secured transactions Flashcards
Uniform Commercial Code Article 9 governs
security interests in personal property, fixtures, and agricultural liens.
Among the items of personal property governed by Article 9 are
deposit accounts, equipment, and crops.
Attachment is required for a security interest to be
enforceable against the debtor with respect to the collateral.
Three conditions must coexist for the security interest to attach to the collateral:
(i) the secured party must have given value (e.g., giving a loan);
(ii) the debtor must have rights in the collateral; and
(iii) the debtor must have authenticated a security agreement that describes the collateral, or the secured party must have possession or control of the collateral pursuant to a security agreement.
Perfection of a security interest is generally necessary for the secured party to have rights in the collateral that are
superior to the rights claimed by third parties in the same collateral.
Perfection has no relevance to the secured party’s rights against
the debtor.
A security interest is perfected upon
attachment of the interest and compliance with one of the methods of perfection.
There are four ways a secured party can perfect a security interest:
(i) filing a financing statement;
(ii) possessing the collateral;
iii) controlling the collateral; and
(iv) automatic perfection (either temporary or permanent).
A deposit account includes
a savings, passbook, time, or demand account maintained with a bank and excludes accounts evidenced by instruments, such as certificates of deposit.
A security interest in a deposit account can be perfected only by
control.
A secured party has control of a deposit account if:
1) the secured party is the bank with which the deposit account is maintained;
(2) the bank, secured party, and debtor agreed in writing to follow the instructions of the secured party; or
(3) the secured party becomes the bank’s customer with respect to the deposit account.
Goods encompasses anything that is
moveable at the time that a security interest attaches and includes fixtures.
Equipment usually refers to goods that are
used or bought for use primarily in a business, such as employees’ desks or machinery used in manufacturing.
where equipment is permanently integrated as part of a structure, it is also a
fixture
Fixtures are perfected by
filing a financing statement.
A financing statement must contain:
(1) the debtor’s name;
(2) the name of the secured party; and
(3) the collateral covered by the financing statement.
When the collateral is related to real property, the financing statement must also include:
(1) an indication that it covers this type of collateral;
(2) an indication that it is to be filed in the real-property records;
(3) a description of the real property to which the collateral relates; and
(4) the name of a record owner, if the debtor does not have an interest of record in the real property.
A security interest is generally an interest in
personal property or fixtures that secures payment of an obligation.
Although Article 9 is usually limited to personal property transactions, it does apply to a security interest in
a secured obligation, such as a promissory note secured by a real estate mortgage.
Unlike other statutory and common-law liens, an agricultural lien is subject to
Article 9.
Included within the definition of an agricultural lien is an interest in farm products (e.g., crops, livestock) that secures payment or performance of an obligation for either:
(i) goods or services furnished with respect to the debtor’s farming operation (e.g., livestock feed sold to a cattle rancher); or
(ii) rent on real property leased by a debtor in connection with a farming operation.
Article 9’s definition of goods also encompasses
growing or unharvested grown crops.
For collateral related to real property, the financing statement is generally filed in
the office for recording a mortgage on the related real property (“local filing”).
In Virginia, a financing statement generally must be filed only with
the Virginia State Corporation Commission (SCC).
Perfecting a lien in goods related to real property also requires filing with
the Virginia SCC.
Included within Article 9’s definition of goods as tangible collateral are
growing or unharvested grown crops.
For a security interest to attach to collateral, there must be
a security agreement authenticated by the debtor to satisfy the Article 9 Statute of Frauds.
A security interest in any collateral, except a deposit account, money, or letter-of-credit rights that are not a supporting obligation, may be perfected by
filing a financing statement.
when the debtor is located in Virginia, a financing statement generally need only be filed with
the Virginia SCC.
A purchase-money security interest (PMSI) is
a special type of security interest that may be accorded special rules with respect to perfection and priority.
A PMSI may exist only with respect to two types of collateral
goods (including fixtures) and software.
