Secured Transactions Flashcards
What law governs secured transactions?
UCC Article 9 governs security interests and provides rules for their priority, and applies to “any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures by contract” (not real property).
Who are the parties involved in a secured transaction?
Creditor (secured party): party that extends value to a debtor in exchange for security interest in debtor’s collateral property
Debtor: party with property right in the collateral, who made a security agreement with creditor
Obligor: party under obligation to furnish money or services due (often also the debtor)
What is a collateral?
Collateral is property subject to a security interest that a creditor can look to satisfy the debt.
What are the different types of collateral?
- Consumer goods: goods used primarily for personal, family, household purposes
- Equipment: goods (for business) other than consumer goods, inventory, farm products
- Inventory: goods for sale or lease to others in the ordinary course of business, or raw materials, work in process, or materials used or consumed in business
- Accessions: goods physically united with other goods while retaining separate identity (e.g., GPS unit installed in car)
- Farm products: goods used for or produced by farming operation, except uncut timber (includes growing/grown crops and born/unborn livestock)
- Classification of tangible collateral may differ depending on the use or owner
Example: A computer could be a consumer good or equipment depending on use
Equipment vs. inventory: cash register vs. line of clothes
Fixtures: goods that are attached to real property such that an interest in them arises under real property law (e.g., chandelier, sprinkler system, furnace)
Intangibles/semi-intangibles include intellectual property, financial instruments (e.g., stocks, bonds, cash proceeds), accounts (right to payment), promissory note / chattel paper (record of monetary obligation and security interest in or lease of specific goods)
What is a purchase money security interest?
PMSI is an interest that arises when a secured party advances money or credit to enable the debtor to purchase the collateral itself (i.e., seller finances the sale).
PMSI gets extra special rights because, without them, the debtor couldn’t have bought collateral. Creditor has priority over all over types of security interests in same collateral. PMSI is interest in personal property or fixtures that secures payment of an obligation that is either taken by the seller of the collateral to secure all or part of the price OR taken by a person who loans money or extends credit to enable the debtor to acquire the collateral.
What is the difference between a lease or security interest?
If a transaction is characterized as a lease of a good but is intended to have effect as security, it will be governed by Article 9 as a security interest.
Intent for security depends on the “economic realities” of the transaction.
A transaction creates a security interest rather than a lease if the rental obligation is not terminable by the lessee, and the lessee has an option to purchase the goods for no or nominal consideration at the end of the lease.
What does a secured transaction protect the creditor from, or why would a creditor want a secured transaction?
A secured transaction protects the creditor from DOTS: debtor, other creditors, trustee in bankruptcy, and subsequent purchaser from debtor.
How can a creditor create a secured transaction?
To protect against the debtor, the creditor only needs to attach.
To protect against others, the creditor must attach AND perfect (think PIG FAT, collateral and cholesterol)
How can a creditor attach?
A security interest is only enforceable against a debtor with respect to the collateral if it was attached.
Attachment (PIG) requires all three of the following:
1. Property must be owned by the debtor - the debtor must have rights to the property/collateral
2. Interest is created - by taking possession of the goods OR a signed security agreement
3. Give value to the debtor - creditor must have given value (consideration)
What is a security agreement?
A security agreement is a writing that includes a description of the asset and signed by the debtor. The agreement must reasonably identify the collateral. A generic description is no good.
An exception to the agreement is when a creditor is in possession. If the creditor has taken possession of the collateral, authentication of the security agreement that evidences the secured transaction is not needed.
What is an after-acquired collateral clause?
An after-acquired collateral clause can create a security interest in property that the debtor does not currently own but may or will acquire in the future.
This type of clause is a floating lien and is enforceable (except for consumer goods).
It is not required for inventory or accounts receivable collateral.
What is perfection?
Perfection provides notice to third parties that a security interest exists.
Perfection (FAT) requires any one of the three:
1. File a financing statement
2. Automatic perfection
3. Take possession
What is a financing statement and what information does it include?
A financing statement is the most common route to perfection, and it gives notice to third parties that a security interest exists.
It includes the following information:
1. Type of collateral
2. Debtor’s name and address - it must not be so misleading as to be undiscoverable
3. Creditor’s name and address
4. Description of collateral - the description may be generic
Where can a financing statement be filed?
The financing statement must be filed in the state of individual’s principal residence; state where registered organization (e.g., corporation, LLC) organized; county of timber, mineral, fixture.
