Secured Transactions Flashcards
1
Q
Governing Law
A
governed by Uniform Commercial Code Article 9
2
Q
Article 9 Transactions
A
- contractual transactions that create a security interest in personal property/fixtures
- agricultural liens explicitly covered by article 9
- sale of accounts, chattel paper, payment intangibles, or promissory notes
- consignments
- security interests under Article 2
3
Q
Contractual Transactions That Create a Security Interest in Personal Property / Fixtures
A
substance determinative: form or label does not control whether security interest created as long as it meets Article 9 requirements
4
Q
Transaction
A
usually credit agreement, often loan or sale on credit, that is secured by collateral
5
Q
Security Interest
A
creditor’s interest in property that secures payment or performance of obligation and gives creditor the right to foreclose if debtor defaults
6
Q
Sale with Retention of Security Interest
A
mimics a lease but if sale with retention of security interest, lessor must comply with Article 9 to have priority over other creditors.
sale with retention… if:
- lessee does not have right to terminate lease during its term
- lessor does not have right of reversion or something of economic value that must be returned at end of lease term (lease term = or > than economic life of goods, lessee must renew, or lessee can renew or become owner for no additional or nominal consideration)
7
Q
Personal Property / Fixtures
A
article 9 does not apply to security interests in real estate
8
Q
Fixtures
A
goods attached to real estate
9
Q
Sale of Business and Article 9
A
if sale of accounts, chattel papers, payment intangibles, or promissory notes occurs as part of sale of business out of which they arise, not subject to Article 9
10
Q
Consignments
A
transaction in which a person (consignor) delivers goods to a merchant (consignee) for the purpose of sale.
if sells goods, pays consignor after deducting fee. if cannot sell goods, returns to consignor
11
Q
Consignments: Security Interest in Consignee’s Inventory
A
if creditor takes a security interest in consignee’s inventory to secure a loan, consignor may use Article 9 rules to get priority over credit.
If consignor does not use Article 9 to get priority, creditor may foreclose on consigned goods if consignee defaults
12
Q
Consignments: Security Interest in Consignee’s Inventory - Consignor Priority
A
four situations in which consignor has priority over secured creditor’s rights, even if consignor did not comply with Article 9:
- consignee does not deal in goods of the kind that are consigned
- consignee is generally known to be selling the goods of others
- consigned goods are worth less than 1k or
- goods were consumer goods before consignment
13
Q
Security Interests Under Article 2: Buyer’s Rights
A
if buyer rightfully rejects nonconforming goods, buyer has security interest in buyer’s possession to secure any payments made or expenses incurred
14
Q
Security Interests Under Article 2: Seller’s Rights
A
if seller reserves title in the goods, once goods are delivered to buyer, reservation limited to the effect of a security interest subject to Article 9
15
Q
Transactions Outside the Scope of Article 9
A
create a security interest but article 9 rules do not apply:
- landlord’s lien on personal property of tenant to satisfy unpaid rent that was created by state statute or common law
- any lien, other than an agricultural lien, created by statute or other law
- liens on real property, even if created by contract
In these cases, a lien creditor will have priority over a conflicting security interest ONLY IF lien arose prior to perfection of security interest.
16
Q
Purchase Money Security Interest (PMSI)
A
security interest that is taken by either:
- seller of goods in the goods sold to the debtor on credit OR
- lender who takes an interest in the goods that the loan enabled the debtor to buyer
only PSMIs in consumer goods automatically perfect
17
Q
Creation of Security Interest
A
Courts will objectively examine substance of transaction to determine if Art. 9 security interest.
DO NOT CONSIDER:
- intent of parties
- form of transaction
- whether title remains with debtor or vests with secured party
18
Q
Attachment of Security Interest: Requirements
A
security interest attaches to collateral and becomes enforceable when:
- secured party has given value to the debtor
- debtor has rights in the collateral or has power to transfer rights in the collateral to secured party
- either (a) debtor has authenticated a written or electronic security agreement that describes the collateral OR (b) the secured party possesses the collateral pursuant to an oral security agreement
19
Q
Debtor’s Rights in Collateral: Limited Rights
A
if debtor has limited rights, security interest attaches only to those limited rights
20
Q
Debtor’s Rights in Collateral: Consignment
A
consignee is deemed to have rights and title to the goods identical to those of the consignor
21
Q
Debtor’s Rights in Collateral: Prohibition on Transfers
A
agreement to prohibit transfers of debtor’s rights in collateral does not prevent transfer from taking effect.