A PMSI in goods exists when:
(i) a secured party gave value (e.g., made a loan) to the debtor to enable the debtor to acquire rights in or use of the goods, and the value given was so used; or
(ii) a secured party sold goods to the debtor, and the debtor incurs an obligation to pay the security party all or part of the purchase price (i.e., a sale of goods on credit).
a note executed by the debtor meets the requirements of a security agreement when it:
(1) is a record;
(2) contains a description of the collateral; and
(3) is authenticated by the debtor.
equipment is
goods that are not consumer goods, farm products, or inventory but that are used or bought for use primarily in a business.
For a security interest to attach to the goods offered as collateral, the security agreement must
satisfy the Article 9 Statute of Frauds
for a security agreement to satisfy the statute of frauds
1) the debtor must authenticate the security agreement or
2) the secured party must possess or control the collateral.
a security interest in any collateral, except a deposit account, money, or letter-of-credit rights that are not a supporting obligation, may be perfected by
filing a financing statement.
A secured party’s possession of tangible (e.g., goods) or quasi-intangible (e.g., chattel paper) collateral satisfies the Article 9 Statute of Frauds for attachment and perfection of the secured party’s security interest if
the secured party’s possession is pursuant to the security agreement.
where a secured parties attachment and perfection is by possession of tangible or quasi tangible collateral, the security interest remains perfect only while
the secured party retains possession.
Unlike in bankruptcy, which provides a pro rata share to all creditors, Article 9
prioritizes the claims and pays them in order.
When there are two or more perfected secured parties with rights in the same collateral,
the first to file or perfect has priority.
A PMSI in goods other than inventory or livestock prevails over all other security interests in the collateral, even if they were previously perfected, if
the secured party perfects before or within 20 days after the debtor receives possession of the collateral.
Knowledge by the purchase money secured party of the conflicting prior security interest does not
prevent the priority of the PMSI over the earlier perfected security interest.
A general creditor is one who
has a claim, including a judgment, but who has no lien or security interest with respect to the property in question (i.e., the collateral).
A general creditor has no interest to assert under
Article 9
A general creditor
does not have a claim to particular property owned by the debtor.
A secured party will always prevail over
general creditor with respect to the debtor’s collateral.
classified as “equipment” because it is
used primarily for business, but not used up, sold, or leased like inventory.
Article 9 sets out rules governing
the priorities of conflicting interests in collateral.
The general rule as to a perfected security interest in collateral is that it is good against
all subsequent buyers
when a buyer in the ordinary course of business buys goods from a seller who is engaged in the business of selling goods of the kind purchased, in Virginia, the buyer
takes free of any security interest created by the seller, unless the buyer knows of the security interest, and the buyer knows that the sale is a violation of the terms of the security agreement.
In the case of consumer goods, a PMSI is perfected
automatically, and no filing is required
While a perfected security interest is good against all subsequent buyers, the exception to this is
the garage sale rule
garage sale rule
1) whereby a consumer purchaser buys consumer goods from another consumer, and
2) he does so without knowledge of a security interest in the goods, and
3) the purchase takes place before a financing statement related to the goods has been filed.
A financing statement covering equipment must be filed in the state where
the debtor is located
When there are two security interests, both of which are perfected, the general rule is that the security interest that was filed or perfected first
has priority
A financing statement may be effective to cover after-acquired property if
such property falls within the collateral described, whether after-acquired property is mentioned as such in the financing statement or even contemplated by the parties at the time that the financing statement was authorized.
priority with regard to one type of collateral is not dependent on priority with respect to
another type of collateral.
unlike the security agreement, the financing statement need not make reference to
future advances in order to cover such advances.
The financing statement is simply required to describe
the collateral, and a description of the type of collateral (inventory) is sufficient.
A financing statement is required to contain
1) the debtor’s name,
2) the name of the secured party or a representative of the secured party,
3) and the collateral covered by the financing statement.
while the debtor must authorize the filing of a financing statement
the debtor need not sign this statement.
although a financing statement must identify the collateral, the description of goods in the financing statement need not
specify a classification; The units could be specifically identified, such as by model and serial number.
