Secured Transactions Flashcards
Secured transactions must
(1) Be consensual
(2) Involve personal property
“Goods” are defined as
Anything moveable at the time a security interest attaches
Sub-categories of goods are
(1) Consumer Goods
(2) Farm Products
(3) Inventory
(4) Equipment
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Rights to payment
(1) Instrument
(2) Chattel Paper
(3) Accounts
(4) Payments Intangible
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Instrument (right to repayment)
Promissory note, checks
Chattel Paper (right to repayment)
Monetary obligation AND security interest or a lease
Accounts (right to repayment)
Right to payment of monetary obligation for property sold, leased or licensed or for services rendered
Payment intangible (right to repayment)
Catch all (right to repayment of money which doesn’t qualify as chattel paper or an instrument)
Additional types of collateral
(1) Document of title (bailee)
(2) Investment Property (stocks/bonds)
(3) Deposit accounts (bank accounts)
Requirements for Attachment include
(1) Value
(2) Rights in the collateral (some property interest)
(3) Security Agreement
Security Agreements must be R.A.D
A record, authenticated, describing the collateral
Absent an authenticated security agreement
possession or control pursuant to an oral or unauthenticated security agreement can also be sufficient
Rights and duties of secured party in possession
(1) Act with reasonable care
(2) Keep collateral identifiable
(3) Relinquish collateral once obligation satisfied
(4) May charge debtor for reasonable expenses for storage and maintenance
Accessions are
goods that are physically united with other goods so that the identity of the original good is not lost (e.g. stereo installed in car)
Commingled goods are
goods that are physically united with other goods to the point that their identity is lost in a larger product or mass (e.g. eggs / flour in cookies)
A Purchase Money Security Interest (PMSI) is used for
goods and software
A PMSI means
(1) value is given allowing the debtor to acquire the goods or software, and
(2) the goods or software acquired secure the loan
A PMSI may be either (two types)
Lender PMSI (value actually used to acquire the goods)
Seller PMSI (goods bought on credit)
Six methods of perfection (once attached)
(1) Filing
(2) Possession
(3) Control
(4) Alternate Perfection Systems
(5) Perfection under a state’s certificate of title law (car / motorcycle)
(6) Automatic perfection
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Perfection by filing is ineffective for
Automobiles, Deposit Accounts, Money, letters of credit
(letters of credit and deposit accounts must be controlled for perfection)
A filing for perfection must include
(1) The name of the debtor
(2) The name of the secured party
(3) Description of the collateral
Real Property has additional requirements for filing including
(1) Financing statement indicate it’s a security agreement for this type of collateral
(2) Note to be filed in real property records
(3) Describe the real property
(4) Name the record holder of real property if debtor is not the one with interest
A financing statement in an authenticated record
must be authorized by the debtor (though signature is not required)
Failure to authorize will lead to actual and statutory damages
Unlike a security agreement, a filing statement may
have a super generic description of the collateral
Errors in financing statements prevent perfection if
they are seriously misleading (minor errors are OK - look to facts presented)
Financing statements lapse
After 5 years and may be continued with filing of continuation within 6 months of expiration
Control can be obtained over a deposit account by
(1) Secured party being the same bank housing the account
(2) Secured party, bank, and debtor agree in authenticated record that secured party has control over account
(3) Secured party becomes banks customer with respect to deposit account
Most common perfection under Alternate Perfection Systems is
A state’s certificate-of-title statute (applicable to cars/motorcycles/vehicles). Perfection is done by noting the security interest on the certificate of title
Note: Cars that are inventory are exempt
A PMSI in consumer goods
Perfects automatically when attached (good for 20 days, file starting day 21 to retain top title)
EXCEPT if a certificate-of-title statute (e.g. for cars) governs
Automatic Perfection Rules apply to
casual or isolated assignment of accounts which do not transfer a significant part of the outstanding accounts receivable
Collateral perfectible by possession includes
(1) Money
(2) Goods
(3) Instruments
(4) Negotiable documents
(5) Tangible chattel paper
Collateral perfectible by control includes
(1) Deposit accounts (exclusive method)
(2) Investment property
(3) Electronic documents
(4) Electronic chattel paper
(5) Letter of credit rights (exclusive method)
A name change resulting in financial statement becoming seriously misleading gives a secured party
4 months to discover the change and file an amendment with the new name (collateral acquired after the 4 month period expires is not covered by the original financing statement)
If a debtor moves out of state a perfected security interest