HOWEVER, debtor’s breach of this provision may constitute default
22
Q
Authentication of Security Agreement
A
debtor must authenticate BUT secured party does not need to authenticate
23
Q
Security Agreement: Collateral Description
A
description cannot be supergeneric. It must reasonably identify the collateral UNLESS agreement involves commercial tort claim or consumer goods. In those cases, must identify particular claim or goods
24
Q
Security Agreement: Composite Document Rule
A
security agreement can be pieced together from multiple documents if those documents, together, satisfy requirements for a formal security agreement
25
Security Agreement: New Debtor
person is bound by a security agreement entered into by another person if either:
- security agreement creates a security interest in a new debtor's property OR
- new debtor becomes generally obligated for the obligations of the first debtor and acquires or succeeds to all, or substantially all, of the first debtor's assets
26
Floating Liens
debtor's rights in the collateral need not exist at the time the security interest is granted.
security interest can attach to:
- after-acquired collateral and
- proceedings from a disposition of collateral
27
Floating Liens: After-Acquired Collateral
security interest can attach to rights a debtor acquires in the future if the agreement so provides.
if collateral is consumer goods, security interest will only attach within 10 days after the secured party gives value
28
Floating Liens: Proceeds
security interest automatically attaches to proceeds of collateral as long as it is traceable to the collateral.
does not need to be stated in agreement
29
Future Advances
security agreement may provided that the present collateral secures future loans or other additional value provided by creditor, even if future advance does not appear to be separately secured
30
Types of Collateral
- tangible property (goods)
- tangible property (fixtures)
- intangible property
- quasi-tangible property
31
Tangible Property (Goods)
includes tangible items that are movable when security interest attaches. Includes the following (based on debtor's POV):
- consumer goods: used primarily for personal, family, or household purposes
- farm products: crops, livestock, supplies used in farming operations
- inventory: held for sale or lease and material used or consumed in business
- equipment: all goods that do not fall into one of te above three subcategories
32
Tangible Property (Fixtures)
includes goods that have become so related to real property that an interest in them arises under real property law
retain separate identity and can be detached from the real property
33
Intangible Property
- accounts: right to receive payment of a monetary obligation
- deposit accounts: accounts the debtor maintains with a bank
- general intangibles: any personal property other than accounts, chattel papers, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, and oil, gas, or other minerals before extractions
34
Quasi-Tangible Property
includes intangible right that historically was represented by piece of paper such as:
- negotiable instruments (promissory notes)
- chattel paper (record that represents monetary obligation and security interest in or lease of specific goods)
- investment property (stocks and bonds)
35
Duties of Secured Party
- duty of reasonable care in custody and preservation of collateral (for chattel paper or instrument, includes taking necessary steps to preserve rights against prior parties)
- duty to keep collateral in its possession identifiable (but can commingle fungible collateral)
- duty to relinquish possession and control of collateral within 10 days of receipt of debtor's authenticated demand if (a) no outstanding secured obligation and (b) secured party not committed to make advances, incur obligations, or give value
36
Rights of Secured Party
- right to charge for reasonable expenses incurred in custody of collateral and secure additional debt with collateral
- right to recover any deficiency in effective insurance coverage (debtor bears risk of accidental loss/damage)
- right to use or operate the collateral to preserve it or its value as permitted by a court order or, if collateral is not consumer goods, as agreed by debtor
- right to hold as additional security any proceeds except money or funds received from collateral (which must be applied to reduce secured obligation or remitted to debtor)
37
Rights of Debtor
- right to receive an accounting of unpaid obligation and a list of collateral securing it within 14 days of secured party's receipt of debtor's authenticated request
- right to receive approval or correction of debtor's statement of unpaid obligations and list of collateral securing the obligations within 14 days of the secured party's receipt of debtor's authenticated request
- right to demand, in authenticated record, that secured party notify any account debtor who has been informed of assignment of debt that it has been released from further obligation to secured party if (a) no outstanding secured obligations and (b) secured party not committed to make advances, incur obligations, or give value
38
Perfection: Definition
- security interest has attached AND
- secured party has taken necessary steps to give 3P notice of security interest
Not required for secured creditor to proceed against debtor but may be necessary for priority
39
Perfection: Choice of law
any choice of law stated in security agreement is irrelevant
40
Perfection by Filing
security interest has attached has been perfected by filing if three requirements met:
- filing authorized by debtor in authenticated record (electronic or written)
- financing statement properly filed (communicated to proper filing office using authorized method along with tender of filing fee OR accepted by filing office)
- financing statement sufficient (includes (a) debtor's name, (b) secured party's name, and (c) indication of collateral
41
Filing Financing Statement
if filing office refuses to accept, filing effective against anyone except purchaser of collateral for value who reasonably relied on absence of record from files
42
Filing Financing Statement: Appropriate Places
must be filed in state where debtor located. In most states, filed with secretary of state.
