delivery, the aggregate value of the goods is less than [choose one: $1,000] at the time of delivery
62
The test under UCC 1-203 can be summarized as follows:
It may be a disguised sale (with a security interest) if the renter/lessee is obligated to pay rent for the right of possession for a fixed term (without an ability to terminate) if
The term of the lease is equal to or greater than the remaining economic life of the goods; OR
The renter/lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement
[UCC 1-203(d) Additional consideration is nominal if it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised.
Additional consideration is NOT nominal if . . . when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.
63
In Marhoefer Packing, the Bankruptcy Trustee’s argument that the term of the lease was equal to or greater than the economic life of the goods failed because
the lessee (Marhoefer Packing) had the option to terminate after 4 years (and the machine was expected to be useful for at least 8 years).
64
In Marhoefer Packing, the Bankruptcy Trustee’s other argument—that the lessee could purchase at the end of the fixed 4-year lease term for nominal additional consideration [choose one: failed because
because when the [choose one: contract was entered into the option price was a reasonable estimate of the fair market value.
Nevertheless, the court emphasized there is no bright line for determining whether the option price will be adequate in a close case.
65
Item #5: In Marhoefer Packing, the court concluded that the lessor could recover the equipment when Marhoefer Packing went bankrupt (even though the lessor failed to file a Form UCC-1) because the arrangement was a [choose one: true lease/disguised sale with a security interest].
true lease
66
The following transactions do not involve a security interest within the scope of Article 9:
* Transactions involving ships, airplanes, and railcars
* Liens created by State law for services or materials, such as mechanics liens, garage liens (such as for auto repairs), and tow yard liens.
* A sale of accounts receivables or promissory notes in connection with the sale of a related business.
67
There are 3 general requirements for attachment (a/k/a creation of a valid security interest under UCC 9-203(b)):
Requirement #1: Value: The creditor must give value which is generally any consideration, including a mere agreement or commitment; to extend credit (as well as actually transferring/loaning cash or selling goods on credit).
* Making a gift [choose one: would/would not] qualify as giving value.
* A lender is also treated as giving value when taking security for a pre-existing claim. UCC 1-204(2).
The lender’s ability to provide “value” before actually transferring cash or goods is important because the time of attachment can set the time of perfection of the creditor’s security interest, which can determine if the lender has priority.
UCC 1-204 (4) described “value “ as including any consideration sufficient to support a simple contract.
Item #9: Requirement #2: Rights: The debtor must be able to transfer rights in the collateral—the debtor could own the collateral, or the owner of the property could authorize the debtor to use the property as collateral.
On a sale on credit, the buyer acquires sufficient “rights’ in the purchased goods when the goods are identified to the contract under UCC 2-501.
Item #10: Requirement #3: Agreement/Description: There must be a voluntary agreement to grant a lien/security interest, and the agreement must describe the collateral. UCC 9-203(b)(3)(A).
The security agreement can be a separate document, or it could be part of a loan agreement or a purchase and sale agreement, or it could be very informal—a simple letter from the buyer/debtor, or a settlement agreement
68
Required Elements of a Valid Security Agreement:
Element #1: Description of the Collateral
Element #2: Identification of the Parties
Element #3: Description of the Obligation Secured
69
UCC 9-108 describes when a description will be sufficient—generally, it merely must
“reasonably identify” the collateral and need not be specific.
70
Inadequate descriptions include
(i) “all assets;” (ii) “all personal property,” and (iii) “all commercial tort claims.” UCC 9-108(c) & (e)
71
Stocks & Bonds
Investment Property
72
Partnership or LLC Interest, Tax Refund
General Intangibles
73
Promissory Notes, Checks & Drafts
instruments
74
Retail Installment Contracts (like when buying a car)
chattel paper
75
Bank Accounts (or Accounts at Other financial institutions)
Deposit accounts
76
As demonstrated in the Troupe case, the description/classification of the collateral under the UCC can impact how the creditor can
perfect in its security interest
77
In Troupe, the creditor did not need to file a Form UCC-1 to perfect its security interest in a tractor because the tractor was described as
a consumer good
78
collateral may be sold in either
public or private setting
79
Safe-Harbors for a “Commercially Reasonable Disposition
* In the usual manner on a recognized market
* At the current price in any recognized market
* Otherwise in conformity with reasonable commercial practices among dealers in the type of property
* A disposition approved in a judicial proceeding [or in a bona fide creditors’ committee—presumably in bankruptcy]
80
If a creditor fails to satisfy a safe-harbor, then it must prove
that every aspect of the sale was commercially reasonable
81
“reputable dealer” test.]
In keeping with prevailing trade practices among reputable and responsible businesses . . . engaged in the same business.”
82
Factors that may indicate a sale was not “commercially reasonable”
include (i) the sale was poorly publicized; (ii) it was sparsely attended; (iii) the auctioneer was sub-par, and/or (iv) it was inconveniently located.
