Secured Transactions Flashcards
What Does UCC Article 9 Apply To
UCC Art. 9 applies to (1) all transactions that create security interests in personal property or fixtures by contract, (2) lease agreements that are not “true leases”, and (3) the sales of accounts receivable, chattel paper, negotiable instruments, and payment intangibles.
They words “security interest” do not have to be specifically stated for one to exist.
Four Classifications of Goods
- Consumer Goods
- Inventory
- Equipment
- Farm Products
The primary use of the goods will determine its characterization.
Consumer Goods
Good that are bought for use primarily for personal, family, or household purposes.
Inventory
A security agreement specifying an interest in inventory will create an interest in after-acquired collateral.
Inventory is a type of goods, and includes raw materials, works in process, or materials used or consumed in business.
Equipment
Goods, other than inventory, farm products, or consumer goods. (Leftovers)
Farm Products
Crops, livestock, products of crops or livestock, or supplies produced in a farming operation.
Attachment
Attachment is a prerequisite to a security interest arising. Three criteria must be met for attachment to occur —
- Value must be given by the secured party to the debtor;
- The debtor must have rights in the collateral; and
- There must have been a binding security agreement.
Once the security interest has attached, the secured party has all of the enforcement rights of Article 9, including the right to possess upon debtor default.
Binding Security Agreement Elements
A binding security agreement requires AID —
- Authentication (written + signed).
- Intent to create a security agreement (“granting clause”).
- Description of the collateral.
After-Acquired Property Rule
Generally, a security agreement can cover after-acquired property and does not need to specifically reference it to be effective.
Methods of Perfection
FAP
- Filing a finance statement (most common).
- Automatic perfection (most common; PMSI).
- Perfection by possession or control.
Priority
The general rule is first-in-time, first-in-right.
Secured Party vs. Secured Party — First to file OR perfect has priority.
Unperfected Secured Party vs. Unperfected Secured Party — First to attach has priority.
Perfected Secured Party vs. Unprotected Secured Party — Perfected interest will have priority.
Exceptions to the Rule That a Security Interest Survives a Sale
- If the buyer is a buyer in the ordinary course of business.
- If the sale qualifies as a consumer-to-consumer sale (“garage sale exception”).
- If the secured party authorizes the sale free of the security interest.
Security Interest
A security interest arises when a party (debtor) uses certain property as collateral to secure repayment of funds to another party (the secured party).
If the debtor defaults, the creditor may take possession of the collateral and apply the collateral to the balance owed.
When a Lease is Treated as a Secured Transaction
A lease will be considered a transaction covered by UCC Article 9 if:
- The lease term is not subject to termination early by the lessee, and
- The lease term is for the economic life of the goods, or the lessee has a purchase option for zero or nominal consideration.
In other words, if it’s basically like you bought it, it will be covered by Article 9.
Types of Collateral
- Goods;
- Tangible Intangibles;
- Intangible intangibles;
- Investment Property
What Does Article 9 NOT Apply To
An interest in a lien on real property, including a lease or rents. This is considered a mortgage and governed by real property law, not the UCC.
Possession Exception for Security Agreements
Where the secured party already has possession, all that is required is an agreement between parties (does not have to be in writing). Called a “pledge” at common law.
Purchase-Money Security Interest (PMSI)
A purchase-money security interest (PMSI) arises when the goods for which the loan is extended to the debtor are the collateral for the security interest.
The general rule is that a PMSI takes priority over a conflicting, perfected security interest in the same goods.
Proceeds
A security interest in collateral automatically extends to all identifiable proceeds of the collateral.
Proceeds are whatever is received upon the sale, lease, license, exchange, or other disposition of the collateral. In general, a security interest in proceeds remains automatically perfected for 20 days.
Perfection
Perfection is the method which established a secured party’s rights in the collateral against 3rd parties. Gives notice to the entire world of its security interest, which is key to determining priority.
Filing a Finance Statement
Filing a finance statement is the most common way to perfect a security interest and establish the secured party’s rights against 3rd parties.
