SECURED TRANSACTIONS Flashcards
UCC Article 9 Definition/Starting Point
“UCC Article 9 applies to any transaction that creates a security interest in collateral. A security interest arises when a debtor uses certain property as collateral to secure the repayment of funds to the creditor.”
The words “security interest” do not have to be included for Art. 9 to apply.
Types of Collateral
The UCC provides for certain kinds of collateral, including consumer goods, inventory, farm products, equipment, intangibles and proceeds.
“Consumer Goods” are defined as those bought primarily for personal, family, or household use.
Attachment
Attachment is the process by which a security interest is created. A security interest attaches in collateral and become enforceable when the creditor —
(1) gives value,
(2) the debtor has rights in the collateral and the right to transfer it, and
(3) the debtor authenticates a security agreement or (3)(a) the creditor takes possession or control.
Requirements of a Security Agreement
Authentication of a valid security agreement attaches a creditor’s security interest to certain collateral.
To be enforceable it, a security agreement must be authenticated by the debtor (signed), include the debtor’s intent to create a security interest in the collateral (usually in a “granting clause”), and a description that “reasonably identifies” the collateral.
Description of the collateral may not be over generic.
Attachment of a Security Interest to After-Acquired Property/Future Proceeds
A security interest in collateral automatically extends to all identifiable proceeds of the collateral.
Security agreements may provide for an itnerest in certain after-acquired collateral with a specific clause, unless the collateral is consumer goods.
If the collateral is inventory or accounts receivable, a specific clause is not required, and the security interest automatically extends.
Perfection
Perfection puts the world on notice of a secured party’s security interest in certain collateral. A security interest is perfected if it has attached, and all of the requirements of perfection are met.
Perfection can occur by (1) filing a financing statement, (2) taking possession or control, or (3) automatically in some instances.
Perfection via Financing Statement
For a security interest to be perfected via financing statement, the statement must include (1) the names of the parties, (2) a description of the collateral, (3) be authorized by the debtor and (4) be correctly filed.
The financing statement must be filed in the state in which the debtor resides — in Georgia, it can be filed with the clerk of any superior court. If the debtor moves, it must be refiled within 4 months in the new state.
A financing statement perfects the security interest for 5 years, unless a continuation statement is filed within 6 months before its expiration.
A financing statement can be filed before the security agreement, thus perfecting upon attachment (backwards).
Minor errors in a financing statement will not render it ineffective unless they are “seriously misleading”, like the wrong name.
Perfection by Possession
Only applies to tangible collateral (think pawn shops).
Perfection by perfection can be established directly by the creditor or a third party.
Perfection occurs immediately upon possession.
Possessor has a duty of reasonable care to not damage the collateral.
If the collateral is returned to the debtor, it remains perfect for 20 days (at which point the creditor must file a financing statement to continue perfection).
Perfection by Control
Only applies to intangible collateral such as accounts and investment securities.
Security is automatically perfected as soon as the creditor exercises control over the collateral.
Debtor may still access the collateral without interfering with the perfection.
Purchase Money Security Interests
When the secured party extends credit to the debtor for the purpose of obtaining collateral or financing the purchase of collateral, it is a purchase money security interest.
A perfected PMSI will take priority over other perfected security interests if the PMSI is perfected when the debtor takes possession of the collateral or within 20 days thereafter. (Excluding inventory)
Priority
The general rule regarding priority is first in time, first in right.
Among two unperfected security interests, the first to attach wins.
A perfected security interest will always have priority over an unprotected security interest.
Among two perfected security interests, the one who filed/perfected first wins.
A PMSI will take priority over earlier creditors if it was perfected within the 20 day grace period from possession.
PMSI Priority
A perfected PMSI prevails over a conflicting and previously perfected security interest if the PMSI is perfected when the debtor receives possession of the collateral or within 20 days thereafter.
A PMSI in inventory requires additional steps to acquire priority over a prior perfected interest. A creditor seeking a PMSI in inventory must (1) notify the other secured party in an authenticated record that intends to obtain a PMSI in the inventory, and must also (2) perfect the PMSI PRIOR to the debtor taking possession of the inventory.
Priority by Control
A security interest in an account or investment held by a creditor who has control over the collateral will have priority over another secured party who does not.
Secured Party vs. Lien Creditors
A secured party will have priority over a lien creditor as long as they perfect their interest before the lien arises.
Continuation
A security interest generally survives the sale of the collateral, however, there are some exceptions:
- If the secured party authorized the sale free of the secured interest.
- If the buyer is a “buyer in the ordinary course of business” —
- One who gives value in good faith, without knowledge of the security interest, in the ordinary course of business from a person dealing in goods of the kind. - If the buyer is not a buyer in the ordinary course of business but the interest is not perfected, they will take free of the security interest if they give value without knowledge of the security interest.
- “Consumer to Consumer” garage sale exception — when a person pays value for goods from someone who used them primarily for personal/family/household uses and intends to use them for the same PFH uses, does not have knowledge of the security interest, and takes before a financing statement is filed does not take subject to the security interest.
Buyer in the Ordinary Course of Business Exception
While a security interest will generally survive the sale of the collateral, a buyer who pays value in good faith without knowledge of an existing security interest for the collateral from a seller dealing in goods of the kind will not take subject to the security interest.
Consumer-to-Consumer Garage Sale Exception
While a security interest will generally survive the sale of the collateral, a consumer who pays value in good faith for goods that have been and are intended to be used for personal, family, or household purposes will take the collateral free from any security interest if the consumer does not have knowledge of the security interest and takes before the filing of a financing statement.
Default
In general, default occurs when the debtor does not fulfill their obligation when due under the parties’ agreement.
Upon default, a secured party may foreclosue on its collateral by seeking judgment or by using self help to repossess tangible collateral as long as it does not breach the peace.
“Breaching the Peace” Upon Default
A secured party may use self help to repossess chattel as long as it does not breach the peace.
“Breach the peace” is not defined, however, courts will examine whether the repossession took place at the debtor’s premises, whether the debtor objected to the repossession, and/or whether deception or trickery was used.
Default on Accounts Receivable
Upon default, the secured party may notify anyone obligated to make a payment to that account to make payment to the secured party instead.
Notification must be authenticated and identify the rights being assigned.
Collateral Resale After Default
Secured party may resell the collateral in any commercially reasonable way.
“Commercially Reasonable” if sold in the usual manner of any recognized market or in conformity with reasonable commercial practices, at or around market price of the collateral, with notice to the debtor and an other secured party or lienholder with a perfected interest.
Resale will discharge the security interest and any subordinate interests or liens, however the debtor may still be liable for any default.
Notification of Resale
Must be at least 10 days before the sale and include the
- Parties
- Method of disposition including time and place
- Description of the collateral
- (if consumer good) Liability for deficiency, and
- (if consumer good) A phone number for more information.
Must be sent to the debtor and all other interested parties.
Damages for Commercially Unreasonable Resale
- Actual damages.
- Deficiency reduced to the difference between the actual sale price and what the collateral would have sold for at a commercially reasonable sale, which is presumed to be the amount of the debt under the rebuttable presumption rule. AKA, deficiency reduced to $0.
Debtor Redemption
After default but before disposal, the debtor can redeem their collateral by paying the entire debt plus expenses/attorney’s fees, or, can bid/buy back the collateral at a public sale.