In a consumer transaction, the creditor may retain the collateral in full satisfaction of the debtor’s obligation if
the debtor has not paid at least 60 percent of the cash price in the case of a purchase money security interest.
in order for a consumer creditor to retain collateral in full satisfaction (where debtor hasn’t paid 60% of value) the creditor must
send the consumer a notice of the creditor’s proposal to take such action.
if the consumer doesnt respond to creditors notice to retain collateral in full satisfaction proposal within
20 days after the proposal is sent, the creditor may retain the collateral in full satisfaction of the consumer’s obligation.
absent a post-default waiver by the consumer-debtor, in order for a creditor to be prevented from retaining the collateral and forced to sell it instead, the consumer must have paid at least
60 percent of the cash price in the case of a purchase money security interest.
full strict foreclosure is permitted in the case of a purchase money security interest if
1) the debtor has not paid at least 60 percent of the cash price
2) and the debtor receives a proper notice of the proposed foreclosure
3) but fails to timely respond.
there is no dollar limit on the creditor’s ability to use
strict foreclosure.
an agricultural lien, which is a lien subject to
Article 9.
An agricultural lien is an interest in
farm products such as crops or livestock
An agricultural lien secures payment for
1) either goods or services with respect to the debtor’s farming operation,
2) or rent on real property leased in connection with a farming operation.
A creditor who has an agricultural lien who hasn’t recorded as a public record any document relating to the lease obligation; has not
perfected the lien by filing a financing statement;
therefore for the security interest to be perfected the creditor must have taken possession or control, or have an interest that qualifies for automatic perfection.
When only one security interest is perfected and the other is not
then the perfected interest takes priority over the unperfected one.
A debtor, secondary obligor, or any other secured party has the right to
redeem collateral.
To redeem, the redeemer must
fulfill all obligations secured by the collateral and reasonable expenses, including attorney’s fees, incurred by the secured party in retaking the collateral or preparing for its disposition.
where the obligation secured by the collateral is the balance due, a tender in the amount in arrears is
not sufficient to redeem collateral
In general, the test for the timeliness of a notification of a disposition is
reasonableness.
The notification of a disposition should be sent sufficiently far in advance of the disposition to
allow the notified party to act on the notification.
Whether five days notification of a disposition is reasonably timely would likely be a question of
fact
when the property in question is held as a tenancy by the entirety, a creditor of one spouse cannot
reach the debtor spouse’s share in the property.
a creditor must do what to reach the property held as tenancy by entirety
Only if the creditor can obtain a joint judgment against both spouses can the entire property be reached.
where property is held as tenancy by entirety by a debtor spouse with wife, creditors cant
force its sale to satisfy any judgment solely against debtor spouse
an enforceable security interest with respect to goods occurs when
the security interest is attached to the goods/collateral
To obtain a security interest in personal property, which includes “goods” (i.e., a moveable object) in general, and specifically equipment (e.g., a machine used in a business to manufacture other goods), a creditor must
comply with Article 9 of the Uniform Commercial Code
Article 9 mandates that, for a security interest to be enforceable against the debtor with respect to the goods
the security interest must “attach” to the collateral.
For attachment to occur, three conditions must coexist:
(i) value has been given by the secured party;
(ii) the debtor has rights in the collateral; and
(iii) the debtor has (a) authenticated a security agreement that describes the collateral, or (b) the secured party has possession or control of the collateral pursuant to a security agreement.
For a creditor to have rights in the collateral that are superior to the rights of other persons in the collateral, the creditor must
perfect its security interest
One method for perfecting a security interest is by
filing a financing statement.
The filing of the financing statement must include
the debtor’s name, but need not be signed by the debtor
the financing statement doesnt need to be signed by the debtor b/c
the purpose of the filed financing statement is to place other persons on inquiry notice as to the existence of the security interest.
for the financing statement to be effective, the debtor must
authorize the filing of the financing statement
If the debtor has authenticated the security agreement
then this authentication constitutes an authorization to file the financing statement with respect to the collateral covered by the agreement (i.e., an “ipso facto authorization”).
for a debtor located in Virginia, the financing statement generally must be filed with
the Virginia State Corporation Commission
For a debtor that is a registered organization, the debtor is deemed to be located
in the state in which it is organized (e.g., a corporation is deemed to be located in the state of incorporation).