debtor-individual: located in state of person's principal residence
debtor-registered organization (corporation, LLC, LLP): located in state in which registered
debtor-organization (partnership): located in state where chief executive office located
43
Sufficient Financing Statement: Debtor's Name
Debtor-individual: name on unexpired driver's license OR if no license, name or legal first and last name
Debtor-Registered Organization (Corp., LLC, LLC): name organization used when registered in state
Debtor-Organization (Partnership): organization's name, or if no name, names of partners, members, or associates
44
Sufficient Financing Statement: Secured Party's Name
sufficient as long as secured party can be found to be contacted about security interest
45
Sufficient Financing Statement: Indication of Collateral
can be broader than description in security agreement. Supergeneric description is acceptable.
46
Perfection: Proceeds of Collateral
proceeds include whatever is obtained on sale, lease, license, exchange, or other disposition of collateral.
creditor's security interest continues in proceeds and, if interest was perfected, perfection will also continue in proceeds for 20 days.
continues beyond 20 days if one of the following satisfied:
- perfection of original collateral was by filing in the same officer where creditor could perfect proceeds
- proceeds are cash proceeds
- security interest in proceeds is otherwise perfected or creditor takes necessary steps to perfect proceeds
47
Term of Financing Statement
properly filed financing statement is effective for five years and can be continued by filing a continuation statement within the last six months of the five-year period
48
Lapse of Financing Statement
if no continuation statement filed, filed financing statement ceases to be effective and security interests perfected by it are deemed to never have been perfected against purchaser of collateral for value UNLESS perfected by other means
49
Termination Statement
if collateral is consumer goods and debtor satisfied debt obligation, secured party must terminate financing statement by filing a termination statement in the same place the OG financing statement was filed. With any other collateral, secured party must terminate financing statement only on demand by debtor
50
Other Methods of Perfection
- taking possession of collateral
- by a control agreement (between broker or bank, creditor, and debtor where securities intermediary grants control over pledged securities to creditor).
- indicating the security on the title (if goods subject to certificate of title. BUT must perfect by filing if goods are inventory in hands of debtor)
- automatic perfection on attachment (only applies to certain security interests)
51
Perfection by Control Agreement: Deposit Accounts
control is only method of perfection allowed for deposit accounts.
creditor can perfect by becoming party to account
52
Automatic Perfection on Attachment
- PMSIs in consumer hands in hands of debtor (collateral subject to certification of title, inventory, or equipment is not automatically perfected)
- assignment of accounts or payment intangibles that does not transfer signficant part of assignor's outstanding accounts or payment intangibles
- sale of payment intangible
- sale of promissory note
53
Priorities: General Creditor v. Secured Party
secured creditor has priority over general creditor
54
General Creditor
creditors with claim but no lien or secured interest in debtor's property (such as credit card companies).
