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.