The failure of the president of entity to sign the financing statement
does not prevent its filing from perfecting creditors security interest.
A statutory or common-law lien creditor is
a creditor who obtains a possessory lien on the property of another by operation of a statute or common-law rule.
Unlike an Article 9 security interest, statutory or common-law liens are
nonconsensual liens.
In Virginia, a mechanic is entitled to
a mechanic’s possessory lien
a mechanic’s possessory lien is for up to and including
$1,000 that is superior to prior security interests, including perfected security interests.
The remainder of the mechanic’s lien apart from the $1000 is
inferior to all prior security interests and liens.
where a mechanic retained possession of the subject collateral at issue, he has
superior rights in the collateral to a creditor’s prior perfect security interest in the collateral for $1000
where a perfected creditor pays the $1000 to the mechanic lien holder, who is in possession of the collateral at issue, mechanic must
surrender the collateral to the perfected creditor upon demand and payment of $1000
for most items of personal property that serve as collateral for a security interest, the filing of financing statement with the Virginia State Corporation Commission is the typical method for
perfecting the security interest
a security interest in a motor vehicle is perfected by
a notation of the security interest on the certificate of title.
notation of the security interest on the certificate of title
is the only method permitted for perfecting a security interest on a motor vehicle, even if the motor vehicle is consumer goods that, under UCC Art. 9, is automatically perfected.
Chattel paper consists of a record that evidences both
a monetary obligation and a security interest in specific goods.
Upon default, a secured party may notify an account debtor (a person obligated on an account or chattel paper) to
make payment to the secured party.
the secured party may collect from the account debtor, and, if the account debtor does not pay, the secured party may enforce the obligation of the account debtor, in a
commercially reasonable manner
Tortious conversion generally cannot
deny a true owner title to his property
someone who does not have good title
cannot transfer it to another
a bona fide purchaser of the property who lacks notice of the conversion can acquire good title if:
(i) the property is money or a negotiable instrument,
(ii) the converter acquired title by fraud in the inducement, or
(iii) the true owner entrusted goods to a seller of goods of that kind and the purchaser is a buyer in the ordinary course of the seller’s business.
When there is a conflict between a secured creditor and an unsecured creditor with respect to collateral of a secured loan who has priority
the secured creditor
a stores security interest will automatically perfect where
its a purchase money security interest in consumer goods
a secured creditor has priority over an unsecured creditor in collateral, even though
debtors obligation to the unsecured creditor arose before the debtors obligation to the secured creditor
first in time, first in right rule applies in a contest between
two unsecured creditors; doesnt apply between a secured and unsecured creditor
filing of a financing statement is a method to
perfect a creditors security interest
A security interest that has attached to specific collateral generally may be
enforced against the debtor upon the default of the debtor.
A security interest attaches to collateral when
the secured party has given value, the debtor has rights in the collateral, and the debtor has authenticated a security agreement that describes the collateral.
A security agreement must be
authenticated by the party against whom it may be enforced (i.e., the debtor).
The most common method of authentication is
for the debtor to sign or execute the record that evidences the security agreement
a security agreement is enforceable against the debtor even though
the secured party does not sign the agreement.
a secured party’s failure to perfect its security interest may affect
its rights to collateral when other parties have a security interest in the same collateral
Under UCC Article 9, the failure to perfect the interest does not affect the ability of the secured party to
enforce the security agreement against the debtor
When a creditor has a security interest in a deposit account, which includes a savings account at a bank, a creditor may perfect its security interest only by
taking control of the account
When a creditor has a security interest in stocks, a creditor may perfect its security interest by either
filing a financing statement with the Virginia State Corporation Commission or by taking control of the stock; applies whether those stocks are in the form of a certificate or in electronic form.
If there are two competing PMSIs and one PMSI secures the price of the collateral for the seller of the collateral while the other PMSI secures loans enabling the purchase of the collateral, then the PMSI taken by the seller has
priority over the PMSI taken by the lender
the general rule where there are conflicting PMSIs is that the first-to-file-or-perfect has priority, when one of the perfected PMSIs is held by the seller of the collateral
the seller’s security interest has priority.
