secured transactions Flashcards
1
Q
secured transaction*
A
a transaction intended to create a security interest in personal property or fixtures
generally to secure a sale on credit or a loan
2
Q
sale on credit
A
sale where buyer does not pay full purchase price at time of sale- buyer provides a down payment and pays the rest of the price over time
3
Q
debtor
A
person who owes payment or performance of the secured obligation (person who owes the money)
4
Q
secured party
A
lender, seller, other person in whose favor there is a security interest (person the money is owed to)
5
Q
unsecured creditor
A
person who makes a loan without taking any security interest
6
Q
secured creditor
A
a creditor with a security interest- I.e. special collection rights
7
Q
security agreement*
A
agreement between debtor and secured party that creates the security interest
8
Q
security interest
A
interest in personal property or fixtures to secure payment or performance. a contingent property interest granted to the creditor.
the creditor has rights upon default (the contingency) and no rights until then. upon default, the creditor has the right to repossess and sell the personal property/fixture.
9
Q
collateral*
A
the property subject to the security interest, which the secured party can repossess upon default
10
Q
purchase money security interest- types *
A
1) seller financed PMSI- a) secured party sells debtor collateral on credit and b) retains a security interest in the item sold for the part of the purchase price not yet paid
2) financer-financed PMSI-a) loan to buy specific collateral from a 3rd party seller, b) buyer uses the loan funds to buy that collateral, c) creditor takes security interest in the collateral for the part of the purchase price that has not yet been paid
11
Q
In a financier financed pmsi, if the buyer does not use the lender’s money to buy the item, what results?*
A
there is still a security interest but it is not a PMSI because the loaned money was not used
12
Q
after-acquired property clause in a security agreement*
A
allows the secured party to obtain a security interest in property acquired by the debtor in the future
13
Q
future advance clause*
A
allows the lender to use same collateral as security for future loans from the lender
14
Q
attachment- defined *
A
steps necessary to create a security interest effective against the debtor
creditor is not a secured creditor until attachment
15
Q
perfection- definition and requirements*
A
gives the creditor rights in the security interest as against other creditors. gives notice of the creditor’s security interest to the rest of the world.
requirements
1. creditor’s rights have attached
2. creditor has taken an additional step to notify third parties, or automatic perfection applies
16
Q
financing statement
A
document typically used to provide notice of the security interest. filed in the public records.
17
Q
types of collateral*
A
perfection requirements differ based on the type
- goods
- intangible/ semi-intangible collateral
18
Q
good
A
tangible, movable personal property
19
Q
consumer goods*
A
goods used or bought for use primarily for personal, family, or household purposes
(example: a guitar bought for recreational use)
20
Q
equipment*
A
used or bought for use in a business (this is a default or catch-all category so it doesn’t necessarily have to be used in business)
example: guitar bought for use by a professional musician, bc used in his profession as a musician
21
Q
farm products*
A
crops, livestocks, supplies used or produced in farming operations or
products of crops or livestock (eggs, milk, maple syrup)
if in possession of debtor engaged in farming operations
22
Q
inventory*
A
good held by the debtor for sale or lease
goods furnished under service contracts, or
materials used or consumed in a business in a short period of time (raw materials)
ex: milk sold by a restaurant or used as an ingredient in cooking, or milk sold by a grocery store, or a Hertz rental car
23
Q
instruments
A
documents containing a creditor’s right to be paid money. ex: checks, promissory note
24
Q
document
A
a document representing the right to receive good (bills of lading, warehouse receipt)
25
chattel paper
document evidencing a monetary obligation and a security interest in or a lease of specific goods (promissory note + security agreement)
26
investment property
stocks and bonds
27
accounts
right to payment for property sold or services rendered (account receivable)
28
deposit accounts
business account maintained with a bank
29
commercial tort claim
tort claim where the claimant is an organization or individual, the claim arose out of the claimant's business or profession and does not include damages for personal injury or death
30
general intangible
patents, copyrights, licenses, etc
31
payment intangible
a general intangible (patents, copyrights, goodwill) under which account debtor's principal obligation is a monetary obligation
32
does a contract that creates a lien in property without calling itself a security interest trigger article 9?*
yes- for example: lease of warehouse space with security interest in the property stored
33
sale with security interest disguised as a lease*