No Art. 9 protection for general creditors
55
Priority: Secured Party v. Secured Party
1) perfected security interests have prio over unperfected
2) if neither perfected, first to attach has priority
3) if both perfected, security interest that was first in time of filing or perfection has priority (assuming no lapse)
56
Priority: Future Advances
if security interest covers advance, perfection dates from time advance made.
timing of advance does not impact priorities among conflicting security interest - FIRST TO FILE OR PERFECT RULE GOVERNS
57
Priority: Proceeds
secured creditor with prio in collateral will generally have prio in proceeds of collateral
58
Exceptions to First-to-File-or-Perfect Rule for Secured Creditors: Superpriority
Superpriority: PMSIs have priority over earlier filed security interests if:
- security interest is in goods other than inventory and livestock and was perfected within 20 days after debtor received possession of collateral OR
- security interest is in livestock / inventory, was perfected when debtor received possession of collateral, and secured party sent notice before debtor received possession of collateral to all other secured parties with security interest
Notice: good for five years for inventory but only six months for livestock
Priority extends to identifiable cash proceeds of inventory received on or before delivery of inventory to buyer if:
- security interest perfected when debtor receives possession of inventory and
- secured party sends an authenticated notification to holder of conflicting security interest
59
Exceptions to First-to-File-or-Perfect Rule for Secured Creditors: Consignor of Goods
PMSI in inventory subject to same perfection and priority rules as security interest in inventory or livestock as discussed above
60
Exceptions to First-to-File-or-Perfect Rule for Secured Creditors: Seller PMSIs
if multiple creditors hold perfected PMSI, seller's PMSI takes prio over PMSI of enabling lender
61
Exceptions to First-to-File-or-Perfect Rule for Secured Creditors: Deposit Accounts
security interest held by secured party having control of deposit account has prio over conflicting security interest held by secured party that does not have control
62
Exceptions to First-to-File-or-Perfect Rule for Secured Creditors: Deposit Accounts with Banks
security interest held by bank with which deposit account is maintained has prio over conflicting security interest held by another secured party UNLESS secured party becomes bank's customer with respect to deposit account
63
Exceptions to First-to-File-or-Perfect Rule for Secured Creditors: Investment Property or Letter of Credit
security interest in investment property or letter of credit that is perfected by control has prio over security interests perfected by other means
64
Exceptions to First-to-File-or-Perfect Rule for Secured Creditors: Instruments and Chattel Paper
security interest perfected by possession in instruments or tangible chattel paper take prio over security interest perfected by filing if creditor takes:
- possession for value
- in good faith AND
- without knowledge that creditor violating the other party's security interest
Also applies to buyers of instruments or tangible chattel paper
65
Exceptions to First-to-File-or-Perfect Rule for Secured Creditors: Subordinates
secured creditors are free to enter into a contract where they agree that party entitled to priority will subordinate its claim to another creditor's claims
66
Lien Creditor
party who has a judgment against creditor
67
Priority: Lien Creditor v. Secured Party
- if secured party's interest unperfected at time of levy, lien creditor has priority. BUT if secured party has PMSI, secured party has 20 days to file from date debtor receives delivery of collateral.
- if secured party's security interest is perfected at time of levy, secured party has priority.
- secured party has priority if its security interest secures in advance and
- advance was made within 45 days after person becomes a lien creditor OR
- advance was made without knowledge of lien
68
Priority: Creditor with Lien Arising by Operation of Law v. Secured Party
if lien arises by operation of law, priority over security interest unless statute creating interest provides otherwise.
69
Lien Arising by Operation of Law
lien other than security interest that
- secures payment for services or materials furnished with respect to goods
- created by statute
- dependent on possession of goods
70
Priority: Buyer of Goods v. Secured Party
generally, security interest remains attached and enforceable when debtor transfers collateral unless creditor authorized disposition free of security interest.