Article 9, Secured transactions are
consensual credit transactions
in a secured transaction, to ensure payment of a debt, the creditor takes a security interest in
the debtor’s specific personal property – the collateral.
in a secured transaction if the debtor defaults, the creditor may
seize and sell the collateral to pay the debt.
Attachment establishes
the creditor’s rights against the debtor.
Perfection establishes
the creditor’s rights in the collateral against third parties.
When more than one creditor has an interest in the same collateral, rules of priority determine
which party is paid first from the collateral’s proceeds.
A security interest is not enforceable unless
it has attached to the collateral.
The three requirements for attachment are:
i) the debtor has authenticated a security agreement that describes the collateral, or the secured party has possession or control of the collateral pursuant to a security agreement;
(ii) value has been given by the secured party; and
(iii) the debtor has rights in the collateral.
Perfection of a security interest is generally necessary for
the secured party to have rights in the collateral that are superior to any rights claimed by third parties.
A security interest is perfected upon
attachment of that interest and compliance with one of the methods of perfection.
Under Article 9, there are four ways by which a secured party can perfect a security interest:
(1) filing a financing statement;
(2) possession of the collateral;
(3) control over the collateral; and
(4) automatic perfection.
A security interest in any collateral, except a deposit account, money, or letter-of-credit rights, may be perfected by
filing a financing statement
The financing statement must include:
(i) the debtor’s name;
(ii) the name of the secured party or a representative of the secured party; and
(iii) collateral covered by the financing statement.
financing statement should also contain the addresses of both the debtor and the secured party, and identify whether the debtor is an individual or organization
The debtor’s signature is
not required on the financing statement, though the debtor must authorize the filing of a financial statement.
If the debtor has authenticated the security agreement, this authentication constitutes
an authorization to file the financing statement with respect to the collateral covered by the agreement (i.e., an “ipso facto authorization”)
In Virginia, a financing statement generally must be filed only with
the Virginia State Corporation Commission.
A security interest may apply to collateral the debtor owns at the time the security interest is granted as well as
collateral that the debtor acquires in the future if the security agreement provides that it applies to after-acquired collateral.
Inventory includes goods that are
held for sale in a business.
Perfection of a security interest is generally necessary for a secured party to have superior rights in
the same collateral
A security interest in inventory may be perfected by
filing a financing statement with the Virginia State Corporation Commission.
Generally, when there are two or more perfected secured parties with rights in the same collateral, the
first to file or perfect its security interest has priority.
If the security agreement includes after-acquired property, then the interest in that property is perfected upon
attachment
A purchase money security interest (PMSI) is a special type of security interest that exists in goods that:
(i) a secured party gave value to the debtor to enable the debtor to acquire rights in or use of the goods, and the value given was so used; or
(ii) a secured party sold goods to the debtor, and the debtor incurs an obligation to pay the security party all or part of the purchase price.
A PMSI in inventory prevails over all other security interests in the collateral (“super-priority”), even if the security interest was previously perfected, if
(i) the PMSI is perfected by the time the debtor receives possession of the collateral; and
(ii) the purchase-money secured party sends an authenticated notification of the PMSI to the holder of any conflicting security interest before the debtor receives possession of the collateral.
A PMSI in consumer goods is automatically perfected upon
attachment and prevails over all other security interest in the collateral without the secured party having to take action to perfect its security interest
A consumer good is a good that is
acquired primarily for personal, family, or household purposes.
A buyer in the ordinary course of business (BOCB) takes
free of a security interest created by the buyer’s seller.
A BOCB is a person who
(1) buys goods (other than farm products);
(2) in the ordinary course;
(3) from a seller who is in the business of selling goods of that kind
(4) in good faith; and
(5) without knowledge that the sale violates the rights of another in the same goods.
Knowing that there is a security interest in the inventory does not mean that the sale violates the secured party’s rights because
the secured party’s interest will automatically attach to identifiable proceeds from the sale.
If collateral is transferred, and the transferee of the collateral is not a buyer, the security interest
generally continues in the collateral unless the secured party authorized the transfer free of the security interest.