Achieved by filing in a public office (usually the state’s Secretary of State, however it could also be the Office of Land Records in the county in which the collateral sits).
The law governing perfection is the law of the jurisdiction in which the debtor is located.
Where to File Financing Statement
Individual — State of residence.
Non-Registered Org. — The state of the place of business. If more than one, the state of the chief executive office.
Registered Org. — The state of incorporation.
Requirements of a Financing Statement
A filing that provides notice that a person may have a security interest in the collateral. Must include:
- Name of the debtor;
- Name of the secured party;
- Description of the collateral covered.
Must reasonably identify the collateral, or indicate that the financing statement covers “all personal property.”
Can be more broad/vague than a security agreement because it is only providing notice.
Special Rule for Fixtures (Filing Statement)
A fixture is personal property that is so closely related to real property that the interest in the item passes under real estate law.
A filing statement for a security interest in a fixture must mention that it covers a fixture, indicate that it is to be filed in real property records, and include a description of the real property itself.
Errors in Filing Statements
If a F.S. is filed in the wrong place, does not include the required information, or is unauthorized by the debtor, it is ineffective and does not perfect the security interest.
Minor errors are ineffective unless it makes the statement “seriously misleading”.
Failure to provide the name of the debtor constitutes “seriously misleading”, and will be ineffective!
Standard Search Logic Exception
If a search of the records of the financing office under the debtor’s correct name, using the office’s standard search logic/engine, would disclose the misspelled financing statement anyways, the financing statement is not “seriously misleading” enough to invalidate perfection.
Automatic Perfection for Proceeds
Automatic perfection for proceeds continues for only 20 days after attachment of the collateral.
Except;
- If the proceeds are idenfit
Change of Name
If a debtor changes their name, making the financing statement seriously misleading, the financing statement will only be effective to perfect the security interest in collateral acquired within 4 months of the name change.
Unless there is an amendment correcting the name change within 4 months of the name change, which will continue the perfection.
Change of Debtor State
If the debtor moves to another state, the financing statement may become ineffective. They may file a new financing statement in the new states within 4 months of the move. If refiled, the financing statement is “continuously perfected” and the priority dates back to the original filing.
Expiration of the Financing Statement
Financing statements are only effective for 5 years after the date of filing, but a “continuation statement” can be filed to prevent lapsing if filed within 6 months before the expiration.
Perfecting by Possession
A secured party may perfect a security interest by taking possession of the collateral, only if the collateral is a tangible negotiable instrument, a good, instrument, money, or tangible chattel paper.
Automatic Perfection
Most commonly applies to purchase-money security interests in consumer goods, which perfect automatically upon attachment and remain effective permanently.
Priority of PMSIs Over Other Security Interests
A perfected PMSI will prevail over a conflicting security interest if the PMSI is perfected when the debtor receives possession of the collateral, or within 20 days thereafter.
If the collateral is inventory, to get priority the PMSI holder must notify the 1st secured in an authenticated record that they expect to obtain a PMSI and take priority.
Lien Creditor
A creditor who has acquired an interest in property by attachment, levy, or similar judicial collection procedures, or a bankruptcy trustee.
Lien Creditor vs. Secured Party Priority
First-in-time, first-in-right still applies. The secured party will have a priority over a lien creditor if —
- The secured party perfects before the lien creditor’s interest arises, or
- Files a financing statement and evidences a security agreement before the lien creditor’s interest arises.
If a PMSI is perfected within 20 days after receiving collateral, they will prevail over the lien creditor.
Buyer in the Ordinary Course of Business (BIOCOB)
Look at the business of the seller/debtor to determine if someone is a BIOCOB.
A BIOCOB is someone who —
1. Buys in good faith;
2. Without knowledge that the sale violates the rights of another person with interests in the goods;
3. In the ordinary course of business;
4. From a person in the business of selling goods of that kind.
Consumer-to-Consumer “Garage Sale” Exception
Generally, a security interest survives the sale of the collateral, except if it is a BIOCOB or falls under the “garage sale” exception.
