Secured Transactions Flashcards
Definition of Secured Transaction
A secured transaction is a transaction intended to create a security interest in personal property or fixtures
*It generally involves a sale on credit or a loan in which the seller or the lender obtains a lien on some or all of the debtor’s property as security for payment.
Terminology:
- Debtor
- Secured Party
- Security Agreement
- Security Interest
- Collateral
Debtor
- the person who owes payment or performance of the obligation secured
Secured Party (“creditor”)
- a lender, seller, or other person in whose favor there is a security interest
Security Agreement
- the agreement between the debtor and the secured party that creates the security interest
Security Interest
- an interest in personal property or fixtures that secures payment or performance of an obligation
- it’s a CONTINGENT property interest in the debtor’s collateral that the debtor grants to the creditor - when that contingency (which is default) occurs, the property interest springs to life and the creditor has rights in the debtor’s collateral
Collateral
- the property subject to a security interest
- it is property that the secured party can repossess upon default to ensure that the debt is paid
Purchase Money Security Interest (PMSI)
A PMSI is a special type of security interest in goods. A PMSI can arise in 2 ways:
(1) the secured party sells the goods to the debtor on credit and retains a security interest in the goods sold (Seller-financed PMSI); or
(2) the creditor loans funds to the debtor to enable the debtor to buy specific collateral, those funds are used by the debtor to acquire the specific collateral, and the creditor takes a security interest in that collateral. The PMSI secures whatever portion of the purchase price that still has to be paid (Financer-financed PMSI)
After-Acquired Property Clause
Provision in security agreement that allows a secured party to obtain a security interest not only in the debtor’s present property, but also in property that the debtor will obtain in the future
Future Advance Clause
A security agreement may provide that the collateral will serve as security not only for the present obligation, but also for advances the creditor makes to the debtor in the future
Goods (Tangible Collateral)
“Goods” includes all things that are movable at the time the security interest attaches (including unborn animals and growing crops). Goods also includes fixtures. There are 4 types of goods. The category into which the good is placed depends on how the debtor is USING the collateral:
(1) Consumer Goods - goods used or bought primarily for personal, family, or household purposes
(2) Equipment - goods that are used or bought for use in a business
- NOTE: this is the default category for goods
(3) Farm Products - crops of livestock or supplies used or produced in farming operations or products of crops or livestock in their unmanufactured states if they are in the possession of a debtor engaged in farming operations
(4) Inventory - goods held for sale or lease, goods that are to be furnished under service contracts, and materials used or consumed in a business in a short period of time
Secured Sale Disguised as a Lease
Leases that are intended to serve as security arrangements (but not true leases); and a lease where the rental obligation is not terminable by the lessee and EITHER:
(1) the lease term is equal to or greater than the remaining economic life of the goods;
(2) the lessee is bound to purchase the goods at the end of the lease or to renew the lease for the remaining economic life of the goods, OR
(3) at the end of the lease, the lessee has an option to purchase the goods or renew the lease for the remaining economic life of the goods for no or nominal consideration.