83
If the secured party fails to meet a safe-harbor (such as the “reputable dealer” test), then the secured party must prove that “every aspect” of the disposition, including
including the method, manner, time, place, and other terms were commercially reasonable
84
rules on the creditor repossessing and keeping the collateral
* The term for this is strict foreclosure.
* Generally, in the case of consumer goods for which the consumer has paid at least 60% of the price, the secured party must dispose of the collateral within 90 90 days. UCC 9-620(e). [Prof Note: This does not seem to be mentioned in the Casebook.] Thus, in these cases there is no strict foreclosure.
* In all cases involving consumer goods, the creditor can only retain the repossessed goods in full satisfaction (no partial satisfaction is allowed).
* For non-consumer goods, the creditor can only retain the collateral in partial satisfaction with the debtor’s consent. The creditor could retain the non-consumer goods in full satisfaction if the debtor failed to respond to a notice within 20 days.
* In these situations, a debtor can always protest and require a sale.
85
Item #4: HYPO: The Parties to a Security Agreement—New Debtors: Crypt’s Credit loaned Drac’s Vampire Den the money to begin operation of a chain of haunted houses. The loan was secured by all current or after-acquired equipment (and proceeds from dispositions thereof). Within a year, Frank’s Fright House, a much larger corporation, purchased all the assets of Drac’s Vampire Den and agreed, by contract, to become obligated for all of Drac’s Vampire Den’s obligations.
* Question a: Presume Drac’s Vampire Den ceases to exit—Is Crypt’s Credit’s loan still secured? (Yes/No) Who is the debtor?
* Question b: Is it necessary for Crypt’s Credit to have Frank’s Fright House sign a new security agreement? (Yes/No)
Yes, Frank’s Fright House, No
86
At common law, what event appears to always qualify as an event of default?
failing to make a payment on time
87
written security agreements usually provide that the debtor will be in default if the creditor has reasonable grounds for insecurity
“This should only arise if the creditor has a good faith belief that the prospect performance is impaired; it cannot be a mere whim or caprice.”
88
A creditor generally has the option of declaring a debtor in default upon the occurrence of the specified event; it is not automatic. (T/F)
True
89
It is customary to provide in a security agreement that if a debtor is in default, the creditor may accelerate all remaining payments. (T/F)
True
90
Taking possession (in other words, repossessing) without judicial process is allowed, but only if
if there is no breach of the peace. The UCC provides no definition of a breach of the peace; instead, it is left to the courts to decide.
91
If a creditor uses an independent contractor to repossess the collateral, could the creditor be liable for damages in the event of a breach of the peace?
Yes
92
damages for a breach of the peace
actual damages and principles of tort law
93
is breach of the peace interpreted broadly?
YEs
94
when is there a breach of the peace
there is a breach of the peace even if the debtor “mildly protests and the repo person takes possession
95
If a debtor defaults, is the creditor required to provide the debtor with advance notice that it plans to repossess the collateral?
No
96
A sale will be in a “commercially reasonable manner” if
First: The manner of the sale is approved in advance by a court or creditors’ committee.
Second: The collateral is sold in the usual manner in a recognized market at the current price.
Third: The collateral is sold in conformity with reasonable commercial practices used among dealers in that type of property. The courts have summarized this safe harbor as the reputable dealer standard.
97
Generally, is the creditor required to give the debtor notice before selling the collateral?
yes, unless goods are perishable or likely to decline in value rapidly.
98
In the case of non-consumer goods, at least ____days notice before the sale
10
99
In the case of consumer goods, __________ is required and the notice must include a phone number the debtor can use to find out the amount the consumer would need to pay to redeem the collateral.
reasonable noteice
100
merely requires that the creditor properly send the notice; the statute does not require that the debtor receive the notice. Nevertheless, the UCC always requires good faith in contract performance and enforcement. (T/F)
True
101
The creditor must always sell repossessed consumer goods within ___ days if the debtor had paid at least 60% of the cash price. UCC § 9-620
In contrast, if the creditor keeps the repossessed property, this is called a “strict foreclosure.”
90
102
As a matter of policy, should “strict foreclosure should be encouraged as it often will produce better results than a disposition for all concerned.” UCC § 9-620 Comment #2.
yes
103
In a consumer goods transaction, the creditor can only retain the collateral in full satisfaction of the debt if the creditor sends a notice proposing the creditor’s acceptance of the collateral in full satisfaction of the debt, and the debtor consents, or the consumer fails to respond within 20 days of the notice.
Treu
104
Partial Satisfaction Rules: For non-consumer collateral, the creditor needs the signed consent of the debtor to make a partial satisfaction; for consumer collateral, the creditor is not permitted to make a partial satisfaction. UCC § 9-620 Comment 12
T