will remain perfected for 4 months (secured party must re-file in the new state within 4 months to remain perfect)
If collateral is transferred to a new debtor who lives out of state the secured party
Has 1 year to file a financing statement listing the new debtor
Secured party perfected by possession is only perfected so long as
it has actual physical possession (loses perfection if loans/gives back to debtor for any reason - exceptions include to sell, exchange or enforce debtor’s rights in the collateral)
Secured party has 20 day period to repossess or file financing statement
3 rules for perfection of proceeds
(1) Amendment (within 20 days)
(2) Cash Proceeds Rule
(3) Same office rule
Cash Proceeds Rule (Proceed perfection)
If collateral is sold, leased, licensed or otherwise disposed of and generates cash proceeds, perfection continues indefinitely so long as cash remains identifiable
Same Office Rule (Proceed perfection)
A security interest in proceeds will be perfected if:
(1) Financing statement covers original collateral
(2) Proceeds are collateral in which security interest may be perfected by filing in same office as original financing statement, and
(3) Proceeds are not acquired with cash proceeds
Perfected security interest v. Perfected security interest
First to file or perfect takes priority
Perfected security interest v. unperfected security interest
Perfected security interest beats an unperfected security interest
Unperfected security interest v. unperfected security interest
First interest to attach or become effective takes priority
Rights of unsecured creditors
No right against property but contractual rights against debtor
Perfected Security Interest v. Lien Creditor
Perfected security interest takes priority
Unperfected security interest v. Lien Creditor
Lien creditor takes priority
UNLESS, security interest was filed but unattached (secured party has not yet been given value)
Security Interest v. Statutory Lien
Statutory lien has priority (secures payment for goods or services furnished)
Secured Party v. Secured party over future advances
Priority is given to first to file or perfect with respect to future advances, even if secured party had knowledge of competing security interest when advance is made
Secured Party v. Lien Creditor over future advances
Secured party has priority if advance made within 45 days of lien creditor’s lien arising
IF: made after 45 days, subordinate to lien creditor unless advance made without knowledge of lien OR advance is made pursuant to a commitment entered into without knowledge of lien
Buyer v. Perfected Security Interest
Unless authorized free and clear, the buyer takes subject to the perfected security interest
Buyer in the ordinary course of business (BIOCB) exception to “subject to” security interest elements
(1) Buyer buys goods from a merchant
(2) In the ordinary course of the merchant’s business
(3) Buyer acts in good faith and without knowledge that sale violates rights of others
(4) Seller is engaged in business of selling goods of this kind (and is not a pawn broker)
Garage Sale (consumer to consumer) exception to “subject to” security interest elements
(1) Buyer buys consumer goods for value
(2) For buyer’s own personal, family, or household use
(3) From a consumer seller
(4) Without knowledge of the security interest
(5) (KEY) Secured interest has NOT filed a financing statement covering the goods before purchase occurred
Buyer v. Unperfected security interest
Buyer takes subject to unless authorized free & clear
Exception:
(1) Gives value
(2) Receives delivery of collateral
(3) Without knowledge of preexisting interest
Purchasers / Secured parties who take possession without knowledge of competing security interest
Will have priority over competing secured parties
A transferee of money or funds from a deposit account
Takes free of security interest unless acted in collusion with debtor
PMSI v. Lien Creditor
General priority rules apply, except PMSIs have 20 day grace period (starting when debtor receives collateral) to perfect and take priority
A PMSI for consumer goods / equipment
takes priority over all other security interests if party perfects within 20 days
If fails to file within 20 days, first to file / perfect rule applies
PMSI priority for Inventory / Livestock will have priority over all other security interests if
(1) Perfects before inventory delivered to debtor
(2) Sends an authenticated notification of PMSI to other secured parties
PMSI v. PMSI
Seller beats lender, otherwise first to file or perfect rule applies
Fixtures v. Real Property
Security interest in fixtures takes priority if secured party files a fixture filing before real property interest is recorded
Construction Mortgage v. PMSI in Fixtures
Construction mortgage has priority over any subsequent interest in fixtures, including PMSIs in fixtures, if recorded before the goods become fixtures and goods become fixtures prior to construction completion
Elements of Bright Line Test for Leases
(1) Lessee is obligated to pay full obligation whether or not there’s early termination (or K cannot be terminated early), AND
(2) Original term of lease is equal to or greater than remaining economic life of the goods (e.g. used up during lease term), OR
