Secured Transactions Flashcards
A secured transaction must
In order for a creditor to gain full protection of a secured transaction they must attach and perfect.
Attachment
Creating a valid security interest in the collateral. There must be value given by the creditor, the debtor must have rights to the collateral, and there must be an authenticated security agreement or the creditor must take possession or control.
Security agreement
Written an agreement that certifies that personal property is being used as collateral on the loan it must describe the collateral. Can’t be super generic description, has to be normal language or language of types of collaterals. Must intend to be a security agreement and be authenticated (signed) by the debtor.
Exceptions to Security Agreement ELement of ATtachemnt
Possession and/or control of the collateral
After Acquired Property
A secured party can add a clause in the security agreement that allows for attachment in after-acquired property. This is not assumed unless for quickly revolving inventory - think a grocery store. Doesn’t apply to consumer goods or commercial tort claims
Future Advance Clause
A secured party can add a clause in the security agreement that allows for money to be given.
Perfection
Can’t be perfect unless you have attached it. This makes the interest superior to those that come after. The general rule is that when you file a financing statement in the filing location in the state where the debtor is located you are perfected against all subsequent creditors.
Financing Statement
A Document that identifies the debtor and the creditor by name and mailing address and described the collateral. Doesn’t have to specifically describe collateral like in a security agreement. If the name is in error it is fine unless it is seriously misleading. A name is not seriously misleading if the agreement could be discovered when searching for the correct name and the search logic brings up the name in error. This needs to be filed in the state of the debtor. THe name needs to be the name on the person drivers license or the name of the corporation as the name is shown in the public record, trade names are not allowed.
How to perfect an interest in a car?
Notation on the vehicle’s title
How to perfect an interest in timber or fixtures?
Statements that describe the land and filed in the county where the land is located.
How to perfect an interest in another way than filing a statement?
Possession
How to perfect an interest in a deposit account?
Control (best way being named on the account, the second way being in control of the account because it’s at your bank, third best way is control agreement)
Purchase Money Security Interest (PMSI)
These are automatically perfected when in consumer goods. When the lender loans money to the borrower specifically for the buyer to purchase certain goods and the lender takes a security interest in those goods or when the security party sells goods on credit and retains and interest on the goods sold.
Priority
Buyer in the ordinary course takes free of any security interest
Holder in due course and the like of a negotiable instrument
Transferee if money or funds from deposit accounts
Purchase of Chattel paper or instruments with possession or control
Possessory lien holder
PMSI (super priority)
Perfect Security Interest by Control and judicial liens that are attached. For judicial lien looks at when the sheriff levies on the collateral and when the interest is perfected.
Perfected Security Interest {non-PMSI}(first to file or first to attach) NOT THE DAY OF ATTACHMENT! (However, the day of attachment is sometimes the day of perfection)
Unperfected Security Interests
Creditor
Debtor
Consumer goods
goods used or bought for personal or household purposes
Inventory
goods held for sale or lease and supplies/materials quickly used up in
business
Equipment
any physical goods other than consumer goods, inventory, or farm
products
Accounts
a right to payment (accounts receivable)
Deposit Account
ONLY commercial business accounts can be attached too. a bank account
Rights of a Secured Party on Default
a secured party has a right to sell the collateral and use the funds from the sale to pay
itself the amount remaining on the loan. They can’t self-help with possession or breach of the peace. Breach of the peace is doing anything that could cause violence to ensure. They can also file an action in court to force a public sale.
Secured Leases
A security agreement can be disguised as a lease. The terms have the lease being equal to or greater than the economic life of the goods, the lessee is bound to purchase the goods at the end of the lease or renew longer than the economic life, or at the of the lease the lessee has the option to purchase the goods or renew the lease for remaining economic life od grounds for no or nominal consideration
Proceeds
whatever is received upon the sale or exchange or other disposition of collateral or proceeds of collateral. Must be identifiable for secured party to claim
Methods of Perfection
Filing - everything except deposit accounts and money
taking possession - can simultaneously satisfy attachment and perfection for certain items. The only way to perfect money is through possession.
control - only for nonconsumer deposit accounts, electronic chattel, and investment property.
automatic perfection - PMSI in consumer goods, small-scale assignment of an account or payment intangible.
temporary perfection - proceeds from the sale of collateral, effective for 20 days for proceeds, when a new value is given, and four months when a debtor moves from one state to another or name change
How to attach and perfect money?
Possession
How to perfect a PMSI in equipment?
File with in 20 days after debtor has possession
How to perfect a PMSI in inventory?
filing when the debtor gets the inventory
when do you take an item without the security interest still attached?
Sale is authorized by secured party
Buyer in the ordinary course of business when the security interest was created by the seller (also applies to leases)
When selling collateral
The notice must be sent to the debtor and other secured parties in a reasonable time and the sale must be commercially reasonable, the secured party is allowed to buy collateral, and money paid on collateral is used to pay off debt.
if there is a question of reasonableness, keep in mind the secured party must show they made an effort to obtain the best price for the collateral. Look at
Sufficient of advertising
the market for the collateral
whether the collateral needed cleaning or repair
if the sale was by public auction and where the auction was held
Price alone is not enough to make something reasonable
Accession
Accessions are goods physically untied with an item, but they don’t lose their actual identity
Fixture
Items become so attached to the property that interest forms under real estate law. There is an intent it becomes permanent property. TO perfect you must file a fixture filing in the office where a mortgage would be filed. Must reasonably identify the real estate and must name the owner. On default, you can remove the fixture but all damages from removing must be paid. Prior filings and PMSI takes priority over fixture filing.
Accession priority rules
when an accession becomes part of the whole, the interest in the full item takes priority over the accession itself. Must pay for the cost of removal if default and taking the item.
Garage Sale Rule
If there is a security interest in consumer goods and the buyer resells the item to another consumer the second consumer takes free of the interest when he has no knowledge of the secured party’s interest and there is no financing statement filed. Only applies when purchased for value.
Sale with Consent of Secured Party
New buyer takes free
Buyer in the Ordinary Course of Business Exception
someone who buys goods in the ordinary course of their business from a seller engaged in the business of selling them. (A Chef buys a knife from a knife dealer). Take free of security interest made by the seller unless they know the sale violates the agreement.
Inventory
goods held for the sale or lease and materials to be used or consumed in a business in a short period of time
Disguised Security Agreements
If a seller portends to keep title to a good that is then given to a buyer on a basis where the buyer makes payments on the goods at the end of the arrangement and owes non nominal amount in order to obtain title there is a security interest.
