Secured Transactions Flashcards
Seller-financed Purchase Money Security Interest
A seller-financed PMSI is a special type of security interest in goods. The secured party sells the goods to the debtor on credit and retains a security interest in the goods sold.
Financer-financed Purchase Money Security Interest
A financer-financed PMSI is a special type of security interest in goods. The creditor loans the 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.
TYPE OF GOODS: Consumer Goods
Goods used or bought primarily for personal, family, or household purposes.
TYPE OF GOODS: Equipment
Goods that are used or bought for use in a business.
ExamTip: Equipment is the default category for goods. If collateral fits none of the other categories, it is considered equipment.
TYPE OF GOODS: Farm Products
Crops, livestock, or supplies used or produced in farming operations in the possession of a debtor engaged in farming operations.
TYPE OF GOODS: Inventory
Goods held for sale or lease, goods to be furnished under service contracts, and materials used or consumed in a business in a short period of time.
TYPES OF INTANGIBLE COLLATERAL
1. Instruments:Pieces of paper representing the right to be paid money (e.g., promissory notes)
**2. Investment Property: **Stocks, bonds, mutual funds, and brokerage accounts
**3. Accounts: **A right to payment for property sold or services rendered (i.e., “accounts receivable”)
**4. Deposit Accounts: **An non-consumer (i.e., business) account maintained with a bank
**5. Chattel Paper: **A record which evidences (1) a monetary obligation; and (2) a security interest in specific goods. E.g., A finances a car and grants a security interest in the new car.
6. General Intangibles: Any personal property that doesn’t fall under one of the above categories. Patents, trademarks, copyrights, and goodwill are general intangibles.
Scope of Article 9 of the UCC
Article 9 applies to any transaction that creates a security interest in personal property or fixtures by contract. Article 9 applies based on substance and not form of a transaction.
Secured Sale Disguised as a Lease
A lease that is intended to serve as a security arrangement will be subject to Article 9.
A lease where:
(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 consideration.
Attachment
A party has no security interest in a debtor’s collateral without attachment.
ATTACHMENT REQUIRES:
- Agreement of parties to create a security interest (“security agreement”)
- Value must be given by the secured party; AND
- Debtor must have rights in the collateral
Authenticated Security Agreement
A security agreement must be:
1. Evidenced by a record
2. Show an intent to create a security interest
3. Authenticated by the debtor (i.e., signed)
4. Contain a description of collateral
5. Description must reasonably identify the collateral
ExamTip: In lieu of an agreement, the creditor can take possession or control of the collateral.
ExamTip: Collateral can be described broadly by type (“all inventory”)
Future Advances
A security agreement may provide that the collateral will serve as a security not only for the present obligation, but also for advances the creditor makes to the debtor in the future.
After-Acquired Property
A security agreement may create a security interest in after acquired collateral. After-acquired property will be subject to an security interest ONLY IF the security agreement explicitly provides for it.
A financing statement need not mention after-acquired property to perfect a security interest in such property if the description is broad enough to cover the after-acquired property
ExamTip: Even in the absence of an explicit clause, a security interest will attach automatically to collateral that is rapidly depleted such as accounts & inventory. E.g., All of the debtor’s equipment, now owned or later acquired.
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.
ExamTip: Proceeds are “identifiable” if they can be traced back to the original collateral.
Lowest Intermediate Balance Rule
In the case of commingled cash proceeds, identifiable proceeds can be traced using the lowest intermediate balance rule.
The lowest balance between the time proceeds are deposited and the application of the rule are considered identifiable proceeds.
ExamTip: The lowest balance can NEVER exceed the value of the cash proceeds originally deposited.
Perfection
Perfection maximizes secured party’s rights in the collateral as against third-parties. A security interest is not enforceable against anyone until it has attached to the collateral.
PERFECTION CAN HAPPEN BY:
1. Filing of a financing statement describing the collateral
2. Taking possession of the collateral
3. Taking control of the collateral
4. Automatic perfection
Automatic Perfection
A security interest is automatically perfected upon attachment.
PMSI in consumer goods are perfected automatically.
ExamTip: Only type of PMSI that automatically perfects is consumer goods.
Perfection by Taking Possession
Security interests in most types of collateral can be perfected simply by taking possession of the collateral.
ExamTip: Perfection begins at the moment of possession AND continues as long as possession is retained.
Perfection by Control
Security interests in the following may be perfected by control:
(1) investment property
(2) business deposit accounts [control is the only way to perfect]
(3) electronic chattel paper
Perfection of Nonconsumer Deposit Accounts
A nonconsumer deposit account can only be perfected by control:
(1) Bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account.
(2) Debtor puts the deposit account in the secured party’s name; or
(3) Authenticated control agreement between the debtor, bank, and the secured party that the bank will comply with the secured party’s orders regarding the deposit account without debtor’s consent.