Secured Transactions Flashcards
Scope and Mechanics of Article 9
Article 9 of the UCC applies to ANY transaction intended to create a security interest in personal property or fixtures. A security interest gives a creditor the right to sell a debtor’s property in order to satisfy a debt.
Collateral
Generally, in an Article 9 transaction, personal property or fixtures secure the payment of a debt or insure performance of a contract obligation with the property serving as collateral.
Secured party
Secured party is the creditor who possesses the benefit of the security interest
Debtor
The party who has an ownership interest or other sufficient interest in the personal property securing the obligation
Obligor
The obligor is the party held responsible for the underlying obligation
Goods
Goods are all things moveable when a security interest attaches.
Consumer goods
Goods used mainly for personal, family, or household purposes
Inventory
Inventory includes goods that are kept by a person for sale or lease
Equipment
Goods that are use or bought for use in a business. Also default catch-all category
Farm Products
Crops or livestock or supplies used or produced in farming operations
Attachment
Requires that (1) there is a valid security agreement memorializing the security interest; (2) the debtor possess rights in collateral; AND (3) the creditor extends value to the debtor
Valid security agreement
Debtor must authenticate the security agreement by providing the creditor with a reasonable description of the collateral in writing and sign it (AID)
Future Advances
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.
After Acquired Property
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.
Exception to After Acquired Property Rule
Even without an after-acquired property clause, a security interest will attach automatically to collateral of a type that is rapidly depleted and replenished, such as accounts and inventory.
Accessions
Collateral that does not lose its identity when physically united with other goods. Security interest may be created in the property that does not lose its identity and continues in the accession collateral.
Proceeds
A security interest in collateral automatically attaches to identifiable proceeds of the collateral, which is whatever is received upon the sale, collection, etc.
Commingled Cash Proceeds
Lowest intermediate balance rule; where bank started vs. where is is now, lowest balance is the proceeds
Perfection vs. Attachment
Once the security interest attaches, it is enforceable. Perfection of the interest only enhances the secured party’s rights to the property serving as collateral. However, if the security interest does not attach, then it CANNOT be perfect no matter what the creditor does.
Perfection Methods
Filing, taking possession, taking control, automatic, and temporary
Automatic Perfection
PMSI in consumer goods
Limitation on Automatic Perfection of PMSI
motor vehicles only by notation on the vehicle’s certificate of title (dealer exception), PMSI in fixtures will have priority over an encumbrance of the real estate only if the PMSI holder files a fixture filing
Perfection by Possession
Where the secured party takes possession of the collateral, the security interest is perfected from the moment of possession and continues as long as possession is retained.
What can’t be perfected by possession?
security interests in general intangibles, deposit accounts, nonnegotiable documents, electronic chattel paper, certificate of title goods, and accounts.
Perfection by Control
investment property, nonconsumer deposit accounts, and electronic chattel paper may be perfected by “control.”
What can only be perfected by control?
Consumer deposit accounts
Financing Statement Must Contain
Debtor’s name and mailing address, secured party’s name and mailing address, and a description of the collateral
Supergeneric language
Not allowed in security agreement, allowed in financing agreement
Perfection for Proceeds
If secured party has a perfected security interest in collateral, the secured party automatically has a perfected security interest in any proceeds of the collateral for 20 days after receipt of the proceeds
When does Perfection for Proceeds go beyond the 20 days?
(1) If the proceeds are identifiable cash proceeds OR (2) the security interest in the original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting the proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral, OR (3) the security interest in the proceeds is perfected within the 20-day period.
Perfected vs. Unperfected Interests
A perfected security interest has priority over a conflicting unperfected security interest in the same collateral.
Secured v. Secured
When there are conflicting perfected security interests in the same collateral, priority goes to whichever party was the first to either file or perfect, whichever is earlier.
Unperfected Secured v. Unperfected Secured
First to attach has priority
PMSI super priority
PMSIs get super priority; they are superior to prior perfected security interests in the same collateral if certain conditions are met
PMSI in Goods Other than Inventory and Livestock
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
has priority over a conflicting security interest in the same inventory or proceeds that are chattel paper, instruments, or cash if: (1) it is perfected at the time the debtor gets possession of the inventory, (2) any secured party who has filed their security interest in the same inventory receives authenticated notification of the PMSI before the debtor receives possession, and (3) the notification states that the purchase money party has or expects to take a PMSI in inventory of the debtor described by kind or type. The notification is effective for 5 years.
Lien Creditors
possess virtually the same status as perfected secured creditors. Accordingly, if a party becomes a lien creditor before a secured party files or perfects, the lien creditor will enjoy priority over that party.
How does a bank have control
Bank in which the nonconsumer deposit account is maintained automatically has control over a deposit account. Other means of gaining control are: (i) putting the deposit account in the secured party’s name; or (ii) 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 without debtor consent
Lien creditors’ priority extends to future advances secured
(1) before the lien arose; (2) within 45 days of the lien; or (3) without knowledge of the lien
Buyers in the Ordinary Course of Business
Buyer in the ordinary course of business are protected even though their interest in the property is created after the attachment or perfection of a security interest.
Buyers in the ordinary course of business take the collateral free of the security interest created by the seller if they are a person who: (1) in good faith and without knowledge that the same to him is in violation of the security interest of a third party; (2) buys in the ordinary course from a person in the business of selling goods of that kind.
BIOCOB Shelter Principle
The protected buyer may sell the purchased collateral to a third-party free of the secured party’s security interest
Consumers buying from consumers
A buyer of consumer goods take the goods free of a security interest, even if perfected, if the buyer buys: (1) without knowledge of the security interest; (2) for value; (3) primarily for the buyer’s personal, family, or household purposes; AND (4) before the filing of a financing statement covering the goods.