lease is subject to article 9 if the substance of the transaction has to be more of a sale- ask if when the item goes back to the other party, it will still have economic value. in leases the property has meaningful economic value when it is returned to the landlord; in a sale the buyer will use up all the economic value (big hint is option to purchase for a very low price, or being obligated to renew it so that it will be leased for whole time it has economic value)
34
attachment requirements*
1 security agreement evidenced by
A) written or electronic record that is authenticated by debtor
B) creditor has possession of the collateral pursuant to an oral agreement
C) creditor has control over the collateral
2 value given by secured party- consideration, even past consideration
3 value given by debtor- consideration is the promise to give a security interest
4 debtor has rights in collateral- owns or leases the collateral
35
security agreement requirements*
1 record that shows an intent to create security interest
2 authenticated (signed) by the debtor- any symbol with intent to authenticate
3 description of the collateral- must reasonably identify the collateral (ex: computers; "all debtor's property" DOES NOT WORK)
36
general rule about which property is subject to a security interest & exception*
the security agreement only reaches the property that the debtor has rights in at the time the agreement is signed
exceptions- security interest will automatically attach to:
1. after acquired inventory and accounts are implicitly included (because it turns over rapidly)
2. identifiable* proceeds of sold original collateral, or insurance payments payable to the debtor for destroyed original collateral
*burden is on secured creditor to prove this by tracing. this is a problem if paid cash & deposited into commingled account, but creditor can still trace by lowest intermediate balance test
37
lowest intermediate balance test
when proceeds of collateral have been commingled with non-proceeds, the proceeds are assumed to be the lowest balance during the time period between when the proceeds were deposited and ending when the rule is applied
but if the lowest balance exceeds the value of the proceeds deposited, the creditor just takes the proceeds deposited
38
if a debtor has a guarantor or surety for an obligation, will a security interest in that obligation reach the guarantor or surety?
yes, this is automatic
39
PMSI in consumer goods perfection*
PMSI in consumer goods are automatically perfected (but they can still lose to buyers if they don’t file)
40
methods of perfection*
1 taking possession (called a pledge)- usually goods. perfection happens when creditor takes possession
2 acquiring control- can do this with deposit account, investment property, chattel paper
3 for vehicles (regardless of personal or business use), putting a notation on the vehicle's title
4 by a filing
41
can perfection and attachment be simultaneous?
yes, for example if the security agreement under attachment is satisfied by taking possession
42
Ways to achieve perfection by control over deposit account*
a) a bank maintaining a deposit account will automatically have control over it
b) putting the deposit account in the secured party's name
(note this is also the way to get control over electronic chattel paper)
c) control agreement- contract between debtor, secured creditor, and bank maintaining the deposit account requiring the bank to pay the account funds to the creditor if debtor defaults
(note this is similar to investment property control- agreement there must allow creditor to sell it w/o further debtor consent)
43
exception to perfection by title notation for motor vehicles*
when the debtor (car dealer) is holding the car as inventory, notation on title won't work and the creditor must file a financing statement describing the cars that are collateral as inventory
44
financing statement- definition and required contents**
form UCC 1 or some other writing with all the info, assuming the SOS accepts it
debtor's legal name (trade names do NOT work, must be as it appears on an unexpired driver license or for an entity on the latest form on the secretary of state)
debtor mailing address (omission won’t invalidate if filing office accepts)
secured party's name (mistakes won't invalidate)
secured party mailing address
45
if a debtor name is wrong on a financing statement when filed, is it ineffective?
yes as long it's not seriously misleading- can be retrieved by a search of the filing system using the correct name
(ex: name is Sabbath but UCC 1 says Sadbath, would be seriously misleading)
46
if a debtor's name is changed without telling the secured party, does that make financing statement ineffective?
it is ineffective against some after acquired property. the rule is the financing statement is effective for collateral acquired before the change and 4 months after the change
47
financing statement collateral description*
reasonably identifiable (by category, specific items)
a super generic description is ok- all debtor's assets
48
if a security interest affects fixtures or minerals is it enough to file a financing statement?