EXCEPTIONS: buyer takes free of security interest if
- security interest unperfected and buyer takes goods without actual knowledge of security interest
- buyer is buyer in ordinary course of business
- buyer is purchaser who bought the goods from a buyer in the ordinary course of business
- goods secure advances made after earlier of (a) the time the secured party learns of the buyer's purchase or (b) 25 days after purchase
- yard-sale exception applies
71
Buyer in the Ordinary Course of Business
buyer of goods from the seller's inventory
72
Yard-Sale Exception
- buyer is a consumer
- goods are consumer goods in the hands of the seller
- security interest was not perfected by filing
- buyer does not have knowledge of security interest AND
- buyer purchased goods for value
73
Priority: Real Estate Encumbrance/Purchaser v. Secured Party with Security Interest in Fixture
real estate encumbrance / purchaser has priority in fixtures over secured party's interest UNLESS
- real estate ... consented to security interest
- before real estate ... recorded, (a) security interest perfected by a fixture filing that (b) includes same info required for a financing statement and (c) identifies the real property
- after real estate ... interest recorded, (a) security interest was a PMSI and (b) was perfected by fixture filing within 20 days after goods became fixtures
- conflicting interest is a lien on the real property obtained by legal or equitable proceedings after the security interest was perfected by any method permitted by Article 9
74
Construction Mortgages
secures obligation incurred for construction of an improvement on land, including acquisition cost of land
have priority over security interest in fixtures if:
- mortgage is recorded before goods became fixtures and
- goods became fixtures before completion of construction
75
Refinancing
mortgage given to refinance a construction mortgage has same priority as a construction mortgage
76
Accessions
goods that are firmly attached to other goods (like tires attached to car)
generally same priority rules BUT accessions to titled goods lose priority to a perfected security interest in titled goods
77
Commingled Goods
goods that are physically united with other goods in such a manner that identity lost in a product or mass
if collateral becomes commingled goods, security interest attaches to resulting product or mass
if security interest was perfected before collateral became commingled goods, resulting security interest in product or mass is perfected
78
Priority When Multiple Security Interests Attached to Product or Mass
1) security interests that were perfected in collateral before it became commingled goods have priority over security interests that were unperfected at that time
2) if more than one security interest perfected in collateral before it became commingled goods, security interests rank equally in proportion to value of collateral at time it became commingled goods
79
Assignment: Perfection
if security interest perfected at time of assignment, interest remains perfected
80
Assignment: Continuation
transferee need not amend original financing statement or file continuation statement until original financing statement would have lapsed
81
Assignment: Priority
transferee has same priority in collateral as transferor
82
Assignment: Defenses
transferees are subject to any defense the debtor has against original creditor unless
- collateral is account, chattel paper, or general tangible
- debtor agreed not to assert defenses against assignees
- assignee took assignment in good faith without notice of any claim or defense against collateral and
- assignment took assignment for value
83
Assignment: Promissory Notes
transferees of promissory notes have protections comparable to those afforded holders in due course
84
Assignment: Prohibitions
term in contract between debtor and account debtor that prohibits assignment of account is not effective against secured party
85
Default: Attachment and Perfection
if security interest properly attached, secured creditor can pursue a remedy upon debtor's default
perfection not necessary for secured party to pursue remedy when debtor is in default
86
Default: Secured Party's Rights and Remedies
- can repossess tangible collateral goods without judicial process / state involvement as long as creditor does not breach the peace
- if want to recover intangible collateral, may notify account debtors to pay secured party. modifications of account made in good faith between account debtor and secured party are effective against debtor
- secured party may remove fixtures in which it has security interest if (a) has priority over encumbrances of real property and (b) secured party reimburses the owner or encumbrancer for any damage caused by removal
- may render equipment unusable and dispose of collateral on debtor's premises
87
Account Debtors
parties who owe debtor money
88
Disposition of Collateral
upon repossession of collateral, secured party can sell or dispose of it if:
- give debtor reasonable notice before disposing of collateral
- every aspect of disposition must be commercially reasonable, including method, manner, time, and place
- secured party must properly apply proceeds of collection
89
Disposition of Collateral: Reasonable Notice
must be sent within a reasonable time before disposition. nonconsumer transactions have a safe harbor of 10 days before disposition
Notice should describe:
- debtor and creditor
- collateral
- method of disposition
- time and place of public disposition or date after which private disposition will take place
- debtor's right to an accounting of unpaid indebtedness and
- if consumer transaction, debtor's liability for any deficiency and contact info from which debtor can learn amount due to redeem collateral and request additional info
must be sent to debtor and secondary obligor. if non consumer goods, must also notify:
- persons from whom secured party received authenticated notification of claim of interest in collateral
- secured parties that, 10 days prior to notification date, held perfected security interest in collateral
90
Disposition of Collateral: Reasonable Notice Exceptions
notice not required if collateral:
- is perishable
- threatens to decline speedily in value or
- is of a type customarily sold on a recognized market
91
Disposition of Collateral: Commercially Reasonable
must be made:
- in usual manner on any recognized market
- at the price current in any recognized market at the time of the disposition OR
- otherwise in conformity with reasonable commercial practices among dealers in the type of property that was subject of disposition
if debtor challenges, secured party must prove sale was commercially reasonable and that proper notice of the sale was given
92
Disposition of Collateral: Proceeds of Collection
Order:
- expenses of collection and enforcement
- reasonable attorney's fees if provided by agreement
- satisfaction of obligation to secured party
- satisfaction of subordinate security interests and liens of which the secured party has notice
sale made in good faith discharges junior security interests but not senior security interests
if surplus (and not sale of accounts, chattel paper, payment intangibles, or promissory notes), must pay any surplus to debtor. If deficient (same exceptions), can recover deficiency from debtor.