Purchase-Money Security Interest (PMSI)
PMSIs have priority over prior perfected security interests if the PMSI is properly executed. A PMSI is either: (1) a security interest held by the seller of collateral to secure payment of all or part of the price; or (2) a security interest of a person that gives value to a debtor so that the debtor may acquire rights in or the use of collateral
PMSI in inventory
A PMSI in inventory has priority over a conflicting security interest in the same collateral if: (1) the PMSI is perfected at the time the debtor receives possession and (2) notice is provided to other creditors.
An unperfected PMSI in inventory will NOT have priority over a perfected security interest in the same collateral.
PMSI in non-inventory
A PMSI in non-inventory (EQUIPMENT) collateral has priority over a conflicting security interest in the same collateral if the PMSI is perfected at the time the debtor receives possession of the collateral or within 20 days thereafter
PMSI in consumer goods
AUTOMATIC
Secured party’s rights in default
Right to repossess, right to dispose of collateral, right to collect directly
debtor’s rights when non-complying disposition of collateral
debtor can: (1) recover actual damages; (2) recover statutory damages; OR (3) be subject to judicially mandated disposition of the collateral
secured party right to repossess
Secured party may attempt to take possession of the collateral so long as they do not commit a breach of the peace
secured party right to dispose of collateral
May sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or in any commercially reasonable manner
sale (non-judicial foreclosure)
Upon default, a secured party may dispose of collateral in its possession by way of sale so long as it is commercially reasonable in all regards.
Article 9 requires the secured party to send reasonable notification of the time and place of any public sale to the debtor and any secondary obligor in a timely manner such that the debtor and any secondary obligor have sufficient time to take appropriate steps to protect their interests
Strict foreclosure
secured party may retain collateral in satisfaction of the debt if:
(1) secured party sends proposal to retain collateral to any other secured parties and notifies. If notified party objects within 20 days after notice, the collateral must be disposed of by sale.
(2) secured party must also obtain debtor’s consent.
secured party’s right to account collateral directly
Upon default, a secured party has the right to collect directly from the account debtor (the person who owes the debtor on the account). To exercise this right, the secured party must send an authenticated notification to the account debtor informing the account debtor that the amount due has been assigned and that the payment is to be made to the assignee. Upon receipt of proper notification, the account debtor may discharge its payment obligation ONLY by payment to the assignee (the secured party)
debtor’s minimum recovery for consumer goods
If the collateral is consumer goods and the secured creditor violates commercially reasonable sale, debtor is entitled to a minimum of 10% of the cash price of the goods plus an amount equal to all the interest charges to be paid over the life of the loan
possible loss of deficiency judgment
If secured party fails to follow rules on default, there is a rebuttable presumption that the sale proceeds equal the amount of the debt. In other words, secured party loses any deficiency
debtor right of redemption
Generally, a debtor or any secondary obligor has the right to redeem collateral until the secured party has disposed of it or entered into a contract for its disposition. To redeem collateral, the debtor must: (1) fulfill all obligations secured by the collateral; AND (2) pay the reasonable expenses and attorney’s fees
Fixtures
Goods that have become so related to real property than an interest in them arises under real property law. Personal property attached to real estate with the intent that it become a permanent part of the real estate is a fixture
perfection of security interest in fixtures
fixture filing must be made in the office where a mortgage on the real estate would be filed
Accessions
goods that are physically united with other goods in such a manner that the identity of the original goods is not lost; perfected when the collateral becomes an accession
priority and accessions in vehicles
a security interest in an accession is subordinate to a security interest in a whole which is perfected by compliance with the requirements of a certificate-of-title statute
to spot a secured transaction?
look for (1) credit transaction; (2) agreement that creates a lien in favor of the creditor in the debtor’s personal property to secure debt
Deposit accounts
Article 9 only applies to security interests in nonconsmer deposit accounts and account monies that are claimed as proceeds of other collateral
can you perfect before you attach?
No.
Names in financing statement
individual debtor = driver’s license; registered organization = name on the public record.
real property related financing statements
must contain description of the related property, the name of the record owner, and an indication that it is to be filed in the real property records
Conflicting security interests in deposit accounts
rank goes: (1) secured party who has obtained control by putting the deposit account in the party’s name; (2) a bank that has control because it maintains the deposit account
authorized sales
Authorized by the secured party free of the security interest, the transferee takes free of the security interest
BIOCOB PMSI grace period exception
If a secured party attaches a PMSI in the debtor’s collateral before the buyer or lessee without knowledge pays value and receives delivery, the secured party will have priority over the buyer or lessee if the secured party files within 20 days after the debtor receives the collateral
When does a creditor become a judicial lien creditor?
at the time of levy (seizure of the collateral by the sheriff).
Judicial lien creditor PMSI grace period exception
If the secured party files a financing statement with respect to a PMSI within 20 days after the debtor receives the collateral, the secured party will have priority over a judicial lien arising between the time the security interest attaches and the time of filing.
Factors for commercially reasonable sale
(1) sufficiency of the advertising; (2) collateral had a limited market, whether people in that market were contacted; (3) whether the collateral needed cleaning or repair; and (4) if the sale was by public auction, the convenience of the time and place
Actual debtor damages for improper collateral sale
Usually measured by the difference between the price obtained for the collateral and the price the collateral would have fetched at a proper sale
Three approaches for debtor remedy when collateral is a consumer good
(1) rebuttable presumption rule, which states that the value of the collateral is presumed to equal the amount of the debt unless the secured party provides otherwise;
(2) the absolute bar rule, which denies the secured party a deficiency regardless of whether the secured party can prove that the collateral is worth less than the debt; or
(3) the setoff rule, which allows the secured party to recover the deficiency minus any actual damages that the debtor can prove