No the statement must also be filed in the county recorder's real property records in the county where the property is located
49
can a filing statement be filed without debtor permission?*
no the debtor must authorize it
the authorization can be: a) in a separate written agreement, including contemporaneous security agreement about same collateral, signed by the debtor or b) signing the filing statement itself
50
where do you file the financing statement?*
in the office of the secretary of state in the state whose law applies
generally the state where the debtor is located (corporation: state of incorporation, individual: state of residence, partnership: state of chief executive office)
51
financing statement- if a debtor moves across state lines
If the collateral perfection is governed by debtor location, the security interest becomes unperfected 4 months after the move, unless a new financing statement is filed in the new state
52
if collateral covered by a financing statement is sold to a new owner in a different state
the financing statement becomes unperfected 1 year after the transfer
53
how long is a financing statement valid?*
5 years
54
do you need to do anything to perfect a security interest in proceeds?*
you will automatically be perfected for 20 days
if you want it to continue, a) must have identifiable cash proceeds or b) same office rule must apply
55
proceeds*
whatever was received in exchange for the debtor's collateral when they disposed of it
it is not always cash- can be inventory, equipment, etc
56
same office rule- perfection*
original collateral was perfected by filing a financing statement
the proceeds would be perfected by filing a financing statement in the same office AND proceeds were not acquired with cash
(ex: selling collateral for cash and then buying something else prohibits using this method)
57
does the debtor's change in the use of collateral affect the perfection of the security interest?
ex: used it as raw materials (inventory) and then used it as equipment
security interest remains perfected
58
priority of security interests between 2 perfected secured creditors*
first to file or first to perfect gets priority*
*perfecting may be later than filing if there are steps needed to finish attaching when you file, and don't need to file for PMSI creditor
59
priority between 2 unperfected secured creditors*
first to attach has priority
60
priority between a PMSI in equipment or consumer goods and another security interest*
PMSI in equipment or consumer goods perfected before or within 20 days after debtor gets possession has priority over security interest in same goods or their identifiable proceeds
61
priority between 2 PMSI's*
seller financed PMSI has priority over financer financed PMSI
Otherwise first to file or first to perfect
62
priority rules for investment property*
security interest perfected by control has priority over interests perfected in any other way (filing etc)
between 2 interests perfected by control, the person who got control sooner wins
63
priority rules for deposit accounts where perfection happens by control*
putting deposit account in creditor's name gives the creditor priority over all other secured parties with control
being the bank who maintains the account gives priority over secured creditors with a control agreement (but the creditor with the account in its name takes priority over bank maintaining the account)
64
priority between a secured creditor and a buyer- general rule *
generally the secured creditor prevails
65
buyer in the ordinary course*
1 buyer in good faith
2 that does not know the sale violates a 3rd person's rights (they may know it has a security interest, but just not know sale is unauthorized)
3 that buys the product in the ordinary course of business from a seller in the business of selling goods like the ones purchased
takes free of any security interest created by the entity/person they bought from
66
what security interests do buyers not in the ordinary course take subject to?*
1. perfected security interests
exception: consumer to consumer (ex: garage sale/ offer up)
buyer takes free of a perfected security interest in consumer goods if:
a. buyer has no knowledge of the security interest,
b. buyer pays value,
c. buyer intends to use it for personal use
d. creditor has not filed a security interest at the time of the sale
Even if perfected will take free of security interest to secure future advances or commitments to make advances made 45d after the buyer purchases or after the creditor learns of the sale to the buyer
2. Unperfected rule- In general they don’t take subject to unperfected security interests, but they do take subject to an upsi that:
A. the buyer knows about OR
B. Involve property with a PMSI that has attached to it, buyer bought from debtor in the first 20 days after the debtor receives collateral, and the creditor files a financing statement w/in that time and before the buyer pays and takes possession
67
judgment lien priority over unperfected security interests *
judgment holder will have a priority over an unperfected security interest if the judgment creditor has levied on it
68
levy*
sheriff seizes the debtor's property to enforce a judgment. judicial lien attaches to the property.