(3) Lessee is bound to renew, OR
(4) Lessee has option to renew for no or nominal consideration, OR
(5) Lessee has option to become owner for no or nominal consideration
If bright line rule is met, the lessor
will be treated as a secured party and needs to file or otherwise perfect interest
Requirements for consignment to be subject to Article 9 (when consignors must file to protect their interests)
(1) Consignor must deliver goods to a merchant who deals in goods of the kind, for merchant to sell
(2) Merchant is not generally known to be engaged in business of selling goods for others
(3) Value of goods must be at least $1000 in each delivery
(4) Goods must not be consumer goods before delivery
Think consignments as big ticket inventory (could easily be mistaken for owner)
Once there has been a default, the secured party can re-possess through either
(1) the judicial process
(2) Self-help repossession (cannot breach the peace)
Disposition of re-possessed property must be
commercially reasonable (conformity, not extremely reduced price)
Safe Harbors: Usual manner in recognized market, sold at current market price, In conformity with reasonable commercial practices
Notice of disposition must be sent to
(1) Debtor
(2) Secondary obligors
(3) Other secured parties
(4) Anyone else whom secured party has received notice of a claim or interest in collateral
Cash proceeds of a disposition are distributed in the following order
(1) Reasonable expenses for collection / enforcement
(2) Pay the debt to foreclosing secured party
(3) Pay subordinate security interests
(4) Any surplus will be returned to debtor
NOTE: Senior security interests survive sale and continue with whoever purchases the collateral
In order to receive full satisfaction of a debt
(1) Debtor must consent in an authenticated record
(2) Silence may be permitted if debtor does not object to proposal of acceptance within 20 days
For consumer goods:
(1) Secured party can only accept collateral in full
(2) If debtor has paid back 60% of the debt or value of collateral then the goods must be SOLD and cannot be accepted (unless debtor waived in authenticated record)
In order to receive partial satisfaction of a debt
(1) Debtor must consent, after default, in an authenticated record
Note: Consent must not be in silence, and partial acceptance is not permitted for consumer goods
Enforcement for default on fixtures allows
the secured party to remove the fixture from any real estate but must pay the damage to the real estate (but not diminution in value)
Remedies for failure to comply
Injunctive relief, actual damages, statutory damages
Rebuttable Presumption rule for commercial transaction
If secured party did not sell goods in commercially reasonable manner, they are not entitled to deficiency unless they can prove sale in compliance with Article 9 would have had same result
Violations of Article 9 obligations - Consumer Transactions by jurisdiction:
Most courts follow rebuttable presumption rule, although some courts institute an absolute bar on deficiency recovery for a secured party which failed to comply
General exam approach for Secured Transactions (4 steps)
(1) Determine whether secured interest has “attached” to the collateral in question
(2) Determine whether the secured interest has been “perfected”
(3) If more than one party claims an interest, determine priority
(4) If collateral is disposed of or sold, determine which party receives proceeds
A security interest does not attach to after-acquired consumer collateral if
the good is not acquired within 10 days of the secured party giving value
A purchaser of Chattel Paper has priority over a Secured Interest in the Chattel Paper if
(1) Gives new value and has possession / control of collateral
(2) Purchase made in good faith / ordinary course of business
(3) Chattel paper does not indicate assignment to identified assignee OR purchase made without knowledge that it violates secured party’s rights
May a party with a secured interest render equipment unusable in the event of a debtor’s default?
Yes
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 has authorized its sale free of the security interest
Inventory includes
Goods, other than farm products, that are held for sale or lease as well as raw materials used or consumed in a business
“Equipment” is
A catchall class consisting of goods that are not consumer goods, farm products, or inventory (commonly goods or machinery of a business)
Article 9 of the UCC governs
any transaction regardless of its form that creates a security interest.
This includes security interests in both tangible and intangible property
Note: Always start off with this in Secured Transactions essays
If the secured party has possession or control of the collateral pursuant to a security agreement, then
a security agreement in the form of a record is not required – an oral agreement suffices
In addition to conducting the sale in a commercially reasonable manner, the secured party is generally required to
send an authenticated notification of disposition to, among others, the debtor (+ any other secured interest holders)
Note: Notice must be given sufficiently far enough in advance (at least 10 days)
