Secured Transactions Flashcards
Scope of Article 9
- Article 9 of the Uniform Commercial Code governs transactions that create security interests in personal property or fixtures by contract.
- If a transaction is characterized as a lease but is intended to have affect as security, it will be governed by Article 9 as a security interest. Whether a lease of a good is intended for security, rather than a “True” lease, depends on the economic realities of the transaction.
- Under Article 9, a creditor must take two steps to gain the full protection of secured transactions law: 1. attach a security interest to the collateral, and 2. perfect the security interest.
Attachment of Security Interest
- Attachment creates a valid security interest in the collateral and gives the creditor rights against the debtor in the collateral.
- The requirements for attachments are
- a security agreement that describes the collateral;
- creditor gives value in exchange for the security interest; and
- debtor obtains rights in collateral.
- The security agreement is evidenced by 1. an authenticated security agreement, 2. the creditor taking possession of the collateral, or 3. the creditor taking control of the collateral. Whenever the last requirement occurs, the security interest attaches.
- If no party perfects, then the first to attach has priority.
Requirements for Attachment of Security Interest
- The requirements for attachments are
- a security agreement that describes the collateral;
- creditor gives value in exchange for the security interest; and
- debtor obtains rights in collateral.
- The security agreement is evidenced by 1. an authenticated security agreement, 2. the creditor taking possession of the collateral, or 3. the creditor taking control of the collateral. Whenever the last requirement occurs, the security interest attaches.
- If no party perfects, then the first to attach has priority.
Perfection of Security Interest
- Perfection gives public notice of an attached security interest. The methods that a creditor can perfect a security interest are by taking possession, automatically, via control, notation on certificate of title, or filing a financing statement. The methods of perfection by control, notation, and automatically depend on the type of collateral.
- Whether goods qualify as a [fill in type] or another type of collateral is determined by the debtor’s primary use at the time of attachment.
Categories of Collateral
- “Goods” include all things which are movable at the time the security interest attaches. **Goods also include fixtures. The category into which the good is placed depends on how the debtor is using the collateral.
- Consumer goods – goods used or bought for personal or household purposes
- Equipment – any physical goods other than consumer goods, inventory, or farm products
- Inventory – goods held for sale or lease and supplies/materials quickly used up in business
Filing a financing statement:
The financing statement must contain the debtor’s name and mailing address; the secured party’s name and mailing address; and a description of the collateral covered by the financing statement. Minor errors in the debtor’s name won’t invalidate a financing statement, but seriously misleading errors will. A seriously misleading error in a debtor’s name is determined by if the financing statement can be found by searching the debtor’s correct name. If not, the error is seriously misleading. If the debtor is a registered organization, the name on the financing statement must match the debtor’s name on public records.
Automatic Perfection:
Perfection may occur automatically, without filing, in the case of a security interest in a small-scale assignment of an account or payment intangible.
Purchase money security interests (PMSIs) in consumer goods are automatically perfected.
Perfection Via control:
the bank in which the nonconsumer deposit account is maintained automatically has control over a deposit account. Other means of gaining control over a nonconsumer deposit account are: i. putting the deposit account in the secured party’s name; or ii. agreeing in an authenticated records with the debtors and the bank in which the deposit account in maintained that the bank will comply with the secured party’s orders regarding the deposit account without the debtor’s further consent.
There are some special perfection rules for certain types of collateral: (5)
- motor vehicles: Security interests in motor vehicles can be perfected only by a notation on the security interest on the vehicle’s title.
- things attached to land: Security interests in things attached to land (e.g., timber or fixtures) usually must be perfected with filing statements that describe the land and are filed in the county where the land is located.
- most types: Security interests in most types of collateral can be perfected by possession by the party holding the security interest.
- few types (business deposit accounts): Security interests in a few types of collateral (e.g., business deposit accounts) can be perfected by control.
- PMSIs in consumer goods: Purchase money security interests (PMSIs) in consumer goods are automatically perfected.
PMSI purchase money security interest
- A purchase money security interest (PMSI) arises
- when a creditor sells goods to a debtor on credit, retaining a security interest in the goods for the purchase price or
- the creditor loans the funds to the debtor to buy specific collateral, the debtor uses those funds to acquire the specific collateral, and the creditor takes a security interest in that collateral.
- Automatic perfection can be done with a purchase money security interest (PMSI) in consumer goods. Consumer goods are goods that are used or bought primarily for personal, family, or household purposes.
- PMSIs have priority over non-PMSIs.
Perfect vs Unperfected Interests
Perfected security interests have priority over unperfected security interests in the same collateral.
Multiple Perfected Creditors
Between two perfected security interests, the first to have been filed or perfected has priority.
BIOC exception
While buyers generally takes goods subject to any perfected security interest, an exception exists for a buyer in the ordinary course of business (BIOC). A BIOC buys goods in the ordinary course of business from a seller engages in the business of selling goods of that kind. A buyer in the ordinary course of business (BIOC) usually takes goods free of any security interests
Garage Sale Rule:
A consumer who buys goods form another consumer, before financing statement has been filed and without knowledge of the interest, takes the goods free of security interests OR a consumer who buys goods subject to an automatically perfected PMSI takes the goods free of the security interest.]