69
PMSI priority over judicial lien*
secured creditor has to file financial statement within 20 days after debtor receives the collateral AND the judicial lien has to arise between the time of security interest attachment & filing of financing statement for the security interest
70
possessory or statutory lien
a lien imposed by state law in favor of people who supply the debtor goods (aka an Article 2 claimant) or services
these liens take priority if the goods or services were provided in ordinary course of business and the collateral is still in the lien holder's possession
71
default
failure to pay or perform, or the happening of events specified in the security agreement
72
how can a judgment holder repossess?
go to court and file a replevin action OR
repossess by self help without judicial process as long as it can be done without a breach of the peace- i.e. potential to lead to violence
Examples of breach of peace: having to break & enter a residence, or repo man persists after debtor or agent/ee verbally objects to creditor taking collateral
73
if a security agreement allows entry on to the property to repossess, does that allow breaking and entering into a residence?
no, need to have debtor consent to take the property at time of repossession
74
if a car is taken from a driveway or public street without debtor knowledge, is this a breach of the peace?
no, simple trespass is not counted as breach of the peace (also no trespass on public street)
75
if a creditor breaks into a business to repossess equipment is that a breach of the peace?
some courts will say no, others will say yes if the door is left unlocked when creditor leaves because it exposes the debtor to more theft
76
self help in accounts
creditor just gives notice to the account debtor to pay the creditor instead of the debtor
77
strict foreclosure- definition, types, requirements
creditor can retain the collateral in full or partial satisfaction of the debt if:
they send a proposal to other secured parties they have notice of, and secured parties who have filed a financing statement and those secured parties do not object AND
In partial strict foreclosure they obtain the debtor's consent by getting debtor to agree in an authenticated record after default
In full strict foreclosure they obtain consent from debtor in authenticated record or or debtor fails to object in an authenticated record within 20 days of notice of foreclosure
78
Consumer goods exception to strict foreclosure
cannot use strict foreclosure if the debtor has paid 60% of the price in a pmsi or 60% of loan amount in non pmsi security interest
79
resale of collateral
secured party may sell, lease or license after repossession by auction or private sale
must first give reasonable notice authenticated by secured party to the debtor, sureties, and other secured parties who have notified secured party of their interests
every aspect of the sale must be reasonable- i.e. likely to produce a buyer and reduce deficiency judgment
80
in a collateral sale after repossession, can a secured party get a deficiency judgment?
yes if the sale price is not enough to pay expenses of sale and the debt
81
does the debtor have a right to redeem?
yes, if they pay the amount owed to the creditor (including any accelerated debt per an acceleration clause) before the sale
82
if the foreclosure sale produces a different price than the debt owed what is the secured creditor's obligation?
If the debtor is a consumer, to produce an explanation of any surplus or deficiency after the sale
Pay the debtor the surplus or recover deficiency judgment
83
fixture filing- definition and contents
financing statement to perfect a security interest in fixtures (goods related to real property)
must describe the real estate and name of the owner
84
security interest in fixtures priority
has priority over later filed security interests in property (mortgages or other fixture filings)
PMSI takes priority over an earlier realty interest if the PMSI is filed before the goods become fixtures or within 20 days after
85
construction mortgages priority
has priority over a later PMSI even if the PMSI is perfected by filing a fixture filing within 20 days of affixation of the fixture subject to the pmsi
(Note that normally pmsi takes priority over prior fixture filings if pmsi perfected within 20d)
86
perfection of fixtures that are readily removable
Can be perfected in ways other than filing before they become fixtures
Applies if the goods are:
office machines, factory machines, equipment not primarily used or leased for use in operation of real estate, or replacements of domestic appliances
87
accession
goods physically united with other goods so that the identity of the original goods are not lost (ex: tires on a car)
88
accession priority
general rules apply
special rule for vehicles: security interest in an accession is subordinate to security interest in the whole that is perfected
89
top 5 topics
article 9 categories
requirements of attachment
sub-requirements of the security agreement
perfection
priority rules
PMSI rules (except PMSI inventory super-priority)
90
How are goods classified? What are the classifications?
classified based on the debtor's use or intended use of the property as either:
a) consumer goods,
b) equipment,
c) farm products,
d) inventory.