Creation of Security Interest (Attachment)
A security interest is not enforceable unless it has attached. There are 3 requirements for attachment, which must co-exist:
(1) the parties must agree to create the security interest (enter into a security agreement), as evidenced by (i) the creditor taking possession of the collateral, (ii) an authenticated security agreement, or (iii) the creditor taking control of nonconsumer deposit accounts, electronic chattel paper, and investment property; and
(2) Value must be given by the secured party, and
- any consideration sufficient to support a simple contract is value
- even past consideration will suffice as value, as long as the security interest is intended as security for the past consideration
(3) the Debtor must have rights (ex: ownership) in the collateral
- the right to possession is also sufficient
Written Security Agreement Requirements
(1) Agreement must be evidenced by a record (written or electronically stored info) and must show an intent to create a security interest;
(2) agreement must be Authenticated by the debtor (signed - any symbol); and
(3) agreement must contain a Description of the collateral
- description must “reasonably identify the collateral”
- collateral can be described broadly by category or type (ex: “all of the debtor’s equipment”) or specifically (ex: “the debtor’s television”)
No Supergeneric Descriptions
- a supergeneric description such as “all of the debtor’s assets” or “all of the debtor’s personal property” is not sufficient) - these are not A9 categories
After-Acquired Property
General Rule: Without an explicit after-acquired property clause in the security agreement, the secured party’s security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement
If the security agreement has an explicit after-acquired property clause, the security interest will attach to the property as soon as the debtor acquires an interest in the collateral
Exceptions
- even without an AAPC, a security interest will attach automatically to collateral of a type that’s rapidly depleted and replenished, such as accounts and inventory
- a security interest will also attach to identifiable proceeds of collateral, even without an AAPC
Proceeds
A security interest in collateral automatically attaches to identifiable proceeds of the collateral
- Proceeds include whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds
Proceeds must be “Identifiable”
- “Identifiable” means that the proceeds can be traced back to the original collateral
Perfection of Deposit Accounts - only by Control
Security interests in nonconsumer deposit accounts can only be perfected by control (unless they’re perfected as proceeds of collateral)
Methods of Obtaining Control
- the Bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account
- if the secured party is not such a bank, it may obtain control either by:
(1) putting the deposit account in the secured party’s name; OR
(2) agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that the bank will comply with the secured party’s orders regarding the deposit account without requiring the debtor’s consent (Control Agreement)
Financing Statement
The financing statement must contain:
(1) the debtor’s name;
(2) the secured party’s name; and
(3) a description of the collateral covered by the financing statement
Debtor’s Name Change
- if the debtor changes their name, the financing statement is effective only against collateral acquired by the debtor before the name became insufficient and within 4 months after
- for collateral acquired after the 4-month period, the secured party must refile using the debtor’s correct name
Description of Collateral
- the description is sufficient if it “reasonably identifies” the collateral, which can be broadly by category or type or specifically
- unlike security agreements, a FS may contain a supergeneric description of the collateral, such as “all assets”
After-Acquired Property
- the FS need NOT mention after-acquired property to perfect a security interest in such property if the description in the FS is broad enough to cover the after-acquired property
Debtor must “Authorize” Filing of Financing Statement
- for a FS to be effective, the debtor must authorize the filing in any signed writing either before or after it is filed
- the debtor automatically authorizes the FS if the debtor authenticates the FS or authenticates a security agreement covering the same collateral as the FS
- the authenticated security agreement itself may be filed as the financing statement if the parties so desire - but it must contain all of the required elements
PMSI Superpriority
PMSI in Consumer Goods
- perfects automatically on attachment
PMSI in Goods other than Inventory and Livestock (ex: equipment)
- a PMSI in goods other than inventory and livestock has priority over conflicting security interests in the same goods or their proceeds if the interest is perfected before or within 20 days after the debtor receives possession of the goods
PMSI in Inventory and Livestock (rare on test)
- a PMSI in inventory collateral has priority over a conflicting security interest in the same inventory or proceeds of the inventory that are chattel paper, instruments, or cash if:
(1) it is perfected at the time the debtor gets possession of the inventory, AND
(2) any secured party who had filed their security interest in the same inventory receives authenticated notification of the PMSI before the debtor receives possession of the inventory, and the notification states that the purchase money party has or expects to take a PMSI in inventory of the debtor described by kind or the same type. The notification is effective for deliveries of the same type of collateral for 5 years.
Special Priority Rules for Conflicting Security Interests in Deposit Accounts
A security interest in a deposit account that is perfected by control has priority over a conflicting security interest that is perfected by another method (namely, proceeds of other collateral).
- If there are conflicting security interests that are perfected by control, they rank according to the time of obtaining control, subject to the following exceptions:
(1) a secured party who has obtained control by putting the deposit account in the party’s name has priority over all other secured parties with control; and
(2) a bank that has control because it maintains the deposit account has priority over all secured parties with control, other than the party who has obtained control by putting the account in their name.
Best: co-owner
Next best: Bank that maintains the account
Worst: control agreement
Note: if a debtor transfers money or deposit account funds to a person, that person takes free of any security interest in the money or funds, unless the transferee acts in collusion with the debtor in violating the rights of the secured party.