The garage sale exception applies only when a person buys goods for personal, family, or household use, from someone who also used the goods for that purpose.
A consumer will take free from the security interest if they:
1. Buy for value;
2. Without knowledge of the security interest, and
3. Before the financing statement is filed.
BIOCOB v. Secured Party
Generally, a security interest will survive the sale of the collateral, except when the buyer is a BIOCOB.
A BIOCOB will take free of any security interest created by the seller, even if the security interest is perfected and the buyer knows of its existence.
Default
A default occurs when the debtor fails to tender an obligation when due. If the debtors fails to make an installment payment, default generally occurs.
Rights Upon Default/Steps a Secured Creditor May Take to Foreclose on its Collateral
If default occurs, the lender may —
- Demand payment;
- Use self-help to reclaim the goods as long as they can do so without breaching the peace; or
- Bring a claim for judgment or foreclosure.
Breach of Peace
Not defined in the UCC, but is generally any act that is likely to lead to violence, or an unauthorized entry onto the debtor’s premises.
If the secured party cannot repossess without breaching the pease, the secured party must bring an action for replevin.
Debtor’s Right to Redeem
The debtor can redeem prior to the disposition by paying the amount due to the creditor, including interest, reasonable expenses, and attorneys’ fees.
The right to redeem cannot be redeemed, unless all parties agree in righting after the default. Cannot be redeemed at any time at all before default.
Disposition/Sale After Default
A secured party may sell or dispose of collateral after default in a “commercially reasonable way”. The security interest is then discharged, but the debtor may remain liable for any deficiency.
A disposition is commercially reasonable if —
- It is in the usual manner of any recognized market;
- It is sold at a price currently recognized within that market;
- Or is otherwise in conformity with commercial practices.
Notification of Disposition
Before disposition, the secured party must send notice to the debtor and any other filed secured party. Notice is not required for perishable goods/inventory.
Non-consumer Disposition
For non-consumers, notice must consist of: A description of the debtor, secured party, and collateral, state the method of disposition, and state that the debtor is liable for unpaid indebtedness was well as a charge for accounting.
Consumer Disposition
Notification must contain all of the requirements of non-consumer disposition, plus a description of any liability for deficiency, a phone number to call for the amount owed, and a phone number or mailing address for additional information.
Rebuttable Presumption for Non-Consumer Transactions
If there is a failure to comply with the requirements of notice and commercial reasonableness, then there is a rebuttable presumption that the collateral was worth the amount of the debt, making the debtor’s deficiency $0.00.
Measured as the difference between the outstanding loan amount and the amount that the collateral would have sold for in a commercially reasonable transaction (which is presumed to be the exact amount of the debt owed).
Rebuttable Presumption for Consumer Transactions
Two approaches that the court may follow:
- Apply the absolute bar rule, which holds that the creditor’s noncompliance bars any recovery of deficiency; or
- Apply the rebuttable presumption rule (for non-consumer transactions).
Order of Proceeds from the Disposition
Cash from the disposition is applied as follows —
- First to pay for the reasonable expenses of the sale/storage/etc.
- Then to satisfy the obligation for the secured party that is disposing of their interest.
- Then to satisfy the obligation of any subordinate secured parties or subordinate liens if the secured party receives an authenticated demand after sending notice.
The debtor then gets any surplus or is liable for any deficiencies.
Buyer NOT in the Ordinary Course of Business
A buyer not in the ordinary course of business takes collateral subject to a perfected interest.
Generally, a buyer does not take subject to an UNperfected interest if they give value and do not know about the interest.
Disposition of Accounts Receivable Collateral
If the collateral consists of accounts receivable the secured party may notify the person obligated on the collateral to make a payment to the secured party.
Notification must be authenticated.
Sufficient Description of Collateral in a Security Agreement
A supergeneric description such as “all the debtor’s personal property” is NOT sufficient in a security agreement.