A good can only be one of these categories!
91
Record
Information stored in a tangible or intangible medium
Tangible= on paper, intangible = electronic
92
How and when do you extend a financing statement?
continuation statement to extend another 5 years. must be filed within the 6 months before expiration of the existing statement (no earlier, no later)
93
How and when do you terminate a financing statement?*
Creditor must file a termination statement if a) there is no outstanding obligation and b) the debtor demands it, w/in 20 days.
For consumer goods, the creditor must file one even w/o demand w/in 1 mo after there is no longer any obligation. same demand rule also applies.
94
if the security interest affects fixtures or timber to cut, what law applies and where would the filing statement be filed?
the state where the property is located
the financing statement must be filed in the state where the property is located
95
if the security interest is in a deposit account, what law governs and where should the financing statement be filed?
the law of the state where the bank has its chief executive office
the state where the bank has its chief executive office is where the financing statement must be filed
96
When will a buyer prevail over a secured creditor?*
authorized sale exception applies. Definition:
(debtor authorized implicitly or explicitly by the secured creditor to sell collateral w/o security interest)
a. explicitly permitted in the security agreement
b. inventory sales to an ordinary consumer are implicitly allowed by a security agreement that doesn't prohibit sale of inventory to an ordinary consumer
c. not enforcing a clause in the agreement requiring consent to sell is implicit authorization
Buyer is a buyer in the ordinary course
97
Judgment lien and non pmsi perfected security interest priorities
Secured party has priority if the secured party perfected before the judgment holder levied OR
Secured party filed a financing statement and got a security agreement (but some of the attachment or perfection steps are missing) before the judgment holder levied
98
Exceptions to perfection requirements for fixtures
perfection is not required if the real estate owner has consented to the security interest in a signed writing or
Real estate owner has disclaimed an interest in the goods as fixtures in a signed writing or
if the debtor has a right to remove the goods
99
what are the debtor's rights if the creditor does not conduct the sale properly or repossess the property properly?
the sale price is presumed to equal the fair market value of the debt and the creditor will have to rebut it to seek deficiency (this presumption doesn't exist ordinarily)
the creditor is liable for actual damages caused by its violations
if the collateral was consumer goods, the debtor is entitled to 10% of the sale price and all the interest that would have been paid over the life of the loan
100
can a debtor waive the right to redeem?
in a security agreement, no
at any time after default, yes
101
Pmsi in inventory or livestock priority rule *
PMSI* takes priority over other security interests in the same inventory or proceeds if pmsi is perfected when debtor takes possession and
other secured creditors who have filed financing statements receive authenticated notification from PMSI creditor before the debtor takes possession
*includes consignor interest in goods
notice for PSMI inventory/livestock valid 5 years
102
Unconventional ways of creating security interests*
If a seller and buyer of goods agree that the seller will retain title to the goods after they are delivered until the buyer has paid for them, the agreement will be treated as the seller’s retention of a security interest
Leases that cannot be terminated and the lessee becomes the owner automatically at the end of the lease term or has an option to buy or renew for remaining economic life of the item for little or no consideration
103
When does a security interest with an after acquired property clause attach to property?
Immediately when the property is acquired
104
A security interest in what kind of collateral can be perfected by possession?
Physical goods unless they must be perfected by a notation on title
Not accounts, certificate of title goods, deposit accounts, nonnegotiable documents, electronic chattel paper, or general intangibles
105
Do shareholders have fiduciary duty?
No unless it’s close corp or there is a shareholder management agreement
106
PMSI*
Creditor loans funds to consumer to buy specific goods
Consumer uses the funds to buy specific goods
Creditor takes a security interest in those specific goods