93
Disposition of Collateral: Proceeds of Collection - Related Transferee
if transferee is a person related to secured party or a secondary obligor AND amount of proceeds is significantly below range that disposition to non-related party would have brought, surplus or deficiency will be calculated based on amount that would have been realized in disposition
94
Disposition of Collateral: Proceeds of Collection - Consumer Goods
secured party must send explanation of calculation to debtor or consumer obligor before or when secured party accounts to debtor and pays any surplus or first makes written demand on consumer obligor for payment of deficiency
if debtor or consumer requests explanation, secured party must send explanation or waiver of secured party's right to a deficiency within 14 days after receipt of request.
95
Retention of Collateral: Strict Foreclosure
secured party may offer to retain collateral in full or partial satisfaction of obligation
96
Full Satisfaction
- debtor consents in an authenticated record after default OR
- secured party sends debtor a proposal and receives no objection within 20 days.
secured party must also send proposal to:
- any person from whom the secured party has received an authenticated notification of a claim of an interest in the collateral AND
- any other secured party or lien holder that held a security interest in or lien on the collateral perfected by filing or by compliance with a statute, regulation, or treaty
97
Partial Satisfaction
in non consumer transaction, debtor must consent to partial satisfaction in an authenticated record
in consumer transaction, no partial satisfaction
98
Mandatory Disposition of Consumer Goods
secured party may not retain consumer goods in satisfaction of debt and must dispose of collateral within 90 days after taking possession if:
- for a PMSI, when 60% of cash price paid OR
- for non-PMSI, when 60% of principal amount of obligation secured has been paid
99
Debtor's Rights and Remedies
if secured party forecloses, debtor has four rights:
- redemption
- injunction and damages
- protection against creditor's claim for deficiency
- common law
100
Debtor's Rights and Remedies: Redemption
may redeem collateral by
- fulfilling all obligations secured by collateral and
- paying reasonable expenses and attorney's fees as provided in security agreement.
can exercise right before secured party has
- collected collateral
- disposed of collateral or entered into contract for disposition or
- accepted collateral in full or partial satisfaction of obligation it secures
in non consumer-goods transaction, debtor or secondary obligor can waive right by agreement that is entered into and authenticated AFTER default
101
Debtor's Rights and Remedies: Injunction and Damages
if secured party does not comply with Art. 9, debtor can get order restraining collection, enforcement, or disposition.
can also recover damages provided in Art. 9 or by law
102
Debtor's Rights and Remedies: Protection Against Creditor's Claim for Deficiency
if secured party does not prove disposition commercially reasonable,
- for a non consumer transaction, rebuttable presumption that collateral equal in value to debt amount so secured party cannot recover deficiency
- for consumer transaction, appropriate remedy is left to individual state court. some apply rebuttable presumption rule and others ban noncomplying party from recovering deficiency
103
Debtor's Rights and Remedies: Common Law
trespass, conversion
